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HLB International Appoints New Member in Equatorial Guinea

 

HLB International, one of the leading global accountancy networks with presence in 140 countries, continues its growth with the recent signing of a new member firm in Equatorial Guinea – BER Chartered Accountants.

BER Chartered Accountants is based in Malabo, the capital of Equatorial Guinea. Established in 2010, the firm provides Tax Management Consulting Services, Internal Audit Services, Audit and Assurance Services, Global Legal Services, Financial Accounting & Reporting Framework Services and Employment Services.

Ana Maria Ebong Uwah Galimah, Managing Partner, of BER Chartered Accountants, commented: “We are very excited to part of HLB International. As Equatorial Guinea’s first national accounting firm, we truly believe that an international presence will contribute immensely to the growth of our firm in terms of getting new clients, career development for our professionals and networking opportunities with other HLB International member firms.”

BER Chartered Accountants will work closely with other HLB members and makes a great addition to our coverage across Africa.

Valuable Tax Credits for Software and Technology Companies

 

Many Federal and Georgia tax credits are available to software and technology companies, though they are often overlooked and go unused. With proper planning and assessment, these credits can go a long way toward improving a company’s bottom line. Below is a summary of some of the more recognizable credits available. In the coming months we will delve into the details of each type of credit.

Research & Development (“R&D”) Tax Credit The R&D Tax Credit is a Federal credit introduced in 1981 to boost the economy. Usage became so prolific that many states, including Georgia, created their own version of the R&D Tax Credit. In general, the R&D Tax Credit helps a company offset dollar-for-dollar incremental research expenses. Companies may be eligible for the credit, for example, if they use new processes or materials in the design and implementation of new software or systems. The Protecting Americans from Tax Hikes Act of 2015 made the federal credit permanent.

Work Opportunity Tax Credit (“WOTC”) The WOTC is a Federal credit provided to employers hiring persons belonging to specific groups, and there are special guidelines with extended credit for qualified veterans. In general, the credit can be equal to 40% of first-year wages up to $6,000. The Protecting Americans from Tax Hikes Act of 2015 extended the hiring deadline to January 1, 2020, meaning the company must hire the employee and the employee must start working before that date to be counted as part of this credit.

Georgia Retraining Tax Credit The Georgia Retraining Tax Credit is only a Georgia credit. The purpose is to encourage employers to continually invest in their employees by upgrading equipment, acquiring new technology, and completing ISO 9000 training. The annual maximum credit is $1,250 per employee. This credit is available to any business that files a Georgia income tax return.

The three credits described above are not an exhaustive list and there may be more Federal and Georgia credits that apply specifically to your business. HLB Gross Collins, P.C. has been serving some of the Southeast’s most prominent software and technology companies for nearly 50 years. Our Technology Practice works closely with the clients to ensure that they are taking advantage of all available credits and savings opportunities.

Real Estate Professional – Do You Qualify and How Can You Prove It?

 

The IRS defines passive activities as:

1. Trade or business activities in which you don’t materially participate during the year.
2. Rental activities, even if you do materially participate in them, unless you’re a real estate professional.

The exception provided in the second definition is a tremendous tax advantage for individuals that meet the requirements of a real estate professional. This is because losses from passive activities can only offset passive income. In years that passive losses exceed passive income, the excess losses must be carried forward and applied against income from passive activities in future years. A real estate professional’s real estate activities are exempt from the general passive activity loss rules and losses resulting from such activities can be used to offset ordinary income.

The tests used by the IRS to determine if an individual qualifies as a real estate professional all revolve around the amount of time spent conducting real estate activities. Recent Tax Court rulings in favor of the IRS should reinforce the importance of having a strong understanding of what constitutes real estate activities and how to properly maintain records of time spent conducting such activities.

Below is a discussion of these recent rulings. For a detailed definition of real estate professional, see section “Real Estate Professional Requirements” below.

Recent Tax Court Rulings

A taxpayer’s rental real estate activities in which they materially participate (defined below) are not subject to limitation under the passive loss rules if: (1) more than half of all personal services performed in a tax year are in real property trades or businesses, and (2) they spend at least 750 hours performing such real property services. A taxpayer can use “any reasonable means” to prove the extent of his or her participation in real estate activities. “Reasonable means” may include identifying of services performed over a period of time and the approximate number of hours spent performing such services by using appointment books, calendars, or other narrative summaries. While IRS regulations do not prescribe specific recordkeeping requirements, they also do not allow a post-event “ballpark guestimate.”

In a recent Tax Court case, Penley v. Commissioner (TC Memo 2017-65), the IRS successfully argued that Penley did not qualify as a real estate professional because he could not properly substantiate his time spent performing real property trade or business.  The court found that Penley’s records of time spent on real estate activities were greatly exaggerated because he rounded to the nearest hour or half-hour, did not specify a start or end time, included time spent driving to and from properties, and did not separate out any time for meals or other breaks. Since Penley also had a non-real estate related job, once the court disallowed the majority of the time he claimed was spent on real estate activities, he no longer satisfied the requirement that more than 50% of the individual’s working time must be spent on real estate activities in which the individual materially participates. As a result, all passive losses were disallowed for the tax year in question, and a negligence penalty of 20% was assessed on the underpayment of taxes.

In the Tax Court case, Moss v Commissioner (135 T.C. 365 (2010)), the IRS got another favorable ruling when they argued that Moss did not qualify as a real estate professional because he improperly counted the number of hours spent conducting real estate activities. Moss contended that he satisfied the 750-hour rule by conducting 650 hours of actual real property services, and spending an additional 100 hours “on call” to perform services on the properties he owned. The court rejected Moss’ argument, noting that the language of IRC §469(c)(2)(iii) and Reg. §1.469-9(b)(4) literally required a taxpayer to “perform” the services that are counted toward the 750-hour threshold. Consequently, all passive losses were disallowed for the tax year in question, and an accuracy penalty of 20% was assessed on the underpayment of taxes.

Real Estate Professional Requirements

For an individual to qualify as a real estate professional, three (3) separate tests must be satisfied.

Test #1 (Material Participation) – Individuals satisfy the material participation test for a particular activity by participating throughout the year on a regular, continuous, and substantial basis. This can be demonstrated by meeting one of the following seven tests:

  1. The taxpayer participates in the activity for more than 500 hours during the year.
  2. The taxpayer’s participation in the activity for the tax year constitutes substantially all of the participation in the activity of all individuals (including individuals who are not owners of interests in the activity) for the year.
  3. The taxpayer participates in the activity for more than 100 hours during the tax year, and that participation is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for the year.
  4. The activity is a significant participation activity for the tax year, and the taxpayer’s aggregate participation in all significant participation activities during the year exceeds 500 hours. A significant participation activity is a trade or business activity in which the taxpayer participates for more than 100 hours during the tax year, but would not be treated as materially participating if not for the significant participation standard.
  5. The taxpayer materially participated in the activity for any five tax years (whether or not consecutive) during the 10 tax years that immediately preceded the tax year at issue.
  6. The activity is a personal service activity and the taxpayer materially participated in it for any three tax years (whether or not consecutive) preceding the tax year at issue.
  7. Based on all of the facts and circumstances, the taxpayer participates in the activity on a regular, continuous, and substantial basis during the year.

Test #2 (750 Hours) – Individuals must spend at least 750 hours per year in real property trades or businesses in which they materially participate. Qualifying real property trades or businesses include property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

  1. Personal services performed as an employee are not treated as performed in real property trades or businesses unless the employee owns five percent or more of the employer entity.

Test #3 (More Than 50% of Time) – More than 50% of the individual’s working time must be spent on real estate activities in which the individual materially participates.

By staying abreast of the latest real estate industry trends and issues, HLB Gross Collins, P.C. specialists are known for deep understanding of the ever changing, complex regulations our clients are facing.  Please do not hesitate to contact us for additional information.

Summary

Taxpayers that conduct real property trade or business and qualify as a real estate professional are exempt from the general passive activity loss rules. This is beneficial because losses resulting from such activities can be used to offset ordinary income. Recent Tax Court Rulings in favor of the IRS highlight the importance of properly maintaining records of time spent conducting real estate activities. Additionally, it is critical that time records accurately count only time spent actually performing real property services rather than “ballpark guestimates” that could include time spent traveling and meal breaks.

 

Contractors & the Research and Development Tax Credit

 

The R&D Tax Credit is one of the most beneficial tax credits available to contractors. Made permanent with the passage of the Protecting Americans from Tax Hikes Act of 2015, this non-refundable credit is available to businesses of all sizes and is designed to encourage the development of innovative and enhanced products, processes, and software in the United States. As both a federal and a Georgia credit, the R&D Tax Credit is one of the largest business tax incentives provided by the U.S. and state government.

The R&D Tax Credit is calculated at 20 percent of the excess of an eligible taxpayer’s qualified research expenses over a base amount. Qualified research expenses are comprised of all internal or contract research expenses paid or incurred by a taxpayer in carrying on trade or business. These expenses include (but are not limited to) salaries and wages, supply cost and contractor costs (i.e., contract research). In order to qualify as a qualified research expense, the research activities have to be conducted on U.S. soil and they must pass a four part test outlined in the Internal Revenue Code (IRC §41). The base amount is determined in reference to the total qualified research expenses for the previous three years. The R&D Tax Credit is incremental in nature – meaning that in order to realize greater benefits from the credit, a taxpayer must increase their research expenses over time.

The Georgia R&D Tax Credit is available to any business that increases its qualified research spending in the state. Just as the qualified research expenses have to be incurred on U.S. soil to be eligible for the federal R&D Tax Credit, the qualified research expenses have to be incurred in Georgia to be eligible for the Georgia R&D Tax Credit. Whereas the federal credit can be carried back one year and forward twenty years, the Georgia credit can be carried forward ten years and is able to offset 50% of net Georgia income tax liability.

Often times, taxpayers do not realize that the work that they are doing is innovative and qualifies for the R&D Tax Credit. The activity does need not be an “innovative” and have an industry-wide impact – as long as the R&D work is related to improving your businesses products or processes, it may be a qualified research and development expense. It is recommended that all business involved in some type of research and development activities have a feasibility study to determine the amount of the possible federal and state credits available to them. The credit can be taken for all open tax years. Thus, the tax benefits of conducting a research and development credit feasibility study and a R&D Tax Credit study could be tremendous and help to generate enormous tax savings over several years.

If you believe that your business is conducting some research and development activities eligible for either the federal or Georgia credit, HLB Gross Collins, P.C. can assist you.  HLB Gross Collins, P.C. has been serving some of the Southeast’s most prominent construction companies for nearly 50 years.  Our Construction Practice works closely with the clients to ensure that they are taking advantage of all available credits and savings opportunities.

June/July Dates to Remember

 

June 15

Individuals. If you are not paying your 2017 income tax through withholding (or will not pay enough tax during the year that way), pay the second installment of your 2017 estimated tax.

If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, file Form 1040 and pay any tax, interest, and penalties due for 2016. If you want additional time to file your return, file Form 4868 to obtain four additional months to file. Then, file Form 1040 by October 16.

Corporations. Deposit the second installment of estimated tax for 2017.

Employers. For Social Security, Medicare, withheld income tax, and nonpayroll withholding, deposit the tax for payments in May if the monthly rule applies.

July 17

Employers. For Social Security, Medicare, withheld income tax, and nonpayroll withholding, deposit the tax for payments in June if the monthly rule applies.

July 31

Employers. For Social Security, Medicare, and withheld income tax, file Form 941 for the second quarter of 2017. Deposit any undeposited tax. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until August 10 to file the return.

For federal unemployment tax, deposit the tax owed through June if more than $500.

If you maintain an employee benefit plan with a calendar year-end, file Form 5500 or 5500-EZ for calendar year 2016.

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