Brian chats with CPA/financial advisor Kelly Allen of Level Advisors to give YOU some practical tools and advice to protect yourself during these uncertain times. In this podcast you'll hear fundamental financial principles, the governmental changes that have occurred, and be given practical tools and action items you can take with you to protect your livelihood, and how to get creative!
A tax incentive to incentivize companies that invest in innovation domestically.
It applies to costs incurred in the innovation of products, services and processes
The credit mechanically operates like an enhanced deduction against your tax bill
Thirty-seven states adopt and apply variations of the federal provisions
Eliminating uncertainties within business processes and manufacturing
Process re-design and re-engineering of existing processes across all business functions (sales, accounting, operations, product development & more)
Enhancing and re-gearing tools and components already used in the business
Technological advances and breakthroughs – even if failures
Business activities that rise to the level of “experimentation” and the creation of “alternatives”
Cost-Benefit Analysis- prior to engaging, we would perform a cost-benefit analysis to quantify a reasonable range of potential tax benefits that may be realized
Formal Proposal- If it makes sense, we will prepare a formal engagement letter for your consideration and execution
Initial Interview & Walkthrough- We would then conduct and plan a site visit designed to a) walk through your plant b) identify those key activities that would qualify, c) identify key stakeholders in charge of those activities and d) develop a co-plan with you on how to capture and quantify the associated expenses with respect to those activities.
Cost Center & Data Collection- Working with your finance team, and the above stakeholders, we will refine the data collection process, iteratively, in order to create a cogent analysis that evaluates any missed opportunities. In addition, we review (on every assignment) the applicable provisions, case law changes and developments in order to ensure that we have captured as much of the qualified expenses as reasonable and practical.
Report- We will then craft a report designed to address those audit risk areas and procedures that would be employed by the IRS under the service’s Audit Technique Guide: Credit for Increasing Researching Activities
Renew- Each year thereafter we will renew, update and recalculate those credits to be calculated taking into consideration changes in case law and authoritative pronouncements or developments.
The federal R&D Tax Credit was made permanent with the Protecting Americans from the Tax Hikes (“PATH”) Act of 2015. PATH also allowed businesses with less than $50MM in gross receipts to offset the R&D Credit against AMT.
The Tax Cuts and Jobs Act of 2017, P.L. 115-97 modified the tax code which increased the benefits of the R&D Tax Credit by increasing the effective reduced rate (from 65% to 79%), among other increased benefits.
Taxpayers with under $5MM of gross receipts can use the R&D Tax Credit to offset payroll taxes.
Western states which have an R&D Credit program include California, Arizona and Colorado, among many other states.
We are not a prepackaged provider. Each study we perform is completely unique to your situation. You will have a knowledgeable professional working with you throughout the process.
Many times, taxpayers are reticent to conduct such exercises for fear that R&D studies increase their respective audit risk. Our first goal is to evaluate the cost benefits of such study before even beginning the exercise. Our second goal will be to prepare a defensible calculation based upon sound principles. It is those taxpayers that unilaterally claim credits that are unfounded, poorly documented and not calculated correctly that should be concerned; not those taxpayers that undertake the legitimate efforts to properly document the scope of their work.
Contact us and ask for an initial assessment. We look forward to working with you!
“…none of us have gained an appreciation for the vast complexities that face this developing industry. How can we? It’s a developing market!”
THC is most certainly challenging our society: from commerce to ethics to health concerns or even health benefits. All we know is that the world of commerce is up to its neck in trying to keep up and no one can seem to keep pace with these forward-thinking and ambitiously brave entrepreneurs; no one. Anyone who says otherwise, in our book, is likely suffering from the Dunning-Kruger effect (see URL below). In other words, none of us have gained an appreciation for the vast complexities that face this developing industry. How can we? It’s a developing market!
Ethically, we see it not much more different than the Age of Prohibition nearing its life expectancy. Consider for instance that the regime for Qualified Opportunity Funds (a new and highly-favorable tax provision encouraging reinvestment) excludes certain “sin businesses” within their provisions but exclude THC-related businesses! A tax provision that encourages reinvestment in eligible communities that excludes massage parlors and liquor stores but not a THC business? Consider, several years ago, that the Service implemented relaxed penalties for companies conducting Federally illegal activities that could not make their tax deposits via Electronic Federal Tax Payments System (“EFTPS”).
As of now, the focus is way too much on “IRC 280E” and those designed machinations created to otherwise legitimize “illegal expenditures” through re-classification and complex tiered entity structuring coupled with the avoidance of entity attribution rules. Yes those are important tax strategies. But what happens when the contractor who thinks everything is a nail has his hammer taken away (e.g. when the THC industry is legalized)? What will the tax accountants talk about then?
We love the industry because it is one of a few that truly requires a multi-disciplinary approach. An industry that touches just about everything: Health Sciences, Manufacturing, Research & Design, Logistics & Transportation, Marketing & Branding, Real Estate, Retail and Politics. To serve only “cannabis” is to fail in seeing the bigger picture. Our clients, in this space, need advisors that see the inter-relationship between the wealth being accumulated and invested into separately owned and controlled businesses and to find an unlock the tax benefits in each unique area as transactions are planned and executed. While our expertise is in tax, we take a global approach in planning by seeing the “bigger picture” amidst keeping our eye on the “devil in the details” and, further, and sometimes even more importantly bringing strategic partners to the table to solve problems outside the realm of tax.
KELLY ALLEN, CPA, CVA, ABAR, CFF, MAFF, MST
What are they?
Qualified Opportunity Funds (“QOFs”) are investment vehicles designed to encourage taxpayers that are sitting on appreciated assets to reinvest those gains in economically challenged areas. Investors receive favorable deferral and exemptions from tax subject to a variety of rules. The rules are designed to encourage long-term investment in improvements within the targeted communities.
Although there are some similarities between QOFs and like kind exchanges, Monetized Exchanges Trusts ("MET") and a variety of other tax tools, there are some stark differences between QOFs. It is important to note that not one tax strategy should be thought to the exclusion of all others. Sometimes, a combination of one or more strategies are the best result for a taxpayer.
Where are they?
There are more than 8,000 communities that have been designated. The communities have been selected by population census tracts and are more thoroughly itemized on the Community Development Financial Institutions Fund website.
When did they come about?
QOFs were part of the Tax Cuts and Jobs Act of 2017. Although passed on December 22, 2017, they have only recently begun to attract media attention because proposed regulations were only issued as recently as mid October, 2018. Until the Secretary of the Treasurer provided a little more clarity, taxpayers lacked sufficient clarity to feel “comfortable” moving forward.
How do they work?
QOFs give taxpayers partial tax forgiveness on eligible gains. Such forgiveness ranges from 10% to as much as 15% of the tax that would otherwise have been paid. The remaining 85% of tax can be deferred until December 31, 2026.
One exceptionally impressive benefit of QOFs is that taxpayers are strongly incentivized to maintain a long-term hold and sell strategy; by doing so, taxpayers can exclude post 2026 gains if the hold the investment long enough.
The statutes and proposed regulations can be summarized as to require (7) criterion. They are: 1) the right investment vehicle, 2) the right investment proceeds, 3) the right reinvestment, 4) the right location, 5) right types of assets, 6) the right type of use and 7) the right holding periods.
They are statutorily balanced with an eye on both public policy in order to insure the funds are used in the intended manner while minimizing bureaucratic red-tape. Additionally, if properly invested in, their inherent nature permits some applicable elements of risk diversification.
Proactive advisors will seek to insure that operating agreements permit flexibility in transferability amongst the designated areas permitting investors some component of marketability with respect to long-term held investments.
Who can use them and why?
Think outside the box! It is not just a simple tax provision. The following is only a handful of some of the more creative uses for which this vehicle should be considered:
1. Businesses that intend to develop exit strategies over the next 5 to 10 years
2. High wealth individuals receiving substantial qualified dividends
3. Businesses and shareholders wanting to revisit age-old tax problems that were not otherwise solvable by the historic tools that were available
4. Cannabis industries, or other expanding businesses, looking to reinvest their gains into other business units
5. High-growth businesses that wish to setup complex divestiture strategies
6. Research & Development companies intending to attract capital
7. Real estate developers- at virtually almost every phase of their real estate projects
8. Manufacturers that might have been contemplating outsourcing to foreign jurisdictions
9. Land use and development projects using public private partnerships
10. Pre-existing or new mobile home park landlords seeking to improve their facilities
11. Sophisticated merger and acquisition advisors seeking to bridge the gap in order to strike a deal
12. Complex tax advisors wishing to layer on additional tax-favored strategies
13. Baby boomers that want to exit their positions tax efficiently and invest in America
An Example
Consider the following hypothetic. A taxpayer has an appreciated asset worth $6MM which they bought for $1MM. Thus, they intend to sell it for a gain of $5MM. It is assumed that all proceeds will be invested at a 5% compounded annual growth rate.
Investor A pays $1MM of taxes on his $5MM capital gain; leaving him with a net $4 million to invest. After 10 years, Investor A will have approximately $5.8MM.
Investor B executes a 1031 Exchange – The entire $6MM is reinvested into a like kind exchange property. After 10 years, Investor B will have $8.3MM of after tax cash.
Investor C uses a QOF- $1MM of Investor C's capital is returned to him tax free. $5MM of the pre-tax gain is then invested into a QOF. Investor C meets all the requisite requirements of the QOF. He escapes $150,000 in tax. He defers $850,000 of tax over (7) years. He avoids tax on the appreciation subsequent to December 31, 2026. After 10 years, Investor C will have $9.2MM cash.
Compare & Contrast of 1031
Aside from the increased amount of cash available to Investor C, there are other notably favorable differences of using a QOF over a 1031 exchange. For example, Investor C 1) gets to enjoy the return of his million dollars without tax, 2) is not obligated to increase the amount they are at economic risk by buying a “bigger and more expensive property”, 3) escapes all subsequent tax on post 2026 appreciation and 4) (unlike Investor A) the QOF investor is not restricted to the sale and acquisition of only real property (an unfavorable change to the 1031 exchanges under the TCJA). Other advantageous and disadvantageous exist in contrast 1031 exchanges as well as other more exotic vehicles like MET’s and Private Annuity Trusts (PATS) or Deferred Trust Sales (“DST’s”).
What’s Next
Additional hearings are scheduled for January 10, 2019 whereby public input will be received and likely incorporated into the final regulations. There will be four teams. Those that dive in head first (to their dismay); those that dismiss these vehicles as a “scheme”; those that attempt to abuse the intended purpose of the statues and those that are responsible. Over time these vehicles will gain momentum, awareness, acceptance and be revised to dissuade abuse.
Why are we the experts?
This is a topic area of particular passion to our firm. We believe in the greater good and have invested substantial amounts of time both academically and socially to remain "in the know" and be on the forefront of tax developments but we believe this one is of major consequence.
We have been specially selected by the AICPA as subject matter experts on this topic. Specifically, we are slated to teach on the topic in June 2018 at the national AICPA ENGAGE conference and are in the process of writing a book on this topic which explores the interworking of this provision with other pre-existing aspects of the tax code. We have built and continue to build alliances with qualified professionals within the legal, political, academic, investment and regulatory environments. Our strategies employ a balanced interpretation of the statutory language and intended public policy. Further, we are advisors aimed at evaluating the entirety of economic decisions; not just tax.
KELLY ALLEN, CPA, CVA, ABAR, CFF, MAFF, MST
