Author: Peter J. Ulrich

IRS Extends Deadlines for Section 1031 Exchanges and Investments in Qualified Opportunity Funds

In response to the challenges faced by taxpayers as a result of the COVID-19 pandemic, the IRS issued Notice 2020-23 on April 10, 2020, which extends many tax filing and payment due dates to as late as July 15, 2020. Notably, this guidance includes deadlines associated with like-kind property exchanges under Section 1031 and investments in Qualified Opportunity Funds (QOFs) under the Qualified Opportunity Zone (QOZ) regime. A like-kind exchange is a tax-deferred transaction that allows for the disposal of an asset, typically real property, and the subsequent acquisition of another similar asset without generating capital gains tax liability from the sale of the initial asset. QOFs allow taxpayers to invest qualified capital gains into real property or businesses located in QOZs, and to defer and partially reduce taxation on the original capital gain while potentially eliminating all taxation on appreciation while in the QOF. Under Notice 2020-23, any person with a specified federal tax payment obligation or a federal tax return or other form filing obligation that would otherwise be due to be performed (originally or pursuant to a valid extension) on or after April 1, 2020 and before July 15, 2020 is deemed to be an affected taxpayer eligible for the later due date. The Notice also lists time-sensitive actions that may be...

Opportunity Zone Update – IRS Releases Second Set of Proposed Regulations

On April 17, 2019, the Internal Revenue Service released the second set of Qualified Opportunity Zone (“QOZ”) proposed regulations (the “New Regulations”). The New Regulations address multiple issues relating to the structuring and operation of qualified opportunity zone funds (“QOFs”) and provide clarity on areas that include: Meeting the original use test for purchased tangible property Safe harbors for leased tangible property to qualify as QOZ business property Related party rules for leased tangible property and tangible personal property Investment vs. active business use of QOZ land Safe harbors to meet the 50% gross income test for the active conduct of a QOZ business Inclusion events for otherwise deferred capital gains Definitions for the term “substantially all” used in several statutory provisions Special elections when QOF partnerships and S corporations dispose of property after 10 years QOF reinvestment of the proceeds from the distribution, sale, or disposition of QOZ property Application of the 90% asset test to newly contributed QOF assets The New Regulations provide answers to many unresolved questions and present needed definitions where uncertainties were impeding investment into QOZs, particularly with respect to QOZ businesses. Our new article discusses many of the details.

Recap: IRS Convenes Public Hearing on Proposed Regulations for Opportunity Zones

Jason J. Redd, a Director in the Gibbons Government & Regulatory Affairs Department attended an overflowing public hearing on February 14 convened by the Internal Revenue Service for the purpose of obtaining input from stakeholders concerning the initial proposed regulations for Opportunity Zones (OZ) issued in October. The IRS is reviewing comments on the first round of proposed rules and is expected to issue the next round of proposed regulations in March, with the potential for final regulations to be issued in late spring. Witnesses at the packed hearing included state cabinet officials, as well as representatives from state economic development groups, small businesses, community reinvestment coalitions, investment funds, and technology and planning organizations, among others. Testimony focused on ensuring that program regulations maximize investment and economic growth by generating new development, capital, and jobs in the distressed communities where OZs are located. There was also a clear call, by all in attendance, for clarity and flexibility in the next round of rules. Suggestions included: (i) modifying the rules to provide more flexibility to investors when exiting Qualified Opportunity Fund (QOF) investments, which is currently limited to a sale of the QOF investment itself; (ii) minimizing sourcing and location rules for OZ business income; and (iii) allowing QOFs to reinvest interim gains within a reasonable...

Qualified Opportunity Funds – An Important Step Forward – IRS Issues Proposed Regulations

On October 19, 2018, the IRS issued highly-anticipated proposed regulations regarding qualified opportunity funds (“QOFs”). As hoped, the proposed regulations provide taxpayers with sufficient initial guidance to start taking advantage of the outstanding tax benefits available to taxpayers making investments in QOFs investing in qualified opportunity zones. Under the new provisions, QOFs allow qualifying taxpayers to invest capital gain proceeds and achieve two significant and distinct tax benefits, (i) a deferral (and 10-15% reduction) of taxation on the original gains and (ii) essentially unlimited tax-free treatment of appreciation while invested in the QOF. The proposed regulations address several key issues relating to the establishment and qualification of a QOF, as well as the initial investments by taxpayers into such funds. Key sections provide that: only capital gains are eligible for deferral, QOFs may be structured as corporations or partnerships (or LLCs taxed as such), and gain proceeds may be split into one or more QOF investments. The proposed regulations also clarify rules relating to partnerships and create a new working capital 31-month safe harbor with respect to meeting the definition of a qualified opportunity zone business. Our new article on the significance and implications of the proposed regulations discusses many of the details. The experienced and dedicated attorneys at Gibbons are happy to discuss any...

Qualified Opportunity Zones – Waiting for Guidance

As part of the comprehensive 2017 Tax Reform, Congress enacted a set of provisions originally introduced in the Investing in Opportunity Act. These provisions present investors with an entirely new taxpayer-friendly investment vehicle. Rolling over the gain proceeds from the sale of any property, presumably including stock or real estate (the “initial property”), into an investment in a qualified opportunity zone (“QOZ”) offers investors the chance to defer and reduce capital gains on that initial sale, and achieve a subsequent tax-free exit from the QOZ investment. Tax Benefits Again, the tax benefits start with a deferral of gain on the current sale of the initial property until December 31, 2026 if the gain proceeds from that initial sale are invested within 180 days in a Qualified Opportunity Zone Fund (“QOF”), or until the investor exits the QOF (if before December 31, 2026). If the proceeds remain in the QOF for at least five years, the basis of the investment is increased by 10% (which will reduce taxes by 10% on the gain from the sale of such initial property). If the proceeds are kept in a QOF for at least seven years, the basis is increased an additional 5%, providing an investor with a total tax savings of 15%. Critically, December 31, 2026 is a...

Tax Changes Funding New Jersey’s New 2019 Budget

This past weekend, Governor Phil Murphy and the New Jersey legislature avoided a government shutdown by agreeing to a $37.4 billion compromise budget deal, which included significant changes to New Jersey’s business and individual taxes, including: A new “millionaire’s tax” on individuals earning $5 million or more increasing the top marginal Gross Income Tax (“GIT”) rate from 8.97% to 10.75% Business taxpayers with NJ allocated income in excess of $1 million will be liable for a 2.5% surtax (on top of the current 9% rate) for the next two years, with the surtax reduced to 1.5% for the following two years The new federal pass-through business income deduction (IRC Section 199A) will be unavailable for Corporation Business Tax (“CBT”) or GIT purposes; other decoupling provisions were adopted For CBT apportionment purposes, sales of services will be sourced to New Jersey if, or to the extent that, the benefit of the service is received at a location in New Jersey Additional legislation to expand the reach of the sales and use tax to remote sellers in light of the recent Supreme Court ruling in Wayfair v. South Dakota is awaiting the Governor’s signature Mandatory unitary combined reporting under the CBT is now required, effective for tax years beginning on or after January 1, 2019; these rules...

Incentivizing Global Monetization of U.S. Based IP Rights – The Carrot and the Stick of the 2017 Tax Act

The 2017 Tax Act, signed into law on December 22, 2017, encompasses the most significant and wide-ranging changes to the U.S. Internal Revenue Code (“IRC”) since 1986. This article addresses both the new taxation of global intangible low-taxed income (“GILTI”) and a new deduction for foreign-derived intangible income (“FDII”), as they relate to patent rights. GILTI and FDII will significantly affect the tax strategies of multinational corporations, particularly those with valuable intellectual property rights held abroad. The new tax laws do not define intangible property through a list of specific types of assets, including intellectual property like patents. Rather, intangible property under the new laws encompasses anything not strictly considered a tangible asset. This expanded definition applies when determining the GILTI and FDII amounts. GILTI New IRC Section 951A effectively imposes a minimum tax on U.S. shareholders who own at least 10% of controlled foreign corporations (“CFCs”) to the extent the CFCs have “global intangible low-taxed income.” The Tax Act provides a formula for calculating GILTI, which exempts the deemed returns on tangible assets. The GILTI amount is calculated by subtracting the “net deemed tangible income return” from the “net CFC tested income.” The remainder is deemed intangible income subject to income tax. Practically, the GILTI base is determined by subtracting a normal return for the...

New Jersey Picks Its Opportunity Zones

The Murphy Administration announced it has recommended census tracts within 75 New Jersey towns to the U.S. Department of Treasury for inclusion in the newly-created federal Opportunity Zones Program. Championed by Senators Cory Booker (D-NJ) and Tim Scott (R-SC), the 2017 tax reform law incorporated the Opportunity Zones Program to provide federal community development tax incentives and encourage long-term investment in eligible census tracts. The Program allows investors to temporarily defer payment of federal income tax on realized gains if the gains are invested in a qualified Opportunity Fund within 180 days of the date of the particular taxable sale or exchange. In addition, when a taxpayer disposes of an investment in a qualified Opportunity Zone held by the taxpayer for at least 10 years, the taxpayer can elect to exclude from gross income the capital gain on the investment in the Opportunity Zone Fund. A qualified Opportunity Fund is an investment vehicle that is organized as a partnership or a corporation for the purpose of investing in Opportunity Zone Property. Eligible Opportunity Zone Property generally includes (i) stock in a domestic corporation; (ii) any capital or profits interest in a domestic partnership; and (iii) tangible property used in a trade or business of the Opportunity Fund that substantially improves the property. The Program is designed...

Key Business Provisions in the Tax Reform Law

On December 22, 2017, President Donald Trump signed into law H.R. 1 (the “Tax Act”), that enacted sweeping changes to the United States tax code. Below are some of the key sections of the Tax Act impacting businesses. These provisions are effective January 1, 2018, unless otherwise noted. Corporate Tax Rate and Alternative Minimum Tax (“AMT”) Currently, corporations are taxed at rates that range up to 35% and are additionally subject to the AMT. Corporations do not benefit from lower long-term capital gain rates. The Tax Act lowers the corporate tax rate to a flat 21% and eliminates the corporate AMT, both effective beginning in 2018 and on a permanent basis. In connection with the corporate rate cut, the Section 199 domestic manufacturing deduction is repealed going forward. The dividends received deduction is reduced from 80% to 65% and 70% to 50%, depending on ownership percentage. Increased Cost Recovery (Bonus Depreciation) Currently, taxpayers can immediately write off 50% of the cost of “qualified property” (generally, tangible personal property with a recovery period of 20 years or less). This ratio drops to 40% in 2018, 30% in 2019, and phases out after that. The Tax Act initially allows full current expensing for property placed in service after September 27, 2017, reducing the percentage that may be...

Federal Tax Reform and the Potential Repeal of the Cash Method of Accounting

In the wake of the introduction by President Trump of his Tax Reform proposal on April 26, 2017, Congress, especially the U.S. House of Representatives Committee on Ways and Means, will be considering various methods to fund tax rate reductions. The White House formally delivered the President’s proposed budget to Congress on May 23, 2017. One proposal likely to be under consideration is the repeal of the cash method of tax accounting for service businesses, though many experts dispute whether many of the budget’s finer details will ever pass both houses of Congress. Under current law, the cash method of accounting cannot be used for income tax purposes by (i) businesses that sell goods and therefore must keep inventories, and (ii) C corporations with average annual gross receipts of $5,000,000 or more. A taxpayer-favorable exception from the C corporation rule is available for qualified personal service corporations, consisting of personal service corporations (PSCs) in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, when at least 95% of the stock of such PSCs is owned directly or indirectly by employees performing services in one of such fields. To oversimplify things, this means that law firms pay federal tax based on actual cash receipts, not based upon billings or upon what...