Real Estate: Should Carried Interest Be Taxed as Ordinary Income, Not as Capital Gains?

Recently, my Commercial Real Estate (CRE) community on Twitter asked me to chime in on a Carried Interest discussion.  You can read the Wall Street Journal article that sparked the conversation here:  Should Carried Interest Be Taxed as Ordinary Income, Not as Capital Gains?

Historically, the real estate lobby has been very strong against taxing a carried interest as ordinary income instead of capital gain.  I personally believe the arguments against it are more compelling than the arguments for it.  However, in politics, strange things happen as bills are negotiated because there are sometimes trades amongst the politicians that result in some seemingly unusual or unfair provisions becoming tax law.  With so many differences between the political parties, I personally think that the Carried Interest Fairness Act of 2012 proposed in February 2012 by Congressman Carl Levin will not pass.  What do you think?

If you want to contribute to this or any other CRE discussion on Twitter, follow me @KurtzCPA.  Thanks to @RetailJeff and @Michael_MBA for great conversation.

5 Income Tax Tips for Texas Commercial Real Estate

Recently, Texas was named top commercial real estate (CRE) market for 2011.  With a construction spending increase by 12%, Texas’s CRE market was responsible for the creation of 2 million jobs nationwide. That number is expected to grow in 2012, as the market continues to show significant improvement (read more about Texas CRE here). While we don't know exactly how Texas CRE will be in 2012, there are a few ways your accounting team can ensure minimal tax penalties and increase cash flow.

1. If a corporation, limited liability company, limited partnership and certain joint ventures or general partnerships owned Texas CRE during 2011, Texas Franchise Tax Reports are due May 15^th, 2012.
2. Extensions of time to file are permitted, but a tax payment equal to prior year’s Texas Franchise Tax or current year’s Texas Franchise Tax must be paid as the penalties are high for not doing so.
3. Reporting is required whether or not the legal entity owning Texas CRE was formed, or is registered to do business, in Texas.
4. If multiple legal entities have common ownership of more than 50%, combined Texas Franchise Tax Reports may need to be filed.
5. If an entity owning Texas CRE has gross rental income plus net capital gain(s) on sale(s) of its Texas CRE during 2011 exceeding $1,030,000, Texas Franchise Tax will be due.

Congratulations if you were a part of 2011 Texas's CRE boom.  We hope the trend continues.  If your team has any state or federal income tax related questions, feel free to give us a call at 972.383.7300.  Our goal is to help you with worry free income tax return preparation, compliance and planning services that increase cash flow.

Franchise Tax Filing in Texas

The Texas Comptroller's Office has identified hot topics in 2012 franchise tax filing, including a late filing penalty, $1 million no-tax-due threshold extended and adjusted, compensation deduction limit adjusted, passive entity reporting, additional reporting requirement for combined groups with temporary credit, temporary credit election, extensions and mandatory electronic funds transfer (EFT), and combined group extensions. (Texas Tax Policy News 4, 04/01/2012.)

 Late filing penalty. A $50 late filing penalty will be assessed on reports filed after the due date, regardless of whether the report is subsequently filed or any tax is due for the period covered by the late-filed report. The $50 penalty is in addition to any other penalties assessed for the reporting period.

 No-tax-due threshold. The legislature has extended the $1 million no-tax-due threshold through December 31, 2013. The Consumer Price Index adjustment requirement under Tex. Tax Code Ann.§ 171.006(b) increases the no-tax-due threshold to $1,030,000 for reports due on or after January 1, 2012, and before January 1, 2014. The threshold will be $600,000 for reports filed on or after January 1, 2014.

Compensation deduction limit. The limit on the compensation deduction is adjusted to $330,000 per person for reports originally due on or after January 1, 2012, and before January 1, 2014.

Passive entity reporting. Effective for franchise tax reports originally due on or after January 1, 2011, a passive entity that is registered, or required to be registered, with the Comptroller's Office or the Secretary of State's Office must file Form 05-163 (Franchise Tax No Tax Due Information Report) to affirm that the entity qualifies as passive for the period upon which the tax is based. An entity that qualifies as passive is not required to file an Ownership Information Report.

Extensions and mandatory EFT. An extension of time to file may be requested by an entity unable to file its annual report by the original due date. If granted, the extension for a non-EFT payor will be through November 15, 2012. The extension payment must be at least 90% of the tax that will be due with the 2012 report or 100 % of the tax reported as due on the 2011 franchise tax report provided the prior report was filed on or before May 14, 2012. The extension request must be made on Form 05-164 and must be postmarked on or before May 15, 2012. If a timely filed extension request does not meet the payment requirements, then penalty and interest will apply to any part of the 90 % not paid by May 15, 2012, and to any part of the 10 % not paid by November 15, 2012. A taxable entity that became subject to the franchise tax during the 2011 calendar year may not use the 100 % extension option.

Special provisions apply regarding filing extensions for taxpayers required to pay by EFT (mandatory EFT). The law provides for a first extension, from May 15 to August 15, and for a second extension until November 15. For 2012, mandatory EFT taxpayers who submit an extension request by May 15 have an extended due date of August 15 to file their reports or to request a second extension of time to file. If a mandatory EFT taxpayer does not request the second extension, a report filed after August 15 is not timely, and the taxpayer cannot claim the temporary credit on the 2012 report and is subject to penalty and interest. EFT payments must be initiated by 6 p.m. CST Monday, May 14, 2012, in order to be timely on Tuesday, May 15, 2012.

Combined group extensions. A combined group may only use the 100 % extension option if the combined group has lost a member or if the members of the combined group are the same as they were on the last day of the period upon which the report due in the previous calendar year was based. A combined group must timely submit Forms 05-164 and 05-165 (Franchise Tax Extension Affiliate List) along with the required payment to request an extension of time to file its report. 

As always, should you have any questions, please feel free to ask in comments or give us a call. 

Thank you,

David Kurtz

North American Petroleum Accounting Conference

The North American Petroleum Accounting Conference features outstanding industry speakers, current topics and convenient session formats. The annual exhibit – open both days during the conference – showcases industry vendors who represent a variety of products and services. Take a few minutes and look over the schedule, then enroll on-line at energy.pdi.org.  You may also use one of several convenient enrollment options found in this brochure.  2012 Tracks Include Tax, Financial Reporting, Law, Operational Accounting and Introductory Sessions

I will be speaking on Thursday, May 17^th at 3:55 PM.  We will be discussing the following topic:

Compliance Issues for US Partnerships with Foreign Partners and US Partners in Foreign Partnerships

The presentation will focus on the issues regarding foreign partnerships and foreign partners.  The IRS is focusing a large amount of its resources and efforts on foreign activities.  Therefore, it is very important that taxpayers and tax professionals involved in foreign related transactions or entities, understand all the potential issues to avoid being subject to significant penalties.

I hope to see you in Dallas on May 17 and 18 at the Westin Galleria in Dallas, Texas.  If you are going to be there, please let me know in comments or give me a call.  I would love to hear from you.

Thank you,

David Kurtz

Foreign Asset Reporting Tips for Taxpayers with Foreign Financial Assets

As we draw closer to tax day, I thought I would share some information that is new to this tax year of 2011.  This post contains a few tips regarding the new reporting form that taxpayers started using this tax filing season to report specified foreign financial assets.  Should you have any further questions, please let us know.

The requirements under IRC Sec. 6038D for reporting specified foreign financial assets on Form 8938 (Statement of Foreign Financial Assets) do not replace or affect a taxpayer's obligation to file Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts).

The IRS posted a helpful chart at www.irs.gov/businesses/article/0,,id=255986,00.html that compares the two forms and their requirements. The chart also identifies various types of foreign assets and whether they are reportable.

Form 8938 should be considered by all Form 1040 filers and certain Form 1040NR filers (i.e. certain nonresident alien individuals) because the penalties for not filing are huge!

Thank you,

David Kurtz