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March 30, 2016
There has been a renewed interest in the distinction between employees and independent contractors.  Bryan Koch, Managing Director at CBIZ & MHM Memphis, wrote an article discussing how this renewed interest can be attributed to the Affordable Care Act, as many of the provisions associated with the law relate to the number of employees working at a company.

In a previous article, the tests used to differentiate between employees and independent contractors were discussed.  In this article, Bryan outlines four different fines and penalties that can be levied by the DOL if a worker is misclassified:

  1. Federal Income Tax
  2. Federal Insurance Contributions Act (FICA)
  3. Unemployment Tax
  4. Payroll Tax

Given the focus on this ACA-related topic, businesses should be aware of how they classify employees versus independent contractors.  In order to avoid penalties and fines, it is important to stay up to date with changes in the tax code— especially with the consultation of a tax professional.

For the full article on our CBIZ Insights & Resources, click here.

To discuss how these potential penalties for misclassification can affect your business, contact Bryan at 901.685.5575 or bkoch@cbiz.com.




February 25, 2015

If you read Part 1 of our blog post series concerning self-rental income, you know that the Net Investment Income (NII) Final Regulations removed self-rental relationships from the inclusion in Bucket 1 of the NII. While the focus of the previous blog post centered with the rental income in Bucket 1, we will now look at the impact of the self-rental relationship impact on Bucket 3 and some additional tax planning considerations.

After the Proposed Regulations were released, many tax professionals suggested converting triple net-lease arrangements to operating leases. An operating lease holds you responsible for more than just collecting money each month. A triple-net lease designates the tenant as solely responsible for all costs and services for the property.

By converting to an operating lease, the belief was that the rental income would not be included in Bucket 1 due to meeting the “derived in a trade or business in which the taxpayer materially participates” language. However, the Final Regulations relieved this concern by exempting activity falling under Reg. §1.469-2(f)(6) and Reg. §1.469-4(d)(1) as illustrated in our previous blog post. By meeting either of those two positions in the Regs, any gain or loss should also be excluded from Bucket 3.

However, there still may be some benefit in converting a triple-net lease into an operating lease even after the change from the Proposed Regs to the Final Regs.

The operating lease may strengthen your position that the rental activity is a trade or business vs. an investment. The disposition of property used in a trade or business is generally considered ordinary under §1231, therefore if the property is disposed of at a loss it might be considered ordinary under §1231 instead of a capital loss (subject to capital loss limits) on investment property. Additionally, if there is a COD event in respect to real property used in trade or business, there may be an opportunity to make an election under §108(c) to reduce the basis of depreciable real property instead of recognizing COD income. This election would not be available if the property was deemed to be an investment property.

If you have further questions regarding the NII tax or your self-rental property, feel free to reach out to me at bkoch@cbiz.com or one of my colleagues.




February 18, 2015

The Net Investment Income (NII) tax went into effect in 2013, but if you participate in a self-rental property arrangement, now may be a good time to review your tax filings and entity structuring as we head into filing season. The NII Final Regulations included a reversal from a position taken in the 2012 Proposed Regulations concerning the treatment of self-rental income.

As a reminder, the 3.8% Medicare surtax on qualifying NII includes three buckets:

  1. Gross income from interest, dividends, annuities, royalties and rents, unless derived in a trade or business in which the taxpayer materially participates
  2. Gross income from a trade or business that is a passive activity or the trade or business of trading in financial instruments or commodities
  3. Net gain from the disposition of property, other than property the income generated from which otherwise would be excluded under Bucket 1 or 2

For a detailed description of the NII tax, feel free to read our previous post on the topic.

In this example, Bob is an attorney and operates his law practice in which he materially participates inside an S-Corporation of which he owns 100% of the stock. Bob also owns the property in which the law practice operates inside of a separate single-member LLC. Under the terms of the lease, Bob’s law practice pays rent to the single-member LLC.

In most circumstances, rental income is by nature considered passive income. However under Reg. §1.469-2(f)(6), rental income derived from property rented to a trade or business in which the taxpayer martially participates “is treated as not from a passive activity.” In the example presented above, since the rental income in Bob’s single member LLC is derived from the S-Corp, which is an operating business in which Bob materially participates, the income would be considered nonpassive. Also, Bob may group the rental activity with the operating business activity under Reg. §1.469-4(d)(1) thus making the grouped activity a nonpassive activity.

Initially under the Proposed NII Regs, self-rental income appeared to be subject to the 3.8% because it fell within the “rents” description in Bucket 1, unless the rental income was proved to be “derived in the ordinary course of a trade or business.” After hearing complaints from tax professionals, Treasury reversed the position in the Final NII Regs allowing rental income from a self-rental to be excluded from Bucket 1 if it is treated as a nonpassive activity (Reg. §1.469-2(f)(6)) or if the rental activity is grouped with an active trade or business activity (Reg. §1.469-4(d)(1) ) (and the grouped activity is nonpassive to the taxpayer).

For most small business owners, it’s common to split real estate and active business operations into separate legal entities for liability issues. Therefore, it is critical that taxpayer’s develop an understanding of self-rental structuring. A rental lease’s arrangement could change the nature of a property owner’s involvement in the trade or business such as in the case of an Operating lease versus a Triple-net lease. This arrangement is one example of a tax planning opportunity available for self-rental property owners.

Also, how you deal with the disposition of the activity or property can affect if your operations are viewed as a trade or business or an investment property. Read more about these considerations in Part 2 of our blog post series.

If you have any further questions regarding the NII tax or your self-rental property, please feel free to contact Bryan Koch at bkoch@cbiz.com or 901.685.5575.




March 3, 2014

As noted in our recent post on Understanding the 3.8% Medicare Tax on Net Investment Income, final instructions for Form 8960, the one page form used to report the calculation of Net Investment Income (NII), were yet to be released. On Wednesday night, February 26, 2014, the IRS posted the final instructions for the form, though the form itself has been finalized since early January.

Changes in the underlying worksheets in the instructions were mostly clarifying in nature, but a few changes could impact calculations of the tax in certain circumstances:

  • Line 5b adjustment: An active calculation has been added when you have a capital loss carryover to the next year. In the draft instructions, this line was N/A for 2013. This adjustment would apply in only limited circumstances, but if you have a capital loss carryover to 2014 and have any other line item adjustments to line 2, you should review these calculations.
  • Application of itemized deduction limited on deductions allocable to NII: This worksheet now includes a line for "gambling losses" which it did not include in the draft instructions. If you have a return with deductible gambling losses, you should review these calculations.

Lack of complete guidance from the IRS may have slowed down the filing process for some taxpayers, as software vendors were waiting for final instructions to be released. Now that additional guidance is available, we should see vendors begin to finalize the form over the next few weeks allowing all taxpayers to file returns that include Form 8960. To see both the draft and final instructions, click on the links below:

If you are an individual subject to the 3.8% Medicare tax, keep in mind that there are potential planning ideas such as examining passive and nonpassive activities, grouping elections for material participation and/or considering the election to become a “real estate professional.” These opportunities could provide you some relief by minimizing your tax, which we will expand upon in a future post.

If you have further questions about this newly implemented tax, feel free to contact Bryan Koch at bkoch@cbiz.com or 901.685.5575.




February 13, 2014

The Affordable Care Act, which was passed in 2010, included provisions that added a 3.8% Medicare surtax on qualifying net investment income to your tax bill beginning with your 2013 return. The final Regulations Section 1.1411 for this tax were issued in 2013. However, Form 8960, the one page form used to report the calculation of Net Investment Income (NII), was just finalized in January. 

Though we are in the beginning of tax season and final instructions for Form 8960 have not yet been released, it's important to take this tax into consideration, as it applies to taxpayers that exceed certain income thresholds. The lack of full guidance from the IRS on how to complete the required form may mean that tax professionals and their clients will be left to interpret key aspects of the calculation from what information is currently available. The legislation refers to this tax as a 3.8% "Medicare tax" on individuals, estates, and certain trusts, yet it is unrelated to Medicare. For individuals, the tax is equal to 3.8% multiplied by the lesser of Net Investment Income (NII) or Modified Adjusted Gross Income (MAGI) in excess of the following thresholds:

  • $250,000 for married couples filing jointly,
  • $125,000 for married couples filing separately,
  • $200,000 for single taxpayers and taxpayers filing as head of household

The Net Investment Income tax includes:

  • Interests, dividends, annuities, royalties and rents (unless such income is derived in the ordinary course of a trade or business), less allocable deductions
  • Income from a passive activity
  • Income from a trade or business of trading in financial instruments or commodities
  • Net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in an active trade or business

If you are an individual subject to the 3.8% Medicare tax, keep in mind that there are potential planning ideas such as examining passive and nonpassive activities, grouping elections for material participation and/or considering the election to become a "real estate professional." These opportunities could provide you some relief by minimizing your tax, which we'll expand upon in a future post.

If you have further questions about this newly implemented tax, feel free to contact Bryan Koch at bkoch@cbiz.com or 901.685.5575.  




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