The Massachusetts Millionaire’s Tax, a significant fiscal policy aimed at taxing the state’s wealthiest individuals, has become a pivotal factor for high-net-worth individuals (HNWIs) considering their residency status, especially those with real estate holdings across multiple states. As these individuals evaluate their future, particularly with retirement on the horizon, understanding the tax’s implications and the requirements for changing domicile becomes crucial. This article delves into the Massachusetts Millionaire’s Tax, its impact on HNWIs, and key considerations for those contemplating a move to another state.

Recap: The Massachusetts Millionaire’s Tax

The Massachusetts Millionaire’s Tax imposes an additional surtax on annual income exceeding $1 million, targeting high earners to contribute more to state revenues. This includes income from wages, investments, and certain capital gains, which can significantly affect HNWIs with diverse income sources, including real estate investments across states. To read more about the Massachusetts Millionaire’s tax, check out this article on our blog.

The Impact on High-Net-Worth Individuals

For HNWIs with real estate in Massachusetts and other states, the Millionaire’s Tax introduces complex considerations for tax planning and residency decisions. The tax affects their income and complicates decisions regarding where to declare residency, especially for those nearing retirement or planning to relocate. We recently put together an article that outlines strategies for easing the tax burden in light of this legislation; read it here.

Considering a Move: Domicile and Residency

The concept of “domicile” is central to understanding one’s tax obligations to Massachusetts. Domicile refers to where you intend to make your permanent home, where you return after being away. You can have multiple residences but only one domicile. For Massachusetts to recognize a change in domicile, thereby releasing an individual from the obligation to pay the Millionaire’s Tax, clear evidence demonstrating a permanent move must be provided.

Establishing a New Domicile

Contemplating a move from Massachusetts to retire in another state requires substantial planning and documentation to authenticate a change in domicile, especially if you retain real estate in Massachusetts. The process is far from straightforward and involves more than just ticking boxes on a checklist. It requires considerable effort and understanding that the transition is nuanced, involving various factors beyond the basic steps. The planning and documentation to prove the shift in domicile can include:

• • Physical Relocation: Moving one’s belongings and family to the new state.
  • Changing Legal Documents: Updating your driver’s license, voter registration, and legal documents to reflect your new state of residence.
  • Economic Ties: Shifting banking, investment accounts, and business interests to the new state.
  • Social Ties: Joining clubs, religious institutions, and community organizations in the new location.
  • Facts and Circumstances Test: Massachusetts employs a “facts and circumstances” test to assess domicile. This means the state will consider all aspects of an individual’s life to determine their domicile.

The Millionaire’s Tax Complication

Introducing the Millionaire’s Tax adds a layer of complexity for HNWIs planning to change their domicile. The tax incentivizes the state to scrutinize claims of domicile change more closely, given the potential loss in tax revenue. This scrutiny means that individuals must diligently establish and document their ties to a new state. The Department of Revenue is intensifying its efforts to verify or refute claims. For instance, they examine data from external sources, including E-ZPass and telephone records.

Key Considerations

Massachusetts residents who own real estate in other states but wish to keep a residence in Massachusetts due to family connections must exercise caution. It’s possible to be considered domiciled in Massachusetts and, as a result, be obligated to pay taxes in the state.

For those contemplating a move, it is vital to:

• • Plan Ahead: Begin the domicile change process well before the move to ensure all documentation and changes reflect your new state of residence.
  • Maintain Records: Keep detailed records of all steps to establish a new domicile, including receipts, memberships, and any other evidence of a permanent move.
  • Consult Professionals: Work with tax and legal professionals specializing in multi-state residency and tax planning to navigate the complexities of the Millionaire’s Tax and ensure compliance.

Conclusion

If you’re contemplating a change in residency, understanding the complexities of being deemed domiciled in Massachusetts based on facts and circumstances is crucial. It involves much more than simply ticking off items on a checklist, such as changing your address or doctor. The effort required is substantial and encompasses a wide array of considerations that go beyond the superficial aspects of relocation. It’s not a straightforward process; it may necessitate a multi-year plan to establish residency in a new state fully.

Additionally, it’s important to remember that other states have their own specific criteria for determining residency, nexus, and domicile. These factors can significantly impact your tax obligations and legal residency status. Given these complexities, you may want to thoroughly reassess your relocation plans, ensuring you fully understand the implications and commitments of such a significant decision.

The post Navigating the Massachusetts Millionaire’s Tax: Implications for High-Net-Worth Individuals with Multi-State Real Estate appeared first on Walter Shuffain.

Fortunately, we seem to have turned a page. Now, over halfway through 2023, we are seeing inflation cool and M&A activity pick back up. Some uncertainty remains — for example, the possibility of additional interest rate hikes — but overall, conditions are improving for the tech industry.

To make the most of changing market conditions, tech companies need to revisit their deal and exit plans. The first step for tech leaders is to understand the current tech private equity (PE) market to get a sense of their opportunities and challenges.

In March 2023, BDO conducted a survey of 405 U.S. private equity fund managers and operating partners, 114 of whom invest in technology (among other industries). We analyzed the data from this subgroup to identify the top six tech PE trends that tech leaders need to know:

1. Asset prices are expected to increase in the next six months. Most fund managers and operating partners investing in tech expect assets to trade higher in the next six months. Thirty-eight percent predict assets will trade 1-9% higher than current prices. Higher valuations should narrow the gap between buyer and seller expectations, which could open more deal opportunities. At the same time, if valuations trend too high, we could see PE firms hesitate to take on deals, even though they have significant dry powder to use.
2. Controlling costs is top of mind. When asked what bottom-line growth strategies they expected their portfolio companies to deploy in the next 12 months, fund managers and operating partners who invest in tech cite cost of goods sold (COGS) reduction through common platforms. This trend was also reflected in answers from respondents across multiple industries. Although high inflation and interest rates have exacerbated cost challenges, changing market conditions could help tech companies slow cash burn.
3. Talent continues to be a top concern in tech. Twenty percent of fund managers and operating partners who invest in tech say talent management is their most used value creation lever. At the same time, they cite income and wage trends as their top concern in terms of economic stability, with unemployment rates and talent availability close behind. As wage growth slows tech leaders may find it easier to source talent. For the time being, however, talent will remain a priority issue for portfolio companies and PE firms alike.
4. Risk is slowing down due diligence. Fund managers and operating partners investing in tech cite risk exposure uncovered during due diligence as the top obstacle to closing deals and investing. Other industries represented in the survey also cite risk as their top obstacle, indicating that this isn’t necessarily a problem unique to the tech industry. As market conditions improve, we may see this trend reverse, leading to shorter deal timelines.
5. SPACs are back in the game — for now. SPACs are making a comeback. Forty-three percent of fund managers and operating partners who invest in tech say that over the next six months, most of the competition for deals will come from SPACs. However, this surge in competition is likely temporary. Many SPACs issued in 2021 are set to expire or reach maturity this year, which is likely driving this resurgence. After this period, we’re unlikely to see the same level of SPAC activity due to continued regulatory uncertainty.
6. ESG risk remains an important consideration for dealmaking. Eighty-one percent of fund managers and operating partners who invest in tech have turned down an investment opportunity due to ESG concerns, with governance concerns topping the list. These trends track with wider issues in the tech industry: Tech companies’ data management practices are under intense scrutiny as the public questions whether these organizations handle their data responsibly.

What Comes Next?

As market conditions improve, competition for deals will be fierce. Here are steps tech leaders should consider taking to help improve their chances of landing the right deal or investment:

1. Take advantage of pre-2022 numbers. It appears that the market conditions of 2022 are already changing for the better, which means the performance dips from last year were likely temporary. Companies with financial metrics from 2021 or earlier should consider using these metrics to illustrate the stability of their business, particularly if these numbers demonstrate strong revenue growth and/or profitability.
2. Carefully manage your costs. To attract PE investment, it’s crucial to show good cost management practices. Look for ways you can reduce unnecessary overhead. For example, automation and generative AI offer significant cost reduction opportunities that can make your company more attractive to potential investors. Look at what technology capabilities you already have and identify ways to optimize them for cost reduction.
3. Re-evaluate your approach to talent management. Tech leaders should have a realistic picture of their companies’ talent needs, as well as a plan to address gaps. If hiring or layoffs are in your company’s future, plan for how and when those adjustments will happen. Tech leaders should avoid cutting too deep or over-hiring in order to plan for long-term growth.
4. Revisit data privacy. Public trust in the technology industry remains a problem as clients worry over the security of their personal data. In order to build trust with clients, tech leaders need to adopt strong data ethics practices on which to build their data privacy programs.

As tech leaders explore deal opportunities and exit options in 2023, closely following and understanding PE trends can help them ensure they’re making the right moves at the right times.

Written  by Hank Galligan and Jim Clayton. Copyright © 2023 BDO USA, P.C. All rights reserved. www.bdo.com

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Corporate tax rates

While corporate tax rates would stay the same under BBB, the proposal includes a 15% minimum tax on book income for corporations reporting more than $1 billion in profits. For corporations with foreign parents, the minimum tax would apply to profits of more than $100 million.

The legislation would also impose a 1% excise tax on the fair market value of any publicly traded U.S. corporation’s stock that the corporation repurchases during the year.

BBB would also change the Foreign-Derived Intangible Income (FDII) deduction and Global Intangible Low-Taxed Income (GILTI) regime, increasing the taxes paid by most, if not all, U.S. multinational corporations.

Applying the Net Investment Income Tax to Trade or Business Income

The net investment income tax (NIIT) levies a 3.8% surtax on net investment income derived from interest, dividends, capital gains, and income from passive activities. NIIT applies when a taxpayer’s modified adjusted gross income (AGI) exceeds a threshold of $200,000 for single filers or $250,000 for married couples filing jointly.

Currently, trade or business income earned by pass-through business owners who materially participate in the business is not subject to NIIT. BBB proposes eliminating that exception for taxpayers with modified AGI greater than $400,000 ($500,000 if married filing jointly).

Limitations on interest expense deductions

The Tax Cuts and Jobs Act of 2017 limited the amount of interest a business can deduct to interest income plus 30% of its adjusted taxable income for the year. The BBB would further limit interest deductions for U.S. members of multinational groups that issue consolidated financial statements. The draft legislation describes the limitation as an “allowable percentage” of 110% of the corporation’s net interest expense.

Paid Family, Medical Leave Requirements

The U.S. is the only industrialized country without federally mandated paid parental leave, but BBB seeks to change that. The legislation guarantees four weeks of paid leave to all workers who are:

• New parents,
• Dealing with a serious medical condition of their own, or
• Caring for a loved one with a serious medical issue.

Employers would not have to foot the bill for that paid leave. States with an existing paid family medical leave mandate equal to or better than the federal benefit would be reimbursed for what it would have cost to cover workers in the federal program.

Employers that voluntarily offer paid leave equal to or better than the federal benefit would be reimbursed for the lesser of:

• 90% of the national average cost of paid leave benefits, or
• 90% of their insurance premium

All other public and private-sector employees would be covered by a public program run by the Social Security Administration.

Investing in small business

Build Back Better also allocates about $3.385 billion to support small businesses by improving access to capital, including:

• Additional funding for SBA 7(a) loans
• Reduced or waived fees for new SBA 7(a) and 504 loan borrowers with loans of $2 million or less
• Additional investments into the Small Business Investment Company (SIBC) program
• Establishing a national network of “uplift incubators” to spur economic development in underrepresented communities
• Additional funding for cash grants to growth accelerators assisting small businesses focused on technology
• Providing funding for grants to help minority-owned businesses launch and expand operations

Although the House passed a version of the Build Back Better bill in November 2021, negotiations over the bill stalled in the Senate, so none of the above proposals have been turned into law as of this publication.

At this point, it’s impossible to say which proposals will survive and in what form, but it is worth keeping an eye on as key portions, like workforce support, are expected to eventually pass. If you have questions in the meantime, please reach out to your tax advisor.

The post Build Back Better May Be Stuck, but How Could It Impact Business Owners? appeared first on Walter Shuffain.

Do I qualify for the payroll tax credit?

Businesses with qualifying research activities and expenditures with less than $5 million in gross receipts for the taxable year and have no gross receipts or interest income dating back more than five years can utilize the payroll tax offset.  For example, a taxpayer making this election for 2020 must not have had any gross receipts in a tax year preceding 2016.

What is the benefit of the payroll tax credit?

The maximum benefit a qualifying business can claim against their payroll taxes each year is $250,000, with a maximum of $1.25 million over five years.

What are qualifying R&D activities?

A company’s activities must pass what is known as the four-part test to be eligible for R&D credits:

• Elimination of uncertainty – a demonstration that an attempt has been made to eliminate uncertainty in the development or improvement of your product or process.
• Process of experimentation –  activities such as modeling, simulation, systematic trial, and error demonstrate a process to address uncertainty in your product development.
• Technological in nature – This experimentation process must rely on hard science, such as engineering, physics, biology, chemistry, or computer science.
• Qualified purpose – Research must be for the purpose of creating a new or improved product or process that results in increased performance, function, reliability, or quality.

What costs are eligible under R&D?

Eligible R&D costs include wages, supplies, contract research, and rental or lease of computers. Taxable wages would apply to employees who provide direct supervision of the research. Supplies used in the research would include extraordinary utilities but not administrative supplies. Contract research would apply to any subcontractor expenses, including labor, services, and research. Lastly, payments were made for computers and server space for hosting software under development.

When do I claim the payroll tax credit?

You can begin to benefit from the payroll tax credit in the first calendar quarter after filing your income tax return.

For example, companies need to file their federal income tax returns by March 30 to apply the payroll tax credit to the second quarter. As a result, the earliest taxpayers are likely to see a benefit in July, when they file their quarterly payroll tax returns for the second quarter (Form 941).  If you extend your income tax return, you’ll be able to take advantage of the credit in the quarter after you file your federal return: file the return by June 30; take credit on the October 31, Form 941 filing; file return by September 30; and take credit on January 31, Form 941 filing.

To better understand the R&D tax benefits, work with your accountant to research approved activities and expenditures your business may incur through research.

The post Understanding How the R&D Tax Credit Can Offset Payroll Taxes appeared first on Walter Shuffain.

Keep reading to learn more about the tax implications associated with cryptocurrency and what the IRS is doing to sharpen its focus on crypto transactions.

What you need to know about virtual currency tax reporting:

Much like when you hold investment accounts, cryptocurrency owners must recognize gains and losses when filing their taxes. While gains are typically subject to capital gains taxes, losses can sometimes be used to counteract those gains.

Here are some important details:

• Short-term gains/losses: Virtual currency held for one year or less recognizes gains or losses as short-term gains.
• Long-term gains/losses: Virtual currency held for more than one year recognizes any gains or losses recognized as long-term.
• Calculating: To figure out if you have a gain or loss to report, subtract the value of the cryptocurrency on the day you purchased it (the virtual basis or cost basis) from the value on the day you sold it. If it’s positive, you have gains to report. If it’s negative, you have a loss.

What about using virtual currency as a form of payment?

Whether you’re using virtual currency to pay someone or receiving virtual currency as payment for something, there can be tax implications. When reporting virtual currency received, use the fair market value on the day you received payment. Here are a few popular reasons virtual currency can be exchanged between two parties:

• Payment for goods or services (Payee): If someone uses cryptocurrency to pay you or your business for goods or services, you’ll want to report this as income. If you’re self-employed, this will also be subject to self-employment tax.
• Payment from an employer: If an employer pays you in cryptocurrency, it constitutes wages paid, and you must report it as income received.
• Payment for goods or services (Payer): If you or your business uses virtual currency to pay for goods or services, there will be a gain or loss to recognize for the funds used.

For more information about the tax implications of using virtual currency, view the IRS FAQ located here.

While it may seem tedious to track every single purchase, exchange, trade, or receipt of virtual currencies, there are online platforms available that analyze the transactions and report to you when you have gains or losses to recognize.

What the IRS is doing with cryptocurrency reporting:

The IRS is partnering with TaxBit to help verify cryptocurrency tax calculations during an audit. This tax automation company is automating the cryptocurrency transaction analysis process for the IRS to understand how much money was made or lost from transactions. When the IRS is auditing a tax filing with cryptocurrency, they’ll request the report from TaxBit, who will then provide it to the IRS and the taxpayer.

In addition to these reports, which some taxpayers may see beginning next year, the IRS has also added a question to Form 1040 asking if the taxpayer has sold, exchanged, sent, received, or otherwise acquired any financial interest in virtual currency. With the IRS requiring taxpayers to treat virtual currency as property for Federal income tax purposes, it shows they recognize virtual currencies aren’t going away any time soon.

The Treasury is currently exploring the possibility of requiring reporting on any virtual currency transfers over $10,000. We’re monitoring this and will keep you posted as more information comes to light.

For help reporting virtual currencies on your tax filings, reach out to our team of tax professionals today. Establishing a system to track purchases, sales, and transfers before the end of the year will help ease the burden of preparing for tax season.

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Rent your office? Leasing your copier or network services? If so, you’ve signed a lease agreement with a lessor and your financial statements will be affected by the new lease accounting standards approved by the Financial Accounting Standards Board (FASB). Luckily, there’s still time to prepare before these changes take effect for public (January 2019) and private companies (January 2020).

What’s the biggest change? Prior to the new standard, operating leases were disclosed in footnotes of your financial statements.  Now, the lessee will be required to disclose them on the balance statement- which also means a lot more time and resources analyzing contracts and pulling the required information.

A change like this can seem overwhelming. Start by taking inventory of all your contracts that contain leases. As a rule of thumb, any contract where you control the right to use an asset qualifies. Information to look for includes:

• Lease and non-lease components
• Terms and classification
• Variable and fixed lease payments
• Options to extend or terminate

Moving forward, a lease with a term over 12 months will now be required to be recorded on the lessee’s balance sheet. A right-of-use asset, corresponding lease liability and initial and subsequent lease payments will be included. Calculating the lease payments can be quite involved and may include:

• Lease payments
• Discount rates
• Initial direct costs
• Present value calculation (required)

What are the next steps in preparing for the new standard? If you haven’t by now, talk to your accountant. Transitioning to the new reporting standards will be a change regardless of how many lease agreements you have. Optimal timing of the transition, an implementation plan and tracking are key factors in ensuring you’re ready when the new standards take place.

Meeting with your banker may also be helpful as the new standards may have implications on your covenant calculations which you’ll want to discuss prior to implementation.

Instead of the large changes to financial statements the lessee will be experiencing, the lessor may find changes to their lease agreements beneficial in attracting and retaining customers.

Whether a lessee or a lessor, give us a call to walk through the new standards and to help you put a plan in place!

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The Financial Accounting Standards Board recently issued new revenue recognition guidance effective December 15, 2017, for public companies and December 15, 2018, for private companies. The new standard will affect all entities that enter into contracts to sell or purchase goods and services.

Not familiar with revenue recognition? An often-misunderstood principle, revenue recognition determines the conditions under which revenue is received. The new standards emphasize that revenue should be recorded when goods and services are transferred, or a customer takes control.  Control is identified as the ability to direct the use of and reap the benefits of the goods or services performed under the contract. The guidance provides five steps to implementing the new standards.

Step 1: Identify if you have a contract under the new standard

Not every business uses contracts with their customers. Here are a few questions to determine if you meet the contract tests under the new standards.

• Has the contract been approved and both parties committed either in writing or orally? Is it clear what each party is giving and receiving?
• Does the contract have commercial substance? Meaning, is the exchange of services or goods legitimate?
• Does your contract outline the payment terms? Look at whether you have communicated how much will be exchanged by both parties. Even if an exact price can’t be given, but can be reasonably estimated, that will work.
• Is the work reasonably collectable?
• Lastly, consider the collectability of the contract, have you considered credit risks of your customers?

Steps 2: Identify your performance obligations in the contract.

Next, it’s time to determine who is doing what. That involves identifying the specific goods and/or services that are being delivered to the client. These goods and services each need to be grouped into distinct bundles per the new standards. These bundles must meet a distinction test. The definition of “distinct” being that the customer can use the good or service on its own, without being highly interrelated to other items within the contract.

Step 3: Determine the transaction price

The revised standards have altered how the price is determined. As you estimate your pricing, ask yourself the following questions to determine the transaction price:

• Do offers such as rebates, refunds or discounts alter what you will receive for the exchange?
• Will events, such as weather conditions or market volatility, significantly reduce the amount of consideration?
• Are you receiving payment before or after the delivery? If so, estimates should incorporate this and take into account the time value of money.
• Are you being paid in cash, (includes check or credit card)? If not, the goods or services should be measured at fair value if the customer is not paying cash.
• Do you owe the customer anything aside from the good or service within the contract? If so, this must also be taken into consideration.

Estimates should be looked at regularly and updated after each reporting period to account for any of the variables above.

Step 4: Allocate the transaction price to each bundle.

When including several distinct bundles of goods or services in one contract, recognize the revenue for each separately. Estimate the price as if each of the items was sold to separate customers and ensure its split up and recorded appropriately.

Step 5: Recognize revenue when you satisfy your performance obligation.

Upon transfer of control, or when the customer can use the good or service, revenue is recognized. If the good or service transfers over a period of time, the revenue is recognized over a period of time as well.

With the standard not going into effect until the calendar year 2019, take advantage of this time to decide if the changes will affect your business and speak with one of our accounting professionals now about altering your contracts to ensure a smooth transition when the time comes.

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Start-ups and small businesses customarily incur expenditures that may qualify for Research & Development (R&D) tax credits, but generally, these businesses don’t have the taxable profit needed to take advantage of the credit. The IRS issued guidance earlier this year that explains how qualifying small businesses can now apply all or a portion of the credit against their payroll tax liability, including social security taxes. Below we’ve answered some of the key R&D questions and whether your business is eligible for offsetting payroll tax.

Do I qualify for the payroll tax credit?

Businesses with qualifying research activities and expenditures which have less than $5 million in gross receipts for the taxable year and have no gross receipts before 2012 can utilize the payroll tax offset.

What is the benefit of the payroll tax credit?

The maximum benefit a qualifying business is allowed to claim against their payroll taxes each year is $250,000, with a maximum of $1.25 million over five years.

What are qualifying R&D activities?

A company’s activities must pass what is known as the four-part test to be eligible for R&D credits:

• Elimination of uncertainty – demonstration that an attempt has been made to eliminate uncertainty in the development or improvement of your product or process.
• Process of experimentation –  activities, such as modeling, simulation, systematic trial and error demonstrate a process to address uncertainty in your product development.
• Technological in nature – This experimentation process must rely on hard science, such as engineering, physics, biology, chemistry or computer science.
• Qualified purpose – Research must be for the purpose of creating a new or improved product or process that results in increased performance, function, reliability or quality.

What costs are eligible under R&D?

Eligible R&D costs include wages, supplies, contract research and rental or lease of computers. Taxable wages would apply to employees who provide direct supervision of the research. Supplies used in the research would include extraordinary utilities but not administrative supplies. Contract research would apply to any subcontractor expenses, including labor, services and research. Lastly, payments made for computers and server space for hosting software under development.

It’s important to note, if you didn’t file for R&D tax credit on your 2016 return, you can still conduct an audit of 2016 R&D expenses and file an amended return by December 31, 2017. You must file the credit on your return before you can begin recognizing the offset on your payroll taxes. To better understand the R&D tax benefits work with your accountant to research approved activities and expenditures your business may incur through research.

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