Monthly Archives: February 2014

Florida’s New LLC Law: Who Cares?

Who should care about Florida’s new limited liability company (“LLC”) law? By now someone also has told you to revisit all your LLC operating agreements, because pre-existing operating agreements are not permanently grandfathered under the old law. Unless you are an attorney, three things probably came to mind:

1. I didn’t know the old law was broken; was it broken?

2. I don’t want to pay an attorney to revisit an agreement I already paid for once.

3. I don’t want to spend time rehashing complicated, long forgotten issues with the other owners; that was painful enough the first time.

Consistent with our “just the facts” focus, we won’t comment further on those thoughts about the new law. Over the course of this year we will, however, note practical steps you can take to manage the new law. We also will highlight salient real-world issues most deserving a slice of your limited available attention.

For those attempting triage, today we offer this:

1. Since the new act is largely a “default” act and the rules applicable to manager-managed LLCs are not dramatically changed, the new law is less likely to affect existing manager-managed LLCs with comprehensive operating agreements. But if there are gaps in an operating agreement, an operating agreement has terms conflicting with new non-waivable provisions, or the LLC is member-managed, changes in the new law are more likely to materially affect the legal status and operations of the LLC.

2. The new act increases personal liability for claims arising out of incorrect public filings. It is now more important to make sure that public filings, including Annual Reports filed with the Secretary of State, are accurate.

There will be more to come later, but for those with interest now, here is a broader overview of the new law:

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Department of Revenue Publishes 2014 Discretionary Sales Surtax Rates

The Florida Department of Revenue published the discretionary sales surtax rates for 2014 (
Florida imposes a state-wide 6% sales tax, but most Florida counties impose an additional local sales tax rate known as the “discretionary sales surtax” or “local option county sales tax.” The discretionary sales surtax rates currently range from 0.5% to
1.5%. The applicable rate is the rate for the county where the goods are delivered or the services are provided. For most transactions, the discretionary sales surtax is only imposed on the first $5,000 of the sales amount. There is no cap on the discretionary
sales surtax for rentals of real property, admissions (such as country club dues), service warranties, or taxable services.

If you have questions regarding the discretionary sales surtax or any other Florida taxes, please contact:

Michael J. Wilson

Applicable Federal Rates for March 2014

The Internal Revenue Code prescribes minimum imputed interest rates and time-value-of–money factors applicable to certain loan transactions and estate planning techniques. These rates are tied formulaically to market interest rates. The Internal Revenue Service updates these rates monthly.

These are commonly applicable rates in effect for March 2014:

Short Term AFR
(Loans with Terms <= 3 Years)                         0.28%

Mid Term AFR
(Loans with Terms > 3 Years and <= 9 Years) 1.84%

Long Term AFR
(Loans with Terms >9 Years)                            3.36%

7520 Rate
(Used in many estate planning vehicles)         2.2%

Here is a link to the complete list of rates:

E. John Wagner, II

Bipartisan Medicare “Doc Fix” Compromise Legislation Released

The United States House Energy and Commerce and Ways and Means Committees and the Senate Finance Committee have released bipartisan compromise legislation that would
repeal the Sustainable Growth Rate (SGR) formula for physician payments and transition Medicare towards a value-based payment system.

The legislation “not only fully repeals the broken sustainable growth rate formal, but puts in place real reforms that move Medicare away from a fee-for-service model that promotes greater spending to one that encourages better results,” Sen. Orrin Hatch said in a press release announcing the legislative moves.

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2013 Federal Income Tax Return “Regrouping” Election Can Permanently Reduce Exposure to the New 3.8 percent Medicare Surtax

2013 is the first year of the 3.8 percent Medicare Surtax, which was enacted as a part of the law popularly known as “Obamacare.” Taxpayers have a one-time opportunity
to make an election on their 2013 federal income tax returns to permanently reduce exposure to the new surtax. Before filing an income tax return this year, it is important to understand and potentially avoid the surtax.

The surtax applies to interest, dividends, capital gains, rental and royalty income, certain annuities, and income from certain passive business and investment activities.
It potentially applies to persons with modified adjusted gross income over $200,000 for individual filers and $250,000 for married joint filers.

The planning opportunity relates to income from “passive” business activities. The IRS determines whether an activity is passive derivatively by reference to the
pre-existing Internal Revenue Code Section 469 passive loss rules. The activity is not passive if the taxpayer meets hourly participation thresholds. Grouping activities under the new rules makes it easier for taxpayers to meet the material participation
hourly thresholds to avoid classification as a passive activity. If separate activities do not individually satisfy the participation thresholds, the aggregated activities may qualify. However, once a taxpayer elects to group activities under Section 469,
he or she usually must retain the grouping for all future years.

Special rules apply to real estate professionals and persons engaging in leasing and farming activities. These individuals may have planning opportunities not available
to others.

The clock is ticking on taxpayers’ limited window to make the regrouping election. The election must be made on a taxpayer’s income tax return for the first tax year
beginning after December 31, 2012. Taxpayers that have exposure to the new surtax in 2013 should plan now to ensure that the election is properly and timely made on 2013 returns.

For more information concerning 3.8 percent Medicare Surtax planning, as well as planning to avoid related taxes:

Medicare Surtax Planning for Real Estate Investors and Developers

E. John Wagner, II

IRS Expands Cancellation of Indebtedness Income Exclusion

When a lender discharges debt for less than full consideration, the borrower by default recognizes income for federal income tax purposes. “Qualifying Real Property Indebtedness” is an exception. Forgiveness of Qualifying Real Property Indebtedness may be excluded from income. New IRS guidance expands this exclusion.

The Qualifying Real Property Indebtedness exclusion generally applies to debt secured by real property, if a taxpayer incurred the debt in connection with a business using the property. The IRS guidance clarifies that “secured” debt is not limited to a traditional real estate mortgage. A debt secured by the membership interest in a “disregarded entity” limited liability company that owns real estate may qualify, even though the lien does not attach directly to the real estate.

IRS targeted the guidance at a specific mezzanine loan structure, but taxpayers in other structures may utilize the exclusion as well. Other notable cancellation of indebtedness income exclusion opportunities include: taxpayer insolvency, debt forgiven in certain bankruptcy proceedings, and seller-financed debt forgiven as a purchase price adjustment.

Here is a link to the IRS guidance:

E. John Wagner, II

Governor Scott Calling for Phase-Out of Tax on Commercial Rents

Florida Governor Rick Scott called for beginning a phase-out of sales tax on commercial rents in fiscal year 2014-2015. A general announcement, but no specifics of the phase-out, was provided in a FAQ statement issued by the Governor’s office on January 28, 2014 ( Florida generally imposes sales tax on rent payments (including constructive rent payments) for commercial property, and the tax is imposed even where the landlord and tenant are related parties. This tax causes an unwelcome surprise to many taxpayers undergoing an audit by the Florida Department of Revenue.

However, in certain situations, there are techniques and restructuring options that can be used to minimize or even eliminate sales tax where related parties own and use the commercial property. Please contact us if you have questions regarding these techniques and options or any other sales tax issues.

Michael J. Wilson

IRS Proposed Regulations Limit Tax-Free Contributions and Distributions of Leveraged Property to and from Partnerships, Reduce Partnership Deduction Allocation Flexibility

On January 30, IRS proposed income tax regulations reducing flexibility to allocate partnership deductions. The regulations also limit tax-free contributions and distributions of leveraged property, including mortgaged real estate, to and from partnership entities. The taxation of partnerships and many LLCs could change.

Old transactions are not permanently grandfathered. Pre-existing arrangements eventually may require restructuring to avoid recognition of gain that was previously deferred.

While these proposals are less taxpayer friendly than existing law, taxpayers should not necessarily jump to restructure preexisting arrangements. The proposed regulations contemplate a transition period after finalization, and they must survive a public comment process before becoming effective. We anticipate these regulations will receive significant scrutiny. The regulations may change substantially before finalization, or they may never be finalized.

We do recommend reevaluation of new transactions that may not permanently achieve favorable results if the proposed regulations become law.

Here is a link to the proposed regulations:

E. John Wagner, II