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Ryan Stute
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It’s that time of year again, where unscrupulous “entrepreneurs” (i.e., scammers) are extremely active trying to defraud the U.S. government and its taxpayers out of billions of dollars of tax money. From phone calls to phishing, scammers will go to any lengths to get at your money.

And now, with the massive Experian data breach, scammers have so much more information to work with.  One of the new scams involves the filing of a false return and having the money actually deposited into the taxpayer’s bank account.  Because they have the information necessary to track the refund on the IRS Where’s My Refund website, scammers know when the deposit will be made.  Soon afterward, the scammer contacts the taxpayer, claiming to be working for the IRS, and demands the return of the erroneous refund. Of course, the scammer provides information for the return transfer, but the information leads to the scammer’s account , not the U.S. Treasury.

This is just one of the methods scammers will use for ill-gotten gains. For more information on this and other current scams, please check out this direct link to the IRS website.

As always, Clark Nuber strongly recommends that tax payers monitor their refunds and, if an amount different than what is anticipated shows up, to immediately contact their tax preparer. Contact Ryan Stute at info@clarknuber.com for more information.

© Clark Nuber PS and Focus on Fraud, 2018. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.

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Washington Tax Considerations for Property Managers Paying Wages to On-Site Personnel

Payment structures for property management services run the gamut.  For example, property managers may charge a flat fee or a percentage of rental income, or a cost-plus pricing model, or any combination of these.  However, if a property manager pays wages and/or benefits to on-site employees, notwithstanding how management fees are structured, the DOR could recharacterize the payroll expense reimbursements as subject to B&O tax, and possibly sales tax.  Moreover, if sales taxable services comprise more than 10% of a non-itemized management fee or non-itemized reimbursement, the DOR could potentially impose sales tax on the entire fee or reimbursement as a “bundled transaction.”

B&O Tax and Sales Tax on Management Fees and Payroll Reimbursements

Before June 1, 2010, payroll expense reimbursements for wages and benefits paid to leasing, maintenance and similar staff were specifically exempt from B&O tax when there was a written property management agreement and the property manager acted solely as the owner’s agent with respect to compensation, benefits and employment decisions.  Since June 1, 2010, for-profit property managers have not been entitled to the exemption and generally must pay B&O tax on management fees.   Payroll reimbursements are similarly taxable, unless  strict rules for exclusion are met. Receipt of reimbursements will generally trigger B&O tax unless the customer bears exclusive liability for payment of the expenses and the person receiving reimbursement and incurring the expense is acting solely as the customer’s agent. This rule is particularly difficult for the real estate industry since property lessors and managers often receive substantial expense reimbursements from tenants and property owners. Management fees and payroll reimbursements are generally taxed at 1.5% under the “service and other” B&O tax classification.  However, if employees of a property manager perform services that are subject to sales tax, reimbursements for those employees’ work could instead be subject to sales tax and retailing B&O tax. Washington imposes sales tax on labor charges for maintenance, repair, construction and landscaping services.  Thus, if employees of a property manager perform these services, the DOR could require the manager to collect and remit sales tax from the property owner on the resulting management fees or payroll reimbursements.  If it is determined on audit that sales tax was not collected, the property manager could be held liable for it. Avoiding explicit payroll reimbursements may help reduce the risk, but unfortunately does not solve the problem altogether.  For example, in one decision the DOR determined that property management fees based on a percentage of rental collections were effectively used by the property manager to pay on-site employees and, consequently, the property manager was subject to B&O tax measured by the wages and benefits paid to the employees.  In another decision, the DOR assessed sales tax and retailing B&O tax on a property manager when an employee on its payroll was borrowed by a related entity to perform construction services.

Common Paymaster B&O Tax Deduction

In many circumstances, using one entity to provide payroll services for numerous real estate projects can avoid the administrative nightmare that would ensue if each project had to have its own reporting accounts with the IRS, the Washington Employment Security Department and Department of Labor & Industries.  Beginning October 1, 2013, the Washington legislature provided B&O tax relief in the form of a deduction for employee payroll reimbursements received from affiliated businesses by qualified employers of record, also known as “common paymasters.” To qualify for the deduction, reimbursements must be for:
  1. Customary amounts received for paying the employer obligations of a client;
  2. Services performed by employees that the taxpayer does not or cannot render;
  3. Services performed for which the taxpayer has no liability; and
  4. Employer obligations the taxpayer is not liable for, except as agent of the client.
This deduction is strictly construed, and if any one of the above requirements is not met, reimbursements are taxable.  Also, the deduction is not available to taxpayers that share employees among entities; each employee must perform services exclusively for a single employer. Qualifying for the paymaster deduction requires detailed planning, and the DOR has issued specific guidance explaining each of the above requirements.  For example, each employee should agree in writing that the paymaster has no liability to the employee for employer obligations.  Also, the language of any agreements between the paymaster and employer should provide that the paymaster has no obligation to provide labor or services to the employer.  Beyond the contract, such terms must be adhered to in practice as well. Although the requirements are stringent, qualifying for the paymaster deduction could provide significant state tax relief to property managers whose employees perform services for affiliated property owners.  The paymaster deduction is not available on services provided to unrelated property owners. If you are interested in more information about qualifying for the paymaster deduction or have other questions about the information in this article, please contact Clark Nuber or your state and local tax advisor at info@clarknuber.com. Jennifar Hill is a manager in Clark Nuber's state and local tax practice team. © Clark Nuber PS, 2018. All Rights Reserved

Private Foundations Receive Excess Business Holdings Relief in Bipartisan Budget Act

Before this change, private foundations were prohibited from holding more than either a 2% de minimis holding in a business enterprise or on a combined basis with all disqualified persons of either 20% or 35% of a business enterprise.  This was restrictive and frustrating for families with closely held businesses who wanted to fund the private foundation with closely held business stock. The change in the tax law may offer some relief, but it will not be a silver bullet.  The change in the tax law swings the pendulum to the other end of the spectrum.  As you will see in the first requirement, ownership in the business enterprise must be 100%.  There are other requirements but this is one that will require careful consideration and structuring.  Still, this change opens many estate and gift planning opportunities involving private foundations. The exception for ownership of an excess business holding has three requirements (listed as new subsection (g)(2), (3), and (4) of new IRC section 4943):

First requirement: Acquisition and Ownership

  • The private foundation must own 100% of the voting stock of the business enterprise at all times during the taxable year; and
  • All of the private foundation’s ownership interest in the business enterprise was acquired by means other than purchase.

Second requirement: Disposition of Profits

  • Within 120 days from the close of the business enterprises’ taxable year, the business enterprise must distribute an amount equal to its net operating income for such taxable year to the private foundation.
    • Net operating income = gross income Less -  deductions allowed by chapter 1 directly connected with the production of such income; Less – tax imposed by chapter 1 on the business enterprise for the taxable year; and Less – an amount for a reasonable reserve* for working capital and other business needs of the business enterprise.

Third requirement: Operational Independence

  • At all times during the tax year, no substantial contributor1 to the private foundation or family member2 of such a contributor is a director, officer, trustee, manager, employee or contractor of the business enterprise, or an individual having powers or responsibilities similar to any of the foregoing, and
  • At least a majority of the board of directors of the private foundation are persons who are not:
    • Directors or directors of the business enterprise, or
    • Family members of a substantial contributor to the private foundation, and
    • There is no loan outstanding from the business enterprise to a substantial contributor to the private foundation or to any family member of such contributor.
There are certain tax-exempt funds and organizations which are subject to the excess business holding rules which are not eligible for this new exception.  These include:
  • Investments held in Donor Advised Funds (DAF) – 4943(e);
  • Investments held in certain Type III Supporting Organizations – 4943(f);
  • Any charitable trust described in 4947(a)(1); and
  • Any split interest trust described in section 4947(a)(2).
This relief to the Excess Business Holdings rules has been lobbied for long and hard by several private foundations with significant business holdings which are 100% owned and operated to fulfill a charitable mission, but are fundamentally a profitable business enterprise.  This shift in the tax law comes as welcome relief to these organizations and a fantastic estate planning opportunity to many closely held family businesses who would like to use those businesses to fund the family private foundation. If you have questions or would like to explore how these change in the law would be beneficial to your estate and gift planning, then please contact your Clark Nuber tax team member to set up an appointment or contact us at info@clarknuber.com. *In Accounting terms, until we have Treasury regulations defining “reasonable reserve,” Net operating income is an amount you can quantify and support. 1Substantial Contributor as defined in section 4958(c)(3)(C) is the definition used throughout this new Code section. 2Family member as defined in 4958(f)(4) is the definition used throughout this new Code section. © Clark Nuber PS, 2018. All Rights Reserved

Changes to Employee Benefits Resulting from Tax Reform

Bicycle Subsidies

Beginning on January 1, 2018, amounts an employer provides to employees to subsidize commuting by bicycle must be included in the employees’ taxable wages.  Prior to 2018, employers could provide up to $20 a month to employees commuting by bicycle and exclude this amount from taxable compensation for its employees. Effective date: calendar year 2018 through 2025. 

Achievement Awards

Achievement awards include length of service awards and safety achievement awards.  Within certain parameters, achievement awards may be treated as tax-free to employees.  While this continues to be true post-tax reform, The Tax Cuts and Jobs Act formalizes and makes permanent a prior, temporary rule that indicated awards of a certain type are not eligible for this tax-free treatment for the recipient of the award.  Types of awards that are taxable to the employee include cash, cash equivalents, gift cards or certificates, vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items.  Gifts of tangible personal property continue to qualify as tax-free to the employee assuming the other achievement award requirements are also met. Effective date: January 1, 2018.

Moving Expense Reimbursements

Beginning on January 1, 2018, amounts an employer reimburses to an employee for qualified moving expenses must be included in the employee’s taxable wages.  Prior to 2018, certain moving expenses were eligible to be reimbursed tax-free to the employee.  What is unclear at this point is the treatment of a situation in which the employee incurred and paid moving expenses in 2017, but the employer reimbursement was not paid until 2018.  The AICPA submitted a request for clarification on this matter in a letter sent to the Department of the Treasury and the Internal Revenue Service on January 29, 2018. Effective date: calendar year 2018 through 2025.

Family Medical and Leave Act (FMLA) payments

Employers that compensate employees while on family or medical leave under FMLA may be eligible for a federal tax credit equal to a percentage of the cost of each hour of paid leave. The credit is only available for paid leave to an employee earning below $72,000 per year, and the employee is compensated at least 50% of his/her regular earnings while on leave. The credit ranges from 12.5% to 25% of the paid leave and is claimed as a general business credit on an income tax return filed by the employer.  To the extent family or medical leave is required to be paid pursuant to state or local law, the federal credit may not be available.  Wages paid in excess of amounts required by state or local law may qualify for the credit.  States currently mandating paid family and medical leave include California, New Jersey, New York (effective January 1, 2018), and Rhode Island.  Washington State’s paid family and medical leave program begins January 1, 2020. Effective date: calendar year 2018 and 2019 only.

Transportation Benefits

The tax reform changes to certain qualified transportation fringe benefits (excluding bicycle subsidies, discussed above) are covered in detail in the following articles.  Employers that decide to treat transportation benefits as taxable wages to employees are encouraged to make this decision sooner rather than later.  Delaying the decision to later in 2018 may mean “catch-up” withholding is required, which directly impacts the cash employees receive with each payroll deposit.  For lower income employees, catch-up withholding later this year may have a detrimental impact on an individual’s or family’s budget.  Employee relations may also suffer if catch-up withholding is necessary at a later date in the year. In its letter dated January 29, 2018, the AICPA requested clarification from the Department of Treasury and the IRS that nonprofit employers electing to treat the employer-paid transportation benefits as taxable to employees will avoid unrelated business income tax on the benefits. Effective date: January 1, 2018.

Questions?

If you would like assistance discerning how the change in the tax law may affect your organization, your employers, or your employees, please contact your Clark Nuber tax advisor or contact us at info@clarknuber.com. © Clark Nuber PS, 2018. All Rights Reserved

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