Treasury, IRS issue proposed regulations on new Opportunity Zone tax incentive

WASHINGTON —The Treasury Department and the Internal Revenue Service today issued proposed regulations and other published guidance for the new Opportunity Zone tax incentive.

Opportunity Zones, created by the 2017 Tax Cuts and Jobs Act, were designed to spur investment in distressed communities throughout the country through tax benefits. Under a nomination process completed in June, 8,761 communities in all 50 states, the District of Columbia and five U.S. territories were designated as qualified Opportunity Zones. Opportunity Zones retain their designation for 10 years. Investors may defer tax on almost any capital gain up to Dec. 31, 2026 by making an appropriate investment in a zone, making an election after December 21, 2017, and meeting other requirements.

The proposed regulations clarify that almost all capital gains qualify for deferral. In the case of a capital gain experienced by a partnership, the rules allow either a partnership or its partners to elect deferral. Similar rules apply to other pass-through entities, such as S corporations and their shareholders, and estates and trusts and their beneficiaries.

Generally, to qualify for deferral, the amount of a capital gain to be deferred must be invested in a Qualified Opportunity Fund (QOF), which must be an entity treated as a partnership or corporation for Federal tax purposes and organized in any of the 50 states, D.C. or five U.S. territories for the purpose of investing in qualified opportunity zone property.

The QOF must hold at least 90 percent of its assets in qualified Opportunity Zone property (investment standard). Investors who hold their QOF investment for at least 10 years may qualify to increase their basis to the fair market value of the investment on the date it is sold.

The proposed regulations also provide that if at least 70 percent of the tangible business property owned or leased by a trade or business is qualified opportunity zone business property, the requirement that “substantially all” of such tangible business property is qualified opportunity zone business property can be satisfied if other requirements are met. If the tangible property is a building, the proposed regulations provide that “substantial improvement” is measured based only on the basis of the building (not of the underlying land).

In addition to the proposed regulations, Treasury and the IRS issued an additional piece of guidance to aid taxpayers in participating in the qualified Opportunity Zone incentive. Rev. Rul. 2018-29 provides guidance for taxpayers on the “original use” requirement for land purchased after 2017 in qualified opportunity zones. They also released Form 8996, which investment vehicles will use to self-certify as QOFs.       

More information on Opportunity Zones, including answers to frequently-asked questions, is on the Tax Reform page of IRS.gov. The Tax Reform page will also feature updates on the implementation of this and other TCJA provisions.

At Zhong & Sanchez, we provide high-quality tax and financial reporting services to privately-held entities and small business owners. Our expertise ranges from income tax filing and accounting services to international compliance and financial analysis. Located in the Silicon Valley, you can reach us at 510-458-4451 or schedule your first consultation today at https://calendly.com/zhongsanchez

Source: IRS

5 ways to hone retirement plans under new tax regime

The Tax Cuts and Jobs Act passed by Congress late last year represents the most significant changes to the tax code since 1986. The changes are biggest for corporate taxpayers. C corps will see their statutory tax rate decline from 35 percent to 21 percent, and pass-through corporate entities — partnerships, sole proprietorships and S corps — where income is taxed at the individual level, will also see permanent and dramatic reductions in their tax liabilities.

The decreases in individual tax rates, on the other hand, are smaller and less certain, with rates set to revert back to current levels by 2026. As a matter of fact, the tax plan will help out corporations a lot more than average Americans. Middle-class Americans itemizing their deductions may actually get hurt by tax reform.

The rule changes regarding deductible expenses, exemptions, credits and the tax brackets pose new income-tax planning challenges for all Americans. They also have implications for retirement planning — most prominently for wealthy Americans — but for taxpayers of more modest means, as well.

Here are five strategies worth considering to improve your retirement planning in the new tax environment.

1. Move to a low-tax state. The lure of the Sunbelt for retirees got a little stronger with tax reform. The capping of the so-called SALT (state and local taxes) deductions at $10,000 will hit taxpayers in high-tax (and invariably blue) states such as California and New York particularly hard. New York Gov. Andrew Cuomo has threatened to sue the federal government over the roughly $14 billion his Department of Finance says it will cost New Yorkers annually.

While the standard deduction on federal tax returns was nearly doubled to $12,000 for individuals, the average SALT deduction on federal returns for New Yorkers in 2015 was $22,000, according to the Tax Policy Center. In California — which also has high income-tax rates — an all-in property tax rate of 1.25 percent on a $1 million home would already put taxpayers over the $10,000 cap.

2. Convert your traditional IRA to a Roth IRA. Roth IRAs provide the ultimate benefit in retirement — tax-free income. You can't deduct your contributions to a Roth IRA, but the investment returns in the account are tax-free and so are account withdrawals (optional-not required) as long as you make them after age 59½.

People need to diversify their tax risk. A tax-free retirement account is important over the long haul because higher rates in the future may hurt you in retirement.

The lower marginal income-tax rates that take effect this year make the conversion of a traditional IRA to a Roth IRA significantly less expensive. With those rates potentially reverting back to current levels by 2026, paying the taxes now could be far less expensive than in retirement. 

One major consideration: The tax bill did away with the option to undo a conversion by the tax-return date of the following year. If the market has a big downturn, you will owe tax on the full amount at conversion even if the account value drops by 30 percent before year-end. We suggests waiting until after Thanksgiving to make a conversion. Taxpayers could also consider converting smaller amounts over several years to reduce taxable income and potentially their marginal rates.

3. Give to charity in a smart way. The deduction for charitable donations was preserved in the tax bill, but with the standard deduction raised to $24,000 for a married couple, you'll have to give a lot to warrant itemizing deductions.

One strategy is to front-load your anticipated donations over multiple years into one tax year. People can bundle up their anticipated donations for the next five years in a donor-advised fund. Of course, that means it's likely only a one-year tax-saving strategy.

If you're over 70½ years old, make your charitable donations directly from your IRA — whether you itemize deductions or not. The donation counts against your required minimum distribution from the retirement account but is excluded from taxable income. The qualified charitable distribution enables a taxpayer to claim the standard deduction and still get the charitable deduction. If you qualify, it's the only way you should give to charity.

4. Mind your business and estate. The tax bill doubled the estate-tax exemption to $11.2 million per person ($22.4 million per married couple) and kept it indexed for inflation. In 2026 it will revert back to 2017 levels indexed for inflation. For the vast majority of Americans, the increase is meaningless, but for high-net-worth taxpayers — particularly business owners — it raises new issues.

Individuals with a net worth of close to or more than $11 million ($22 million for couples) can still lower the tax hit to their heirs with the use of trusts and estate-planning strategies. With the estate and gift tax still unified, it may also make sense to gift large amounts of assets tax-free to heirs now given the bigger but potentially temporary exemption.

The downside of gifting assets before you die is that heirs do not get a step up to market value in the cost basis of the assets. If and when they sell them, they will be on the hook for capital gains taxes. In a perfect world, people would pay no estate taxes and get a step up in cost basis at death. That sweet spot, however, may require your dying before the exemption reverts back to a lower level.

We suggests that married couples with an estate valued at less than $20 million take a "wait and see" attitude regarding the value of their business or assets before a potential in life transfer.

5. Talk to a financial advisor or CPA. The numerous changes to the tax code provide a lot of income-tax planning opportunities, which can translate into more retirement savings. But it is complicated. Any decision regarding something like a Roth conversion should be made in conjunction with other issues.

At Zhong & Sanchez, we are dedicated to provide high-quality tax and financial reporting services to privately-held entities and small business owners. Our expertise ranges from income tax filing and accounting services to international compliance and financial analysis. Located in the Silicon Valley, you can reach us at 510-458-4451 or schedule your first free consultation today at https://calendly.com/zhongsanchez

Picture credit: USA Today; Source: CNBC

Tax Reform and U.S. Expats: The Good, the Bad and the Same

Source: CPA Practice Advisor

Here’s what we know. The new tax reform bill called, Tax Cuts and Jobs Act (TCJA), is the first time in 30 years that the tax code has been fully transformed. While it is expected to ease tax filings and processing for Americans, the same can’t be said for American Expats. These are US Citizens who live abroad (whether for personal or professional reasons), and who are also required to file with the IRS annually. For years, this group of tax-paying Americans have raised concerns about changes they would like made but unfortunately, for the most part, their voices were ignored. Below is a look inside the new tax reform bill for US Expats:

What hasn’t changed:

The Foreign Information Reporting Requirements Expats are required to submit, in addition to their tax returns, are largely unchanged. The Foreign Bank Account Report, AKA FBAR or FinCen 114, the FATCA requirements - Form 8938, Form 5471 (Report of Certain Foreign Corporations), Form 3520 (Report of Foreign Trusts), and the Net Investment Income Tax, are still here and unchanged. This means that many Expats will continue having trouble banking abroad and face onerous penalties if they fail to file.

The two most important tax code provisions for Expats, the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit have also not been substantially changed. Expats can use the FEIE to exclude over $100,000 in earned income, from their US taxes each year and can use the FTC to reduce their US taxes dollar for dollar by the amount they have paid to a foreign government. This allows individuals to try to avoid double taxation and this has been largely unchanged in the Tax Cuts and Jobs Act. However, the way the FEIE will increase going forward has been changed, which brings us to what has changed.

What’s New:

The new tax reform changes the way inflation is calculated and will affect a number of tax-related issues. Inflation calculations had previously been calculated using the “regular consumer price index,” but going forward the IRS will use the “chained consumer price index.” The end result is a lower rate of inflation will be used to calculate the increase to the FEIE, which will increase taxes over time.

Modifications were made in tax brackets, exemptions, and deductions. Tax brackets are now larger, meaning you may now be in a lower bracket than you were previously, and the standard deduction has been nearly doubled. For those considering a move to or from the US, two new issues should be considered: 1) the moving deduction has been completely eliminated; 2) the individual mandate, as part of the Affordable Care Act has been eliminated. Unfortunately, the Net Investment Income Tax was not eliminated and will still impact Expats.

The corporate tax has been the most talked about change. This tax reform bill has transitioned the US to a territorial system of corporate taxation. Before, the US operated using worldwide taxation, meaning that corporations had to pay taxes on the income they earned abroad. This change will affect Expats who own corporations outside of the US, because they will face a one-time deemed repatriation tax of 15.5% of any previously untaxed overseas profits as the US transitions to a more territorial system for corporations instead of a worldwide system.

For US Expats, the new tax bill is pretty much the same tax bill with disappointments and frustrations for the nearly 9 million Americans living away from the United States. And, those who own small businesses abroad may actually find their situation is worse under the TCJA than under the old system! We at Zhong and Sanchez will help you sort through TCJA and advise on your international exposure under TCJA. We are dedicated to provide high-quality tax and financial reporting services to privately-held entities and small business owners. Our expertise ranges from income tax filing and accounting services to international compliance and financial analysis. Located in the Silicon Valley, you can reach us at 510-458-4451 or schedule your first free consultation today at https://calendly.com/zhongsanchez