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A Different Type of Enterprise

If you’re looking to expand your business, moving to a Qualified Enterprise Zone may provide an opportunity to grow in a tax-smart way.

A PRIMER

Enterprise zones have been around for decades. And while federal tax breaks for enterprise zones expired, companies that meet certain requirements may gain state and local tax credits in exchange for locating or expanding their businesses in locales that qualify as enterprise zones.

Individual enterprise zone rules vary, but generally a company looking for tax credits will need to actively conduct a significant part of its business and earn a good ratio of its gross income within the zone. A substantial part of a company’s tangible and intangible property and services typically must be located in the zone, and enterprise zone companies typically must hire a healthy percentage of their employees from the distressed areas in which they are located.

In New Jersey, for example, which has one of the country’s longest-running enterprise zone programs, the Department of Community Affairs oversees 32 designated zones. Economic incentives are generous, including up to a $1,500 tax credit per permanent fulltime employee hired. Individual states and locales have different rules, so contact your local agencies to learn more.

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A Qualified Opportunity

When you sell appreciated assets, you pay taxes on them in the year you realize capital gains. But when you invest in a Qualified Opportunity Fund (QOF), you defer capital gains taxes and potentially receive tax-free appreciation. If you invest outside of a qualified retirement plan, you might explore how these types of funds could fit into your investment strategy.

A NEW OPPORTUNITY

Qualified Opportunity Zones (QOZs) were created by the Tax Cuts and Jobs Act (TCJA), the last major federal tax overhaul, to benefit economically distressed areas and those who invest in them. QOF investments are either corporations or partnerships that must meet a number of requirements. For example, a QOF must hold at least 90% of its assets in QOZ property, and at least 50% of a zone property’s gross income should come from conducting business in a designated zone.

TAX BENEFITS

If you reinvest capital gains into these funds, you defer gains until selling or exchanging shares (until 2026, when this provision expires with the rest of the TCJA). If you hold the investment for at least five years, you’ll get a 10% step up in basis on reinvested capital gains. A special rule applies if you hold a QOF at least 10 years: the amount gained will be tax-free because the basis will increase to 100% of fair market value once gains are realized. Talk to your tax professional to learn more.

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Exploring Trusts For Your Estate

While the federal estate tax basic exclusion amount has risen dramatically in recent years, some states have not followed suit by raising their exemptions. Even with higher current exemptions, the future of taxes is unpredictable, so you need a strategy to deal with potential estate taxes if you own significant assets. A trust could be part of that strategy.

CONTROL AND PRIVACY

A trust can help you control when and how assets are used during your lifetime. And when estate taxes aren’t an issue, a revocable trust may offer an attractive option. (It is revocable because you can change its terms or cancel it.)

Trusts, both of the revocable and irrevocable variety, shield their assets from the public glare of probate. One caveat: Only those assets owned by the trust avoid probate, so you’ll have to change the title of any assets you move. Both types of trusts can also include terms and conditions that deal with potential incapacitation.

And even when taxes aren’t an issue, you may want to consider trusts that can offer you more control over how and when adult special-needs and spendthrift children receive assets during their lifetimes.

TAX REDUCTION

While all trusts provide a measure of privacy and control, revocable trusts won’t provide tax advantages. However, an irrevocable trust will. The federal estate tax exclusion, now more than $11 million per person, was half that just three years ago and below $1 million two decades ago. As governments seek revenue, know that taxes can rise as easily as they fall.

Regardless, some states offer the same exemption allowed by the federal government, but others decouple their rates – some to as low as a $1 million exemption. Other states levy separate inheritance taxes, too. So if you have assets you want to pass to future generations, talk to an estate planning attorney and your tax professional to learn more about trusts.

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New Retirement Rules

Congress capped off last year by passing the Setting Every Community Up for Retirement Enhancement (SECURE) Act as part of a larger spending bill. This is the biggest change in retirement saving rules in more than a decade. We urge you to discuss any changes to your retirement strategy with your tax and financial professionals, but here’s a quick look at why the new law may change your approach to saving for retirement.

MORE TIME

One big change is the age when minimum required distributions (RMDs) must begin. Now, that age moves back to April 1 of the calendar year following the year in which you turn 72. Previously it was age 70 1/2. This tweak is particularly helpful if you want to delay taking RMDs as long as possible.

Congress also removed the age cap for contributing to a traditional IRA, as long as there is sufficient earned income to offset the contribution. Previously, you couldn’t contribute to one after age 70 1/2, whether or not you earned income.

LESS TIME

While Congress gives, it also takes away in the case of stretch IRAs. Some people who inherit an IRA anytime beginning in 2020 will get less time to stretch out payments. While beneficiaries used to have the ability to stretch inherited IRA assets to last their lifetimes, new rules mandate that some people withdraw all IRA assets within 10 years. There are exceptions to this rule, including surviving spouses, minor children and special-needs beneficiaries.

OTHER CHANGES

Two provisions in this spending bill will especially help younger taxpayers. The first is a new ability to take up to $10,000 tax-free from Section 529 plans to pay qualified student loans and the cost of some apprenticeships. The second is a new penalty-free exception to take up to a $5,000 distribution penalty-free from an IRA and some qualified retirement plans for a qualified birth or adoption.

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April 2020 ClientLine Newsletter

New Retirement Rules – last year, Congress passed the Setting Every Community Up for Retirement (SECURE) Act. This is the biggest change in retirement saving rules in more than a decade.

Exploring Trusts For Your Estate – while the federal estate tax basic exclusion amount has risen dramatically in recent years, some states have not followed suite by raising their exemptions.

A Qualified Opportunity – when you invest in a Qualified Opportunity Fund, you defer capital gains taxes and potentially receive tax-free appreciation.

A Different Type of Enterprise – if you’re looking to expand your business, moving to a Qualified Enterprise Zone may provide an opportunity to grow in a tax-smart way.

Insights and Tips – the SECURE Act also creates big changes for companies offering qualified retirement plans.

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