5 Year-End Tax Tips CRE Professionals Should Keep In Mind
The end of the year brings images of snow, family and the holiday spirit. But for CRE professionals, there is something else on their minds: taxes.
For Baker Tilly partner Steve Lawson, now is the perfect time to review tax paperwork and prepare for April. Lawson specializes in providing transactional tax planning, compliance and business advisory services to companies and their owners.
As 2017 comes to a close, and as tax reform looms on the horizon, here are five ways CRE professionals can organize their taxes before the ball drops on New Year’s Eve.
1. Accelerate deductions and defer income
The proposed tax reform plan from Republicans calls for the reduction of tax rates and the repeal of tax deductions used by many filers. Taxpayers’ ability to deduct state and local taxes are limited under the proposed plan.
Commercial real estate professionals and all taxpayers benefiting from the deductions should explore paying taxes normally due in January or April before the end of the year to take advantage of the current policy.
Because of the predicted decrease in tax rates for 2018, real estate professionals looking to close a deal at year-end should consider if deferring to the new year is more advantageous, Lawson said. While capital gain rates remain unchanged under the proposed plan, ordinary rates are expected to decrease. The proposed plan also calls for shorter recovery periods for real and personal property, which could make an acquisition in the new year more attractive to buyers.
2. Review partnership audits and agreements
In an effort to audit more partnership returns, the Internal Revenue Service reissued regulations under the Bipartisan Budget Act of 2015. Under the new procedures, the IRS will be allowed to assess tax to partnerships in the year the adjustment is discovered. Previously, the IRS assessed tax at the partner level, which allowed for taxpayers to use various tax attributes to reduce the amount owed.
The new BBA audit rules go into effect Jan. 1. Lawson recommends that CRE professionals investing in large or small partnerships set aside time this month to review their partnership agreements and check that these new regulations are addressed. The new regulations require that all partnerships name a representative who would present information to the IRS in the event of an audit.
3. Explore all tax deduction options (while you can)
While tax reform is expected to repeal many current deductions, CRE professionals could be missing out on additional deductions depending on the type of properties in their portfolios. The Domestic Production Activities Deduction, for instance, provides a deduction to taxpayers actively involved in the trade or business of construction, architectural and engineering of property in the U.S.
Qualified taxpayers can offset income with a tax deduction of 9% on profits from qualified activities.
Other deductions have an expiration date. Enacted as part of the Energy Policy Act in 2005, Section 179D, the Energy Efficient Commercial Buildings Tax deduction, has been a popular option for developers constructing energy-efficient buildings. Although the deduction has not been extended to buildings placed in service after Dec. 31, 2016, there is still an opportunity for owners of older properties to take advantage of Section 179D.
4. Learn when to use capitalization vs. expensing
In 2014, the IRS issued new rules for determining when to currently deduct or capitalize expenditures incurred for tangible property. An expenditure is immediately deducted and can instantly reduce a taxpayer’s taxable income. A capital expenditure is not deducted immediately and is recovered over time through depreciation deductions. The IRS made it easier for some taxpayers to immediately deduct items, raising the expense threshold to $5K per item.
Owners now have flexibility when determining whether to capitalize or deduct expenditures related to property improvements, but many do not keep detailed records or know how to use the rule change to their advantage, Lawson said.
“Most accounting departments for CRE professionals either don’t have a policy or they have an unwritten one,” Lawson said. “Baker Tilly can help professionals and their teams come up with an accounting policy that looks for opportunities under these new rules.”
5. Keep detailed records of real estate hours
Losses from real estate activities are generally considered passive and cannot be used to offset income from nonpassive activities where a taxpayer works on a regular basis. Wages, salaries, guaranteed payments, 1099 commission income and portfolio or investment income are deemed to be nonpassive. Portfolio income includes interest income, dividends, royalties, gains and losses on stocks, pensions, lottery winnings and any other property held for investment.
Certain taxpayers who qualify as real estate professionals and materially participate in the activity may treat real estate as nonpassive. When preparing taxes, the taxpayer must document their hours of participation in each activity.
The IRS will ask for detailed time records as proof that taxpayers are materially participating in the activities they claim. In recent years, real estate professionals have been no exception. A real estate professional should keep a detailed calendar including specific discussions related to financing, leasing, insurance and capital improvements related to real estate.
It helps to bring tax professionals into the process as early as possible. Baker Tilly works with clients year-round to help keep tax documentation organized and identify potential deductions.
“I always go by the rule: the earlier the better,” Lawson said. “We advise clients year-round. One of the things I appreciate is that this way, in April, there are no surprises.”
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