How Does Tax Reform Affect the Construction Industry?

In December 2017, the Tax Cuts and Jobs Act (TCJA) was passed and resulted in sweeping changes to the tax code. Within this immense overhaul are two critical changes that all construction companies need to know about in order to stay ahead in their businesses. Some rules and planning strategies that worked in the past to limit taxable income are no longer available, while new regulations and guidelines have come out for tax years 2018 and beyond.

1.Threshold amount for reporting using the percentage-of-completion method versus the completed contract method

One change that takes affect for small- to medium-size contractors is the change in the threshold to report using the percentage-of-completion method versus the completed contract method. Before 2018, if the taxpayer’s average annual revenue was more than $10 million, they were required to file using the percentage-of-completion method. Going forward, the threshold to report using the percentage-of-completion is increased to $25 million.

The shift to a higher threshold will allow more taxpayers to defer revenue into later years because under the completed contract method, the taxpayer will recognize only the income (and the associated costs) for projects that are substantially complete. With the percentage-of-completion method, taxes are calculated on the portion of the contract that is complete, regardless of the stage of the project.

It is important to note that this change applies to contracts entered into after December 2017 and the average annual gross receipts test is calculated based on the prior three tax years. Therefore, if the taxpayer meets the $25 million average annual revenue test in 2017, they can still file under the completed contract method for 2018.

2.Elimination of the Domestic Production Activities Deduction

Another change that will have a significant impact on tax planning is the repeal of the Domestic Production Activities Deduction (DPAD). This deduction, which lowered taxable income by the lesser of 9 percent of net income or 50 percent of W-2 wages, has been eliminated and replaced by two separate changes.

• For Flow-through Entities (non-C Corporations), a new 20 percent deduction is calculated based on qualified business income. This deduction may be limited depending on a taxpayer’s taxable income. If the taxpayer has less than $157,500 of taxable income as an individual filer ($315,000 married filing jointly), they can deduct a straight 20 percent from the income. Above those income thresholds, there is a phase-out window that is used to calculate the total deduction based on the greater of 50 percent of W-2 wages or 25 percent of W-2 wages plus 2.5 percent of depreciable assets.
• C Corporations are not eligible for the above deduction; it is applicable only to pass-through entities. C Corporations are now taxed at a flat 21 percent, meaning many of those entities will see substantial tax savings.

For an outlook for residential and commercial builders, please see my article, .Construction Industry Outlook: What to Expect in 2018

For help with planning for the changes in 2018 and guidance about which new tax laws will have the most effect on your business, please reach out to me or another member of Yeo & Yeo’s Construction Services Group.

Wrapping up the end of 2017, the Bureau of Labor Statistics reported that the construction industry added 30,000 jobs in December. Throughout all of 2017, the construction industry added 210,000 jobs, a 35 percent increase over 2016.. While residential and commercial builders are optimistic, the new year will not be without its challenges.

For residential builders, it appears that 2018 could be a strong year, but there is one caveat to this – the millennial. Will they start the migration from the apartments and condos in the metro areas and move into the suburbs? If so, that will certainly drive the residential building market throughout 2018. Even if this migration occurs, there will still be plenty of opportunity for multi-family builds. With the slight downturn in residential new builds over the past five years, many residential builders have constructed multi-unit buildings to fill the gaps in business, and they can continue this trend in 2018.

For commercial building, one area that shows growth is the construction of warehouses and distribution centers. With the rise in e-commerce, fewer people are going to big-box stores; rather, they are ordering online. Commercial contractors have been busy over the past two to three years building massive warehouses and distribution centers, and with e-commerce showing no signs of leveling, it appears the opportunities for these builds will continue in 2018.

Some of the obstacles in the way are consistent with prior years: skilled trades labor shortages, material pricing, and thin margins to work with. While there has been an intense focus from within the industry to correct the skilled labor shortfall, 2018 will still be a tough year to find qualified workers. Many local colleges and trades centers are picking up steam and funding, so it should not be long before the industry sees more qualified workers in the talent pool. With rising prices of materials, especially lumber, the margins that builders are working with are much thinner than they are used to. Will they be forced to raise prices to remain profitable, or will the new tax reform allow enough cushion for them to continue operating on the course they are on?

For help with planning for the changes in 2018 and to learn what new tax laws will have the most effect on your business, please reach out to me or another member of Yeo & Yeo’s Construction Services Group.

In January 2017, the Governmental Accounting Standards Board (GASB) issued Statement No. 84 Fiduciary Activities (GASB 84). The Statement is effective for fiscal years beginning after December 15, 2018, which in practice means for fiscal years ending December 31, 2019, and later. Fiduciary activities are those activities that state and local governments carry out for the benefit of individuals and other agencies outside the government such as employee groups, members of the public, and other governments. This article will provide an overview of the statement and some basis to consider which activities may need to be treated differently under GASB 84, keeping in mind that some activities may impact budgeting or the account structure for the 2019 calendar year or the 2019/20 fiscal year. The GASB is currently working on an Implementation Guide for this standard, which is expected to be issued in 2019.

Read part two of our series: GASB 84 Defining Four Generic Types of Fiduciary Funds

GASB 84 is the first major change to the way fiduciary activities are identified and reported since GASB 34, which is now almost 20 years old. Before GASB 84, none of the existing standards defined fiduciary activities. GASB 34 required governments to include fiduciary funds in the financial statements and defined those funds, but did not provide clear definitions of what constitutes fiduciary activities. There was a wide diversity in practice for reporting fiduciary activities. Specific guidance was not available for identifying what needed to be reported in fiduciary funds and what needed to be reported in a government’s own funds. Moreover, similar activities of governments were not being reported on a comparable basis. For example, a single activity could be reported in a governmental fund, a fiduciary fund, or not reported at all.

GASB 84 defines and clarifies fiduciary activities and establishes criteria for identifying those activities with a focus on whether a government is controlling the assets and the beneficiaries with whom the relationship exists. The standard requires all pension and Other Post-Employment Benefit (OPEB) trusts (as defined in GASB 67 and 74) to be reported as fiduciary funds. This is most likely already happening in the vast majority of cases.

Beyond pension and OPEB trusts, identifying other fiduciary activities is where we can get started with implementing GASB 84. Other fiduciary activities have all of the listed attributes in place and, if those are not present, an activity might need to be presented in a government’s own funds or possibly not at all.

For an activity to be fiduciary, the assets have all of the following attributes:

• Held under control of the government. Control of the assets is defined in the standard as being met if the government holds the assets or can direct their use.
• The activity must also not be solely based on the government’s own-source revenues.Own-source revenues are revenues generated by the government itself such as water/sewer charges and income and property taxes.
• No administrative involvement such as monitoring recipients for compliance, determining eligibility, discretion in the allocation of funds or direct financial involvement such as matching requirements or liability for any disallowed costs.

Activities that do not have these attributes would not be fiduciary activities; these would be reported as funds of the government itself or potentially not reported at all. This has some implications on current practice. Activities may either need to be moved into the government’s own funds or moved to fiduciary funds.

• If any funds are managed by an employee of the government (such as a staff advisor to an outside or inside group), those would not be fiduciary activities based on administrative involvement and need to be reported in a government’s own funds.
• If deposits or other funds are being held in enterprise funds, those are fiduciary activities and would need to be moved to fiduciary funds. An exception would be funds expected to be held for three months or less, and those can continue to be reported in an enterprise fund.
• Grant activities would generally not be fiduciary activities as there is administrative involvement through subrecipient monitoring and possible direct financial involvement such as matching requirements or responsibility for any costs that are disallowed.
• A significant change for some governments in Michigan will be that the MERS Retiree Health Funding Vehicle now meets the definition of a fiduciary activity and will need to be recorded in a fiduciary fund, as may not have been the case under current practice.

GASB 84 describes four generic fiduciary fund types and makes some significant changes to the financial statements of fiduciary funds. Those changes are more focused on the year-end financial statements and will be discussed and described in future articles.

With the effective date of this standard being what it is, we still have time to analyze, learn, and plan for implementation. Additionally, we expect specific guidance to be forthcoming from the GASB, GFOA, and MGFOA to help with implementing this standard. For now, we can focus on educating ourselves on the standard and starting to analyze how it might affect each of our unique situations.

Yeo & Yeo is here to help. Please don’t hesitate to reach out to your Yeo & Yeo professional with questions about this standard. We will be happy to assist you.

Budgets are a key component in the planning and financial stability of a nonprofit organization. A budget provides answers to how resources will be used to accomplish the organization’s vision, mission, goals and objectives. It provides a plan for where funds will originate and how they will be used. A well-developed budget can help lead to the success or contribute to the failure of an organization.

The budget should be more than just an annual exercise with minimal thought or effort! The following are recommendations for creating an accurate, useful and strategic budget.

• Identify priorities. Resources are often limited in nonprofit organizations. Nonprofits are trying to invest the majority of their funds into the programs it provides. Therefore, the organization should identify the most important objectives and budget for those first. This way, if cuts or adjustments need to be made, they can be applied to the lower priority items.

• Look at trends and past activity. The best way to start creating a budget is to look at what has happened in the past and adjust the current budget for any changes that are expected in the future. Many revenues and expenses are often very consistent from year to year when the trends are analyzed.

• Give revenues just as much attention as expenses. The main focus of a budget is often expenses; however, the revenues deserve just as much attention. After all, it doesn’t matter what the budgeted expenses are if the nonprofit doesn’t have an accurate depiction of the funds needed to pay for them.

• Avoid reliance on unknown fundraisers or contributions. For some, the solution to balancing a budget is increasing contributions or adding an unknown fundraiser. Nonprofits should not assume they will be able to simply raise or solicit more funds if there is not an actual plan or event in place to do so. Don’t spend now and hope for funds later.

• Don’t be afraid to make unpopular decisions. Again, resources can be limited. It can be apparent when developing the budget that the organization simply cannot afford the amount of expenses it anticipates. Unpopular decisions to make cuts to reduce expenses is better for the financial health of the organization if those decisions are made sooner rather than later.

• Budget for administration and fundraising. While the programmatic activities of nonprofit are the main focus, these activities need the support of the administrative and fundraising staff. Donors and grantors want to give funding to nonprofits that not only have a great mission but are fiscally responsible with funds and manage them appropriately.
  
  Supplemental Reading: Best Practices for Effective Donor Acknowledgement Letters.

• Monitor and analyze. A budget should not be approved once a year and then tucked away. It is a living document that should have a regular appearance in the financial analysis and reporting of the organization. Board members and management should regularly review actual results versus the budget to determine if the organization’s performance is progressing according to plan or if adjustments should be made.

• Revise the budget when necessary. A budget is not a static document. Organizations do their best to plan and create the budget, but sometimes things change. Major changes from the original budget expectations should be reflected in an amended budget. Original and amended budgets should be approved by the board of directors.

• Involve departments and celebrate success. The key to making a budget useful and getting employee buy-in is to make others a part of it. By making departments or employees responsible for their portion of the budget, accountability and overall concern for the financial success of the organization can be established. Don’t forget to celebrate actual favorable results with the employees that helped make it happen!

If you have questions about your nonprofit’s budget process, contact Yeo & Yeo’s Nonprofit Services Group.

The Nonprofit Advisor will feature quick tips focusing on policies that all nonprofit organizations should consider establishing, and the key components those policies should include. In this issue we focus on the reasons for establishing the policies themselves.

Formal policies are vital to any nonprofit organization. Policies not only provide guidance, but they protect the organization from legal challenges, provide compliance with regulations and funding agencies, and set the tone for ethical and transparent conduct by employees. Policies also allow organizations to operate consistently when similar situations arise or when there is turnover in management and governance.

Policies should be well thought out and thoroughly documented by the organization to be the most effective. Policies are not static and should be considered periodically for updates in regulations, laws and the activities of the organization.

Each month, the Office of Inspector General (OIG) publishes various Work Plans (topics) that target concerns raised by Congress, the Centers for Medicare and Medicaid Services (CMS) and other organizations, on which the OIG will focus for the current fiscal year or beyond. 

Continue reading, OIG Work Plan Topics, to learn about the two recent targets for 2018.

WPS Government Health Administrators (WPS GHA) is authorized by the Centers for Medicare and Medicaid Services (CMS) to conduct the Targeted Probe and Educate (TPE) review process. This process is required of the providers identified by Medical Review.

Read more about the TPE process by visiting Yeo & Yeo Medical Billing & Consulting’s blog. 

If the Michigan Department of Treasury determined that one or more of your pension or OPEB plans was underfunded after you completed Form 5572 – Local Retirement Government System Annual Report, the Treasury will send a letter regarding their preliminary review of the underfunded status. An application to apply for a waiver will be attached to the letter. 

For each underfunded plan, a separate waiver application must be submitted. Local units have 45 days from the date of the letter to submit their application; otherwise, plans will be automatically deemed underfunded.

The application must describe steps that the local unit has taken to address the underfunding. This is not a prospective plan, but rather actions that local units have already done (closed plans, reduced benefits, obtained additional funding, etc.). The waiver application must be approved by the local unit’s governing body, and evidence of approval must be submitted with the application.

Once received, the Treasury will determine whether a waiver will be granted.

• If a waiver is granted, the Treasury will provide notification.
• If a waiver is not granted, corrective action (approved by the governing body) will be requested by the Municipal Stability Board within 180 days (with a possible 45 day extension). The Board will then approve or reject the corrective action plan within 45 days.

Please contact your Yeo & Yeo representative if you have questions.

Yeo & Yeo’s Education Services Group is reminding all school districts about the deadline for Uniform Guidance policies. 

Beginning July 1, 2018, all aspects of the Uniform Guidance procurement standards must be satisfied by your district’s policies and procedures. There will not be another deferment. All policies and procedures related to federal programs should be updated and in place no later than July 1 to ensure compliance with Uniform Guidance.

Following are useful links to examples that the MDE, MSB0, and several Michigan schools have compiled to assist with the process.

• MSBO Revised Federal Awards Procedures Manual – November 2017
• Compensation – Personal Services Through Federal Grants
• Tangible Personal Property Purchases with Federal Funds
• MDE Guidance on Federal Grant Programs
• Uniform Guidance Reference Guide: Guiding Questions/Considerations

Please contact your Yeo & Yeo representative if you have questions.

When it comes to income tax returns, April 15 (actually April 17 this year, because of a weekend and a Washington, D.C., holiday) isn’t the only deadline taxpayers need to think about. The federal income tax filing deadline for calendar-year partnerships, S corporations and limited liability companies (LLCs) treated as partnerships or S corporations for tax purposes is March 15. While this has been the S corporation deadline for a long time, it’s only the second year the partnership deadline has been in March rather than in April.

Are you curious about 2018’s tax return? See our Pass-through Deduction flow chart that describes the tax treatment for deductions under the Tax Cuts and Jobs Act (TCJA).

Whether you’re claiming charitable deductions on your 2017 return or planning your donations for 2018, be sure you know how much you’re allowed to deduct. Your deduction depends on more than just the actual amount you donate.

• If the property isn’t related to the charity’s tax-exempt function (such as a painting donated for a charity auction), your deduction is limited to your basis.
  
• If the property is related to the charity’s tax-exempt function (such as a painting donated to a museum for its collection), you can deduct the fair market value.
  

Join us for a complimentary seminar that includes breakfast and three informative sessions that will help you take control of the financial side of your business.

Wednesday, March 28
AgroLiquid Conference Center | St. Johns, Michigan
8:00-11:00 a.m.

• “How Will Tax Reform Affect Agribusiness,” presented by Eric Sowatsky, CPA, of Yeo & Yeo CPAs & Business Consultants.
  Plan ahead for tax changes for you personally and your business.
• “‘Don’t Get Robbed,” presented by David Boeve, Assistant VP of Agricultural Banking at PNC Bank. How to stop money from escaping the farm cash flow.
• “The Powerful Habits of the Most Effective Marketers,” presented by Chad Goodwill of Stewart-Peterson.
  A holistic view of risk management can lead to better financial outcomes.

Reserve your seat at the seminar in St. Johns.

We look forward to seeing you at the seminar. If you have questions, please contact Yeo & Yeo’s Agribusiness Services Group.

The “sandwich generation” accounts for a large segment of the population. These are people who find themselves caring for both their children and their parents at the same time. In some cases, this includes providing parents with financial support. As a result, estate planning — which traditionally focuses on providing for one’s children — has expanded in many cases to include aging parents as well.

Including your parents as beneficiaries of your estate plan raises a number of complex issues. Here are five tips to consider:

1. Plan for long-term care (LTC). The annual cost of LTC can reach well into six figures. These expenses aren’t covered by traditional health insurance policies or Medicare. To prevent LTC expenses from devouring your parents’ resources, work with them to develop a plan for funding their healthcare needs through LTC insurance or other investments.

2. Make gifts. One of the simplest ways to help your parents financially is to make cash gifts to them. If gift and estate taxes are a concern, you can take advantage of the annual gift tax exclusion, which allows you to give each parent up to $15,000 per year without triggering taxes.

3. Pay medical expenses. You can pay an unlimited amount of medical expenses on your parents’ behalf, without tax consequences, so long as you make the payments directly to medical providers.

4. Set up trusts. There are many trust-based strategies you can use to financially assist your parents. For example, in the event you predecease your parents, your estate plan might establish a trust for their benefit, with any remaining assets passing to your children when your parents die.

5. Buy your parents’ home. If your parents have built up significant equity in their home, consider buying it and leasing it back to them. This arrangement allows your parents to tap their home equity without moving out while providing you with valuable tax deductions for mortgage interest, depreciation, maintenance and other expenses. To avoid negative tax consequences, be sure to pay a fair price for the home (supported by a qualified appraisal) and charge your parents fair-market rent.

As you review these and other options for providing financial assistance to your aging parents, try not to overdo it. If you give your parents too much, these assets could end up back in your estate and potentially exposed to gift or estate taxes. Also, keep in mind that some gifts could disqualify your parents from certain federal or state government benefits. Contact us for additional details.

© 2018

The CAN Council Great Lakes Bay Region honored Yeo & Yeo Principal Michael T. Tribble as their 2018 Child Advocate of the Year. The award was presented on February 22 at Horizons Conference Center during the CAN Council’s 25th Annual Mardi Gras Auction.

Since 2000, the CAN Council’s Child Advocate of the Year award has annually honored an outstanding individual or group for being extraordinarily committed to making the Great Lakes Bay Region a better place for children and families. Past recipients include Richard J. Garber, William (Bill) McNally, the dental team of Paul W. Allen, DDS, the Honorable Faye M. Harrison, AGP & Associates, Inc., Al Doner of New Executive Mortgage, Chip Hendrick, President of R.C. Hendrick & Son, Inc. and last year’s honoree, Judy Zehnder Keller of the Bavarian Inn Lodge.

Mr. Tribble is a long-time child advocate serving on the board of the Boys & Girls Club of the Great Lakes Bay Region. He was a dedicated board member and past president of the Boys & Girls Club of Saginaw County, a past chairperson and advisory board member of the CAN Council of Saginaw County, a United Way VITA program trainer, as well as a trustee for numerous community foundations. In addition, Mike served on the Boys & Girls Clubs National Board of Directors and the Home Builders Association, locally and statewide.

As an expert in tax and estate planning, Mike has assisted many local nonprofits for decades. As a way to combine two of his favorites – the Saginaw Spirit and the CAN Council Great Lakes Bay Region – Mike was the catalyst for the annual Superhero Hockey Night with the Saginaw Spirit, a benefit for the CAN Council.

“Mike’s someone who is always energized by discovering new, exciting ways where he can partner to help protect our children. On top of his decades of support, Mike continues to prioritize children’s best interests in his daily work. He truly is the best choice as our 2018 Child Advocate of the Year,” said Suzanne Greenberg, CAN Council President/CEO.

Amy R. Buben, CPA, CFE, was recognized as one of 10 recipients of the 2018 RUBY Awards presented by 1st State Bank.

Amy was honored as one the area’s brightest professionals under the age of 40 who have made their mark in their professions and are having an impact throughout the Great Lakes Bay Region.

“This award recognizes Amy’s contributions to the CPA profession, her leadership and her commitment to the community. She is disciplined, dedicated, respected by her staff and highly valued by her clients. She has a great passion to build up those around her, and she is a great ambassador for Yeo & Yeo in the community and the associations she is affiliated with,” says David W. Schaeffer, managing principal of the Saginaw office.

Amy is a Principal in the management advisory services department of the Yeo & Yeo’s Saginaw office. She leads the firm’s manufacturing services group and is a member of the tax services group. She joined Yeo & Yeo in 2006 and has over 20 years of experience working with manufacturers.

In our community, Amy is the vice-chair of Women in Leadership, treasurer of the Great Lakes Bay Manufacturing Association, and a board member for Covenant Healthcare Foundation. In 2014, the Michigan Association of Certified Public Accountants honored her with its Women to Watch Emerging Leader Award.

The RUBY Awards ceremony was held on February 27 at Apple Mountain in Freeland. Jen Carpenter of Junior Achievement nominated Amy for the award.

The “Corporate Records Service” scam has resurfaced. Michigan businesses are receiving an official-looking form called the “Annual Records Solicitation Form” from the “Michigan Council for Corporations.” Although this document looks like an official government form, the Michigan Council for Corporations is not a government agency. They are soliciting business to maintain a record of corporate shareholders and directors on behalf of the company for $150. They are not filing or otherwise satisfying any Michigan corporate requirements.

It is advised you disregard this deceptive notice as it is not from the State of Michigan, and Michigan corporations are not required by law to file corporate records with LARA’s Corporations, Securities & Commercial Licensing Bureau.

Similar deceptive solicitation mailings have also occurred in several other states. These entities operate under identical or similar names and request fees ranging from $125, $150, $175 to $239 for the completion and submittal of annual corporate records.

Legitimate notices and mailings to Michigan corporations are issued from LARA’s Corporations Division and mailed to the resident agent at the registered office address on record. When receiving any official-looking document, please review it carefully and read the small print. If you are not sure, please contact the LARA Corporations, Securities and Commercial Licensing Bureau at 517.241.6470.

If you purchased qualifying property by December 31, 2017, you may be able to take advantage of Section 179 expensing on your 2017 tax return. You’ll also want to keep this tax break in mind in your property purchase planning, because the Tax Cuts and Jobs Act (TCJA), signed into law this past December, significantly enhances it beginning in 2018.

2017 Sec. 179 benefits

Sec. 179 expensing allows eligible taxpayers to deduct the entire cost of qualifying new or used depreciable property and most software in Year 1, subject to various limitations. For tax years that began in 2017, the maximum Sec. 179 deduction is $510,000. The maximum deduction is phased out dollar for dollar to the extent the cost of eligible property placed in service during the tax year exceeds the phaseout threshold of $2.03 million.

Qualified real property improvement costs are also eligible for Sec. 179 expensing. This real estate break applies to:

• Certain improvements to interiors of leased nonresidential buildings,
• Certain restaurant buildings or improvements to such buildings, and
• Certain improvements to the interiors of retail buildings.

Deductions claimed for qualified real property costs count against the overall maximum for Sec. 179 expensing.

Permanent enhancements

The TCJA permanently enhances Sec. 179 expensing. Under the new law, for qualifying property placed in service in tax years beginning in 2018, the maximum Sec. 179 deduction is increased to $1 million, and the phaseout threshold is increased to $2.5 million. For later tax years, these amounts will be indexed for inflation. For purposes of determining eligibility for these higher limits, property is treated as acquired on the date on which a written binding contract for the acquisition is signed.

The new law also expands the definition of eligible property to include certain depreciable tangible personal property used predominantly to furnish lodging. The definition of qualified real property eligible for Sec. 179 expensing is also expanded to include the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems.

Save now and save later

Many rules apply, so please contact us to learn if you qualify for this break on your 2017 return. We’d also be happy to discuss your future purchasing plans so you can reap the maximum benefits from enhanced Sec. 179 expensing and other tax law changes under the TCJA.

© 2018

Yeo & Yeo was honored with Saginaw Future’s 2018 Economic Excellence Award at Saginaw Future’s 26th Annual Awards Luncheon at the Bavarian Inn Lodge in Frankenmuth on February 23. Yeo & Yeo was recognized for the expansion of its corporate headquarters in 2017 in Saginaw County. The firm was acknowledged alongside 35 other companies’ economic development projects in Saginaw County with a total impact of more than $171 million. These projects represent significant growth in manufacturing and service industries and continued investment in communities throughout Saginaw County.

Saginaw Future is a public-private alliance of area businesses, Saginaw County, the city of Saginaw, 15 local municipalities and the Saginaw County Chamber of Commerce. Saginaw Future’s strategic partners also include education, labor and government.

Read more about the event and the award winners. 

If you’re planning on buying a home that you one day wish to pass on to your adult children, a joint purchase can reduce estate tax liability, provided the children have sufficient funds to finance their portion of the purchase. With the gift and estate tax exemption now set at an inflation-adjusted $10 million thanks to the Tax Cuts and Jobs Act, federal estate taxes are less of a concern for most families. However, the high exemption amount is only temporary, and there’s state estate tax risk to consider.

Current and remainder interests

The joint purchase technique is based on the concept that property can be divided not only into pieces, but also over time: One person (typically of an older generation) buys a current interest in the property and the other person (typically of a younger generation) buys the remainder interest.

A remainder interest is simply the right to enjoy the property after the current interest ends. If the current interest is a life interest, the remainder interest begins when the owner of the current interest dies.

Joint purchases offer several advantages. The older owner enjoys the property for life, and his or her purchase price is reduced by the value of the remainder interest. The younger owner pays only a fraction of the property’s current value and receives the entire property when the older owner dies.

Best of all, if both owners pay fair market value for their respective interests, the transfer from one generation to the next should be free of gift and estate taxes.

The relative values of the life and remainder interests are determined using IRS tables that take into account the age of the life-interest holder and the applicable federal rate (the Section 7520 rate), which is set monthly by the federal government.

Consider the downsides

The younger owner must buy the remainder interest with his or her own funds. Also, while the tax basis of inherited property is “stepped up” to its date-of-death value, a remainder interest holder’s basis is equal to his or her purchase price. This step-up in basis allows the heir to avoid capital gains tax on appreciation that occurred while the deceased held the property.

But, in most cases where estate tax is a concern, the estate tax savings will far outweigh any capital gains tax liability. That’s because the highest capital gains rate generally is significantly lower than the highest estate tax rate.

Keep it simple

In a world where many estate planning techniques can be complicated, a joint purchase isn’t. Contact us with any questions.

© 2018

Many businesses hired in 2017, and more are planning to hire in 2018. If you’re among them and your hires include members of a “target group,” you may be eligible for the Work Opportunity tax credit (WOTC). If you made qualifying hires in 2017 and obtained proper certification, you can claim the WOTC on your 2017 tax return.

Whether or not you’re eligible for 2017, keep the WOTC in mind in your 2018 hiring plans. Despite its proposed elimination under the House’s version of the Tax Cuts and Jobs Act, the credit survived the final version that was signed into law in December, so it’s also available for 2018.

“Target groups,” defined

Target groups include:

• Qualified individuals who have been unemployed for 27 weeks or more,
• Designated community residents who live in Empowerment Zones or rural renewal counties,
• Long-term family assistance recipients,
• Qualified ex-felons,
• Qualified recipients of Temporary Assistance for Needy Families (TANF),
• Qualified veterans,
• Summer youth employees,
• Supplemental Nutrition Assistance Program (SNAP) recipients,
• Supplemental Security Income benefits recipients, and
• Vocational rehabilitation referrals for individuals who suffer from an employment handicap resulting from a physical or mental handicap.

Before you can claim the WOTC, you must obtain certification from a “designated local agency” (DLA) that the hired individual is indeed a target group member. You must submit IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” to the DLA no later than the 28th day after the individual begins work for you. Unfortunately, this means that, if you hired someone from a target group in 2017 but didn’t obtain the certification, you can’t claim the WOTC on your 2017 return.

A potentially valuable credit

Qualifying employers can claim the WOTC as a general business credit against their income tax. The amount of the credit depends on the:

• Target group of the individual hired,
• Wages paid to that individual, and
• Number of hours that individual worked during the first year of employment.

The maximum credit that can be earned for each member of a target group is generally $2,400 per employee. The credit can be as high as $9,600 for certain veterans.

Employers aren’t subject to a limit on the number of eligible individuals they can hire. In other words, if you hired 10 individuals from target groups that qualify for the $2,400 credit, your total credit would be $24,000.

Remember, credits reduce your tax bill dollar-for-dollar; they don’t just reduce the amount of income subject to tax like deductions do. So that’s $24,000 of actual tax savings.

Offset hiring costs

The WOTC can provide substantial tax savings when you hire qualified new employees, offsetting some of the cost. Contact us for more information.

© 2018