HOW TO GET AROUND THE NEW TAX LAW’S BARRIERS TO CHARITY
In the recently-passed tax reform bill, Congress raised the standard deduction, which is now $12,000 for single filers and $24,000 for married taxpayers filing joint returns. Due to this increase, many Americans will likely elect to take the standard deduction, as opposed to itemizing their tax deductions. Many experts anticipate that this change will negatively impact charitable organizations because the amount taxpayers will need to donate in order to receive a tax benefit will likely outweigh the tax benefit they receive from the donation. According to these experts, this change will lead to fewer taxpayers donating to charitable organizations. This article explores several options that taxpayers can use to get the highest tax benefit from their charitable giving.
Bundle Your Donations: The new tax bill curtailed certain itemized deductions, such as the deductions for mortgage interest, state income tax, and property taxes. Americans are required to pay mortgage interest, state income taxes, and property taxes regardless of whether they can deduct the expenditures. However, Americans can choose to stop donating to charities. As a result, we expect to see Americans tighten their belts by reducing their charitable giving.
Itemized deductions for state and local taxes, capped at $10,000 per year, cannot be bundled. In other words, the taxpayer will have to pay them every year when they come due. However, taxpayers can control the timing of their contributions. For example, consider a hypothetical taxpayer under the old tax regime donated $10,000 a year to charitable organizations. Under the new regime, the taxpayer should consider making a one-time donation in Year 1 of $50,000 and reducing his or her yearly contributions in Years 2 through 5. That way, the taxpayer can take advantage of the itemized deduction and tax benefit in Year 1.
Create a Private Foundation: Taxpayers with large amounts of disposable income, and who can shoulder the start-up costs associated with a foundation, may benefit from creating a private foundation, which is usually created as a tax-exempt, not-for-profit corporation. Under this scenario, the taxpayer creates the foundation by donating a meaningful sum to the foundation in Year 1. The taxpayer may then itemize its donation and receive the tax benefit from beginning the foundation in Year 1. In subsequent years, the foundation manages the yearly charitable contributions. The taxpayer can make a large infusion of cash into the foundation in subsequent years to take advantage of the itemized deduction.
Contribute to a Donor-Advised Fund: For those taxpayers without the ability to fund the set-up cost of a foundation, consider a charitable funding vehicle known as a “donor-advised fund.” Many established charitable organizations sponsor donor-advised funds, which allow a taxpayer to contribute to the fund and recommend how the contributed funds should be paid. A donor-advised fund works very similar to a foundation. However, unlike a foundation, the taxpayer has less control over the way the organization spends its donation. While donors may recommend how the organization spends money, the organization ultimately decides how to allocate its resources.
The Take-Away: The new tax law presents challenges to individuals who previously itemized their deductions to take advantage of tax benefits, including those taxpayers who benefited from charitable donations. Despite the new law, careful planning may allow taxpayers to continue to benefit from itemized deductions, including charitable giving. We recommend consulting with professionals, such as attorneys and accountants, who understand the intricacies of the new law, to determine your options.
By: Bruce E. Bell
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ILLINOIS IS BACK IN THE LLC BUSINESS
For years, small business owners in Illinois have lamented about the high fees charged to Illinois limited liability companies (“LLCs”) in formation, annual reports, and other filings. Especially for individuals with multiple LLCs, such as real estate developers, the costs quickly become significant. A small real estate developer with ten properties, each held in its own LLC, would have paid a total of $5,000 to initially form all of those entities, and $2,500 annually to keep them in good standing with the state. What’s worse is that fees for corporations were a fraction of the cost. But filing as a corporation instead of an LLC isn’t an option for everyone. LLC owners were understandably frustrated.
In July of 2017, Illinois enacted extensive changes to the Illinois Limited Liability Company Act. These changes primarily bring the Illinois statute more in line with the Revised Uniform Limited Liability Company Act (the “RULLCA”). Similar to the Uniform Commercial Code, the purpose of the RULLCA is to create a framework that states can voluntarily adopt to create more consistency across the nation’s various LLC statutes. Despite embracing this greater consistency, Illinois still imposed some of the highest fees for LLCs in the nation. For many years, groups such as the Small Business Advocacy Council and dozens of local chambers of commerce and industry organizations pressed Springfield to bring LLC fees more in line with national averages. When the Illinois legislature finally answered that call, the resulting reductions exceeded expectations. Illinois Senate Bill SB 867 made surprisingly drastic cuts to LLC fees, effective December 20, 2017:
Filing Previous Fee Reduced Fee
Articles of Organization $500.00 $150.00
Annual Report $250.00 $75.00
Name Reservation $300.00 $25.00
Articles of Amendment $150.00 $50.00
Before passage of SB 867, a 2015 survey prepared by the University of North Carolina MBA program compared state fees to form an LLC. They ranged anywhere from the low end of the spectrum in Kentucky ($40.00) to Illinois and Massachusetts ($500.00), which were tied for the most expensive states in the nation to form an LLC. The services provided by the states in exchange for these filings are essentially identical. Making matters worse, Illinois charged as much as $100.00 in additional fees to file documents online, despite the fact that doing so saved the state money by reducing the processing and disposal of paper documents. In contrast, with the passage of SB 867,
Illinois now is in the middle of the pack of state filling fees, which average $130 across all states.
Filing in another state. Previously, the high fees in Illinois and other factors had business owners seeking refuge in other states with lower fees under the theory that it doesn’t really matter where an LLC is formed. Wyoming, Nevada and Colorado became popular states in which to form an LLC instead of Illinois, even if the company was based here. It is true that there is no legal requirement that a company be physically located in a state in order to file their articles of organization there. But this was an imperfect solution. To their dismay, many companies found that they ultimately needed to register their “foreign LLC” in Illinois regardless. A company will need to register in Illinois, even if formed somewhere else, if it owns real estate in Illinois, has employees in Illinois, holds a license issued by an Illinois agency, or operates with a “sufficient nexus” with the State of Illinois. The fees for registering an out-of-state LLC in Illinois are the same as the fees for filing here in the first place. As a result, the company had to file annual reports and tax returns in two states.
Relocating to another state. Not many business owners would physically transfer their entire business across state lines just to avoid a $250.00 annual report filing fee. But Illinois also has one of the highest real estate tax rates in the nation and a relatively high personal income tax rate. Our firm has assisted clients in taking their business operations into states that have lower real estate taxes, lower income tax, or which collect no state income tax at all. This is particularly viable for consultants and independent sales representatives working in virtual or home offices where they less frequently interact with customers face-to-face.
Conclusion. In deciding where to choose to file the articles of organization of an LLC, one should always consider all the applicable factors, including filing fees, and consult with an attorney experienced in forming LLCs in other states. Avoid falling into the trap of following popular trends or simply chasing the lowest fees. You may find yourself actually increasing your costs and number of state tax filings. A proper analysis includes reviewing statutory requirements, licensing implications, corporate and personal tax rates, real estate tax rates (even for those leasing space) and availability of a qualified workforce. Most often, the main driver behind the physical location of a business is where the founder resides, so the fee reduction is certainly welcome relief for Illinois LLC owners. As Illinois Governor Bruce Rauner recently said, “By easing the fee burden for LLCs here, we are sending a message to entrepreneurs and small business owners in Illinois: Start here and stay here.”
By: James D. Voigt
Introducing Michael S. Friman
Michael Friman has joined the Firm as a partner focusing on commercial real estate transactions, finance and business transactions. He uses his experience and creativity in proactively finding tax and other savings incentives available to real estate owners. Michael’s breadth of experience allows him to not only provide strategic planning and routine business transactional support to companies, but also enables him to capably “quarterback” any number of unique issues facing companies by spotting issues and engaging specialists when needed, such as intellectual property, environmental and regulatory counsel.
Introducing Andrew D. Bell
Andrew Bell has joined the Firm as a tax, estate planning and transactional attorney. He regularly works with his closely held business clients to effectuate transitions from one generation to the next, leveraging his tax and estate planning background to achieve cost-effective strategies.
On Nov. 2, 2017, Bob Goldberg, who also serves as Business Technology Association’s general counsel, was presented with a Lifetime Achievement Award at The Cannata Report’s 32nd Annual Awards & Charities Dinner held at The Madison Hotel in Morristown, New Jersey.
Joan Berg had an editorial profile featured in Leading Lawyers Magazine – Real Estate, Construction & Environmental Edition for 2018. Copies were distributed to all attendees at Law Bulletin Media’s annual Real Estate Forecast Conference on Jan. 17, 2018 at the Hyatt Regency Chicago.
Prior editions of the Firm’s Newsletter, Sensible Solutions, are available on the Firm’s website.
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