December 30, 2019

NCAA Passes Initial Steps for Student Athletes to Benefit from their Likeness

California passed legislation to allow college athletes to be compensated for their likeness. Under this new legislation, schools would not compensate student athletes, but athletes would be allowed to profit off their likeness via third party businesses. This law would not go into effect until 2023. In response to this recently passed legislation, the NCAA’s Board of Governors unanimously voted to allow student athletes the opportunity to profit off their name, image and likeness (NIL), but with a catch.

The Collegiate Model

The actions by the Board of Governors do not allow athletes to immediately benefit from their NIL. Instead, the board has directed each of the NCAA’s three divisions to begin creating a structure for student athletes to make money off their name, image and likeness. Each division has until January 2021 to create a framework on how to govern student athletes. In the official wording, the NCAA added an unclear condition — any benefit would have to be “consistent with the collegiate model.” Many questions will need to be addressed before student athletes see any benefit from their likeness.

Profiting off of Popularity

The road for student athletes to officially benefit from their NIL will certainly be a messy one. If implemented, student athletes will not be paid by their universities, but they will be able to strike deals with businesses to profit off their marketability. Revenue sources would come from autographs, video games, and endorsement deals from shoe and clothing companies. This would provide many student athletes, who will not play professionally, the opportunity to cash in on their peak profitability during their collegiate years. Undoubtedly, the NCAA will want to have oversight of how and when athletes are compensated.

If the NCAA ultimately devises a framework for student athletes to benefit off their likeness in the future, the Anders Sports, Arts & Entertainment Group will have the knowledge to help student athletes with a variety of areas including tax compliance and planning. Contact an Anders advisor to learn more.

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December 23, 2019

Unpopular Parking Tax on Not-for-Profits May Be Repealed

Many not-for-profits organizations have been concerned about the taxability of parking and transportation benefits as a result of the Tax Cuts and Jobs Act. Fortunately, Congress recently moved to repeal the dreaded “parking tax” on fringe benefits, such as free parking, offered by tax-exempt organizations.

What is the Parking Tax?

The “parking tax” refers to section 512 (a)(7) of the tax code that requires tax-exempt organizations, including churches, to include the amounts they pay or incur on transportation fringe benefits in unrelated business taxable income. This tax applied to many situations, including if not-for-profits paid a third-party for employee parking spots or if they owned or leased all or a portion of a parking facility.

Repealing the Parking Tax

The bill to repeal the tax has been passed by the House and Senate and is awaiting action by the president. If enacted, the repeal would be made retroactive so that affected organizations that actually paid the tax would be entitled to a refund. Organizations that were required to pay but didn’t would be relieved of the responsibility.

Contact an Anders advisor to discuss how this repeal will impact your organization.

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December 17, 2019

Entity Planning for Startups: 6 Questions to Ask Before Classifying as a C-Corporation or LLC

While seemingly a minor decision that many startups do not invest much time or planning into, the decision to start the company as an LLC or C-Corporation has some significant tax implications, both short term and long term. Below are several key differences between these two entity types to start the planning discussion for your startup company.

1. Who benefits from the startup tax losses?

LLC

The individual owners reap the benefits of the tax losses from the company, as LLCs are referred to as “flow-through” entities. Simple in concept, but much more complicated in execution, LLCs split their losses for the year based on some percentage, either a profit/loss percentage or a special allocation percentage, between the owners. The owners then report their share of the LLC losses on their individual tax return for the year. Depending on the tax basis rules and the tax passive loss rules, the owners may be able to deduct their share of the LLC’s losses against their other income sources for there. Which, then reduces their overall tax for the year. While the tax deductions are not a dollar-for-dollar offset to the owner’s tax, they do serve some immediate economic benefit to the owner versus waiting purely for an earn-out event or dividend in the future.

C-Corp

The company itself benefits from the tax losses generated during the year. This is because C-Corporations are their own taxable entity in the eyes of the IRS, so the company is subject to tax at the entity level. If the company generates a loss, then the company does not pay any tax that year. It’s important to note that this applies to Federal tax and many states. However, some states do have minimum tax amounts that are assessed regardless of profitability.

In years in which the company generates tax losses and does not utilize them in that year, those losses generate a “Net Operating Loss.” Those losses can then be carried-forward to the next year to offset a future year’s taxable income. If there are multiple loss years in a row, the losses compound on each other year-over-year to create a larger Net Operating Loss to be utilized once the company is profitable.

2. Are the owners subject to yearly tax reporting with an ownership interest in the entity?

LLC

Due to the flow-through nature of an LLC, the owners are subject to yearly tax reporting due to their ownership interest in the LLC. This reporting is done by way of a “Schedule K1” from the LLC to the owner. The K1 is how the company reports each owner’s share of profit or loss for the year, as well as many “separately stated” income and deduction items from the company. Since the K1 is needed to file the owner’s individual tax return for the year, the owner will have to wait for the company’s tax return to be completed for the year, as the K1s are prepared with the company’s tax return for the year. In other words, the K1s are not stand-alone forms that can be prepared ahead of the company tax return like an employee’s W2 Form can.

C-Corp

Since C-Corporations are their own taxable entities, the owners are not subject to tax on the C-Corporation’s taxable income for the year, just as the owners do not benefit from the C-Corporation’s losses for the year. There is no additional tax reporting from the C-Corporation to the owner for the year, which means owners of C-Corporations do not have to wait for the C-Corporation tax return to be filed in order to file their individual tax return for the year. The only caveat would be if the C-Corporation issues dividends to the owners, or pays the owners wages for services provided to the company. If either of these applies, the C-Corporation will issue the owner a 1099-DIV for dividends or a W2 for wages. These are required to be issued by the end of January, so they do not hold up the owner’s tax return any more than any other tax forms for the year, such as bank 1099 forms, home interest 1098 forms, investment tax statements, etc.

3. Who pays the tax once the company becomes profitable?

LLC

Just as the owners benefit from the tax losses from the LLC, they are also responsible for paying the tax on the company’s taxable income for the year. Most owners are shocked to hear this, as why would they have to pay the tax on the company profit? While on the surface this seems counterintuitive it actually works to tax the company profit only one time, at the owner level. Since the owners are paying tax on the company income, most LLCs will make cash distributions to the owners to pay the tax. These are simply called tax distributions, and effectively make it that the company is using its cash to pay its tax. It just requires the tax to be reported by the owner, who is then given company cash to pay the tax.

C-Corp

Just as the company benefits from its tax losses, it also pays the tax in profitable years. As such, there is not the need to pay tax distributions to the owners because their tax returns are not impacted by company tax profit.

4. Does double taxation apply?

LLC

Aside from states that have state-level LLC tax, an LLC is not subject to double taxation the Federal level. This is the scenario in which the company pays tax on its profit, and then the owners pay tax on their cash distributions from the entity. For an LLC owner, as long as they have “tax basis” in their cash distributions, they do not pay additional tax on those distributions. Profitable LLCs only pay tax on the profit one time, which is done at the owner level.

C-Corp

C-Corporation profit, when paid out to the owners as dividends, is taxed two times. The first time is when the company pays tax on its profit for the year. Then, a second time when the owners are paid a dividend for the year because the owners are subject to tax on their dividend payments from the company. There are favorable tax rates for certain types of dividends, however, tax does apply still. As such, profitable C-Corporations that pay out dividends every year are subject to double tax.

5. What is the tax impact of selling ownership?

LLC

When selling an LLC interest, the owner’s gain on the sale is subject to tax on the gain. The gain is the total sales proceeds less the owner’s tax basis in the ownership interest. While, there are some scenarios in which some of the gain could be subject to ordinary tax rates, the hope in selling an LLC ownership interest is for capital gains tax rates to apply. If the ownership interest is held for over a year, then the favorable long-term capital gains rates would apply. This gives the LLC owner an effective tax break on selling the LLC ownership.

C-Corp

As with an LLC, when a C-Corporation ownership interest is sold, the sale is subject to tax on the gain on the sale. The gain is calculated similarly to an LLC ownership interest sale in which the proceeds less the owner’s tax basis in the ownership interest. The gain would be subject to capital gains tax rates, and would get the favorable long-term capital gains rates if the ownership is held for over a year.

6. Are there tax benefits when selling ownership?

LLC

For LLC owners, aside from long-term capital gains tax treatment if ownership is held for over a year, there are no extra tax benefits at the point of sale for LLC ownership.

C-Corp

For C-Corporation owners, there is a significant tax benefit for owning Qualified Small Business Stock, which is stock of a qualifying small business corporation. If the owner holds their stock for at least five years, they can sell the stock and avoid paying tax on the first $10,000,000 in gain on the stock. This could even be higher depending on the amount they purchased their stock for, but they would at least get to exclude the first $10,000,000. At a 30% tax rate, which is not uncommon when Federal capital gains tax, Net Investment Income Tax, and state tax apply, that would be a $3,000,000 tax savings. This can be a huge tax benefit and incentive to invest in C-Corporations that are Qualified Small Businesses.

If the Qualified Small Business Stock is sold within five years, then the tax gain exclusion is lost. However, if those proceeds are used to purchase new Qualified Small Business Stock, then the gain on the sale of the first stock is deferred until the new stock is sold. While this does not give the owner the permanent gain exclusion, it does allow the owner to “serial invest” from one Qualified Small Business into the next.

While there are some other subtle tax differences between the two entities, we highlighted the most significant tax differences between an LLC and a C-Corporation. As with any company structural decision, there is not one of the above factors that should be the sole decision point for deciding between LLC and C-Corporation for your startup company. A planning discussion around all of these factors, as well as the legal implications of each entity, should be engaged in prior to determining the legal entity type for your startup. For more information on this planning area, or for assistance in determining your entity type, please contact an Anders startup advisor.

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December 10, 2019

2019 Year-End Tax Planning Strategies

The end of the year is fast approaching whether we are ready or not! There are several tax savings strategies that you can utilize to reduce the taxes you will be paying for the 2019 tax year.

Bunch Itemized Deductions

Bunch with Charity

With the changes of tax reform last year, it is more important than ever to utilize itemized deductions. Taxpayers can bunch their deductions in order to maximize their itemized deductions. One way is to bunch charitable deductions into one year. If a taxpayer were to bunch their charitable deductions into a single year, rather than multiple years, they would be able to utilize a higher itemized deduction in one year, and possibly take advantage of the standard deduction in the following years. One way to do this is through a donor-advised fund (DAF). A DAF is a fund that holds your charitable donations until you direct the funds to the desired charity – so it would be possible to still gift over the years from the DAF, but you would receive the deduction in the year of initial donation to the DAF.

Gifting appreciated stock is also a great way to donate to charity and avoid any gains on the stock.

Bunch with Medical

Taxpayers can also consider bunching medical expenses to maximize itemized deductions. This can be done by prepaying medical expenses or waiting to pay until the year they would be utilized.

Take out your Required Minimum Distributions

Taxpayers over 70 ½ must remember to take their Required Minimum Distribution (RMD) from their retirement plans by the end of the year to avoid penalties. Taxpayers that have turned 70 ½ during the year must start taking RMD’s. In the year a taxpayer first turns 70 ½, the withdrawal can be deferred until April, and two distributions can be taken the following year.

Inherited IRA’s also must take their RMD before the end of the year.

Gift your RMD

Gifting your RMD directly to charity is a great tax savings strategy. If donated, the distribution from the IRA would be a tax-free distribution. There would not be an additional charitable deduction, but typically this strategy is more tax advantageous.

Trigger Expenses and Defer Income

Of course, one of the simplest ways to lower tax liability would be to trigger expenses and defer income until 2020, if applicable. Cash basis taxpayers would need to pay deductible expenses by year-end in order to be deducted in 2019 or receive income after the end of the year to be considered 2020 income. For accrual-basis taxpayers these additional expenses would need to be incurred in 2019 to reduce tax liability.

Consider Gifting

2019 annual gift exclusions are $15,000 from person to person. This means each year taxpayers can gift up to $15,000 without tax consequences or triggering a gift tax return. A couple may gift up to $30,000 per person or $60,000 to another couple.

Plan for QBI

Qualified Business Income (QBI), more commonly known as the 20% Business Deduction, is a huge tax planning strategy. QBI can be dramatically influenced by bonuses, year-end expenses/income deferral, etc. It is a good idea to check in with your CPA to make sure you are maximizing this deduction.

Make Educational Contributions

529 plans have many state tax savings advantages. Look up your state’s limits to donate. In Missouri, up to $8,000 per taxpayer can be donated to a 529 plan and taken as a state tax deduction. 529 plans can now be used for private elementary and high school tuition as well as all college tuition.

Other Reminders

A few other reminders for year-end:

  1. Some trust distributions need to be taken by year-end.
  2. Consider harvesting capital losses to offset capital gains.
  3. Make sure you have contributed to your retirement plan.

Even though our time is ticking down until 2020, there is still time to review your tax situation. Contact an Anders advisor and we would be happy to discuss these strategies and more.

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December 10, 2019

Forbes Names Anders a Top Recommended Tax and Accounting Firm

Anders has been named to Forbes’ Top Recommended Tax and Accounting Firms List for 2019. With firms recommended in tax and accounting, Anders is one of just 90 firms in the country to be recommended for both lists.

To create the list of America’s Top Recommended Tax and Accounting Firms, Forbes partnered with the market research company Statista to consider 1,800 survey responses from CPAs, enrolled agents, tax lawyers, accountants and CFOs. Survey participants who worked for a tax or accounting firm could name up to ten firms for tax and ten firms for accounting that they would recommend if their company were not able to take on a client. Survey participants who worked in a company on the client side were asked to name up to ten firms each in tax and accounting that they would recommend based on their professional experience during the last three years. The firms that received the most recommendations were included on the list. The 227 firms identified include the biggest firms in the country and some of the smallest. According to Statista, they’re all tackling the complexities of the ever-changing tax laws head-on.

Between the Tax Cuts and Jobs Act and the upcoming election, it’s vital that your accounting firm understands evolving legislation and how it impacts you, your family and your business. Anders has CPAs and advisors keeping up with tax law updates to help our clients adjust to and benefit from the changes.

Read the full list of Forbes’ Top Recommended Tax and Accounting Firms for 2019.

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December 3, 2019

Investing in Property Through a 1031 Exchange? Here are 4 Reasons to Consider a Delaware Statutory Trust (DST)

Current tax laws have made a certain investment vehicle more appealing to real estate investors. Delaware Statutory Trusts, known as DSTs, provide a way to defer gains from real estate sales for income tax purposes through a 1031 Like-Kind Exchange. DSTs allow real estate owners to passively invest with several other investors in large properties, such as apartment buildings, shopping centers and other sizable commercial properties. Before deciding to invest 1031 proceeds in a DST, it’s important to understand some key benefits they provide.

What Can a DST Do for Investors?

1) Avoid Taxable Gains When Buying and Selling

Finding a property within an exact dollar amount is a challenge for investors when performing a 1031 Exchange. Since all remaining profit on the sale of a relinquished property is taxable, this poses a problem when selling a property and buying another with different price tags. A DST can solve this issue by investing the excess profit in a DST to completely avoid taxable income.

2) Use a DST Property as a Backup for a 1031 Exchange

To successfully complete a 1031 Exchange, new properties must be identified within 45 days. This can be a tough timeline due to financing, inspections and other problems that cause properties to fall out of escrow. If an investor can’t acquire the target property within the timeline, investing in a DST can act as an insurance policy to meet 1031 deadlines and defer the capital gains tax.

3) Diversify Easily

DSTs provide the opportunity to invest in multimillion-dollar properties that otherwise would be outside an investor’s price range. Investors can invest in multiple DSTs across different states to increase diversification and protect against natural disasters and other risks damaging their entire portfolio.

4) Use as an Estate Planning Tool Allowing Multiple “Swaps”

Investing in a DST can be a valuable estate planning tool and eliminate confusion if the investor passes away. In this situation, the heirs would continue to receive distributions from the DST investment, if any, and each of the heirs choose what to do with their inherited portion upon the sale of the property owned by the DST. Properties can also be exchanged over and over again until the investor passes away and their heirs receive a step up in basis.

Though Delaware Statutory Trusts are not new, current tax laws have made them a potential solution for passive IRC §1031 exchange investors and direct (non- IRC §1031) investors alike. If you are considering investing in a DST, contact an Anders advisor to assist you with identifying the advantages and disadvantages. Learn more about the Anders Real Estate Group.

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