Business Tax

Are you concerned about being stuck with large capital gain in 2018? What if there was a way to avoid it this year? How about for the next 10 years?

If you’re facing beefy tax payments because of capital gains, a new tax break may be worth exploring. The program is part of the Tax Cuts and Jobs Act. It’s called the Opportunity Zone Tax Incentive, and along with saving you money, it’s true purpose is to promote investors to push money into low-income areas to increase their value.

Where Are These Opportunity Zones Located?

An Opportunity Zone is a community nominated by the state and certified by the Treasury Department as qualifying for this special program. Approximately 8,700 Opportunity Zones qualify nationwide. All 50 states have certified zones that qualify, as do Washington DC and US territories.

How Does The Program Work?

Taxpayers who wish to take advantage of this program because they are facing large capital gain after the sale or exchange of appreciated property have a limited amount of time in which to take action. They have 180 days from the date of the sale or exchange to invest into a Qualified Opportunity Zone Fund. The fund is a vehicle organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property.

What happens to the return of principal? Taxpayers may reinvest it along with recognized capital gain. Only the portion attributable to the capital gain will be eligible for the tax exemption on further appreciation of the Opportunity Zone Investment.

Is the Opportunity Zone Fund Similar to Other Investments?

Just as in other investments, the value of an Opportunity Zone Fund investment may increase or decrease over the holding period. The investor may pay income on this investment. Keeping in mind that the purpose of the program is to improve designated low-income areas, the fund is expected to continue investing in the improvement of the property.

What About Cash Flow?

Once the property improvements are complete, the property may be leased or sold to third parties. At this time, cash flow may occur.

Are There Any Risks?

Investing in The Opportunity Zone Tax Incentive may or may not have risks associated. It’s new, and the IRS and Treasury Department are still gathering information on how the fund will work over time. Because of this, the level of risk is difficult to assess. However certain potential risks have been identified.

Among other things, risks may include market loss, liquidity risk, and business risk. Before you make any plans, note that investment in the new tax incentive may or may not be appropriate in your case. It’s best to consult with a tax professional to determine it it’s a fit for you.

Request your free consultation today by calling Sorenson & Company, CPA at 801-553-1120. As a thank you gift for scheduling your consultation, we’ll provide a free book, The Great Tax Escape.

The new Section 199A provides self-employed taxpayers the ability to deduct up to 20% of their Qualified Business Income (QBI) on their tax returns. In general, QBI is net income that is received from a Qualified Trade or Business. However, there are some exclusions, the most common of which are capital gains, dividend and interest income. Additionally, any guaranteed payments or “reasonable compensation” paid to owners is excluded.

How Does the New Tax Law Define QBI?

Section 199A(c) defines QBI as, “the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer.” The section further states that qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income are specifically excluded from the definition of QBI.

What are “Qualified Items of Income, Gain, Deduction, and Loss?”

Qualified items of income, gain, deduction, and loss are defined as items that are connected with a trade or business that is operated in the United States and are generally included or allowed when a business determines its taxable income for the year. However, there are items that are specifically excluded:

• Short-term capital gains and losses
• Long-term capital gains and losses
• Dividends
• Interest income
• Foreign personal holding income
• Income from an annuity if not received in connection with the business

These items may not be income or deductions for purposes of calculating QBI. A basic method of viewing QBI is “ordinary” income less “ordinary” expenses. In other words, investment gains and expenses are not QBI for Section 199A purposes.

Reasonable Compensation and Guaranteed Payments

In addition to the items discussed above, any reasonable compensation paid to the taxpayer by the business, including guaranteed payments, is not QBI. For example, if you receive $50,000 in wages from an LLC that you own and your share of income at the end of the year is $100,000 – only the $100,000 would be considered QBI.

Contact Sorenson and Company, CPA, today at 801-553-1120 to schedule your free consultation and learn about our unique tax reduction services. As a thank you for scheduling your consultation, we’ll provide you with a free book, The Great Tax Escape.

Crowdfunding — or funding a project through the online contributions of many different backers — is becoming increasingly popular. If you are considering raising crowdfunding revenue or contributing to a crowdfunding campaign, you will need to address the many tax issues that can arise.

Background

While crowdfunding was initially used by artists and others to raise money for projects that were unlikely to turn a profit, others have begun to see crowdfunding as an alternative to venture capital. Depending on the project, those who contribute may receive nothing of value, a reward of nominal value (such as a T-shirt or tickets to an event), or perhaps even an ownership/equity interest in the enterprise.

Is It Income?

In an “information letter” released in 2016,¹ the IRS stated that crowdfunding revenues will generally be treated as income unless they are:

• Loans that must be repaid
• Capital contributed to an entity in exchange for an equity interest in the entity
• Gifts made out of detached generosity without any “quid pro quo”

The IRS noted that the facts and circumstances of each case will determine how the revenue is to be characterized and added that “crowdfunding revenues must generally be included in income to the extent they are for services rendered or are gains from the sale of property.”

Frequently, the IRS learns of the activity because crowdfunding entrepreneurs have used a third-party payment network to process the contributions. Where transactions during the year exceed a specific threshold — gross payments in excess of $20,000 and more than 200 transactions — that third party is required to send Form 1099-K (Payment Card and Third-Party Network Transactions) to the recipient and the IRS. Payments that do not meet the threshold are still potentially taxable.

If It’s Income

“Ordinary and necessary” business expenses are generally tax deductible, but deductions for expenses are limited if the IRS deems the activity a hobby rather than a trade or business. Generally, the IRS applies a “facts and circumstances” test to determine if you have a profit-making motive, which is necessary for a trade or business.

New Businesses

Favorable deduction rules may be available for certain types of expenses incurred in starting a new business. If eligible, the business may elect to expense up to $5,000 of those costs (subject to phaseout) in the year the business becomes active, with the remainder of the start-up expenditures deducted ratably over a 180-month period.

For Contributors

Campaign contributors should not assume that their gifts qualify as tax-deductible charitable contributions. Tax-deductible contributions must meet certain requirements, including that they be made to a qualified charitable organization. If gifts are made to an individual or nonqualified organization, you will generally need to file a gift tax return for gifts to any one recipient that exceed the gift tax annual exclusion ($15,000 for 2018).

These are just some of the potential tax issues that may arise. Consult your tax advisor regarding your specific situation.

Contact Sorenson & Company, CPA, today at 801-553-1120 to schedule your free consultation and learn about our unique tax reduction services. As a thank you for scheduling your consultation, we’ll provide you with a free book, The Great Tax Escape.

Source/Disclaimer:

¹Information Letter 2016-0036