Tax Law – LakelandLaw.com

The Qualified Target Industry Tax Refund

December 27, 2019/in Blog, Tax Law /by CCLM Law

By: Zachary Brown

A tax incentive is a way that the government can encourage or attract certain economic activities to a particular area. Tax incentives typically are aimed at attracting investment as a way of increasing employment, economic output, research and technology development, and improving infrastructure to surrounding areas. Tax incentives are offered at the federal, state, and local level through a variety of different means and mechanisms. The Qualified Target Industry Tax Refund (QTITR) is one type of incentive offered by the State of Florida

The QTITR is a tool the State of Florida offers to communities to encourage job growth in industries that the state has prioritized because of the types of jobs those industries create or the services they offer to surrounding communities. The Qualified Target Industry Tax Refund allows a company to recoup some of the taxes it pays based on certain economic activity the company creates. Some of these taxes include corporate income, sales, ad valorem, intangible personal property, and other various taxes levied by the government. The program’s rules state that no more than 25 percent of the total refund approved may be taken for a single fiscal year and that a qualified business may receive no more than $1.5 million in tax refunds for a single fiscal year.

So how does a business qualify for the QTITR? Well, a business must first be a Qualified Target Industry (QTI). QTIs are the businesses that Florida is looking to attract to the state. Broadly speaking, QTIS are in certain industries that include cleantech (such as sustainability and biomass technology companies), life sciences, infotech (such as digital media and software companies), aviation and aerospace, homeland security and other defense companies, and financial/professional services. While some businesses may consider themselves on the edge of one of those categories, it should be noted that Florida Statutes expressly provide that a QTI is not “any business subject to regulation by the Division of Hotels and Restaurants or the Department of Business and Professional Regulation.”

All business ventures are evaluated on an individual basis, so don’t assume by operating in one of the above mentioned QTIs automatically indicates eligibility. To determine eligibility, an application is submitted to Enterprise Florida (EFI). EFI is a public-private partnership between Florida’s business and government leaders. It is the principal economic development organization for the State of Florida and the Chairman of the EFI board is Governor Ron DeSantis. EFI will evaluate a certain project or business venture based upon how many full-time jobs are created and the annual wages those jobs pay. There are several other minor economic factors that EFI evaluates before pre-approving the application and sending it off to the Department of Economic Opportunity (DEO).

The DEO is the Florida agency that gives a final decision on whether a business will receive the QTITR. The amount of the tax refund provided by the DEO varies depending on each situation. The DEO provides the applicant with a letter of certification approving or denying the applicant’s request. The applicant and DEO then work to sign a written tax refund agreement that includes the specifications of what kind of refund the applicant will receive.

There are many rules and regulations when applying and attempting to receive the QTITR, so it is important to navigate the process as carefully as possible. As always, seeking the help of counsel to navigate this process is a good idea.

Zach Brown is an attorney with the law firm Clark, Campbell, Lancaster & Munson, P.A. in Lakeland. Questions can be submitted to thelaw@cclmlaw.com.

LLC’s Electing to be taxed as S Corporation

September 5, 2019/in Blog, Tax Law /by CCLM Law

Limited liability companies (“LLC”) have become a popular entity for owning and operating a business. A multi-member LLC can elect to be taxed as a partnership, C corporation or an S corporation. It is common to see LLC’s elect to be treated as S corporations for federal tax purposes. An S corporation has certain limitations on the number of owners, the type of owners, and the classes of stock. This article will focus on the classes of stock limitation of an LLC electing to be taxed as an S corporation. An LLC typically does not issue stock, but rather issues membership interests to its members. The membership interests operate as stock for S corporation purposes.

Under the Internal Revenue Code, an S corporation can only have one class of stock receiving the same distribution and liquidation rights. The S corporation, however, may issue both voting and non-voting stock, and this will not cause the corporation to lose S election so long as the other rights remain the same, such as liquidation and distribution rights.

Should a multi-member LLC elect to be taxed as an S corporation, then the LLC must follow all of the S corporation requirements under the Internal Revenue Code. That is, the LLC, taxed as an S corporation, must only have members, who qualify as S corporation shareholders, no more than 100 members, and one class of membership interest.

The governing document for the management and operation of an LLC is usually governed by an Operating Agreement. Because a person may easily form an LLC online and obtain a draft Operating Agreement from the web, they do not look at the terms and provisions of the Operating Agreements to see if it does not inadvertently create a second class of stock. Most Operating Agreements found on the web or prepared by third parties are drafted in the context of partnership tax law or may include terms and restrictions on certain members resulting in a second class of stock.

For instance, the Operating Agreement may include common partnership tax language that upon liquidation, distributions will be paid to members with positive capital accounts in accordance with their respective positive capital account balance before other distributions to members. Or the Operating Agreement may have specific profit or loss allocation language. Such language may result in the LLC’s S election being inadvertently terminated because the members of the LLC do not have identical rights to distribution and liquidation proceeds as required under the Internal Revenue Code and Regulations. Therefore, the IRS will conclude that upon entering into the Operating Agreement, the LLC ceased being an S corporation for tax purposes and had become a C corporation. The loss of S corporation election will result in increased taxes, filing requirements and other limitations or potential liability, such as built-in gain tax.

To fix this inadvertent S termination and treat the LLC as an S corporation from the date of S termination, the LLC will need to formerly seek and obtain approval from the IRS to treat the LLC as an S corporation and to correct the error in accordance with the Internal Revenue Code.

We recommend that when forming or starting a business, the parties seek competent tax and legal counsel in choosing the best type of entity (partnership, LLC, S corporation, C corporation, etc.) for not only operating and managing the business, but also for the overall tax and costs benefits. Each entity has its own advantages and disadvantages. Even after you choose the type of entity, the governing documents, the Operating Agreement, need to be carefully drafted to conform to the type of business selected.

John J. Lancaster, LL.M is a shareholder with the law firm of Clark, Campbell, Lancaster & Munson, P.A., in Lakeland. Questions can be submitted to thelaw@cclmlaw.com.

DOCUMENTARY STAMP TAXES

June 13, 2019/in Blog, Tax Law /by Mike Workman

By: Michael E. Workman, Esq.

If you have bought or sold real property in Florida, or if you have borrowed money in Florida, then you have probably seen references to the collection and payment of documentary stamps taxes. You may have heard them referred to as doc stamps or the stamp tax. Documentary stamps taxes have nothing to do with the preparation of the documents for a real estate closing or a loan, although you may have to pay a separate fee for such services. Instead, they are an excise tax on documents that is payable to the Florida Department of Revenue on documents executed and/or delivered in the State of Florida.

Section 201.01, Florida Statutes (2018), lists the documents that are generally subject to the documentary stamp tax. Common examples of documents subject to the stamp tax are deeds, promissory notes and mortgages. Deeds and other documents that transfer an interest in real property are taxed at a rate of 70 cents per $100, or any fraction thereof, of taxable consideration. Additionally, Miami-Dade County imposes an additional surtax on some transfers of real property. For purposes of calculating documentary stamp taxes on deeds, taxable consideration can include money paid or agreed to be paid, the discharge of an obligation, and the amount of any mortgage or other encumbrance on the real property. Promissory notes and mortgages are taxed at a rate of 35 cents per $100, or any fraction thereof, of the amount of the indebtedness indicated in the document; however, unsecured promissory notes are subject to a maximum documentary stamp tax of $2,450.

Prior to March 31, 1997, the Department of Revenue issued adhesive stamps that were affixed to documents in the appropriate amounts denoting that the documentary stamp taxes had been paid. When these adhesive stamps were used, they were initialed and dated so that they could not be used again. Now, the amount of the documentary stamp taxes is typically calculated and collected by the closing agent and remitted to the Clerk of Court with the deed or mortgage for recording. For unrecorded documents, documentary stamp taxes are remitted to the Department of Revenue using a form prescribed by the department. One of our experienced attorneys can help you with your doc stamp questions, as well as closing your transactions that trigger the payment of doc stamps.

Michael E. Workman is a shareholder with the law firm of Clark, Campbell, Lancaster & Munson, P.A., in Lakeland. Questions can be submitted to thelaw@cclmlaw.com

Are Peanuts and Crackerjacks at the Ballpark Still Deductible for a Business?

October 18, 2018/in Blog, Tax Law /by Kevin Albaum

By: Kevin R. Albaum

The Tax Cuts and Jobs Act of 2017 (“TCJA”) lowered tax rates for businesses. However, certain business deductions of the past were eliminated as well. This article will address entertainment expenses and business meals under TCJA.

Under TCJA, entertainment expenses incurred on and after January 1, 2018 became non-deductible (previously they were 50% deductible). That leads to the question…well what is considered entertainment to the IRS? The Internal Revenue Code (“The Code”) defines entertainment as follows:

“Entertainment” means any activity which is of a type generally considered to constitute entertainment, amusement, or recreation, such as entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips, including such activity relating solely to the taxpayer or the taxpayer’s family. The term entertainment may include an activity, the cost of which is claimed as a business expense by the taxpayer, which satisfies the personal, living, or family needs of any individual, such as providing food and beverages, a hotel suite, or an automobile to a business customer or his family.

The Code’s definition of entertainment was not changed in TCJA so the old definition remains in place. Note that the definition for entertainment includes “providing food and beverages”. This has led to confusion in the tax community as business meals have generally been 50% deductible since 1993. Additionally, TCJA did not change or reduce this 50% deduction for business meals.

We know that business meals are a 50% deduction and that entertainment is no longer a deduction. We also now know that the Code’s definition for entertainment includes food and beverages. Are food and beverages at an entertainment event with current or prospective clients still deductible? The IRS has now issued some guidance on that question in a notice released on October 3, 2018.

For a business meal to be deducted in an entertainment setting, it must meet the following requirements:

The expense is an ordinary and necessary expense paid or incurred during the tax year in carrying on any trade or business;
The expense is not lavish or extravagant under the circumstances;
The taxpayer, or employee of the taxpayer, is present at the furnishing of the food or beverages;
The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
The food and beverages must be purchased separately from entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.

Here are a couple of examples:

Example 1: A business owner takes a prospective client to a professional baseball game and buys two (2) suite tickets that include food and beverages.

Result: The full amount paid is not deductible as a business expenses because no invoice, bill, or receipt was obtained that separated the cost of food and beverage from the cost of the overall ticket.

Example 2: A business owner takes a prospective client to a professional baseball game and buys two (2) suite tickets that include food and beverages. The business owner requests and obtains an itemized receipt showing the food and beverages expense was $200 and the game experience expense was $800.

Result: The food and beverage expense is entitled to a 50% deduction but the $800 games experience expense is a non-deductible entertainment expense.

This guidance provided by the IRS is helpful, and it is a good idea to always obtain itemized receipts, invoices, or bills for food and beverages in any entertainment setting. However, if you are unsure whether a food or beverage deduction is allowed, it is recommended that you consult with your tax professional.

Kevin Albaum is an attorney in the Elder Law Practice at Clark, Campbell, Lancaster & Munson, P.A. Questions can be submitted online to thelaw@cclmlaw.com.

Alternative Ways for Charitable Giving After the Tax Cuts and Jobs Act of 2017

May 3, 2018/in Blog, Tax Law /by Kevin Albaum

BY: Kevin R. Albaum, ESQ.
Clark, Campbell, Lancaster & Munson, P.A.

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA) into law. Most of the changes went into effect on January 1, 2018, and do not impact 2017 taxes. The individual tax changes are favorable to many with the standard deductions being raised in 2018 ($12,000 for an individual. $13,600 for 65+ individual; $24,000 for married couple; and $26,600 for married 65+ couple) and most individual income tax rates being lowered a few percentage points. Further, the child tax credit is doubled from $1,000 to $2,000 and the estate tax threshold was raised ($11.2 Million for an individual or $22.4 Million for a married couple).

Some believe that because of TCJA that the number of households claiming a Charitable deduction for an itemized gift to non-profits organizations will shrink. As result of the increased standard deductions, many taxpayers may not be able to claim an itemized deduction for their charitable gifts. Although the standard deduction has been increased, there are planning opportunities to still receive a tax benefit for gifts to charities.

The question becomes should you stop donating to your favorite charities that depend on your donations for their day-to-day operations just because it may no longer be as tax-advantageous? No, as many people give to help benefit the charitable organizations they care about and not just for potential tax benefits. However, you may consider other alternative charitable giving opportunities.

An individual over age 70 ½ can transfer up to $100,000 per year from their traditional IRA (not Roth) to charity (the distribution can count as the Required Minimum Distribution) and if they follow the rules for a qualified charitable distribution, the gift will not count as taxable income to the individual. However, the distribution must go directly from the individual’s IRA to the charity to be transferred income tax-free. For example, if your RMD is $50,000 in a given year, you may direct all of the RMD, a portion of it or up to $100,000 from your IRA be distributed to a charity. If you direct $5,000 of the $50,000 RMD payment to a charity, you will recognize only $45,000 of income.

If you are interested in using your IRA to give to a charity, contact your plan administrator that manages your IRA and explain to them that you would like to make a qualified charitable distribution and they will help assist you in the transaction. It is very important not to receive your distribution first and then give the money to the charity (after you received it) as this will not qualify as a qualified charitable distribution of your IRA to a charity and will make the distribution subject to individual income tax. You can give up to $100,000 of your IRA to the charitable organization and name as many organizations you wish to receive the qualified charitable distributions (For example, you may give $50,000 from IRA to 5 different charities).

An individual may also bundle their contributions all at once, so they can benefit from a larger itemized deduction in certain years instead of making smaller gifts each year. If you do not wish for a charity to receive a lump sum gift in a given year, you may give the large sum to a donor advised fund (DAF). Often this large charitable gift is not given to the charity directly but instead given to a DAF. By using a DAF, you claim a large itemized deduction in one year, and the DAF will distribute the money to your favorites charities over time as you direct them. There are numerous charitable organizations and financial companies that can assist to establish and manage the DAF for you. DAFs are a good option for those that want to continue to make charitable donations but also obtain the income tax benefits while doing so.

Before setting up a DAF or planning IRA distributions to your favored charities, it is recommended that you contact either a qualified tax professional or an attorney to advise you on obtaining the tax benefits that you are seeking.

Kevin Albaum is an attorney in the Elder Law Practice at Clark, Campbell, Lancaster & Munson, P.A. Questions can be submitted online to thelaw@cclmlaw.com.

Tax Deed Sale or Tax Deed Fail?

July 27, 2017/in Blog, Tax Law /by CCLM Law

By Clark, Campbell, Lancaster & Munson, P.A.

Q: I’d like to purchase property at an upcoming Tax Deed sale. What do I need to do, and what should I be aware of?

A: Prior to the Tax Deed sale, you’ll need to visit your local Clerk of Court’s website to register and place a deposit which is typically the greater of $200 or 5% of your maximum bid and should be made by electronic check or wire transfer. For example, you should deposit $2,500 if you intend to bid up to $50,000. If you wish to purchase the property with an LLC or other entity, you should form the entity well in advance of the Tax Deed sale.

If you have the winning bid, within 24 hours you must pay to the Clerk the balance of the bid along with the recording fee and state documentary stamp taxes based on the winning bid amount. After the Clerk receives full payment, the Clerk issues and records the Tax Deed. However, according to statute, the property owner has the right to redeem his property by paying all back taxes and costs at any time before the successful bidder makes full payment to the Clerk for the Tax Deed.

When purchasing property at a Tax Deed sale, there are several things to be aware of. The Clerk must take certain steps and actions before the property may go to Tax Deed sale. If these requirements are not strictly complied with, the Tax Deed may be invalid. Furthermore, the tax certificate holder applying for the Tax Deed is sometimes the high bidder at the Tax Deed sale because the tax certificate holder is entitled to a credit against the tax certificate holder’s bid price equal to the amount of the tax certificate. Also, you should keep in mind that there may be environmental issues with the property, and you probably won’t be able to have a proper environmental assessment done until after the Tax Deed sale which is risky.

Moreover, a Tax Deed is basically an administrative Quit Claim Deed without any warranty of title, and the former owner has 4 years to bring an action to challenge the Tax Deed sale. Therefore, many title insurance companies will require a quiet title action if you decide to sell the property within 4 years of purchasing the property and wish to provide title insurance to your buyer.

On top of all this, the following are some of the interests in real property that survive the issuance of a Tax Deed:
• Easements
• Matters reflected on a plat
• Covenants and restrictions that run with the land
• Mineral reservations
• Federal tax liens
• Subordinate liens which are held by state, municipal, or county governmental units.

Therefore, it would be wise to have a real estate attorney do a title search for the property you plan to purchase well in advance of bidding so you’re aware of any issues before you wind up with a problem.

While many view Tax Deed sales as an easy way to scoop up valuable property at an inexpensive price, if you don’t do your homework beforehand, you might scoop up a headache instead. A savvy real estate attorney can help you navigate the process and choose the right property.

Moving your Trust to Florida

June 29, 2017/in Blog, Tax Law /by Kevin Albaum

By: Kevin R. Album, Esq.

You finally did it. You worked hard, put the kids through college, saved enough money, and now your movers are packing up a moving truck destined for the warm Florida climate. When you move to a new state, you will need to find new doctors, new drycleaner, new favorite restaurant, and just about new everything. One item that is often overlooked amid the chaos of moving your family across the country is making sure your trust moves with you to Florida. Failure to “pack” your trust for the move could: make the trust administration more challenging for you or the successor trustee, trigger unwanted taxes owed to your previous state, and unintentionally thwart your planning.

The Situs of your Trust and Taxes

Each trust has a domicile, but for trusts we don’t use the term domicile, instead we refer to a trust’s domicile as a trust’s “situs”. Situs means the location where a trust is located and also where it is subject to jurisdiction for state taxes. Generally, a trust document names the state you live in when the trust is created as the situs of your trust. Therefore, when the trust document names a situs, that is the state that holds jurisdiction for taxation of your trust (even after your move to Florida). If no situs is named in a trust document, then common law and state trust codes will give guidance to the trustee on how to determine the proper situs of a trust.

If you have a revocable trust, a written amendment can be utilized to change your trust’s situs to a new state. If you have an irrevocable trust (such as a special needs trust, life insurance trust, or charitable trust), you still may be able to change your situs but would likely not be able to amend your trust in order to do so. The most common ways that an irrevocable trust can be revised in Florida are by judicial modification, non-judicial modification, combining multiple trusts into one trust, or decanting (creating a new trust and “pouring” the majority of the contents of the old trust into the new trust). The options available to change an irrevocable trust’s situs will depend on both the language of the trust and what is allowed under Florida’s Trust Code.

Your trust’s situs will determine which state holds jurisdiction for tax purposes. Florida has no state income tax, no estate tax, and no inheritance tax. Therefore, it is possible that Florida may have more advantageous tax laws than the state you moved here from. As a result, when a person moves to Florida, changing the situs of a trust is often desired. If you don’t transfer the situs of your trust to Florida when you move here, your previous state may claim jurisdiction to tax your trust.

Choosing your Trustee and Personal Representative Wisely

If you named a friend or family member residing in another state as trustee of your trust, they can likely serve as the trustee of your trust in Florida. However, if a probate is also required, a friend (non-relative) would not be able to serve as the Personal Representative of your Estate when you die as non-relatives that do not reside in Florida usually cannot serve in that role.

If you determine you want a corporate trustee, under Florida law, banks and trust companies must be incorporated under the laws of Florida and have trust powers or else they are not qualified to serve as trustee of your trust. Therefore, if you named a bank or trust company that is not located in Florida as your trustee, the company may not qualify to serve as the trustee of your trust. The failure to have a proper trustee or successor trustee in place for a trust leads to the appointment of a new successor trustee by either the beneficiaries of the trust or a court holding jurisdiction over the trust.

Homestead in Trust

If you purchase a home in Florida and reside there, you likely will file for a homestead tax exemption with your local property appraiser’s office to save money on your annual real estate taxes. However, Florida’s homestead laws also have restrictions on the devise of a homestead property. For example, if you purchased your Florida home in the name of your out-of-state trust, you may have unintentionally made an improper devise of the Florida home to your trust that could result the Florida home being pulled out of your trust and subjected to probate in Florida after you die. If you have improperly devised your Florida home to your trust, it can usually be corrected to meet your wishes by amending the trust and/or by executing new deed(s) that accomplish your estate planning goal for the property.

When moving to Florida with an out-of-state trust, it is prudent to have an estate planning attorney review your trust to see if there are any items that need to be updated to ensure your wishes are met, and there is no added strain upon the trust’s administration resulting from your move to Florida.

Kevin Albaum is an attorney in the Elder Law Practice at Clark, Campbell, Lancaster & Munson, P.A. Questions can be submitted online to thelaw@cclmlaw.com.

Homestead: More than Just a Property Tax Exemption

April 20, 2017/in Blog, Tax Law /by Kevin Albaum

BY: Kevin R. Albaum, ESQ.
Clark, Campbell, Lancaster & Munson, P.A.

Most people know that there is a tax break available to them on their home (house, condominium, co-ops apartments, and some mobile home lots also qualify). The way it works is that a tax exemption can be applied for at the local property appraiser’s office on a person’s home if the person owns and lives in the home that they are trying to obtain the exemption on by January 1 of the year they are trying to claim the exemption.

The tax exemption provides that the first $25,000 of the assessed value is exempt from real property taxes and the third $25,000 of the assessed value is exempt as well. The tax exemption provision is a nice perk provided by the Florida Constitution (Article VII, Section 6) to Floridians and can easily save a Polk county resident hundreds or possibly over $1,000 per year in property tax owed. However, the property tax exemption provision is just one of the benefits of owning a homestead property in Florida.

So, what exactly is a homestead? Article VII of the Florida Constitution further explains the property tax exemption and defines homestead as real estate held by a person who maintains title to the property and maintains permanent residence thereon. Further, you only get one (1) homestead property per individual or family unit. The Florida Constitution has another provision on homestead property (Article X, Section 4) which adds that for creditor protection, homestead property can be up to 160 contiguous acres outside of a municipality or up to (1/2) one-half acre if the residence is located within a municipality and owned by a natural person. Article X goes on to add restrictions on the devise of a homestead property if you have a spouse or minor child. For example, if you are married and own a house (in your name only) but your spouse lives in your house, it is likely that you cannot convey the homestead property without your spouse signing the deed as well.

Is my homestead protected from creditors? Specifically, if your property qualifies for homestead status and fits within the definition under Article X, regardless of the home’s value, it is exempt from the forced sale by any court and protected from judgments of your creditors (except for the payment of tax liens, mechanic’s liens, HOA liens or mortgages). For example, if you get a new roof put on your house and don’t pay the roofer, you will most likely not have homestead creditor protection against the roofer. Additionally, if a person files for bankruptcy, a different set of rules for creditors pursuing the homestead property will also apply.

Can I transfer my homestead to my trust or my business? Many Florida court cases have found a revocable living trust can own a natural person’s homestead property and maintain Article X creditor protections. However, many other entities and types of trusts cannot own a homestead property and also maintain creditor protection. For example, you can’t transfer your home to your limited liability company and expect to maintain homestead creditor protections for your home if your limited liability company is sued in the future.

Calling Florida’s homestead laws complex would be a drastic understatement and when questions arise regarding whether or not your home: 1) Qualifies for the Article VII tax exemptions; 2) Qualifies for the Article X creditor exemptions or 3) Has Article X restrictions on whether or not there are restrictions on devising the property, it is always best to speak with an attorney who has experience in this area to look at your specific situation and properly advise you on your home.

Kevin Albaum is an attorney in the Elder Law Practice at Clark, Campbell, Lancaster & Munson, P.A. Questions can be submitted online to thelaw@cclmlaw.com.

Collecting Taxes on Collectibles

March 23, 2017/in Blog, Tax Law /by CCLM Law

By: Clark, Campbell, Lancaster & Munson, P.A.

Do you have a collection that you wish to sell? If so, the IRS may determine that your collection is composed of “collectibles” and apply a 28% capital gains tax rate to any gain you may acquire from the sale of your collection. Generally, for most taxpayers, the capital gains tax rate is 15%.

Q: What are collectibles?

A: The IRS has stated that the following are collectibles:

Works of art;
Rugs;
Antiques;
Metals;
Gems;
Stamps;
Coins;
Alcoholic beverages;
Musical instruments;
Historical objects; and
Any other tangible personal property specified by the Secretary for purposes of this subsection.

Notably, comic books, toys, and cars are not explicitly provided in the above list. However, the IRS has the discretion to consider such items as collectibles depending on the facts and circumstances.

Q: What is an example of tangible personal property that the IRS may consider a collectible?

A: Taxpayer collects dolls from a popular toy company and keeps her collection in a climate controlled storage unit. Taxpayer sells five dolls from her collection for $1,000.00. Taxpayer’s dolls may be considered a collectible if taxpayer’s treatment of her collection indicates that she is attempting to preserve her collection’s value, the collection has considerable value, the dolls are sought after collectors, and the taxpayer has no personal use for the dolls.

Q: I have an item that is considered a collectible; will I automatically be subject to the 28% capital gains tax rate for any gain I may acquire from the sale of my collectible?

A: Not necessarily. In order for the 28% capital gains tax rate to apply, the item must be held by the taxpayer for more than a year. For example, if taxpayer bought a collectible in January 2017 and sold the same collectible in April 2017 for a profit, then the sale will not be subject to the 28% capital gains tax rate because taxpayer held the collectible for less than a year. Instead, the sale of the collectible will likely be taxed as ordinary income.

Q: How do I determine basis in my collectible?

A: It depends on how the collectible was acquired. For example, taxpayer’s great grandmother bought a collectible in 1960 for $3.00, and at the time of her death, the collectible was valued at $1,000.00. If taxpayer inherited the collectible from her great grandmother, then taxpayer’s basis in the collectible will be its fair market value at the time of inheritance, which is $1,000.00. If taxpayer’s great grandmother gifted the collectible during her lifetime to the taxpayer, then taxpayer’s basis in the collectible will be her great grandmother’s basis in the collectible, which is $3.00. If taxpayer bought the collectible from an auction, then taxpayer’s basis in the collectible will be the amount taxpayer paid for the collectible, plus any auction fees. Finally, a taxpayer’s basis in a collectible may increase due to maintenance and restoration costs to preserve the collectible’s value.

Q: Are there any other tax consequences that I should consider?

A: Yes. Generally, collectibles are sold at a loss. Whether a taxpayer will be able to claim a loss from the sale of a collectible will depend on whether the taxpayer personally used the collectible and whether the taxpayer is engaged in a hobby or a business.

If you are unsure whether you have a collectible or whether you may claim a loss from the sale of your collectible, it is advisable to seek counsel from a tax professional.

Federal Historic Tax Credit

November 15, 2016/in Blog, Tax Law /by CCLM Law

By: Clark, Campbell, Lancaster & Munson, P.A.

The Federal Historic Tax Credit, currently at 20%, is a form of public policy to encourage the preservation and rehabilitation of older buildings. Before the Federal Historic Tax Credit, there was no financial incentive to restore or rehabilitate older buildings. In fact, it was more financially beneficial to demolish such buildings so that the owner could take advantage of a deduction related to their demolition.

Q: What are the general requirements for the Federal Historic Tax Credit?

The building must be a certified historic structure. A certified historic structure is any building which is either: (1) listed in the National Register of Historic Places, or (2) located in a registered historic district and certified as being of historical significance to the district.

The building must be placed in service before the beginning of the rehabilitation. The placed in service date generally determines which taxable year the credit may be allowed. The placed in service date is when the appropriate rehabilitation has been completed whereby occupancy of the building would be allowed. If the building is still in service or occupied during the rehabilitation, the placed in service date will be the rehabilitation project completion date.

The building must be substantially rehabilitated. The Historic Tax Credit is not available to owners or lessees who make minor restorations to a building. Instead, the rehabilitation of the building must be substantial. The substantial rehabilitation tests a 24 month period, which is selected by the owner or lessee, whereby the rehabilitation expenditures must exceed the greater of $5,000 or the adjusted basis of the property, whichever amount is greater. The substantial rehabilitation test does not require all rehabilitation work to be completed within this 24 month period. The 24 month period is simply a window to determine whether the rehabilitation is truly substantial.

Q: Can a lessee take advantage of the Federal Historic Tax Credit?

A lessee may claim the credit if the lessee has incurred costs to substantially rehabilitate the historic building. However, there is an additional requirement regarding the term of the lease. If a lessee wishes to claim the credit, the lease term must exceed 39 years for nonresidential real property and exceed 27.5 years for residential rental real property.

The Federal Historic Tax Credit has been one of the most successful programs to revitalize communities, increase property values, and save historic buildings that may otherwise be destroyed. Notably, recent legislation has been introduced to increase the Federal Historic Tax Credit from 20% to 30%.

The November 17th edition of “The Law” will discuss social media and the law.