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8030 La Mesa Blvd Ste # 608, La Mesa, CA 91942

Month: January 2021

Taxpayers Need to Take Advantage of the Temporary Gift Tax Break

The coronavirus disease 2019 or COVID-19 has gravely affected the majority of the population. If they didn’t get ill with the virus, they suffered financially from the effects of the disease. Quarantine orders were made, which forced people to work from home. Some companies had to shut down while others had to cut down employees.

The year has been a terrible one and there are no indications that the negative effects are about to end. This is why people have to be smart about their taxes.

There is one thing that people can take advantage of: federal give and estate tax exemption. Through the Tax Cuts and Jobs Act of 2017, this exemption has been doubled temporarily until 2025.

When calculated, the exemption permits a taxpayer to transfer up to $11.58 million that will be free of federal gift or estate tax. For married couples, the amount can be doubled. That’s $23.16 million that will not be taxed.

What taxpayers can do

For people who have properties, this is a great opportunity to present family members with some of their assets before the provision will be dropped to the previous level of $5 million by Jan. 1, 2026. For couples, the amount will be $10 million.

This was not a very popular strategy before because wealthy people fear possible clawback. The fear was not unfounded. There was indeed a risk that a part of the pre-2026 gifts will be under clawback and will be subjected to estate taxes if the exemption amount is lower at the time of the taxpayer’s death.

However, the Internal Revenue Service (IRS) clarified that this will not happen. A November 2019 set of regulations carried the clear interpretation.

Cost segregation study

Of course, there are other strategies to keep in mind aside. For taxpayers with real estate used for commercial purposes, the cost segregation study is always a practical system.

This will allow taxpayers to consider other assets as separate entities for taxing purposes. The purpose of this is to have segregated assets be depreciated much quicker than the real estate. This means that one’s tax due will be greatly reduced. As a result, cash flow will increase.

Coupled with bonus depreciation, the cost segregation study will really help people out during this economically difficult time. The bonus depreciation allows taxpayers to immediately deduct 100% of the cost of qualifying assets that were started to be accounted for between Sept. 28, 2017 and Dec. 31, 2022.

Bonus depreciation will be phased out over four years starting in 2023.

Taxpayers need to be meticulous about their filing to ensure that there will be no red flags raised from their tax return. The chance of being audited by the IRS isn’t that high. In 2019, for example, the figure was less than 0.50%.

Still, it’s better when a taxpayer is prepared for eventualities. Among those that can be considered red flags are the higher-than-normal deductions, claim for significant losses, and the claim of 100% business use of vehicle, among others.

Tax Tips: What Businesses Can Do to Alleviate COVID-19 Effects

Unless the business is Amazon, most businesses really had to suffer economically from COVID-19. The disease didn’t just hit the health of millions of people around the world, it also affected the majority of the businesses.

The worst part is, even if businesses took a financial hit this year, they still need to settle their taxes.

There are also various changes this year because of the coronavirus pandemic. Some businesses, for example, had to revise their work design so that employees can work from home.

Another change that businesses have to employ in their ledgers is the Paycheck Protection Program (PPP). This is a loans program under the CARES (Coronavirus Aid, Relief and Economic Security) Act to help small businesses pay their employees.

PPP covers payroll costs as well as benefits. Interests on rent, utilities and mortgage are also covered. There is also a provision under the CARES Act for loan forgiveness on a part of the PPP loans or all of it. But that would depend on how the loan was used.

The Internal Revenue Service has recently clarified that expenses from the forgivable loans are not tax deductible.

The best thing to do for businesses is to start reviewing their tax requirements so that they can make the best possible decision in order to optimize the benefits of the tax laws and reliefs.

Telecommuting effect

The work-from-home arrangement may seem like a good thing. It may be complicated at first, but as soon as the system is in place, it’s more convenient for the employees. It’s a different situation for management.

Business owners, on the other hand, have to keep track of where the employees are working from. If they are working from a separate state, this could prompt confusion.

It has to be noted that each state has a different set of tax regulations. If this is the case, businesses need to seek assistance immediately before it’s too late.

Cost segregation study

Businesses should really look at the benefits of cost segregation analysis. This is a strategy that allows owners to separate some of its assets from the real estate itself. This way, the assets that are normally part of the building, will be depreciated much quicker. The result is that this will become part of the deduction and cash flow will increase.

The CARES Act also has its own provision that makes the cost segregation study even more beneficial to real estate owners. Qualified improvement property also took in a new meaning. There is now any improvement to an interior section of a building characterized as non-residential property as long as said improvement is placed in service at a later date than was first placed into service.

The accelerated depreciation could mean a deduction of the entire amount of the property the year it has been acquired.

Profit-sharing benefit

With or without the CARES Act, profit sharing is always a sound advice. This is the process of using retirement plans to cut down taxable income at the end of the year.

All these could really help out businesses, which has since been suffering since the start of the pandemic.

Property Tax Abatements: The New Hampshire Circumstance

It’s been a year since the coronavirus has come to light, hence, the name COVID-19—coronavirus disease 2019. In just a few months, the world will be celebrating the anniversary of the coronavirus pandemic. Perhaps celebrating is the wrong word for it. The point is, it’s been almost a year when the entire world has experienced the disease that affected everybody.

Not a single person was immune to the ill effects of the virus. If they weren’t affected health-wise, they certainly felt its ramifications in terms of economics and relationships. A lot of people lost their jobs while some have to adjust to working fewer hours. Work had to shift to the home environment as well.

There were so many adjustments that people had to cope with without fair warning. One of those adjustments was on a person’s buying practices. Instead of going to the store and buying products—essentials or not—they just shop online. Whether they are afraid or go out or constrained by the stay-at-home rules at the start of the pandemic, it’s a fact that buying habits had to shift.

So, what happens to commercial spaces?

New Hampshire property taxation

With companies shifting to work-from-home format, it leaves a lot of unused office space. Malls are no longer densely occupied. Plus, it’s not a great time to buy properties because a lot of people are financially struggling.

The coronavirus pandemic has shone a spotlight on the need to rethink the use of commercial spaces. With that much space and a definite decrease in earnings for fiscal year 2020—for most companies that is—there was a need for rent deferrals.

In the case of New Hampshire, property taxation is based on ad valorem. This means that taxing a property will be determined through a percentage of the fair market value of the land or building (or both) that is subject to taxation. Every town is mandated to appraise the real properties within the boundaries.

In New Hampshire, taxation should be proportionate. It takes a more complex turn when one taxpayer owns multiple properties in the same town. Appraisal doesn’t just look at one property’s fair market value but also its comparison to other properties in the same community.

Before COVID-19, the calculation is determined every year by the New Hampshire Department of Revenue Administration. The determinant is called the median equalization ratios. To be more specific about it, if the median equalization ratio is 95%, this means that all real estate in a particular community will be assessed at 95% of its fair market value. For a taxpayer with multiple properties in the same town, this means that they will get an aggregate assessment of fair market value.

Abatement

Knowing that everybody is having a hard time—financially and otherwise—during the pandemic, taxpayers can make a legal plea in terms of property taxation. New Hampshire has a Revised Statutes Annotated 76:16, which provides for a brief period of time where one can challenge the property assessment after having received the year-end tax bills for the specific fiscal year.

Taking this into consideration, taxpayers can request for abatement on or before March 1, 2021. The request will be filed before selectmen and other authorized representatives of the area.

On the part of the selectmen, they should respond to the abatement request not later than July 1. If the selectmen deny the request or even if they don’t respond to it, the taxpayer can make an appeal. The said appeal should be filed before the Superior Court of the county where the property lies, or before the Board of Tax and Land Appeals. The appeal should be filed not later than Sept. 1.

The process should be properly documented. The New Hampshire Assessing Standards Board has put it as responsibilities of the selectmen and retained assessors to make the procedures accurate, credible, fair, and transparent. Those should not be n the way of the selectmen’s autonomous legal and credible responsibilities to make sure that assessments are reflective of the fair market value or that these are proportional.

It has to be noted, though, that the burden of proof to show that there was over assessment of properties lies with the taxpayer.

Valuation

This means that the taxpayer should know how to determine the fair market value. This way, they can appropriately conclude they the assessment of their tax is greater than the actual valuation.

There are three ways to identify the fair market value: income / income capitalization approach, cost approach, and sales comparison approach.

The income approach is used to determine the fair market value of income-generating properties. This means that the expected income will be the basis to look at the anticipated benefits that the property may accomplish.

The cost approach, on the other hand, will make an estimated value by checking the cost required to reproduce the property when depreciation is taken into consideration.

Lastly, the sales comparison approach puts side by side the subject property and other recent sales, including adjustments.

The New Hampshire Supreme Court doesn’t favor one particular approach in its decisions. The appropriate valuation type or approach will depend on the kind of property that is being discussed. As the burden of proof lies on the taxpayer, there should be prudence in looking at the assessment of the property.

Abatement is necessary especially as people are grappling with the economic effects of the pandemic.

Real estate investment

One of the known economic consequences of COVID-19 is the drop in real estate investment. Commercial office space recorded the sharpest drop in economic returns. Obviously, it is not the right time to invest in office spaces when people are still working from home. Unless the majority of the population have been vaccinated, it is still best to just stay at home.

Retail, too, has seen a large drop in returns and investments. A lot of stores, particularly those selling non-essentials, were forced to close since they couldn’t keep up with fiscal responsibilities. Hospitality, too, is in the same vain as people are discouraged from going on vacations.

These matters affect valuation methods as the drop in real estate investment and returns affect the fair market value.

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