Investing In “Opportunity Zones” While Deferring Taxes

The IRS defines an opportunity zone as an “economically distressed community where new investments may be eligible for preferential tax treatment.” The Treasury has certified nearly 9,000 of these districts across all U.S. states and its territories, including the entire island of Puerto Rico. An opportunity zone designation has the potential to trigger a rush of investment activity and is intended to help revitalize neglected areas.

A qualified opportunity zone fund is an investment vehicle that must invest at least 90 percent of its assets in businesses that operate in a ”qualified opportunity zone”, either by acquiring stock or a partnership interest. The fund can also make direct investments in properties and real estate located within a qualified opportunity zone. REITs and other operators are forming opportunity zone funds to access the capital expected to be generated by this program to acquire and develop properties.


Taxpayers can defer taxes by reinvesting capital gains from an asset sale into a qualified opportunity fund. The capital gains will be tax-free until the fund is divested or the end of 2026, whichever occurs first. The investment in the fund will have a zero-tax basis. If the investment is held for five years, there is a 10 percent step-up in basis and a 15 percent step-up if held for seven years. If the investment is held in the opportunity fund for at least 10 years, those capital gains would be permanently exempt from taxes.


While opportunity zones offer enticing benefits, tax savings should not be the only factor influencing the decision to invest or break ground on a new development. A bad deal is still a bad deal, and not all qualified investments are worth pursuing. As investors scope out opportunity zones, they should assess the potential investment with the same level of due diligence they would use for any other deal. Questions to consider include: Are the area’s property values and income levels likely to grow? Does the developer or business have an established track record?

Investments in opportunity zones also have associated risks, just like any other investment. Larger qualified opportunity zone funds and ones established by experienced real estate owners and developers like REITs will have an advantage in this arena.


Investors should look out for additional IRS guidance on opportunity zones in the new year. One of the remaining questions relates to “churning” investments, or the time period investors have to reinvest capital gains in a qualified opportunity zone after recognizing the gains from the sale of another qualified opportunity zone asset. The proposed regulation suggests this will be a 180-day period, but confirmation is still pending and could influence investors’ next steps.

To maximize the potential benefits, taxpayers must invest in a qualified opportunity fund before Dec. 31, 2019. While investors shouldn’t blindly rush into opportunity zones, the clock is ticking to take full advantage of the tax savings.

The New and Exciting 20% QBI Deduction

When President Trump signed into law the Tax Cuts and Jobs Act (TCJA) in December 2017, much was made of the dramatic cut in corporate tax rates. But the TCJA also includes a generous deduction for smaller businesses that operate as pass-through entities, with income that is “passed-through” to owners and taxed as individual income.

The IRS issued proposed regulations for the qualified business income (QBI), or Section 199A, deduction in August 2018. Now, it has released final regulations and additional guidance, just before the first tax season in which taxpayers can claim the deduction. Among other things, the guidance provides clarity on who qualifies for the QBI deduction and how to calculate the deduction amount.

QBI deduction in action

The QBI deduction generally allows partnerships, limited liability companies, S corporations and sole proprietorships to deduct up to 20% of QBI received. QBI is the net amount of income, gains, deductions and losses (excluding reasonable compensation, certain investment items and payments to partners) for services rendered. The calculation is performed for each qualified business and aggregated. (If the net amount is below zero, it’s treated as a loss for the following year, reducing that year’s QBI deduction.)

If a taxpayer’s taxable income exceeds $157,500 for single filers or $315,000 for joint filers, a wage limit begins phasing in. Under the limit, the deduction can’t exceed the greater of 1) 50% of the business’s W-2 wages or 2) 25% of the W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified business property (QBP).

For a partnership or S corporation, each partner or shareholder is treated as having paid W-2 wages for the tax year in an amount equal to his or her allocable share of the W-2 wages paid by the entity for the tax year. The UBIA of qualified property generally is the purchase price of tangible depreciable property held at the end of the tax year.

The application of the limit is phased in for individuals with taxable income exceeding the threshold amount, over the next $100,000 of taxable income for married individuals filing jointly or the next $50,000 for single filers. The limit phases in completely when taxable income exceeds $415,000 for joint filers and $207,500 for single filers.

The amount of the deduction generally can’t exceed 20% of the taxable income less any net capital gains. So, for example, let’s say a married couple owns a business. If their QBI with no net capital gains is $400,000 and their taxable income is $300,000, the deduction is limited to 20% of $300,000, or $60,000.

The QBI deduction is further limited for specified service trades or businesses (SSTBs). SSTBs include, among others, businesses involving law, financial, health, brokerage and consulting services, as well as any business (other than engineering and architecture) where the principal asset is the reputation or skill of an employee or owner. The QBI deduction for SSTBs begins to phase out at $315,000 in taxable income for married taxpayers filing jointly and $157,500 for single filers, and phases out completely at $415,000 and $207,500, respectively (the same thresholds at which the wage limit phases in).

The QBI deduction applies to taxable income and doesn’t come into play when computing adjusted gross income (AGI). It’s available to taxpayers who itemize deductions, as well as those who don’t itemize, and to those paying the alternative minimum tax.

Rental real estate owners

One of the lingering questions related to the QBI deduction was whether it was available for owners of rental real estate. The latest guidance (found in IRS Notice 2019-07) includes a proposed safe harbor that allows certain real estate enterprises to qualify as a business for purposes of the deduction. Taxpayers can rely on the safe harbor until a final rule is issued.

Generally, individuals and entities that own rental real estate directly or through disregarded entities (entities that aren’t considered separate from their owners for income tax purposes, such as single-member LLCs) can claim the deduction if:

  • Separate books and records are kept for each rental real estate enterprise,
  • For taxable years through 2022, at least 250 hours of services are performed each year for the enterprise, and
  • For tax years after 2018, the taxpayer maintains contemporaneous records showing the hours of all services performed, the services performed, the dates they were performed and who performed them.

The 250 hours of services may be performed by owners, employees or contractors. Time spent on maintenance, repairs, rent collection, expense payment, provision of services to tenants and rental efforts counts toward the 250 hours. Investment-related activities, such as arranging financing, procuring property and reviewing financial statements, do not.

Be aware that rental real estate used by a taxpayer as a residence for any part of the year isn’t eligible for the safe harbor.

This safe harbor also isn’t available for property leased under a triple net lease that requires the tenant to pay all or some of the real estate taxes, maintenance, and building insurance and fees, or for property used by the taxpayer as a residence for any part of the year.


Aggregation of multiple businesses

It’s not unusual for small business owners to operate more than one business. The proposed regs include rules allowing an individual to aggregate multiple businesses that are owned and operated as part of a larger, integrated business for purposes of the W-2 wages and UBIA of qualified property limitations, thereby maximizing the deduction. The final regs retain these rules with some modifications.

For example, the proposed rules allow a taxpayer to aggregate trades or businesses based on a 50% ownership test, which must be maintained for a majority of the taxable year. The final regulations clarify that the majority of the taxable year must include the last day of the taxable year.

The final regs also allow a “relevant pass-through entity” — such as a partnership or S corporation — to aggregate businesses it operates directly or through lower-tier pass-through entities to calculate its QBI deduction, assuming it meets the ownership test and other tests. (The proposed regs allow these entities to aggregate only at the individual-owner level.) Where aggregation is chosen, the entity and its owners must report the combined QBI, wages and UBIA of qualified property figures.

A taxpayer who doesn’t aggregate in one year can still choose to do so in a future year. Once aggregation is chosen, though, the taxpayer must continue to aggregate in future years unless there’s a significant change in circumstances.

The final regs generally don’t allow an initial aggregation of businesses to be done on an amended return, but the IRS recognizes that many taxpayers may be unaware of the aggregation rules when filing their 2018 tax returns. Therefore, it will permit taxpayers to make initial aggregations on amended returns for 2018.


UBIA in qualified property

The final regs also make some changes regarding the determination of UBIA in qualified property. The proposed regs adjust UBIA for nonrecognition transactions (where the entity doesn’t recognize a gain or loss on a contribution in exchange for an interest or share), like-kind exchanges and involuntary conversions.

Under the final regs, UBIA of qualified property generally remains unadjusted as a result of these transactions. Property contributed to a partnership or S corporation in a nonrecognition transaction usually will retain its UBIA on the date it was first placed in service by the contributing partner or shareholder. The UBIA of property received in a like-kind exchange is generally the same as the UBIA of the relinquished property. The same rule applies for property acquired as part of an involuntary conversion.

SSTB limitations

Many of the comments the IRS received after publishing the proposed regs sought further guidance on whether specific types of businesses are SSTBs. The IRS, however, found such analysis beyond the scope of the new guidance. It pointed out that the determination of whether a particular business is an SSTB often depends on its individual facts and circumstances.

Nonetheless, the IRS did establish rules regarding certain kinds of businesses. For example, it states that veterinarians provide health services (which means that they’re subject to the SSTB limits), but real estate and insurance agents and brokers don’t provide brokerage services (so they aren’t subject to the limits).

The final regs retain the proposed rule limiting the meaning of the “reputation or skill” clause, also known as the “catch-all.” The clause applies only to cases where an individual or a relevant pass-through entity is engaged in the business of receiving income from endorsements, the licensing of an individual’s likeness or features, or appearance fees.

The IRS also uses the final regs to put a lid on the so-called “crack and pack” strategy, which has been floated as a way to minimize the negative impact of the SSTB limit. The strategy would have allowed entities to split their non-SSTB components into separate entities that charged the SSTBs fees.

The proposed regs generally treat a business that provides more than 80% of its property or services to an SSTB as an SSTB if the businesses share more than 50% common ownership. The final regs eliminate the 80% rule. As a result, when a business provides property or services to an SSTB with 50% or more common ownership, the portion of that business providing property or services to the SSTB will be treated as a separate SSTB.

The final regs also remove the “incidental to an SSTB” rule. The proposed rule requires businesses with at least 50% common ownership and shared expenses with an SSTB to be considered part of the same business for purposes of the deduction if the business’s gross receipts represent 5% or less of the total combined receipts of the business and the SSTB.

Note, though, that businesses with some income that qualifies for the deduction and some that doesn’t can still separate the different activities by keeping separate books to claim the deduction on the eligible income. For example, banking activities (taking deposits, making loans) qualify for the deduction, but wealth management and similar advisory services don’t, so a financial services business could separate the bookkeeping for these functions and claim the deduction on the qualifying income.

REIT investments

The TCJA allows individuals a deduction of up to 20% of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income, including dividends and income earned through pass-through entities. The new guidance clarifies that shareholders of mutual funds with REIT investments can apply the deduction. The IRS is still considering whether PTP investments held via mutual funds qualify.

Proceed with caution

The tax code imposes a penalty for underpayments of income tax that exceed the greater of 10% of the correct amount of tax or $5,000. But the TCJA leaves less room for error by taxpayers claiming the QBI deduction: It lowers the threshold for the underpayment penalty for such taxpayers to 5%. We can help you avoid such penalties and answer all of your questions regarding the QBI deduction.



It Is Time We Look At The New Tax Law Changes That Will Impact You And Your Business!

Who will be affected? 

If you own a business, pay state and local taxes, have entered into a new mortgage, purchased  property plant & equipment for your business, incurred losses at the business level or through a pass through entity or have carried forward losses from a prior year, incurred business interest expense at either the entity or individual level, are in the midst of planning to minimize estate taxes, incurred meals and entertainment expense, in the process of determining what type of entity (corporation, S corporation or partnership . . ) to utilize for your next business venture, or just filing an individual tax return that includes rental real estate; you are about to encounter new tax law changes that will affect your tax return preparation and tax liability when compared to prior years.                                                                   

Will you qualify for the new QBI deduction?

One key component of the new tax law is determining if your business qualifies for the new Internal Revenue Code Section 199A Qualified Business Income Deduction:

  • The QBI deduction could reduce your overall tax liability by up to 20%!
  • The QBI deduction calculation includes approximately 10 new steps that will be required at the entity and individual tax return levels that must be completed in order take advantage of this valuable new deduction.

The following is a summary of the many new tax law changes that templeton will be reviewing with you over the coming months. 


  • Retains seven brackets, but at reduced rates, including a top marginal rate of 37 percent. The current tax rates of 10%, 15%, 25%, 28%, 33%, 35%, 39.6% rates would be replaced with tax rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Provisions sunset at end of 2025.
  • Increases the standard deduction to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers, while eliminating the additional standard deduction and the personal exemption. Provisions sunset at the end of 2025.
  • Retains the charitable contribution deduction
  • Retains the mortgage interest deduction for acquisition, but limited (for new purchases) to $750,000 in mortgage debt, while eliminating the deduction for equity debt. Reverts back to $1 million 1/1/26, regardless of when debt occurred. Available for second homes.
  • Caps the state and local tax deduction at $10,000 (property plus choice of income or sales taxes, as under current law), except for taxes paid or accrued in carrying on a trade or business.
  • Medical expense deduction – applies to expenses that exceed 7.5% of AGI in 2017 and 2018, and expenses that exceed 10% of AGI thereafter. The medical expense deduction threshold is lowered to 7.5 percent for 2018, and reverts to 10 percent thereafter. Eliminates other itemized deductions.
  • Increases the child tax credit to $2,000. Of this, $1,400 would be refundable, with the refundable portion indexed to inflation. All dependents ineligible for the child tax credit are eligible for a new $500 per-person family tax credit. Provisions begin to phase out at $400,000 ($200,000 for single filers). Social Security Numbers required for portions of the above. All provisions sunset at the end of 2025.
  • Retains alternative minimum tax (AMT) – Increases the exemption to $70,300 single/$109,400 MFJ) and raises the phaseout threshold to $500,000 single/$1 million for joint filers. (Other exemptions and phaseout thresholds exist for single filers and married filing separately, and are also adjusted.)
  • Expands the use of 529 accounts to cover tuition for students in K-12 private. Allows distributions of up to $10,000 per student tax-free from 529 accounts to be used for elementary, secondary and higher tuition.
  • Retains retirement savings options such as 401(k)s and IRAs
  • Net capital gains and qualified dividends would continue to be taxed at the current 0%, 15%, 20% rates and also would continue to be subject to the 3.8% net investment tax
  • Repeals the moving expense deduction (except for active duty military personnel) and eliminates the alimony deduction effective 2019 for divorce agreements executed after December 31, 2018 (though those receiving alimony no longer count it as income). Retains other above-the-line deductions, including educator expenses and student loan interest. Graduate student tuition waivers also remain in place.
  • Repeals all itemized deductions subject to the 2% floor (home office, license and regulatory fees, professional dues)
  • Retains adoption credit
  • Retains current law ownership period for the exclusion of gain from the sale of a principal residence
  • Continues to allow graduate students to exclude the value of reduced tuition from taxes
  • Continues to allow deductions for student loan interest and for qualified tuition and related expenses

Individual Mandate Penalty

  • Reduces the individual mandate penalty to $0 in 2019, effectively repealing it

Businesses (in general)

  • C corporate tax rate 21% (effective January 1, 2018)
  • Fiscal year end filers may have blended rate for 2018
  • Corporate alternative minimum tax (AMT) is repealed for tax years beginning after December 31, 2017
  • Dividends Received Deduction – Reduces the deduction for dividends received from other than certain small businesses or those treated as “qualifying dividends” from 70% to 50%. Reduces dividends received from 20% owned corporations from 80% to 65%
  • Capital investment – Allows full (100 percent) expensing of short-lived capital investment, such as machinery and equipment, for five years, then phases out the provision over the subsequent five, and raises Section 179 small business expensing cap to $1 million with a phaseout starting at $2.5 million. Allows immediate write-off of qualified property placed in service after 9/27/17 and before 2023. The increased expensing would phase-down starting in 2023 by 20 percentage points for each of the five following years. Eliminates original use requirement. Qualified property excludes certain public utility property and floor plan financing property. Taxpayers may elect to apply 50% expensing for the first tax year ending after 9/27/17
  • 179 – Expands “qualified property” to include certain depreciable personal property used to furnish lodging, and improvements to nonresidential real property (such as roofs, heating, and property protection systems)
  • Interest Expenses – Caps net interest deduction at 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) for four years, and 30 percent of earnings before interest and taxes (EBIT) thereafter. Limits deduction to net interest expense that exceeds 30% of adjusted taxable income (ATI). Initially, ATI computed without regard to depreciation, amortization, or depletion. Beginning in 2022, ATI would be decreased by those items. Regulated utilities are generally excepted.
  • NOLS – Eliminates net operating loss carrybacks while providing indefinite net operating loss carryforwards, limited to 80 percent of taxable income. Limits NOLs to 80% of taxable income for losses arising in tax years beginning after 2017. Repeals carryback provisions, except for certain farm and property and casualty losses; allows NOLs to be carried forward indefinitely
  • Repeals like-kind exchanges except for real property
  • Contributions to Capital (Sec. 118) – Retains Section 118; clarifies that such contributions do not include any contribution in aid of construction, any other contribution made by non-shareholders and any contribution made by any governmental entity or civic group. Clarification would generally apply to contributions made after the date of enactment
  • Research and Experiment expenses – domestic research expenses required to be amortized over 5 years; foreign research expenses required to be amortized over a 15 year period;
  • Business Credits – modifies, but does not eliminate, the rehabilitation credit and the orphan drug credit, while limiting the deduction for FDIC premiums. Research and development credit is retained without modification from current law.
  • Modifies rehabilitation credit to provide 20% historic credit ratably over 5 years, repeals credit for pre-1936 property
  • Work Opportunity Tax Credit, New Markets Tax Credit, Low Income Housing Tax Credit – Retains current law for WOTC, NMTC, and LIHTC, however, modifies rehabilitation credits for old and/or historic buildings
  • Orphan drug credit survived, but modified – Reduces credit to 25% and generally would need to exceed 50% of the average expenses over a three-year period. Reduced credit applies to amounts paid or incurred in tax years beginning after 12/31/17
  • “OLD” 9% Domestic Production Deduction (Sec. 199) repealed for tax years after 2017 (see new QBI deduction)
  • Limits meals and entertainment expenses, including meals for the convenience of the employer
  • Repeals deduction for qualified transportation fringes, including commuting except as necessary for employee’s safety
  • Cash method of accounting – Increases eligibility to businesses with up to $25 million in income; taxpayers that meet the new $25 million threshold are also not required to account for inventories under Sec. 471 or apply 263A; Accounting method changes may be treated as initiated by the taxpayer and made with the consent of the Secretary.
  • Energy provisions – Does not repeal any conventional energy tax credits and leaves untouched the deductibility of intangible drilling costs, taxpayers’ eligibility to take percentage depletion and the designation of certain natural resource related activities as generating qualifying income under the publicly traded partnership rules
  • Provides tax credit to certain employers who provide family and medical leave (sunsets 12/31/19)
  • Executive compensation changes
    • Expands the Section 162(m) $1 million deduction limit that applies to compensation paid top executives of publicly held companies for TY beginning after 12/31/17
    • Covered employees would to include the CFO and all executives once identified
    • Eliminates the performance-based compensation exceptions and extends deduction limitation to deferred compensation paid to executives who previously held a covered employee position
  • Expands applicability of the deduction limitation to certain foreign private issuers and private companies that have publicly traded debt
  • Provides a transition rule for compensation paid pursuant to a plan under a written binding contract that is in effect on 11/2/17 and is not materially modified thereafter
  • Eliminates deduction for certain fringe benefit expenses
  • Business entertainment activities and membership dues; transportation or commuting expenses are not excludable from income or deductible by the employer
  • Employee achievement awards may not be deducted or excluded from income if the award is paid in cash, gift cards, meals, lodging, tickets, securities, or other similar items
  • No longer exempts employer-provided eating facilities from 50% deduction limitation; in 2026, deductions are completely disallowed for employer-provided eating facilities and meals provided for the convenience of the employer
  • Adds a new income inclusion deferral election allowing deferral of tax for options and restricted stock units issued to qualified employees of private companies; applies on or after 12/31/17

Pass-Through Entities (rules specifically for pass-through entities)

  • Pass-through Income – 20% deduction for pass-through income limited to the greater of (a) 50 percent of wage income or (b) 25 percent of wage income plus 2.5 percent of the cost of tangible depreciable property for qualifying businesses, including publicly traded partnerships but not including certain service providers. Limitations (both caps and exclusions) do not apply for those with taxable incomes below $315,000 (joint) and $157,500 (single), and phase out over a $100,000 range.
    • Allows individual taxpayers to deduct 20% of domestic “qualified business income” (QBI) from a partnership, S corporation, or sole proprietorship (“qualified businesses”) subject to certain limitations and thresholds. Trusts and estates may take the deduction. Effective for tax years beginning after 12/31/17 and before 1/1/26
    • QBI for a tax year means the net amount of domestic qualified items of income, gain, deduction, and loss with respect to a taxpayer’s qualified businesses. “Qualified businesses” does not include specified services trades or businesses such as accounting, law, health, several other professions, service businesses related to investing, but does include engineering and architecture trades
    • Deduction is limited for individual taxpayers with taxable income above $315,000 (mfj) and $157,500 (sf) to the greater of 50% of the W-2 wages, or the sum of 25% of the W-2 wages plus 2.5% of the unadjusted basis of all qualified property.
  • Other key changes include repeal of partnership technical termination rules; a rule imposing a three-year holding period to treat capital gain as long-term capital gain for certain partnership interests held in connection with the performance of certain services; a rule limiting taxpayers (other than C corporations) ability to deduct business losses for tax years beginning after 12/31/17 and before 1/1/26, with excess business losses carried forward
  • Disallows active pass-through losses in excess of $500,000 for joint filers; $250,000 for all others (sunsets 12/31/25)
  • Tax gain on sale of a partnership interest on look-thru basis
  • Charitable contributions and foreign taxes taken into account in determining limitation on allowance of partner’s share of loss
  • Expands the definition of substantial built-in loss for purposes of partnership loss transfers
  • Modifies treatment of S corporation conversions into C corporations
  • Recharacterization of certain gains on property held for fewer than 3 years in the case of partnership profits interest held in connection with performance of investment services

International Income

  • Moves to a territorial system with anti-abuse rules and a base erosion anti-abuse tax (BEAT) at a standard rate of 5 percent of modified taxable income over an amount equal to regular tax liability for the first year, then 10 percent through 2025 and 12.5 percent thereafter, with higher rates for banks.
  • GILT (global intangible low taxed income (minimum tax on foreign earnings)
  • Foreign derived intangible income (formula) (not just a patent box)
  • Domestic corporations allowed a 100% deduction for the foreign-source portion of dividends received from 10% owned (vote or value) foreign subsidiaries. (Deduction not available for capital gains or directly-earned foreign income)
  • One-time transition tax on post-1986 earnings of 10% owned foreign subsidiaries accumulated in periods of 10% US corporate shareholder ownership. 15.5% rate on cash and cash equivalents, and 8% rate on the remainder
  • Mandatory annual inclusion of “global intangible low-taxed income” (GILTI) determined on an aggregate basis for all controlled foreign corporations owned by the same US shareholder. Partial credits for foreign taxes properly attributable to the GILTI amount
  • Domestic corporations allowed a deduction against foreign-derived intangible income (37.5% deduction initially, reduced to 21.875% for tax years beginning after 12/31/25) and mandatory GILTI inclusion (50% deduction initially, reduced to 37% for tax years beginning after 12/31/25)
  • No deduction for certain related party payments made pursuant to a hybrid transaction or entity
  • If certain thresholds are met, a “base erosion minimum tax” levied on an applicable taxpayer’s taxable income determined without regard to certain deductible amounts paid or accrued to foreign related persons; depreciation or amortization on property purchased from foreign related persons; and certain reinsurance payments to foreign related persons. Generally 10% rate for tax years beginning before 12/31/25, and 12.5% thereafter, but 11% and 13.5% for banks and registered securities dealers
  • Deemed repatriation – Enacts deemed repatriation of currently deferred foreign profits at a rate of 15.5 percent for liquid assets and 8.0 percent for illiquid assets.

Estate Taxes

  • Doubles the estate tax exemption in 2018 (would continue to be adjusted for inflation)

Exempt Organizations

  • 21% excise tax on excess tax-exempt organization executive compensation (certain exceptions provided to non-highly compensated employees and for certain medical services)
  • Unrelated business income separately computed for each trade or business activity
  • Charitable deduction not allowed for amounts paid in exchange for college athletic event seating rights
  • Creates excise tax based on investment income of private colleges and universities with endowment per student of at least $500,000
  • Repeals the substantiation exception for certain contributions
Note: As a general rule; many of the individual tax law changes are temporary while many of the corporate changes in the tax law changes are permanent. Although the House passed the latest tax reform package in late September that would have made the individual tax cuts permanent, the new Democrat-led House puts GOP tax cuts in jeopardy.


State Tax Risk Due To The “Wayfair Supreme Court Decision”

On June 21, the U.S. Supreme Court issued its widely anticipated decision in South Dakota v. Wayfair. The Court held that states may require a business to collect and remit sales and use taxes even if the business has no in-state physical presence.

The Wayfair decision means that states are now free to subject businesses to state taxes based on an “economic” presence within their state. Overnight, remote sellers, licensors of software, and other businesses that provide services or deliver their products to customers from an out-of-state location may have to start complying with state and local taxes. The Wayfair decision also supports states that subject out-of-state businesses to income taxes based on economic “factor-presence” nexus statutes that some states have enacted in recent years.

States’ Economic Nexus Statutes
While some states’ economic nexus statutes have been in place since 2016 and are effective now, others are effective later this year, and some don’t apply until 2019. Thus, enforcement will be uneven across states, pending further administrative guidance. The number of states that adopt economic nexus statutes is expected to grow quickly in the months to come.

Measuring Your Tax Risk Related To Wayfair
Wayfair has widespread implications, from state and local tax consulting and compliance matters and tax provision and accruals (ASC 450 and ASC 740), to increased exposure for businesses involved in M&A transactions. Wayfair also provides an opportunity for companies to use their data more effectively and modify their ERP systems to properly report their state taxes.

  1. Does your company make sales into states in which you are not registered or filing sales/use tax returns?
  2. Does your company ship goods or provide services to customers located in states where you have little or no in-state physical presence?
  3. Does your company make retail sales of tangible goods?
  4. Does your company provide online services or make sales of digital goods?
  5. Does your company file sales/use tax returns in every state where you ship or deliver goods or services?
  6. Has your company received a “nexus questionnaire” or received audit or tax notices from any state where you are not currently registered for sales/use taxes?

If the answer is “yes” to any of these questions, your company is likely impacted by Wayfair and you should be taking steps to minimize potential exposures from tax, interest, and penalties that are arising now from Wayfair, and plan around the very fluid state changes that are happening and will occur in the near future.

Steven P. Leone Earns Certified Valuation Analyst Credential

Steven P. Leone, CPA - Ft Lauderdale CPAWest Palm Beach, Fla. – April 3, 2018  Templeton & Company is pleased to announce that Steven P. Leone, CPA, CVA, Managing Tax Partner, has successfully completed the certification process with the National Association of Certified Valuators and Analysts® (NACVA®) to earn the Certified Valuation Analyst® (CVA®) designation. The CVA designation is granted only to individuals who have met a high bar or both prerequisite qualifications and passed a substantive examination testing both understanding of theory and the application of skills in the field of private company business valuation.

“The CVA designation is an indication to the business, professional, and legal communities that the designee has met NACVA’s rigorous standards for professionalism, expertise, objectivity, and integrity in the field of performing business valuations, and the attendant financial consulting related to the discipline,” stated Parnell Black, MBA, CPA, CVA Chief Executive Officer of NACVA.

“NACVA’s CVA designation is the only valuation credential accredited by the National Commission for Certifying Agencies® (NCCA®), the accrediting body of the Institute for Credentialing Excellence™ (ICE™),” Black added.

Steve joined Templeton & Company in 2013. Prior to joining the firm, Steve worked with a Big 4 CPA firm for 18 years serving as the Managing Tax Partner working with clients in the information technology, financial services, retail, real estate, construction, communications, manufacturing and distribution, and entertainment industries.

About Templeton & Company

Founded in 1990, Templeton & Company, LLP is a professional services firm providing comprehensive business solutions to help its clients discover and realize their vision for success. Located in Fort Lauderdale and West Palm Beach, Fla., the firm provides consulting services to businesses in multiple industries with a focus on audit, tax, technology, accounting, succession strategy, and business valuations. Templeton & Company is also an independent member of the BDO Alliance USA, a national network of leading CPA firms. For more information about Templeton, its people, services, experience, and alliances, visit

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Gotta Get Away: Timeshares, Hotels and the Sharing Economy

By Kevin Riley

It’s a familiar tale: An entrepreneurial business model enters the real estate market, disrupting traditional players. Even now-ubiquitous chain hotels were once a disruptor and, in the 1970s, timeshare executives were the ones shaking up the hospitality market. Timeshares became such a competitive presence that every major hotel conglomerate entered the market and acquired existing, successful companies. Now, in the past few years, timeshare businesses have adapted to the digital age and rapidly diversified their offerings to appeal to a changing consumer base. Perhaps because of its entrepreneurial roots, the timeshare industry may be well-positioned to adapt and weather the market’s newest disruption: the sharing economy and the growth of online rental platforms offering an alternative—and in many cases, more affordable—hospitality experience.

The power is in the hands of the consumer. With an expanding pool of options available for consumers, vacation rental providers are jockeying for travelers’ dollars. Online platforms, such as HomeAway, and its subsidiary VRBO, offer consumers a different travel experience, with accommodations available at their fingertips. The flexibility these platforms provide has particularly resonated with millennials and anyone traveling on a budget.

Because the traditional timeshare model offers an alternative to purchasing a second home, rental platforms have impacted timeshares differently than hotels. Timeshare buyers have long had access to a variety of travel destinations without the hassle of upkeep and maintenance. Destination choices, however, have evolved. For the past 15 years, some timeshare operators have prioritized expanding into urban areas, including major hubs like New York City and Miami, as well as secondary urban markets gaining popularity as cultural destinations, like Boston, San Diego, Vancouver and New Orleans. And competition could get fiercer in those markets, particularly because many customers are swayed by the authentic travel experience online rental platforms can offer via homestays and other non-traditional arrangements.

In addition to providing greater exposure for smaller competitors, the secure automated payment processing capabilities of online rental platforms also removed a barrier to entry into the market for these smaller players. Companies with a modest supply of vacation rentals, for example, may not have had the ability to obtain a merchant account to enable online transactions. While online rental platforms charge a host service fee for each transaction, that fee is a much cheaper alternative to a merchant account and allows small players to offer a convenience on par with larger hotels and timeshare companies.

As a testament to its financial adaptability, the timeshare industry has seen prominent deal activity in 2016. In June, private equity investment firm Apollo Global acquired Diamond Resorts International Inc. Following suit of other major hotel conglomerates, this December, Hilton Worldwide Holdings’ board of directors approved the spinoff of its timeshare business, Hilton Grand Vacations, which represented 12 percent of their top line, and Park Hotels & Resorts, Inc. The spinoffs are expected to be finalized in early January 2017. Starwood Hotels and Resorts also completed the spinoff and sale of its timeshare business, Vistana Signature Experiences this year, before finalizing its merger with Marriott, in September. Because the hotel industry is an entirely different business than timeshares, with different multiples and earnings, spinning off timeshares into a separate public entity is a common strategy.

All signs point to sustained growth of the sharing economy in the coming years. Hotel owners and timeshare operators alike would be wise to develop agile service offerings and adaptable marketing strategies to prepare for disruptions on the horizon and secure their share of the market.

This article originally appeared in BDO USA, LLP’s “Construction Monitor Newsletter (Winter 2017). Copyright © 2017 BDO USA, LLP. All rights reserved.


Tax-Exempt Bond Compliance

By Marc Berger, CPA, JD, LLM

One of the benefits of tax exemption under Internal Revenue Code (IRC) Section 501(c)(3) is the ability to use tax-exempt financing. Tax-exempt bonds generally carry a lower interest rate than taxable bonds and the interest received by the bondholders is excludable from income for federal income tax purposes.

Because of these advantages, tax-exempt bonds are subject to strict federal tax requirements both at the time of issue and for as long as the bonds remain outstanding. The Internal Revenue Service (IRS) recognizes that all requirements are closely monitored and complied with at the time bonds are issued. Bond counsels for the organization, the issuing authority and the underwriter are all keenly focused on closing a clean transaction. However, problems can arise after closing, when all of the outside professionals have moved on to the next transaction.

In order to keep their tax-exempt bonds in compliance, organizations must actively monitor the use of proceeds and bond-financed property throughout the entire period that bonds remain outstanding. The IRS encourages organizations to adopt written procedures which go beyond reliance on the tax certificates included in bond documents. Written procedures should contain certain key characteristics, including:

  • Due diligence review at regular intervals;
  • Identifying the official or employee responsible for review;
  • Training of the responsible official/employee;
  • Retention of adequate records to substantiate compliance (e.g., records relating to expenditure of proceeds and use of facilities);
  • Procedures reasonably expected to identify noncompliance in a timely manner; and
  • Procedures ensuring that the issuer will take steps to correct noncompliance in a timely manner.

The goal of establishing and following written procedures is to identify and resolve noncompliance on a timely basis in order to preserve the preferential status of the bonds.

Ownership and Use of Property

All property financed with 501(c)(3) bonds must be owned by a 501(c)(3) organization or a governmental entity. For this purpose, a “governmental entity” includes a state or local governmental entity, but not a federal entity. In addition, use of bond-financed property in an unrelated trade or business or use by parties other than 501(c)(3) organizations is limited. This type of nonqualified use is known as private business use, or private use. In order to maintain its tax-exempt status, a 501(c)(3) bond issue may not have more than 5 percent private use over its lifetime. The 5 percent limit applies to a bond issue as a whole as opposed to each underlying project being financed. Additionally, the costs associated with a bond issue (e.g., counsel fees, underwriters’ discounts, financial advisory fees, accounting fees, rating agency fees) count toward the 5 percent private use limit. Depending on the size of a bond issue, costs of issuance may range from .5 to 2 percent of the bond issue. As a result, tracking private use becomes very important. The situations that can generate private use fall into the following categories:

  • Property sold or leased;
  • Property subject to management and service contracts;
  • Property involved in research activities; and
  • Property used in unrelated business activities.

While each of these situations results in private use, there is some potential relief from private use treatment. Bond-financed property that is sold to a non-501(c)(3) organization or governmental entity can be “remediated.” For example, if an organization’s sales proceeds are used to make qualifying capital expenditures, private use treatment can be avoided. In addition, there are safe harbors for certain management and services contracts as well as for certain research activities. If these safe harbors are met, then no private use will result. Proper planning in each of these situations can avoid exceeding the private use limit.

Section 501(c)(3) organizations with tax-exempt bonds should be tracking private use at regular intervals. This may involve working with an organization’s legal, facilities, contracting, real estate and finance departments. Schedule K of the Form 990, which must be completed by organizations with outstanding tax-exempt bonds, asks whether the organization has established written procedures to track compliance with all of the tax requirements – a question to which all organizations should be answering “yes.” The ability to issue tax-exempt bonds is a benefit that should not be taken for granted, and consistent post-issuance compliance will allow an organization to realize this benefit over many years.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2015). Copyright © 2015 BDO USA, LLP. All rights reserved.

Federal Tax Day – IRS Provides Some Relief to Data Breach Victims

The IRS will not assert that an individual, whose personal information may have been compromised in a data breach, must include in gross income the value of identity protection services provided by the entity that experienced the data breach. In addition, the IRS will not assert that an employer, whose employees’ data may have been compromised in a data breach of the employer, must include the value of identity protection services in the employees’ gross income.

The announcement does not apply to cash received in lieu of identity protection services, or to identity protection services received for other reasons that a data breach, such as identity protection services received in connection with an employee’s compensation benefit package. The announcement also does not apply to proceeds received under an identity theft insurance policy.

Comments Requested

Comments are requested on whether organizations commonly provide identity protection services in situations other than as a result of a data breach, and whether additional guidance would be helpful in clarifying the tax treatment of the services provided in those situations. Comments should be submitted in writing on or before October 13, 2015, to: Internal Revenue Service CC:PA:LPD:PR (Announcement 2015-22) P.O. Box 7604 Ben Franklin Station Washington, D.C. 20044. Comments also may be sent electronically to “Announcement 2015-22” should be included in the subject line. All comments will be available for public inspection.

Federal Tax Day – IRS Issues Back to School Reminders

The IRS has issued back-to-school reminders for parents and students about education-related tax benefits, including the two college tax credits. In general, the American Opportunity Tax Credit or Lifetime Learning Credit are available to taxpayers who pay qualifying expenses for an eligible student. Eligible students include the taxpayer, spouse and dependents. The American Opportunity Tax Credit provides a credit for each eligible student, while the Lifetime Learning Credit provides a maximum credit per tax return. Although a taxpayer may qualify for both of these credits, only one can be claimed per student/per year. To claim these credits, the taxpayer must file Form 1040 or 1040A and complete Form 8863, Education Credits.

The credits apply to eligible students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. The credits are subject to income limits that could reduce the credit amount allowed on their tax return. Also, eligible parents and students can get the benefit of these credits during the year by filling out a new Form W-4, claiming additional withholding allowances, and giving it to their employer.

There are a variety of other education-related tax benefits including:

  • Scholarship and fellowship grants are generally tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
  • Student loan interest deduction of up to $2,500 per year.
  • Interest on savings bonds used to pay for college can be tax free in certain circumstances; income limits apply, and the bonds must have been purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.
  • Qualified tuition programs, also called 529 plans, are used by many families to prepay or save for a child’s college education.

In addition, taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the Earned Income Tax Credit.

U.S. IPOs to Maintain Pace Over Remainder of Year

Initial public offerings (IPOs) on U.S. exchanges finished the first half of the year with a flurry of activity. In fact, the 33 offerings that priced in June represent the highest number of deals since July of last year. Yet, despite this strong finish, the number of U.S. IPOs and proceeds raised through six months are down significantly when compared to 2014.*

According to the 2015 BDO IPO Halftime Report, a survey of capital markets executives at leading investment banks, IPO activity on U.S. exchanges during the second half of the year should mirror the first six months of 2015. A majority (54%) of bankers predict IPO activity will remain at the same level as the first half of the year. Just over a quarter (26%) anticipate the pace of U.S. IPO activity will increase in the second half of 2015, while one-fifth (20%) forecast a decrease in offering activity. Overall, capital market executives are predicting virtually no net change (under 1%) in the number of U.S. IPOs during the second half of the year.

Bankers anticipate these offerings will average just $174 million in size for the remainder of 2015, approximately the same as the first half of the year. This projects to less than $36 billion in total IPO proceeds on U.S. exchanges in 2015, the lowest level of proceeds since 2009 when the market was still reeling from the financial crisis.

“It was almost inevitable that the 2015 U.S. IPO market was going to experience a slowing of growth given the impressive increases achieved in 2013 and 2014, however the drop-off in offerings this year has been significant. While there are always multiple contributing factors for such a dramatic change, the capital markets community clearly believes the wide availability of private financing at favorable valuations is playing the leading role,” said Brian Eccleston, a partner in the Capital Markets Practice at BDO USA. “If this access to private funding continues, bankers believe it will lead to fewer IPOs moving forward. Certainly, this is a trend that bears watching.”

When compared to 2014, when 275 IPOs generated more than $85 billion in proceeds*, the number and size of U.S. IPOs have dropped considerably this year. A majority (56%) of capital markets executives believe the widespread availability of private funding at attractive valuations is the main factor in the dramatic drop in the number of initial public offerings (IPOs) on U.S. exchanges in 2015 when compared to 2014. A cooling stock market (22%), fewer offerings from private equity firms (14%) and the collapse of oil prices (8%) are cited as the main factor by much smaller proportions of the bankers.

When asked about the impact of companies putting off their IPOs due to the availability of late-stage financing in the private sector, a majority (61%) of the bankers feel it will lead to fewer offerings going forward, while more than a quarter (29%) predict it will result in better IPOs in the future. Two-thirds (66%) of the capital markets executives believe the recent trend of mutual fund companies investing in popular, private technology businesses is a further disincentive to companies considering an IPO.
In addition to the drop in the number of IPOs, the size of the average offering – even absent last year’s massive Alibaba offering – has decreased significantly in 2015. A large proportion of the capital markets community (41%) attribute the smaller average deal size to fewer large deals coming from private equity firms who have already exited many of their more mature businesses. Other factors cited by the bankers for the smaller sized offerings are increased investor risk tolerance for smaller offering businesses (32%) and valuation pressures forcing offering businesses to cut prices (21%). Only 6 percent attribute the decreased size to the JOBS Act encouraging smaller businesses to go public. Moving forward, capital markets executives anticipate that the size of the average IPO in the second half of the year will be $174 million, approximately the same as the first half.

*Renaissance Capital is the source of all historical data related to number and size of U.S. IPOs

This article originally appeared in BDO USA, LLP’s Quarterly Client Newsletter (Summer 2015). Copyright © 2015 BDO USA, LLP. All rights reserved.