The IRS Says That You Can Contribute More to Your IRA and 401(k) in 2019

by | Nov 6, 2018 | News

Late last week, the IRS announced increased contribution limits for IRAs, 401(k)s and other retirement plans. IRAs have been stuck at $5,500 since 2013, but are finally moving up to $6,000 starting in 2019. If you save in a 401(k), including a Solo K, the good news is that your contribution limits were increased too, with employee contributions increasing from $18,500 to $19,000 and total 401(k) contributions (employee and employer) reaching $56,000. The IRS announcement and additional details can be found here.

Health savings account (HSA) owners also won a small victory with individual contribution maximums increasing by $50 to $3,500, and family contribution amounts increasing by $100 to $7,000.

Breakdown

Here’s a quick breakdown on the changes:

  • IRA contribution limitations (Roth and Traditional) increased from $5,500 to $6,000, and there is still the $1,000 catch-up amount for those 50 and older.
  • 401(k) contributions also increased for employees and employers: Employee contribution limitations increased from $18,500 to $19,000 for 2019. The additional catch-up contribution for those 50 and older stays the same at $6,000. The annual maximum 401(k) (defined contribution) total contribution amount increased from $55,000 to $56,000 ($62,000 for those 50 and older).
  • HSA contribution limits increased from $3,450 for individuals and $6,900 for families to $3,500 for individuals and $7,000 for families.

These accounts provide advantageous ways for an individual to either save for retirement or to pay for their medical expenses. If you’re looking for tax deductions, tax deferred growth, or tax-free income, you should be using one or all of these account types. Keep in mind there are qualifications and phase out rules that apply, so make sure you’re getting competent advice about which accounts should be set up in your specific situation. Lastly, remember, all of these accounts can be self-directed and invested into assets you know best.

What is a Foreign LLC or Corporation, and When Do I Need to Register My Company in Another State?

by | Aug 27, 2018 | IRA/LLCs

Business owners and investors doing business in multiple states often ask the question of whether their company, that is set up in one state needs to be registered into the other state(s) where they are doing business. This registration from your state of incorporation/organization into another state where you also do business is called a foreign registration. For example, let’s say I’m a real estate investor in Arizona and end up buying a rental property in Florida. Do I need to register my Arizona LLC that I use to hold my real estate investments into Florida to take ownership of this property? The answer is generally yes, but after reviewing a few states laws on the subject I decided to outline the details of when you need to register your LLC or Corporation into another state where you are not incorporated/organized. (Please note that the issue of whether state taxes are owed outside of your home state when doing business in multiple states is a different analysis).

In analyzing whether you need to register your out of state company into a state where you do business or own property it is helpful to understand two things: First, what does the state I’m looking to do business in require of out of state companies; and Second, what is the penalty for failure to comply.

When Do I Need to Register Foreign?

First, a survey of a few state statutes on foreign registration of out of state companies shows that the typical requirement for when an out of state company must register foreign into another state is when the out of state company is deemed to be “transacting business” into the other state. So, the next question is what constitutes “transacting business”? The state laws vary on this but here are some examples of what constitutes “transacting business” for purposes of foreign registration filings.

  1. Employees or storefront located in the foreign registration state.
  2. Ownership of real property that is leased in the foreign registration state. Note that some states (e.g. Florida) state that ownership of property by an out of state LLC does not by itself require a foreign registration (e.g. a second home or maybe land) but if that property was rented then foreign registration is required.

Here is an example of what does not typically constitute “transacting business” for foreign registration requirements.

  1. Maintaining a bank account in the state in question.
  2. Holding a meeting of the owners or management in the state in question.

So, in summary, the general rule is that transacting business for foreign registration requirements occurs when you make a physical presence in the state that results in commerce. Ask, do I have employees or real property in the state in question that generates income for my company? If so, you probably need to register. If not, you probably don’t need to register foreign. Note that there are some nuances between states and I’ve tried to generalize what constitutes transacting business so check with your attorney or particular state laws when in question.

What is the Penalty if I Don’t Register Foreign?

Second, what is the penalty and consequence for failing to file a foreign registration when one was required? This issue had a few common characteristics among the states surveyed. Many company owners fear that they could lose the liability protection of the LLC or corporation for failing to file a foreign registration when they should have but most states have a provision in their laws that states something like the following, “A member [owner] of a foreign limited liability company is not liable for the debts and obligations of the foreign limited liability company solely by reason of its having transacted business in this state without registration.” A similar provision to this language was found in Arizona, California and Florida, but this provision is not found in all states that I surveyed. This language is good for business owners since it keeps the principal asset protection benefits of the company in tact in the event that you fail to register foreign.  On the other hand, many states have some other negative consequences to companies that fail to register foreign. Here is a summary of some of those consequences.

  1. The out of state company won’t be recognized in courts to sue or bring legal action in the state where the business should be registered as a foreign company.
  2. Penalty of $20 per day that the company was “transacting business” in the state when it should have been registered foreign into the state but wasn’t. This penalty maxes out at $10,000 in California. Florida’s penalty is a minimum of $500 and a maximum of $1,000 per year of violation. Some states such as Arizona and Texas do not charge a penalty fee for failure to file.
  3. The State where you should have registered as a foreign company becomes the registered agent for your company and receives legal notices on behalf of your company. This is really problematic because it means you don’t get notice to legal actions or proceedings affecting your company and it allows Plaintiff’s to sue your company and to send notice to the state without being required to send notice to your company. Now, presumably, the state will try to get notice to your company but what steps the states actually takes and how much time that takes is something I couldn’t find. With twenty to thirty day deadlines to respond in most legal actions I wouldn’t put much trust in a state government agency to get me legal notice in a timely manner nor am I even certain that they would even try.
  4. In addition to the statutory issues written into law there are some practical issues you will face if your out of state company is not registered into a state where you transact business. For example, some county recorders in certain states won’t allow title to transfer into your out of state company unless the LLC or corporation is registered foreign into the state where the property is located. It is also common to run into insurance and banking issues for your company until you register foreign into the state where the income generating property, employee, or storefront is located.

In summary, you should register your company as a foreign company in every state where you are “transacting business”. Generally speaking, transacting business occurs when you have a storefront in the foreign state, employees in the foreign state, or property that produces income in the foreign state. Failure to file varies among the states but can result in penalties from $1,000 to $10,000 a year and failure to receive legal notices and/or be recognized in court proceedings. Bottom line, if you are transacting business outside of your state of incorporation/organization you should register as a foreign entity in the other state(s) to ensure proper legal protections in court and to avoid costly penalties for non-compliance.

2017 Tax Reporting for Your Self-Directed IRA

by | Feb 12, 2018 | News

Self-Directed IRA investors should be aware of the following IRA tax reporting responsibilities.  Some of these items are completed by your custodian and others are the IRA owner’s sole responsibility. Here’s a quick summary of what should be reported to the IRS each year for your self-directed IRA.

IRA Custodian Files

Your IRA Custodian will file the following forms to the IRS annually:

IRS FORM PURPOSE WHAT DOES IT REPORT
Form 5498 Filed to the IRS by your custodian. No taxes are due or paid as a result of Form 5498.  

IRA contributions, Roth conversions, the account’s fair market value as of 12/31/17, and required minimum distributions taken.

 
Form 1099-R Filed to the IRS by your custodian to report any distributions or Roth conversions. The amounts distributed or converted are generally subject to tax and are claimed on your personal tax return. IRA distributions for the year, Roth IRA conversions, and also rollovers that are not direct IRA trustee-to-IRA trustee.


IRA Owner’s Responsibility

Depending on your self-directed IRA investments, you may be required to file the following tax return(s) with the IRS for your IRA’s investments/income:

IRS FORM DOES MY IRA NEED TO FILE THIS? DUE DATE
1065 Partnership Tax Return If your IRA is an owner in an LLC, LP, or other partnership, then the Partnership should file a 1065 Tax Return for the company to the IRS and should issue a K-1 to your IRA for its share of income or loss. Make sure the accountant preparing the company return knows to use your custodian’s tax ID for your IRA’s K-1’s and not your personal SSN (or your IRAs Tax ID if it has one for UBIT 990-T tax return purposes). If your IRA owns an LLC 100%, then it is disregarded for tax purposes (single-member LLC) and the LLC does not need to file a tax return to the IRS. March 15th, 6-month extension available
990-T IRA Tax Return (UBIT) If your IRA incurs Unrelated Business Income Tax (UBIT), then it is required to file a tax return. The IRA files a tax return and any taxes due are paid from the IRA. Most self-directed IRAs don’t need to file a 990-T for their IRA, but you may be required to file for your IRA if your IRA obtained a non-recourse loan to buy a property (UDFI tax), or if your IRA participates in non-passive real estate investments such as: Construction, development, or on-going short-term flips. You may also have UBIT if your IRA has received income from an active trade or business such as a being a partner in an LLC that sells goods and services (C-Corp dividends exempt). Rental real estate income (no debt leverage), interest income, capital gain income, and dividend income are exempt from UBIT tax. April 15th, 6 -month extension available

Most Frequently Asked Questions

Below are my most frequently asked questions related to your IRA’s tax reporting responsibilities:

Q: My IRA is a member in an LLC with other investors. What should I tell the accountant preparing the tax return about reporting profit/loss for my IRA?

A: Let your accountant know that the IRA should receive the K-1 (e.g. ABC Trust Company FBO John Doe IRA) and that they should use the Tax-ID/EIN of your custodian and not your personal SSN. Contact your custodian to obtain their Tax-ID/EIN. Most custodians are familiar with this process, so it should be readily available. If your IRA has a Tax-ID/EIN because you file a 990-T for Unrelated Business Income Tax then you can provide that Tax-ID/EIN.

Q: Why do I need to provide an annual valuation to my custodian for the LLC (or other company) my IRA owns?

A: Your IRA custodian must report your IRA’s fair market value as of the end of the year (as of 12/31/17) to the IRS on Form 5498 and in order to do this they must have an accurate record of the value of your IRA’s investments. If your IRA owns an LLC, they need to know the value of that LLC. For example, let’s say you have an IRA that owns an LLC 100% and that this LLC owns a rental property,  and that it also has a bank account with some cash. If the value of the rental property at the end of the year was $150,000, and if the cash in the LLC bank account is $15,000, then the value of the LLC at the end of the year is $165,000.

Q: I have a property owned by my IRA and I obtained a non-recourse loan to purchase the property. Does my IRA need to file a 990-T tax return?

A: Probably. A 990-T tax return is required if your IRA has income subject to UBIT tax. There is a tax called UDFI tax (Unrelated Debt Financed Income) that is triggered when your IRA uses debt to acquire an asset. Essentially, what the IRS does in this situation is they make you apportion the percent of your investment that is the IRA’s cash (tax favorable treatment) and the portion that is debt (subject to UDFI/UBIT tax) and your IRA ends up paying taxes on the profits that are generated from the debt as this is non-retirement plan money. If you have rental income for the year, then you can use expenses to offset this income. However, if you have $1,000 or more of gross income subject to UBIT, then you should file a 990-T tax return. In addition, if you have losses for the year, you may want to file 990-T to claim those losses as they can carry-forward to be used to offset future gains (e.g. sale of the property).

Q: How do I file a 990-T tax return for my IRA?

A: This is filed by your IRA and is not part of your personal tax return. If tax is due, you will need to send the completed tax form to your IRA Custodian along with an instruction to pay the tax due and your custodian will pay the taxes owed from the IRA to the IRS. Your IRA must obtain its own Tax ID to file Form 990-T. Your IRA custodian does not file this form or report UBIT tax to the IRS for your IRA. This is the IRA owner’s responsibility. Our law firm prepares and files 990-T tax returns for our self-directed IRA and 401(k) clients. Contact us at the law firm if you need assistance.

Sadly, not many professionals are familiar with the rules and tax procedures for self-directed IRAs, so it is important to seek out those attorneys, accountants, and CPAs who can help you understand your self-directed IRA tax reporting obligations. Our law firm routinely advises clients and their accountants on the rules and procedures that I have summarized in this article and we can also prepare and file your 990-T tax return.

Tax Planning for Bitcoin and Other Cryptocurrency Profits

by | Dec 12, 2017 | Investing

Image of a variety of cryptocurrency coins laying on one another.Bitcoin, Ethereum, Litecoin, and other cryptocurrencies have seen dramatic price increases this year. Have you thought about cashing in? Are you wondering how will you be taxed?

Cryptocurrency is a Capital Asset

The IRS has clearly stated that cryptocurrency (aka virtual currency) is a capital asset like property. And therefore, the buying and selling of it for profit results in short-term capital gain if held for under one year, and long-term capital gain if held for over a year. Short-term capital gain rates are based on your regular income tax bracket, while the long-term capital gains rate is 15-20%, depending on income level. IRS Notice 2014-21.

So, for example, let’s say I bought 10 Bitcoin in June 2017 for $25,000 US dollars when the price of Bitcoin was approximately $2,500. I decide that in December 2017 that I would like to sell my Bitcoin. The price is now approximately $16,500 per Bitcoin, so my holdings are now worth $165,000. As a result, my $25,000 investment has generated a taxable profit of $140,000. Since I owned the Bitcoin for less than one year, the income will be short-term capital gain income and I will pay at my regular federal rate.

If I instead held the cryptocurrency until July 2018, then I would have long-term capital gain and would be paying tax at a much lesser rate.

Any realized gain from the cryptocurrency profit is taxable. This is the case if you exchanged Bitcoin for other cryptocurrency, or for goods or services. In this instance, you take the value of the Bitcoin in US dollars at the time of the exchange for other property and treat whatever gain you have when that Bitcoin was exchanged (at the value of the other property) as your taxable gain. Let’s say you bought 10 Bitcoin in 2015 for $250 per Bitcoin for a total purchase price of $2,500. You decide to exchange one Bitcoin, valued at $16,500 in December 2017, for 17 Ethereum valued at approximately $500 per Ethereum. Your gain on the Bitcoin being exchanged is the value of the Ethereum, $16,500, minus the cost of the Bitcoin, $250, for a long-term capital gain of $16,250.

Mining Cryptocurrency

Cryptocurrency mining is the process of using servers and other computers to verify the blockchain and transactions that are the backbone of the cryptocurrency. This IRS has stated that income from cryptocurrency mining, whether received in dollars or cryptocurrency, is taxable as regular income. Consequently, if you have engaged in the cryptocurrency mining business or are otherwise self-employed doing cryptocurrency mining then the income you received is taxable at your ordinary income rates and it will also be subject to self-employment tax.

Retirement Accounts and Cryptocurrency

Retirement accounts such as IRAs and 401(k) can own Bitcoin and other cryptocurrency. This requires a self-directed IRA or 401(k) and some careful structuring. For a more detailed discussion on this topic, check out my prior article and video here. When gains are made from the sale of cryptocurrency, whether for US dollars or other cryptocurrency, there is no tax owed on the gain. And, if you use a Roth IRA or Roth 401(k), there will be zero tax owed when you pull the funds out at retirement. For traditional IRAs and 401(k)s you pay tax when you withdraw the funds at retirement and these distributions, as is the case for all traditional IRA or 401(k) distributions, are subject to tax at your ordinary income tax rate at the time of distribution.

If your self-directed IRA or 401(k) is invested into cryptocurrency mining, as opposed to holding cryptocurrency for investment, then the income from such mining activities will likely cause unrelated business income tax.