A 1031 exchange is a popular way to sell your real estate and exchange it for another piece of real estate without having to pay any tax. The tax deferral allows the taxpayer to invest more of their cash into a new property instead of the alternate scenario of paying taxes on the gain and purchasing a new property.

The process of an exchange has a lot of complications but the basics to qualify for a 1031 exchange and pay no tax are as follows.

Exchanges can also be used to reduce the total capital gain from a sale if a taxpayer wants to buy a smaller replacement property. The general rule is that smaller the reinvestment then the greater taxable gain. As with all things in tax the details matter and each specific situation warrants its own analysis to determine if its tax treatment. While the benefits of a tax-free exchange can be substantial the tax treatment should not be the only thing to consider.

The decision to make a 1031 exchange should include a total evaluation of the tax effects as well as the economics of the sale. Talking with your financial and or tax advisor about any potential exchanges along the cost benefit should be discussed as each situation has its own merits. While saving money on the sale of a property can make sense for tax purposes, exchanging it for a property which is a bad investment overall leaves you worse off in the long run. The time constraints on a 1031 to identify and purchase can make finding a suitable replacement property a common issue among people during the exchange period.

From a tax perspective, 1031s are the most beneficial when you have a property with a low tax-basis and substantial appreciation. The higher the tax deferral then the more cash that is saved for a replacement property. If the property you are looking to exchange has not appreciated much in value since the initial purchase, a 1031 exchange might not be the best bang for your buck.

As an alternative, a cost segregation study can accelerate the depreciation on new property which can offset the gain from the sale. With this strategy you can buy the second property without the short time constraints of the 1031 requirements. However, the purchase will have to be in the same tax year as the sale for an offset of the gain. This approach would involve a careful review of the details of both transactions to fully determine the tax consequences.

From a nontax perspective you should also consider the economic factors of the replacement property as well. Factors like cash flow, type of property, debt service, and market conditions of the location all play a major role in deciding to purchase real estate besides taxes.

Another opportunity with 1031 exchanges is the opportunity for a multi-property exchange. If the sale is large enough, you can purchase multiple properties with an exchange. Often this is a good strategy to diversify a real estate portfolio as it lets the buyer spread out their real estate investment into different markets and properties tax free. For example, a sale of a commercial building can be exchanged into a residential rental, multifamily complex, or even an interest in a Delaware Statutory Trust (DST).

If you have more questions about the 1031 exchange or its tax benefits, please do not hesitate to reach out to experts or visit our real estate page for more resources.

The corporate scandals of Enron, WorldCom, and Tyco in the early 2000s have forever changed how management and investors view risk management programs. Circumventing controls and exposing a business to increased risk is a recipe for disaster that could result in reputational damage.

Despite management’s good faith efforts to implement comprehensive risk assessments and mitigation programs, the percentage of successful implementations remains relatively low. Gladly, there are some clear indicators that your risk assessment may be falling short.

Risk assessments often result in a substantial amount of documentation that is filed away once completed. However, if the risk management process is not incorporated into daily business processes, it becomes a “check-the-box” exercise, and the benefits are never realized. To be effective, it needs to be refreshed as the business changes and should be continuously updated.

When performing risk assessments, companies tend to identify generic risks. For example, they may conclude that there is a “risk or fraud,” which is too generic. Instead, potential fraud scenarios should be identified, including who the likely perpetrators are, how they could conceal the fraud, and how the potential fraud could be prevented.

Many companies utilize a top-down approach, which is great for identifying strategic risks. Others prefer a bottoms-up approach, which is better for identifying operational risks. However, each one provides only a partial view. Having the perspectives of both executive management and operational staff is necessary for developing a holistic view of the organization’s risk exposures and ways to mitigate them.

When issues are identified, remediation efforts often address the symptom but fail to treat the root cause of the problem. As a result, the root cause goes unresolved and the risk of further issues remains high.

Risk assessments are often done by someone independent of the business process, such as the Compliance person, and sometimes without getting buy-in or feedback from the business area. This can result in incorrect assumptions being used, leading to poor process documentation and incorrect controls.

A best practice would be to have three components to your business risk assessment:

Being aware of potential pitfalls is the first step toward effective mitigation. If you would like to learn more about how we can help improve your business’s risk assessment process, please contact us.

In this blog post, we will explain what SOX is and how your business can be compliant. We’ll also provide some resources to help you get started.

Since signed into law in 2002, Sarbanes-Oxley (SOX) compliance has become one of the most historically significant reforms to U.S. security legislation. To increase transparency and create a more formalized system of internal checks and balances, SOX essentially measures how well a company manages its internal controls.

Broad ranged and crucial to success, SOX affects financial governance and accountability, data storage and transmission, and information technology. The goal is to safeguard investors against inaccurate or unreliable corporate disclosures.

Strictly enforced and far-sweeping, SOX has affected global markets far more than expected. In an interdependent world, it has proven critical to understand, implement, and maintain the proper controls and compliance rules set forth by SOX. SOX noncompliance penalties range in severity and can result in fines and removal from the Public Stock Exchange.

To avoid noncompliance issues, it is extremely important to have a well thought out strategy. All SOX implementations and ongoing maintenance will follow these general steps:

Perform a SOX-based risk assessment and determine the scope of business units and processes to be included. Based on an understanding of transactional processes and financial misstatement risk, determine what key controls are required and design them to mitigate significant risks effectively. Considering risk periodically is critical, as a company’s risk profile can change dramatically throughout the year, especially in a high-tech or equally dynamic industry.

Tip: The controls (and thus their design) should be reviewed periodically as circumstances change (i.e., acquisition, new product launch, new markets, growth, or downturn), but at least annually.

Key controls require sufficient documentation so that the process can be properly performed and replicated. Anyone performing control activities should be clear on how to perform and document them consistently, and internal and external auditors should be able to test controls for compliance easily.

Tip: The keyword for documentation is “sufficient.” Over documentation, especially in the first year, is a serious resource consumer. Reaching the documentation balance requires experience and perspective, so be sure to consult with your internal audit and external auditors to stay on track

All key controls must be periodically tested with the appropriate samples to gather evidence and support a conclusion about the effectiveness of management’s controls. The nature and extent of testing should be discussed early in the process, to ensure management and external auditors agree. Having this agreement will enable external auditors to place greater reliance on management’s testing.

Tip: Year after year, testing will consume much of your SOX budget. Spend time and effort to ensure you have the most efficient and effective test resources available. A highly efficient test program will include experienced testers, executing well-developed test plans, utilizing appropriate technology and proven procedures.   

Testing results will be compiled and evaluated to determine if there are deficiencies and, if so, their severity. There are three levels of deficiencies:  deficiencies, significant deficiencies, and material weaknesses. There is a lot written about the technical definition of deficiencies, but the practical concerns with each are as follows:

Deficiency – a control did not operate as “advertised,” but the resulting impact is insignificant. Correct the problem and learn from it. Report the issue to management and share it with external auditors.

Significant deficiency – a control did not operate effectively and the impact was close to material, but not quite. This must be reported to management, external auditors, and the audit committee.

Material weakness  – one or more controls failed and the result was, or could have been, a material misstatement to the financials. This level requires full public disclosure in the financial statements.

Tip:  Developing a highly effective test program can help you find issues early, which will help you correct problems before they escalate beyond a simple deficiency.

SOX compliance may seem daunting, but it doesn’t have to be. By following our tips and partnering with a qualified consultant, you can ensure your company is on track for compliance. Have questions about SOX or need more information? Contact us – we’re here to help!

There are many reasons why a person may choose to work at one company over another. From casual dress codes, unlimited vacation days, and remote work opportunities, today’s job perks run the gamut. But one employee incentive undoubtedly takes the cake regarding recruitment and retention power — equity.

Simply put, having equity in a company means you have a stake in the business and its success. In 2021, major Initial Public Offering (IPOs) like Coinbase, Rivian, and Bumble resulted in thousands of employees owning shares of large enterprises virtually overnight.

With plenty more IPOs on the horizon for 2022, many hopeful employees are considering the likelihood that their stock options and restricted stock units (RSUs) will produce major payouts. Before you start shopping for an island in the Caribbean, there are certain factors to look at when evaluating your equity and your potential benefit.

Equity packages come in many shapes and sizes, from initial signing bonuses to compensation packages and promotions. When considering the pros and cons of joining or staying with a company, you will likely want to evaluate just how lucrative that equity may be in the future. To do that, remember that equity is only valuable if your company is successful; therefore, it’s crucial to think like an investor and consider the company’s growth potential before investing your time and effort.

Return on your equity typically comes as a liquidity action, like an acquisition or IPO. The value produced by one of these exit routes will ultimately drive the return on your equity. Your equity represents a percent of your company, and that ownership as a percentage of the overall company value equals the value of equity you hold.

It’s helpful to look at this in terms of the equation A x B = C, where your percent ownership (A), times the company’s value (B), equals the equity you own (C).

However, due to things like liquidation preferences (which determine who gets paid first and at what return), things may not always be a straightforward equation. Your percentage of ownership is the number of shares you have (or shares you have the option to buy) divided by those fully diluted shares outstanding. While this information is not always readily accessible, you will likely find these figures in your offer letter or the company’s equity management platform, like Carta.

When determining your ownership, it’s also essential to consider the number of shares you own or have the opportunity to own. In this case, vesting and dilution are the two critical things to consider.

Typically, options and RSUs follow a four to six-year vesting schedule, meaning you can’t exercise your option (or pay to turn your option into actual stock) until that vesting date is reached. This comes into play when considering leaving the company before your options are fully vested.

However, many companies have accelerated vesting or early exercise options where options may vest quicker than the typical four-year minimum or become 100% vested in the event of an acquisition. The vesting schedule and terms will be spelled out in your option grant details.

Dilution causes your ownership percentage to shrink, consequently reducing your equity value (think back to the equity equation). Early-stage companies raise multiple financing rounds, thus diluting your piece of the pie as more and more shares are issued to investors. The same thing also happens when more stock options or RSUs are granted to employees.

Not to worry, dilution isn’t all bad news. With early-stage companies, each round of financing creates new value within the company. As the company’s value goes up, your piece of the pie can grow exponentially. Therefore, considering the potential growth and value of your company in the future, particularly at the time of an acquisition or IPO, is a significant factor in examining what your equity may be worth.

Need advice on using equity as an employee benefit? Get in touch with our team of employee benefit experts today.

One of the most overlooked (and fascinating) industries that should be taking advantage of the Research & Development tax credit is food and beverage. Whether it’s a manufacturer of finished food products, an ingredient or flavor developer, or even brewing and distilling, there is usually a lot of interesting research and development. 

The Research & Development tax credit (often called the R&D Credit) can be a powerful way to help bring back some of the investment in the form of a dollar-for-dollar tax credit. The R&D credit does a great job of rewarding the entire footprint of certain product and process development activities within a company. 

The footprint includes (but is not limited to) the people and supplies to develop the product or process. It extends to testing, quality, regulatory compliance, and direct supervisory activities. 

When Congress created the R&D Credit, the goal was to reward investment in both new and improved products along with new and improved processes. Nearly any commercial efforts in the food and beverage industry will involve at least one of the following:

While Internal Revenue Code Section 41 – Credit for Increasing Research Activities guidelines specifically excludes “aesthetics” including projects relating “to style, taste, cosmetic, or seasonal design factors;” typically, technical  R&D is required to meet the chemistry, materials science, and engineering needs of the project.

Once the food or beverage profile or specification is created, the work to develop a commercial product is highly technical. The science and engineering involved with scale-up and mass production are just as technical as any industrial application. 

Opportunities in the food and beverage industry are not limited to the initial product creation and scale-up. Here are some of the other elements that can aware an R&D credit:

Development work related to new ingredients such as alternative sweeteners, salt reduction, allergen management and protocols, CBD, and other functional ingredients and dietary restrictions like vegan and keto are also good indicators of potentially eligible investments.

Production improvements to comply with the Food Safety Modernization Act (FSMA) also potentially generate R&D tax credits. Efforts related to these activities are required by companies of all types, from start-ups to mature producers.  Even line extensions may be eligible. Any product modification that adds steps to the production process can trigger a qualified research project.

National and global certifications allow the food and beverage industry to leverage the R&D credit. Creating, developing, and modifying products to meet ever-changing requirements challenges manufacturers. Kosher, Halal, organic, sustainable, non-GMO, and other dietary specifications present further challenges on top of food safety concerns.

Packaging and distribution projects can step into the limelight as an area for R&D credit opportunities. Adding new and improved packaging capability and capacity, like canning and bottling for a brewery, automating manual packaging processes, and technology implementation to improve cold-chain management can all be great opportunities to find qualified research expenses.

Traceability of ingredients is another challenge faced by the increasingly global food and beverage industry. Records intended to track the entire ingredient supply chain require high-tech methods for data management and processing. The traceability data aids in recalls and contamination avoidance, along with providing a chain of information for every batch made by each chain link. 

However, to comply with the resulting increased data requirements, many companies must turn to new software solutions for managing this information. Investing in and integrating these unique data solutions into existing systems involves substantial technology investment.

The food and beverage industry offers many opportunities to recapture investment through the R&D tax credit. We are here to provide direction and can offer a plan to allow you to stake a claim to your share of the credits available. The R&D tax credit process, while complex, can be navigated efficiently and effectively with the right help. As we said in the title, we want you to be able to make your cake and eat it too. Contact us to help claim your tax credit.

It’s no surprise that the long-awaited changes to lease accounting standards have caused quite the ruckus in recent years, particularly as businesses scramble to understand and implement the complex new rules. In addition to understanding the new rule’s impact on an operational level, it’s also important for businesses to prepare for the various tax implications that are likely to ensue.

In a nutshell, the new lease accounting standards (formally referred to as ASC 842) require businesses to record all leases greater than one year on the balance sheet. This will require businesses to collect and analyze their lease agreements to identify leases and ultimately separate non-lease components from lease agreements.

Affecting virtually every industry in the United States, the increase in liabilities on the balance sheet will inherently change how those numbers are perceived and understood. Public companies were required to implement the new standard by December of 2018, while the changes go into effect for private companies beginning December 15, 2019.

 Here are seven of the major areas impacted by the new lease accounting standard:

There’s no question that the new standards will affect nearly every business’ accounting methods. Businesses may need to revisit certain aspects of their taxes, particularly with respect to characterization of leases, timing of income under IRC 467, treatment of tenant allowances, and treatment of lease acquisition costs.

The new rules require operating leases to be recorded as right-of-use (ROU) assets with a corresponding lease liability, consequently grossing the balance sheet. This will result in additional recordkeeping to track book-to-tax items. Book and tax basis items need to be reconciled to ensure that deferred tax liability (DTL) and deferred tax assets (DTA) are recorded correctly. Note that this is a temporary difference that will reverse over the life of the lease term. Furthermore, valuation allowance may also need to be considered.

Many states consider a company’s property when determining the amount of income tax to be allocated to the state. Because the new standard requires ROU assets related to operating leases to be recorded on the same line item as underlying assets, property factors (such as plants and equipment) may appear to be increased on a company’s balance sheet.

Ultimately, this will affect state apportionment for companies with activity in states that include property factors when calculating apportionment percentage. In addition, it will also affect state filings where a net worth-based tax is implemented.

The new standard will affect companies with related party leasing arrangements, as transfer pricing arrangements may need to be revised to reflect the arm’s length standard. The arm’s length standard relies on financial ratios and profit level indicators, which may change when companies begin to record all leases on their statements of financial position.

In addition to its effect on state and local income tax, the new standard will also impact foreign country income tax. The extent of the impact will depend on the particular tax jurisdiction and how income tax is calculated within that country.

Depending on the tax jurisdiction, ROU assets may be considered tangible personal property and must therefore be included in property tax filings.

Going forward, companies must determine whether a state will treat a lease transaction as a taxable purchase.

ASC 842 will have a wide-sweeping impact on virtually every business, and it’s best to prepare for the changes as soon as possible. If you have questions about the new lease accounting standards, or want to learn more about the potential tax implications for your business, please get in touch with us.

In today’s economy, many small businesses are strapped for cash. They may find it beneficial to barter or trade for goods and services instead of paying cash for them. Bartering is the oldest form of trade and the internet has made it easier to engage with other businesses.

But if your business gets involved in bartering, be aware that the fair market value of goods that you receive in bartering is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties.

Here are some examples:

In these cases, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there’s contrary evidence.

In addition, if services are exchanged for property, income is realized. For example,

Many businesses join barter clubs that facilitate barter exchanges. These clubs generally use a system of “credit units,” which are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.

In general, bartering is taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units when they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,500 credit units one year, and each unit is redeemable for $2 in goods and services. In that year, you’ll have $5,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed once on that income.

If you join a barter club, you’ll be asked to provide your Social Security or Employer Identification Number. You’ll also be asked to certify you aren’t subject to backup withholding. Unless you make this certification, the club must withhold tax from your bartering income at a 24% rate.

By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services, and credits you received from exchanges during the previous year. This information will also be reported to the IRS.

By bartering, you can trade away excess inventory or provide services during slow times, all while hanging onto your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you know the federal and state tax consequences, these transactions can benefit all parties. If you need assistance or would like more information, contact us.

© 2023

Since the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, individuals who itemize their federal tax deductions have been limited to a $10,000 deduction for state and local income taxes (“state taxes”). This has impacted taxpayers in high tax states like Oregon.

A pass-through entity elective tax (“PTE-E”) is meant to be a workaround for the federal $10,000 state tax limitation. It imposes an income tax directly on the PTE-E that is available as a refundable credit on the individual’s state tax return. The validity of a PTE-E tax has been the subject of scrutiny by the IRS, which left many states hesitant to adopt such a tax. In November 2020 the IRS issued Notice 2020-75, which announced the IRS’ intent to allow the PTE-E deduction in future regulations, validating the PTE-E strategy to avoid the federal $10,000 state tax limitation.

Oregon established their PTE-E tax in July of 2021 with the signing of Senate Bill 727. For tax years beginning on or after January 1, 2022 entities taxed as S corporations and partnerships may elect annually to be subject to the PTE-E tax at a rate of 9 percent tax on the first $250,000 of distributive proceeds and 9.9 percent tax on any amount exceeding $250,000. The election shall be made annually on or before the due date, including extensions, of the pass-through entity’s return.

If your pass-through entity elects to take the credit, you might be eligible for a credit on your personal Oregon income tax return. Qualifying members are eligible for a credit equal to 100 percent of the member’s distributive share of the PTE-E tax paid.

Unlike California’s PTE-E, all members of the pass-through entity must consent to PTE-E for the election to be valid. This includes Oregon non-resident shareholders and/or partners of the pass-through entity who might be subject to a lower effective tax rate on their Oregon non-resident return than the PTE-E would afford them.

If the pass-through entity is a member of a multi-tiered partnership structure, the pass-through entity may qualify to make the Oregon PTE-E election if it meets specific ownership requirements. Additional guidance from Oregon is needed to determine which multi-tiered partnerships may qualify and how the credit is distributed to partners of the pass-through entity.

The law is set to expire if the federal SALT deduction limitation expires or is repealed.

Currently, there is limited guidance available from the OR DOR. However, the state has released an FAQ indicating that pass-through entities wishing to make the PTE-E election and pay their 2022 estimated PTE-E tax payment, must register online first. Registration will open on June 6, 2022, with the Q1 and Q2 2022 PTE-E tax estimated tax payments due June 15, 2022. Registration enables pass-through entities to make PTE-E estimated tax payments but does not automatically elect the pass-through entity into the Oregon PTE-E as the election can only be made on a timely filed return.

Our team of SALT and Oregon Tax experts are available to you. Get in touch with our team to get your questions asked and answered.

New standards have been released for reporting on financial statements of employee benefit plans (EBP). The changes are intended to enhance the quality and transparency of ERISA plans for both the participants and reporting agencies (i.e. ERISA, DOL, etc.) by prescribing certain audit procedures.

Under the new standard, “limited-scope” audits will now be referred to as “ERISA Section 103(a)(3)(c)”. This change is effective for all EBP plans with years ending after December 15, 2021. The changes will largely impact the audit’s presentation and documentation but should have no significant changes to the requirements of the plan administrator.

There are new requirements for plan auditors in all phases of the audit. Areas with key changes include:

Before engagement acceptance, auditors are now required to obtain management’s written acknowledgment of their responsibility in the following:

When management elects to have an ERISA Section 103(a)(3)(c) audit, the auditor must:

Plan management will need to provide a substantially complete draft of Form 5500 prior to dating the auditor’s report.

At the conclusion of the engagement, the auditor will request written acknowledgment from management of the same matters obtained before engagement acceptance. In addition, management will need to provide written acknowledgment that they have provided the auditor with the most current plan instrument for the audit period, including plan amendments.

Auditors must now evaluate whether certain matters identified during the audit result in “reportable findings”. Reportable findings include:

Auditors and plan management may establish what would be considered a reportable finding during the engagement planning process. The auditor must communicate in writing to those charged with governance, on a timely basis, reportable findings from the audit procedures performed. The written communication should include a description of the reportable findings, the context for the communication, and an explanation of the potential effects of the reportable findings.

Get in touch with our EBP team today if you have any questions about ERISA Section 103(a)(3)(c) or if you would like to talk about your company’s plan. Our team of experienced employee benefit plan auditors makes the 401(k) audit process simple and efficient. Our goal is to offer you a streamlined process with third-party communication — giving you more time to focus on your business, not filing through compliance documents.

A net operating loss (NOL) occurs when your deductions for the year are more than your gross income. An NOL year is the year in which an NOL occurs. You can use an NOL by deducting it from your income in another year or years. This reduces the taxable income for the year.

Before 2017, NOLs could be carried back two years and carried forward 20 years. The Tax Cuts and Jobs Act (TCJA) changed these rules. Here’s an overview of those changes.

In 2017, the TCJA changed NOL rules so that most taxpayers no longer have the option to carry back a net operating loss (NOL). For most taxpayers, NOLs arising in tax years ending after 2020 can only be carried forward.

In 2020, the CARES Act made some temporary changes to NOL rules. NOLs generated in 2018, 2019, and 2020 and be carried back up to five years. This five-year period is known as the carryback period. You can then carry forward any remaining NOL indefinitely. This is known as the carryforward period. Additionally, for these three tax years you can elect to forgo the carryback and only carry forward these NOLs.

The TCJA has also substantially impacted some of the other rules for NOLs. For tax years 2018, 2019, and 2020 you can use 100% of an NOL and reduce the tax liability to zero. Beginning in 2021, you can only use up to 80% of the NOL. However, eligible taxpayers can use the R&D tax credit to close this gap.

The Research and Development (R&D) Tax Credit is designed to keep top talent and innovation thriving in the United States. This credit is an incentive that rewards companies who continue to innovate within their business industry. There is no requirement that your company’s R&D needs to be revolutionary to the world. Projects and initiatives that are evolutionary, or incremental to your business, can also qualify. In addition to the federal credit, many states now offer similar incentives for R&D. For more information on the R&D tax credit, visit our research and development tax credit page.

Changing laws around the R&D tax credit can make it difficult to figure out if your business is eligible to claim the credit. Business owners can contact our R&D tax credit team for more information.

C corporations, individuals, estates and trusts, and tax-exempt organizations with unrelated business taxable income can generally take advantage of the CARES Act NOL carryback. Partnerships and S corporations may be able to take advantage of the CARES Act NOL carryback, but there are different rules for passthrough entities.

Using the R&D tax credit and NOLs in conjunction can help you extend the time before your business needs to start paying taxes. For example, if you have $500,000 of taxable income in 2022, and $1,000,000 in carryforward NOL from 2021, you can only use $400,000 to offset your taxable income. However, if your business is eligible to take the R&D tax credit, you may be able to reduce the outstanding tax burden.

Contact our research and development team for more support in claiming R&D tax credits and determining your net operating loss strategy.

Since the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, individuals who itemize their federal tax deductions have been limited to a $10,000 deduction for state and local income taxes (“state taxes”). This has impacted taxpayers in high tax states such as California, New Jersey, and New York.

A pass-through entity (“PTE”) tax is meant to be a workaround for the federal $10,000 state tax limitation. It imposes an income tax directly on the PTE that is available as a non-refundable credit on the individual’s state tax return. The validity of a PTE tax has been scrutinized by the IRS, which left many states hesitant to adopt such a tax. In November 2020, the IRS issued Notice 2020-75, which announced the IRS’ intent to allow the PTE deduction in future regulations, validating the PTE strategy to avoid the federal $10,000 state tax limitation.

On July 16, 2021, California joined the ranks of 13 other states that have PTE taxes when  Governor Gavin Newsom signed California Assembly Bill 150 (“AB 150”). While California is the most recent state to pass such legislation, various other states currently have PTE tax bills pending, with most expected to be adopted.

On February 9, 2022, Governor Gavin Newsom signed Senate Bill 113 (“SB 113”), which included multiple taxpayer friendly amendments to CA’s PTE tax. Please see below for a summary of CA’s PTE tax election as amended by SB 113.

For tax years beginning on or after January 1, 2021 and before January 1, 2026; qualified entities can make an irrevocable annual election to pay a 9.3% tax on the sum of each qualified taxpayer’s share of the PTE net income for the elected tax year.

Through the PTE’s payment of the elective tax, each qualified taxpayer will be allowed a nonrefundable credit against their CA income tax liability – which can be carried forward for up to five years if the credit exceeds the taxpayer’s CA tax liability in the year of the election.

SB 113 amended AB 150 such that the PTE tax credit can now reduce a consenting taxpayer’s CA net income below their tentative minimum tax. This change significantly increased the number of taxpayers that may benefit from making the PTE tax election.

However, it should be noted that CA’s $5M business credit utilization limitation applies to the PTE tax and may limit taxpayers’ ability to utilize PTE tax credits in the year generated fully.

Qualified entities must do business in CA and taxed as a partnership or S corporation. This includes limited liability companies elected to be taxed as a partnership or S corporation.

SB 113 has amended the definition of “qualified entity” to now include PTEs that have partnerships as owners.

However, publicly traded partnerships, and entities required to be in a combined reporting group still do not qualify to make CA’s PTE tax election.

Qualified taxpayers include any individual, fiduciary, estate, or trust subject to CA’s personal income tax that consent to have their pro rata share or distributive share of income taxed at the PTE level.

SB 113 amended the definition of “qualified taxpayer” to include single-member LLCs (SMLLCs) owned by an individual, estate, or trust. SMLLCs can now consent to the PTE tax and the owner of the SMLLC will receive the PTE tax credit.

However, even with the changes from SB 113, partnerships are still not considered “qualified taxpayers” such that tiered partnerships will be limited to making the election and receiving the credit at the lowest tier level.

It should be noted that a PTE with non-consenting owners may not limit the PTE’s ability to make CA’s PTE tax election. However, in the S corporation context, there is a potential pitfall that strongly suggests that all S corporation shareholders must consent. In cases where less than all S corporation shareholders consent, this introduces the possible violation of the corporation’s subchapter S status/election.

SB 113 has expanded the definition of “Qualified Net Income” (“QNI”) to include guaranteed payments now when determining the qualified taxpayer’s 9.3% PTE tax liability. Additionally, the FTB provided guidance via their FAQ website as to what lines of a K-1 are includable in qualified net income.

For qualified taxpayers qualified net income is:

S corporations = sum of K-1 lines 1 to 10, minus lines 11 and 12

Partnerships = sum of K-1 lines 1 to 11, minus lines 12 and 13

For tax years beginning on or after January 1, 2021, and before January 1, 2022, CA’s PTE tax is due on or before the due date of the return without regard to any extensions. For calendar year filers, the 2021 tax year deadline is March 15, 2022.

For tax years beginning on or after January 1, 2022, and before January 1, 2026, the PTE tax must be paid in two installments. The first installment is due on or before June 15^th of the current tax year and is the greater of $1,000 or 50% of the elective tax paid in prior year. The second installment is due on or before the due date of the return without regard to any extensions.

The FTB has clarified regarding the 2021 PTE tax election, that the PTE tax election will not be invalidated if the PTE tax is underpaid after March 15, 2022 and the PTE return has been extended.

However, the PTE tax election will be deemed invalid if the PTE underpaid the first installment for the 2022 PTE tax.

Qualified entities and their owners will need to evaluate the tax implications of making this election on a yearly basis. Ample time should be provided to evaluate the election’s benefits and obtain consent from eligible taxpayers. The current recommendation is that both the qualified entity and qualified taxpayer sign a written consent for each applicable year the PTE tax election is made.

As is common with new tax laws, there are still areas that need clarification, so we remain waiting for additional guidance from the Franchise Tax Board. Additionally, due to the changes from SB 113 the required PTE tax forms to be filed remain in draft form as of today and could have further changes until finalized.

In the meantime, we recommend working with a state and local tax expert to determine if your business should make the PTE election, and what owners should consent to the election. Get in touch with our state tax team today to get started.

The above is intended to be an overview of the current law that exists at the time of release.  It is not intended to cover every aspect of the PTE election, and your tax advisor should be consulted to discuss your specific facts and circumstances.

Are you looking to have a business valuation or learn more about what they entail? We’ve got you covered. Below is our guide to business valuations: why you need them, what the process is like, what the benefits are, and how to get started.

A business valuation is a process used to determine the worth or value, in whole or in part, of a company. Your business might need a valuation for a variety of reasons. The purpose of your valuation is an important part of the valuation process; it guides the information collection and evaluation process.

Here’s a list of situations in which you might need a business valuation:

If you decide to undergo a valuation, you’ll need to plan on having at least 3-5 years of financial statements (and/or federal income tax returns) available. If you anticipate major changes in the next few years (i.e., relocation, addental line of service/product), a forecast of income and expenses is essential.

In addition to financial statements and returns, you must complete a questionnaire and provide company background/history and management information. The analyst evaluating your business will also meet with management and conduct a site visit.

While a business valuation can be used to determine values for the above-mentioned purposes, it is also a tool to gain a better understanding of your operation compared to the industry. Business owners review the valuation exercise and identify issues that could materially affect the company’s value. Proper planning, including allowing adequate time, will help increase the company value and maximize your profit when you are ready to exit the business or admit new business partners.

Our talented team of experts is ready to support your business through a valuation. We offer various levels of valuation support, ranging from valuations for internal use to a full valuation service culminating in a conclusion of value. Contact us to get started.

With the generous tax benefits available to taxpayers investing capital gains in Opportunity Zones, real estate-focused businesses and investors should consider immediate action. The opportunity for long-term tax benefits combined with potentially significant returns from appreciated real estate appears unparalleled and, if properly structured and managed, could give rise to greater tax savings than traditional real estate gain-deferral techniques.

To realize the benefits, investors might form a closely held Qualified Opportunity Fund (QOF) that invests in a Qualified Opportunity Zone Business (QOZB), which is acquired or established to purchase raw land as its primary Qualified Opportunity Zone Business Property (QOZBP). Unlike other QOZBP, for raw land to meet the QOZBP criteria, it need not meet an original use test or a substantial improvement test but must be used in operating a trade or business.

Thus, a QOZB could acquire raw land with the expectation that it will appreciate over time, and during the time the QOZB operates, the raw land could be used to generate income. Possible QOZB may include real estate development enterprises, agricultural enterprises, leasing operations, or other businesses capable of generating revenue from land with potentially minimal capital improvements. Such opportunities may exist in urban and rural areas designated as Opportunity Zones.

Taxpayers with realized capital gains from transactions between unrelated parties can defer recognition and taxation of gains by investing in a QOF. Capital gains can be from any source and must generally be invested in a QOF within 180 days of the realization-triggering transaction. Gains reinvested may qualify for the following temporary and permanent opportunity zone tax benefits:

1. 100% of gain deferral until the earlier of an inclusion event or December 31, 2026.

2. possible 10% permanent exclusion of gain held in QOF for more than five years.

3. possible additional 5% permanent exclusion of gain held in QOF for more than seven years.

4. possible 100% permanent exclusion of gain specific to the appreciation of a QOF investment held 10 years or more. Only gains invested in QOF prior to December 31, 2026 are eligible for these tax benefits.

Any entity may invest in a QOF. Pass-through entities can either elect deferral by investing in a QOF directly or pass out any realized gain to the owners for investment in QOF. A closely held QOF can be established and held by one or a few investors. Such an arrangement would permit investors to retain greater control over the use and management of gains and the QOF investment.

A QOF must hold 90% of its assets in the form of QOZBP either directly or through ownership of a QOZB. A QOZB, in turn, must hold 70% of all tangible property in the form of QOZBP and derive 50% of its gross income from the active trade or business in the QOZ. QOZBP must meet the following tests to qualify: (1) the original use test; (2) the substantially improved test; and (3) held for use in a QOZB’s trade or business. Raw land is exempt from the first two requirements.

Raw land cannot qualify as QOZBP if it is held for investment purposes only, so there must be an active business purpose for holding the land. A variety of possible structures exist for meeting the QOZBP requirement for raw land while still benefiting from the inherent appreciation.

Some examples include a fee-based parking lot, public storage of vehicles or vessels without the need for costly structural improvements, leasing property to another party other than in a triple-net-lease arrangement, or farming the land.

A QOF might purchase a well-located piece of raw land in an urban area, for example, and might minimally improve the land for income production purposes. Consider raw land near an event center where parking may be limited and costly. The QOF or QOZB could minimally improve the land by installing base rock or pavement and a small parking toll structure.

Overhead costs and business oversight time could be minimal as the operations and management need not be daily. The revenue generated from this special event-operated parking lot could potentially cover the underlying cost of maintaining the land while meeting the QOZBP criteria.

Similarly, raw land could be acquired for use in a vessel storage facility business, as a recreational vehicle park, or for any other storage-type trade or business that requires minimal management and nominal capital improvements.

Consider also an animal boarding facility or an equestrian operation. Minimal fencing and stable construction could be sufficient to establish a facility for use in an income-producing trade or business without significant capital outlay. Appreciation could continue while revenue is generated through the boarding or training operations.

A QOF or QOZB lease to an unrelated party is eligible QOZBP for any “arm’s-length” leases entered into after December 31, 2017. Related-party leases are permissible if certain criteria are met. Triple net leases are not QOZBP, so raw land leases may be QOZBP provided there is adequate owner participation in the operations, and the leases are not triple net.

Consider our examples above involving a parking lot, storage site, or animal boarding facility. If raw land is leased to such a business but does not itself operate the business, as long as the QOF or QOZB retains responsibility for maintaining or making any capital improvements, the lease should be QOZBP.

Many agricultural areas are designated QOZs. Agricultural businesses might invest gain in a QOF that then purchases raw land used to generate income from producing and selling produce. Alternatively, land might be minimally improved with a warehouse for food storage, a food packaging or sorting facility, or a farm stand for sale of produce. Agriculturally based businesses purchasing raw land through a QOF are poised to benefit from the new Opportunity Zone benefits with potentially minor modifications or expansions to their existing business.

Alternatively, consider an agricultural business wishing to substantially improve a portion of the raw land acquired by a QOF to provide affordable housing for local and migrant workers. The land and improvements would be QOZBP and income-producing through the rental of constructed units.

This scenario could apply to various real estate development projects and businesses. After a number of years, the company might sell the land and the attached structure at a significant gain and yet be exempt from taxation on the appreciation.

Investors operating real estate development-based businesses must be careful because raw land may be inventory if it becomes part of the active trade of developing and selling real estate generating ordinary income, which is not eligible for QOZ tax incentive benefits.

Investors must acquire raw land to use it in operating a QOZB. Raw land purchased with the primary intent to realize gain on the appreciation may be disqualified from the Opportunity Zone tax benefits. Careful structuring, documenting, and implementing the use of raw land in operating a QOZB is crucial, and all transactions are subject to potential review under the IRS anti-abuse rule.

Opportunity Zones offer federal tax incentives only. Any gain invested in a QOF faces potential taxation at the state level in the year the gain is generated. For this reason, investors might prefer to defer gain in a §1031 exchange.

Such transactions, however, are limited to real property gain deferrals only. To the extent “boot” would be recognized in a §1031 exchange, or in situations where there is a partial or potentially failed §1031 exchange, investment in a QOF could be a viable alternative.

In many situations, the tax deferral benefits of investing in a QOF to purchase raw land may prove more advantageous than those of a §1031 exchange. A QOF investment allows for temporary and permanent tax deferrals on gains, provides greater investor liquidity since only the gain portion must be reinvested, and permits deferral of taxes on capital gains from non-real estate investments.

Would you like to start taking advantage of the opportunity zone tax benefits? If so, contact us to learn more and get you set up to reap the benefits.

In a survey that asked 2,300 organizations about their month-end close, the bottom 25% needed 10+ days to finish, while the top 25% needed five days or less.

So, where do you fit on that spectrum? No matter what position you occupy, every accountant wants (and probably needs) to improve the time and labor-intensive close process that ends each month. At the very least, ensure you’re following best practices.

You need to be honest about what’s working with the month-end close and what’s not. Just as importantly, you need to be honest about your capacity for implementing best practices. Knowing how to perfect the month-end close helps immensely, but it doesn’t make the work involved any easier. Truthfully, many businesses that want to institute best practices simply lack the time, technology, or staff to achieve best-in-class accounting.

Instead of optimizing your own practices, consider outsourcing them. Each month you have talented, methodical, and insightful staff made up of educated accountants, ensuring you have a clean and efficient close.

Best of all, someone else handles the heavy lifting, including whatever it takes to consistently perfect the process. In that way, outsourcing transforms the month-end close and, by extension, the entire accounting department.

If you’re ready to join the top quarter of all companies, we can help. Contact us to explore all that we offer.

A couple of decades ago, most business owners would argue that social responsibility had little to do with the mission of a business. Today, however, we are witnessing a movement of companies using their corporate success as a tool for social and environmental change. One big indicator of this movement is an increase in companies seeking B Corporation certification.

More and more businesses are proving that a successful business can be — and even should be — equal parts profit and purpose. In my experience running a B Corp, I’ve found that it’s possible to maintain healthy profit margins and still impact the health and sustainability of the community and the larger economy.

B Corporations are businesses verified by the independent nonprofit, B Lab, to uphold a strict level of corporate, social, and environmental responsibility.

Becoming a certified B Corp requires a rigorous assessment that measures the extent to which your company balances monetary success with doing good. The B Impact Assessment requires an in-depth analysis of your company’s business practices and your impact on employees, customers, the supply chain, the community, and the environment. The assessment consists of approximately 200 questions that vary based on your company’s size and industry.

You can use the B Impact Assessment as a free online evaluation tool to measure your company’s impact. Then, when you are ready for your company to become a B Corp, you can submit the assessment to B Lab for third-party verification, evaluation, and certification. Maintaining certification requires you to update your B Impact Assessment and reverify your scores every three years, in addition to being ready for an in-person spot audit at any given time.

If you think this sounds like a lot of work, you are undoubtedly correct. It can take months to complete and obtain B Corp certification, not to mention the extensive labor required to track, record, and collect a massive amount of data.

So, why put yourself and your business through this tedious task? Aside from positively impacting the community, I have found the B Corp values to be increasingly relevant when building a successful business that people trust and value.

Most businesses have a set of core values and operational practices that govern their organization. In most cases, these core values cover factors like employee happiness and customer satisfaction, and they often also mention the betterment of the community.

However, how often do you get to prove that you abide by these beliefs? Becoming a B Corp gives life to these claims, which are valuable to employees and consumers. It’s also immensely important when it comes to adding substance to your mission and practices.

The economy is always evolving. Markets change. Consumer demand shifts. New technologies are continually improving the way we do business. Consumers today are no longer fooled by marketing claims; they want cold, hard facts and proof that companies are transparent about their operations.

The B Corp assessment creates a baseline for current practices by requiring management to scrutinize how their organization impacts others. The evaluation highlights working practices, identifies operational inefficiencies, and creates a road map for constantly comparing and improving future strategies.

On the surface, all businesses exist to make a profit. However, consumer demand for increased transparency and regulations makes it clear that a company’s actions and operational choices directly impact marketability. The B Corp community, or the “B economy,” creates a network of like-minded businesses with which to work and grow. It gives management the power to spend budget dollars and build relationships with other companies that operate in a way that betters the world around them. This creates a supply chain of businesses that use their practices as a force for good.

Ultimately, the behaviors of B Corps focus on the success of everyone in the community, not just the owners and employees of the business. This community-centric trend is gaining popularity among younger generations looking to invest their time and money in companies that fight for causes they care about.

Likewise, many investors emphasize environmental, social, and governance (ESG) factors when building their investment portfolios. I expect that successive generations of workers, consumers, and investors will demand that the organizations they associate with be mission-focused rather than profit-focused.

Although rewarding, undergoing the B Corp certification process takes time, patience, and diligence. It’s important to know that you don’t have to become a certified B Corp to create a mission-based enterprise. The B Impact Assessment is free to use as a framework for assessing your overall impact and adjusting your practices as needed. For those looking to complete certification, having buy-in and support from your organization’s leadership team is exceedingly helpful when it comes time to identify shortcomings and adjust policies and culture.

Assembling a task force with a representative from every department (human resources, IT, marketing, finance, etc.) can help create a cohesive vision and maximize efficiency during the data-gathering and assessment phases. For extra support, you can hire a B Corp consultant to help guide you through the requirements, gather data, and navigate the audit process.

Ultimately, joining the B Corp community is a way to make a public promise to yourself and the world that your company exists to fight for a better future. If you have any questions or need help with the B Corporation Certification Process, contact us.

Here’s a simple question: Would you rather continue to manage accounts payable manually or put the whole process into an automated workflow? Considering the amount of time consumed by staff and other resources in the AP process, most companies should jump at the opportunity to automate. Fortunately, that’s never been more possible than now.

Accounts payable automation is affordable, accessible, and impressively effective, leading almost half the businesses surveyed to report they’re investigating its potential. Most see automation as a viable way to increase efficiency and reduce fraud within AP – a process that has proved historically hard to perfect. The added benefit is that it can help to reduce the overall cost of processing payments as well.

If you’ve already decided to automate AP, you’re moving in the right direction. However, you will need to follow industry best practices to reap the benefits and ROI that you expect from this upgrade:

With so many kinds of AP automation software on the market, it’s important to choose a tool that fits both the budget and the business needs. Some options are far better than others.

Properly implementing automation software can take a few months to implement fully, but it’s time well spent to ensure that you’re maximizing the tool’s effectiveness. A lot of this is dependent upon how organized you are today. AP Automation is highly reliable as long as it’s set up correctly.

AP Automation software can handle the vast majority of AP workflows, but they have to be customized to reap the most benefits. Investing time upfront to challenge your AP process flow will pay off when you implement your AP automation software. Eliminate unnecessary steps and embrace the capabilities of the tool. This will allow you to reap the most benefit from it.

Just because you want to automate AP doesn’t mean you want everything paid automatically, without proper review. Establish approval levels that make sense for your business so that larger purchases (like new equipment) get reviewed by actual accountants. With an automated tool, you can set approval levels to maintain effective internal controls.

Exciting as the potential of AP automation may be, it can also be daunting. Even when you know what best practices to follow, companies struggle to successfully optimize AP automation software because they lack the experience, expertise, or expendable resources to challenge current processes and project manage a successful implementation.

The good news is that companies don’t need world-class tech teams to utilize world-class automation software. Outsourcing accounting services can help with product selection, implementation, and ongoing support. That way, companies don’t have to recruit expensive tech talent or wade through the complexities of implementing automation software.

Ultimately, outsourcing the implementation of AP Automation software is a BEST practice because it makes accounts payable automation more accessible and affordable while ensuring the technology is expertly implemented to deliver its full value. It’s the best of all outcomes, especially when compared to tackling automation on your own. When you’re ready to get serious about perfecting accounts payable, we have all the help you need. Contact us at your convenience.