As the economy tightens, making smart money moves and avoiding tax and other financial pitfalls become more important.
Accordingly, Marks Paneth & Shron LLP, a New York City-based accounting firm with nearly 500 people, providing tax advisory and consulting for high net worth individuals and their families, as well as a wide range of services for international, real estate, media, entertainment, nonprofit, professional services, and energy clients, has highlighted some tips with potential payoff, as well as issues to be aware of and pitfalls to avoid, in the coming months.
The firm believes its clients - and anyone interested in making sound decisions - should:
Look out for tax code abuses of the hedge fund investor. Taxation watchdogs may miss the point when they claim hedge funds get unfair breaks. There is, indeed, abuse in the current tax code when it comes to hedge funds, but it affects investors: They're often subjected to taxes that wipe out nearly all - or more than all - of the income they made from the fund. The reason: In many cases the tax code severely limits hedge fund investors' ability to deduct expenses - such as investment fees, legal fees, etc. - that are necessary for the fund to earn income. Careful attention to how these deductions are claimed may help mitigate the damage.
Consider taking dividends and capital gains soon. After 2010, the beneficial tax rate of 15% on dividends and capital gains is scheduled to jump due to a sunset provision in the current law. Dividends would be taxed at ordinary income rates, currently up to 35%. If you own a C Corp, consider distributing a portion of your earnings and profits as dividends in order to save up to 20% on the rate change. Also, consider taking capital gains on securities before the end of 2010, since the tax rate will increase to 20%. You should always consider the fact that you are accelerating income tax to achieve a lower tax rate.
Beware of "double taxation" - New York State residency taxes may apply, even if you live and pay taxes somewhere else. Buying or renting a pied-a-terre in New York City, even if not used very often, or staying regularly with a friend, can be more expensive than many work-weary - or city-loving - commuters think. Those overnights often subject out-of-town residents to New York residency taxes.
Take advantage of recent filing fee reductions, if you're thinking of establishing an LLC in New York. Effective for 2007, New York State will dramatically lower the LLC fees that are imposed. Sole member LLCs's will no longer be charged a filing fee and the fees for LLCs taxed as partnerships will be reduced significantly.
Think twice about like-kind exchanges of property. Don't settle for a bad property in order to avoid taxes. In the quest for lower taxes, people often wind up overpaying or getting an inferior property. Paying the tax on a current property may end up costing less in the long run.
Stop and take a "safety check" before joining a nonprofit board. As enticing as it may sound for cause-related reasons, prestige, or networking, joining a nonprofit board should never be a "no-brainer." Even minor conflicts of interest and governance gaps on nonprofit boards can result in embarrassing, time-consuming situations for board members. Before signing on, you should understand the board's true mission; review its governance policies, including whether the organization has a whistleblower's policy; and know what type of conflict of interest guidelines are in place. You should also check to see if there is D&O insurance.
Be ever more vigilant and prepared if you're a corporate board member or executive. Today's business environment is complex and demanding. Increasing rates of litigation and fraud investigations are just a few pieces of the puzzle. Corporate board members need to not only strengthen internal controls, but to also focus on understanding their responsibilities and obligations in their role as corporate stewards.
Take advantage of legislation now if you're a landlord. Legislation passed that enables landlords to continue claiming costs of qualified leasehold improvements in a compressed timeframe. It covers qualified improvements placed in service before the end of 2007, but it's unknown whether this will be extended to 2008.
Take full advantage of recently changed New York State tax credits, and little-known New York City tax breaks, especially if you're in the production or media business. New York State now provides a tax credit linked to commercials and films produced in the state, and there's also a tax credit for purchased editing and production equipment used in the state. Meanwhile, New York City's leniency for manufacturers - including production and media companies - reduces city tax for sales made outside of the city.
Consider new ways to qualify as a Co-op housing corporation and get the tax benefit. The recently enacted Mortgage Forgiveness Debt Relief Act provides new opportunities for housing co-ops to qualify and permit their shareholders to deduct their share of mortgage interest and real estate taxes. It used to be that 80% of the co-op's total income had to be derived from tenant-shareholder income (as opposed to from commercial income or other sources) to qualify. The parameters have widened a bit. Now, the co-op can also qualify if 80% or more of its square footage is used or available for use by tenant-shareholders for residential or related purposes - or if 90% or more of the co-op's annual expenditures involve acquisition, construction, management and/or maintenance of the property for the benefit of tenant-shareholders.