Defer Tax With A Section 1031 Exchange, But New Limits Apply This Year

March 22 2018

Normally when appreciated business assets such as real estate are sold, tax is owed on the appreciation. But there’s a way to defer this tax: a Section 1031 “like kind” exchange. However, the Tax Cuts and Jobs Act (TCJA) reduces the types of property eligible for this favorable tax treatment.

What is a like-kind exchange?

Section 1031 of the Internal Revenue Code allows you to defer gains on real or personal property used in a business or held for investment if, instead of selling it, you exchange it solely for property of a “like kind.” Thus, the tax benefit of an exchange is that you defer tax and, thereby, have use of the tax savings until you sell the replacement property.

This technique is especially flexible for real estate, because virtually any type of real estate will be considered to be of a like kind, as long as it’s business or investment property. For example, you can exchange a warehouse for an office building, or an apartment complex for a strip mall.

Deferred and reverse exchanges

Although a like-kind exchange may sound quick and easy, it’s relatively rare for two owners to simply swap properties. You’ll likely have to execute a “deferred” exchange, in which you engage a qualified intermediary (QI) for assistance.

When you sell your property (the relinquished property), the net proceeds go directly to the QI, who then uses them to buy replacement property. To qualify for tax-deferred exchange treatment, you generally must identify replacement property within 45 days after you transfer the relinquished property and complete the purchase within 180 days after the initial transfer.

An alternate approach is a “reverse” exchange. Here, an exchange accommodation titleholder (EAT) acquires title to the replacement property before you sell the relinquished property. You can defer capital gains by identifying one or more properties to exchange within 45 days after the EAT receives the replacement property and, typically, completing the transaction within 180 days.

Changes under the TCJA

There had been some concern that tax reform would include the elimination of like-kind exchanges. The good news is that the TCJA still generally allows tax-deferred like-kind exchanges of business and investment real estate.

But there’s also some bad news: For 2018 and beyond, the TCJA eliminates tax-deferred like-kind exchange treatment for exchanges of personal property. However, prior-law rules that allow like-kind exchanges of personal property still apply if one leg of an exchange was completed by December 31, 2017, but one leg remained open on that date. Keep in mind that exchanged personal property must be of the same asset or product class.

Complex rules

The rules for like-kind exchanges are complex, so these arrangements present some risks. If, say, you exchange the wrong kind of property or acquire cash or other non-like-kind property in a deal, you may still end up incurring a sizable tax hit. If you’re exploring a like-kind exchange, contact us at (818) 789 1179. We can help you ensure you’re in compliance with the rules.

© 2018


Casualty Losses Can Provide A 2017 Deduction, But Rules Tighten For 2018

March 21 2018

If you suffered damage to your home or personal property last year, you may be able to deduct these “casualty” losses on your 2017 federal income tax return. For 2018 through 2025, however, the Tax Cuts and Jobs Act suspends this deduction except for losses due to an event officially declared a disaster by the President.

What is a casualty? It’s a sudden, unexpected or unusual event, such as a natural disaster (hurricane, tornado, flood, earthquake, etc.), fire, accident, theft or vandalism. A casualty loss doesn’t include losses from normal wear and tear or progressive deterioration from age or termite damage.

Here are some things you should know about deducting casualty losses on your 2017 return:

When to deduct. Generally, you must deduct a casualty loss on your return for the year it occurred. However, if you have a loss from a federally declared disaster area, you may have the option to deduct the loss on an amended return for the immediately preceding tax year.

Amount of loss. Your loss is generally the lesser of 1) your adjusted basis in the property before the casualty (typically, the amount you paid for it), or 2) the decrease in fair market value of the property as a result of the casualty. This amount must be reduced by any insurance or other reimbursement you received or expect to receive. (If the property was insured, you must have filed a timely claim for reimbursement of your loss.)

$100 rule. After you’ve figured your casualty loss on personal-use property, you must reduce that loss by $100. This reduction applies to each casualty loss event during the year. It doesn’t matter how many pieces of property are involved in an event.

10% rule. You must reduce the total of all your casualty losses on personal-use property for the year by 10% of your adjusted gross income (AGI). In other words, you can deduct these losses only to the extent they exceed 10% of your AGI.

Note that special relief has been provided to certain victims of Hurricanes Harvey, Irma and Maria and California wildfires that affects some of these rules. For details on this relief or other questions about casualty losses, please contact us at (818) 789 1179.

© 2018


Building A Sales Prospect Pipeline For Your Business

March 20 2018

An old business adage says, “Sales is a numbers game.” In other words, the more potential buyers you face, the better your chances of making sales. This isn’t completely true, of course; success also depends on execution.

Nonetheless, when a company builds a pipeline to funnel prospects to its sales team, it will increase the opportunities for these staff members to strike and close deals. Here are some ways to undertake construction.

Do your research

First, establish a profile of the organizations that are the best candidates for your products or services. Criteria should include:

• Location,
• Number of employees,
• Sales volume,
• Industry, and

• Specific needs.

Next, think lead generation. The two best sources for generating leads are companywide marketing activities and individual salesperson initiatives, both of which create name recognition and educate prospects on the benefits of your products or services. Although you may find one method works better for you than the other, try not to be too dependent on either.

3 ways to reach out

Once you identify prospects, your sales team has got to reach out. Here are three ways to consider:

1. Cold calls. Every salesperson has done traditional cold calling — assembling a list of prospects that fit into your established customer profile and then calling or visiting them. Cold calling requires many attempts, and the percentage of interested parties tends to be small. Encourage your sales staff to personalize their message to each prospect so the calls don’t have a “canned” feel.

2. Researched cold calling. Select a subset of the most desirable candidates from your prospect list and do deeper research into these organizations to discover some need that your product or service would satisfy. Work with your sales team to write customized letters to the appropriate decision makers, highlighting your company’s skills in meeting their needs. If possible, quote an existing customer and quantify the benefits. The letter should come from the sales rep and state that he or she will be following up with a phone call. Often, after sending such a letter, getting in the door is a little easier.

3. Referrals. Research potential referral sources just as you study up on sales prospects themselves. Your goal is to develop and maintain a referral network of satisfied customers and other professionals who interact with your prospects. When you get referrals, be sure to send thank-you notes to the sources and keep them informed of your progress.

Go with the flow

Does your business regularly find itself hitting dry spells in which sales prospects seem to evaporate into thin air? If so, it may be because you lack a solid pipeline to keep the identities of those potential buyers flowing in. Contact us at (818) 789 1179 for further ideas and information.

© 2018


Your Auditor Sees Red, Do You?

March 19 2018

For more information contact us at (818) 789 1179


How Materiality Is Established In An Audit Or A Review

March 19 2018

When accountants conduct an audit or review, they can’t test every transaction. Instead, they set a “materiality” threshold. This benchmark is used to obtain reasonable assurance in an audit — or limited assurance in a review — of detecting misstatements that could be large enough, individually or in the aggregate, to be material to the financial statements.

What is materiality?

Unfortunately, there’s no specific definition of materiality under U.S. Generally Accepted Accounting Principles (GAAP). But the Conceptual Framework for Financial Reporting under International Financial Reporting Standards (IFRS) says:

Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity. In other words, materiality is an entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report.

Several definitions of materiality exist. But the universal premise is that a financial misstatement is material if it could influence the decisions of financial statement users.

How do auditors determine materiality?

To establish a level of materiality, auditors rely on rules of thumb and professional judgment. They also consider the amount and type of misstatement.

The materiality threshold is typically stated as a general percentage of a specific financial statement line item. For example, let’s suppose Joe Auditor sets a materiality threshold of 1% of revenue for ABC Company. For 2017, the company reports annual revenue of $190 million, so its materiality threshold is $1.9 million.

During fieldwork, Joe unearths a clerical error that caused ABC to understate revenue by $1 million. Is this error material? Although a $1 million error may seem significant, it’s less than 1% of the company’s annual revenue. So, it’s immaterial to ABC’s overall financial performance.

On the other hand, if the company had overstated its revenue by $1 million due to a fraud scheme involving a senior executive, Joe may deem the misstatement as material because it involved a member of the senior leadership team and potential criminal activity.

Regardless of whether a misstatement of revenue is considered material, it may trigger a material misstatement in accounts receivable. In other words, the balances recorded as due from customers may be materially different from the actual amounts due.

It’s all relative

As these examples demonstrate, materiality is a relative concept. In practice, auditors must evaluate a material misstatement on a standalone basis and within context of a company’s financial statements overall. What constitutes a material misstatement for one company may not reach the materiality threshold for another. Materiality is a matter of professional judgment and your audit team’s experience. Contact us at (818) 789 1179 for more information on what’s considered material for your business.

© 2018


Make Sure Repairs To Tangible Property Were Actually Repairs Before You Deduct The Cost

March 15 2018

Repairs to tangible property, such as buildings, machinery, equipment or vehicles, can provide businesses a valuable current tax deduction — as long as the so-called repairs weren’t actually “improvements.” The costs of incidental repairs and maintenance can be immediately expensed and deducted on the current year’s income tax return. But costs incurred to improve tangible property must be depreciated over a period of years.

So the size of your 2017 deduction depends on whether the expense was a repair or an improvement.

Betterment, restoration or adaptation
In general, a cost that results in an improvement to a building structure or any of its building systems (for example, the plumbing or electrical system) or to other tangible property must be depreciated. An improvement occurs if there was a betterment, restoration or adaptation of the unit of property.

Under the “betterment test,” you generally must depreciate amounts paid for work that is reasonably expected to materially increase the productivity, efficiency, strength, quality or output of a unit of property or that is a material addition to a unit of property.

Under the “restoration test,” you generally must depreciate amounts paid to replace a part (or combination of parts) that is a major component or a significant portion of the physical structure of a unit of property.

Under the “adaptation test,” you generally must depreciate amounts paid to adapt a unit of property to a new or different use — one that isn’t consistent with your ordinary use of the unit of property at the time you originally placed it in service.

Seeking safety

Distinguishing between repairs and improvements can be difficult, but a couple of IRS safe harbors can help:

1. Routine maintenance safe harbor. Recurring activities dedicated to keeping property in efficient operating condition can be expensed. These are activities that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.

Amounts incurred for activities outside the safe harbor don’t necessarily have to be depreciated, though. These amounts are subject to analysis under the general rules for improvements.

2. Small business safe harbor. For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. A qualified small business is generally one with gross receipts of $10 million or less.

There is also a de minimis safe harbor as well as an exemption for materials and supplies up to a certain threshold. To learn more about these safe harbors and exemptions and other ways to maximize your tangible property deductions, contact us at (818) 789 1179.

© 2018


7 Ways To Prepare Your Business For Sale

March 14 2018

For some business owners, succession planning is a complex and delicate matter involving family members and a long, gradual transition out of the company. Others simply sell the business and move on. There are many variations in between, of course, but if you’re leaning toward a business sale, here are seven ways to prepare:

1. Develop or renew your business plan. Identify the challenges and opportunities of your company and explain how and why it’s ready for a sale. Address what distinguishes your business from the competition, and include a viable strategy that speaks to sustainable growth.

2. Ensure you have a solid management team. You should have a management team in place that’s, essentially, a redundancy of you. Your leaders should have the vision and know-how to keep the company moving forward without disruption during and after a sale.

3. Upgrade your technology. Buyers will look much more favorably on a business with up-to-date, reliable and cost-effective IT systems. This may mean investing in upgrades that make your company a “plug and play” proposition for a new owner.

4. Estimate the true value of your business. Obtaining a realistic, carefully calculated business appraisal will lessen the likelihood that you’ll leave money on the table. A professional valuator can calculate a defensible, marketable value estimate.

5. Optimize balance sheet structure. Value can be added by removing nonoperating assets that aren’t part of normal operations, minimizing inventory levels, and evaluating the condition of capital equipment and debt-financing levels.

6. Minimize tax liability. Seek tax advice early in the sale process — before you make any major changes or investments. Recent tax law changes may significantly affect a business owner’s tax position.

7. Assemble all applicable paperwork. Gather and update all account statements and agreements such as contracts, leases, insurance policies, customer/supplier lists and tax filings. Prospective buyers will request these documents as part of their due diligence.

Succession planning should play a role in every business owner’s long-term goals. Selling the business may be the simplest option, though there are many other ways to transition ownership. Please contact our firm at (818) 789 1179 for further ideas and information.

© 2018


Size Of Charitable Deductions Depends On Many Factors

March 13 2018

Whether you’re claiming charitable deductions on your 2017 return or planning your donations for 2018, be sure you know how much you’re allowed to deduct. Your deduction depends on more than just the actual amount you donate.

Type of gift

One of the biggest factors affecting your deduction is what you give:

Cash. You may deduct 100% gifts made by check, credit card or payroll deduction.

Ordinary-income property. For stocks and bonds held one year or less, inventory, and property subject to depreciation recapture, you generally may deduct only the lesser of fair market value or your tax basis.

Long-term capital gains property. You may deduct the current fair market value of appreciated stocks and bonds held for more than one year.

Tangible personal property. Your deduction depends on the situation:

  • If the property isn’t related to the charity’s tax-exempt function (such as a painting donated for a charity auction), your deduction is limited to your basis.
  • If the property is related to the charity’s tax-exempt function (such as a painting donated to a museum for its collection), you can deduct the fair market value.

Vehicle. Unless the vehicle is being used by the charity, you generally may deduct only the amount the charity receives when it sells the vehicle.

Use of property. Examples include use of a vacation home and a loan of artwork. Generally, you receive no deduction because it isn’t considered a completed gift.

Services. You may deduct only your out-of-pocket expenses, not the fair market value of your services. You can deduct 14 cents per charitable mile driven.

Other factors
First, you’ll benefit from the charitable deduction only if you itemize deductions rather than claim the standard deduction. Also, your annual charitable donation deductions may be reduced if they exceed certain income-based limits.

In addition, your deduction generally must be reduced by the value of any benefit received from the charity. Finally, various substantiation requirements apply, and the charity must be eligible to receive tax-deductible contributions.

2018 planning

While December’s Tax Cuts and Jobs Act (TCJA) preserves the charitable deduction, it temporarily makes itemizing less attractive for many taxpayers, reducing the tax benefits of charitable giving for them.

Itemizing saves tax only if itemized deductions exceed the standard deduction. For 2018 through 2025, the TCJA nearly doubles the standard deduction ? plus, it limits or eliminates some common itemized deductions. As a result, you may no longer have enough itemized deductions to exceed the standard deduction, in which case your charitable donations won’t save you tax.

You might be able to preserve your charitable deduction by “bunching” donations into alternating years, so that you’ll exceed the standard deduction and can claim a charitable deduction (and other itemized deductions) every other year.

Let us know if you have questions about how much you can deduct on your 2017 return or what your charitable giving strategy should be going forward, in light of the TCJA. Contact us at (818) 789 1179

© 2018


Tes’ Take: Tax Cuts & Jobs Act – Unintended Consequences

March 12 2018

Tes Macaraya is a partner and head of tax at Martini Iosue & Akpovi

As we continue to review and analyze the new tax law, we have noticed unintended consequences. One of these is in the area of depreciation. Lawmakers meant to consolidate the three categories of renovation – qualified leasehold improvement, qualified restaurant property and qualified retail improvement property into one category called qualified improvement property. However, the final bill inadvertently omits the provision which would have given the qualified improvement property a 15 year recovery period. The result is this type of property has a 39-year recovery period and is not eligible for bonus depreciation or Section 179 expense.

Follow this link for an interesting read on how this affects the restaurant and retail businesses.

Will this be part of the Technical Correction bill that is being worked on right now?

For more information please contact me on (818) 789 1179 or email me at


Feeling Lucky? How To Find A Pot Of Gold In Your Financials

March 12 2018

Every business experiences occasional cash shortages. When this happens, owners often assume they should go out and sell more. But this strategy can sometimes compound money troubles over the short run. Why? The answer lies in a concept known as the “cash gap.” Understanding this concept can help your business generate extra cash to meet working capital needs. Here’s how.

Focus on the balance sheet

The cash gap is a function of the timing difference between 1) when companies order materials and pay suppliers, and 2) when they receive payment from their customers. This difference can lead to cash shortages if the company doesn’t have extra savings, doesn’t qualify for additional bank financing or doesn’t want to draw on a line of credit. It’s also important to keep in mind that cash gaps funded by bank financing incur interest costs.

Boosting sales generally isn’t the solution, because, when cash is tight, selling more will often widen the cash gap. That’s because the company will need to front the incremental cost of sales while new orders are fulfilled, invoices are sent and customers remit payment. This concept explains why start-ups and high growth companies tend to experience cash shortages.

Finding hidden treasures

If the company finances its cash gap, shaving a day or two off the gap could save thousands of dollars in interest expense over the course of a year. Minimizing the cash gap requires you to focus on its underlying variables:

Inventory. There are numerous ways to minimize your investment in inventory. For instance, you might search the warehouse for slow-moving items and then either return stale items for credit, trade them with another supplier or competitor, or sell the items for scrap.

You can also revise your company’s purchasing policies. For example, some materials and parts suppliers may agree to discounted bill-and-ship or consignment arrangements in exchange for exclusive or long-term contracts.

Receivables. The faster a company can get money in the door, the smaller its cash gap will be. Your business can encourage faster payments from customers by sending out past-due reminder letters and following up with phone calls. Also evaluate invoicing procedures to minimize the days in receivables. Poor communication among billing, sales and production staff can cause invoicing delays.

Payables. Think of trade payables as a form of interest-free financing. But, beware, there are limits to how far a company can extend its payables. Slow-paying businesses may forgo early-bird discounts or receive less favorable treatment from suppliers, such as slower delivery, higher rates or cash-on-delivery terms. Delayed payments can also harm a company’s credit rating, as well as its reputation among its pool of eligible suppliers.

Put it to work for you

The cash gap can be a helpful management tool, because it pinpoints hidden treasures in your balance sheet. Put simply, companies with shorter cash gaps tend to experience fewer cash shortages and rely less on bank financing. Contact us at (818) 789 1179 for help measuring your cash gap and using it to manage working capital more efficiently.

© 2018


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