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Now Is The Time To Review Your Tax Provisions

By:  Amanda Wilson

As tax season is underway, one important deadline is coming that should not be overlooked.  Tax law allows for partnership and LLC agreements to be amended retroactively to the first day of the prior year, provided the amendment is executed before the due date (without extensions) for the prior year’s tax return.

What does this mean for your agreements?  You should look at the tax provisions and see if there are any items that should be corrected.  For example, do the allocation provisions result in unintended consequences that you would like to correct?   Would you like to add a limited deficit restoration obligation so that one member or partner can utilize losses?   Or does your agreement provide for a tax matters partner, which is a concept that was replaced by a partnership representative (previously discussed here).  You should act quickly, though, as the deadline for executing any amendments for the 2018 tax year is March 15, 2019.

IRS Announces New Real Estate Safe Harbor for 20% QBI Deduction

By:  Amanda Wilson

Section 199A introduced a new 20% deduction for qualified business income (previously discussed here).  To qualify for the deduction, income must be from a trade or business.  Whether rental activity rises to the level of a trade or business can often be a difficult question to answer.  In Notice 2019-07 (found here), the IRS announces a safe harbor under which a rental real estate enterprise will constitute trade or business for Section 199A purposes if the enterprise performs 250 or more hours of rental services during the year.  Any enterprise wishing to fall within this safe harbor must maintain records such as a time log or calendar documenting the services.  If the real estate is rented under a triple net lease, the safe harbor is not available.

The IRS notice provides a helpful safe harbor, but it is important to note that it is only a safe harbor.  The fact that a real estate business cannot satisfy the safe harbor does not mean that it might not otherwise qualify as a trade or business for Section 199A purposes.

IRS Issues Guidance on Qualified Opportunity Zones

By:  Amanda Wilson

The 2017 Tax Cut and Jobs Act included significant new tax benefits for investments in qualified opportunity zones. Specifically, taxpayers can defer tax recognition on capital gains when the gains are reinvested in a qualified opportunity fund, which is a partnership or corporation that invests in qualified opportunity zones. In addition, the gains from the investment in the fund can be permanently eliminated if the investment is held for at least 10 years.

Qualified opportunity zones are a new concept, and tax practitioners and investors have been eagerly awaiting guidance on how these new rules will be implemented. The IRS released its first round of guidance on Friday, in the form of proposed regulations and a revenue ruling. This guidance clarified several important issues. For example, qualified opportunity zone property includes tangible property if the qualified opportunity fund substantially improves tangible property located in a qualified opportunity zone. It was unclear what this meant in the context of property such as a building. Revenue Ruling 2018-29 answers this question by providing that substantial improvement occurs when the cost of the improvements is equal to at least the adjusted basis in the building, rather than requiring the improvements to cost at least the adjusted basis in the building and the underlying land. In addition, the qualified opportunity fund is not required to separately substantially improve the land upon which the building is located.

The proposed regulations also clarify that a qualified opportunity fund does not need to be a newly formed entity, and that only capital gains qualify for this new tax regime. The regulations also clarify that 100% gain elimination (for gains occurring from the investment in the fund) is available if the investment is held for at least ten years, even if the designation of an opportunity zone expires prior to the ten year anniversary of the investment. This last piece of clarification addressed a significant concern of many tax practitioners, as the designation of all of the current opportunity zones expires December 31, 2028. The regulations also provide that taxpayers can generally rely on the proposed regulations at this time.

The regulations leave many questions unanswered for now as the regulations reserved several important issues, including what constitutes the active conduct of a trade or business and . Stay tuned for further developments as additional guidance is issued.