NewFinCEN Filings Go into Effect on January 1
For existing businesses, the Corporate TransparencyAct (CTA) goes into effect on January 1, 2024, and imposes a brand-new federalfiling requirement on most corporations, limited liability companies, and limitedpartnerships and on certain other business entities.
No later than December 31, 2024, all non-exemptbusiness entities must file a beneficial owner information report (BOI report)with the Financial Crimes Enforcement Network (FinCEN)—the TreasuryDepartment’s financial intelligence unit.
The BOI reports must disclose the identities andprovide contact information for all of the entity’s “beneficial owners”: thehumans who either (1) control 25 percent of the ownership interests in theentity or (2) exercise substantial control over the entity.
Your BOI report must contain all the followinginformation for each beneficial owner:
Full legal name
- Full legal name
- Date of birth
- Complete current residential streetaddress
- A unique identifying number from either acurrent U.S. passport, state or local ID document, or driver’s license or, ifthe individual has none of those, a foreign passport
- An image of the document from which theunique identifying number was obtained
FinCEN will create a new database called BOSS(Beneficial Ownership Secure System) for the BOI data and will deploy the BOSSto help law enforcement agencies prevent the use of anonymous shell companiesfor money laundering, tax evasion, terrorism, and other illegal purposes. Itwill not make the BOI reports publicly available.
The CTA applies only to business entities such ascorporations and LLCs that are formed by filing a document with a state secretaryof state or similar official. It also applies to foreign business entities thatregister to do business in the United States.
Some businesses are exempt from the CTA, including
- larger businesses with 20 or moreemployees and $5 million in receipts, and
- businesses already heavily regulated bythe government, such as publicly traded corporations, banks, insurancecompanies, non-profits, and others.
The CTA does not apply to sole proprietors or generalpartnerships in most states. But it does apply to single-member LLCs, eventhough the tax code disregards such entities and taxes them on Schedule C, E,or F of Form 1040.
The initial BOI report filing does not expire, and youdon’t need to renew it. But you have an ongoing duty to keep the BOI report upto date by reporting any changes to FinCEN within 30 days of occurrence.
Failure to comply can result in hefty monetarypenalties and up to two years in prison.
Beatthe Net Investment Income Tax
Here is some important informationregarding the net investment income tax (NIIT), which may be relevant to yourfinancial situation.
NIIT Overview
The NIIT is a 3.8 percent tax that could applyif your modified adjusted gross income (MAGI) exceeds $200,000 (single filers),$250,000 (married, filing jointly), or $125,000 (married, filing separately).It targets the lesser of your net investment income or the amount by which yourMAGI exceeds the thresholds.
What Qualifies as Net Investment Income?
Net investment income includes income frominvestments (such as interest, dividends, and annuities), net rental income,and income from businesses in which you don’t materially participate. It doesnot include wages, self-employment income, tax-exempt income, and distributionsfrom qualified retirement plans.
Reducing or Avoiding the NIIT
To mitigate the NIIT, it’s crucial tounderstand what’s triggering it—your net investment income or your MAGI. Hereare some strategies:
- Invest in municipal bonds. Pick bonds that are exempt from the NIIT and from federal andstate taxes.
- Donate appreciated assets. The correct asset donation avoids the NIIT and provides a taxdeduction.
- Avoid selling appreciatedstock. Buy growth stocks that don’t pay dividends, and hold them.
- Utilize Section 1031. It avoids MAGI and net investment income, and defers taxes.
- Invest in life insurance andannuities. This typically defers tax until withdrawal.
- Harvest investment losses. This can offset gains and reduce taxable income.
- Invest in rental real estate.Structured correctly, this can minimize taxable income.
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Other Strategies
- Active participation inbusiness. It avoids classifying income as net investment income.
- Short-term rentals and realestate professional status. These also avoid classifyingincome as net investment income.
- Alternative marital status.Though this option may seem extreme, two single taxpayers have a higher MAGIthreshold than a married couple.
- Retirement plan investments. These can reduce MAGI.
- IRA conversions. Converting traditional IRAs to Roth IRAs may trigger the NIIT butcan have long-term tax benefits.
- Installment sales. They can level out MAGI over time.
The NIIT can be complex, but strategicplanning can significantly reduce its impact.
Deducting Start-up Expenses for a Rental Property
Are you interested in becoming a commercial orresidential landlord?
If so, you’ll likely have to shell out plenty of moneybefore ever collecting a dime in rent. The tax code treats some of those moniesas start-up expenses.
Start-up expenses are some of the costs you incurbefore you offer a property for rent. There are two broad categories:
- Investigatory
- Pre-opening costs, such as advertising,office expenses, salaries, insurance, and maintenance costs
Your cost of purchasing a rental property is not astart-up expense. Rental property and other long-term assets, such asfurniture, must be depreciated once the rental business begins.
On the day you start your rental business, you canelect to deduct your start-up expenses.
The deduction is equal to
- the lesser of your start-up expendituresor $5,000, reduced (but not below zero) by the amount by which such start-upexpenditures exceed $50,000, plus
- amortization of the remaining start-upexpenses over the 180-month period beginning with the month in which the rentalproperty business begins.
When you file your tax return, you automatically electto deduct your start-up expenses when you label and deduct them on yourSchedule E (or other appropriate return).
Costs you pay to form a partnership, limited liabilitycompany, or corporation are not part of your start-up expenses. But under adifferent tax rule, you can deduct up to $5,000 of these costs the first yearyou’re in business and amortize any remaining costs over the first 180 monthsyou are in business.
Note that the cost of expanding an existing businessis a business operating expense, not a start-up expense. As long asbusiness expansion costs are ordinary, necessary, and within the compass ofyour existing rental business, they are deductible.
The IRS and tax court take the position that yourrental business exists only in your property’s geographic area. So, a landlordwho buys (or seeks to buy) property in a different area is starting a newrental business, which means the expenses for expanding in the new location arestart-up expenses.
You can’t deductstart-up expenses if you’re a mere investor in a rental business. You must bean active rental business owner to deduct them.
