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What Is A 1031 Exchange And How Can It Help With Taxes?

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In the world of real estate, the term 1031 exchange is a type of purchase that is allowed under Section 1031 of the United States Internal Revenue Code. The purchase allows either a business or the owner of an investment property to defer the federal taxes on certain real estate exchanges. 

The term comes from the Internal Revenue Code Section 1031 which allows the exchange of real property that is not being held primarily for sale for other business or investment property.

Section 1031 Explained

A 1031 exchange, also known as a like-kind exchange, is one that occurs when one investment property is swapped for another. These transactions are taxable sales but if you meet the requirements of a 1031 exchange you will have limited tax or no tax at the time of the exchange. Essentially you are changing the form of an investment without cashing out or recognizing a capital gain as the Internal Revenue Service would see.

Benefits of a 1031 Tax Exchange

A 1031 tax exchange has many benefits for the average property owner. The primary benefit of a 1031 exchange is that you can sell one property, buy another property and avoid capital gains tax through the transaction. Doing this can save you a substantial amount of money while allowing you to purchase a new property and sell another property. It also helps you to avoid paying what could have been a hefty tax amount.

Time Limits

There are time limits associated with a 1031 exchange that must be strictly adhered to. When completing an exchange a new property must be purchased within 180 days. Failing to stay within this timeframe could have dire consequences. When completing any 1031 exchange you must be sure to complete your new property purchase within the time limit.

Rules for 1031 Tax Exchanges

In addition to the time limits, there are rules associated with 1031 tax exchanges that you should be aware of. 

The first and foremost rule is that the replacement property should be of equal or greater value than the original property. You should not get a lower-cost property when doing a 1031 tax exchange. 

Second, you can purchase up to three properties without regard to their fair market value as long as their aggregate value does not exceed 200 percent of your original property’s sale price. 

Third, you have to identify your replacement properties within 45 days of selling the original property. Finally, the replacement property (or properties) purchase must be completed within 180 days of the initial property sale.

How Can a 1031 Exchange Help With Taxes

A 1031 exchange can help you with taxes by allowing you to avoid short-term capital gains taxes. Capital gains are the profits made from selling an asset such as a car, land, house, or boat. Typically, an individual is taxed on these profits but by completing a 1031 tax exchange you can avoid this tax entirely.

Other Benefits of a 1031 Tax Exchange

There are several benefits associated with a 1031 tax exchange – one being that it resets the clock on depreciation. Depreciation is the percentage of the total cost of an investment property that is then written off each year. It also allows you to consolidate multiple properties into one property for the purpose of estate planning. 

Alternatively, it gives you the option of dividing one single property into multiple assets. Perhaps most importantly a 1031 tax exchange allows you to defer the capital gains tax. This frees more capital for investing in the replacement property.

Getting The Most Out Of a 1031 Tax Exchange

There are several benefits associated with a 1031 tax exchange and it is important that you take advantage of as many as possible. Getting the most leverage out of the exchange can help you in the long run with taxes, other purchases, and more. 

In order to learn more about this type of tax exchange and find out how they can help you talk to a qualified and experienced tax attorney. The tax attorneys at Wilson Ratledge can review your unique financial situation and determine how a 1031 tax exchange can be used to help you. We can help you in planning your course of action, fill out the documentation for you, communicate on your behalf, and much more. 

If you have more questions or are ready to move forward with a 1031 tax exchange, reach out to our office today to schedule a consultation!

SALT cap here to stay… for now.

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The state and local tax (SALT) deduction allows taxpayers of to deduct state and local tax payments on their federal tax returns. The tax plan signed by President Trump in 2017, called the Tax Cuts and Jobs Act, instituted a cap on the SALT deduction. 

On Monday, April 18, 2022, the United States Supreme Court declined to hear New York, New Jersey, Connecticut and Maryland’s plea to reverse the federal cap on state and local tax deductions that was instituted under former President Donald Trump’s signature tax plan.

The U.S. Supreme Court turned down the case in which states argued that the $10,000 federal cap on state and local tax deductions was coercive in violation of the U.S. Constitution’s 10th and 16th amendments.  Further, the states claimed that the cap harmed states with higher state and local tax burdens by increasing their residents’ federal tax bills and effectively raising the cost of home and property ownership.

Federal lawmakers have been debating over the last year whether to actually increase the cap, but have been unable to reach an agreement on such a proposal, partly because lawmakers on both sides of the aisle have agreed that a higher deduction would primarily benefit high-earners.  It is worth noting that, absent further legislation, the SALT deduction cap will sunset at the end of 2025.

In its legal filings, Treasury acknowledged that if the cap was viewed in isolation, its limitation may increase the federal tax liability of certain individuals who reside in the states challenging the provision. Nevertheless, states are free to address their own tax policy, and more than 20 states, including North Carolina, have put pass-through entity tax workarounds in place after the Internal Revenue Service and Treasury issued guidance indicating they would be a permissible method to bypass the cap.  Pass-through entities include S corporations, partnerships, and limited liability companies taxed as partnerships or S corporations.

What Are Tax Extensions and How Do They Benefit Taxpayers?

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Tax extensions are an additional period of time granted to a tax filer to prepare and file their taxes. In addition to giving a tax filar additional time to file their taxes, a tax extension gives an individual an opportunity to better review their forms prior to filing. 

A tax extension gives individuals six extra months to file their taxes. This extension pushes the tax filing deadline from April 15th to October 15th. Requesting a tax extension can aid an individual or couple who realize they are not prepared to file their tax returns by the Internal Revenue Service’s deadline.

Extensions Can Increase Accuracy

Tax extensions have multiple benefits with the first benefit being an increase in the overall accuracy of the tax return. Mistakes can often occur at the height of the hectic tax season leading to delays in processing tax refunds and increasing the chances of being audited. 

These mistakes are sometimes attributed to stressed-out filers or rushed accountants and those errors can ultimately cost the tax filer money. Requesting an extension can help ensure that the tax return is accurate making the tax season a smooth one for you and your family.

Extensions Can Save Accountant Fees

Accountant rates tend to increase during tax season and they often spike sharply the week of the filing deadline. Seeking help during the height of the tax season can be costly. Filing for an extension allows taxpayers to save money by giving them an opportunity to consult with an accountant outside of the busy tax season. 

Taxpayers can expect to save a significant amount of money in accountant fees if they request an extension moving their tax filing deadline back. These savings can add up with each tax season and become very beneficial.

Most Tax Extensions Are Automatically Approved

Most tax extension requests are honored automatically. Certain people like deployed active duty military members receive extensions without having to file form 4868. Simply make sure your information such as your legal name and social security number are correct. Errors on the form could result in rejections delaying your ability to receive approval quickly or result in a rare rejection.

Tax Extensions Can Reduce Late Penalties

The IRS imposes late penalties when a tax return is filed late without an extension being requested. There are two types of late penalties that can be charged to the taxpayer:

  1. 5% fee on any tax due for each month or fraction of a month
  2. Late payment penalty of between 0.5 and 25%.

If you request an extension, you only have to pay one of these fees regardless of how much taxes you owe. If you pay estimated tax when filing your extension, there is generally no penalty at all.

Extensions Can Improve the Accuracy of The Return

When a tax filer is hurrying to meet a looming tax deadline the chances of them making a tax filing mistake increases. Requesting an extension gives you extra time to go over the return to ensure accuracy prior to sending it to the IRS. The extension can provide you with an opportunity to avoid errors and improve the overall accuracy of your tax return.

Extensions Can Preserve Your Tax Refund

There is a three-year deadline for receiving a tax refund check from the IRS if you are owed one. This three-year period begins on the original filing deadline for that tax year which is typically April 15th. 

The statute of limitations is extended by six months when an extension is filed for. Even if a taxpayer is behind on submitting tax returns they can benefit from this extension and preserve their ability to receive a tax refund.

Extensions Cut Down on Confusion

The request to file a tax extension signals to the IRS that you are required to file a tax return for the season. This can reduce confusion if you are a person who does not always file a tax return. Requesting a tax extension lets the IRS know that you meet the requirements for filing and avoids some potential issues that might otherwise arise.

Contact Our Tax Controversy Attorneys Today

If you are having issues with audits, IRS collections, or any other tax-related controversies, it’s important that you contact a qualified tax attorney today. The tax controversy attorneys at Wilson Ratledge are here and ready to help. Contact our office today to schedule an initial consultation so we can help guide you through the resolution process with your tax issues.

How To Take Advantage Of Government Funding For Your Business

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Funding is always a challenge for small and growing businesses. There are a number of government grants and other forms of support for small businesses that can help you expand. Most of these programs are specific to the type of business and the business’s goals for expansion. Some of them are also directed toward specific demographic groups. This is certainly not a comprehensive list of government funding opportunities for small businesses, but it will provide an overview of the type of funding that might be available.

Small Business Administration Programs

The U.S. Small Business Administration (SBA) is a go-to resource for many small business owners. The SBA offers several different ways to get funding, though most are loans rather than grants.

Small Business Innovation Research (SBIR)

This is a competitive program that gives small businesses grant funding to participate in federal research projects with commercial potential. If your business deals with research and innovation, this could be a good way to expand that function. To qualify, businesses need to be based in the U.S., for profit, run by a U.S. citizen or permanent resident, and have fewer than 500 employees.

Small Business Technology Transfer (STTR)

STTR is similar to SBIR, with the major difference being that businesses participating in STTR will need to partner with a nonprofit research organization. This can be a college or university, private research nonprofit, or a federally funded research center. The program’s goal is to strengthen the connection between basic scientific research and businesses that can take advantage of research products’ innovations.

State Trade Expansion Program (STEP)

If you want to expand your business by exporting your product, STEP can help provide access to foreign markets. Businesses can also receive support for developing international marketing campaigns and access to foreign trade shows. This is a federal program that uses state agencies to distribute funding, so you’ll work with the Economic Development Partnership of North Carolina to apply for STEP.

Small Business Investment Company (SBIC) Funding

SBICs are private investors licensed by the SBA. The SBA matches the private investment 2:1, and this money can be given as a loan, equity in the company or a combination of the two. SBIC funding can range from $250,000 to $10 million. To qualify, businesses need to be U.S.-based, meet the SBA’s size standards to qualify as a small business, and be part of certain approved industries.

SBA-Backed Loans

SBA-guaranteed loans usually come with lower interest rates and lower down payments than private business loans. They can range from $500 to $5.5 million depending on the size, nature and needs of your business.

Department of Commerce Programs

The federal Department of Commerce is another good source for business funding. These grants tend to be more specific, so you’ll want to be sure you qualify before applying.

Minority Business Development Agency (MBDA)

The Minority Business Development Agency offers specific grants and loans for minority-owned businesses. These will vary, so you’ll need to watch the agency’s website for opportunities that apply to you and your business. This is another federal program that operates through state agencies, so you’ll want to get in touch with the North Carolina MBDA Business Center.

Economic Development Administration (EDA)

This agency provides competitive grants to either specific demographic groups, regions of the country, or industries. These will vary based on the needs the agency sees throughout the year. Recent examples include indigenous communities and travel and tourism businesses. Businesses can apply for these grants through grants.gov.

U.S. Department of Agriculture Programs

The USDA offers several funding programs both for businesses directly involved in agriculture and those operating in rural areas.

Farmers Market Promotion Program (FMPP)

Farmers Market Promotion Program grants support farmers’ markets and similar arrangements that support direct producer to consumer sales, with the additional goal of improving consumer access to locally farmed products. Agricultural businesses, as well as related trade groups and nonprofits, can apply for these grants.

Rural Innovation Stronger Economy (RISE)

The RISE program is designed to create high-paying jobs and promote business growth in low-income rural areas. While for-profit businesses are not eligible to apply for these grants, they do support building and growing businesses in rural areas.

North Carolina State Programs

In addition to federal programs, North Carolina offers funding opportunities for small businesses as well, mostly run through the state Commerce Department. These include cash grants and tax exemptions that can improve your cash flow.

A factor you’ll see mentioned in many North Carolina state programs is the County Distress Rankings system. This system sorts the state’s counties into three tiers based on their economic well-being, with Tier 1 being the best off and Tier 3 being the most economically strained. This calculation is based on the counties’ average unemployment rate, median household income, property taxes and population growth. Businesses will receive the most credit for investing in Tier 3 counties.

Job Development Investment Grant (JDIG)

The JDIG program provides cash grants to companies that invest and create jobs in North Carolina. The grants are awarded based on the number of jobs created, the wage those jobs pay, the county’s economic tier and the industry the business is in. They are paid annually for up to 12 years.

One North Carolina Fund (OneNC)

This is another cash grant program that is designed to allow the governor, through the North Carolina Department of Commerce, to support job creation quickly. To calculate grant amounts, the department considers the number of jobs a business creates, the location, the economic impact, the overall importance to the state and the level of investment in the state.

Business Tax Exemptions

North Carolina offers a few different ways for businesses to reduce their tax burdens. For example, manufacturing machinery and raw materials are exempt from sales tax. There are several other goods and services that are exempt from state sales and use taxes, detailed here.

Start Your Business Off Right With Our Business Startup Team

Applying for government grants can be complicated, but many agencies offer online resources like webinars and application guides to make it easier. Federal grants are usually processed through grants.gov.

Starting a business, applying for grants, and serving clients all at the same time can be a daunting task. Make sure you’re building your business the right way with the business law team at Wilson Ratledge by your side. Call us today at 919-787-7711 or fill out our online form to schedule a consultation!

When Do I Need A Tax Attorney?

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For many people with straightforward finances, taking care of their taxes and any tax hurdles they may encounter is often as simple as scheduling an appointment with their accountant or CPA. 

However, in certain circumstances, tax issues can become so complex that even your accountant may not be able to handle problems that arise. In this case, it is often necessary to consult with a tax attorney. Yet, you may find yourself wondering what a tax attorney is, how they differ from an accountant, and how you will know if you need a tax attorney.

What Does A Tax Attorney Do? 

While you likely work with an accountant at least annually to help you stay on top of your income/business taxes, you are not alone if you are unfamiliar with what a tax attorney does. While accountants typically review and examine financial records and provide tax advice, tax attorneys can handle more complex tax issues. 

A tax attorney is a lawyer who specializes in tax law and can help people arrange their finances to optimize their tax situation. They can also assist people who encounter legal problems with their taxes. 

However, it is essential to note that a tax attorney will not help you file your taxes. So, when would you need to hire a tax attorney? Keep reading for a look at a few situations where you could benefit from consulting a tax attorney in North Carolina.        

Situations When You May Need A North Carolina Tax Attorney

You Are Being Audited By The IRS

If you are being audited by the IRS, this does not necessarily mean that you’ve done something wrong. It simply means that the IRS is doing a formal examination of your tax records. Most tax audits are simple and can be handled by a certified public account. 

However, if you disagree with the audit results and wish to dispute them, or the IRS takes you to court during the audit, you must consult a tax attorney. You must work with a tax attorney in this situation, as an experienced lawyer can be instrumental in helping you navigate the complex world of IRS audits. 

Let’s face it unless you have a background in finance and tax law, trying to understand a tax audit, let alone appeal the IRS’s findings, can feel impossible. Fortunately, a tax attorney can communicate with the IRS on your behalf, removing much of the stress of appealing an IRS case from your shoulders. 

They can research your case to help you find a solution, they can represent you should your case go to court, and they can also help you negotiate a settlement with the IRS. Do not try to handle a complicated IRS audit on your own. If you are planning to appeal your case or your case is being taken to court, it is essential that you work with a tax attorney.

You Owe Back Taxes

If, after filing your taxes or completing an audit, you find that you owe a significant amount of money in back taxes to the federal, state, or local government, you may want to consider consulting a tax attorney. Tax attorneys know tax law in ways that accounts don’t, and they may be able to help you work with the IRS, or other government agencies, to help you find a solution to your current tax problem. 

A tax attorney may be able to negotiate on your behalf to work out a formal agreement to help you settle your tax debt. Tax attorneys know tax law inside and out, and they may even be able to help you settle your debt for less through an offer in compromise or a penalty abatement. They can also help you work out a deal to make installment payments on any remaining tax debt if you owe more than you can afford to pay upfront. 

You Are Starting a Business

Of course, consulting a tax attorney can also prove instrumental in helping you to avoid problems with the IRS, particularly if you are planning on starting a business. When you are in the process of starting a business, you will have to decide what type of business to establish, such as an LLC, an S-Corp, or a C-Corp. 

Working with a tax attorney when setting up your business is critical. You will want to make sure that you understand the type of business you are establishing and the tax responsibilities that come with it to avoid problems with the IRS. 

It is then imperative that your work with a tax attorney when starting a business, as an attorney can help you to structure your business in a way that reduces your tax burden and potential liabilities, preventing you from encountering problems with the IRS in the first place.  

You Are Considering Buying/Selling a Business

You should also consult a tax attorney if you are considering buying or selling a business in the near future, as a tax attorney can help you structure the sale in a way that minimizes your tax burden. 

For instance, someone selling a business will want to structure the sale in a way that minimizes capital gain, while someone buying a business might want an allocation that helps them recover the purchase price faster through depreciation. 

The fact is that buying or selling a business can result in a complicated tax situation, and working with a tax attorney can help minimize the amount of taxes you pay while also helping to ensure that the sale is being handled properly, reducing the likelihood of an audit down the road.

You Are Looking to Create an Estate Plan

Considering that you have worked hard to establish yourself and earn all of the assets in your estate, it is understandable that you would want to do everything to ensure that your assets pass to your heirs after your death with as little as possible being lost to estate taxes. 

Fortunately, only large estates valued at more than $12 million pay estate taxes. However, if you believe that your estate will be subject to taxation after your death, a tax attorney can help you devise estate planning strategies to minimize the tax burden placed on your estate. This can help ensure that as much of your estate as possible passes to your heirs. 

Contact Our North Carolina Tax Controversy Attorneys

There are many situations in which working with a tax attorney is necessary. These legal professionals have specialized knowledge and experience that can prove instrumental in helping you avoid encountering problems with the IRS. If you’re facing a situation with the IRS where you may need a tax attorney, contact Wilson Ratledge today at 919-787-7711 to schedule a consultation.

What Are the Workers’ Compensation Insurance Requirements for North Carolina Employers?

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Workers’ compensation claims have a twofold purpose: to compensate employees who suffer work-related injuries and to protect employers from being sued by their injured employees. For this reason, North Carolina requires most businesses with three or more employees to obtain workers’ compensation insurance. Here, we discuss the general worker’s compensation requirements for North Carolina employers and how COVID-19 might impact employee claims.

General Requirements for Employers

The North Carolina Workers’ Compensation Act (North Carolina General Statutes §97-94) generally requires all businesses in the state (whether they operate as corporations, sole proprietorships, LLCs, or partnerships) with three or more employees to obtain worker’s compensation insurance. Certain exemptions apply, including for businesses that employ:

  • “casual” employees (those whose work is casual and not part of the regular trade or business);
  • domestic servants working in a household;
  • farm laborers when there are fewer than ten full-time, non-seasonal workers;
  • employees of certain railroads; and
  • North Carolina federal government employees.

Who Does NOT Count as an “Employee” for Workers’ Compensation Purposes?

Whether a business employs three or more employees is not as straightforward as it might sound. The following groups of individuals generally do not need to be covered by workers’ compensation insurance:

  • Business owners, such as partners in a partnership, do not necessarily count as employees.
  • Corporate officers may elect to be excluded from coverage (however, they will still be counted as employees when determining whether a business has three or more employees, even if they opt-out of coverage).
  • Finally, with some exceptions, independent contractors generally do not qualify as employees.

How Much Does Workers’ Compensation Coverage Cost Employers?

The cost of workers’ compensation insurance coverage will vary depending on the number of employees a business employs and the type of jobs its employees perform. The North Carolina Rate Bureau is a non-profit organization that sets “class codes” and “base premium rates” for workers’ compensation, which will determine the total cost of workers’ compensation for a business.

These figures vary and reflect how dangerous a job is compared to another type of job (with high-risk jobs carrying higher base rates than lower-risk jobs). Depending on an employee’s class code and base premium rate, the North Carolina Rate Bureau will set a rate for its workers’ compensation premiums, which businesses must follow.

North Carolina workers’ compensation insurers usually offer discounts to employers. These discounts will vary based on the insurer but can include discounts for a drug-free workplace; for businesses that are part of a professional, trade or industry group; and for businesses that implement certain safety or fall prevention programs. 

COVID-19 and Workers’ Compensation in North Carolina

For the foreseeable future, COVID-19 appears to be here to stay, and businesses across the State continue to be affected by it. While most businesses will undoubtedly be impacted by COVID-19 in one way or another, many business owners likely wonder how it will affect their workers’ compensation claims. Most notably: Will employees be able to file workers’ compensation claims for having contracted COVID-19?

Unfortunately, the short answer is that we simply do not know. It is unclear whether these claims will be compensable under North Carolina law. While it appears more likely that they will be denied, to understand why this issue is so complex, it helps to review the laws surrounding workers’ compensation claims.

Coverage for Workers’ Compensation Injuries

Coverage for workers’ compensation injuries is divided as follows:

  • Injuries that occurred because of an accident or specific trauma (e.g., a slip-and-fall at work); and
  • Injuries caused by an “occupational disease.”

Potential COVID-19 claims would likely have to be filed as “occupational disease” claims. The North Carolina statutes define an occupational disease as either one of the specific diseases enumerated in the Act (which does not include COVID-19), or any disease acquired while working at a job that placed the person more at risk for getting the disease than the general public.

Thus, if the general public is equally exposed to the disease outside of the place of employment, the disease is not considered an occupational disease and therefore would not be covered by workers’ compensation.

Establishing Eligibility for a COVID-19 Workers’ Compensation Claim

To be eligible for benefits, an employee must show that he or she contracted COVID-19 from exposure on the job and, because of the job, he or she was at a greater risk than the general public. It might be that some frontline workers, such as healthcare workers, would be able to show that they were at higher risk of exposure to the virus than the general public. Likewise, it is possible that others, such as grocery store clerks, could show the same.

What becomes more challenging to prove, however, is causation, that is, a link between the employee’s job and the resulting COVID-19 infection. Even if it were likely that the employee contracted the virus while on the job, (such as while working at a hospital or treating patients infected with COVID), it would be very hard to prove this, as the disease could have just as easily been contracted outside of work. In other words, proving causation is extremely difficult, if not virtually impossible.

Currently, unless legislation is passed that defines COVID-19 as an occupational disease, it appears likely that an employer will be in the position to deny such claims in North Carolina. However, this is an unfamiliar terrain, and the coming months are likely to bring more clarity.

Workers’ Compensation Claims During Uncertain Times

While the costs associated with a workers’ compensation policy will vary depending on the size and nature of your business, owners of small, medium-sized, or large businesses should be aware of their obligations. At this time, it remains unclear whether COVID-19 claims will be covered under workers’ compensation insurance, but business owners should make sure they are fully in compliance with the laws regardless of what changes may be on the horizon.