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New Rules for HELOCs

by | Jul 1, 2018 | ASSET PROTECTION RESOURCES, BLOG, REAL ESTATE, Real Estate Information

Your Home is No Longer a Full Service Tax Deducting ATM

Have you ever tapped the equity in your home to pay for a new car or a college tuition? With a HELOC, also known as a home equity loan or line of credit, you could do so. Better yet, you could deduct the interest you paid on those loans on your tax return.

The new tax law has changed all of this (at least through 2025, when this portion of the tax law expires). With over 14 million HELOCs borrowing over $500 billion, the new rules affect many Americans for the tax year starting 2018.

You can still tap into your home’s equity for whatever you want. But under the new tax law, you can’t deduct the interest in every circumstance. And there are limits on how much you can deduct even if you are using the money correctly.

What is a proper usage for an interest deduction?

Borrowings used to “buy, build or substantially improve” your home are accepted. Fast cars are not. (But again, you can still buy the car and just not deduct the interest.)

The borrowing must be used to improve the house securing the loan. So you can’t use a HELOC on your primary residence to improve a vacation home.

Interest can only be deducted on the total debt of up to $750,000 for up to two homes. If you had a debt of up to $1 million on one or two homes before December 15, 2017 (the last date before the tax law changed) you can still deduct the interest if the money was used to improve, build or buy a home.

How does the $750,000 limit come into play?

Let’s say John has a $700,000 mortgage on a primary residence and borrows $100,000 on a HELOC to make improvements on that property. His total borrowings are now $800,000. John can only deduct interest on the first $50,000 of the HELOC. The remaining $50,000 in interest is over the $750,000 limit.

Mary has a primary residence and a vacation home. Her residence has a $300,000 mortgage on it with the vacation home having a $200,000 mortgage. Her total borrowings are $500,000. Mary then borrows $100,000 against each property. The money borrowed against her primary residence goes for improvements on that property. Likewise, the $100,000 vacation home borrowing is used for a landscaping project on that property. Mary’s total borrowings are now $700,000. Because she used the money the right way on each property she can deduct the full amount of interest on the $700,000 in loans.

There is another wrinkle to be aware of here. You can only deduct interest on a HELOC of up to $100,000. And that HELOC deduction is limited to the price you paid for the property.

Let’s say you bought a Detroit fixer-upper for $50,000. Somehow, you are able to get a HELOC on it for $75,000 so you can completely remodel it. You can only deduct interest on the first $50,000 of the loan, because that is what you paid for the place.

Once again, the tax law benefits single persons. Two singles could deduct a combined $1.5 million in mortgage debt ($750,000 each) if they bought a home together. Married couples are limited to the $750,000 amount.

Of course, record keeping becomes important in this arena. You’ve got to be able to prove all of this up to the IRS. Track your spending and save all of your invoices. If you don’t already have one, consider using a bookkeeper to assist with it. Save these records for a good long time. The IRS may take years to get at any audits on this. You may need to be prepared into the distant future.

Media And Tech Giants

by | May 1, 2018 | ASSET PROTECTION RESOURCES, BLOG

You Can’t Vote On Us
Do As I Say, Not As I Do

Hypocrisy: A pretense of having some desirable or publicly approved attitude.

The media and tech elite in America lecture us that our voting system is unfair, easily colluded with and leaves millions of people disenfranchised.

Those words clearly describe the voting systems within their own corporations. Of course, when you control the flow of information duplicities go unnoticed. Unless you are a large pension fund with fiduciary duties.

The New York Times, CBS, Viacom, News Corp (Fox News), Google, Facebook and others all use corporate structuring strategies to limit shareholder voting and input. The right to vote for a board of directors is an important right of corporate share ownership. But the geniuses running these companies know better than mere shareholders.

By using two or three classes of stock with different voting rights per class, founders and management can maintain control.

For example, Viacom owns Paramount Pictures, Comedy Central, Nickelodeon, BET, VH1 and NTV, among other valuable media assets. The Redstone family owns 10% of the total outstanding shares through their Class A shares. Most outside investors hold Class B shares. Class A shares hold 80% of all the votes to elect a board of directors. So with 10% ownership the Redstones have 100% control of Viacom. Similarly, Facebook founder Mark Zuckerberg maintains voting control without having to deal with a majority of the owners.

Does this benefit the other majority shareholders? Are the Redstones and Zuckerbergs always right?

Defenders of unequal voting rights argue that founders and management need the ability to make decisions that are tough in the short term but result in long term gains. They decry Wall Street’s focus on quarterly short-term performance instead of year to year, decades long execution. But this is a shallow argument. Pension funds and key institutional investors are also focused on long term success. They will certainly bless solid and fair strategies for the future.

With entrenched management comes skewed incentives, which always benefit the insiders at the expense of shareholders. With a minority of the shareholders controlling a majority of the voting, the voices of opposition, much less reason, are not heard. In the political world they refer to this in abstract theory and sometimes practice as the tyranny of the majority. In the corporate world it is the tyranny of the minority day in and day out within the media and tech giants of America. As a shareholder you are required to ignore the people behind the curtain.

A 2016 study prepared by the Investor Responsibility Research Center found that multi class voting corporations came with weaker corporate governance and higher CEO pay.

So, of course with such evidence, the next trend is to offer shareholders no voting rights at all. Snap, Inc. just completed one of the largest tech IPO’s in history. Purchasers of shares received no voting rights in the corporation.

The California Public Employees’ Retirement System (Cal PERS) is the largest public pension fund in the country. They have a difficult job. State and local politicians have promised generous retirement benefits to California’s public employees. But they haven’t properly funded the system. Cal PERS is one trillion dollars (yes, with a ‘t’) short on what has been promised. So they have to be very careful on how they invest. They have fiduciary duty to the retirees and they can’t be losing money.

Cal PERS is very critical of Snap’s structure whereby public shares have no right to vote. Said a Cal PERS spokesperson of Snap shares: “I think you have to relabel this junk equity. Buyer beware.”

Over the last ten years, corporations with multiple classes of stock and unequal voting rights have seen more than their share of management scandals and securities violations. Better shareholder returns are seen where companies allow for greater shareholder involvement. Before investing, research a company’s corporate governance structure. Buyer Beware.

And recognize the hypocrisy of media and tech elites that scold America on unfair systems. They need to be questioned first and foremost on the inequities within their own home base organizations. Wealth inequality actually starts on their doorstep.

Estate and Gift Tax Exemptions Increased for 2018

by | Dec 14, 2017 | ASSET PROTECTION RESOURCES, BLOG, Corporate Direct

The Internal Revenue Service (IRS) just announced new rules for 2018.

First, the estate tax. In 2017, an individual could pass with $5.49 million in assets and not be subject to any federal estate tax. This amount is doubled for married individuals (or $10,980,000.) For 2018, this exemption amount has been increased to $5.6 million, or $11.2 million for marrieds. That is a lot of money to pass on tax free to your heirs. For context, in 1998 the estate tax exemption was only $625,000. The gift tax is assessed on gifts made during the year (as opposed to at your death). In 2017, an individual could gift $14,000 of assets to anyone without having to report the gift to the IRS on a tax return. There is no upper limit on the number of individuals you can gift money or assets to during your life. Grandpa Eddy can gift $14,000 this year to his ten grandchildren and get $140,000 out of his estate. For 2018, the gift tax exemption is $15,000. No gift tax return is required for gifts up to this amount. So now, Grandpa Eddy and Grandma Edna could each gift $15,000 to their 10 grandchildren and get $300,000 ($15,000 times 2 gifters times 10 grandchildren) out of their estate. Of course, with the estate tax exemption now at $11.2 million the need for couples to gift away assets during your lifetime to avoid a large estate tax at their death is somewhat diminished. One other tax change of note for 2018 is the Social Security wage base for computing payroll taxes. In 2017, this amount was $127,200. For 2018, it moves up to $128,400. Best wishes for the holidays and for a prosperous 2018!

13 Tips for Responding to IRS Notices

by | Jul 20, 2017 | BLOG, Corporate Direct, RUNNING A BUSINESS

Contributed by Robert W. Wood, Tax Lawyer and Managing Partner with Wood LLP Everyone must pay federal income taxes. Yet exactly how much you owe, and on exactly how much, is famously complex. All tax returns must be signed under penalties of perjury. That means you have to do your best to report everything fully and honestly, but the grey areas are plentiful. For example, exactly when is something income, even though you physically don’t have it? What type of proceeds qualifies for long term capital gain rather than ordinary income rates? What losses are full write-offs, and which ones are limited to offsetting gains? What assets can be written off all at once, and what must be capitalized and written off ratably over many years? These and many other questions come up at tax return time. You must have some answers to be able to file, even if you are leaving many of the details to tax return preparers. But once you sign your name and file, what about the IRS notices that come? How should you react, and in what order? You can contest many IRS tax bills, although there are times not to. When you disagree with the IRS, procedure is important. You must pay attention to the order in which notices arrive and the specific ways in which you can respond.

Most Audits are Via Correspondence

Most audits do not involve sitting across the desk from an IRS agent. Let’s say you file your tax return and later receive a notice from the IRS saying it has information that you received $6,000 that you failed to report. It might be due to a Form 1099 you mislaid, one that failed to show up in the mail, or some other bit of information the IRS has that does not match your return. Usually such a notice will ask you to sign the form and mail it back if you agree. Alternatively, the notice will ask for an explanation of why the information is incorrect. You can contest it—if you do so promptly. You can also agree if the IRS is right.

 Don’t Fight Every Tax Bill

If you know the IRS is correct, don’t fight. Likewise, if the IRS is seeking a small amount of tax, you may be better off not fighting it, even if you are right. Just consider whether it is worth it if the dollars are small. Of course, what is a small tax bill can mean different things to different people. Sometimes, disputing something small can end up triggering other issues that might have best been left alone. So consider that too. In most cases, if you get a bill for additional taxes, you’ll want to preserve your rights. Timelines and procedure are critical.

Watch Out for Proposed Deficiencies

The notice described above is not a Notice of Proposed Deficiency. Still, you should answer it. An Examination Report may follow the first notice if you fail to respond. Most tax lawyers call the Examination Report and accompanying letter a “30-day letter.” It will say you have 30 days to respond in a so-called administrative “protest.” A protest is just a letter.

Make Sure You Prepare a Timely Protest

If you receive an IRS Examination Report, make sure you prepare a protest and sign and mail it before the deadline. Keep a copy for your records, and keep proof of mailing too, preferably certified mail to provide verification of mailing and of IRS receipt. Explain yourself thoroughly and attach documents where they will be helpful. Your protest should analyze the facts and the law. Put your best foot forward. The IRS may review your protest and agree with you. Even if they don’t, how you frame your protest can help later. If you have protested in a timely way, you will normally receive a response that the IRS is transferring your case to the IRS Appeals Division.

IRS Appeals Division is Nationwide

The IRS Appeals Division is a separate part of the IRS. Its mission statement is to resolve cases. By definition, these are cases in which the auditor has recommended additional taxes, and the taxpayer disagrees. The Appeals Officer assigned to your case works for the IRS, and in that sense, can never be truly unbiased. Even so, the IRS Appeals Office is separate, and they try to be impartial and, when they can, fair. This process of working out compromises works surprisingly well. A tax lawyer may be best qualified to handle your case, but an accountant can be equally qualified. Alternatively, you can do it yourself. Just be aware that while it is less expensive to do it yourself, it is also generally less effective. The vast majority of tax cases are resolved at Appeals. Usually, you’ll be assigned to the Appeals Office closest to you. Offices are throughout the U.S. and sometimes you are assigned to an Appeals Office in some far corner of the country. This is generally based on the workload of the offices and Appeals Officers. It can also be based on particular tax issues that some offices are handling. If that location doesn’t facilitate a face-to-face meeting and you want one, you can ask for the case to be moved to the IRS Appeals Office nearest you, nearest to your tax lawyer, your books and records, etc. The IRS is not required to grant such requests, but they usually do. Most IRS Appeals Officers are happy to get a case they are assigned off their desk and assigned to someone else!

Beware a Notice of Deficiency

If you fail to protest, or if you do not resolve your case at IRS Appeals, you’ll next receive an IRS Notice of Deficiency. An IRS Notice of Deficiency always comes via certified mail. It can’t come any other way. A Notice of Deficiency is often called a “90-day letter” by tax practitioners because you’ll have 90 days to respond. There used to be many flubs about exactly when that 90 days ran out. So today, the IRS is required to prominently display on page one of the Notice of Deficiency the actual deadline for your response. Don’t write the IRS to protest a Notice of Deficiency. In fact, only one response to a Notice of Deficiency is permitted: filing a Tax Court petition in the U.S. Tax Court clerk’s office in Washington, D.C. Although it is best to hire a tax lawyer, some taxpayers handle their Tax Court case on their own, pro se. There are special simplified procedures available to taxpayers who represent themselves in cases where less than $50,000 in tax is in dispute. Whether you are handling the case yourself or you hire a tax lawyer, the U.S. Tax Court cannot hear your case if you miss the 90-day deadline.

Tax Court Judges Travel to Your Area

The Tax Court building and clerks are all in Washington, D.C. However, the 19 Tax Court judges travel to federal courthouses all around the country to conduct trials. You can pick the city where you want your case to be heard when you file your Tax Court petition. Tax Court procedure and rules of evidence are streamlined, with no jury, and with relaxed rules of evidence. You can call witnesses, and many cases are presented based on a “stipulated record.” In it, you and the government agree on certain facts.

Your Case Can Go Back to IRS Appeals

Remember, the only way you can respond to a Notice of Deficiency is to file a timely petition in U.S. Tax Court. Fortunately, though, that doesn’t mean your case will necessarily be decided in court. An IRS lawyer will file an answer to your Tax Court petition. As with most other answers in litigation, the IRS will generally deny whatever your petition says. But then, you can ask the IRS lawyer to transfer your case to IRS Appeals. Often, a Notice of Deficiency is issued before a case has ever gone to IRS Appeals. In that sense, it can seem as if the IRS is trying to cut off your right to an Appeal. Actually, though, it is usually because of workload, or because the IRS is worried that the statute of limitations on the tax year in question is about to run. The IRS often issues a Notice of Deficiency to make sure you can’t later say the IRS is too late to assess taxes. When this happens, the IRS lawyer will almost always be happy to transfer your case to (or back to) IRS Appeals. This also ties into extensions of the IRS statute of limitations, below.

IRS Often Asks You to Extend the Statute

Often, the IRS says it is auditing you, but needs more time. Giving the IRS more time to audit you? It may sound counterintuitive–if not downright crazy to give the IRS more time, but it is not, as we will see. The IRS may ask you for an extension because they need more time to audit you. Your first reaction may be to relish the thought of telling the IRS absolutely not! Even a routine tax audit can be expensive and nerve-wracking. The IRS normally has three years to audit, measured from the return due date or filing date, whichever is later. But the three years is doubled in a number of cases. For example, the IRS gets six years if you omitted 25 percent or more of your income. Even worse, the IRS has no time limit if you never file a return, or if you skip certain key forms (for example if you have an offshore company but fail to file IRS Form 5471). You have to assume that if the IRS is asking you to extend the statute, the IRS is already monitoring you closely. And for the most part, people usually do voluntarily give the IRS more time to audit. Why would anyone do that? It works like this. The IRS contacts you (usually about two and a half years after you file), asking you to extend the statute. Most tax advisers say you should usually agree. If you say “no” or ignore the request, the IRS will assess extra taxes, usually based on an incomplete and quite unfavorable picture. You might think that you could fail to say yes or no and that the IRS might forget about you. But this is something the IRS is very careful about. The IRS rarely misses issuing a Notice of Deficiency, and you usually will be worse off (often much worse off) than if you agreed to the extension. There are exceptions to this rule, but relatively few. And sometimes you can agree to the extension but limit the extra time you give, or even the tax issues at stake. Get a professional to help you weigh your facts.

You Can Sometimes Get Extensions Too

Everyone knows there are automatic six-month extensions to filing your taxes. April 15 can become October 15, although you still must pay any taxes due by April 15. But what about extensions when the IRS demands a response to a notice or letter within 30 days? For many notices, the IRS will grant an extension of time to respond. In some cases, though, they can’t. For example, when you receive a Notice of Deficiency (90-day letter), you must file in Tax Court within 90 days, and this date cannot be extended. Most other notices are less strict. If you do ask the IRS for an extension, confirm it in writing, and keep a copy. In fact, confirm everything you do with the IRS in writing.

Some IRS Actions Can Be Undone.

It is always best to respond to IRS notices within their stated time frames. Still, it is sometimes possible to undo IRS action after the fact. For example, even after the IRS places a lien on property or levies on a bank account, this can be reversed. However, it is usually harder and more expensive to undo something, and it usually requires professional help.

You Can Pay Up, Then Sue

If you do not respond to a Notice of Deficiency within 90 days, and you have an assessment, all is not lost. You will not be able to go to Tax Court, but you can contest the taxes in federal district court or in the U.S. Claims Court. Usually you must pay the taxes first, and file a claim for refund. If the refund request is not granted, then you can sue for a refund. The primary advantage of proceeding in Tax Court is that you need not pay the tax first. In contrast, most taxpayer suits in U.S. District Court or U.S. Claims Court are after the tax has been paid. Sometimes, though, you can cleverly shoehorn yourself into one forum even though it might seem that you don’t satisfy the rules. Take the case of Colosimo v. U.S., 630 F.3d 749 (8th Cir. 2011). There, the IRS pursued the company and its owners for payroll taxes. The owners sued in District Court for a ruling they were not “responsible persons” required to pay the payroll taxes. But the owners paid only a fraction of the taxes the IRS was seeking. This was a clever use of the notion that sometimes you can pay only a portion of the tax due, with your suit resolve both pieces of the asserted tax: the part you paid, and the part you didn’t.

Be Careful

Remember, there are many different types of tax notices, even if you are only talking about the IRS. We have covered a few types of IRS notices here, including a Notice of Deficiency. However, there are many other types of important notices, including liens, levies and summonses. Forms of response vary, and procedure is important. You’re best advised to get some professional help. In general, don’t ignore anything you get from the IRS! Robert W. Wood is a tax lawyer with www.WoodLLP.com,  and the author of numerous tax books including Taxation of Damage Awards & Settlement Payments (www.TaxInstitute.com).  This discussion is not intended as legal advice.

Is Your Website Ready For ADA Compliance?

by | Jun 29, 2017 | BLOG, Corporate Direct, RUNNING A BUSINESS

New Court Case May Indicate Future Requirements

Winn-Dixie, a large supermarket chain, was sued under the Americans with Disabilities Act (ADA). Juan Gil, a blind Florida resident, went to court because the chain’s website was not accessible to him. The ADA requires that places of public accommodation provide “full and equal enjoyment of the goods, services, facilities, privileges, advantages, or accommodations of any place of public accommodation.”  The U.S. District Court Judge for the Southern District of Florida relied upon previous court holdings that the ADA covered both tangible and intangible barriers that restrict individuals with disabilities from the enjoyment of a public accommodation’s service. Since the supermarkets’ website did not accommodate the visually impaired, it denied Mr. Gil “the full and equal enjoyment of Winn-Dixie’s goods, services, facilities, privileges, advantages, or accommodations because of his disability.” The court issued an injunction requiring Winn-Dixie to make its website accessible to the disabled. A new standard has emerged known as the Website Content Accessibility Guidelines (WCAG), version 2.0. Screen reader technologies can now read website content to individuals with blindness and assist them in navigating the site with voice prompts. Integrating such technologies into a “public” website will help satisfy the new and developing WCAG requirements. Is your website ADA compliant? Hotels, restaurants, retailers and other places of public accommodation that transact business with the public over their website should take note. If not now, at some point in the future you may be required to bring your website into compliance with WCAG 2.0.

Is an LLC a Separate Legal Entity?

by | Dec 9, 2015 | BLOG

To answer this question, first let’s answer what an entity is.

What is an Entity?

An entity is a business organized according to state law to limit the liability of the owners. Entities can be corporations, limited-liability companies (LLCs) and limited partnerships (LPs). All provide much greater asset protection when compared to a sole proprietorship or general partnership.

An entity is a separate legal being. It is the ‘separateness’ of an entity which protects you – the entity’s owner – from unlimited personal liability. Without that separation, if an angry customer sues you, any assets you own such as your house, car or bank account can all be taken should a judgment be found against you.

It’s critical to know that an entity can’t protect you if it is not set up right at the start. You can’t set up a corporate entity while you’re being sued and expect it to protect you. Furthermore, it can’t protect you if you don’t properly maintain your entity over the long term.

Maintaining an LLC or Corporate Entity

In order to maintain the limited liability protection provided by corporate entities, you must follow certain requirements called “formalities.” These include:

  • Filing statements
  • Paying annual fees
  • Maintaining a resident or registered agent to receive all legal documents
  • Keeping corporate minutes

Failure to follow these formalities can result in personal liability to officers, directors and shareholders.

When Should You Use an LLC?

A limited liability company (LLC) is a great entity for a beginning business that:

  • wants to invest in assets that will appreciate over time
  • is intended to be an estate-planning vehicle to transfer wealth to the next generation
  • wants its owners to hold their interests in the names of other entities or trusts
  • wants to be able to sell ownership interests all over the world
  • wants to provide its owners with flow-through taxation
  • wants to divide up the profits and losses in ratios other than strict ownership percentages
  • wants to protect its assets from creditors

LLCs are one of our favorite entities to use. They provide both the limited liability protection found with corporations, as well as the flow-through taxation of a partnership. They allow you to divide up profit and loss allocations among the owners in varying ways — and not based strictly on ownership percentages, as is required in C and S Corps. Ownership may be held by individuals, corporations or trusts, and there are no restrictions on where owners live.

Annual meetings are not required but are strongly recommended, both as a good method of communication between the Managers and the Members, as well as establishing that the LLC is a distinct, stand-alone entity. That last point is important, as when corporate formalities are not followed creditors may attempt to pierce the veil of protection of LLCs as well as corporations.