Update: Senate Launches Effort to Renew §179D Deduction and Other Tax Extenders

The Senate Finance Committee recently launched an initiative that would renew the tax extenders—or temporary tax incentives, including the §179D deduction for energy-efficient commercial buildings, that have expired in the past few years. The tax extenders were never permanent parts of the tax code, but historically would lapse at the end of each year and subsequently be renewed by Congress. However, the fate of these provisions has been uncertain since the enactment of the Tax Cuts and Jobs Act of 2017, thus creating tax planning frustration for countless taxpayers and their advisors.

However, hope for the tax extenders may now be on the horizon. In June 2019, Senate Finance Committee Chairman Chuck Grassley and Ranking Member Ron Wyden announced that bipartisan task forces had been established to assess various tax extenders that had recently expired or were set to expire at the end of 2019. The main purpose of the task forces is to consider solutions that may provide longer-term certainty regarding these valuable incentives.

A widely popular and beneficial tax extender, the §179D deduction was created in 2005 as a way to promote sustainability while helping commercial building owners and primary designers—including architects, engineers, and contractors—significantly reduce their tax burdens. Most recently, this deduction was retroactively renewed for projects completed by December 31, 2017. Section 179D provides a deduction of up to $1.80 per square foot for qualifying energy-efficient improvements to a commercial building’s lighting systems, building envelope, or HVAC systems. Learn more about the §179D deduction: https://www.capitalreviewgroup.com/certification-for-179d-deduction/

At Capital Review Group, our team of tax experts is keeping abreast of any updates on §179D and the other tax extenders. Visit our blog for the latest news, or contact us today for more information!

(Source: https://www.jdsupra.com/legalnews/back-from-the-dead-senate-taskforces-95372/)

Using Life Insurance Retirement Plans (LIRPs) as a Tax Diversification Strategy

In planning for retirement, most investors are familiar with the concept of diversification as a way to minimize the volatility of their portfolios over time. However, another important financial strategy is often overlooked: tax diversification. By leveraging tax diversification through the use of tax-free assets, such as life insurance retirement plans (LIRPs), investors can build long-term wealth by reducing their tax burdens now and into the future.

What is tax diversification?

Tax diversification refers to the strategy of investing in a variety of tax-advantaged accounts—including both tax-deferred and tax-free assets—as a way to minimize taxation each year. When saving for retirement, many people over-allocate to tax-deferred plans, such as traditional IRAs and 401(k)s. While these plans are integral to any comprehensive retirement savings strategy, they are also subject to losses due to market downturns. In addition, distributions are taxed at the investor’s income tax rate. Considering that tax rates are likely to rise in the coming years, many investors could face significant reductions in their retirement income due to taxation of withdrawals from these traditional plans.

Tax-free assets, on the other hand, include Roth IRAs, LIRPs, and municipal bonds. By pursuing a tax diversification strategy that includes tax-free assets, investors can safeguard themselves from tax increases, market volatility, and other factors that could negatively impact their financial comfort during retirement.

What are life insurance retirement plans (LIRPs)?

Life insurance retirement plans are long-term life insurance policies that are funded beyond standard premium payments as a way to encourage growth in the cash value of the policy, instead of merely providing death benefits. As a result, LIRPs may yield numerous advantages, including the following:

  • Life insurance retirement plans have no income limits. On the contrary, many traditional retirement plans limit or prohibit high-income earners from contributing to them. For example, married couples filing jointly may not contribute to a Roth IRA if they earn $203,000 or more in 2019, while single taxpayers are not eligible if they earn $137,000 or more. Life insurance retirement plans do not have these restrictions, making them a valuable tool for wealthier investors seeking to maximize their retirement savings.
  • There are no contribution limits, allowing greater flexibility for those who want to invest as much as possible in their retirement plans. In addition to having income limits, the IRS generally sets annual contribution limits on traditional retirement plans.
  • The cash value of the policy enjoys tax-deferred growth.
  • Distributions from the LIRP may be taken on a tax-free basis. Therefore, they do not affect the investor’s income tax bracket, capital gains exposure, or Medicare premiums. By contrast, withdrawals from traditional retirement plans are typically added to taxable income, thereby requiring additional taxation that may have a negative effect on a retiree’s financial well-being.
  • Life insurance retirement plans are contractually shielded from market volatility, making them an ideal option for anyone who is concerned about losing money in an economic downturn and would prefer steady, predictable growth.
  • Although LIRPs are intended mainly to provide tax-free retirement income, they also offer death benefit protection in the present. This allows investors to ensure financial security for their heirs when they pass away.
  • Life insurance retirement plans offer greater flexibility when it comes to taking distributions. Many traditional plans impose penalties for taking distributions before a certain age (generally, 59.5), while also mandating distributions after age 70.5. Life insurance retirement plans do not follow these rigid limitations; investors may withdraw at any time as long as the policy is in effect, allowing them to access their money when the need arises—or continue saving for as long as possible. Most LIRPs also feature flexible investing options, which usually include a choice between a market-based return on a variety of mutual funds or a fixed return guaranteed by the issuer of the policy.

Who should consider using an LIRP as a tax diversification strategy?

While LIRPs offer numerous benefits for certain investors, they may not be the right vehicle for everyone. Ideal candidates for an LIRP include:

  • High net-worth individuals who are already maxing out their contributions to traditional retirement plans. By omitting any limitations on income or contribution amounts, LIRPs may provide a valuable option for those seeking to truly maximize their retirement savings.
  • Individuals between the ages of 20 and 65 who are in relatively good health. As with any life insurance policies, the cost-effectiveness of LIRPs may vary depending on age and health status.
  • Those who understand the importance of tax diversification in retirement planning and are committed to a long-term investment strategy.

Benefit illustration: tax diversification through an LIRP

At Capital Review Group, our mission is to help business owners maximize the tax savings available to them in order to build wealth in the present and future. Among our previous clients were the owners of a successful hotel. As they approached retirement age, they wanted to boost their tax savings, increase the amount of income that would be available to them in retirement, and ensure financial security for their heirs. After helping the hotel owners save a staggering $700,000 in taxes through the IRS-approved strategy of Cost Segregation, we assisted them with the process of creating a more tax-efficient estate plan that included an LIRP. By applying their $700,000 tax savings to the LIRP, the couple would be able to enjoy an estimated tax-free benefit of over $2.2 million—an amount that would assure them financial comfort in the future while providing the hotel with enough liquidity that it would be able to stay in the family for generations. Read more about the strategies we pursued in this case: https://www.capitalreviewgroup.com/hotels-and-cost-segregation-case-study/

Is tax diversification through an LIRP right for your retirement strategy? Contact the tax experts at CRG today to schedule a pro bono analysis!

(Sources: https://money.usnews.com/investing/articles/2017-06-19/how-ordinary-investors-can-use-lirps, https://www.advisorperspectives.com/articles/2019/02/25/what-is-an-lirp-and-why-should-clients-use-them).

The Impact of Cost Segregation Studies on Historic Tax Credit Claims

The federal tax code provides several incentives and strategies that allow commercial building owners to reduce their tax burdens. Among the most powerful of these strategies is Cost Segregation, which enables building owners to claim accelerated depreciation deductions by simply reclassifying certain real property assets as personal property. Another provision called the Historic Tax Credit offers investors and owners of historic buildings a tax deduction of up to 20 percent of the costs of rehabilitation work performed on the building. 

While Cost Segregation and the Historic Tax Credit may each offer significant tax savings, benefits stemming from the Historic Tax Credit may be reduced when the credit is claimed in conjunction with a Cost Segregation study. In other cases, using both strategies may yield optimal savings. Therefore, the owners of qualifying historic buildings should consult their tax advisors to determine whether it is more advantageous to pursue one or both opportunities.

Understanding Cost Segregation 

Nonresidential real property is generally depreciated over a period of 39 years, while tangible personal property is depreciated over 5, 7, or 15 years. Therefore, personal property assets yield more substantial and immediate depreciation deductions. The IRS-approved strategy of Cost Segregation examines a commercial building and reclassifies specific assets—including wall coverings, carpeting, electrical wiring, and more—from real property to personal property. As a result, the building owner can reap the benefits of the shorter depreciation lives by claiming accelerated deductions, thus significantly reducing their tax burden and boosting cash flow.

Cost Segregation studies may be performed retroactively, but the optimal time is during the year that the building is placed into service in order to begin maximizing deductions as soon as possible. Newly constructed buildings, as well as acquisitions and renovations, are eligible. The key to a successful Cost Segregation study is to work with qualified professionals with engineering and tax expertise. 

Tax reform changes to the Historic Tax Credit

Created in 1976, the Federal Rehabilitation Tax Credit—commonly known as the Historic Tax Credit—incentivizes investment in the preservation and restoration of historic buildings. According to the National Trust for Historic Preservation, the credit has created more than 2.5 million well-paying local jobs, leveraged nearly $145 billion in private investment, and supported the preservation of more than 43,000 historic buildings across the U.S. 

Before the enactment of the Tax Cuts and Jobs Act of 2017 (“tax reform”), there were two incentives available as part of the Historic Tax Credit: a 10 percent credit for the rehabilitation of buildings that are not on the National Register of Historic Places but were built before 1936, and a 20 percent credit for projects that meet the following qualifications:

    • The building is listed or eligible for listing on the National Register of Historic Places;
    • The building produces income (including residential rental income);
    • Renovations were completed in accordance with the Secretary of the Interior’s Standards for Rehabilitation, which generally require that updates are consistent with the historic character of the building; and
    • The building owner completes a three-part approval process through the state and the National Park Service.

The Tax Cuts and Jobs Act eliminated the 10 percent credit, except for certain taxpayers that owned or leased the building as of January 1, 2018 and continued to own or lease the building after that date. In addition, while tax reform preserved the 20 percent credit, taxpayers must now claim it over a five-year period, at a rate of four percent utilization per year. Previously, the entire 20 percent credit could be used during the year the property was placed into service. Building owners may claim the credit themselves, or allocate it to an investor involved in the project. 

The Historic Tax Credit is calculated as 20 percent of qualified rehabilitation expenditures (QREs), which include architectural and engineering fees, legal expenses, site survey fees, building restoration costs, and any other construction-related expenses that may be added to the basis of the building. Costs related to land improvements and personal property assets are not considered QREs. 

To qualify for the Historic Tax Credit, projects must satisfy a “substantial rehabilitation” requirement, which stipulates that the amount spent on the rehabilitation must equal or exceed the original basis of the building at the beginning of the project (excluding personal property, land, and land improvements). For example, if the property was purchased for $1,000,000, and $200,000 of that amount was for the land, the rehabilitation expenses must equal or exceed $800,000. 

In addition to the federal Historic Tax Credit, most states offer some form of rehabilitation tax credit. Combined federal and state credits may equal up to 45 percent of QREs. 

How might a Cost Segregation study affect the Historic Tax Credit?

In some situations, a Cost Segregation study could have a negative impact on the amount that a building owner may claim through the Historic Tax Credit. The Historic Tax Credit is only available for costs incurred for the renovation of qualifying real property—not personal property. Therefore, because Cost Segregation studies reclassify real property assets within the building as personal property, the building owner would not be able to claim the credit for costs  pertaining to those assets. The Historic Tax Credit may be further affected if investors are involved in the transaction or if the taxpayer is also claiming a state-level rehabilitation tax credit, the New Markets Tax Credit, or the Low-Income Housing Tax Credit. 

However, Cost Segregation may still be beneficial in many cases. For example, a Cost Segregation study may be used to confirm that the basis of the building is accurate and that the land improvements and personal property have been properly depreciated. This could help to keep the starting basis lower—therefore requiring a lesser investment to meet the substantial rehabilitation requirement. Furthermore, the Historic Tax Credit is not available for additions to the original building, so Cost Segregation may be a valuable tax strategy for added-on sections. 

The federal tax code is highly complex, and outcomes are entirely dependent upon each taxpayer’s unique circumstances. Therefore, when pursuing the Historic Tax Credit, Cost Segregation, or other incentives, it is important to work with experienced tax professionals in order to navigate the nuances of the tax code and determine the best course of action for optimal savings. 

At Capital Review Group, we offer the tax and engineering expertise needed to maximize savings through Cost Segregation, and we can advise building owners on the interaction between the Historic Tax Credit and Cost Segregation. Contact CRG today at 877.666.5539 to schedule a pro bono analysis! 

(Sources: https://ascsp.org/quarterly-e-newsletter-spring-2019-the-interplay-of-cost-segregation-with-the-historic-tax-credit/, https://www.irs.gov/newsroom/tax-reform-brings-changes-to-real-estate-rehabilitation-tax-credit, https://savingplaces.org/historic-tax-credits#.XNt5Z5NKiu4). 

Understanding the Section 45S Employer Credit for Paid Family and Medical Leave

In September 2018, the IRS issued Notice 2018-71 providing guidance on a lesser-known feature of the Tax Cuts and Jobs Act: the Section 45S Employer Credit for Paid Family and Medical Leave. Created as a way to incentivize businesses to continue paying employees who are out of work to care for family members, Section 45S offers employers a general business tax credit equal to a percentage of wages paid to qualifying employees on family and medical leave. Although the credit is currently available for only the 2018 and 2019 tax years, it may provide an attractive tax savings opportunity for organizations that already have a paid family and medical leave policy or those that are considering adopting one. 

Qualifying for the Section 45S Credit

In order to claim the Section 45S Credit, employers must have a written paid family and medical leave policy in place that fulfills certain requirements. For example, the policy must:

  • Cover all qualifying employees, defined as those who have worked for the employer for at least one year and who did not earn more than a specified amount in the preceding year. For employers claiming the credit for tax year 2018, qualifying employees must not have earned more than $72,000 in 2017 (not including overtime pay and bonuses). 
  • Provide at least two weeks of paid family and medical leave each year for qualifying full-time employees; paid leave may be prorated for part-time employees. 
  • Provide paid leave that is no less than 50 percent of the qualifying employee’s regular wages.
  • If the organization has any qualifying employees who are not covered by Title I of the Family and Medical Leave Act (FMLA), the written policy must include “non-interference” protections.

The IRS has provided transition relief for 2018, stipulating that employers’ written leave policies will qualify for the Section 45S Credit as of the policy’s effective date (rather than the adoption date), as long as the policy was adopted no later than December 31, 2018. 

Calculating the Employer Credit for Paid Family and Medical Leave

The Section 45S Credit is equal to a percentage of the wages paid to a qualifying employee while he or she is on family and medical leave, for up to 12 weeks per year. Organizations that pay employees 50 percent of their regular wages (the minimum amount required to qualify for the credit) will be eligible for a tax credit of 12.5 percent of wages paid. This credit amount increases by 0.25 percent for each additional percentage point by which family and medical leave wages exceed 50 percent of a qualifying employee’s regular wages. Therefore, organizations that pay qualifying employees at their regular rate of pay while on leave will be eligible for the maximum tax credit of 25 percent of wages paid. 

In determining the amount of paid family and medical leave provided by the employer, any leave paid by a state or local government or required by law is not taken into account. 

What constitutes “family and medical leave” for purposes of the credit?

Employees may take family and medical leave for a variety of reasons, including:

  • The birth and subsequent care of the employee’s child;
  • Placement of a child with the employee for foster care or adoption;
  • The employee’s serious health condition that causes him or her to be unable to perform essential job duties; 
  • The need to care for the employee’s child, spouse or parent who has a serious medical condition; 
  • A qualifying exigency due to the employee’s spouse, child, or parent being an active duty member of the military;
  • The need to care for a service member who is the employee’s child, spouse, parent, or other next of kin.

Any vacation, personal, or sick leave that the employer provides—other than for the reasons stated above—is not considered paid leave for purposes of the Section 45S Credit. 

Offering employers a new opportunity to reduce their tax burdens while incentivizing paid family and medical leave, the Section 45S Credit serves as a multi-beneficial—albeit temporary—addition to the tax code. The credit may be claimed via Form 8994, Employer Credit for Paid Family and Medical Leave, and Form 3800, General Business Credit, both of which are filed with the employer’s income tax return. However, the Section 45S Credit may impact organizations’ tax savings through other wage-based business credits, so employers should work with their tax professionals to determine the proper strategy for maximum tax reduction. 

Wondering whether your business may be eligible for tax savings through the Section 45S Credit or other incentives? The experts at Capital Review Group can help you reap the benefits of savings opportunities available through the Tax Cuts and Jobs Act and other tax laws. Contact CRG today to schedule a pro bono analysis! 

(Sources: https://www.irs.gov/newsroom/section-45s-employer-credit-for-paid-family-and-medical-leave-faqs, https://www.journalofaccountancy.com/issues/2018/dec/tax-credit-paid-family-medical-leave.html).

Opportunity Zones Offer a Powerful Way to Reduce Taxes—Here’s What Investors Need to Know

The Tax Cuts and Jobs Act—the sweeping tax reform law enacted in December 2017—has garnered significantBusiness person considers growth opportunities in city. attention for drastically lowering the corporate tax rate and expanding incentives for individuals and businesses. However, one lesser-known feature of the new tax law is the Investing in Opportunity Act, which established the Opportunity Zone program. 

Created with the goal of attracting investment and stimulating job creation in economically disadvantaged communities, Opportunity Zones offer investors a powerful way to defer taxation on prior gains. The following frequently asked questions about Opportunity Zones will help investors take advantage of this widely beneficial new program.

What are Opportunity Zones?

The Investing in Opportunity Act allowed state governors across the U.S., as well as the mayor of Washington, D.C., to nominate low-income census tracts within their jurisdictions for designation as Opportunity Zones. These nominations were then reviewed and certified by the U.S. Treasury. Currently, there are approximately 8,700 Opportunity Zones in urban and rural communities across all 50 states, Washington, D.C., and five U.S. territories. 

What are Opportunity Funds?

Qualified Opportunity Funds (QOFs) are partnerships or corporations that have been set up to facilitate investment in eligible property located within Opportunity Zones. Eligible property includes business property, newly issued stock or partnership interests in a Qualified Opportunity Zone business, and real estate that is either new construction or has been substantially improved. Certain “sin” businesses, including country clubs, liquor stores, and gambling facilities, may not be eligible. A minimum of 90 percent of a QOF’s assets must be held in Opportunity Zone property. QOFs may self-certify without approval from the Treasury Department, and they are administered by fund managers as opposed to government agencies.

How can investors benefit from investing in Opportunity Zones? 

The Opportunity Zone program allows taxpayers to defer taxation on gains from the sale of stock, real estate, collectibles, businesses, and other assets by investing those gains (within 180 days of realizing them) in a QOF. Investors do not need to live or work in Opportunity Zones in order to participate. Since the goal of the Opportunity Zone program is to incentivize long-term investment in struggling communities, investors accrue greater tax benefits the longer that QOF investments are held:

    • If a QOF investment is held for fewer than five years, the only benefit to investors is that they will be able to defer payment of existing capital gains taxes until the date when the QOF investment is sold or exchanged.
    • If the investment is held for five to seven years, investors will be able to defer payment of taxes until the investment is sold or exchanged, and will receive a ten percent exclusion of taxes on the existing capital gain.
    • If the investment is held for seven to ten years, investors will be able to defer payment of existing capital gains taxes until December 31, 2026, or the date when the QOF investment is sold or exchanged—whichever comes first. In addition, fifteen percent of the existing capital gains taxes will be canceled. 
    • Investors receive the greatest tax benefits when the QOF investment is held for more than ten years. In addition to receiving the same benefits as when the investment is held between seven and ten years, investors will qualify for an increase in basis equal to the investment’s fair market value when it is sold or exchanged. This allows investors to avoid paying any capital gains tax on the appreciation of assets held in the QOF. 

By allowing investors to defer and reduce hefty capital gains tax liabilities, the Opportunity Zone program offers an attractive way to maximize returns on investments—while advancing the important societal goal of stimulating growth in economically distressed communities. 

Interested in learning more about the tax savings opportunities of investing in a QOF? Now is the time to act! Contact CRG today to schedule a pro bono analysis. 

(Sources: https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions, https://ofn.org/sites/default/files/resources/PDFs/Opportunity_Zone_fact_sheet.pdf, https://fundrise.com/education/blog-posts/what-are-opportunity-zones-and-how-do-they-work). 

An End-of-Year Checklist for Minimizing Your Business Tax Burden in 2018

As the year quickly draws to a close, the time has come for businesses to start the onerous process of preparing for tax season. Although the end of the year tends to be hectic, it is crucial to begin gathering paperwork and planning strategies in order to reduce your business’s 2018 tax burden. Recent changes to federal tax law—most notably the Tax Cuts and Jobs Act (also known as tax reform)—have made it particularly important for businesses to carefully examine the tax savings opportunities available to them.

As you review your records in preparation for tax season, ensure that your business has taken the following steps in an effort to minimize taxes: 

  • Verify that you have claimed the §179D deduction for energy efficiency projects completed in 2017. Section 179D of the tax code offers commercial building owners and primary designers—such as architects and engineers who develop qualifying projects for public buildings—a deduction of up to $1.80 per square foot for energy-efficient improvements to a building’s envelope, lighting, or HVAC systems. As a “tax extender,” the §179D deduction expired on December 31, 2016, but was retroactively renewed only for projects completed in 2017 by the Bipartisan Budget Act. While this popular incentive could potentially be renewed again in the future, commercial building owners and designers should act swiftly to claim it for eligible projects completed last year. 
  • Ensure that your business is properly classified for maximum savings under the Tax Cuts and Jobs Act. The new tax law grants pass-through entities—including sole proprietorships, S-corporations, and partnerships—a substantial deduction of up to 20 percent. While this will be a boon to many small and mid-sized businesses, the deduction is not available to certain service-based businesses, such as law firms, accounting firms, and medical practices, with taxable income over $315,000. In addition, the Tax Cuts and Jobs Act lowered the corporate tax rate from 35 to 21 percent. Therefore, businesses should work with their tax advisors to determine whether it is more advantageous for them to be classified as C-corporations or pass-through entities. 
  • Determine whether your business may be eligible for the Research and Development (R&D) Tax Credit. The Protecting Americans from Tax Hikes (PATH) Act of 2015 permanently added the R&D Credit to the tax code and expanded its utility for smaller and newer businesses by allowing them to apply the credit toward their payroll tax burdens. In light of these changes, businesses in a wide variety of industries—ranging from architecture and engineering to construction and manufacturing—should examine their project records and consult a tax expert to determine whether they may be eligible for this lucrative credit. Claiming the R&D Credit requires thorough documentation of qualifying activities, so it is best to begin the preparation process in advance of tax season. However, the effort may be more than worthwhile—businesses routinely receive six-figure tax savings through the R&D Credit.
  • Take advantage of expanded bonus depreciation. The concept of bonus depreciation allows businesses to depreciate a certain percentage of the cost of new business property during the year it is placed into service, and then depreciate the remainder of the cost over the property’s useful life. However, through tax year 2022, the Tax Cuts and Jobs Act will allow businesses to deduct 100 percent of the cost of eligible property during its first year in service. This will yield more substantial and immediate tax savings than depreciating the property over a longer period of time. 
  • Consider investing in Opportunity Zones. Added to the tax code by the Tax Cuts and Jobs Act, Opportunity Zones are economically distressed communities in which certain investments may qualify for favorable tax treatment. With a goal of spurring economic development and job growth in these communities, the new tax law allows investors to defer capital gains taxes owed when they invest in Qualified Opportunity Funds (“O-Funds”). O-Funds are partnerships or corporations established to facilitate investment in qualified property located in Opportunity Zones. Investors are permitted to defer tax on prior gains invested in an O-Fund until December 31, 2026 or the date when the fund is sold or exchanged—whichever is earlier. Investors do not need to live, work, or have businesses in Opportunity Zones in order to take advantage of the tax benefits of investing in O-Funds. For more information, visit https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions. 
  • Determine whether your business is eligible for the new employer credit for paid family and medical leave. Another opportunity for tax savings enacted by the Tax Cuts and Jobs Act is §45S of the tax code, which grants employers a credit equal to a percentage of wages paid to qualifying employees on family or medical leave. If the employer pays at least 50 percent of the employee’s regular pay, the credit equals 12.5 percent of wages paid during family and medical leave; this amount increases by 0.25 percent for each subsequent percentage point over half the employee’s regular pay. Employers that continue to pay employees 100 percent of their wages while on leave may receive the maximum tax credit of 25 percent of wages. To qualify for the credit, employers must have a written policy in place describing various aspects of the paid leave policy. Employers should read IRS Notice 2018-71, which provides more in-depth information on the paid family and medical leave tax credit, and review their workforce policies to determine whether they may qualify for the credit in 2018 or upcoming tax years.
  • Ensure that your business is compliant with state sales tax laws. Businesses that sell goods out of state have always contended with a confusing patchwork of sales tax rates and exemptions among the country’s more than 10,000 jurisdictions. However, in light of the Supreme Court’s recent decision in South Dakota v. Wayfair, numerous businesses are now facing a costly compliance burden. In Wayfair, the Court ruled that states may require online retailers to collect sales tax on internet purchases—even if the retailer lacks any physical presence, such as a factory or office, within the state. In the months since the Wayfair decision, several states have enacted legislation requiring out-of-state sellers to collect sales tax if they meet certain criteria. Given these changes, businesses that conduct sales transactions with customers in multiple states should ask their tax advisors about pursuing a nexus review. At Capital Review Group, our nexus reviews are designed to identify a client’s past, present, and potential future sales tax collection responsibilities. We can help you formulate a plan to mitigate tax liabilities, ensure compliance with changing state laws, and implement systems and processes to monitor sales transactions completed in various states. 
  • Consider conducting a cost segregation study. In addition to the §179D deduction, one of the most powerful ways for commercial building owners to reduce their tax burdens is through the IRS-approved strategy of cost segregation. Real property is usually depreciated over 39 years, while tangible personal property is depreciated over five, seven, or fifteen years. A cost segregation study examines a parcel of real property and divides it into personal property assets—thus enabling the building’s owners to minimize taxes and boost cash flow through accelerated depreciation deductions.
  • Examine your hiring practices and determine whether you may qualify for the Work Opportunity Tax Credit (WOTC). For any business, the workforce is one of its most valuable assets—and one of its greatest ongoing expenses. WOTC grants employers an opportunity to offset some of the costs of hiring by providing a tax credit of up to $9,600 for each qualifying employee hired from a target group, as defined by the Department of Labor. These groups include veterans, recipients of government assistance, and summer youth workers. Employers must act quickly if they believe that they have made a WOTC-eligible hire: initial paperwork must be filed with the state workforce agency within 28 days of the new employee’s start date. The PATH Act extended WOTC through December 31, 2019, so now is the time for employers to review their hiring practices and determine whether they may qualify for WOTC with recent or future hires.

As your business prepares for tax season, one of the most important steps you can take is to work with an experienced tax professional to ensure that you are maximizing savings. At Capital Review Group, we work with businesses and their tax or financial advisors to claim all available tax incentives and provide guidance in light of changing laws, including the shifting landscape of state sales tax laws. Act now to begin planning for tax season—contact CRG today at 877-666-5539 to schedule a pro bono analysis!

10 Frequently Asked Questions About the Research and Development (R&D) Tax Credit

From manufacturing companies streamlining processes to architecture firms developing innovative building plans, businesses in a wide variety of industries routinely conduct research and development (R&D) activities. Unfortunately, however, many of these businesses do not realize that they may qualify for the R&D Tax Credit, a dollar-for-dollar federal tax credit that offers a powerful way for business taxpayers to boost their net profits. 

While businesses that successfully claim the R&D Credit may save hundreds of thousands of dollars in taxes, this valuable incentive is widely misunderstood. Here are answers to ten frequently asked questions to help demystify the R&D Credit:

  1. What is the R&D Tax Credit?

Also known as the Research and Experimentation (R&E) Tax Credit or the credit for increasing research activities, the federal R&D Credit was created in 1981 with the goal of encouraging American businesses to innovate. This incentive is available to business taxpayers that incur qualified research expenses (QREs) in the process of conducting qualified research activities, such as the development of new or improved products, processes, or software. 

  1. Will the R&D Credit be available in future tax years?

Yes. For many years, the R&D Credit was not a permanent part of the tax code. It lapsed every few years but was almost always renewed by Congress due to its widespread popularity. However, this pattern created uncertainty, which impaired the utility of the credit for both taxpayers and society as a whole—when there was doubt about whether or not the credit would be renewed, businesses were less likely to pursue costly innovative activities. Fortunately, the Protecting Americans from Tax Hikes (PATH) Act of 2015 permanently added the R&D Credit to the tax code, so businesses can rely on its existence now and in the future. 

  1. Isn’t the R&D Credit only for companies that engage in scientific research or develop revolutionary new products?

No! One of the most common and damaging misconceptions about the R&D Credit is that it is only available to scientists in white lab coats or high-tech companies creating the next major breakthrough. In reality, the R&D Credit rewards businesses of all sizes in a wide range of industries, including architecture, engineering, manufacturing, and construction.

  1. What types of activities qualify for the R&D Credit?

Just as businesses in several different industries may be eligible for the R&D Credit, a wide variety of activities could be considered qualified research. A few examples include: pursuing green building initiatives; developing models or prototypes; evaluating new materials or design concepts; and improving tools, machinery, or equipment used in the manufacturing process. To be considered qualified research, an activity must satisfy each prong of the following four-part test:

    • The activity must be intended to create new or improve the existing functionality of a business component.
    • The taxpayer must seek to eliminate uncertainty about the activity.
    • In attempting to eliminate the uncertainty, the taxpayer undertakes a process of experimentation designed to evaluate one or more alternatives.
    • The process of experimentation is scientific in nature and relies on physics, biology, engineering, or computer science. 
  1. Are there certain types of research activities that do not qualify for the R&D Credit?

Yes, there are several activities that are specifically excluded from the credit. For example, businesses generally may not claim the R&D Credit for activities conducted outside the U.S., the routine testing of products or materials for quality control purposes, research in non-scientific disciplines like the arts, humanities, or social sciences, and activities conducted solely with the goal of improving a product’s aesthetic appeal. 

  1. Is it worthwhile for businesses that do not have significant income tax liabilities in the current year to pursue the R&D Credit?

Yes, many businesses with lower income tax burdens may still be able to take advantage of the R&D Credit. In addition to making the credit a permanent part of the tax code, the PATH Act expanded its availability to smaller businesses and start-ups. Specifically, the new law allowed businesses that have been in operation for fewer than six years, have gross receipts of $5 million or less in the current tax year, and did not have any gross receipts in the previous five years to apply up to $250,000 per year of R&D Credits against their payroll tax liabilities. Taxpayers may also carry the credit back for up to three years and forward for up to 20 years in order to reduce their tax burdens as needed. 

  1. Does the alternative minimum tax (AMT) limit a taxpayer’s ability to take advantage of the R&D Credit? 

The AMT was designed to prevent taxpayers from eroding their tax burdens by requiring them to pay tax at a designated minimum rate, regardless of available credits and deductions. However, recent changes have reduced AMT limitations for both businesses and individuals, so many taxpayers now face fewer restrictions when claiming the R&D Credit and other incentives. Businesses are advised to consult a tax professional in order to determine whether their credits will be limited by the AMT. 

  1. What are QREs under the R&D Credit?

Qualified research expenses (QREs) are expenses that a business incurs in conducting qualified research under the R&D Credit. QREs include amounts paid for supplies, wages paid to employees who engage in qualified research or those who directly supervise or support these employees, and amounts paid to third parties who are under contract to perform R&D activities. The credit amount that a taxpayer receives equals a percentage of QREs over a certain base amount, up to a net thirteen percent of QREs. 

  1. Are R&D Credits available at the state level? 

Yes. Several states offer businesses tax credits for engaging in R&D activities, and most of these states follow the federal guidelines for determining what constitutes qualified research. Therefore, businesses may be able to claim both state and federal R&D Credits without much additional effort. At Capital Review Group, we have found that savings through state R&D Credits are often more substantial than savings at the federal level. For example, we recently worked with a mid-sized engineering firm in Phoenix that qualified for substantial state and federal R&D Credits. Based on activities like testing different design concepts, developing environmentally friendly plans, and complying with complicated building codes, the firm was able to save up to $152,000 per year in federal R&D Tax Credits and up to $234,000 per year in Arizona R&D Credits. 

  1. What should businesses do if they think they may be eligible for the R&D Credit? 

Claiming the R&D Credit is a complex process that requires thorough documentation—but if their claims are successful, businesses will be able to significantly reduce their tax burdens, thus freeing up capital to reinvest in their operations and future growth initiatives. Necessary documentation may include employee time sheets, payroll records, state and federal tax returns, and project lists. In order to assess potential eligibility and maximize savings under state and federal R&D Credits, businesses should consult experienced tax professionals like the team at Capital Review Group. At CRG, we have helped businesses in a variety of industries significantly boost their bottom lines through the R&D Credit. 

Need additional information on the R&D Credit or think that your business may qualify? Contact CRG today at 877-666-5539 to schedule a pro bono analysis!

Supreme Court Rules that States May Require Online Retailers to Collect Sales Tax

On June 21, the Supreme Court issued a ruling that overturned a 26 year-old precedent and will impose a costly compliance burden on numerous businesses that sell goods online. The Court’s 5-4 decision in South Dakota v. Wayfair held that states may require online retailers to collect sales taxes on internet purchases—even if the retailer does not have a physical presence, such as a factory, office or store, in the state. As a result, countless businesses may now need to keep track of the varying sales tax rates and rules among the nation’s more than 10,000 jurisdictions, and collect and remit such taxes for online sales. 

The Wayfair decision reverses Quill v. North Dakota, which the Supreme Court decided in 1992—before the explosion of e-commerce. In Quill, the Court held that a state’s taxing authority did not extend to businesses that had no physical presence within the state, so it would be unconstitutional to require out-of-state sellers to collect and remit sales taxes. However, as online shopping has surged in popularity, it has become increasingly common for businesses to make hundreds of thousands of dollars in sales to customers located in states to which they have no physical nexus. As a result, states have been unable to collect up to $13.4 billion per year in sales tax revenue, according to a study by the Government Accounting Office. In addition, traditional brick-and-mortar stores have complained that it is unfair that they are required to collect sales tax, while their customers can often purchase the same products from online retailers and avoid such taxes. 

The Wayfair case arose when South Dakota violated Quill by enacting a law that required businesses, regardless of their location, to collect and remit sales taxes if they made $100,000 or more in sales or at least 200 transactions per year to South Dakota residents. In essence, South Dakota’s law mandated sales tax collection for businesses with merely an economic nexus to the state, rather than a physical presence. By the time the case reached the Supreme Court, South Dakota had been joined by 41 other states, as well as brick-and-mortar retailers seeking a more level playing field. The Court agreed with their argument that Quill’s physical presence requirement no longer applies in the age of online shopping, and noted that South Dakota’s law does not unduly burden interstate commerce. However, the Court indicated that more complex or far-reaching state sales tax laws may be problematic. 

States are already responding to the decision

With states now having the freedom to tax all online transactions, businesses must stay tuned for new sales tax legislation in each state where they sell goods. Several states have passed “economic nexus” laws similar to South Dakota’s; in some states, these laws may have already taken effect, while other states will need several months to establish systems for taxing remote sales. In addition, Congress may step in to create a national framework for state taxation of online sales—some businesses, as well as the dissent in Wayfair, have advocated for this solution.

As of July 2018, states that have responded to the Wayfair decision include: 

    • Hawaii. Hawaii passed Act 41, which states that a person or business will be subject to Hawaii’s general excise tax (GET) if, in the current or preceding calendar year, they have gross income of $100,000 or more in sales, or they have entered into 200 or more separate transactions in Hawaii. Act 41 went into effect on July 1, 2018 and will not be applied retroactively. 
    • Idaho. The Idaho State Tax Commission announced that although it is still awaiting possible Congressional action, it has implemented House Bill 578. Effective July 1, this new law requires out-of-state retailers to collect sales tax on sales to Idaho customers—but only if they have an agreement with an Idaho retailer to refer customers to the out-of-state retailer for a commission, and their sales to customers in Idaho exceeded $10,000 in the previous year. 
    • Iowa. In May 2018, Iowa Governor Kim Reynolds signed Senate File 2417, which includes provisions identical to the South Dakota law. Specifically, it requires out-of-state retailers to collect Iowa sales tax if they have $100,000 or more in sales or make 200 or more transactions within the state. Senate File 2417 also requires marketplaces with multiple sellers to collect sales tax. This new law will take effect on January 1, 2019 and will not apply retroactively. 
    • Maryland . Although Maryland has not yet enacted a law governing sales tax collection for out-of-state businesses, the State Comptroller has issued a tax alert stating that it will collect sales tax as broadly as it is permitted to do so under the Constitution. The Comptroller’s office will provide additional guidance as further developments occur following Wayfair. 
    • North Dakota. On October 1, 2018, North Dakota will begin requiring out-of-state sellers to collect sales tax—unless they meet the same $100,000 or 200 transaction small seller exception that has been adopted by South Dakota and other states.
    • Wisconsin. The Wisconsin Department of Revenue issued a Statement of Scope declaring that it will begin collecting sales tax from out-of-state sellers in accordance with Wayfair on October 1, 2018. Wisconsin will also follow South Dakota’s small seller exception.

What does the Wayfair decision mean for businesses that sell goods and/or provide  taxable services from out of state? 

As businesses await state and/or Congressional action on this issue, now is the time to act to determine what impact this decision may have on your business.    

The first thing that you or your clients should consider is a nexus review. By conducting a review of the company’s tax footprint, a nexus review will help to determine whether your business has past, present, and potential future exposure. At CRG, our reviews often identify past sales tax collection responsibilities where a company exceeded the scope of the previous Constitutional protections. These amounts could be significant and there is generally no statute of limitations for non-filed returns. In addition, an online service and/or software may be subject to sales tax in another state even if it is not taxable in the home state. A company may also have additional income filing requirements. 

Once completed, a plan can be tailored to mitigate past, present, and future liabilities. One solution may be to enter into binding agreements with states to limit look-back periods and eliminate penalties and interest. Amnesty programs may also be an option if there are prior unpaid tax liabilities.

Options for future filings can also be addressed as a result of the nexus review. For example, the team at CRG can help you implement systems and processes to monitor the number and dollar value of transactions made in each state. This will allow you to determine whether you must collect sales taxes in states with economic nexus laws similar to the one passed in South Dakota. We will also guide you in understanding and abiding by the tax rates, exemptions, and any special rules that may apply in states where you or your clients make sales.

At CRG, we are experienced in helping businesses in a variety of industries understand the complex sales tax systems to which they are subject and ensure that they collect and remit accurate amounts. Contact CRG today to learn more. 

(Sources: http://www.cpapracticeadvisor.com/news/12417886/us-supreme-court-rules-in-favor-of-south-dakota-in-wayfair-sales-tax-case, https://www.practicalecommerce.com/sales-tax-expert-impact-supreme-courts-wayfair-decision, https://www.accountexnetwork.com/blog/2018/06/change-is-in-the-air-preparing-for-south-dakota-v-wayfair/, https://www.forbes.com/sites/greatspeculations/2018/06/26/dissecting-supreme-courts-internet-sales-tax-decision/#fbcd8053fbee). 

Capital Review Group Continues to Provide Tax Incentive Consulting Under New Leadership

The team at Capital Review Group (CRG) is pleased to announce that Jordan Taylor, will serve as the company’s new CEO, taking over the reigns from Marky Moore. Ms. Moore founded CRG in 2004 to provide critical tax and specialty services to professional advisors, clients and institutional partners. In the years since, she has grown CRG into a leading national incentive/tax advisory firm that develops customized strategies to help clients drastically reduce their tax burdens. As the company enters a new chapter under Mr. Taylor’s leadership, Ms. Moore will continue to be with CRG during the transition and to offer her vast expertise by serving as a consultant to CRG.

“I am excited for the opportunity to lead CRG into the next phase of an amazing legacy created by Marky,” said Mr. Taylor. “Following Marky as CEO won’t be easy to do, but I’m up for the challenge.”

As a Certified Sustainable Building Advisor and an Accredited Professional for the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED AP/BD&C), Ms. Moore has been instrumental in establishing CRG as a leading provider of tax services for architects, engineers, and commercial building owners. Specifically, the company offers services in Cost Segregation, the Tangible Property Regulations, certification for the §179D deduction, business tax credits, specialty construction/engineering consulting, and more. Expanding on these services, CRG is continuing to master new ways to help clients optimize their financial health. In addition to her professional success in spearheading CRG, Ms. Moore has demonstrated her expertise as a featured speaker in the industry and the author of several articles for major industry publications. 

“Marky was a visionary in the tax incentive arena well before many of our competitors existed,” noted Mr. Taylor. “She led CRG with the highest level of integrity and an eye toward providing the absolute best support for our advisor partners and clients. Her transition out of CRG is well-deserved.”

CRG is based in Phoenix, Arizona and serves clients nationwide, with a focus on those located throughout the Western U.S. and Texas. Contact us at https://www.capitalreviewgroup.com/contact/ to learn more about what we offer or to schedule a pro bono analysis.

Completed Energy Efficiency Projects in 2017? Act Now to Take Advantage of the §179D Deduction!

Since its enactment under the Energy Policy Act of 2005 (“EPAct”), the §179D deduction has been a powerful tool for promoting sustainability while saving commercial building owners and primary designers thousands of dollars in taxes. However, this important incentive has never been a permanent part of the tax code and has traditionally expired at the end of each year. Most recently, the §179D deduction expired on December 31, 2016, sparking widespread uncertainty over whether Congress would act to renew it. 

After months of speculation, the recently enacted Bipartisan Budget Act of 2018 renewed the §179D deduction retroactively for energy-efficient projects completed last year. Therefore, eligible taxpayers may now claim the deduction for projects completed through December 31, 2017. Although this renewal is short-term, Capital Review Group is pleased to announce that we have bolstered our resources for helping our clients claim this valuable incentive. 

What is the §179D Deduction?

Section 179D of the tax code incentivizes energy efficiency measures in public and commercial buildings by providing a deduction of up to $1.80 per square foot. Specifically, the §179D deduction is worth up to $0.60 per square foot for improvements to lighting systems, $0.60 per square foot for the building envelope, and $0.60 per square foot for HVAC systems. This deduction is available to commercial building owners who install qualifying energy efficiency measures, as well as the primary designers—including architects, engineers, and contractors—of such measures in buildings owned by local, state, or federal governments.

Taxpayers may claim the $179D deduction for qualifying measures implemented in new buildings and retrofits to existing buildings. However, construction completed in 2016 or later must meet or exceed the standards enumerated in ASHRAE 90.1-2007. Energy-efficient building projects must also be certified by a qualified third party, such as CRG, to ensure that they satisfy all the requirements of §179D. 

What’s Next for the §179D Deduction?

At this time, Congress has not taken action to extend the §179D deduction for 2018 or future years. Due to the deduction’s widespread popularity, however, future extensions are possible. In the meantime, commercial building owners and primary designers who completed energy efficiency projects in 2017 should act swiftly to seize this powerful incentive while it is available. 

As CRG continues to expand our services in order to help our clients minimize their tax burdens, we are available to assist with certifying §179D projects and navigating the process of claiming the deduction. Contact the team of tax experts at CRG today by calling 877-666-5539 or visiting https://www.capitalreviewgroup.com/contact/!

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