New FinCEN Filings Go into Effect on January 1
Effective January 1, 2024, the Corporate Transparency Act (CTA) brings forth significant changes for established businesses, mandating a fresh federal filing obligation. This applies to most corporations, limited liability companies (LLCs), limited partnerships, and select other business entities.
Before December 31, 2024, all non-exempt business entities are required to submit a Beneficial Owner Information report (BOI report) to the Financial Crimes Enforcement Network (FinCEN), the Treasury Department’s financial intelligence unit.
The BOI reports must unveil the identities and furnish contact details for all “beneficial owners” of the entity, defined as individuals who either (1) control 25 percent of ownership interests or (2) exert substantial control over the entity.
Each BOI report should encompass the following details for each beneficial owner:
– Full legal name
– Date of birth
– Current residential address
– A unique identifying number from a U.S. passport, state or local ID, or driver’s license, or a foreign passport if none of these are available
– An image of the document containing the unique identifying number
FinCEN is set to establish a new database, the Beneficial Ownership Secure System (BOSS), to store BOI data. This system will assist law enforcement agencies in combating the use of anonymous shell companies for illicit activities such as money laundering, tax evasion, and terrorism. It’s important to note that BOI reports will not be publicly accessible.
The CTA specifically targets business entities formed through state filing or registration to conduct business in the United States. Exemptions are granted to certain entities, including larger businesses with 20 or more employees and $5 million in receipts, as well as those already heavily regulated by the government, such as publicly traded corporations, banks, insurance companies, and non-profits.
Sole proprietors and general partnerships in most states are exempt from the CTA, but single-member LLCs fall under its purview, despite being taxed on Schedule C, E, or F of Form 1040.
Unlike traditional filings, the initial BOI report filing has no expiration date; however, a continuous obligation exists to promptly update FinCEN of any changes within 30 days.
Non-compliance carries severe consequences, including substantial fines and a potential two-year prison term. It is imperative for businesses to adhere to the new FinCEN filings to avoid legal ramifications.
Beat the Net Investment Income Tax
Understanding the Net Investment Income Tax (NIIT) is crucial for managing your financial affairs. This 3.8 percent tax comes into play when your modified adjusted gross income (MAGI) surpasses specific thresholds: $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married individuals filing separately. The NIIT focuses on the lesser of your net investment income or the amount exceeding the MAGI thresholds.
Defining Net Investment Income
Net investment income encompasses earnings from various investments (such as interest, dividends, and annuities), net rental income, and income from non-materially participating businesses. Not included in this calculation are wages, self-employment income, tax-exempt income, and distributions from qualified retirement plans.
Strategies for NIIT Reduction or Avoidance
To navigate the impact of NIIT, understanding whether it’s triggered by net investment income or MAGI is essential. Consider these strategies:
- Invest in Municipal Bonds: Choose bonds exempt from NIIT, federal, and state taxes.
- Donate Appreciated Assets: Strategically donating assets can sidestep NIIT while providing a tax deduction.
- Hold Appreciated Stock: Opt for growth stocks without dividends to avoid triggering NIIT.
- Utilize Section 1031: This option avoids both MAGI and net investment income while deferring taxes.
- Explore Life Insurance and Annuities: These instruments can defer tax obligations until withdrawal.
- Harvest Investment Losses: Offsetting gains with losses helps reduce taxable income.
- Invest in Rental Real Estate: Properly structured, this investment can minimize taxable income.
- Active Business Participation: Engaging actively in business prevents income from being categorized as net investment income.
- Short-Term Rentals and Real Estate Professional Status: These designations also prevent income from falling under net investment income.
- Alternative Marital Status: While extreme, two single taxpayers may have a higher MAGI threshold than a married couple.
- Retirement Plan Investments: Allocating funds to retirement plans helps reduce MAGI.
- IRA Conversions: Converting traditional IRAs to Roth IRAs may trigger NIIT but can offer long-term tax benefits.
- Installment Sales: Spreading income over time can help smooth out MAGI.
Dealing with NIIT can be intricate, but strategic planning significantly lessens its impact. Be proactive in implementing these measures to optimize your financial situation.
Deducting Start-up Expenses for a Rental Property
Considering a venture into commercial or residential landlordship? Be prepared to invest upfront before reaping rental returns. The tax code designates certain expenditures as start-up expenses, distinguishing between investigatory and pre-opening costs, including advertising, office expenses, salaries, insurance, and maintenance.
It’s essential to note that the purchase cost of a rental property isn’t categorized as a start-up expense. Assets like rental properties and long-term assets such as furniture are subject to depreciation once the rental business commences.
Upon initiating your rental business, you have the option to deduct start-up expenses. The deduction is determined by the lesser of your start-up expenditures or $5,000, with a reduction (not below zero) for amounts exceeding $50,000. Additionally, the remaining start-up expenses are amortized over a 180-month period starting from the month the rental property business begins.
To elect this deduction, label and deduct your start-up expenses on your tax return, specifically on Schedule E or the appropriate form. However, costs associated with forming a partnership, limited liability company, or corporation are not considered start-up expenses. Nevertheless, you can deduct up to $5,000 of these costs in the first year of business and amortize any remaining costs over the initial 180 months.
Expansion costs for an existing business are treated as business operating expenses, provided they are ordinary, necessary, and within the scope of the existing rental business. The IRS and tax court maintain that a rental business is geographically confined to the property’s location. Consequently, purchasing or intending to purchase property in a different area is considered starting a new rental business, making the associated expenses start-up costs.
It’s crucial to note that mere investors in a rental business cannot deduct start-up expenses. Deductions are reserved for active rental business owners who meet the criteria. Ensure a clear understanding of these tax implications as you embark on your landlordship journey.