Tax Act Simplifies the Private Foundation Excise Tax on Investment Income

Taxpayer's desk and excise documents to import and export industrial goods for the purpose of maximizing profits for large business organizations.

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Written by David Wheeler Newman

Tax legislation that was included in the massive spending bill signed by the President included provisions affecting the charitable sector.  We previously reported on one provision involving the reviled nonprofit parking tax and on another provision granting temporary tax benefits for donations targeting disaster relief.  Another provision will be good news for private foundations and their advisors.


Tax Act Enhances Deductibility of Disaster Relief Donations for a Limited Time Only

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Written by David Wheeler Newman

Tax legislation that was included in the massive spending bill signed by the President included provisions affecting the charitable sector.  We previously reported on one provision that will be welcomed across the sector.  Another provision will be good news for donors making charitable contributions for disaster relief.

The Taxpayer Certainty and Disaster Relief Tax Act signed into law on December 20 includes various tax provisions intended to mitigate a portion of the enormous financial cost of recent hurricanes, tornadoes, forest fires, earthquakes and other natural disasters.  Included was an enhanced tax benefit for donors making charitable contributions to organizations providing disaster relief.


Hasta la Vista to the Reviled Nonprofit Parking Tax

Empty parking lots, aerial view.

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Written by David Wheeler Newman

Christmas came early for the nonprofit community when Congress repealed the hugely unpopular tax on parking and other transportation employee benefits.

The 2017 Tax Cuts and Jobs Act added a provision to the Internal Revenue Code that had no friends in the charitable sector: section 512(a)(7) made transportation fringe benefits including parking and public transit benefits, provided by nonprofit employers, subject to the unrelated business income tax (UBIT).  Not only did this provision defy logic by taxing expenses rather than income, it forced the filing of an income tax return (Form 990-T) upon thousands of nonprofits that before 2018 had only filed a Form 990 informational return, but not a 990-T, not to mention countless churches that don’t even need to file the Form 990.


Are you rEDDy for the Audit?

Incoming Financial Audit

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By Jeffrey Davine

We regularly assist clients with worker classification audits that are conducted by both the Internal Revenue Service (the “IRS”) and the California Employment Development Department (the “EDD”).  It appears that these types of audits may be occurring with greater frequency than in the past. Waiting until after the IRS or the EDD comes calling to review the status of these workers is not a good option.

There are two categories of workers- employees and independent contractors.  From the perspective of a business, classifying a worker as an independent contractor is usually less expensive and entails fewer administrative burdens than classifying a worker as an employee.  This is because various tax obligations (such as withholding and remitting income and employment taxes) are triggered when a worker is classified as an employee.  In addition, if a worker is an employee he or she may be eligible for certain fringe benefits such as paid vacation, health insurance, and retirement plan participation.  Moreover, labor laws impose numerous obligations on a business when it hires an employee.  These tax and administrative requirements do not need to be satisfied when engaging an independent contractor.  (more…)

Wealthy Californians (and their Children) Can Breathe a Sigh of Relief

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By Joyce Feuille

Wealthy Californians, and more importantly, their children and grandchildren, can pop that champagne. The bill that would have imposed a California gift, estate, and generation skipping transfer tax appears to be dead – – at least for now. It will not get a floor vote in the California Legislature.  Absent a floor vote, the California bill will not obtain the required approval of the California Legislature to put it on the November 2020 ballot. (more…)

Opportunity Zones Overview

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Part Two:  Flow-Through QOF Basis Benefits

By Andrew Park

On April 17, 2019, the highly anticipated, second round of proposed regulations (the “April 2019 Proposed Regulations”) were finally issued, and taxpayers were rewarded for their patience.

The primary tax benefit for a qualifying investment in a QOF is the investor’s ability to step up his or her QOF investment basis to FMV if a 10-year holding period is met.  The plain language of the statute appears to limit the benefit of the basis step-up to the equity interest in the QOF itself, but not the QOF’s assets. (more…)

Opportunity Zones Overview

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Part One: Section 1031 vs. QOF

By Andrew Park

Historically, a like-kind exchange under Internal Revenue Code Section 1031 was the preferred mechanism for the deferral of gain from the sale of certain types of assets. As a result of the 2017 Tax Cuts and Jobs Act (“TCJA”), 1031 exchange treatment is now limited to exchanges of real property. If executed properly, a 1031 exchange allows investors to defer paying capital gains tax – potentially indefinitely – on the sale of property by reinvesting the sales proceeds into a new property. However, an investor is taxable on any capital gains realized on the sale to the extent that any sales proceeds are not reinvested. (more…)

A Movable Feast

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State Taxation of CRT Distributions for Beneficiaries Who Move from California to Another State

By David Wheeler Newman

MSK private clients sometimes move from California, the state with the highest maximum individual income tax rate in the US – 13.3%! — to states like Nevada and Wyoming that have no income tax at all.  Some of these clients are income beneficiaries of large charitable remainder trusts. How are distributions from those CRTs taxed once the income beneficiaries are no longer California residents?

First things first: remember how CRT distributions are characterized for tax purposes. Under Internal Revenue Code §664, distributions are treated as coming first, from the current and accumulated ordinary income of the trust (Tier One); second, from capital gains (Tier Two); third, from tax-exempt interest (Tier Three); and fourth, from corpus (Tier Four). Within each tier, distributions are treated as coming first from income taxed at a higher rate – for example, gain from the sale of collectibles, taxable at 28% before gain from the sale of stock, taxable at 20%. This requires careful record keeping by the trustee, to track the various types of trust receipts in the various sub-tiers, especially for NIMCRUTs that may make no distributions for several years. (more…)

Don’t Let the IRS Yank Your Passport

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By Jeffrey Davine

The IRS has in a recent news release (IR-2019-23) reiterated its warning that individuals who owe federal taxes may not be able to renew their passport or obtain a new passport.

As we recently reported, taxpayers who have a “seriously delinquent tax debt” may be prevented from obtaining a new passport or renewing a current passport.  This means that, if someone owes taxes to the federal government, he or she might be unable to travel outside of the U.S. (more…)

Is the West Coast the Best Coast?

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Should You Organize Your LLC in California or Delaware? Part 1- Voting Rights

By Daniel M. Cousineau

We are often asked whether a new limited liability company (“LLC”) that will be active in California should be organized in California or Delaware. In the next several posts we will explore different topics relating to this threshold question, since an LLC operating in California may have its internal affairs governed by Delaware law if it is organized and properly maintained under Delaware law. And while the answer depends on the facts of each case, there are important common factors that all parties involved in this decision making process must carefully consider.

One of the most important factors in picking between California and Delaware are the default voting rights given to members in California that cannot be waived or altered by agreement. These fundamental voting rights shift a certain amount of power and control away from the managers, who are often the founders or initial investors, and towards the other members. (more…)