Tag Archives: Abo and Company


Why Business Owners Should Own Real Estate Personally

Let’s explore why business owners should own real estate personally rather than in a separate corporation. A frequent mistake made by small business owners is to have the operating corporation own the real estate, or to have a separate C corporation own the property and lease it to the business. The reason is that when the company eventually disposes of the property, usually after it has significantly appreciated and been substantially depreciated for tax purposes, a double tax bill will result. First, the corporation will be taxed on the appreciation upon the disposition of the real estate, and then, the shareholder(s) will be taxed on the proceeds of the disposition when they are distributed to them as a dividend or through liquidation. The tax traps are not limited to C corporations. Holding real estate in an S corporation has its own pitfalls. Mortgage debt does not constitute “basis” for tax losses when the accompanying real estate is owned in an S corporation. As most real estate investments yield potentially deductible losses after factoring depreciation on the structure, this could eliminate the tax benefits for a great deal of investors.

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Why business owners should own real estate personally rather than in a separate corporation.

A better approach is for the business owners to own the real estate personally in a limited liability company or
even in a partnership with other investors, and then lease it to the operating business. Among the advantages;

  • The business owner can sell the real estate interest for his or her own account, avoiding tax at the corporate level.
  • The owner can refinance the property for his or her own benefit.
  • Lease payments received by the property owner are not subject to employment taxes and are deductible
    by the company as a business expense.

If the property owner dies while still owning the property, heirs will get it at its stepped-up basis, eliminating tax on all of the gain resulting from appreciation. It’s particularly important for small business owners to engage in careful tax planning with respect to real estate being acquired for use by their business, and I’m sure our buds at WCRE and attorneys they deal with receive frequent requests for assistance with appropriate business and tax strategies as do we at Abo and Company.

While we’re talking real estate and hopefully that which is not titled in corporate form, do you own a property
that has appreciated considerably and that you want to sell? Are you concerned about incurring a large capital
gains tax liability? We reminded WCRE readers in a previous suggestion but one option is to structure the sale as an installment sale. Here the buyer pays the cost of the property plus interest in regular installments, frequently for a period of 5 years, enabling the seller to reflect the capital gain for tax purposes over the entire payment period. Sellers who decide on this strategy are cautioned, however, that an installment sale carries more risk than an outright sale of the property. Thus, the seller needs to:

  • Carefully assess the creditworthiness of the buyer and possibly obtain personal guarantees if the purchaser is a business.
  • Evaluate the future income producing capability of the property to make sure it provides sufficient cash flow to enable the buyer to make the payments.
  • Use an interest rate that is competitive with current market rates in the area so as not to squash the deal.
  • Obtain a down payment of at least 20% to have a cushion in the event of buyer default, and to cover the
    expenses if foreclosure becomes necessary.

Business property transactions are often complex, and the services of knowledgeable professional advisors can be vital in developing strategies that make it possible to bring a contemplated transaction to a successful conclusion.

FOR MORE INFORMATION:
Martin H. Abo, CPA/ABV/CVA/CFF is a principle of Abo and Company, LLC and its affiliate, Abo Cipolla Financial Forensics, LLC, Certified Public Accountants – Litigation and Forensic Accountants. With offices in Mount Laurel, NJ and Morrisville, PA, tips like the above can also be accessed by going to the firm’s website at www.aboandcompany.com.  

 

Currently Proposed Business Tax Reform Bills

Business Tax Reform BillsThe proposed tax reform bills are a topic you can’t escape these days. With proposals in both the House and the Senate, we thought it would help to review some changes that could affect your business in 2018. Alas, this time around, year-end tax planning for our business clients is complicated by the possibility of major tax reform that could take effect next year. The business tax reform proposals are ambitious in scope and would generally be good news for many businesses and owners we advise (for which we thank you). However, tax rate cuts and other pro-business changes could be balanced by eliminating some longstanding tax breaks. There is no guarantee that any bill will actually get through Congress and become law. Stay tuned for developments, and be ready to move fast near year-end once the future becomes known.

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Anyway, considering the proposals in both the House and the Senate, we thought it would be helpful to at least
review some changes we at Abo and Company think may affect your business in 2018. Not a business or self-employed, pass this email along.

• Section 179 Deduction. For tax years beginning in 2018 through 2022, the House tax reform bill would increase the maximum Section 179 deduction to a whopping $5 million per year, adjusted for inflation. The maximum deduction would phase out at $20 million (adjusted for inflation). The Senate would increase the maximum annual Section 179 deduction to $1 million and increase the deduction phase-out threshold to $2.5 million (both numbers would be adjusted annually for inflation).

• Bonus Depreciation. Both the House and Senate tax reform bills would allow unlimited 100% first-year depreciation for qualified assets acquired and placed in service after 9/27/17 and before 1/1/23.

• Tax Rate on Pass-through Income. The House bill would install a maximum 25% federal income tax rate for income from a pass-through entity, subject to certain restrictions. The Senate bill would generally allow an individual taxpayer to deduct 17.4% of business income from a pass-through entity.

• Corporate Tax Rate. The House bill would tax C corporation income at a flat 20% rate for tax years beginning in 2018 and beyond. The rate for personal service corporations would be a flat 25%. The Senate bill would also install a flat 20% corporate rate, but it wouldn’t take effect until tax years beginning in 2019.

• Net Operating Losses (NOLs). Under both the House and Senate tax reform bills, taxpayers could generally use an NOL carryover to offset only 90% of taxable income (versus 100% under current law). Under both bills, NOLs couldn’t be carried back to earlier tax years but could be carried forward indefinitely.

• More Businesses Could Use Cash-method Accounting. The House tax reform bill would allow a C corporation or partnership with a C corporation partner to use the cash method of accounting if its annual gross receipts for the prior three years don’t exceed $25 million. The Senate bill would set the threshold at $15 million.

• Limits on Deducting Interest Expense. Under the House tax reform bill, deductions for business interest expense in tax years beginning in 2018 and beyond generally couldn’t exceed 30% of the business’s adjusted
taxable income (subject to exceptions). Under the Senate tax reform bill, business interest expense for tax years beginning in 2018 and beyond would be limited to the business interest income plus 30% of adjusted taxable income.

• Deductions and Credits. Both the House and Senate bills would eliminate the domestic production activities deduction and certain tax credits.

Other important changes have been proposed. Stay tuned….

FOR MORE INFORMATION:

Martin H. Abo, CPA/ABV/CVA/CFF is a principal of Abo and Company, LLC and its affiliate, Abo Cipolla Financial Forensics, LLC, Certified Public Accountants – Litigation and Forensic Accountants. With offices in Mount Laurel, NJ and Morrisville, PA, tips like the above can also be accessed by going to the firm’s website at www.aboandcompany.com.

Why Corporate Owned Real Estate is a No No

corporate owned real estate noLet’s explore Corporate Owned Real Estate. A frequent mistake made by small business owners is to have the operating corporation own the real estate, or to have a separate C corporation own the property and lease it to the business. The reason is that when the  company eventually disposes of the property, usually after it has significantly appreciated and been substantially depreciated, a double tax bill will result. First, the corporation will be taxed on the appreciation upon the disposition of the real estate, and then, the shareholder(s) will be taxed on the proceeds of the disposition when they are distributed to them as a dividend or through liquidation. The tax traps are not limited to C corporations. Holding real estate in an S corporation has its own pitfalls. Mortgage debt does not constitute “basis” for tax losses when the accompanying real estate is owned in an S corporation. As most real estate investments yield potentially deductible losses after factoring depreciation on the structure, this could eliminate the tax benefits for a great deal of investors. There are great alternatives to corporate owned real estate.

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A Better Approach to Corporate Owned Real Estate

corporate owned real estate yesA better approach than corporate owned real estate is for the business owners to own the real estate personally in a limited liability company or in a partnership with other investors, and then lease it to the operating business. Among the advantages:

• The business owner can sell the real estate interest for his or her own account, avoiding tax at the corporate level.

• The owner can refinance the property for his or her own benefit.

• Lease payments received by the property owner are not subject to employment taxes and are deductible by the company as a business expense.

• If the property owner dies while still owning the property, heirs will get it at its stepped-up basis, eliminating tax on all of the gain resulting from appreciation.

It’s particularly important for small business owners to engage in careful tax planning with respect to real estate being acquired for use by their business, and we receive frequent requests for assistance with appropriate tax strategies.

While we’re talking real estate and hopefully that which is not titled in corporate form, do you own a property that has appreciated considerably and that you want to sell? Are you concerned about incurring a large capital
gains tax liability? One option is to structure the sale as an installment sale. Here the buyer pays the cost of the property plus interest in regular installments, frequently for a period of 5 years, enabling the seller to reflect the capital gain for tax purposes over the entire payment period. Sellers who decide on this strategy are cautioned, however, that an installment sale carries more risk than an outright sale of the property. Thus, the seller needs to:

• Carefully assess the creditworthiness of the buyer and possibly obtain personal guarantees, if the purchaser is a business.

• Evaluate the future income producing capability of the property to make sure it provides sufficient cash flow to enable the buyer to make the payments.

• Use an interest rate that is competitive with current market rates in the area so as not to squash the deal.

• Obtain a down payment of at least 20% to have a cushion in the event of buyer default, and to cover the expenses if foreclosure becomes necessary.

Similarly, a topic for another alert is our frequently suggested use of Section 1031 which provides an alternative strategy for deferring the capital gains tax that may arise from a business/investment property sale. As of the writing of this Abo and Company Tip-of-the Month, we’ve read that the days of deferring 100% of gain via likekind
exchanges of real-estate could be numbered if the much talked about tax reform occurs in this particular arena does take place. Republican lawmakers are seeking tax breaks to trim or scrap to offset the cost of significantly cutting the income tax rate for businesses. We’ve seen tax-free real estate exchanges/swaps targeted before nixing like-kind swaps, immediately taxing the full amount of gain or in President Obama’s proposal to cap the deferral at $1 million. If the deferral is curbed, we don’t think the break will be axed retroactively but who really knows at this point.

Business property transactions are often complex, and the services of a knowledgeable CPA (hopefully we at Abo and Company) can be vital in developing strategies that make it possible to bring a contemplated transaction to a successful conclusion.

FOR MORE INFORMATION:

Martin H. Abo, CPA/ABV/CVA/CFF is a principal of Abo and Company, LLC and its affiliate, Abo Cipolla Financial Forensics, LLC, Certified Public Accountants – Litigation and Forensic Accountants. With offices in Mount Laurel, NJ and Morrisville, PA, tips like the above can also be accessed by going to the firm’s website at www.aboandcompany.com.

Protect Your Assets Using Proper Corportate & LLC Form

corporate llc

A prime reason for incorporating or forming a corporate LLC (Limited Liability Company) is the limited liability that it offers its owners. The owners generally have no personal responsibility for the debts, obligations or liabilities beyond their initial investment in the business (as long as they didn’t sign for anything personal). But the limited liability may be lost if the shareholders/members don’t act like persons doing business in the proper corporate LLC form.

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Then creditors may enlist the help of attorneys and forensic accountants (that be us) to “pierce the corporate veil” and pin personal liability on the owners for what otherwise would be corporate/LLC debts and liabilities. The risk is often particularly acute for sole proprietorships and partnerships switching to the corporate LLC form.

They’re apt to ignore the change and the requirements of corporate or LLC operation (board meetings, shareholder meetings, notice of meetings, waiver notice, motions, resolutions, voting procedures, proxies, election of officers, fixing of compensation, etc.). They may treat the corporate LLC treasury as their own. At the very beginning of corporate or LLC operations, they may neglect to do such simple things as notifying creditors of the change, consistently using the “Inc.” or LLC designation on business letterhead, the business checking account, business licenses and the like, signing correspondence and documents as an officer/member, and so forth.

Failure to comply with one or more of these corporate requirements won’t necessarily be “fatal”. To play it safe, have your lawyer supply you with a list of essential “housekeeping” chores to preserve limited liability. Of course, liability exposure questions almost always turn on state law which is why we always advise clients to seek competent legal counsel for answers to all specific questions about the liability aspects of business and investment operations. In our line of work, an abiding principle is “One size doesn’t fit all”. Thus, we’d be happy to recommend one or more lawyers we’ve worked with seasoned in this arena.

FOR MORE INFORMATION:
Martin H. Abo, CPA/ABV/CVA/CFF is a principle of Abo and Company, LLC AND ITS AFFILIATE, Abo Cipolla Financial Forensics, LLC, Certified Public Accountants – Litigation and Forensic Accountants. With offices in Mount Laurel, NJ and Morrisville, PA, tips like the above can also be accessed by going to the firm’s website at www.aboandcompany.com

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Installment Sale Reporting Can Work for You Tax Wise

Installment Sale Reporting Can Work for You (PDF)

By Martin H. Abo, CPA/AB/CVA/CFF October 16, 2015
Do you own a property that has appreciated considerably and that you want to sell, perhaps to free up some capital, perhaps to downsize your operation, perhaps to expand but now rent rather than own? Are you concerned about incurring a large capital gains tax liability? One option is to structure the sale as an installment sale.

Of course, selling commercial real estate in a slow or problematic market, you will often be requested anyway to provide financing to ensure the deal gets consummated. Where at least one payment is received after the tax year in which the sale occurs, the installment sale method is used to defer a portion of the income tax due on a gain. In fact, unless you specifically elect out, the installment sale method is mandated by the Internal Revenue Service.

Under the installment sale method, the seller recognizes a portion of each payment as gain when received. Typically, each payment the seller receives consists of three parts:

(1) a return of basis (investment) in the property sold,

(2) gain (profit)on the sale, and

(3) interest on the installment note. Only the gain and interest portions of each payment are taxable to
the seller.

Reporting gain from the disposition of property under the installment sale method allows the seller to spread the tax liability over several years rather than all in the year of sale. Thus, the seller’s payment of tax corresponds with the actual cash flow generated from the sale.

Of course, a number of limitations and restrictions come with the use of the installment sale method. In general, persons who regularly sell or otherwise dispose of personal property on the installment plan or who hold real property for sale to customers in the ordinary course of business (“dealers”) generally cannot use the installment sale method except for sales of timeshares, residential lots or farm property. However, in the case of timeshares and residential lots, interest must be computed and paid each year on the deferred tax liability. Also, any item that must be included in ending inventory is ineligible for such installment sale reporting.

We are CPAs and business advisors and NOT attorneys but sellers who decide on this strategy are cautioned that an installment sale carries more risk than an outright sale of the property. Rather obvious suggestions to keep such risk manageable include:

  • Carefully assessing the buyer’s creditworthiness. Consider getting personal guarantees.
  •  Evaluate the future income producing capability of the property to make sure it provides sufficient cash flow to enable the buyer to make the payments.
  •  Use an interest rate that is competitive with current market rates in the area so as not to squash the deal.
  •  Obtain a down payment of at least 20% to have a cushion in the event of buyer default, and to cover the expenses if foreclosure becomes necessary.

In certain circumstances, it may be beneficial to elect out of the installment sale method and report the entire gain in the year of sale. When you or your business has expiring carryovers such as net operating losses, tax credits, or perhaps charitable contributions, opting OUT OF reporting the entire gain in the year of sale could allow use of those carryovers and minimize any tax liability. In addition, if you are concerned that applicable tax rates will increase in the future, it may be advantageous to elect out of installment sale treatment and avoid higher taxes down the road.

Business property transactions are often complex, and surrounding yourself with a credible “team” made up of your CPA, attorney and real estate professional can be vital in developing strategies that make it possible to bring a contemplated transaction to a successful conclusion.

Martin H. Abo, CPA/ABV/CVA/CFF is a principle of Abo and Company, LLC and its affiliate, Abo Cipolla Financial Forensics, LLC, Certified Public Accountants – Litigation and Forensic Accountants. The below article was retrieved from the “E-mail alerts” disseminated to clients and friends of the firm. With offices in Mount Laurel, NJ, Morrisville, PA and Franklin Lakes, NJ, tips like the above can also be accessed by going to the firm’s website at www.aboandcompany.com or by calling 856-222-4723.

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Martin H. Abo, CPA/ABV/CVA/CFF

307 Fellowship Road, Suite 202
Mount Laurel, NJ 08054
(856) 222-4723 phone
(856) 222-4760 fax
www.aboandcompany.com