1031 Exchange – Is It Right for You?

Do you own a piece of real estate whose fair market value is greater than its basis?  Are you contemplating selling and buying another? A 1031 Exchange may be for you!

In a Section 1031 Exchange, also known as a “like-kind” exchange or a Starker exchange, the taxpayer does not recognize and pay tax on the gain on an exchange of like-kind properties so long as both properties are held for use in a trade, business, or investment purposes.

There are specific guidelines to follow to qualify for a Section 1031 exchange.  The first is the term “like-kind.” Luckily, like-kind is a broad term. For example, a rental property can be exchanged for raw land, and vice-versa.  A multi-family rental property can be exchanged for commercial property, a warehouse for an office building, residential apartment building for a storefront, etc. According to the IRS, so long as the properties being exchanged are of the same nature, character, or class, they would qualify (e.g., Real Property for Real Property, etc.).  Second, this provision applies to business or investment property only. You cannot exchange your primary residence for another home. For example, if you are moving from Rhode Island to another state, the sale of your home and purchase of a new home would not qualify for like-kind treatment.

Third, the IRS requires that the value of the property and equity purchased must be the same as or greater than the property given up in exchange.  To qualify for 100% deferral of the gain, an example would be a piece of property worth $500,000 with a $100,000 mortgage attached. It would have to be exchanged for another piece of property with a minimum value of $500,000 and a $100,000 mortgage retained.  This leads us to another rule: A taxpayer must not receive “boot” in the transaction to qualify for 100% deferral of the gain. Any boot received is considered taxable to the extent there is realized gain on the transaction. For example, you own a property worth $1,500,000, and you are exchanging it for a qualified property worth $900,000.  The $600,000 cash received in this instance would be considered “boot,” and you would pay tax on the amount up to the gain on the property.

Because simultaneously swapping properties is rare between two owners, you’ll engage in a “deferred” exchange where you enlist the help of a QI (qualified intermediary). Additionally, there are a few time constraints when conducting like-kind exchanges. You, as the property owner, have up to 45 days after selling and closing on your original property to identify up to three potential pieces of like-kind exchange property. The replacement property needs to be received and the exchange completed within 180 days from the sale of your original property or the due date of your income tax return (including extensions) for the tax year in which the relinquished property was sold – whichever is earlier. Please note that there are no extensions available for the 45-day and 180-day periods.

To add more to the like-kind exchange gamut, the recently enacted Tax Cuts and Jobs Act (TCJA) changed a rule related to like-kind exchanges.  For exchanges completed after December 31, 2017, the TCJA limits these like-kind exchanges to real property not held primarily for sale (real-property limitation.) Therefore, after December 31, 2017, personal property and intangible property no longer qualify. There are transition rules that only apply in certain circumstances.

All these rules and guidelines can confuse even the most astute investors. Many areas in the like-kind exchange arena can trip you up and therefore disqualify transactions from tax deferral.  If you are contemplating a like-kind exchange, please give us a call at (401) 921-2000 and we would be more than happy to assist you.

On Thursday, June 21, 2018, the U.S.  Supreme Court overturned its previous 1967 and 1992 rulings on two cases, National Bellas Hess vs. Illinois and Quill vs. North Dakota, that had upheld physical presence being required in a state before it could impose sales tax on purchases made by residents in their state.  In a 5 – 4 decision in Wayfair vs. South Dakota, the Supreme Court ruled in favor of the state authority to require online retailers to collect sales taxes without regard to physical presence in the state.

With this decision, states stand to gain much-needed tax revenues for their budget deficits. In addition, there may be even more significant cost consequences for small online retailers that do business in multiple states.

As part of the ruling in the 1992 Quill vs. North Dakota case, Congress was given ultimate power to resolve sales tax issues pertaining to interstate commerce.  Discussions surrounding the concept of an “internet sales tax” is not new. Each year, since 2010, legislation has been introduced that proposed a federal tax bill; however, to date, Congress has failed to pass any such legislation that would lend a sense of uniformity to sales tax regulations.

Now that states are being given the authority to pass their own legislation to impose sales tax on purchases from out-of-state retailers regardless of physical presence, and with the inevitable increased complexity that retailers will be forced to comply with, it is possible that Congress will be spurred to provide federal guidance surrounding applicability and compliance as a result of the ruling.

Read More at AP News

In our previous post, Authenticated Financial Information, we explored the need for a private company clearinghouse that can be used to protect and deliver trustworthy financial information. One of the ways firms and their business clients are utilizing a clearinghouse is for SOC report distribution – a process that is becoming more challenging to manage as an increased focus on third-party controls has led to a rise in requests for reports.

If you consider the way most service organizations distribute SOC reports today, you might think of basic methods like email and mail, often with no standardized process or central group managing it. Requests are often sent to various individuals at a service organization from different types of requestors. While convenient, these methods offer little in their ability to track where reports have been sent to and in verifying that the person requesting the report is qualified to receive it. What happens when there is a change or updated report available? How would the previous recipients be notified? What is the approval process? Are NDAs appropriately collected?

Aside from internal challenges, what about the customer experience? Providing customers with an easy, quick way to receive reports is important, but one should also consider if their distribution methods reflect a level of security and control that one would expect from an organization that has already undergone a SOC engagement.

RIVIO solves all these challenges and boasts a high level of user-friendliness for all parties. It puts a service organization in control over the distribution of their SOC reports while also keeping everything confidential and secure.

How does it work?

RIVIO Clearinghouse is a platform designed for three different users: CPA firms, businesses, and third-party users. It provides one location for each party to request, share, and verify information – all through a secure, accessible environment that has undergone all three SOC examinations, has received an ISO 27001 Certification for Service, TRUSTe Privacy Policy Certified, and EU-US Privacy Shield certified.

  1. Request: The platform offers a way for organizations to request SOC reports from their CPA firms and provides a way for customers to request reports from their service providers. When requests are issued, a notification is generated through the system and produces a link for the appropriate party to respond by uploading the SOC report.
  2. Share: SOC reports can be shared with individual customers or with groups through defined distribution lists. The platform tracks recipients of reports and also provides a way to recall information, should a report be updated.
  3. Verify: The platform has a validation process to confirm information came from an authentic source and has been unaltered.

Are you ready to take control of SOC report requests? Visit RIVIO.com to learn more.

There is a growing demand today for accurate, source-verified financial information. But, what is driving this demand? Users of audited financial statements, such as investors and lenders, have increased their focus on the authenticity of the information they receive. While technology has positively impacted the speed and accessibility of information, it has also had some negative impacts – creating new ways to alter and compromise information.

Unfortunately, there are plenty of instances of fraud occurring, either by altering information after it’s been reviewed by a CPA firm, completely falsifying an audited financial statement, or even creating a fictitious firm. Those committing these types of fraud have put the information that others provide under great scrutiny. How can those receiving the information be sure of its validity?

For public companies, this is avoided by use of EDGAR. However, for private companies, there hasn’t been a similar Clearinghouse until recently. CPA.com, an AICPA company, collaborated with Confirmation.com to develop RIVIO Clearinghouse to not only ensure that financial information provided by a CPA firm is protected, but also to provide a more efficient way for all parties to exchange information.

RIVIO provides an online platform that enables CPA firms to exchange information with their private business clients who can then share it out to any third parties that may need this information. It streamlines and controls the process while also ensuring that third parties receive authenticated financial information. For private businesses, it brings more trust to the information provided to third parties and facilitates a more efficient manner for exchanging information.

This cutting-edge solution is a gamechanger for CPA firms and their private business clients, and it is rapidly gaining market acceptance. In a time where it is becoming more challenging to control and protect information, RIVIO is positioned to meet the growing need for authenticated information.

Learn more at RIVIO.com

We receive regular checkups to monitor, maintain, and improve our health. But did you know that you should do the same for your company?  Financial statements provide the vital statistics necessary to track a company’s health. Investors use financial statements to research potential investments, bankers base lending decisions on a company’s financial statements, and valuation experts utilize financial statements to determine a company’s worth. By routinely scrutinizing your financial statements, you can monitor and improve your company’s performance and, ultimately, its value.

A comprehensive financial analysis employs ratios to measure a company’s past and current operations, allowing you to compare its results to others in its industry. This type of review offers insight into the historical growth, profitability, debt capacity, and overall liquidity of the subject company in the context of its industry. All such factors can be important indicators of a company’s ultimate value and provide useful information to business owners and managers who want to more effectively and efficiently manage their operations.

You can perform your own financial checkup for your business. To begin, obtain a history of your company’s financial statements; five years’ worth is usually a good base. Next, convert the financial statements to common size. Common size financial statements are simply your company’s financials expressed in the form of percentages rather than dollars. A common size format readily identifies trends and growth patterns. Additionally, since industry benchmark data is often produced in this format, it makes it easier to compare your results with the competition. Industry benchmark information can be obtained from a commercial vendor, your accountant, or, depending upon the industry, from trade associations.

Next, financial ratios are calculated. There are a number of ratios to choose from – some of the more common ratios measure liquidity, debt coverage, leverage, and operating and profit performance. Their relevance is dependent upon your company, its operating characteristics, and the industry. Bankers and accountants can be especially useful in identifying the more pertinent ratios.

The information gathered thus far is analyzed and compiled on a trended, composite, and industry basis. The results of this analysis, when performed regularly, help you to monitor and recognize the vital statistics necessary to maintain the success and growth of your business. The benefits of this assessment include:

Competitive Advantages & Disadvantages

An industry assessment enables you to identify your company’s strengths and weaknesses and acquire valuable information on the competition.

Budgeting & Forecasting

Studying trends and growth patterns is a very effective preliminary step in preparing internal budgets and forecasts.

Strategic Planning

Recognizing specific performance measurements (company and industry) will help to set goals and objectives for the future (e.g. increasing sales, gross profit margins, and net income).

Acquisition Opportunities

Knowledge of key performance measurements assists in the evaluation of a proposed sale, merger, or acquisition.

Focus

Greater awareness of the interrelationship of the financial statements and a complete understanding of financial operations allows you to focus on the areas important to the growth and success of your business.

Regardless of whether you perform, or your accountant performs, a financial analysis is akin to your annual physical examination…it is crucial to understanding your company’s health – past, present, and future.

 

Our partner, Leah Szlatenyi, directs the Bentley Consulting Group, LLC and has over 25 years of tax, financial advisory, and business consulting experience. As a former member of the American Institute of Certified Public Accountants’ (AICPA) National Business Valuation Committee, Leah has extensive knowledge in the evaluation of an organization’s financial health, business planning and forecasting, and strategic implementation.

Is your company future ready? We are living in an incredible time of rapid change around the world. Technology, regulation, global economics, political uncertainty, business transformations, generational shifts; and there is no end in sight.

Planning for Market Shifts

We have always dealt with change but never has change come so rapidly. Your smartphone is only 10 years old. How has it changed your life and your business? Artificial intelligence, virtual reality, augmented reality, online commerce, blockchain, Bitcoin, driverless cars, and more. Are you ready for those changes to your business or organization? Will your organization be disrupted by the likes of Uber, Air B&B, Amazon, and others – or will you be a disruptor by creating the next big thing?

Like so many of us, we go through our business day focusing on the present and dealing with the past, but what about the future? Is your organization properly positioned to seize new opportunities and navigate upcoming threats? Have you addressed succession in ownership, management, and on the shop floor? What will your organization look like in three, five, and ten years? These are difficult questions that many simply put off.

Strategic Planning Engagements

Your financial advisor can certainly assist in projecting financials like revenue, profits, taxes, cash flow, and future capital needs, but, in some cases, they can also help you dream about the future of your organization through a formal Strategic Planning Engagement.

The process of developing a future strategy can be daunting, especially for smaller family-owned businesses or organizations with limited resources. The best way to accomplish this goal is to use an outside facilitator who understands the process of long-term planning and the business challenges that all U.S. companies face, serving as a neutral voice in building consensus.

Our partner, Bill Pirolli, has decades of just such experience. Not only has he been on the front lines with his clients for over 40 years as their trusted business advisor (as well as serving in management positions in DiSanto, Priest & Co.), he has also led dozens of strategic planning retreats for accounting and law firms, private businesses, and non-profit organizations.

About Bill Pirolli

Bill has been a volunteer to the accounting profession and business community for over 20 years.  He has been the President and Chairman of the Rhode Island Society of CPAs (RISCPA), the Central Rhode Island Chamber of Commerce, and the American Institute of Certified Public Accountants’ (AICPA) Private Company Practice Section. He has held many other committee positions and is currently appointed to the United States and International Board of Directors of the AICPA, an organization with over 650,000 members in 189 countries. Through these experiences, Bill has participated in many strategic organizational visioning projects and learned the best practices for developing a future-proofed strategy.

Get in Touch

Contact us to see how strategic planning can propel your business into the future.

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As we continue to welcome in the first quarter of 2018 and the new tax bill, let’s take a quick look at what has changed and what remains the same.

Federal

Thanks to the Tax Cuts and Jobs Act, beginning in 2018, the exemption for Gift, Estate, and Generation Skipping Transfer (GST) tax has increased. The amount that can now be left to heirs, tax free, will be approximately $11.2 million per person and $22.4 million for married couples. Furthermore, the annual gift tax exclusion has been raised from $14,000 to $15,000 beginning in 2018. The 40% tax rate for estate, gift, and GST tax remains the same. In addition, the basis step-up rules, adjusting assets passing from a descendent to fair market value at date of death, does not change.

Rhode Island

For descendants dying on or after January 1, 2018, the estate tax threshold will be raised an additional $22,500, changing from $1,515,156 in 2017 to $1,537,656 in 2018.

What is happening in our neighboring states?

Connecticut

On October 31, 2017, Connecticut increased the individual exemption up from $2 million to $2.6 million in 2018. This will increase again to $3.6 million in 2019 and will match the federal Estate, Gift, and GST Tax Exemption in 2020.

Massachusetts

Massachusetts’ exemption remains unchanged at $1 million. In fact, Massachusetts and Oregon are now tied for the lowest estate tax exemptions in the nation.

President Donald Trump signed into law the Tax Cuts and Jobs Act (TCJA) on December 22, 2017. This new law is the most significant tax law overhaul in 31 years and it affects corporations, pass-through entities, and individuals. Below is a summary of the substantial changes affecting businesses in real estate and construction. Unless otherwise noted, these changes are effective for tax years beginning after December 31, 2017.

  • A new rule limiting like-kind exchanges to real property that is not held primarily for sale.
  • The exception for small construction contracts from the requirement to use the percentage of completion method has been expanded to apply to contracts for the construction or improvement of real property if the contract:
    1. is expected to be completed within two years of the commencement of the contract, and
    2. is performed by a taxpayer that meets the $25 million gross receipts test.
  • The R&D credit has been retained. However, for tax years beginning after December 31, 2021, amounts defined as specified research or experimental expenditures will be required to be capitalized and amortized ratably over a five-year period beginning with the midpoint of the taxable year in which the expenditures were paid or incurred.
  • Bonus depreciation has been doubled to 100% and has been expanded to include used assets. This change is effective for assets acquired and placed in service after September 27, 2017 and before January 1, 2023. For property placed in service after December 31, 2022, the 100% allowance is phased down by 20% per calendar year.
  • Section 179 expensing limit has been doubled to $1 million and the expensing phaseout threshold has been increased to $2.5 million.
  • Qualified improvement property is now generally depreciable over 15 years without regard to whether the improvements of the property are subject to a lease or placed in service more than three years after the date the building was first placed in service.
  • New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies, and S Corporations) and sole proprietorships. This deduction is available through 2025.
  • New disallowance of deductions for net interest expense more than 30% of the business’s adjusted taxable income (exceptions apply).
  • Section 199 deduction, also commonly referred to as the domestic production activities deduction, has been eliminated for tax years beginning after December 31, 2017.
  • The rules regarding partnership technical terminations under Section 708(b)(1)(B) have been eliminated.

This is just a summary of the most significant TCJA provisions that will affect businesses engaged in real estate and construction. If you are interested in learning more about how these and other provisions of the new law impact you, please contact your tax advisor.

With today’s evolving economic landscape, market conditions, and compliance standards, you need a strategic partner that can keep you ahead of the curve. Whether it be cost segregation studies or bonding analysis and planning, DiSanto, Priest & Co. can help you build a strong financial foundation that allows you to adapt as changes come your way.

We Offer

Beyond a stable financial future for your business, you also need a personal financial plan that will help you meet your goals. With our trusted advisory services and industry experience, we’ll help you reach your growth potential.

SALT, (State and Local Taxes), has become a familiar term for business owners that operate in multiple states; however, taxes are not the only area of compliance that businesses that operate over state borders need to be concerned with.

Property managers that lease residential units or apartments need to be aware of the state regulations pertaining to landlord and tenant’s rights and obligations.  Each state’s business regulation department provides guidance pertaining to the Landlord/Tenant relationship and just like state taxes, these regulations vary from state to state.

Some of the key topics pertaining to the Landlord/Tenant relationship are summarized below for the Tri-state area of Rhode Island, Connecticut, and Massachusetts.  For more detailed information please refer to the individual state’s business regulations that can be located at the websites indicated at the top of the chart.

Landlord/Tenant Chart (RI, CT, MA)

 

Disanto, Priest, & Co. and its affiliates do not provide legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for legal advice. You should consult legal advisors before engaging in any transaction.

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