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The Federal Opportunity Zone Program Overview

Federal Opportunity Zone Program Overview By Blake Christian

The 2017 Tax Cut and Jobs Act (2017 Act) created the federal Qualified Opportunity Zone program (QOZ or Program) effective in 2018 and operative up to the next three decades.

Beginning January 1, 2018 through December 31, 2026, individuals, corporations, REITs, and pass-through entities can sell their appreciated capital assets and elect to reinvest the resulting capital gain into a Qualified Opportunity Fund (QOF). The federal tax impact of participating in a QOF includes deferring qualified gains for up to eight years and permanently exempting up to 15% of the original federal gain and 100% of the post-reinvestment gain – after holding the investment for seven and ten years, respectively. State conformity to this law is varied and requires a careful state-by-state analysis.

The Program offers a powerful and flexible tax savings and diversification tool for taxpayers generating capital gains. To participate, taxpayers must roll all (or a portion) of their capital gains (whether short-term or long-term) into a QOF. The QOF must then timely (180-day window discussed below) invest the gain into undeveloped or developed real estate, a new or existing QOZ-based business, or into other qualified QOZ property. While most of the focus is on real estate projects, the Program also provides significant potential benefits for taxpayers investing in active businesses that operate primarily within a QOZ. A future sale of an active business at multiples of 6- to 8-times EBITDA can easily eclipse a healthy real estate appreciation.

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Opportunity Zone Program – Federal Qualified Opportunity Zones

A Tax Deferral Tool

The 2017 Tax Cuts and Jobs Act (P.L. 115-97) introduced the Qualified Opportunity Zone (“QOZ”) program under I.R.C. Section 1400Z-1 and 1400Z-2. The QOZ program is an economic development platform intended to encourage private investment into low-income communities throughout the United States and U.S. territories and is generally effective January 1, 2018, through December 31, 2026.

Federal Tax Deferral

The QOZ gives taxpayers a federal tax deferral (as well as a potential partial permanent tax savings) of realized capital gains on the sale of appreciated assets. The taxpayer will still need to recognize the ordinary gain portion on the initial sale, but can effectively defer the portion of the gain subject to 20% or 23.8% capital gains tax, depending on the taxpayer’s specific facts and circumstance. For example, taxpayers will experience different marginal rates depending if the original investment was active, passive, or investment portfolio activity. Note that further guidance from the Internal Revenue Service (“IRS”) is required in this area.

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Top 10 Things You Need To Know About The Federal Opportunity Zone Program

Blake Christian - Top Ten Things You Need To Know

This post discusses the top ten things you need to know about the Federal Opportunity Zone Program.

1. Which Gains Are Eligible? – The Deferred Tax Gain can be related to a wide variety of capital assets sold by the investor, ranging from: the sale or disposition of land, developed real estate, stock or bond portfolios, artwork, collectibles, Bitcoin or other cryptocurrencies, as well as other tangible and intangible assets.  The Deferred Tax Gain must be reinvested into a Qualified Opportunity Zone Fund (QOF) within 180 days of recognizing the tax gain on sale (note there are beneficial timing rules for gains reportable from a partnership). Timely reinvestment will generally allow deferred gain reporting until the earlier of December 31, 2026, or the date the QOF is sold.

2. Qualified Opportunity Fund Requirement -Taxpayers wishing to participate in the QOZ program must do so through a QOF.  The statute provides a fairly straightforward process to meet the QOF requirements.  The entity must be either: i) a C Corporation, ii) an S Corporation or iii) a Partnership (including an LLC electing to be taxed as a partnership).  A QOF can represent a single investor or multiple investors.
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What Taxpayers Need To Know About Dividends, Interest And Capital Gains In The New Tax Landscape

Blake Christian
Key Takeaways
  • Regular dividends are generally not eligible for the lower long-term capital gains tax rates that Qualified Dividends receive unless the recipient holds the underlying shares for a specific period of time.
  • A common misconception is that the underlying shares must be held for longer than one year in order for any related dividends to be taxed as Qualified Dividends.
  • Since Real Estate Investment Trusts (REITs) generally pay no entity-level tax, dividends issued by a REIT are generally not eligible for the reduced rates assigned to Qualified Dividends.
  • Mutual fund distributions will only qualify for the reduced tax rate to the degree that the amount is determined to be a Qualified Dividend that’s received by the mutual fund.

Introduction
With the new 21 percent flat tax rate, along with liberalized asset depreciation and expensing provisions plus a lower tax on repatriated foreign earnings, the landmark Tax Cut and Jobs Act (TCJA) has been a boon to U.S. C corporations since its passage late last year. But, many individual taxpayers and their advisors are still digesting the changes and mulling over their next steps. Below is a primer about the tax treatment of dividends, interest and capital gains in light of the new tax reform landscape.

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The Federal Opportunity Zone Program – Overview

Blake Christian-Federal Opportunity Zone Program

The 2017 Tax Cut and Jobs Act (2017 Act) created the federal Qualified Opportunity Zone program (QOZ or Program) effective in 2018 and operative up to the next three decades.

Beginning January 1, 2018 through December 31, 2026, individuals, corporations, REITs, and pass-through entities can sell their appreciated capital assets and elect to reinvest the resulting capital gain into a Qualified Opportunity Fund (QOF). The federal tax impact of participating in a QOF includes deferring qualified gains for up to eight years and permanently exempting up to 15% of the original federal gain and 100% of the post-reinvestment gain – after holding the investment for seven and ten years, respectively. State conformity to this law is varied and requires a careful state-by-state analysis.

The Program offers a powerful and flexible tax savings and diversification tool for taxpayers generating capital gains. To participate, taxpayers must roll all (or a portion) of their capital gains (whether short-term or long-term) into a QOF. The QOF must then timely (180-day window discussed below) invest the gain into undeveloped or developed real estate, a new or existing QOZ-based business, or into other qualified QOZ property. While most of the focus is on real estate projects, the Program also provides significant potential benefits for taxpayers investing in active businesses that operate primarily within a QOZ. A future sale of an active business at multiples of 6- to 8-times EBITDA can easily eclipse a healthy real estate appreciation.

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Is Your Business Still The Right Entity Under The New Tax Rule? (Part 2)

Blake Christian - Choose Business Entity Part 2

More tips about determining the right corporate, partnership or other structure that’s best for your business—and where you are in life.

Key Takeaways:
• The legal structure of your business operations can have a significant impact on your annual income tax and estate planning.
• When you and/or your heirs expect to be at or near the maximum income tax rates, you will generally want to leave appreciated and appreciating assets in the taxable estate, rather than transfer them prior to death.
• In general, assets with the potential to appreciate in value should not be placed into an S or C Corporation.

As many of you know, The Tax Act of 2017 created a host of changes and considerations for successful business owners in their families. There are six widely used business operating structure. In Part 1 {LINK} of this article we discussed Sole Proprietorships (Schedule C), Limited Liability Companies (LLC) and Limited Partnerships. Here will take a closer look at the other three
entities: General Partnerships, Subchapter S Corporations and Subchapter C Corporations.

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Top 10 Tax Provisions You May Not Have Heard In The News

Even though described as “Simplification,” the Ways and Means proposal is 82+ pages long and will likely expand during the markup Even if passed in 2017, the vast majority of changes will not be effective until 2018.

While the tax rate brackets will be simplified from seven to four, higher income taxpayers will occasionally find them in a higher bracket under the proposal than they would under current law. For example, an individual taxpayer with $200,001 to $424,950 in 2018 will jump to a 35% rate vs. 33% under current law. Likewise, a married couple with $260,001 to $424,950 will jump to 35% vs. 33%. Read more

More States Impose Sales Tax On E-Commerce Sales

Over the last few decades, states have had the opportunity to broaden their income and franchise tax base by ensnaring a larger proportion of out-of-state taxpayers in their taxing regime through adoption of broad economic or factor-based economic nexus standards.

However, states have traditionally struggled to do the same with respect to their sales and use tax base because of the long-standing United States Supreme Court nexus decision in Quill Corp. v. North Dakota (1992).” 1 For nearly three decades, the dicta contained in Quill have prevented states from adopting economic-based nexus
standards with respect to sales and use taxes, requiring instead a more stringent physical presence standard (or “substantial nexus”).
The Supreme Court has repeatedly declined to hear challenges or cases related to Quill, until recently. Read more

Olympians May Earn More Than Just A Medal: Tax Implications For PyeongChang Medalists

With the South Korean Winter Olympics just a week away, thousands of athletes are beginning to converge on the PyeongChang region and of participants from around the world are finalizing their physical and mental preparations. 2018 will bring out a projected 2,925 athletes from 92 countries into South Korea.  The 2018 U.S. Olympic Team is comprised of 242 athletes (135 men, 107 women).  For a number of reasons, including snow-deficiencies in the majority of countries (let’s ignore the Jamaican bobsled teams for the moment), the Winter Olympics are just as exciting, but a bit smaller-scale than the Summer Games.  Compared to the 2016 Rio Summer Olympics, the Winter Games will feature about 70% less athletes from less than half as many countries.   Read more

5 Ways The New Tax Law Affects Paying For College

The final version of the GOP tax bill that passed last month rewrites the tax code in many ways, eliminating deductions and adding new benefits. Some of these new provisions affect those paying for college. The final version of the GOP tax bill that passed last month rewrites the tax code in many ways, eliminating deductions and adding new benefits. Some of these new provisions affect those paying for college. Read more

Lottery Winners Tax Strategies – Lump Sum vs. Installments

TaxConnections Picture - Lottery BallsThe most frequently asked questions from lottery winners and those who just dream about being a lottery winner is:

“Should I take a lump-sum or installments?”

Take the installments!

 

Despite everyone telling you to take the lump-sum. Your heirs will receive the balance if you die before collecting all the payments and at least 65% of your lump-sum amount will be gone within the first year due to discounting and taxes.

A lump-sum winning will typically get reduced by 45% or more for the time value of money (acceleration by 20 plus years) and then the net amount is further reduced by approximately 35% or more for taxes — leaving a net amount of 35% or less of the gross winnings.

Installment collections will generally only be subjected to the federal tax hit (depending on state rules) and the taxes are paid over the collection period. In effect, each payment includes a layer of interest earning and once the amounts are received, the recipient is free to make their own investment decision on those funds. Read more

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