Congratulations On Your Promotions Joe, Chester and Brett!

August 15 2017

We are excited to announce that several of our team members have recently been promoted!

Pictured from left to right – Brett Scharg has been promoted to Supervisor, Chester Ventura and Joe Fernandez are now Senior Managers.

Congratulations Joe, Chester and Brett!

For more information about working at Martini Iosue and Akpovi, LLP, please contact us by phone at (818) 789-1179

 

Leasing Property To Your Business Might Trigger Undesirable Tax Consequences

August 14 2017

If you own property and a business, there’s an obvious temptation to lease that property to the business. Such an arrangement can make sense from many perspectives.

You’re no doubt familiar with the property and its advantages to your company; the deal could be carried out quickly; and the money changing hands would stay between you and your company. And if you participate in other loss-producing passive activities, you may be hoping to offset the net rental income with those losses.

There’s just one big problem: You’d risk triggering the “self-rental rule” and not achieving your desired tax outcome.

Self-rental rule in a nutshell

Internal Revenue Code (IRC) Section 469 generally prohibits taxpayers from deducting passive activity losses (PALs).

It typically applies to “flow-through” income and losses from partnerships, limited liability companies (if they’ve elected to be treated as a partnership for tax purposes), S corporations and trusts.

The rules define “passive activity” as any trade or business in which the taxpayer doesn’t materially participate. Rental real estate activities generally are considered passive activities regardless of whether the taxpayer materially participates. (There’s an exception if the taxpayer qualifies as a real estate professional.)

A PAL is the amount by which the taxpayer’s aggregate losses from all passive activities for the year exceed the aggregate income from all of those activities. A PAL can usually be used only to offset passive income, though there are a few exceptions.

The self-rental rule in IRC Sec. 469 applies when you rent property to a business in which you or your spouse materially participates. Under the rule, any net rental losses are still considered passive, but the net rental income is deemed nonpassive. That means your net rental income can’t be offset by other passive losses, yet net rental losses generally can offset only other passive income. This could have negative tax consequences if you’re hoping to offset your self-rental net income with passive losses from other activities.

The power of grouping

You may be able to avoid the negative tax consequences of IRC Sec. 469’s self-rental rule by “grouping.” The regulations allow you to group your separately owned rental building with your business to treat them as one activity for purposes of the passive loss rules if they constitute an “appropriate economic unit.”
The regulations determine this based on factors such as common ownership and control, types of activities and location. As long as you materially participate in the business — and the business isn’t a C corporation — the rental activity won’t be treated as passive for the purposes of income or losses.
To take advantage of this option, you must own both the rental property and the business. You could also use grouping if the rental activity is “insubstantial” (a term undefined by the regulations) in relation to the business activity.
Finding the best arrangement
Renting property to a business in which you materially participate can seem like a great idea. But doing so can turn out to be a lose-lose proposition when it comes to taxes — particularly for S corporation owners who may not understand the rules. Please contact Martini Iosue & Akpovi, LLP by phone at (818)789-1179 if you have questions or would like more information.

 

Know Your Tax Hand When It Comes To Gambling

August 7 2017

A royal flush can be quite a rush. But the IRS casts a wide net when defining gambling income. It includes winnings from casinos, horse races, lotteries and raffles, as well as any cash or prizes (appraised at fair market value) from contests. If you participate in any of these activities, you must report such winnings as income on your federal return.

If you’re a casual gambler, report your winnings as “Other income” on Form 1040. You may also take an itemized deduction for gambling losses, but the deduction is limited to the amount of winnings.

In some cases, casinos and other payers provide IRS Form W-2G, “Certain Gambling Winnings” — particularly if the entity in question withholds federal income tax from winnings. The information from these forms needs to be included on your tax return.

If you gamble often and actively, you might qualify as a professional gambler, which comes with tax benefits: It allows you to deduct not only losses, but also wagering-related business expenses — such as transportation, meals and entertainment, tournament and casino admissions, and applicable website and magazine subscriptions.

To qualify as a professional, you must be able to demonstrate to the IRS that a “profit motive” exists. The agency looks at a list of nonexclusive factors when making this determination, including:

  • Whether the taxpayer conducts the gambling activity in a “businesslike” manner
  • The quantity of time spent gambling, and
  • How much income is earned from nongambling activities.

But don’t “go pro” for the tax benefits, since doing so is a major financial risk. If you enjoy the occasional game of chance, or particularly if you’re considering gambling as a profession, we can help you manage the tax impact. Please contact Martini Iosue & Akpovi, LLP by phone at (818) 789-1179 if you have questions or would like more information.

 

Martini Iosue & Akpovi Goes To Illinois!

August 2 2017

Martini Iosue & Akpovi goes to Illinois! Two of our tax managers, Aza Ghazaryan and Kim Neumann, are attending an advanced tax conference at Sikich university in Naperville, Illinois.

For more information about working at Martini Iosue and Akpovi, LLP, please contact us by phone at (818) 789-1179

 

Asking The Right Questions About Long-Term Care Insurance

July 31 2017

Like most people, as you age into your 40s and 50s, you may wonder what the future holds for your health and well-being. Will you be as sharp mentally and robust physically as you are right now? Could a serious medical condition arise in your future that might prevent you from performing routine daily tasks?

Unfortunately, many of us require long-term care (LTC) at some point in our lives. To hedge against this considerable financial risk, insurers offer LTC coverage.

Do You Really Need It?

LTC insurance policies help pay for the cost of long-term nursing care or assistance with activities of daily living (ADLs), such as eating or bathing. Many policies cover care provided in the home, an assisted living facility or a nursing home, though some restrict coverage to only licensed facilities. Without this coverage, you’d likely need to pay these bills out of pocket.

Medicare or health insurance generally covers such expenses only if they’re temporary — that is, during a period over which you’re continuing to improve, such as recovering from surgery or a stroke. Once you’ve plateaued and are unlikely to improve further, health insurance or Medicare coverage typically ends.

That’s when LTC insurance may take over. But you need to balance the value of LTC insurance benefits with the cost of premiums, which can run several thousand dollars annually (though a portion may be tax deductible). Depending on your income and net worth, as well as your personal and family health history, LTC insurance may not be a worthwhile investment.

Should You Buy Now Or Later?

The younger you are when you buy a policy, the lower the premiums typically will be. And, the chance of being declined for a policy increases with age. Certain health conditions, such as Parkinson’s disease, can also make it more difficult, or impossible, for you to obtain an LTC policy. If you can still get coverage, it likely will be much more expensive.

So buying earlier in life may make sense. But, keep in mind you’ll potentially be paying premiums over a much longer period. You can often trim premium costs by choosing a longer elimination period or a shorter benefit period.

The elimination period is the amount of time between the start of the benefit trigger and the time that the policy begins paying benefits. This can range from 30 days to several months. Premium costs decrease as the elimination period increases.
Meanwhile, the benefit period is the period of time over which the policy pays for care. This can range from a year or two to an unlimited amount of time.

Boon Or Bust

Buying LTC insurance can be a boon or a bust. You should consider contacting our firm before making the purchase. We can help you determine whether LTC insurance is right for your situation and, if so, when to buy and the appropriate amount of coverage.

Please contact Martini Iosue & Akpovi, LLP by phone at 818-789-1179 if you have any questions or want more information.

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Martini Iosue & Akpovi Supports The Nicole Parker Foundation For Children

July 28 2017

One of our partners, Steve Martini, donated a day of golf and lunch to The Nicole Parker Foundation Golf Fundraiser. The event was purchased by some Sheriffs and LAPD officers, and they played 18 holes last week at El Cab golf course. Here they are pictured with Steve (2nd from left) on the golf course.

 

Yueyang Jiang Joins MIA As A Tax Senior

July 26 2017

Yueyang has four years of experience working in tax and accounting. Her specialties include taxation of high-net-worth individuals, along with the entertainment and professional services industries. Yueyang enjoys watching movies and spending time with her cat in her free time. Welcome to the team Yueyang!

For more information about working at Martini Iosue and Akpovi, LLP please contact us by phone at (818) 789-1179

 

Tax Calendar

July 24 2017

July 17 — If the monthly deposit rule applies, employers must deposit the tax for payments in June for Social Security, Medicare, withheld income tax and nonpayroll withholding.

July 31 — If you have employees, a federal unemployment tax (FUTA) deposit is due if the FUTA liability through June exceeds $500.

  • The second quarter Form 941 (“Employer’s Quarterly Federal Tax Return”) is also due today. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until August 10 to file the return.

August 15 — If the monthly deposit rule applies, employers must deposit the tax for payments in July for Social Security, Medicare, withheld income tax and nonpayroll withholding.

September 15 — Third quarter estimated tax payments are due for individuals, trusts and calendar-year corporations.

  • If a six-month extension was obtained, partnerships should file their 2016 Form 1065 by this date.
  • If a six-month extension was obtained, calendar-year S corporations should file their 2016 Form 1120S by this date.
  • If the monthly deposit rule applies, employers must deposit the tax for payments in August for Social Security, Medicare, withheld income tax, and nonpayroll withholding.

Please contact Martini, Iosue & Akpovi, LLP by phone at (818) 789-1179 if you have questions or want more information.

 

Renting Out Your Vacation Home? Anticipate The Tax Impact

July 17 2017

When buying a vacation home, the primary objective is usually to provide a place for many years of happy memories. But you might also view the property as an income-producing investment and choose to rent it out when you’re not using it. Let’s take a look at how the IRS generally treats income and expenses associated with a vacation home.

Mostly Personal Use

You can generally deduct interest up to $1 million in combined acquisition debt on your main residence and a second residence, such as a vacation home. In addition, you can also deduct property taxes on any number of residences.

If you (or your immediate family) use the home for more than 14 days and rent it out for less than 15 days during the year, the IRS will consider the property a “pure” personal residence, and you don’t have to report the rental income. But any expenses associated with the rental — such as advertising or cleaning — aren’t deductible.

More Rental Use

If you rent out the home for more than 14 days and you (or your immediate family) occupy the home for more than 14 days or 10% of the days you rent the property — whichever is greater — the IRS will still classify the home as a personal residence (in other words, vacation home), but you will have to report the rental income.

In this situation, you can deduct the personal portion of mortgage interest, property taxes and casualty losses as itemized deductions. In addition, the rental portion of your expenses is deductible up to the amount of rental income. If your rental expenses are greater than your rental income, you may not deduct the loss against other income.

If you (or your immediate family) use the vacation home for 14 days or less, or under 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a rental property. In this instance, while the personal portion of mortgage interest isn’t deductible, you may report as an itemized deduction the personal portion of property taxes. You must report the rental income and may deduct all rental expenses, including depreciation, subject to the passive activity loss rules.

Brief Examination

This has been just a brief examination of some of the tax issues related to a vacation home. Please contact our firm for a comprehensive assessment of your situation.

Please contact Martini Iosue & Akpovi, LLP by phone at 818-789-1179 if you have any questions or want more information.

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New Accounting Rule May Lower Perceived Value Of Franchisors

July 12 2017

By Christopher L. Passmore, Managing Partner of Martini Iosue & Akpovi, and Barry Kurtz, chair of the Franchise & Distribution Practice Group at Lewitt Hackman 

Originally published in the June 29 edition of the Daily Journal

Franchisors will need to adjust their methods when accounting for franchise fees either this year or next, depending on whether the system is publicly owned or not. The Financial Accounting Standards Board (FASB) updated a rule that changes when most franchisors recognize revenue in their financial statements from initial franchise fees.

The impact of this rule, FASB Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASC 606), will negatively affect many balance sheets and may have unintended consequences.

To provide context, initial franchisee fees used to be recognized as revenue for a franchisor upon receipt, generally on completion of a franchise sale.

Then in March 1981, the FASB Statement of Financial Accounting Standards No. 45, Accounting for Franchise Fee Revenue, changed standards for continuing franchise fees, product sales, agency sales, repossessed franchises, costs, comingled revenue and even relationships between franchisors and franchisees. In essence, Rule 45 prohibited franchisors from recognizing franchise fees until all initial services required under the franchise agreement were performed by the franchisor. Generally, a franchisee opening for business was the best indicator that the franchisor fulfilled these obligations.

Under Rule 45, the franchisor could count on additional cash on a balance sheet when that initial franchise fee was received. On the other hand, a corresponding liability for the deferred initial franchise fee remained — at least until the new franchisee began operations.

Negative Effects and Unintended Consequences of New Rule

Fee recognition standards changed again with the FASB’s issuance of new rules last May. Public companies will be required to apply the new revenue standards to annual reporting periods beginning after Dec. 15, 2017. Nonpublic companies have additional time to prepare and are required to apply the new standards to annual reporting periods beginning after Dec. 15, 2018.

As a result, franchisors will face several consequences, which may even cause a never-ending cycle of negative impact. Consider these scenarios:

Under the new accounting standards, the granting of a franchise right represents a distinct performance obligation that is satisfied over time, and initial franchise fees will be stretched out over the life of the franchise agreement. Franchisors will now have to determine how much of the initial franchise fee should be allocated to this franchise right.

This exercise will require franchisors to assess whether their other upfront services are distinct and separate performance obligations under their franchise agreements. In order to be a separate performance obligation, the provided service must represent distinct obligations within the franchise agreement and have a standalone value. Franchisors will have to evaluate their franchise agreements to determine whether the services provided to franchisees are distinguishable from the general franchise right.

Examples to consider are values that could be allocated to franchisors’ advisory and consulting services on site criteria, selection and evaluation, facility specifications and design, pre-opening and continuing management training programs, operations manuals, product sourcing, marketing guidance and the like. Notwithstanding these possibilities, it is generally expected that most of the initial franchisee fee will be allocated to the franchise right performance obligation and recognized on a straight-line basis over the franchise term.

It is important to note that the recognition of revenue related to royalty income is expected to remain unchanged as a result of the new rules.

This could make income look a little thin. If an initial franchise fee is $50,000 and the term of the agreement is 20 years, revenue will be recognized as $2,500 per year for those 20 years. Additionally, the new rule will apply to multi-unit development as well. Franchisors face the stigma of lowered valuations, again because they will not be able to recognize all initial franchise fees as revenue when the first location opens, but rather, as each location opens, further diluting value.

In addition to the deferral of revenue, franchisors will have to retrospectively calculate the impact of the new revenue recognition standards for prior year franchise agreements in effect at the date of adoption. Franchisors have the choice to restate the financial statements of all prior periods presented or record a cumulative “true-up” in the year of adoption with comprehensive supporting footnote disclosure.

Income will be reduced and liabilities will increase.

Deferred liability reduces net worth and may trigger registration state restrictions on the franchisor’s ability to collect initial franchise fees when a franchise agreement is signed, which also negatively reflects on the system’s perceived value. Extrapolating further, the decreased value offers potential for unhappy unit owners to back out of agreements, citing misinformation on franchise disclosure statements. And that can lead to claims and litigation.

Growing franchise systems that rely on franchise sales for revenue could take a hit, as the system as a whole may be seen as less attractive. This could turn off potential franchise buyers.

Please contact Martini, Iosue & Akpovi, LLP by phone at (818) 789-1179 if you have questions or want more information.

 

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