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Top Small Business Software All Provide Phone Support

  • Written by T. Steel Rose, CPA

CPAs serving small businesses have many demands for their accounting software. Recent updates attempt to meet those demands from the top vendors who all offer phone support.

AccountantsWorld Accounting Power Provides Multiple Data Entry Methods

"There have been many new enhancements added to Accounting Power in 2017, but the most significant improvements include bill payment workflow and digital checks..." said Dr. Chandra Bhansali, co-founder and CEO of AccountantsWorld. The cloudbased system allows the CPA and client to log in to the same application without having to transfer data between incompatible systems.

Red Wing Software CenterPoint Accounting Also Has Farm Accounting

With a full complement of accounting modules Red Wing is probably best known for its payroll. The Red Wing General Ledger provides income statements, cash flows, balance sheets, and budgets. You are able to search, view and edit original source transactions and have the information returned to a spreadsheet style report; useful as an internal or external auditing tool. You are able to drill down from summarized reports to detailed reports, and then drill down further to the original transactions. In addition Red Wing also offers Fund Accounting for Non-Profits and Municipalities and Farm Accounting software.

QuickBooks Online Collaborates with Third-Party Developers

“In the past year, QuickBooks Online has implemented multiple new integrations with the most popular apps on the market aimed at helping users eliminate manual entry, save time and reduce errors. Customers who use TSheets to track time, invoice clients and manage payroll can now easily review, edit and approve time straight from within QuickBooks Online. Users who useBill.com for electronic bill pay will also be able to import, review and pay bills directly from QuickBooks Online, while fans of G Suite can invoice clients directly from Gmail and even schedule billable appointments using Bill My Time with Google Calendar,” said CeCe Morken, executive vice president and general manager, Pro-Connect Group of Intuit.

Intuit QuickBooks Premier 2017 Includes Smart Search

“In the 2017 version [of QuickBooks Premier], new automated reports let you know that your reports are on time and accurate based on the data provided, automatically generated and emailed to you when you schedule them. Additionally, reports filters are easily viewable and can be applied across multiple reports and viewed on one screen. You can now print information about what filters have been included in reports, as well as make multiple-record filter selections more easily.

“More improvements to QuickBooks Premier include smart search, which is a personalized autocomplete feature that helps you search for names, account numbers, and transaction amounts quickly,” said CeCe Morken, executive vice president and general manager, Pro- Connect Group of Intuit.

Sage Small Business Adds Sage Impact Hub

Sage Impact is used by accountants and bookkeepers to access a variety of apps including making proposals. Although offered free it’s good to review the terms and conditions which state that if you continue to use any of the products for which Sage charges, you may incur charges after four months. Sage offers a head-spinning assortment of accounting products. The starter package is Sage Start which provides Sales Invoicing and the ability to see how much customers owe and chase overdue balances. Clients may connect their bank and bank data flows in automatically. Reports include Profit & loss, Balance Sheet and Trial Balance.

Sage Cloud Accounting

Sage One is described as Simple Cloud Accounting Entrepreneurs and Small Businesses to manage cash flow and invoices. Sage Live is described as customizable cloud accounting for small and mid-sized businesses that create customizable reports, manage inventory, chart of accounts, manage multiple business units or locations and connect with Salesforce. The multi-dimensional general ledger may be used to track financial performance from multiple perspectives: by territory, team or project.

PC Software Accounting® Provides Windows Computer Checkbook

The Checkbook System is designed to directly interface to PC Software Accounting Windows® Client Write-Up System for accounting to prepare payroll and financial reports. The Checkbook System writes payroll and payables checks. It can also prepare deposit slips, and allows “journal entries” to be made to record other accounting transactions such as debit card transactions, online payments or accumulated depreciation. The system has a bank reconciliation feature that allows bank and credit card accounts to be formally reconciled. There is also a job costing feature and a fixed assets system available.

Wave Features Scheduling and Recurring Invoicing

"The most significant improvement in Wave this year is an end-to-end elevation of invoicing and payments," said Kirk Simpson, CEO and co-founder of Wave. "We've rolled out new workflows to make invoicing easy and clear. We've introduced industry-leading scheduling for recurring invoices, automatic payments for credit card customers, and extensive invoice customization. And we've relaunched our mobile apps for iOS and Android to great reviews from thousands of customers."

AICPA Fights for Small Business Tax Reform

  • Written by CPA Magazine

Annette Nellen, Chair, AICPA Tax Executive Committee presented and provided a written statement to the U.S. Senate Committee on Small Business & Entrepreneurship on June 14, 2017. The hearing was on “Tax Reform: Removing Barriers to Small Business Growth.” Nellen’s statement included these 14 AICPA proposals:

1. Tax Rates for Pass-through Entities
2. Distinguishing Compensation Income
3. Cash Method of Accounting
4. Limitation on Interest Expense Deduction
5. Definition of “Compensation”
6. Net Operating Losses
7. Increase of Startup Expenditures
8. Alternative Minimum Tax Repeal
9. Mobile Workforce
10. Retirement Plans
11. Civil Tax Penalties
12. Tax Administration
13. IRS Deadline Related to Disasters
14. Other Small Business Tax Issues

1. Tax Rates for Pass-through Entities

As Congress moves forward with tax reform, it is important to recognize that a rate reduction for only C corporations is inappropriate. The vast majority of businesses are structured as pass-through entities (such as, partnerships, S corporations, or limited liability companies). In 2014, there were almost 25 million individual tax returns that included a non-farm sole proprietorship.

Congress should continue to encourage, or more accurately – not discourage, the formation of sole proprietorships and pass-through entities because these business structures provide the flexibility and control desired by many new business owners as opposed to corporations which are subject to more formalities. Entrepreneurs generally do not want to create entities that require extra legal obligations (such as holding annual meetings of a board of directors). They prefer business structures that are simple and provide legal and tax advantages, such as the flowthrough of early stage losses. As a business grows, however, it may need to change its structure to raise additional equity funding (such as, having employees become shareholders).

If Congress decides to lower income tax rates for C corporations (which are generally larger businesses), all business entity types including small businesses should also receive a rate reduction. Tax reform should not disadvantage sole proprietorships and pass-through entities at the expense of furthering larger C corporations, or require businesses to engage in complex entity changes to obtain favored tax status.

2. Distinguishing Compensation Income

We recognize that providing a reduced rate for active business income of sole proprietorships and pass-through entities will place additional pressure on the distinction between the profits of the business and the compensation of owneroperators. We recommend determining compensation income by using traditional definitions of “reasonable compensation” supplemented, if necessary, by additional guidance from the Secretary of the Treasury. Changes to existing payroll tax rules, such as a requirement for partnerships and proprietorships to charge reasonable compensation for owners’ services and to withhold and pay the related income and other taxes, will also facilitate compliance for small businesses.

We encourage Congress to consider the existing judicial guidance on reasonable compensation that reflects the type of business (for example, labor versus capital intensive), the time spent by owners in operating the business, owner expertise and experience, and the existence of income-generating assets in the business (such as other employees and owners, capital and intangibles).

We acknowledge that reasonable compensation has been the subject of controversy and litigation (hence, the numerous court decisions helping to define it). Therefore, the IRS should take additional steps to improve compliance and administration in this area. For example, the creation of a new tax form (or preferably, modification of an existing form, such as Form 1125-E, Compensation of Officers) or a worksheet maintained with the taxpayer’s tax records, would allow businesses to indicate the factors considered in determining compensation in a reasonable and consistent manner. These potential factors include:

a. Approximate average hours per week worked by all owners;

b. Approximate average hours worked per week by non-owner employees;

c. The owner’s years of experience;

d. Guidance used to help determine reasonable compensation for the geographic area and years of experience (such as, wage data guides provided by the U.S. Bureau of Labor Statistics); and

e. Book value and estimated fair market value of assets that generate income for the business.

Changes are also necessary for existing payroll tax rules to require partnerships and proprietorships to charge reasonable compensation for owners’ services and to withhold and pay the related income and other taxes. These types of changes to existing payroll tax rules will facilitate small business compliance. The partners and proprietors are not treated as “employees,” but rather owners subject to withholding – a new category of taxpayer – similar to a partner with a guaranteed payment for services. Similar rules requiring reasonable compensation currently exist in connection with S corporations and such owners are considered employees of the S corporation. The broader inclusion of partners and proprietors in more well-defined compensation rules, should facilitate and enhance the development of appropriate regulations and enforcement in this area.

The AICPA believes there are advantages of this reasonable compensation approach for owners of all business types. These advantages include:

a. Fairness that respects the differences among business types and owner participation levels;

b. A reduced reliance by both taxpayers and the IRS on quarterly estimated tax payments for timely matching of the earning process and tax collection;

c. Diminished reliance on the selfemployment tax system (since businesses would include payroll taxes withheld from owners and paid for owners along with their employees); and

d. Simplification from uniformity of collection of employment tax from business entities, and an ability to rely on a deep foundation of case law (in the S corporation and personal service corporation areas) to provide regulatory and judicial guidance.

In former Ways & Means Committee Chairman Dave Camp’s 2014 discussion draft, a proposal was included to treat 70% of pass-through income of an owner-employee as employment income. While this proposal presents a simple method of determining the compensation component, it would result in an inaccurate and inequitable result in many situations. If Congress moves forward with a 70/30 rule, or other percentage split, we recommend making the proposal a safe harbor option. For example, the proposal must make clear that the existence and the amount of the safe harbor is not a maximum amount permitted but that the reasonable compensation standard utilized for corporations will remain available to sole proprietorships and pass-through entities. These rules will provide a uniform treatment among closely-held business entity types. Appropriate reporting requirements, when the safe harbor option is not used, would also address the enforcement challenges currently faced by the IRS. For example, the modification of Form 1125-E would fully disclose factors considered in determining compensation that the IRS currently struggles to track.

3. Cash Method of Accounting

The AICPA supports the expansion of the number of taxpayers who may use the cash method of accounting. The cash method of accounting is simpler in application than the accrual method, has fewer compliance costs, and does not require taxpayers to pay tax before receiving the income. Therefore, entrepreneurs often choose this method for small businesses. We are concerned with, and oppose, any new limitations on the use of the cash method for service businesses, including those businesses whose income is taxed directly on their owners’ individual returns, such as partnerships and S corporations. Requiring businesses to switch to the accrual method upon reaching a gross receipts threshold unnecessarily creates a barrier to growth.

Limiting the use of the cash method of accounting for service businesses would:

a. Discourage natural small business growth;

b. Impose an undue financial burden on their individual owners;

c. Increase the likelihood of borrowing;

d. Impose complexities and increase their compliance burden; and

e. Treat similarly situated taxpayers differently (because income is taxed directly on their owners’ individual returns).

Congress should not further restrict the use of the long-standing cash method of accounting for the millions of U.S. businesses (e.g., sole proprietors, personal service corporations, and passthrough entities) currently utilizing this method. We believe that forcing more businesses to use the accrual method of accounting for tax purposes increases their administrative burden, discourages business growth in the U.S. economy, and unnecessarily imposes financial hardship on cash-strapped businesses.

4. Limitation on Interest Expense Deduction

Another important issue for small businesses is the ability to deduct their interest expense. New business owners incur interest on small business loans to fund operations prior to revenue generation, working capital needs, equipment acquisition and expansion, and even to build credit for larger future loans. These businesses rely on financing to survive. Equity financing for many start-up businesses is simply not available. A limitation in the deduction for interest expense (such as to the extent of interest income) would effectively eliminate the benefit of a valid business expense for many small businesses, as well as many professional service firms. If a limit on the interest expense deduction is paired with a proposal to allow for an immediate write-off of acquired depreciable property, it is important to recognize that this combination adversely affects service providers and small businesses while offering larger manufacturers, retailers, and other asset-intensive businesses a greater tax benefit.

Currently, small businesses can expense up to $510,000 of acquisitions per year under section 179 and deduct all associated interest expense. One tax reform proposal under consideration would eliminate the benefit of interest expense while allowing immediate expensing of the full cost of new equipment in the first year. However, since small businesses do not usually purchase large amounts of new assets, this proposal would generally not provide any new benefit for smaller businesses (relative to what is currently available via the section 179 (expensing rule). Instead, it only takes away an important deduction for many small businesses who are forced to rely on debt financing to cover their operating and expansion costs.

5. Definition of “Compensation”

Tax reform discussions have recently considered whether the tax system should use the same definition for taxable compensation of employees as it does for the compensation that employers may deduct. In other words, should businesses lose some of their current payroll-type deductions if employees are not required to report those same compensation amounts as income?

We are concerned, particularly from a small business perspective, about any decrease of an employer’s ability to deduct compensation paid to employees, whether in the form of wages or fringe benefits (health and life insurance, disability benefits, deferred compensation, etc.). We are similarly concerned about expansion of the definition of taxable income for the employees, or removal of the exclusion for fringe benefits. Such changes in the Tax Code would substantially impact the small and labor-intensive businesses’ ability to build and retain a competitive workforce.

6. Net Operating Losses

Congress should also provide tax relief to small businesses in the calculation of benefits related to net operating losses (NOLs). An NOL is generally the amount by which a taxpayer’s business deductions exceed its gross income. Corporations currently operating at a loss can benefit from carrying these NOLs back or forward to offset taxable income. According to the current rules, these losses are not deducted in the year generated, but carried back two years and carried forward 20 years to offset taxable income in such years.

One of the purposes of the NOL carryback and carryover rules is to allow a taxpayer to better reflect its economic position over a longer period of time than generally is allowed under the restraint of the annual reporting period. Since 1987, our experience with the 90% AMT limitation on the use of NOLs shows that this limitation often imposes a tax on corporations, especially small businesses in their early growth years, when such businesses are still struggling economically. Therefore, a proposal for a 90% limitation on NOLs imposes an artificial restriction on a company’s use of business losses and discriminates against companies with volatile income which could potentially pay more tax than companies with an equal amount of steady income over the same period.

For sole proprietors, the calculation of the NOL is overly complicated. Congress should simplify the calculation while retaining the carryback option for small businesses. Most startup businesses are formed as pass-through entities and the initial startup losses incurred are “passed down” and reported on the owners’ tax returns. Because individual taxpayers report both business and non-business income and deductions on their returns, the required calculations to separate allowed business losses from disallowed personal activities is complex. Individual business owners would benefit from more specific guidance on NOL computations.

7. Increase of Startup Expenditures

In the interest of economic growth, we encourage Congress to consider increasing the expensing amount for startup expenditures. Section 195 allows immediate expensing of up to $5,000 of startup expenditures in the tax year in which the active trade or business begins. This amount is reduced dollar for dollar once total startup expenditures exceed $50,000, with the excess amortized ratably over 15 years. Thus, once startup expenditures exceed $55,000, all of these expenditures are amortized over 15 years. The rationale for the $5,000 expensing was to “help encourage the formation of new businesses that do not require significant startup or organizational costs.” These dollar amounts, added in 2004, are not adjusted for inflation. Only for tax years beginning in 2010, the $5,000 was increased to $10,000 and the $50,000 phase-out level was increased to $60,000. This change was described as “promoting entrepreneurship.”

The AICPA recommends increasing the $5,000 and $50,000 amounts of section 195 and adjusting them annually for inflation. These changes will further simplify tax compliance for small businesses by reducing (or eliminating) the number of such businesses that must track and report amortization of startup expenses over a 15-year period. In addition, as was suggested for the 2004 and 2010 legislative changes, the larger dollar amounts will better encourage entrepreneurship. Higher dollar amounts also reflect the costs for legal, accounting, investigatory, and travel that are frequently incurred when starting a new business. Also, in light of the increased, inflation-adjusted dollar amounts under section 1791 to help small businesses, it is appropriate to similarly increase the section 195 dollar amounts and adjust them annually for inflation.

8. Alternative Minimum Tax Repeal

Congress should repeal AMT for both individuals and corporations. The current system’s requirement for taxpayers to compute their income for purposes of both the regular income tax and the AMT is a significant area of complexity of the Tax Code requiring extra calculations and recordkeeping. AMT also violates the transparency principle in masking what a taxpayer is allowed to deduct or exclude, as well as the taxpayer’s marginal tax rate. Businesses, including those businesses operating through pass-through entities and certain C corporations, are increasingly at risk of being subject to AMT.

The AMT was created to ensure that all taxpayers pay a minimum amount of tax on their economic income. However, small businesses suffer a heavy burden because they often do not know whether they are affected until they file their taxes. They must constantly maintain a reserve for possible AMT, which takes away from resources they could allocate to business needs such as hiring, expanding, and giving raises to workers.

The AMT is a separate and distinct tax regime from the “regular” income tax. IRC sections 56 and 57 create AMT adjustments and preferences that require taxpayers to make a second, separate computation of their income, expenses, allowable deductions, and credits under the AMT system. This separate calculation is required for all components of income including business income for sole proprietors, partners in partnerships and shareholders in S corporations. Small businesses must maintain annual supplementary schedules used to compute these necessary adjustments and preferences for many years to calculate the treatment of future AMT items and, occasionally, receive a credit for them in future years. Calculations governing AMT credit carryovers are complex and contain traps for unwary taxpayers.

Sole proprietors who are also owners in pass-through entities must combine the AMT information from all their activities in order to calculate AMT. The computations are extremely difficult for business taxpayers preparing their own returns and the complexity also affects the IRS’s ability to meaningfully track compliance.

9. Mobile Workforce

The AICPA supports the Mobile Workforce State Income Tax Simplification Act of 2017, S. 540, which provides a uniform national standard for non-resident state income tax withholding and a de minimis exemption from the multi-state assessment of state non-resident income tax.

The current situation of having to withhold and file many state non-resident tax returns for just a few days of work in various states is too complicated for both small businesses and their employees. Businesses, including small businesses and family businesses that operate interstate, are subject to a multitude of burdensome, unnecessary and often bewildering non-resident state income tax withholding rules. These businesses struggle to understand and keep up with the variations from state to state. The issue of employer tracking and complying with all the different state and local tax laws is quite complicated, consumes a lot of time and is costly. S. 540 would provide long-overdue relief from the current web of inconsistent state income tax and withholding rules on nonresident employees. Therefore, we urge Congress to pass S. 540 that provides national uniform rules and a reasonable 30-day de minimis threshold before income tax withholding is required.

10. Retirement Plans

Small businesses are especially burdened by the overwhelming number of rules inherent in adopting and operating a qualified retirement plan. Currently, there are four employee contributory deferral plans: 401(k), 403(b), 457(b), and SIMPLE plans. Having four variations of the same plan type causes confusion for many plan participants and small businesses. Congress should eliminate the unnecessary complexity by reducing the number of choices for the same type of plan while keeping the desired goal intact: affording employers the opportunity to offer a contributory deferral plan to their employees and allowing those employees to use a uniform plan to save for retirement.

Startup business owners are inundated with a myriad of new business decisions and concerns. These individuals may have expertise in their business product or service, but rarely are they experts in areas such as retirement plan rules and regulations. We encourage Congress to consider creating a uniform employee contributory deferral plan to ease this burden for small businesses.

11. Civil Tax Penalties

Congress should carefully draft penalty provisions and the Administration should fairly administer the penalties to ensure they deter bad conduct without deterring good conduct or punishing innocent small business owners (i.e., unintentional errors, such as those who committed the inappropriate act without intent to commit such act). Targeted, proportionate penalties that clearly articulate standards of behavior and are administered in an even-handed and reasonable manner encourage voluntary compliance with the tax laws. On the other hand, overbroad, vaguely-defined and disproportionate penalties create an atmosphere of arbitrariness and unfairness that can discourage voluntary compliance.

The AICPA has concerns about the current state of civil tax penalties and offers the following suggestions for improvement:

a. Trend Toward Strict Liability
The IRS discretion to waive and abate penalties where the taxpayer demonstrates reasonable cause and good faith is needed most when the tax laws are complex and the potential sanction is harsh. Legislation should avoid mandating strict liability penalties. Over the past several decades, the number of increasingly severe civil tax penalties have grown, with the Tax Code currently containing eight strict liability AICPA penalty provisions (for example, the accuracy penalty on non-disclosed reportable transactions).

b. An Erosion of Basic Procedural Due Process
Taxpayers should know their rights to contest penalties and have a timely and meaningful opportunity to voice their feedback before assessment of the penalty. In general, this process would include the right to an independent review by the IRS Appeals office or the IRS’s FastTrack appeals process, as well as access to the courts. Pre-assessment rights are particularly important where the underlying tax provision or penalty standards are complex, the amount of the penalty is high, or fact-specific defenses such as reasonable cause are available.

c. Repeal Technical Termination Rule
We recommend the repeal of section 708(b)(1)(B) regarding the technical termination of a partnership. A technical termination most often occurs when, during a 12-month period there is a sale or exchange of 50% or more of the total interest in partnership capital and profits. Because this 12-month time frame can span a year-end, the partnership may not realize that a 30% change (a minority interest) in one year followed by a 25% change in another year, but within 12 months of the first, has caused the partnership to terminate.

In practice, this earlier required filing of the old partnership’s tax return often goes unnoticed because the business is unaware of the accelerated deadline due to the equity transfer. Penalties are often assessed upon the business as a result of the missed deadline. This technical termination area is often misunderstood and misapplied. The acceleration of the filing of the tax return, to reset depreciation lives and to select new accounting methods, serves little purpose in terms of abuse prevention and serves more as a trap for the unwary.

d. Late Filing Penalties of Sections 6698 and 6699
Sections 6698 and 6699 impose a penalty of $200 per owner related to late-filed partnership or S corporation returns. The penalty is imposed monthly not to exceed 12 months, unless it is shown that the late filing is due to reasonable cause.

The AICPA proposes that a partnership, comprised of 50 or fewer partners, each of whom are natural persons (who are not nonresident aliens), an estate of a deceased partner, a trust established under a will or a trust that becomes irrevocable when the grantor dies, and domestic C corporations, is considered to have met the reasonable cause test and is not subject to the penalty imposed by section 6698 or 6699 if:

· The delinquency is not considered willful under section 7423;

· All partnership income, deductions and credits are allocated to each partner in accordance with such partner’s capital and profits interest in the partnership, on a pro-rata basis; and

· Each partner fully reported its share of income, deductions and credits of the partnership on its timely filed federal income tax return.

e. Failure to Disclose Reportable Transactions
Taxpayers who fail to disclose a reportable transaction are subject to a penalty under section 6707A of the Tax Code. The section 6707A penalty applies even if there is no tax due with respect to the reportable transaction that has not been disclosed. There is no reasonable cause exception to this penalty.

Under section 6662A, taxpayers who have understatements attributable to certain reportable transactions are subject to a penalty of 20% (if the transaction was disclosed) and 30% (if the transaction was not disclosed). A more stringent reasonable cause exception for a penalty under section 6662A is provided in section 6664, but only where the transaction is adequately disclosed, there is substantial authority for the treatment, and the taxpayer had a reasonable belief that the treatment was more likely than not proper. In the case of a listed transaction, reasonable cause is not available, similar to the penalty under section 6707A.

For example, a company that engaged in a “listed” transaction which gave rise to a deduction of $25,000 over the course of two years and inadvertently failed to report the transaction may be subject to a $200,000 penalty per year, for a total penalty of $400,000. The penalty can apply even if the deduction is allowable.

We propose an amendment of section 6707A to allow an exception to the penalty if there was reasonable cause for the failure and the taxpayer acted in good faith for all types of reportable transactions, and to allow for judicial review in cases where reasonable cause was denied. Moreover, we propose an amendment of section 6664 to provide a general reasonable cause exception for all types of reportable transactions, irrespective of whether the transaction was adequately disclosed or the level of assurance.

f. 9100 Relief
Section 9100 relief, which is currently available with regard to some elections, is extremely valuable for taxpayers who inadvertently miss the opportunity to make certain tax elections. Congress should make section 9100 relief available for all tax elections, whether prescribed by regulation or statute. The AICPA has compiled a list of elections (not all-inclusive) for which section 9100 relief currently is not granted by the IRS as the deadline for claiming such elections is set by statute. Examples of these provisions include section 174(b)(2), the election to amortize certain research and experimental expenditures, and section 280C(c), the election to claim a reduced credit for research activities.

g. Form 5471 Penalty Relief
On January 1, 2009, the IRS began imposing an automatic penalty of $10,000 for each Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, filed with a delinquent Form 1120, U.S. Corporation Income Tax Return, series return. When imposing the penalty on corporations in particular, the IRS does not distinguish between: a) large public multinational companies, b) small companies, and c) companies that may only have insignificant overseas operations, or loss companies. This one-size-fits-all approach inadvertently places undue hardship on smaller corporations that do not have the same financial resources as larger corporations. The AICPA has submitted recommendations regarding the IRS administration of the penalty provision applicable to Form 5471. Our recommendations focus on the need for relief from automatic penalties assessed upon the late filing of Form 5471 in order to promote the fair and efficient administration of the international penalty provisions of the Tax Code.

12. Tax Administration

The current degradation of the IRS taxpayer services is unacceptable. The percentage of calls from taxpayers the IRS answered between 2004 and 2016 has dropped from 87% to 53%, however, the need for taxpayer assistance increased (the number of calls the IRS received increased from 71 million to 104 million).

As tax professionals, we represent one of the IRS’s most significant stakeholder groups. As such, we are both poised and committed to being part of the solution for improving IRS taxpayer services. We recently submitted a letter to House Ways and Means Committee and Senate Finance Committee members in collaboration with other professional organizations. Our recommendations include modernizing IRS business practices and technology, re-establishing the annual joint hearing review, and enabling the IRS to utilize the full range of available authorities to hire and compensate qualified and experienced professionals from the private sector to meet its mission. The legislative and executive branches should work together to determine the appropriate level of service and compliance they want the IRS accountable for and then dedicate appropriate resources for the Service to meet those goals.

Additionally, we recommend the IRS create a new dedicated practitioner services unit to rationalize, enhance, and centrally manage the many current, disparate practitioner-impacting programs, processes, and tools. Enhancing the relationship between the IRS and practitioners would benefit both the IRS and the millions of taxpayers, including small businesses, served by the practitioner community. As part of this new unit, the IRS should provide practitioners with an online tax professional account with access to all of their clients’ information. The IRS should offer robust practitioner priority hotlines with higher-skilled employees that have the experience and training to address complex issues. Furthermore, the IRS should assign customer service representatives (a single point of contact) to geographic areas in order to address challenging issues that practitioners could not resolve through a priority hotline.

13. IRS Deadlines Related to Disasters

Similar to IRS’s authority to postpone certain deadlines in the event of a presidentially-declared disaster, Congress should extend that limited authority to state-declared disasters and states of emergency. Currently, the IRS’s authority to grant deadline extensions, outlined in section 7508A, is limited to taxpayers affected by federal-declared disasters. State governors will issue official disaster declarations promptly but often, presidential disaster declarations in those same regions are not declared for days, or sometimes weeks after the state declaration. This process delays the IRS’s ability to provide federal tax relief to impacted businesses and disaster victims. Taxpayers have the ability to request waivers of penalties on a case-by-case basis; however, this process causes the taxpayer, tax preparer, and the IRS to expend valuable time, effort, and resources which are already in shortage during times of a disaster. Granting the IRS specific authority to quickly postpone certain deadlines in response to state-declared disasters allows the IRS to offer victims the certainty they need as soon as possible.

This past year, multiple states along Southeastern U.S. were affected by Hurricane Matthew, including Florida, Georgia, North and South Carolina, and Virginia. From October 6 through 10, Matthew traveled north along the southeast coast. A federal state of emergency was declared for Florida on October 6 and later extended to include Georgia and South Carolina. Tax preparers and taxpayers living in the affected regions not only lost access to power and the Internet, but lost tax documents and financial information due to flooding and destruction of both their homes and businesses. On October 13, 2016, the IRS issued IR-2016-132 offering federal tax relief to regions of North Carolina. The relief arrived two days before the major October 15 extended tax filing deadline – which caused tax practitioners unnecessary stress and burden for the days leading up to the issuance of the relief. Three days after the extended filing deadline, on October 18, the IRS issued relief for Florida and Georgia – which was, unfortunately, too late to make a substantial difference. More recently, on March 13, 2017, Winter Storm Stella hit the Northeast and Mid-Atlantic U.S. covering many states in multiple feet of snow two days before the March 15 business return due date. Before 2:00 pm (ET) on the first day of the storm, governors in New York and other states began issuing emergency declarations while the AICPA and state CPA societies along the northeast received calls from members needing federal filing relief from the IRS. Two days later, at approximately 4:30 pm (ET) on the March 15 filing due date, the IRS finally issued IR-2017-61 offering business taxpayers affected by Winter Storm Stella additional time to file. Receiving federal extensions are helpful, but the sooner the IRS can grant this relief, the greater the beneficial impact on victims.

The AICPA has long supported a set of permanent disaster relief tax provisions and we acknowledge both Congress’s and the IRS’s willingness to help disaster victims. To provide more timely assistance, however, we recommend that Congress allow the IRS to postpone certain deadlines in response to state-declared disasters or state of emergencies.

14. Other Small Business Tax Compliance Issues

There are several other small business tax compliance burden proposals that we support, including:

a. Listed Property
We suggest removing “computer or peripheral equipment” from the definition of “listed property” in order to simplify and modernize the traditional tax treatment of computers and laptops. Classifying computers and similar property as “listed property” under section 280F is clearly outdated in a business environment where employees are increasingly expected to work outside of traditional business hours. Various forms of technology, including laptops, tablets and cell phones, are all converging to serve similar purposes. The costs for the Internet and service plans are now frequently sold in “bundles” and shared between multiple devices and it has become arguably impossible to segregate the cost of service between a cell phone, tablet, and laptop. The AICPA believes legislative change to update the treatment of mobile devices is the best simplification, similar to section 2043 of the Small Business Jobs Act of 2010, where cell phones were removed from the definition of listed property for taxable years beginning after December 31, 2009.

b. Executive Compensation
The AICPA supports that section 409A requirements should apply only to public companies. Section 409A, which applies to compensation earned in one year but paid in a future year, was enacted to protect shareholders and other taxpayers from executives guarding their own financial interests without concern for the financial interests of the organization, its shareholders or other creditors.

The rules apply to a broad array of compensation arrangements, including many business arrangements that are not thought of as deferred compensation. Nonpublic companies often want arrangements with employees to allow for sharing equity or providing capital accumulation for long-term employees, and constraining the nonpublic business owner by rules designed to protect absentee shareholders should not occur.

Many nonpublic entities have noncompliant plans that are not correctable under the existing administrative correction programs. The cost of a noncompliant 409A plan is excessive given the unintended violations. In addition to accrual base income recognition, the additional 20% tax applies to the recipient, often a person unknowingly affected by the violations. Requiring private companies to pay for the specialized tax guidance needed to ensure that a compensatory arrangement is 409A compliant should not occur. The cost of imposing 409A requirements on nonpublic companies is far in excess of any benefit derived.

c. Elimination of Top-Heavy Rules (for Retirement Plans)
Small businesses are especially burdened by the overwhelming number of rules inherent in adopting and operating a qualified retirement plan. Therefore, we support repealing the sole remaining top-heavy rule, which limits the adoption of 401(k) and other qualified retirement plans by small employers and requires a minimum contribution or benefit. The determination of top-heavy status is difficult and the required 3% minimum contribution is often made for safe harbor 401(k) plans. Without the top-heavy rules, more small businesses would adopt plans to benefit their employees.

d. Provide Full Deductibility of Health Insurance
We recommend allowing full deductibility of health insurance costs in calculating the self-employment tax for self-employed individuals. This suggestion would provide that deductions allowed in determining income subject to Survivors, and Disability Insurance (OASDI) and health insurance (HI) taxes remain consistent amongst taxpayers regardless of whether they are employees or self-employed individuals. Currently, employees receive this deduction for their health insurance costs while self-employed individuals are not allowed a deduction in determining their net income subject to these taxes. The calculation of income subject to a particular tax should remain consistent amongst all taxpayers.

e. Increase the Passive Income Percentage to 60% and Eliminate the Three-Year Termination for S Corporations
The AICPA recommends increasing the threshold of an S corporation’s income that is considered passive without incurring an entity-level tax to 60% (from 25%). Additionally we recommend eliminating the current rule that terminates an S corporation’s pass-through status if the S corporation has excess passive income for three consecutive years.

Currently, if an S corporation has excess passive income for three consecutive years, even though incurring a corporate-level tax is a possibility due to the taxable income limitation, the S election is subject to termination, creating uncertainty in S corporation operations. Under current law, if the S corporation unknowingly has $1.00 of accumulated earnings and profits, the S election is terminated if the S corporation has excess passive investment income for three consecutive years. The IRS routinely grants waivers of the involuntary termination under section 1362(d)(3). S corporations without C corporation earnings and profits may receive an unlimited amount of passive investment income and are not subject to the S election termination.

f. Guidance Needed on Emerging Issues
Online crowdfunding and the sharing economy are quickly expanding mediums through which individuals obtain funds, seek new sources of income, and start and grow businesses. Individuals may understand the steps through which they can use these new crowdfunding and sharing economy opportunities to their advantage. However, many tax preparers and their clients do not have the guidance necessary to accurately comply with the complex, out-of-date, or incomplete tax rules in these emerging areas.

Lawmakers and tax administrators must regularly review existing laws, against new changes in the ways of living and doing business, to determine whether tax rules and administration procedures need modification and modernization. We urge Congress and the IRS to develop simplified tax rules and related guidance in the emerging sharing economy and crowdfunding areas. Some of the areas in need of modernization include information reporting (such as to avoid reporting excluded income, such as a gift, as income), simplicity in reporting and tracking rental losses from year to year, and simplified approaches for recordkeeping for small businesses. Offering clarity on these issues will allow taxpayers to follow a fair and transparent set of guidelines while the IRS benefits from a more efficient voluntary tax system. In addition, it is not recommended to bypass these evolving opportunities of connecting businesses and customers, and generating funds for equity and sales, due to entrepreneurs concerned about uncertain tax effects.

How Interest Can Be Deducted When Money is Borrowed to Buy Investments

  • Written by Julie Welch, CPA, CFP

welch julieIf a taxpayer borrows money to purchase investments, such as mutual funds, bonds or stock, the interest paid on the loan can usually be deducted. There are two limitations, however, on the amount of interest that can be deducted. First, a taxpayer cannot deduct the interest on loans used to buy investments that produce tax-exempt income. In other words, if a taxpayer borrows money to buy a municipal bond, the interest paid on the loan cannot be deducted.

Second, a taxpayer’s investment interest expense deduction for the year cannot exceed the net investment income for the year. Net investment income is the amount of a taxpayer’s investment income over his or her investment expenses, other than investment interest expense, for the year. Investment income includes interest and short-term capital gains, however it does not include dividends that qualify for the special dividends tax rate. Investment expenses include amounts paid for investment advice, investment publications and safe deposit boxes. Investment expenses do not include brokers’ fees taxpayers pay when buying or selling stock. These are added to the cost of the stock and reduce the gain or increase the loss when the stock is sold.

If part of the interest a taxpayer pays is not deductible because it exceeds the investment income, the disallowed deduction is not lost. The amount can be carried forward to future years. The disallowed amount is then deducted in the year or years that the taxpayer’s net investment income exceeds his or her investment interest.

 

EXAMPLE

If your client has $2,000 of net investment income and $2,400 of investment interest expense, you can deduct $2,000 of investment interest. The $400 ($2,400 – 2,000) you could not deduct is carried forward to the following year.

 

Investment Expenses

In calculating net investment income, investment income is reduced only by the investment expenses you can deduct. If you cannot deduct investment expenses because of the 2% of adjusted gross income (AGI) floor for miscellaneous deductions, you do not need to reduce investment income by the expenses. In other words, the investment income is reduced only by expenses from which a taxpayer receives a tax benefit.

 

EXAMPLE
Your client has $1,800 of interest income and total AGI of $50,000. Your client borrows money from a broker to purchase stock. The investment interest expense is $1,700. The only miscellaneous expenses are $500 for investment publications. Although it appears that the net investment income is $1,300 ($1,800 – 500) and $400 ($1,700 – 1,300) of the investment interest expenses will be disallowed this year and carried forward, this is not correct.

Because miscellaneous expenses must exceed 2% of your client’s AGI, $1,000 ($50,000 x 2%), before he or she can take a deduction for the expenses, you cannot deduct the investment expenses. As a result, you do not have to reduce the investment income by the investment expenses. The net investment income is $1,800, so you can deduct the entire $1,700 of investment interest expense.

 

Qualifying Dividends and Long-Term Capital Gains

Qualifying dividends and long-term capital gains, including capital gain distributions from mutual funds, are not automatically included in investment income. You may elect to include qualifying dividends and long-term capital gains in the calculation of the net investment income. You may elect to include qualifying dividends and long-term capital gains in the calculation of the net investment income. If the election is made, qualifying dividends and long-term capital gains are taxed as they are ordinary income. In other words, the maximum 15% rate on qualifying dividends and long-term capital gains must be sacrificed to generate an investment interest expense deduction at ordinary rates.

Congress changed the law to prevent taxpayers from taking advantage of the difference in rates between ordinary income and long-term capital gains. Without the change, taxpayers could deduct interest expense at his or her ordinary tax rate of 25%, 28%, 33% and 35%. At the same time, taxpayers could have your qualifying dividends and long-term capital gains taxed at a 15% tax rate.

For the most part, planning with this election is straightforward. If the net investment income is more than the investment interest expense without including qualifying dividends and long-term capital gains, do not make the election to include long-term capital gains in investment income. This way the taxpayer benefits from the 15% maximum tax rate on the qualifying dividends and capital gains.

The difficult choice occurs when qualifying dividends and long-term capital gains are taxed at a rate lower than an ordinary tax rate. If a taxpayer’s investment interest expense deduction is limited because he or she does not have enough investment income, the taxpayer must choose between an investment interest expense deduction today or an investment interest expense deduction in a future year. The decision depends on the amount of qualifying dividends and long-term capital gain that will be taxed at the ordinary tax rate if the election is made; and the amount of interest deduction that will be lost this year and carry over to the next if the election is not made. The decision also depends on how much investment income is expected in the future.

 

EXAMPLE

Your client is in the 33% tax rate bracket, has an investment income of $2,000 and a long-term capital gain of $3,000. Itemized deductions include investment interest expense of $2,700.

If no election is made, your client will pay tax of $450 (15% x $3,000) on the long-term capital gain. There is no tax on the net investment income of $2,000 because it is offset by $2,000 of the investment interest expense. Your client has an investment interest expense. There is an investment interest expense carry-over of $700 ($2,700 – 2,000). The $700 carry-over could reduce tax by $231 ($700 x 33%) in the following year if there is enough investment income. If you make the election to tax $700 of the $3,000 long-term capital gain at ordinary rates, all of the investment interest expense is deductible in the current year. Your client pays tax of $345 (($2,000 + 700 – 2,700) x 33%) + (15% x 2,300 (the remaining long-term capital gain)) on the income. Your client saves $105 ($450 – 345) this year, but no longer has an investment interest expense carry-over. Thus, over the two-year period, your client may pay additional tax of $126 ($231 (savings by not making the election and using the investment interest carry-over next year)).

If you are certain your client’s investment income next year will be more than his or her investment interest expense and investment interest expense carry-over, you should not make the election. By making the election, you can deduct the investment interest expense this year when you know your client can take the deduction.

Construction Tax Planning: A Proactive Methodology to Accelerated Depreciation

  • Written by Peter J. Scalise

scalise peterA properly designed and implemented Construction Tax Planning analysis will proactively identify additional tax savings related to new and / or planned construction projects. It should be duly noted that a Construction Tax Planning analysis should not be confused with a Cost Segregation analysis as there are several notable differences between a Cost Segregation analysis and a Construction Tax Planning analysis.

A Cost Segregation analysis will methodically review property, plant and equipment and properly reclassify real property (e.g., property that is generally depreciated for tax return purposes over a period of either 27.5 years in the case of commercial residential apartment buildings or 39 years in the case of commercial office buildings) into personal property (e.g., property that is generally depreciated for tax return purposes over a period of either 3, 5, or 7 years) and land improvements (e.g., property that is generally depreciated for tax return purposes over a period of 15 years) by reviewing all of the structural components within the building structure (e.g., exterior walls, roof, windows, doors, etc.) and the building systems (e.g., lighting, HVAC, plumbing, electrical, escalators, elevators, fire-protection and alarm systems, security systems, gas distribution systems, etc.). In general, floor plans and blueprints are meticulously reviewed and site inspections are conducted to review the building envelope as part of an engineering based Cost Segregation analysis to ensure sustainable tax return filing positions per Circular 230.

In sharp contrast, a Construction Tax Planning analysis utilizes a proactive “Pre-Design Phase” methodology to identifying, gathering, and documenting additional tax savings related to new and / or planned construction projects whether in connection to:

Constructing a New Building;

Adding a New Wing to an Existing Building; or

Renovating a Single Floor within an Existing Building.

Construction Tax Planning enables accelerated depreciation deductions through the recommendation of select materials and supplies to be utilized in the “Construction Phase” to ensure that the structural components will be classified as personal property as opposed to real property (e.g., requesting a design-build contractor to utilize modular internal walls to bifurcate office and / or conference room space in a commercial office building as opposed to permanently affixing these said internal walls to bifurcate office and / or conference room space within the floor configuration layout will enable the said structural components to be classified as personal property with a 5 year depreciable class life as opposed to real property with a 39 year depreciable class life).

In addition, Form 3115 is never filed as Construction Tax Planning is proactive planning and not reactive planning. Noting, there is no need to reclassify asset classifications as all of the structural components of the building envelope are properly classified when they are initially placed into service on a timely filed tax return. This mitigates IRS audit risk as an accounting method change never occurred and consequently Form 3115 is not filed. It should be duly recalled that Accounting Method changes only occur when a transaction is treated a certain way on a tax return (i.e., regardless of correctly or incorrectly) for a period of two years or more.

Finally, and as applicable, by combining Cost Segregation analysis with both the principles of Construction Tax Planning and Abandonment Deduction Planning per the Final Treasury Regulations governing Tangible Property (e.g., the retirement or abandonment of structural components within the building envelope before they have been fully depreciated over their asset class life for tax return purposes) you can optimize the true value of a comprehensive fixed asset analysis.


Peter J. Scalise serves as the Federal Tax Credits & Incentives Practice Leader for Prager Metis CPAs, a member of The Prager Metis International Group.

Documentation to Transfer Closely Held LLC Interests by Gift or Sale

  • Written by Martin M. Shenkman, CPA, MBA, PFS, AEP, JD

mug martin shenkmanFunding Irrevocable Trust with Family or Closely Held LLC Interests

LLCs are the default entity for most family or closely held business and real estate ventures. Practitioners are therefore commonly involved in assisting clients with these transfers. The role of the CPA will vary depending on the involvement of the client’s lawyer, an outside appraiser and others. The following is a broad checklist listing much of the information that should be organized for each family or closely held LLCs interest and suggested steps to be taken with respect to the transfer of your interests to an irrevocable trust. Many of the examples use real estate as an example, but if the LLC owned different assets or business interests these would simply have to be changed to be relevant to the particular circumstances. Even though a number of the documents should be prepared by others, e.g., a real estate appraiser (assuming the practitioner does not perform real estate appraisals) or legal documents, the practitioner still needs these steps on his or her radar screen.

  1. Coordination of Legal, Appraisal and other Work. The more of these steps that can be handled internally by legal counsel for the real estate business/entities, the more efficient and cost effective. This will especially be true if other family members are undertaking similar planning.
  1. 2704 Regulations May Eliminate Valuation Discounts.
    1. The Treasury (IRS) recently issued Proposed Regulations that may eliminate valuation discounts. These Regulations could be effective as early as December 31, 2016. The loss of discounts could have a substantial adverse impact on leveraging these real estate LLC interests out of your clients’ estates. This might result in a flurry of gift and sale transactions before these Regulations become effective.
    2. This same issue should affect all other owners and thus many if not all owners should be undertaking similar planning by year-end. If this is the case then all owners can share the costs of the appraisals, preparation of transfer documents and other steps. This will greatly simplify the process and lower the cost of all the transfers involved for any particular owner (e.g., your client).
    3. This checklist might prove useful to coordinate that effort. If other owners will not become involved or will not proceed in this matter it is important that you guide your client to the appropriate steps and realistic cost estimates.
  1. LLC Owner Details.
    1. Information as to the owners and their relationships for each entity should be obtained.
    2. This may be essential to the interpretation of the operating agreement and what must be done to approve the particular transfers your client wishes to make.
    3. In the future this may be essential to determine the applicability of the 2704 valuation discount restriction rules (i.e., is it a family controlled entity in technical not common usage terms).
  1. Appraisal.
    1. Appraisals must be completed by “qualified appraisers” as defined in applicable Regulations. The qualified appraiser must complete a “qualified appraisal” which also must comply with a checklist of requirements contained in applicable tax laws.
    2. The appraisal must be a two-tiered process.
      1.                                                i.     First the fair market value of underlying real estate must be determined. An MAI appraisal of the fair market value of each real estate property owned by each LLC is necessary. The appraiser will require all the applicable information to complete this type of appraisal: rent rolls, historical operating expenses and rents, survey, leases, and so forth.  Whatever data you have used to make these estimates might be useful for an appraiser and might defray appraisal costs but formal appraisals should be collected (e.g. prior appraisals for estate planning purposes, bank appraisals, etc.).
      2.                                              ii.     An appraisal of the ownership entity and, in particular, the LLC membership interests of the member which will be transferred as part of the estate planning. This will require that the appraiser be provided with the governing legal documents for the entity, several years of tax returns, and other data. Some of this is discussed elsewhere in this checklist.
  1. Real Estate Documents to Collect.
    1. Narrative.
      1.                                                i.     A narrative for each property/entity that describes the relationship of the owners, who manages the property/entity, the type of property, any plans or anticipated future for the property (e.g., hold for long term, potential sale in a specified time frame, planned rehab, etc.).
      2. Accounting data.
        1.                                                i.     Rent roll.
        2.                                              ii.     Financial statements for a number of prior years.
        3.                                             iii.     Distributions, salaries and other economic benefits the family receives from the property, and any other important facts.
      3. Deed.
        1.                                                i.     For any entities that are closely held it is recommended that the deeds to the underling properties also be part of the documentation organized to be certain that they are held in the correct entity name.
        2.                                              ii.     While this might seem unnecessary, I have seen errors in deeds and entities for clients with similarly significant holdings. It is imperative that before any entity interests are transferred it be certain that the properties are properly titled in those entities. If such an error were discovered on an IRS audit following transfers it could be costly and could undermine significant components of a plan.
      4. Mortgage.
        1.                                                i.     Current balance will be necessary for the appraiser.
        2.                                              ii.     Mortgage documentation will be necessary for real estate counsel to review to ascertain what prerequisites if any may affect your intended transfers.
      5. Leases or other contractual agreements.
        1.                                                i.     These may affect valuations or assist your real estate counsel in identifying restrictions, notice or other requirements for transfer.
  1. Entity Documents to Collect.
    1. Formation Certificate.
      1.                                                i.     Documents filed on the formation of the entity.
      2.                                              ii.     Any amendments.
      3. Certificate of good standing for the entity.
        1.                                                i.     This is inexpensive but, surprisingly even for well-organized clients, some issues are identified. It is preferable that any issues as to the validity of the entity be addressed by the CPA or attorney before estate planning transactions are consummated.
      4. Confirmation of the tax status of each entity.
        1.                                                i.     While most LLCs are taxed as partnerships some elect to be taxed as S or C corporations. Confirmation of the tax status is vital because of the importance of achieving a basis step up on death.
        2.                                              ii.     If the ownership entity is a partnership or LLC taxed as a partnership the ability to step up the inside basis of the partnership in the asset, referred to as a IRC Sec. 754 basis adjustment, will be crucial whether this has been addressed for entities involved. This should all be reviewed now and if amendments are advisable, negotiating (if necessary) with other owners, an amendment and restatement of the entity documents to give members/partners the right to demand that the entity make a 754 basis adjustment.
      5. Operating Agreement.
        1.                                                i.     Copies of the governing documents for each entity. This is generally an “operating agreement” for an LLC but sometimes other records are involved.
        2.                                              ii.     Copies of all amendments. The most current agreement should reflect all current owners and their correct owners and should be consistent with applicable income tax returns (e.g., Forms K-1 of Form 1065 if the LLC entity is taxed as a partnership).
        3.                                             iii.     Please be certain all copies provided are of fully executed documents. If these do not exist, have the client follow up with counsel.
        4.                                             iv.     This should be reviewed by your corporate/real estate counsel to ascertain whether transfers of your interests as between each of you and then trusts is permitted.
        5.                                              v.     As noted below an amended and restated operating agreement should be prepared reflecting all transfers. Many lawyers simply prepare an assignment of LLC membership interests. On a tax audit it is preferable to have an operating agreement reflecting ownership interests before the transfer and one reflecting the revised ownership percentages after the transfer.
      6. Other key legal documents.
        1.                                                i.     This could include minutes or consents or other documents.
      7. Recent federal income tax returns for the entity.
        1.                                                i.     If the LLCs have all chosen to be taxed as partnership for income tax purposes then this would be Form 1065.
      8. Tax Basis.
        1.                                                i.     An estimate of the tax basis for the properties held by each entity. This is important to consider the pros and cons of shifting any of these interests outside of your estates (e.g. via direct gifts, gifts through GRATs, or sales to a grantor trust, etc.).
        2.                                              ii.     Depending on the anticipated holding period for a particular property or entity, the magnitude of appreciation, and other factors, it may prove more advantageous to retain a particular asset inside your client’s estate rather than shifting it out. Real estate, in particular, is a somewhat unique asset for purposes of this type of analysis in that if a property is a quality property that you intend to hold for the long term, or for which a tax deferred Code Section 1031 is feasible (but beware that proposals have been made to severely restrict this tax benefit), then removing that asset from your client’s estate may be more beneficial than retaining it to realize a basis step up. In all events consider putting the client on notice of basis considerations.
  1. Transfer restrictions.
    1. Confirmation by real estate counsel that any contractual restrictions on transfer have been met or that none exist.
    2. This could include lender requirements (e.g., due on transfer clauses).
    3. Depending on the nature of the properties involved, anchor tenants, or others may have negotiating contractual restrictions or perhaps only notification requirements before transfers.
  1. For LLC interests gifted to an irrevocable trust.
    1. Gift letter. A letter signed by the donor member transferring by gift LLC interests to the irrevocable trust.
    2. Assignment of LLC interests.
      1.                                                i.     An assignment document transferring LLC interests from you as owner to the irrevocable trust.
      2.                                              ii.     This should be signed by the trustee confirming acceptance of the gift.
      3. If the LLC certificates its membership interests, a new membership certificate indicate the interests or units owned by the trust. If not all interests or units are being given a second certificate reflecting the interests or units retained by the transferor member after the gift should also be provided.
      4. Amended and restated operating agreements reflecting membership interests and owners after the gift.
  1. For LLC interests sold to the irrevocable trust.
    1. All the same documents listed above for gifts but instead of a gift letter the following documents might be included.
    2. A sale of interests will be necessary if you wish to transfer more value of interests then a mere gift will permit. This will depend on the size of the member’s estate, the value of the interests involved, how much exemption the member still has remaining (the total in 2016 is $5,450,000), and other factors.
    3. LLC membership interest purchase and sale agreement.
    4. Note given by irrevocable trust for purchase of LLC membership interests.
    5. Security agreements with respect to sale if trust buys interests for a note.
  1. Gift tax returns.
    1. Be certain the client is aware of the requirements to file a gift tax return reporting the transactions.
    2. Sales may be reported as “non-gift” transactions on the gift tax return.
  1. Consolidation.
    1. It might be useful to consolidate smaller holdings into a single family real estate holding entity to simplify the legal work and formalities of gifts and/or sales to various trusts.
    2. If, for example, no other members wish to make transfers, it may be simpler for you to transfer all your family real estate LLC interests to a new personal LLC holding company and then use membership interests in that new holding company to transfer interests to your irrevocable trust.