JAK + CO., Author at JAK + CO.

Qualified Opportunity Zones: What to Know Before You Invest

September 19, 2019 By JAK + CO.

Since early 2018, much has been said about the opportunity zone provisions that were enacted as part of the Tax Cuts and Jobs Act (TCJA). Designed to spur economic growth in select low-income communities across the U.S., the provisions designate more than 8,700 such communities as qualified opportunity zones (QOZs). Taxpayers who invest in businesses or property within QOZs may be eligible for federal tax incentives.

The IRS guidance surrounding QOZs was initially quite vague. To alleviate confusion, the IRS issued proposed regulations in October 2018. Although the regulations clarified certain aspects of the provisions, much remains unclear. Nevertheless, this is certain: When leveraged correctly, QOZs have the potential to provide investors with significant tax benefits.

If you’re considering a QOZ investment, here are a few things you should know first.

Are you eligible?

According to the TCJA, any taxpayer who realizes eligible gain for federal tax purposes may elect to defer the gain—as long as the taxpayer meets certain requirements. A taxpayer could be an individual, C corporation, partnership, S corporation, trust, or estate.

What are the requirements?

To invest in a QOZ, a taxpayer must realize eligible gain, reinvest the gain within 180 days into a qualified opportunity fund (QOF), and then defer the gain for the year of sale. Before taking advantage of the associated tax benefits, a taxpayer must satisfy several requirements, including a specific process, critical definitions, deadlines, and quantitative tests. Also, at least 90% of the assets held by the QOF must be within the QOZ.

What are the tax benefits?

Taxpayers who invest in a QOZ and meet the necessary requirements may take advantage of the following tax benefits:

Temporary deferral of capital gains reinvested in a QOF
Partial exclusion of previously deferred gains from gross income when the QOF is held for at least five years
Permanent exclusions of post-acquisition gains from the sale of an investment in a QOF held longer than 10 years

Is it a good investment?

Just because a business or property is in a QOZ does not make it a good investment, despite its tax benefits. Think of the potential for tax benefits as icing on the cake—they shouldn’t make the deal.

When should you take action?

The opportunity zone provisions won’t be around forever. In fact, a portion of the potential tax benefits will expire as early as 2020, and QOZs will disappear at the end of 2028. In order to take full advantage of the tax benefits, it’s important to act quickly. To qualify for the full exclusion of gains, investors will need to complete a deal by the end of 2019. But if you don’t make this deadline, don’t worry—you can still defer a portion of your gains up to 2026 and qualify for the permanent gain exclusion.

Look before you leap.

Although the benefits associated with QOZ investments may sound enticing, it’s important to fully understand the IRS requirements, potential tax benefits, and, of course, the viability of the investment itself before you move forward. If you have questions about the tax implications associated with QOZs, the JAK team can help. We can also guide you through setting up the appropriate entity for investing in a QOF and provide an overall analysis of the investment. Contact us today to learn more about how the opportunity zone provisions could benefit you.

Do These 5 Things Before You Start Your Business

June 27, 2019 By JAK + CO.

You’ve finalized your business plan. You’ve acquired capital and assembled a rock-star team. You’ve designed your logo and set up your social media handles. You’re ready to launch your business.

Or, are you?

The thrill of starting a business can be overwhelming. But amid the frenetic joy and anticipation, it’s important to give attention to the less-than-exciting details, too. Here are five things every new business owner should put on their pre-launch to-do list.

1.Gather a team of trusted professionals.

Having the support of professionals keeps you focused on what’s really important—running your business. Consider building a team that includes the following:

Attorney – to assist with required business filings and general legal advice.
CPA – to assist with entity type selection, tax planning and preparation, accounting and bookkeeping, and business advising.
Payroll Provider – to assist with payroll deposits and filing requirements on a monthly, quarterly, and annual basis.

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Be sure to tap into the expertise of other advisors, too. There are plenty of successful business owners who have gone before you, and they can offer you valuable advice.

2.Determine your business entity structure.

The most common business entities are LLC, S Corporation, and C Corporation. The structure you choose will impact how your income is taxed, how profits are distributed, and the type of personal liabilities you could face. Be sure to think about your business type as well as your long-term goals, as your decision could impact your business for years to come. Your attorney and CPA can provide insight to assist you with entity selection. Once you’ve determined your business entity structure, you’ll likely want to obtain an Employer Identification Number (EIN) from the IRS.

3.Open a business bank account and credit card.

Having a bank account and credit card that you use exclusively for your business helps with accurate recordkeeping and tax reporting. It can also keep you from missing any tax deductions. Plus, requesting that a check be made out to your business instead of your name enhances your credibility as an established business. When you open an account under your business name, the bank will likely require you to have an EIN.

4.Determine a recordkeeping method.

Good recordkeeping is necessary to make sure you’re taking advantage of the tax deductions for which you are eligible and to support what you’re reporting on your tax return. An accounting software such as QuickBooks can help you keep track of expenses, accounts payable, and even your time. An app that tracks your mileage is worthwhile, too.

5.Set aside a portion of your net income to pay your quarterly estimates.

Once you become self-employed, you may no longer have an employer withholding payroll and income taxes on your behalf. To compensate for this, you may have to make quarterly estimated tax payments to the IRS and state taxing authorities—or else be vulnerable to penalties.

Secure the support you need for a successful launch.

Checking these five to-dos off your list can help you start your business on the right foot. We’re here to help, whether it’s outlining tax implications of an entity type or determining the amount you should pay in to the IRS and state each quarter. If you have questions about your next step as a new business owner, please don’t hesitate to give us a call.

Starting a Family? Plan Your Estate Now

June 18, 2019 By JAK + CO.

Christopher Kuklok — By Chris Kuklok, CPA

There’s so much to think about when you’re preparing for parenthood. For my wife and I, it was an unbelievably exciting yet incredibly daunting experience. Between planning for the birth, arranging the nursery, and figuring out how to work the car seat, we were overwhelmed! As first-time parents, we also had to think about how we were going to provide for our son in the weeks—and years—ahead.

This is where planning your estate can help.

You may think of estate planning as something people do when they’re old and gray, but the reality is, it’s something you should consider doing now. Planning your estate gives you peace of mind that your child will be provided for in the event you’re unable to do so, and in accordance with your wishes.

Here are the estate-planning activities that soon-to-be parents should complete as soon as they can.

Purchase life insurance

This was the first thing my wife and I did when we were preparing for the birth of our son. Having life insurance gives you a way to provide for your child and spouse if you were to pass away. There are two types of life insurance: term and whole life. Term life insurance is just like it sounds—it’s for a specified length of time. Purchasing a 25-year term life policy, for instance, would provide a safety net for your family until your child reached the age of 25.

Whole life is typically more expensive than term life. The upside of whole life insurance is that the policy’s cash value slowly builds over time. Should you decide to cancel the policy, you receive the cash value less any fees.

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Write your will

Having a will is critical as it establishes guardianship for your child in the event you and your spouse were to both pass away. It also gives you a way to direct how your life insurance payout should be spent and dictate to whom your assets should pass. You can find a boilerplate will template online, fill in your information, and have it notarized. It is also important to set your healthcare directive and power of attorney. If your estate is more complicated, it’s wise to hire an attorney to draft your will—or you may even want to consider setting up a trust. A trust gives you a way to pass on assets (similar to a will), but in a way that doesn’t go through probate, which can be expensive, not to mention emotionally taxing, on your family members.

Update your beneficiary designations

As a rule of thumb, you should review your beneficiary designations on your retirement accounts, including your IRA, Roth, and insurance policies, every five years or upon major life events (e.g., the birth of your child). Beneficiary designations supersede wills. For instance, if your will stated that your retirement savings should go to your spouse, but your ex-spouse was still listed as the beneficiary, the savings would go to your ex-spouse.

Open an education savings account

There’s no time like the present to begin saving for your child’s education. A good way to do this is to set up a tax-advantaged 529 savings plan. With a 529 plan, the money you put into it is taxed, but the earnings you take out is tax-free—as long as it goes toward qualified education expenses. A Roth IRA can be used to fund your child’s education, too. You can pull out your Roth contributions, not the earnings, at any time and put them toward qualified education expenses.

Ready to take your first step?

The most important thing to have in place before the birth of your child is your life insurance policy. But I don’t recommend putting off other estate-planning activities. Once your child is born, life moves at warp speed. Taking care of the rest of the details now, including your will, beneficiary designations, and education savings accounts, will give you more time to enjoy your new role as a parent. Although it will also give you more peace of mind, I can’t promise you’ll sleep more soundly at night—at least not until the teething phase is over.

Your JAK team is here to help guide you through the estate planning process. If you have questions or are unsure of where to start, give us a call today.

2018 Tax Filing Considerations for Contractors

February 18, 2019 By JAK + CO.

Andrew F. Knutson - Tax Advisor St. Paul — Andy Knutson, CPA

For most contractors and construction-related businesses—particularly for those structured as pass-through entities—the 2018 tax season is anything but business as usual. With the Tax Cuts and Jobs Act (TCJA) on the books, there are several tax law changes that could impact your tax filing this year. Here are a few things to consider as you prepare your return.

Do you qualify for the qualified business income deduction?

One of the changes brought about by the TCJA was the qualified business income (QBI) deduction for pass-through entities, such as partnerships and S corporations. Only certain types of businesses qualify for the deduction; thankfully, most general contractors and subcontractors meet the requirements.

There are many phases to the calculation, but in general it is equal to 20 percent of the lesser of your flow-through business income or your taxable income. If a business owner’s taxable income exceeds $207,500 (or $415,000 if married filing jointly) you must also factor in wages paid by the company and the original cost of equipment and property owned by the business. Please talk to your tax advisor about this deduction, as it is highly complicated and the rules surrounding it were only recently finalized.

If you do qualify for the 20 percent deduction, consider this: The TCJA also limited the state income tax deduction and eliminated the production deduction, both of which were approximately 9 percent deductions (for high-income Minnesota taxpayers). So, although 20 percent sounds really great, in reality it’s only a 2 percent sway.

Should you change your accounting method?

Thanks to the TCJA, businesses with less than an average of $25 million in annual revenue over the last three years can now file tax returns on a cash basis. Previously, the threshold was $10 million ($5 million for C corporations). So, if you are a $10-million-a-year contractor who has been “stuck” on the accrual method of accounting, you now have an option to switch to cash.

Will you make the switch? A decision about whether or not to change your accounting method should never be made in haste. There are pros and cons to both methods, so it’s important to talk to your tax advisor to determine which is best for your business.

One more thing: The new $25 million threshold also applies to the use of percentage of completion for long-term contracts. This means you could have additional options for how you account for these, too.

Are you required to do a lookback interest calculation?

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Previously, businesses that had more than $10 million in average annual revenue over the prior three years were required to do a lookback interest calculation. Now, this threshold has increased to an average annual revenue of $25 million or more over the last three years. For many contractors, this provides even more of an incentive to be conservative in estimates, which is not only good practice but also desired by third-party users of financial statements.

Will you expense incidental inventory?

One of the new rules ushered in by the TCJA is the ability to elect to expense up to $2,500 of incidental inventory. If you make this election, it must be reflected on your internal books and records. The election may not be appropriate if you’re using GAAP financial statements.

Partner with an expert to file your 2018 return.

When it comes to tax filings, much has changed since last year. It’s important to not only be aware of the new deductions, rules, and thresholds but also how they could impact your tax burden in 2018 and beyond. If you haven’t already, ask your tax advisor to help you understand your options, so you can make the right filing for your business.

3 Must-Have Professionals for Your Estate Planning Team

January 25, 2019 By JAK + CO.

By Cindy McLagan, EA

Estate planning is the process of determining what will happen to your funds, assets, and general finances after your death. While it may not be the most pleasant thing to think about, JAK estate planning services helps ensure your wishes are carried out in the future.

A wise first step is to assemble a team of professionals who can help you through the estate planning process. Here are three must-have professionals for your estate planning team.

Financial advisor

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It’s likely your family may already have a relationship with a financial advisor. In the context of estate planning, your financial advisor’s role is to recommend and fund your investment, trust, and retirement accounts, as well as to assist in the proper titling of any non-retirement accounts you might own. Your financial advisor will also make sure the beneficiaries and secondary beneficiaries named on your retirement accounts are updated—a critical but often overlooked step. Often, your financial advisor can assist with life insurance, too.

A savvy financial advisor will understand not only how to manage your estate’s finances but also the importance of working closely with the following two professionals.

Estate planning attorney

Your estate planning attorney can create and prepare a will and a trust according to your wishes. In addition, this professional can draw up your durable power of attorney for your health care, verify your property titles, and make sure that assets you own in other states are properly titled. If you own a business, your estate planning attorney can create a legal document that ensures a plan for the succession of your business.

Finally, working with an estate planning attorney to create a will or trust can help your family avoid the hassle of probate court, which is a court that deals with the property and debts of the deceased. But if probate were to become necessary, your estate planning attorney can prepare and file all of the necessary court documents, relieving your executor of this often-stressful task.

Tax professional

Needless to say, the U.S. tax system is very complex, especially when it comes to estate taxes. Although the federal estate tax exemption in 2019 is $11.4 million, many states, including Minnesota, have much smaller exemptions, which could trigger the need for your family to file an estate return. The tax professionals at JAK can assist with this as well as the interpretation of and compliance with tax laws.

A qualified tax professional is able to direct you in a tax efficient manner to accomplish your goals. They also understand that estate planning is about much more than taxes and can use their experience to direct you and your family.

Tax professionals are also one of the critical professionals who will guide the personal representative or executor of an estate with closing responsibilities such as obtaining a federal ID number, setting up an estate account, tax filings and paying the final distributions to beneficiaries.

It’s never too early to build your estate planning team.

If you haven’t started the estate planning process, consider reaching out to a financial advisor, an estate planning attorney, and a tax professional as soon as possible. Although their roles may overlap in some areas, it’s in your best interest to enlist all three in order to get the most accurate and up-to-date information and advice. Working together and with you, these professionals can help to clarify and facilitate your estate planning wishes, giving you and your family peace of mind for the future.

If you have questions about estate tax planning, feel free to give us a call. Our Twin Cities based estate planning specialists are here to answer any questions you have. We also work closely with many financial advisors and estate planning attorneys and would be happy to provide a referral if needed.