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Tax News Now Ep. 8 - Tax Topics with Brian Lovett
2 Playsin 7 days
Mark Gallegos, Tax Partner at Porte Brown, and his guest delve into the leading tax topics each month. Gain insights from their expertise on the current tax landscape, with 2025 looking like a pivotal year for expiring tax provisions and potentially a new tax policy landscape. Recognizing the many uncertainties tax professionals face this year, Mark and his guests emphasize the opportunities to strengthen client relationships and drive future revenue for tax practitioners.
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Transcript
Introduction to Tax News Now Podcast
00:00:09
Speaker
Hey everyone, welcome back to Tax News Now, the podcast where we shine a flashlight into the footnotes of tax legislation and translate into actionable intelligence for real people like yourselves, real firms and real business.
00:00:21
Speaker
I'm your host, Mark Gallagos, tax partner Portie Brown, and the guy who thought reading the new H.R.
Impact of HR1 Tax Law
00:00:26
Speaker
1 tax law would be a light Sunday project. Spoiler alert, many hours later, many legal pads and one full identity crisis later, I realized this wasn't just a bill, was a change in the tax
Modern Tax Compliance Overview
00:00:38
Speaker
universe. But today's episode, it's all about the backbone of modern tax compliance, partnership and S-Corp filings.
00:00:44
Speaker
We're diving deep into the 1065s and 1120s, CPAR elections, AAA, reasonable comp, bonus depreciation, we'll cover it all. mainly focused around the One Big Beautiful Bill Act.
Introducing Brian Lovett
00:00:56
Speaker
To help us unpack this, I'm joined by someone I truly admire, Brian Lovett. Partner it with him. Now, Brian is a lot of things. He's a brilliant tax mind, you'll learn. He brings clarity to an incredible complex situations.
00:01:08
Speaker
He's a strategist, a technician, and someone whose judgment I deeply trust. But he's also a friend. He's a husband, a fantastic dad, and the kind of person who leads with both heart and head. And if you've ever talked with him, you know his ability to translate chaos into confidence is what makes him such a trusted advisor in this profession.
Brian's Journey into Tax Law
00:01:26
Speaker
He leads Witham's real estate strategic tax planning practice, advises both public and private entities, and somehow makes CPAR and push-out elections sound like actual strategy, not just compliance hurdles.
00:01:37
Speaker
So today we'll cover a number of topics. Obviously, compliance stuff, pitfalls regarding flow through entities, what's changed under the One Big Beautiful Bill Act, how to document basis, fringe benefits, a number of things on this way. So, but before we break out the tax code, we're starting with Brian's story.
Motivation and Approach to Tax Advisory
00:01:56
Speaker
His why, what drives him to do his work and what brings him to do his highest level on a daily basis. So Brian, welcome to the show. Thank you, Mark. Thank you. That was ah far too kind and and undeserving, but ah it's good to be here with you and and to connect again.
00:02:13
Speaker
Oh, thank you. Thanks for being here. So but before we jump into all the technical stuff, Brian, I want to rewind the tape a bit. When we first talk about how you first got into a county accounting and eventually tax and
Balancing Personal and Professional Life
00:02:25
Speaker
you got your JD, give us kind of like the journey that you went through um from that late teenager on.
00:02:31
Speaker
Yeah. All right. So, I mean, when I... i went through high school. I wasn't a hundred percent sure where I wanted to focus. I thought maybe business. Um, I was more of, you know, an athlete. I was playing sports and and not really thinking about the future. And I remember, uh, I went to the college of New Jersey back then it was TCNJ and I took a tour, um,
00:02:52
Speaker
probably my junior year of high school, um and had some conversations with the ambassador that gave me that tour. And that person happened to be a business major. They weren't an accounting major. um And so the conversation evolved around, you know what do you want to do? What do you want to major in? And um you know the advice that I got then was, hey, if you think you want to do business, start in accounting, see if you like it. It's kind of the backbone for all business, really.
00:03:16
Speaker
um So start in accounting, see if you like it. And then if not, it's easy to transfer into finance. It's easy to transfer into other disciplines within the School of Business. So I started
Common Mistakes in Partnership Tax Returns
00:03:25
Speaker
with accounting. And I just, I enjoyed it. Um, I still remember that first tax class that I took now.
00:03:31
Speaker
I enjoy accounting. I really enjoy tax and, and, you know, we're here to talk about tax. I, I be, I, I touched, I did enough audit to get my license. Um, but I'm not an auditor. I, I, my firm doesn't want me anywhere near audits, uh, or any kind of value or any kind of, uh, assurance services, but, um, yeah. Yeah. So like I took that first tax class in college and there was just this, Hey, I could do this. Like, this is interesting to me.
00:03:56
Speaker
Um,
Intricacies of Partnership and S-Corp Filings
00:03:58
Speaker
Interned with the big four when I was in school, really wanted to you know land at a big four firm. um Did not. Coming out of college, I had the opportunity to go to a big four firm, but it was an audit job. And I had interned with a really small firm in Princeton, New Jersey, ah while I was in college. And it was a tax boutique firm.
00:04:17
Speaker
And um you know really started to cut my teeth there with respect to what is tax? How do we service our clients and got an appreciation for the impact that tax can have on the average, you know whether it's a mom pop or you know that small business and the impact that tax proper tax planning, tax compliance can have. So that kind of hooked me in. I was i remember junior year, I started there. And um you know I was splitting time between working at the mall in a retail store and interning. And I was just like, how many more hours can I pick up? Let me give up this mall. Because this is the stuff I really enjoy doing. so um So that was really what what drew me in. It was just this advisor saying, start in accounting, and then really just kind of getting that bug. right That first tax class really just planted a seed for like this is interesting to
Centralized Partnership Audit Regime (CPAR) Explained
00:05:02
Speaker
me.
00:05:02
Speaker
um and And then from there, it just kind of took off. And and so um graduated, passed the CPA exam, worked for a couple of years. And I ended up, you know, I am a JD. I went to law school.
00:05:15
Speaker
I ended up probably three years, two years, three years after I graduated thinking there's more to this. um You know, I think that, yes, I was in this small boutique firm, you know, handling.
00:05:27
Speaker
It was a lot of compliance. Um, but, but knowing that I wanted more, right. That I, that there had to be more. So I went to law school, never intending to step into a courtroom. Um, really not a litigation mind, you know, uh, you have to do it enough to get through law school, I guess, or have that mindset and go through those courses. But, you know, ah my real focus in law school was tax law, business law, you know, all of those things just to make myself a better accountant.
00:05:53
Speaker
Um,
Practical Implications of CPAR
00:05:54
Speaker
And, you know, so that really drove me to, you know, understanding the why, right? Being able to read the, you know, I didn't do it on a Sunday afternoon looking for for fun like you did with this new one big, beautiful bill. But, you know, just the ability to...
00:06:10
Speaker
dive into the regulations to understand the why um was what really drove me back to law school. And then obviously graduated law school. I worked at PwC for a little while and I've been with them for ah coming up on 17 years now. So it's it's worked out well for me.
00:06:25
Speaker
That's awesome. and And I think it's a great one-two punch because you have the accounting slash tax background, but also the JD really helps you get a better perspective on when you're reading case law, when you're reading regs and and some of the complex complex stuff that we got to do. Right.
00:06:40
Speaker
So it really kind of helps open that mind to really diving in and looking for the nuggets that we're trying to advise our clients on. Yeah, agreed. Now, what I've always admired about you is that you're not just technical, but you got passion about what you do, you know, whether it's sports or whether it's your your personal life or or just what you get to do with clients.
00:07:01
Speaker
And so what is the thing, you know, let's talk about what someone's why, right? Like what
Issues in S-Corp Filings
00:07:06
Speaker
gets you up every morning and keeps you excited about, you know, just being who you are and going to work and doing what you do?
00:07:13
Speaker
Yeah, yeah yeah we I started thinking about this and I really it required me to dive back into, um you know, kind of thinking back to when this all started. And it really was it is about um being able to, you you know, for whether it's for my clients or for my staff, um ah from a professional perspective, it's really being able to.
00:07:33
Speaker
um understand and then explain, right? To really help bring people along. Really the, you know, it's ah it's always been about making, you know finding the ways to put my clients in a better position ah from the tax side, right? So it's really about being able to understand and explain because tax is complicated. It's a sea of regulation and not everyone understands it. And so my real why is to be there for, know,
00:08:03
Speaker
You know, in the professional context is to be there for my my clients, help guide them in their business decisions from a tax perspective. And, you know, and that does transfer now into, you know, family life. Right. So I have you mentioned I have five boys.
00:08:16
Speaker
um Keeps me pretty busy when I'm not at work. But it's also to help guide them. Right. So, you know, whether it's the tax code or just kind of navigating high school or the college selection process, it's just,
The One Big Beautiful Bill Act's Impact
00:08:27
Speaker
you know, to be there for my clients, to be there for my staff, to help open up doors that maybe weren't open for me or or to help try to open doors that weren't open for me, to help my clients understand and better make make better decisions using the tax code as an opportunity instead of a burden.
00:08:43
Speaker
um And, you know, so that's really it. it's to It's to help folks who, you know, maybe, you know, if they don't have the background I have, they don't have the experience that I have. So even with my staff coming up, it's to to point them in the right direction, to arm them with, you know, these are the tools that you use. These are the tools.
00:09:02
Speaker
You know, this is how you would approach approach the problem, solve the problem, you know, help to empathize, put yourself in the client's shoes. What would you want to be told? What would you want to better understand as you make this decision?
00:09:14
Speaker
So, you know, that's what really gets me up. Like the the teaching I love to teach. I know you and i sit together on a few committees. I enjoy getting out there and and talking about these technical tax topics and trying to break them down and make them understandable for everybody because, you know, that that's what allows people You know, all of us, whether it's me and my client relationships, you and your client relationships, or anybody who's listening and their client relationships, it's what makes you that trusted advisor
Section 174 Updates
00:09:38
Speaker
because you can help them understand and you can help them um make decisions and drive their business forward.
00:09:45
Speaker
It's more than just kind of putting numbers on forms, right? I feel like that numbers on form stuff is much less important. It's really that consulting, that guidance, that sitting at the table and helping to make strategic decisions. um And so that's what keeps me going.
00:09:58
Speaker
Yeah, that's great. I mean, I always kind of view it as like anybody can put numbers on a return. AI, human beings. Machines are going to do it soon, right? I mean, the numbers are going to get on there. It may even be in balance. It may even be somewhat right. But understanding why a number goes a certain way, understanding the complexity of the theory of why taxes, why the way it is and how do we, how do we, is that right? Or is there something else we could be doing? So, no, it's so important there.
00:10:23
Speaker
um On a lighter note, when you're not solving for basis and dealing with partnership 754 basis, step up and the whole thing, what do you do to unwind? Right. What are your hobbies? Like what what what else are you doing beyond this?
00:10:36
Speaker
life? Yeah. So it's a lot of family. Um, my, yeah, I got, like I said, I got the boys. So we're sitting on base. I coached them through, you know, their little league years. so now they're getting a little older. And so it's being a dad, being able to be on the sidelines and root for them or in the
Strategic Planning with HR1 Changes
00:10:54
Speaker
backyard with some extra swings off a tee or whatever it may be.
00:10:57
Speaker
Um, years ago now, um, probably 2014 or 2015, I did find CrossFit. So fitness is ah a little bit of a passion when I'm not working. Um, I have, uh, you know, I've been in and out of that for years, but, um, since the pandemic and the kind of the shutdown of the world, I built my garage out to a gym. So if I'm not at my computer, I am probably out in my garage gym, trying to better myself, uh, know, from a fitness perspective and, you know watching what you're trying to figure out what the human body is capable of. I, I have done, um,
00:11:30
Speaker
probably 14 marathons, some triathlons in my life. So, um you know, fitness and activity has always been something that, you know, is important to me. It's a passion of mine. It's something that I really enjoy.
00:11:41
Speaker
ah But it's also a nice break from what is a ah ah pretty sedentary job, right? I mean, when when we're traveling and speaking, it's nice to be able to walk around the stage and talk. But for the most part, what I do, what I'm doing right now is what I do for way too many hours a day. So it gives me an opportunity to get up and move. But you know That's really it, just getting outside, being outside with the boys, you know trying to get them involved in whatever they're involved in at school. you know One of them, you know it's the school play, so it's getting him to and from school and going to support him in the school play or, like I said, weekend baseball tournaments with my high school junior um or you know whatever we can all do together to just to to get outside, to appreciate everything.
00:12:25
Speaker
nature and and and just kind of clear. For me, it's really clear my head from, ah you know, what is a, what can be a very intense, you know, job trying to figure this stuff all out.
Partnership Compliance Hacks and Final Takeaways
00:12:38
Speaker
That's awesome. No, that's great. I mean, yeah, obviously that it ah the number of boys you have, obviously there's some strong testosterone running around, which is great. um But, you know, you're you're driving from here to there and, you know, just that, you know, having those moments is great because, you know, it gets us away from the complexity of what we do and not not that that's any easier by any stretch, which you're describing, but it's just something different, right? So it's a different, it's, it's stress of a different type, but it's, it's good stress and,
00:13:08
Speaker
It's nice to have the opportunity to be there and to, you know, having a job that's flexible enough to be able to be there. You know, if he's got games after school, it's nice to be there. If there's something to be there, you know, something to be there for, it's nice to have the flexibility and the opportunity to be there.
00:13:23
Speaker
And I think that's the important thing when I talk to people who are like, should I, you know, whether I stay in accounting or maybe I should go into accounting, you know, they think all we do is work, work, work. They hear the horror stories and they never get a ah life. And, you know, you know, what you've been describing, what I've experienced is that, yes, we do have times where we're,
00:13:43
Speaker
you know, pedal to the metal, but but you also have that flexibility in this industry to be able to do things for your personal life, to your family, to travel, to do things
Conclusion and CPE Credits Reminder
00:13:53
Speaker
that are just not sitting behind the computer. So it's always good.
00:13:57
Speaker
Yeah. And that's consistent with what I hear from from folks who are happy and engaged in their careers and their professions and the firms they work for is they do feel like, and I think it's important, they do feel like there is the ability for them to balance things you know, their opportunities within the firm and their opportunities in their career with their family life and an understanding that, you know, look, it's not an easy profession.
00:14:21
Speaker
It's never been easy. um But that, you know, you're going to work really hard, but you need the the latitude and the leverage to be able to spend some time with your family because, you know, it's all very important, right? I don't want to say my my family is obviously the most important, but my career is very important, too. And so in order to be able to meet the demands of all of those things, you really have to find a place where, know,
00:14:41
Speaker
you know, you feel like you can share, communicate, right? I mean, a lot of it and I deal with this with our teams, communication is key. If you have to be somewhere for your family, like you have my 100% support to do that, just make sure we know about it so we can plan and structure around it. You know, I want to make sure they're empowered to do that um and be there for that because this career is tough, um but it's a lot harder if you feel like you're doing it at the sacrifice of other things.
00:15:05
Speaker
Absolutely. Now, those are words of wisdom right there. Thank you, Brian. So now let's shift gears to let's talk about partnerships. My favorite. Yeah. So when you think about the partnership tax return form 1065, just off the surface, what are some of the most common mistakes that you see? Things that firms or taxpayers consistently miss or underestimate out there?
00:15:30
Speaker
Yeah, I mean, i think the the the general theme of a lot of the things that I see ah is is that there is more obligation being put on the practitioner um than there probably ever has in the past um in the form of disclosures, in the form of questions.
00:15:51
Speaker
um So, you know, you'll see a lot of those questions, you know, even just recently, some changes with respect to you mentioned 754 adjustments, right? Is there a 754 election in place? If there is that, you know, the now the question asks, well, what what was the date that it was in place? And um I've seen more and more where, you know, that box is not checked or that date is just made up or, you know, they put in a date that's 1231 2023 because one because they're doing return.
00:16:17
Speaker
but we have a seven fifty four adjustment three years ago um you know So it's important to make sure that you're reviewing the questions, you're asking the questions accurately. There's a lot of you know I am not an international person. i know enough to know when to raise my hand and look for help. But um you know there's a lot of questions on there about international ownership and do you have certain types of owners? And so I think one is not really reading and understanding the questions that are being asked, because if you answer one of those questions wrong,
00:16:44
Speaker
You could open up a whole can of worms. That's a problem. you know, that that'll be problems you're just going to continue to fight. um I see a lot of issues. with guaranteed payment reporting as well, right? So partner, partner medical, partner retirement plans, the cash paid to partners, is it ah is it properly reported as a guaranteed payment? Are we getting the deductions on the return? Are we running the right things to the M1 schedule or are we not running the right things to the M1 schedule?
00:17:11
Speaker
um And just making sure that all of that is done. um The K-1 disclosures are another one. I know ah you know I've spoken more and more on this recently at different events. I think I'm scheduled to talk about it again in a couple months, but the the the instructions just get more and more complex and more and more complicated. And so you know all the way down to, you have 754 adjustments? If so, you're supposed to be disclosing the basis of your 743Bs and all of these all of these things as footnotes to the K-1.
00:17:40
Speaker
um And I do see more and more people who just you know are not properly completing that K-1, all of it, right? Whether it's just the face of the K-1 or all the so the subsidiary, like the footnotes that go along with it, the supplemental information.
00:17:54
Speaker
um was working with one person yesterday this week, I guess it was probably maybe Monday. um The appreciation schedule showed all of these like 704C assets that came in. And so I started asking, hey, do we have tax basis, fair market value? What's the built-in gain? I look over at the K-1, on the bottom left-hand side of the K-1, there's a question, did the partner contribute an asset with built-in gain or loss? ah you know There's nothing there. So you know being consistent throughout the return with respect to what information we're putting on the return and then being confident in
00:18:28
Speaker
you know, if I'm putting on an asset that was contributed by one of the partners with a fair market value that differs from its basis, and that's gain or loss, right? So if you read that, it's not just 704c gain, it's also built-in losses, making sure that we're getting all those disclosures because, um you know, you wouldn't want to find yourself in a situation where, you're you know, you're the IRS would allege you didn't file a complete return or or or anything along those lines. if we're If we have these issues, it's making sure that, you know,
00:18:54
Speaker
were properly reporting and disclosing. And so that's what I see as some of the most challenging issues is they ask for more and more information. And if the practice is just, hey, this is what I did last year, so I'm just going to do it again. Right. Hey, what's your support for this?
00:19:11
Speaker
It's what we did last year. It's what we've done for the last five years. um There's new questions, there's new details, there's new K-1 supplemental information that is required. So you know I always recommend to my teams that when the new forms come out, take a pass through the instructions, especially the what's new section. I mean, the IRS does do a decent job of giving you like a little blurb at the beginning of what's new.
00:19:32
Speaker
um Understand what's there. If you have the tools, take last year's instructions and this year's instructions and do a compare in PDF and understand what's what new information is in this. I'm not saying you know not everybody's wired to sit there and read the partnership instructions, which are quite long and not all that exciting.
00:19:49
Speaker
um But with the advent of AI and machines, we can do compares between two PDFs and understand what changes are out there. So understanding you know what new information is required, what new questions are being asked, and what is the IRS looking for.
00:20:02
Speaker
um It is constantly changing, even now with is the change in liabilities a result of a sale of a partnership interest. I mean, they're asking more and more, and that's putting the requirement on the preparer and the practitioner to be more well versed in what is being asked and and how we properly answer those questions. So that is, you know, on the partnership side, that is a big a big issue that I've seen.
00:20:25
Speaker
and And I think one of the things that you've explained there that I think is fantastic is, in my opinion, the 1065, when you really look at it, is probably the most complex of the reporting entities that we have to deal with.
00:20:38
Speaker
Not that anything else isn't complex and doesn't have its own issues, but just because the amount of disclosure, the amount of questions, and kind of like you said early on, I mean, you you answer some of this stuff wrong or don't answer it, it could really have... um detrimental consequences potentially.
00:20:55
Speaker
And now we're, you know, I always say, you know, with AI and, you know, whatever the IRS is doing, the process, this stuff, I mean, they're just adding more and more questions for us to answer to kind of give them the field work to say, hey, are they doing this right or not? Right. And so, and I see this a lot when I pick up a new return, maybe another accountant did it or whoever, and, you know, capital account reconciliations, you know, that's,
00:21:19
Speaker
You know, that is something that I mean, the first thing I always look at is like, is this even accurate? Right. And you start to look at book capital, 704B capital, looking at tax capital, all these things. And you realize a lot of people just don't understand that. Do you see that a lot? Yeah.
00:21:37
Speaker
Yes, we see it a lot. And I think, you know, both again, it's, you know, I'd love to be able to sit here and say an absolute that it's always when we pick returns up from other places, but it's not necessarily always that sometimes it's just, you know, again, know, the engagement team just for a little bit relied on this is how it's always been done or rolled the capital forward. But, you know, that tax basis capital regime that was kind of floating around for a while, I, you know, it started,
00:22:01
Speaker
becoming mandatory a few years ago to report our capital accounts on um tax basis. And, you know, it's always been, you know, yes, I agree with you on partnerships. I love partnerships because I do feel like they are the most complex.
00:22:14
Speaker
um And there's a lot of opportunity there and you special allocations and all of the other things, 754 and all the things that make it complex are to me the things that really excite me because they give us a lot of planning opportunity and a lot of flexibility.
00:22:27
Speaker
um But the balancing was always very nice, right? Your schedule L tied to your M2. Yes, it worked. The M1, that went here. like You could kind of do a quick tick and tie and say, now it all makes sense.
00:22:40
Speaker
um But a few years ago, we had this change from M2, the M2 and the capital accounts on the K1s being reported at whatever basis you chose to report them. So if you wanted to report them as GAAP, you could report them as GAAP. And you know I think you know as the IRS, to your point, I think a lot of these disclosure changes and and and everything is really giving the agents the tools at a snapshot to say,
00:23:05
Speaker
Is there basis here? Is this done correctly? Without needing to say, okay, well, this is a gap basis. Capital account, really doesn't tell me anything. What I'm dealing with tax basis is the loss deductible. right The whole point of but you know the capital account and tax basis rules is that's the first loss limitation. right we We know that if I have a loss allocated to me from a partnership, do I have basis to take that loss under 704 is the first test. And then we get into at risk and passive and the new four sixty one l But you know being able to tell right on the face of the K-1 is their basis for this in this investment is a lot of this rule. So now that L and M2 don't necessarily reconcile anymore, I do see a lot of confusion.
00:23:46
Speaker
um I love, you know, we've tried to implement internally some work papers for that, right? ah Give us a reconciliation. Why, what are the differences between the L and M2? And some of them are, you know, if we're doing a gap financial statement for something, maybe on the real estate side, we have some fair market value adjustments for gap that are not obviously in our tax numbers.
00:24:05
Speaker
um But, you know, but ultimately understanding, being able to reconcile the differences between your L and your M2, your tax basis capital accounts, I think is really important. It helps to make sure that whatever your change in your tax basis capital accounts are makes sense, right Because that's obviously what we care about the most um for tax. I don't really care what the capital is on the L if it's in if it's a gap financial. if i have a gap financial and I'm tied in on Schedule L to the gap financial, I'm not really worried about what that capital account says. But i am i would like to the confidence of knowing...
00:24:36
Speaker
that reconciles back to what we have on the tax side so that we can move forward and say, okay, I trust the tax numbers. Now, the hard part that you mentioned is picking this up from other places, not necessarily having the history of, you know, it's it's been around for 20 years. And I don't know about the folks that are listening, but I know our retention policy is not 20 years, right? So, you know, if the tax returns from 15 years ago don't exist, how can we have confidence in, you know,
00:25:04
Speaker
Was that conversion done to tax basis? Was it done properly? There are some rules in the regulations of of like how we should have converted to that tax basis capital account when we were required to go to get or from from whatever basis to just tax basis.
00:25:19
Speaker
um But trying to understand the history of what happened, ask the right questions. um If possible, we can recreate. We've done it. if If we have the access to the tax returns, we can try to recreate those tax basis capital accounts.
00:25:31
Speaker
um But it is important to understand what should and should not go through. Probably the biggest thing that I see that I've seen flush through tax basis capital that shouldn't anymore be flushed through tax basis capital is those 743 adjustments that you know may exist from a cross purchase. Those are all now required to be separately stated on the K-1, and there's some supporting schedules for that.
00:25:53
Speaker
But I've seen a whole lot of um partnerships where 754 adjustments under 743 were booked to the balance sheet under like a almost like a hybrid tax basis. It's not really partnership basis, and that confuses people. And You know, you know, like probably if we wanted to, we could spend the next hour talking about it. But, you know, but ultimately that adjustment is personal to the acquiring partner. So while it can go on the return and it can go on your depreciation schedule and you're going to have that expense reported to that partner, it's really not partnership basis that would go on your balance sheet.
00:26:25
Speaker
But I've seen a lot of partnerships that booked it to the balance sheet. It's flushed through the capital account. And you know technically, that's not correct. And I think being able to do a reconciliation and understand, oh wait, this million-dollar adjustment is sitting in my tax basis capital account allows you to pull that out of there and make sure that it's ah you know you're accurately reporting it. But it is a very complicated area.
00:26:46
Speaker
um and And that reconciliation, you know coming up with a consistent work paper and trying to tie back into it, understand the change in your M1 adjustments and your temporary adjustments and that they're still reversing. And that's why there's a difference.
00:27:01
Speaker
That will certainly help. Yeah, no, I mean, that gets back to the whole point. There's inside tax basis and outside tax basis. Sometimes they're the same, but many times they're much different and understanding how they how we got there and and what it all means is is part of the problem. so Yeah.
00:27:18
Speaker
Now, I think a topic that comes up, I get a lot of questions on in the partnership world is this CPAR, Central Partnership Audit Regime. Obviously, this came out while back. But can you, you know, talking about what that is, it's just at a 50,000 foot level. and then And then, you know, because I see taxpayers, maybe they're preparing a 1040 and they're like, hey, I got this form 8986 for this client.
00:27:40
Speaker
What in the world am I supposed to do with this? And where is this coming from? So this all kind of hinges on that. So if you want to just kind of holistically talk about it. Sure. so This comes out of, I think it was the Bipartisan Budget Act of 2015 that was passed. ah It was effective for tax years going back to 2018.
00:27:59
Speaker
You could have elected if you wanted to to be in earlier, you didn't have to, but for all partnership returns, I believe it's 2018, filed 2018 later, Um, the Congress passed the Bipartisan Budget Act that changed the whole entire process of how partnerships get audited, right? I think what Congress noticed, and if you look at some of the, you know, things that were published at the time, you know, the, the use of partnerships and LLCs taxed as partnerships, um, exploded, uh, You know, obviously they became more and more popular.
00:28:29
Speaker
It used to be that, you know, you had two options. You were a C-Corp or you were an S-Corp. And these, you know, in the 80s, these LLCs came around. We have the default rules and LLC, multiple members is default taxed as a partnership.
00:28:41
Speaker
And now I would say the vast majority of small businesses do business as partnerships for tax purposes. So Congress sees the use of partnerships explode, but they see the audit rates on partnerships.
00:28:53
Speaker
not keeping pace with the use of partnerships. The percentage of partnerships audited was not climbing at a representative rate. um And so what this centralized partnership audit regime, CPAR, some people call it BBA partnerships, CPAR partnerships, um what this was designed to do was to streamline or or provide an easier process for the IRS for auditing partnership returns.
00:29:18
Speaker
probably the biggest change between ah you know the old rules, which were TEFRA and they applied to large partnerships. so There was the old rules that were TEFRA partnerships over 100 partners. Then there were the you know there was the small partnership rules, which i don't know that anybody really knows what they were, but the you ultimately, the way they audited partnerships was they would come in and they would examine the partnership.
00:29:39
Speaker
and Then if they found differences, changes, you know kind of what we now would call an imputed underpayment. right If they found a deduction that shouldn't have been taken, they would then on the back end, the IRS would open up the returns of all the partners and push that adjustment through to the partners for the partners to be assessed the tax. Because we know Partnerships don't pay tax.
00:30:03
Speaker
The individual partners, you know whatever you got tiered structures, eventually you're going to get out to an individual taxpayer, a trust taxpayer, a corporate taxpayer, some taxpaying entity. But the entity, the partnership entity itself, not a taxpayer.
00:30:15
Speaker
So prior to the BBA, prior to this new regime, the IRS couldn't just come in and say, hey, you overstated your deductions by $100,000. 37% that. thirty seven percent of that um They had to go open up all the partners returns, assess the one hundred thousand dollars, figure out the waterfall, figure out the allocation to the partners and assess to those partners.
00:30:34
Speaker
um Each partner had to had ah due process rights. They could then, you know, kind of throw a monkey wrench into this and say, well, I didn't agree. So, you know. So what they tried to do was make a centralized regime, button it up, make it a little easier.
00:30:49
Speaker
So now the IRS comes in, they examine a partnership return. There is a designated partner representative. Think of the old tax matters partner back in the TEFRA days. The difference here is it doesn't have to be a partner.
00:31:01
Speaker
It can be. And I think in most cases, doesn't. It is in the things that I'm aware of. um But if there's a non-partner manager or something like that, the partnership can designate that person as the partner representative. That partner representative is the only person the IRS will deal with.
00:31:15
Speaker
And they have the opportunity or they have the they have the right to bind the partnership and all the partners to the changes. um The real change here with CPAR is that any underpayment is assessed against the partnership at the highest rate, individual or corporate. right so They kept it open and said, whatever the highest rate is at the time, we're going to assess it against the partnership.
00:31:39
Speaker
Now, Individual rate right now, 37%. We know it continues now as 37%. If the IRS came in, and audited a partnership and found $100,000 underpayment, they would send a bill to the partnership and say, you owe us 37% of $100,000 because we found this deduction that shouldn't have been claimed.
00:31:57
Speaker
And the default rule is the partnership needs to pay that tax. right There are a whole host of issues with that. First is, hey, maybe all the partners aren't individual partners. Maybe I have three corporate partners that would only be taxed at 21% if that adjustment was pushed through.
00:32:12
Speaker
Maybe I have tax-exempt partners involved that would not pay any tax. Maybe the 37% partners have net operating losses. And had that assessment been pushed out or done, had that $100,000 been included in the year that we're reviewing,
00:32:26
Speaker
they wouldn't have actually paid any tax. So, or maybe three of the partners that were involved in 2018, when this audit, you know that was the tax year, three of those partners have sold and they're gone. So now I'm a new partner and I'm paying, the partnership's paying tax money, I'm never gonna get profit that I had to pay tax on from my allocable share.
00:32:43
Speaker
And the other partners were here at the time. Right. It wasn't even my obligation. um So for all those reasons, the CPAR gives us a bunch of options. And you mentioned the form 8986. One of one of the options that the partnership has within, ah you know, within a fixed the amount of time after a notice of final adjustment is they have the option to push that adjustment out to the partners that were partners in the year that was audited.
00:33:09
Speaker
And so that provides the partnership with some flexibility to say, well, I don't have to pay $37,000 because of this change. I can push it out to you. And if you're a corporation, you'll pay it at 21%. If you're a nonfor nonprofit, it you know may not result in any tax to you if it's not UBIT.
00:33:25
Speaker
um And if you're an individual taxpayer with tax attributes, um you can take advantage of those tax attributes. Now, the I know I just talked for a long time about it and it only gets more complicated once we push it out. So I'm going to stop there and kind of say that's a brief overview as best as I can do it in a short period of time without trying to make it too complicated.
00:33:46
Speaker
But it is designed to streamline the process, to allow the IRS to examine more partnership returns and to understand compliance at the partnership level. No, i said Brian, that's that's that is a very good explanation that a lot of people can't do. So no, thank you. I think i think the idea there is that there's there's this change. They want to streamline the process.
00:34:07
Speaker
But within the streamline, if you say, you know what, let's not pay tax on whatever this adjustment is at the partnership level and we want to push it out. And we won't get into all that, but that's where you get into the complexity. And you and I can talk for eight hours on that right now. And you walk through so examples and scenarios of why and what you need to do.
00:34:26
Speaker
And when you actually start to go through the mechanics of it, wow, it's ah it's it's an ordeal. Yeah. And I think the one thing that I would add that I didn't touch on, because we really just looked at it from the audit side of this. Right. One thing that, you know,
00:34:41
Speaker
that I think is, I don't know if it's little known or it's not a it's not appreciated, that was baked into the statutory changes that came around with CPAR is that partnerships that are not eligible to elect out. There is a whole election out regime. yeah um And I don't know if you wanted to get into it too much, but there is an opportunity if you're a small enough partnership, right? You have less than 100 partners and they're all of the proper type.
00:35:03
Speaker
of partnership, which are really individuals, you know very limited types. right So if you have 10 individuals in a partnership, you could choose to elect out of the centralized partnership audit regime and say, I don't want to be in this new system.
00:35:15
Speaker
If you audit the partnership, we're going to have to push it out to all the individuals, kind of follow a procedure that is not really well documented. It's a little bit of the Wild West right for those smaller partnerships. um But if you have tiered partnership structures,
00:35:27
Speaker
You are not allowed to opt out if you have you know disregarded entities and things like that that own in trusts that own in that are complex trusts into your structure. And a lot of my clients have done estate planning and move things to trust for the benefit of dynasty trust for the benefit of generations.
00:35:43
Speaker
Or we have a lot of you know JV entities with tiered partnership entities. We're not eligible to elect out. If you're not eligible to elect out of the centralized partnership audit regime, you're also not eligible to amend your partnership returns if you realize there's a problem.
00:35:58
Speaker
um So if you file a 2022 tax return and now you realize, oh, wait, I have I missed this deduction or, you know, whatever it may be. And I want to go back and I want to amend that partnership return.
00:36:11
Speaker
There's a section in the code that that implemented this that says, if you're subject to CPAR, you're not ah eligible to amend your return anymore. And the process for fixing um return errors is what's known as an administrative adjustment request.
00:36:26
Speaker
The administrative adjustment request, unfortunately, does push out to the partners In the year the AAR is filed, right? So if we're sitting here in 2022, we filed a partnership return in April of 2023 or March of 2023.
00:36:40
Speaker
And we know we have until the beginning of 26. And now we just realized there's an error. We can't go amend the 22 tax return. We need to file an amended an ah an administrative adjustment request. We'll file that in 2025 and then effectively follow the push out procedures we talked about briefly. Hey, here's the tax benefit. We push that out to the current to the partners in 2022.
00:37:01
Speaker
That works out to be a effectively it gets to the point where it's a non-refundable credit in the year that you know, you are filing, right? So you do go back through your 22 return and you would figure out what the change would have been to your 22 return and it generates a non-refundable credit. But I stress the word non-refundable because we have found issues and we've dealt with issues internally where, um,
00:37:26
Speaker
whatever the circumstances are, a taxpayer who has this benefit coming from 2022, we go file this AAR in 25, 25 something happened and they have no tax liability.
00:37:37
Speaker
That's a non-refundable credit. So if they had a $100,000 tax credit because they overpaid their 22 tax because we had this partnership error that we now noticed and we want to fix it. um But then they get to 2025 and for whatever reason, their tax liability in 25 only $20,000.
00:37:52
Speaker
Now they have $100,000 against $20,000 tax bill. That
00:37:58
Speaker
disappears. It's not a carry forward. It's not refunded to them. It's a non-refundable credit that is not ever recaptured. So that's where I think we start to get into complexity around timing of that change.
00:38:10
Speaker
Obviously, you know, you have the statutory period. So maybe if you know, 25 isn't going to be a great year, 26 is going to be a better year. You can kind of play with your timing, but, but ultimately um these rules are wildly complex and can end up in situations where, you know,
00:38:27
Speaker
The error was made in 22. You've identified the error, but now fixing the error means that some taxpayer may not ever see the full benefit of what they would have had if they could have just gone back and amended their 22 return and amended their 22 individual return to claim that credit.
00:38:40
Speaker
So. um Again, adds a lot of complexity and puts a lot into the decision tree as far as trying to fix not just audits, but trying to fix identified errors in partnership returns, which is one reason that we recommend all partnerships extend in March so that you can supersede returns and not have to worry about the amended if you find out that you made a mistake by the September 15th extended duty.
00:39:04
Speaker
Yeah, no, that's so good. And I think at the end of the day, obviously, you know, what Brian just said is is complex, right? And making sure, and I always say, if if you're sitting there listening to this and you're like, hey, i have these issues and I don't know what to do with it and I'm in a small firm sole practitioner, then reach out to experts out there that actually deal with this and and bring them in because the the last thing you want is to fumble this and and not know what you're doing with it along the way, so.
00:39:34
Speaker
Now, if we're shifting kind of gears more to the other side of the flow through to the S corporation a little bit, um when you when you think of the scorp the eleven twenty S the 1120S, what are some of the gotchas, the trip up problems you've seen, the bigger the bigger errors we we we've seen that people need to pay attention to in the S corp world?
00:39:53
Speaker
Yeah, I mean, and I think I think we're I don't do a ton with S-Corps. I you know, we we we have a few um with a lot of my practice being in real estate.
00:40:04
Speaker
My advice is always to stay away from corporate solution, obviously, just because of the flexibility that partnerships allow with distributing property that may have appreciated in value. And once you have that in corporate solution, you can't get it out. You have to you know, you have to recognize that gain. But, you know, the the biggest things I see are the shareholder compensation issue. right? Low or no shareholder compensation saying and I'm going to pay myself $5,000 and I'll take the rest and draw our distribution because it's not going to be taxable.
00:40:31
Speaker
um You know, and trying to play a lot of folks who want to play use the S corporation or trying to play that like self-employment tax game where they can lower their wages, lower their net self-employment tax exposure.
00:40:41
Speaker
um So not having, you know, and and we can talk more, but not having those, you know, reasonable compensation discussions, not reporting reasonable compensation. Um, Tracking basis and reporting AAA is always a little bit interesting and understanding the ordering rules ah that are in play for distributions from the S corporation, understanding the history of that corporation as far as whether there's earnings and profits, are you accurately tracking aaa um This applies to partnerships too, but for some reason, you know see it a little bit in S-Corps is having expenses that don't match your basis of accounting. right If you're a cash basis taxpayer, you certainly shouldn't have something like bad debt expense. kind of looks bad. right
00:41:25
Speaker
um There's been some notices recently with the IRS's focus and I think use of AI on prior year balance sheet inconsistency, right? If you had that, you did a return for 23 and then you realized there was a mistake and you just changed the beginning balance sheet on 24, it didn't have any P&L impact. It was just a reclassification of your balance sheet.
00:41:43
Speaker
You may see a notice there for that because the IRS is is running, you know, running checks on the background to say, does the 23 ending balance sheet match the 24 beginning balance sheet? And if not, What happened? Why? like um So those are the biggest. I think the biggest issues in S-Corp that I see are you know the S-Corp officer comp issue and just a the understanding basis and reporting of distribution.
00:42:07
Speaker
Yeah, I'd agree with that. Reasonable comp's huge. i you know I get called, you know medical practice, doctor says, hey, you know we make $10 million dollars a year and I'm just gonna pay myself 25 grand. Well, you know the idea of when you explain to them what reasonable comp is supposed to be, you know that you you realize real quickly, like there are you know there there are some tests out there, there's no fine line to it, but um in that example, that is definitely not gonna meet the SNF tests with the Internal Revenue Service. So,
00:42:35
Speaker
Yeah, I mean, and I always ask, you know, again, kind of, and I think this is somewhere in guidance. I don't think I made it up, but what is ordinarily paid for similar services by a similar business under similar circumstances? If you're a doctor and then your name is on the door, you know,
00:42:49
Speaker
and and take the name off the door, right? If you had to go hire somebody to come do your job, because all of a sudden you own this practice and you can't meet your patient demand and you got to bring in a second doctor, are you paying them $25,000 too? If not, you know, that certainly starts to smell like maybe a problem or something I would investigate a little bit more. And to your point, I don't think there's any bright line. I've heard of a whole lot of Well, I just do this because it's close enough and or or it lowers my exposure. I think the one is paying up to the Social Security wage base.
00:43:17
Speaker
um but After that, it's just Medicare. So it's close enough. But again, I think that the assessment that any examiner examiner is going to look at is you know what is so what would you pay for a similar purpose or another person to do these services in this business under same conditions?
00:43:35
Speaker
That's great. Yeah, no, no. and And I think, I think there's, you know, partnerships, we talked about, you know, capital accounts and basis there, but also S-Corps, you know, basis is also need to be calculated. Sometimes I think people focus a lot more on the basis on the S-Corps because there's an actual form, after three um and it's got to be filled out.
00:43:56
Speaker
But, you know, I always say, no matter what type of entity, you got to be able to tie the basis out, period, you know, so. Yeah, yeah. I mean, I think, Yes, with S-Corps, it's to your point.
00:44:06
Speaker
it's You have to, right? You have this form, it gets filled out. But um you know it's also understanding... what that basis is, understanding the impact of certain things. I've seen a whole lot of people when they're doing debt basis calculations, looking at the debt of the S corporation, even though that's not a debt direct from the shareholder, right? So just a quick distinction between partnerships where partnerships, partners do get basis for the debts of the partnership, right? They're allocable share, they're properly allocated share under 752, kind of, again, not to get into an hour long conversation, but as a partner in a partnership, you can put no money in,
00:44:41
Speaker
and have basis in that partnership interest because the partnership went out and took a loan and you're allocated, you're properly allocated a share of that loan. So that'll give you basis. In the S-Corp context, that doesn't apply. if the If you put no money in for your stock, but the S-Corp went out and borrowed money,
00:44:57
Speaker
You start with zero um and understanding those nuances and then, you know, kind of being able to track the money that went out. The other thing I see an awful lot is, hey, I don't want this to be a ah ah distribution that may be taxable. So I'm going to hang it up on the balance sheet as like a loan to the shareholder and he'll pay it back at some point. And then five years later, he still hasn't paid it back. And maybe that loan has grown to, you know, five times the original amount because we're just trying to dodge this. Yeah.
00:45:23
Speaker
potential excess distribution, the tax on the excess distribution. You're not going to get away with it. you know it's It's better to be able to track the basis, explain it to the taxpayer. You can't do this. You need to do it.
00:45:34
Speaker
you know If you're going to take a loan, we got to document it as a loan, perform it like a loan. We can't just hang it up so you can wait and defer the tax till later. No, that makes sense. Awesome. Well, that's good stuff there.
00:45:46
Speaker
Now, let's kind of shift into the HR1, One Big Beautiful Bill Act. Obviously, we're not even 30 days into it being signed, but um you and i know we've been kind of digesting it and trying to see how this applies.
00:46:01
Speaker
But, you know, when we're thinking about the context of, you know, we've just been talking about partnerships and S-Corps and flow through entities and, You know, there's a number of provisions that have some impact, you know, and not to go over everything, but like, you know, for example, the SALT cap went up to $40,000 for individuals.
00:46:18
Speaker
That may, depending on where you live and your tax liability of the state you file in, that could have some impact. Are you seeing that and as far as when you start to think about how do we plan for our clients this fall and and going forward?
00:46:31
Speaker
Yeah. I mean, we're starting to talk about it. We're looking at it, you know, again, that 40,000, you know, considering some of the clients we deal with of that, that phases out, uh, at the individual level, the higher and higher that income goes, right? So you really want to get a full understanding of, um, you know, who the partners are in the partnership or the pass through entity, who the shareholders are and what is their individual tax picture look like. And you may not necessarily do the individual work for all the partners or for all the shareholders. And so, um,
00:46:57
Speaker
i My personal opinion is that's a decision that the entity has to look at. And if they're in a state where you know there's a PTET election in place or or opportunity in place, um you know getting the the decision makers inside the corporation on the phone, getting the inside you know the decision makers inside the partnership, say, maybe we need an all hands call with everybody's individual advisors to fully understand, hey, if if the taxes, if you're going to get your full 40 and that's going to be okay for you, then maybe we don't need to think about a pte election but if if the income you know we don't necessarily know what everybody's going on if if other partners are going to be losing that 40 000 because maybe their income is too high doing the ptet with inside the inside the entity is still going to provide benefit across the board so it's really being able to fully you know we're just starting to get our hands around you know what does it look like for 25 obviously we have largely been
00:47:49
Speaker
yeah With the $10,000 cap, we've been doing a lot of PTT, a lot of taxpayers in our practice. I'm in East Brunswick, New Jersey. So we have New Jersey, we have New York, obviously very high tax jurisdictions. um But you could certainly have competing concerns between taxpayers with you know, that live in Texas or live in Florida or somewhere where there there may not be the same level of state tax. And so, you know, they're not as sensitive to that deduction. But it's it's certainly, you you know, planning and planning as soon as possible and making sure you're involving all the right folks in the decision because, ah you know, you don't want to make it a decision with blinders on to the fact that, you know, there may be other parties that aren't similarly situated.
00:48:26
Speaker
No, it's so good. And yeah, i agree. I mean, the nice thing with the bill is besides the salt cap um and looking at that is, you know, PTET, you know, we still get the ability to continue to operate in the world of, you know, if the states allow it to continue. And I think we got what, 36 states and maybe one locality that allows PTET and,
00:48:46
Speaker
um it's a great It's a great planning tool. you know It's not for everybody, but depending on the situation, I have seen huge tax savings for clients. And I think that's where you need to make sure you're looking at it.
00:48:57
Speaker
Absolutely. 10 to 40 is big for certain folks. you Again, for our folks here in New Jersey, 10 to 40 doesn't change all that. I mean, it's $30,000, but it's still ah sometimes a drop in the bucket relative to what they're um paying.
00:49:10
Speaker
And ah you know A lot of times they're in that higher income bracket that's going to phase it back down to 10 anyway. That's right. Now, another provision in the tax bill that I thought is you know on people's minds is Section 174. We had to, if you remember, we went back to in 22, we had to start capitalizing those R&E costs and amortize them domestically. It was five-year amortization, four and 15 years.
00:49:37
Speaker
Can you kind of talk about what changed with this tax bill on 174 and what we can expect? Yeah. so So with 174 now, we we have obviously the fix that says for domestic, now again, domestic R&E, we don't need to capitalize it anymore.
00:49:53
Speaker
For foreign R&E, you still have to capitalize and amortize. The amortization period remains 15 years. So if you're using you know if you're using vendors that are not United States vendors, 174 is still a problem for you. But for the vast majority of the folks that I deal with, 174 now does not need to be part of their um their calculus anymore.
00:50:13
Speaker
um But there are some opportunities there um for smaller taxpayers to be able to, um you know, take some of these deductions for, um you know, take them quicker, these deductions that have been hung up on the balance sheet Now, in a lot of the cases and the folks that I'm dealing with, they're three, four years into this because they started doing it back in 2022, right? So um they're looking at, hey, the amortization that I've got, that it's coming out, you know,
00:50:38
Speaker
um We're obviously going to continue to deduct now, but maybe we're not going to bother going back and and amending or doing anything with that. We're just going to let it kind of roll out. We're going to take the deductions as they're available. But um there are some opportunities for taxpayers under 174 to get those amounts that were on their balance sheet as capitalized um out to their P&L.
00:51:00
Speaker
And so, you know, it's important to make sure that we understand, you know, who our taxpayers are and and what they're going to be motivated by and whether or not they can take the benefit of those. Right. Because that's the other thing we're dealing with, too, is if you're already in a lost position or you have some kind of situation going on where you're not going to necessarily be able to realize the benefits of this significant deduction, does it make sense to just wait and not, you know, go back and try to fix it? Right. let' Leave it um going forward.
00:51:26
Speaker
so Yeah. i think I think the idea that starting in 25, domestic R&E, we can fully expense going forward, which is great. They made it permanent. Permanent, i've always put in quotation marks because it is what it is.
00:51:40
Speaker
It's only permanent until there's another tax bill. That's right. That's what I always say. Permanent means for now. But they do give the option that you know if you're a small business and they define a small business of average gross receipts of 31 million or less and you fall into that category, that you can go back and amend 22, 23, 24,
00:51:59
Speaker
And essentially expense off the unamortized capitalized piece that you had there. Right. Right. And that's an option you have to think about. Or if you are a small business, you don't have to do that. Or definitely if you're a large business, you have to.
00:52:14
Speaker
You could also elect to write it off in 25 or 50 percent 25, 50 percent 26. Now, obviously, we need guidance on what this election is because it's a change in accounting method. We had to do that.
00:52:25
Speaker
We had to start doing this. so So there's a lot of questions out there. I know the AICPA and other places are really trying to get some advocacy on, hey, we need guidance sooner than later on this particular provision.
00:52:37
Speaker
But with all that being said, we talked about S-Corps basis. We talked about partnerships. One of the things that I have thought about, Brian, and I don't know what if you've done or not, is, hey, I got this client. They got massive amounts of R&E that's been capitalized.
00:52:50
Speaker
there's And now we're going to be able to write it off, let's just say in 25. And I'm now doing I'm going to trigger a giant loss, right? And I'm a partnership. Or I want to go back and amend because I'm under that 31 million. And you're like, client's like, I want to go back, i want to get all this money. Well,
00:53:07
Speaker
And they you know they fall in CPAR. they They have different things that have to come up. just All of these things that we just talked about, you have to be thinking beyond like, oh yeah, you get this deduction, right?
00:53:18
Speaker
Correct. So isn't that what we've got to be thinking through is ah as practitioners? Yeah. Yeah. I mean, how do we fix it? Right. Yes. The code says we can go amend those returns. But the code, that section of the code, at least to my knowledge and the guidance we have so far, doesn't overrule the CPAR rules, which tell me I can't amend my tax return. Right. So if I can't get back to twenty two or you're right, what if we get to twenty five? We say I'm not going to go amend the return or I'm a I'm a large taxpayer. I'm over the threshold. So I'm going to take all these deductions in twenty twenty.
00:53:45
Speaker
um Five. But now this has created this, to your point, a large loss. um Maybe partners, shareholders are going to be stuck with, um you know, do they have basis to take the loss of that basis at risk?
00:53:58
Speaker
um 461L now creeps in, right? So we have the net business, the net excess business loss rules. Now, obviously, the one nice thing that did come out of one the the the One Big Beautiful Bill Act, um they had proposed, there was a lot of potential change to that that would have kept 461L as a separate loss category, similar to how at risk is maintained separately and passive is maintained separately.
00:54:20
Speaker
um The original legislation would have had once seven or the 461L losses become its own separate category of losses, which I think would have been you know devastating to some taxpayers because you know once you start hanging that up there, you you have to have excess business income to be able to start eating it up. And if you constantly are throwing off excess business losses over the threshold, you're just adding to that loss. Under the current law, before the the bill and now after the bill with the no change, 461L, I believe, was adjusted to be permanent.
00:54:54
Speaker
However, If I have an excess loss in 25, any disallowed loss in 25 becomes part of my net operating loss in 2026. So while that's a good answer, there's a couple of things to keep in mind. After TCJA, net operating losses are only available against 80% of your taxable income, excluding obviously those few years that were CARES Act changes back around 2020.
00:55:16
Speaker
But for right now, NOLs are only available against 80% my taxable income, not 100% like it was before. And there's no carry back availability. So I can't go back and get it. And I think that's the other thing, even looking at this, I have a client that's a C Corp and we're looking at, hey, the 174 changes. And for years now, they've had issues with one seventy four the combination of 174 and 163J just really smashing them.
00:55:42
Speaker
You're at a break even, but you got to add back cash expenses that were 174 expenses and amortize them over five years. And then you're going to look at your adjusted taxable income without adding back your depreciation expense. And you got to limit your interest expense to 30%.
00:55:55
Speaker
And so while you may have cash basis, lost money or had a break even year, you got a pretty sizable tax bill to the government. Well, now they're over the thirty one million dollar threshold. They aren't eligible to go amend prior returns. They are eligible if they so choose to flush all those capitalized R&E expenses through 2020.
00:56:15
Speaker
um five But we still have 163J as a problem. We still have, now it creates a net operating loss and that net operating loss doesn't get me back to 22 and 23 and 24 when I paid tax that really didn't represent true income.
00:56:31
Speaker
um So you got a lot of competing concerns and a lot of of issues here with respect to the timing and not just the timing of the deduction, but theyre the the realization of the benefit, right? If it just dumps you into a net operating loss, that's not dollars you're going to see now. It's maybe dollars you parted with in 22 and 23 and 24, but now you have this tax benefit that's going to carry forward for a number of years. And so understanding that timing and trying to You know, if I make a left here, this is what it's going to do. If I make a right here, this is what it's going to do. And and what's the best answer for the ultimate stakeholders is, you know, and especially when you're doing it in partnership world or S-Corps, because everybody's, you know, what works for partner A may not work for partner B. Now, that's so good. and't i and And you brought up what I was going to talk about. I mean...
00:57:14
Speaker
163J. So, you know, if you're thinking it through like, hey, we had capitalized 174 costs, maybe we had a decent year, but not a great year in 25. And now we're going to flush all these unadvertised costs from the the previous three years through.
00:57:27
Speaker
Plus now we still get to expense in 25, our current year stuff. And we create a tax loss. Well, maybe, you know, you got to be starting to think about, um can we take all these losses?
00:57:39
Speaker
ah Bonus depreciations kick back up to 100%. now we're writing off all this machinery equipment we bought. And now the loss is even bigger. And oh, by the way, now I have this tax loss. And I didn't think about can we utilize it for my partner or shareholder. And on top of that, 163J, maybe it applies there. And remember under the rules we had, we were only calculating 30% of EBIT. Now we're able to go back to EBITDA, but 30% of ATI that zero is still zero.
00:58:07
Speaker
Right. Yeah, you need a if you create a lot of these other losses for 174 deduction, to your point, bonus depreciation, now it's wonderful that it's back to 100%. And there is, keep in mind, as we talk about your exact analysis, there is an option for 2025, only 2025, it would have been This year, you can choose to not take 100% on your 25 eligible assets. You could take 40.
00:58:30
Speaker
So that may be something you want to think about when you're saying, hey, I got all these 174 deductions freeing up. I have one sixty three j sitting there in the background just waiting for me to calculate my taxable income so I can do my adjustment to ATI.
00:58:42
Speaker
And you know even though I get to add back, the depreciation expense. So for 163J purposes, that's probably going to be a push, right? Because it's going to come now back in all those 174 deductions.
00:58:53
Speaker
ah Unless somebody tells me differently, I don't think they're going to be considered. And I don't know that that's amortization like the 174 was amortization. Is the free up of all those deductions treated to be amortization or is it R&E expenses that would normally hit my P&L as research and experimentation?
00:59:10
Speaker
There's no add back for research and experimentation expenses. um So kind of walking this line of like, how big of a loss can I create? um Because if you create this nice tax loss and then you realize you got to add back to your point, the entirety of my interest expense, because if I don't get back to a positive number when I do my ATI, now I have 30% of zero, zero. So I get no interest deduction and that interest deduction now carries forward.
00:59:34
Speaker
um What's the actual benefit to the to the the ultimate taxpayer? and And yes, if I do all this, do the shareholders even have basis to take it? And the hard part excuse me the hard part of um the 163J is the carry forward treatment is different between whether dealing with a partnership and you're dealing with an S-Corp, right? So at the partnership level, you would allocate the non-deductible expense to the partners. The partners would carry that forward and be able to deduct it against the you know, the excess business income coming forward in future years at the S-Corps is taxable or carried forward at the S-Corp level.
01:00:11
Speaker
So there's a whole lot of different competing concerns. And then you kind of have to understand, okay, if I'm going to do this and create these losses and limit my interest expense, do I think there's any reasonable, how how quick do I think there's a reasonable prospect of being able to utilize that interest expense in the future?
01:00:26
Speaker
So, you know, there's a lot of a lot of competing concerns that go into it. Yeah, I think the bottom line is you need to get your arms around um these provisions. And as you're starting to talk to your clients and plan into the fall for 2025 and beyond, you look at all the facts and circumstances and and really start to figure just because we can generate some losses doesn't necessarily mean we get to utilize them.
01:00:52
Speaker
and And understanding what we've been talking about today, i think is going to be key to understanding the theory and to the compliance level. Because what you don't want is to say, Brian, you're my client. We can take all these deductions, write all this stuff off, and you get all excited.
01:01:06
Speaker
And now we file your tax returns next year. And you're like, well, did I get anything from this? You're like, well, not really, because we got hung up with this, this, and this. Your response to me would be like, did you not look at that, right? So but just make sure you're looking at everything holistically, because I think that is where we need to be.
01:01:22
Speaker
Yeah, and I think that is the biggest challenge is understanding the benefits that are there, but to really handicap utilization. Because to your point, it looks really great to be like, hey, we can do all these changes and you'll take $2 million dollars loss. But if there's no ability to utilize that loss today and you're telling me I have a $2 million NOL that I may not realize for the next three years, not that there's no benefit to it, there is still benefit to it. There's a time value of that benefit. And I think as long as it's explained up front,
01:01:49
Speaker
You know, you can't control all the loss limitations like because we as practitioners, right? We don't control the loss limitation provisions, but it is important that we understand them, how they're going to impact utilization of those losses and make sure we're presenting the expectation that you will get this eventually, you just will not get it today. And do you want to go forward under that assumption?
01:02:08
Speaker
That's great. Thank you. Now, as far as like quick lightning round here, like when you think of compliance hacks out there, what's one you would consider a compliance hack for partnerships?
01:02:22
Speaker
Compliance hack for partnerships. um You know, I think, you know, Again, really, and I talked about it earlier, but I think the biggest compliance hack for partnerships is to understand exactly what you're being asked to to provide on the form and to put systems in place early on to be able to gather that information.
01:02:42
Speaker
So being aware of what's changed in the in the instructions, being aware of the information you're going to need so that when you're doing information requests to the client, you can ask for all of that information if you need information.
01:02:53
Speaker
details on, you know, was there a partnership interest change during the course of the year? Because now, hey, we have to talk about that. Another one I see all the time is guarantees, right? So when we're dealing with liabilities under 752, we need to understand, did any partner guarantee this? And um are we specially allocating any of those debts to a particular partner for guarantees? And we have obligations to disclose it. So, you know, partnerships are complex, right?
01:03:19
Speaker
um But the more you understand and the more you can set up, you know, kind of this consistent work paper approach, a consistent information request and get that information up front. So you're not kind of in this back and forth vortex of, oh, now I need this and now I need that. It makes it a lot easier um on the compliance process to be able to have all the information. And if the answer is no, there's no changes, then at least, you know, no, there's no changes um or there's no guarantees or there's no contributions. But, you know, again, if did a partner contribute property?
01:03:49
Speaker
what Was it valued? right um you know Making sure we have, the the one thing I see all the time too, is making sure we have the operating agreement and that we've read the operating agreement.
01:04:00
Speaker
but A lot of times we get into partnerships and we just assume, hey, you're 20%, he's 20%, he's 20%. We're just allocating 20% across the board. And then you go in there and you read, and it's a targeted capital account. And then when you look at the liquidation provision, somebody's got priority over somebody else or somebody's do a preferred return over somebody else.
01:04:18
Speaker
And so, you know, working through the hypothetical liquidation that's required in a targeted capital account analysis and understanding how that money would be distributed. Right. So if we just look at it and say, oh, it's an equal partnership between these three people,
01:04:30
Speaker
We're not doing our due diligence, getting the partnership agreement, understanding what's in that operating agreement and making sure that you know our our allocations are either going to be in line with the partnership the partner's interest in the partnership or the safe harbor rules or whatever it may be.
01:04:43
Speaker
So you know having all that information in our files and being able to ask the right questions, I think, is the one biggest compliance hack that I see all the time. Awesome. Awesome. So Brian, before we wrap up here, any final takeaways for practitioners or firms looking to get ahead, not just keep up?
01:05:03
Speaker
Yeah, I think we, we, We talked about a lot today, but I think the only thing that I can say for folks looking to get ahead is take, and I tell this to all of my teams, take responsibility for knowing what's out there.
01:05:16
Speaker
um you know Understand this law, ask questions. Mark mentioned it before. Don't hesitate to call. You can call me. I'm happy to kick around. you know, my understanding of of different provisions, but understanding the impact of some of these these changes, understanding the impact of not just the bill changes, but the compliance obligations and all these other things before we get into filing season. I know right now we're looking at extension season for 2024 returns, but, um you know, planning for the future.
01:05:43
Speaker
starts with understanding what your obligations are. So, you know, taking responsibility for the learning, taking responsibility for, Hey, I'm going to try to figure this out, or I'm going to ask questions of the right people and not just saying, well, this is what it was last year. So it must be this again.
01:05:59
Speaker
um You know, that that is really it, you know, trying to be a little more active and a little less passive and say, I'll wait for the software to come out. I'll wait for the software to tell me, you know, that that that reliance on either other people or the software, I think, is is one thing that especially in this day and age with all of these new changes, to your point, you know, it wasn't just an extension bill that was passed.
01:06:18
Speaker
It's pretty wholesale changes in a lot of ways. um So just to say, well, it's TCJ 2.0 and we'll just extend everything we're doing. it may not necessarily be the case. So, um you know, being really active in that, you know, planning for the future and not waiting for the planning to come to you and and being able to analyze, you know, look through understanding how this some of this stuff may impact clients and start asking those questions getting those discussions going. It's always good to be in front of clients. It's an opportunity to meet with them, to talk to them, to strengthen that relationship.
01:06:49
Speaker
Wow. Brian, thank you for your insight, your depth, and for reminding us that compliance isn't just about checking a few boxes. It's about building our systems, telling the full story of the business, and obviously protecting the the client along the way. So thank you for joining us today.
01:07:04
Speaker
Absolutely. And to our listeners, partnership and S-Corp compliance isn't getting any easier. From capital account reconciliations to reasonable comp documentation, from CPAR pushouts to bonus depreciations, it's a game changer. And the one big, beautiful bill act just changed the rules again, and we need to get up to speed on all that.
01:07:22
Speaker
Now's the time to update your checklists, revisit your planning models, and train your team to work smarter, not just faster. Documentation is currency. Elections are leveraged, and strategy is no longer optional in my opinion.
01:07:34
Speaker
So subscribe to TaxNews now, follow with them for Brian's thought leadership and keep an eye on the AICPA and the IRS guidance as new compliance regs emerge because of this bill. And here's your CPE reminder. If you're a Becker Prime CPE subscriber, this episode qualifies, log in record your credit and keep sharpening your edge.
01:07:52
Speaker
Not a subscriber, now's the time to join and stay ahead of the curve with unlimited access to content that counts. I'm Mark Gallagos. Until next time, keep leading, keep learning, and never forget, in tax, as in life, a strong basis gets you further than a big distribution. Thanks for joining us.