Tag: new tax law

The New Tax Law’s Impact on Law Firms

New tax rules that apply to law firms are complicated

Lakeland Bank Breakfast presentation
Breakfast with Lakeland Bank: The Impact of the Tax Cuts and Jobs Act on Law Firms. Neil Gordon and Ottilia Stura from Lakeland Bank, with Maria Rollins and Jerry Shanker

KRS partner Jerry Shanker and I discussed the impact of the Tax Cuts and Jobs Act on law firms at a Breakfast with Lakeland Bank on June 12.

From working with our law firm clients and associates, we realized that many firms are still scrambling to come to grips with the tax code changes and develop tax planning strategies around them. The attendees at our Lakeland Bank talk had similar concerns.

While many businesses stand to benefit from the tax code overhaul, when it comes to the Act’s impact on law firms and their partners and associates – it can get complicated.

These key provisions of the Act affect law firms and their members:

  • Reduction in individual and corporate income tax rates
  • $10,000 annual limit on deduction of state and local income taxes (SALT). This includes deduction for real estate taxes
  • No deduction for miscellaneous itemized deductions Increased standard deductions
  • Introduction of new Code Section 199A, which provides for a tax deduction of 20% of qualified business income, subject to limitations and exclusions

Free Guide for Law Firms

We’ve summarized several other key changes in the tax code that impact law firms in a downloadable guide, “The Tax Cuts and Jobs Act of 2017 – Considerations for Law Firms.”

TCJA Considerations for Attorneys
Law firms need to develop new tax planning strategies so they don’t pay more tax than necessary under the new tax laws.

If you are a managing partner or executive at your law firm, understanding the factors covered in the Guide will help you and your firm determine the best strategy for optimizing your firm’s and your partners’ tax positions. By downloading this guide, you will learn:

  • How the choice of business entity – C-Corp, S-Corp, or pass-throughs – is impacted by the updated code
  • New rules for specified service businesses
  • Changes that impact entertainment and fringe benefit expenses
  • Code Section 179 changes that impact expense deductions
  • New limitations on business interest and excess business loss
  • Key changes to Section 199A deductions that impact individual W-2 wage earners.

Download the Guide

We’ve got your back

At KRS, we’re working to help our clients understand and navigate the new tax law changes – and those affecting law firms are particularly complicated. Because each law firm’s and individuals’ taxable income and deductions are unique, each individual set of facts and circumstances must be reviewed.  We’re happy to help you with yours. Contact me at [email protected] or 201.655.7411 for an initial consultation.

The Importance of a ‘Paycheck Checkup’

The Importance of a Paycheck CheckupThe Internal Revenue Service is urging taxpayers to do a “paycheck checkup.”

To help understand the implications of the Tax Cuts and Jobs Act, the IRS unveiled several new features to navigate the issues affecting withholding in their paychecks. The effort includes a new series of plain language Tax Tips which detail the importance of reviewing withholding as soon as possible.

The new tax law could affect how much tax you should have your employer withhold from your paycheck. To help with this, taxpayers can use the IRS’ Withholding Calculator. The Withholding Calculator can help prevent you from having too little or too much tax withheld from their paycheck. Having too little tax withheld can mean an unexpected tax bill or potentially a penalty at tax time next year. With the average refund topping $2,800, some taxpayers might prefer less tax withheld up front and receive more in their paychecks.

Individuals can use the Withholding Calculator to estimate their 2018 income tax. The Withholding Calculator compares that estimate to your current tax withholding and can help you decide if you need to change your withholding with your employer.  When using the calculator, it’s helpful to have a completed 2017 tax return available.

Those who need to adjust their withholding must submit a new Form W-4 to their employer. If you need to adjust your withholding, doing so as quickly as possible means there’s more time for tax withholding to take place evenly during the rest of the year. If you wait until later in the year, it could have a bigger impact on each paycheck and your 2018 return.

The Tax Cuts and Jobs Act increased the standard deduction, removed personal exemptions, increased the child tax credit, limited or discontinued certain deductions, and changed the tax rates and brackets. Those who should especially check their withholding are:

  • Two-income families
  • People working two or more jobs or who only work for part of the year
  • People with children who claim credits such as the Child Tax Credit
  • People with older dependents, including children age 17 or older
  • People who itemized deductions in 2017
  • People with high incomes and more complex tax returns
  • People with large tax refunds or large tax bills for 2017

We’ve got your back

At KRS, we’re working to help our clients understand and navigate these tax law changes. We strongly encourage all taxpayers to do a paycheck checkup to ensure they’re having the right amount of tax withheld for their unique personal situation. Contact managing partner Maria Rollins at [email protected] or 201.655.7411 for a complimentary initial consultation.

The New Tax Law and Business Interest Expense

The New Tax Law and Business Interest Expense

The tax legislation known as the Tax Cuts and Jobs Act (the Act) places a new limit on the amount of interest expense businesses can deduct on their tax returns. This new limit will punish over-leveraged companies and discourage companies from becoming too leveraged.

Starting in 2018, businesses can only deduct interest based upon a formula contained within the act.

Business Interest Deduction

Under the new tax law, a business’s net interest expense deduction is limited to 30 percent of EBITDA (Earnings before Income Taxes, Depreciation, and Amortization). Beginning in 2022 the net interest expense deduction limitation is 30 percent of EBIT (Earnings before Income Taxes).

Businesses with average annual gross receipts of $25 million or less for the prior three years are exempt from this provision. The amount of business interest not allowed as a deduction for any taxable year is treated as business interest paid or accrued in the succeeding taxable year. Business interest may be carried forward indefinitely, subject to certain restrictions.

Real Estate Exception

Real estate is both illiquid and capital intensive, making leverage and the ability to deduct interest important to the industry.  A real property trade or business can elect out of the net interest expense deduction limitations if they use the Alternative Depreciation System (ADS) to depreciate business-related real property.

Taxpayers electing to use the real estate exception to the interest limit must depreciate real property under longer recovery periods prescribed by ADS. Those recovery periods are 40 years for nonresidential property, 30 years for residential rental property, and 20 years for qualified interior improvements. This is compared to recovery periods of 39 years for nonresidential property, 27.5 years for residential rental property, and 15 years for qualified interior improvements.

Application to Partnerships

Most real estate investment vehicles are structured as pass-through entities. The limitations on current interest expense is applied at the operating entity level, and any allowable deduction is included in the non-separately stated income or loss on each partner’s Form K-1. However, any disallowed interest will be carried forward at the partner level.

Aggregation Rules

In groups of related entities, it appears aggregation rules will apply in determining whether the $25 million gross receipts threshold has been exceeded. Additional guidance is anticipated on calculations of the limitation as well as explanations as to how this section will interact with other sections of the Internal Revenue Code.

We’ve Got Your Back

Rather than guessing at how the business interest rules apply to your situation, why not let the experts at KRS CPAs help? Check out the New Tax Law Explained! For Real Estate Investors page and then contact partner Simon Filip at [email protected] or 201.655.7411 for a complimentary initial consultation.

The Tax Cuts and Jobs Act (TCJA) and Code Section 1031

The Tax Cuts and Jobs Act (TCJA) and Code Section 1031The Tax Cut and Jobs Act (TCJA) was signed into law on December 22, 2017, and took effect on January 1, 2018. Included in the political promise of tax simplicity and historically large tax cuts to middle-income households were amendments to existing tax code, including Code Section 1031. Investment property owners will continue to be able to defer capital gains taxes using 1031 tax-deferred exchanges, which have been in the tax code since 1921.

What changes under the new tax law?

The tax law repealed 1031 exchanges for all other types of property that are not real property. This means 1031 exchanges of personal property, assets that can no longer be exchanged including collectibles, franchise licenses, and patents, aircraft, machinery, boats, livestock, and artwork.

What didn’t change for 1031 exchanges?

Real estate exchanges are subject to the same rules and requirements as prior law. Taxpayers must still identify their replacement within 45 days and exchange within 180 days. All real estate in the United States, improved and unimproved, also remains like-kind to all other domestic real estate.  Foreign real estate continues to be treated as not like-kind to real estate.

Are there timing considerations?

Pursuant to the transition rules, a personal property exchange to be completed in 2018 would be afforded tax deferral under the prior law if the relinquished property was sold or the replacement property was acquired by the taxpayer prior to December 31, 2017.

What about cost segregation?

A cost segregation study identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income taxes. Taxpayers entering into a 1031 exchange who are contemplating a cost segregation study, need to consider the disallowance of personal property as like-kind to real property. Reclassifying asses to shorter recovery periods will increase annual depreciation deductions, but can potentially cause gain recognition from the exchange.

We’ve got your back

The new tax code is complex and every taxpayer’s situation is different, especially when real estate is involved – so don’t go it alone! Check out the New Tax Law Explained! for Individuals and then contact me at [email protected] or 201.655.7411 to discuss tax planning and your real estate investments under the TCJA.