April 8, 2014

Valuation of Family Limited Partnerships

One common procedure when gifting interests in a Family Limited Partnership (FLP) is to have a valuation performed.  Limited Partners are prohibited from participating in daily operations, never have control over any of the property, and many times are restricted from sale of their interest.  Both the IRS and tax courts have recognized that due to the Limited Partners lack of control and lack of marketability of their interest, the Limited Partner interest is considered worth less than that of the General Partners.  For this reason, a valuation is performed to discount the fair market value.  The valuation discount will reduce the value of a Limited Partner’s interest for gift tax purposes.  By utilizing the valuation discount, the taxpayer can effectively gift additional limited partner interest.  Since FLP’s are a popular technique for reducing estate and gift taxes, they are being targeted by the IRS.  One common area challenged by the IRS is the reason for formation.  For this reason, a valid non-tax reason must be present to form a Family Limited Partnership.

Contact your Anders advisor to determine if a FLP is right for you.

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April 6, 2014

Proposed Tax Changes Will Affect Non-Profit Fundraising

When House Ways and Means Chairman Dave Camp released the discussion draft of the “Tax Reform Act of 2014”, he did not exempt charities and other nonprofits from the proposed changes. While no one expects the Act to be enacted in its current form, many of the proposals are expected to be included in future tax legislation.  Because of the impact of these changes on exempt organizations, nonprofits should stay aware of the progress of the legislation.

Parts of the proposed legislation will directly affect how nonprofits raise funds from corporations by significantly increasing the types of revenue that would be taxable to non-profits. For example, currently, royalties from licensing of a nonprofit’s name or logo to a for-profit entity are not subject to unrelated business income tax.  Under the proposed legislation, fees from the licensing of a nonprofit’s name or logo would become taxable income.

Because advertising has always been subject to unrelated business income tax, the proposed legislation widens the definition of advertising by limiting the benefits that nonprofits can provide to corporate sponsors. Sponsorships for any one event in excess of $25,000 will be subject to additional scrutiny. In certain cases, the benefits received by these larger sponsors will no longer be able to increase as the amount of the sponsorship increases.

The Act also changes the treatment of research income, only allowing the income exclusion for research that is freely shared with the public at large.  Removing this exclusion will impact university programs that perform medical and other research for corporations.

A copy of the Act in its entirety is available at https://www.jct.gov/publications.html.  Numerous other provisions that affect nonprofits will be the topic of future articles.  If you have questions, please contact Anders for more information.

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April 1, 2014

CPAs Can Offer Cost-Saving Advice for Historic Tax Credits

Proponents of Missouri’s Historic Preservation Tax Credit Program rejoiced back in May of last year when a proposed economic development bill that would have reduced the state-wide historic tax credit cap from $140 million to $90 million died during a legislative session. However, while this bill failed to live another day, the discussion of cutting state taxes continued.  Now, almost a year later, it appears that a tax cut compromise between Senator Will Kraus and Governor Jay Nixon may soon be unveiled, which has a strong possibility of being signed into law by the governor. Among the details of this tax cut compromise, you guessed it, a reduction of the available historic preservation tax credits to $90 million annually. While this news will come as a disappointment to developers and property owners who participate in historic property redevelopments, the fact remains that these tax credits still exist, albeit possibly on a smaller scale.

One reality that remains unchanged is that the Missouri Historic Preservation Tax Credit Program provides a large incentive for owners of certified historic structures to rehabilitate those buildings which increases their return on investment of the projects. For more information on the program itself, visit a previous Anders blog on the topic: https://anderscpa.com/historic-tax-credits/.

Another strategy to increase the return on investment from these projects is to control project expenses. Project participants are sometimes surprised to find out that one of the requirements of the historic tax credit program is that a CPA must perform an examination of the project expenditures list. Depending on the project size and documentation organization, the fee range for these examinations can vary significantly. Frequently, project participants speak with historic tax credit application consultants up front, but do not consult with the CPAs examining the projects until after the renovation project is completed.

A little known fact is that meeting for a few hours at the inception of the project with the CPA, who will perform the examination is crucial to reducing the final CPA examination fees.  Additionally, it makes for a much smoother examination process. CPA’s knowledgeable in the historic tax credit project arena can provide invaluable cost saving advice such as:

  1. How to develop and format the Missouri Department of Economic Development’s (DED) prescribed EXP-Form to summarize project costs.
  2. How to organize invoices and bank statements to cut down on CPA examination time.
  3. Helping to identify what costs are qualified versus non-qualified according to the DED’s guidelines.
  4. Identifying what tasks project participants can complete on their end before giving the project to their CPA for examination to avoid the CPA performing administrative tasks that add to the examination fees.
  5. Providing tips and advice on how to maximize total qualified costs so that no dollar in credits is wasted.

For more information on how to reduce your CPA examination fees, and keep more money in your pocket, contact a member of Anders’ Historic Tax Credit Team before you begin your next project. Also, stay tuned to the Anders blog for more information on the proposed Missouri tax cut bills as the legislative session continues.

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