In the current scenario, focus on taxes, cash flow and risk management continues to provide a prudent prism for consideration of new opportunities. With your time demands in mind, we’ve kept each topic tight and concise – maximizing focus on key issues. Wishing you continued success. Below are the top tax planning opportunities you can consider.
Qualified Business Income Deduction
Take advantage of the new 20% qualified business income deduction, which is limited to the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the unadjusted basis of depreciable property. Real estate management is eligible for the deduction.
Qualified Improvement Property
Updates may be coming that affect qualified improvement property. Eligible property is intended to qualify for both a shortened 15-year depreciation period and 100% bonus depreciation. The drafting error should be corrected in subsequent legislation.
Consider undertaking a cost segregation study to identify property eligible for enhanced depreciation deductions such as bonus depreciation and Section 179. Time is of the essence; bonus depreciation begins to wind down in 2023.
Be advised that personal property is now ineligible for 1031 like-kind exchanges, but the exchanges continue to be a useful taxminimization tool for real estate investment properties.
Business Interest Limitation
Companies can elect to fully deduct business interest to avoid the business interest expense limitation – 30% of adjusted taxable income (essentially EBITDA). As a trade-off, they must use the Alternative Depreciation System (ADS), which eliminates bonus depreciation but not Section 179. Businesses with less than $25 million of average annual gross receipts for the past three years are exempt from the limitation.
Excess Business Losses
Evaluate the impact of the limitation for excess business losses, which for passthrough entities is $250,000 ($500,000 for joint returns) annually, with excess losses carried forward as net operating losses (NOLs). Carrybacks for NOLs are eliminated and can be carried forward indefinitely but are limited to 80% of taxable income.
Watch out for the new three-year threshold for long-term capital gains associated with carried interests in partnerships, which will result in more gains being subject to the higher, shortterm rate (i.e., taxed as ordinary income).
Qualified Opportunity Zones
The new Qualified Opportunity Zone (QOZ) program offers deferrals and exclusions of capital gains tax for qualifying investments in designated lowincome communities, but time is of the essence; the program rewards investors who utilize it early.
The new law preserves many popular credits, but it eliminated the Rehabilitation Credit for buildings other than certified historic structures. If you’ve used it in the past, you need to evaluate how the loss of the credit may affect your planning.
Lifetime exemptions for the estate tax increased to an estimated $11.2 million per person, and proposed limitations on valuation discounts were withdrawn, combining to make interests in real estate pass-through entities an excellent estate planning strategy.
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