Title owners of real property need to be aware that various actions taken with regard to real property may affect whether a gain or loss on the sale of the property is capital or ordinary in nature. The actions (or inactions) taken throughout the life cycle of a real property investment determine whether specific real estate is held for investment or held as dealer property. Real estate deemed held for investment is subject to favorable capital gain tax rates, while real estate treated as dealer property is subject to less-favorable ordinary income tax rates. In addition to facing higher tax rates on dispositions of property, dealers in real property are precluded from using tax-deferral strategies such as installment sale treatment under section 453 and like-kind exchange treatment under section 1031.

The issue of dealer versus investor classification has been frequently litigated. Because the federal tax code and regulations do not provide clear guidelines, taxpayers and their advisors must wade through numerous judicial interpretations involving a wide range of differing facts and circumstances in order to make a determination as to the appropriate classification. In general, the case law looks to five main factors in determining the proper classification of a taxpayer as either a dealer or an investor.

As explained more fully below, a recent Tax Court case, Cordell D. Pool v. Commissioner of Internal Revenue, T.C. Memo 2014-3 (2014), provides a refresher course on the five main factors. It also serves as a reminder that taxpayers and their advisors need to analyze all the specific facts and circumstances, document the known facts and the representations relied upon, and ensure all tax return filings reflect the appropriate status. The taxpayer bears the burden of proof in any dispute with the IRS.

The five factors as explained in the Pool decision are briefly discussed below:

1. Frequency and continuity of sales

Frequent and continual sales of various parcels of real property may indicate that such sales are undertaken in the ordinary course of business, while infrequent sales, often for significant profits, are more indicative of real property held as an investment. In Biedenharn Realty Co. v. United States, 526 F.2d 409 (5th Cir. 1976), the frequency and substantiality of sales were analyzed as the two most important criteria in determining dealer status.

In Suburban Realty Co v. United States, 615 F.2d 171 (5th Cir. 1980), a corporation held large volumes of land it had received from its shareholders. The corporation then sold more than 240 separate parcels to different buyers over a period of 33 years. The corporation engaged in no solicitation, advertising, development activity or subdivision activity, and did not act as a broker. Despite other facts that would typically suggest capital gain treatment, the court found that the continuous sales activity by the corporation over 33 years and the large number of discrete sales (240 over a 33-year period) were overriding factors compelling the conclusion that the corporation was selling its land parcels as a dealer in the ordinary course of business.

By contrast, the Tax Court in Buono v. Commissioner, 74 T.C. 187 1980, concluded that the taxpayer was entitled to capital gain treatment upon a single sale of land, despite the fact that the taxpayer was involved in activities related to zoning and subdivision. Buono acquired undeveloped land with the intention of subdividing the property into smaller lots to increase the property’s value and promptly selling the property once it secured municipal approval of the subdivision. In Buono, the court reasoned that although the taxpayer was involved in subdividing and zoning activities, the land was disposed of in a single asset sale and should accordingly be treated as investment property eligible for capital gain treatment. The court reasoned that the taxpayer did not engage in frequent sales, did not make any improvements to the land, and engaged in the subdivision merely to make the land more marketable for sale by the party to whom it sold the subdivided tract. It should be noted that Buono was able to prove its intention from the beginning was to sell the land to a single buyer.

2. Nature and extent of improvements and development activities

If a taxpayer’s activities with regard to a tract of land include subdividing, grading, zoning, or installing roads and utilities, the taxpayer may be deemed a dealer due to the nature of the development activity performed. It should be noted that this factor should be studied in relation to the particular parcel or tract of land involved. The mere fact that the owner of an investment parcel is also engaged in development activities with respect to other parcels should not be relevant to the tax treatment of a parcel genuinely held for investment.

The courts closely study the specific facts and circumstances in a case where there is some level of improvement and development to real property in relation to the other four factors.

In Pritchett v. Commissioner, 63 T.C. 149 (1974), the taxpayer was in the business of developing real estate and acquired a particular parcel of property that he intended to hold for investment. On prior-year returns, the taxpayer recognized ordinary income on the sale of real estate that he held for development (parcels he subdivided and developed). In this case, the IRS argued the gain on the sale of the parcels that Pritchett claimed were held for investment should also be recognized as ordinary income, similar to the treatment of the parcels he sold in the past. The court found in favor of Pritchett and allowed capital gain treatment on the property because Pritchett made no effort to subdivide or improve the property and the property was sold after he received an unsolicited offer from a third party.

It should also be noted that it is helpful to show the segregation of investment and dealer properties when multiple types of properties are held in an entity. Segregating into separate accounts and reflecting this on the financial statements and supporting documentation can help to lead to successful outcomes in court. The surrounding facts for the various parcels must also support the dealer and investor categorizations. There are several cases in which segregation is discussed including Robert P. Walsh T.C. Memo 1994-293 and Boree v. Commissioner 2016-2 U.S.T.C.

3. Solicitation, advertising and sales activities

Another important factor to explore in the determination of investor versus dealer status is the extent of the taxpayer’s sales and marketing effort related to the disposition of a particular parcel of real estate. If the taxpayer advertises, markets, solicits customers, or merely lists the property for sale, it is more likely that there will be ordinary treatment on an ultimate sale.

In Biedenharn Realty Co. v. United States, 526 F.2d 409 (5th Cir. 1976), cert. denied, 429 U.S. 819, the court denied capital gain treatment to a taxpayer who acquired land with the original intent to hold for investment. Although there were some other negative factors (some development and frequent sales), the court spent considerable time focusing on the taxpayer’s solicitation and advertising efforts. The court noted the amount of signage used for marketing purposes as an important factor in concluding that the taxpayer was a dealer, not an investor. Furthermore, the court noted that the use of an independent broker to solicit sales does not shield a taxpayer from being treated as a dealer. This case is similar to others where a taxpayer may have some factors suggesting ordinary income, but the extent of the taxpayer’s sales and marketing activities is the nail that seals the coffin, requiring dealer treatment.

4. Extent and substantiality of transactions

The overall level of the taxpayer’s real estate activities, with a particular focus on the extent to which the taxpayer’s main occupation is developing property for sales to customers in its ordinary line of business, also factors into the dealer versus investor determination. Questions the courts have examined include whether the taxpayer owns or operates a related construction, development or brokerage business; whether the taxpayer has performed similar activities on other parcels of real property; how many parcels and sales the taxpayer has been involved with in the past; whether the taxpayer has a full-time occupation other than real estate; and whether the taxpayer has a history of syndicating buy-and-hold real estate investment vehicles for investors.

5. Nature and purpose for holding property

Finally, courts have extensively analyzed the taxpayer’s intent in acquiring and holding the property. The ultimate questions are “why did the taxpayer buy the real property in the first place?” and “for what purpose was the property held at the time of sale?”

In Moore v. Commissioner, 30 T.C. 1306 (1958), taxpayers acquired property by gift and liquidated the tract of land by selling 22 lots over an 11-year period. The court in Moore found in favor of the taxpayer and allowed capital gain treatment. The Tax Court noted that one may liquidate an asset in the most advantageous way and still obtain capital gain treatment. The real question is whether, at the time of sale, the property is held merely for liquidation or whether the owner has entered into the business of holding property primarily for sale to customers in the ordinary course of the business. In Moore, the taxpayer’s method of disposal was chosen merely to maximize proceeds. The court found that the intent was never anything other than to receive the maximum proceeds on sale—intent consistent with investor treatment. Further supportive facts were that the taxpayer did not engage in extensive development or sales activities during the 11 years of sales.

Courts have also found that a taxpayer’s intent may change. Then, the relevant question is the purpose for which the property was held at the time of its sale. In Nevin v. Commissioner, T.C. Memo 1965–53 (1965), parcels of real estate that were not yet platted were deemed investment property at the time of sale. However, income from sales of parcels that were platted with streets installed before the sale was deemed ordinary. The court in Nevin noted that “when a rapid turnover occurs under the circumstances … and the taxpayer is in the real estate business and originally acquired the property for resale, it stretches the imagination to conclude that the land was held for investment at the time of sale.” The taxpayer in Nevin treated everything as held for investment, but the court deemed that some plots were held for investment and some were held as dealer property.

It is possible for a taxpayer to acquire a large tract of real property, break it into sections, and upon the sale bifurcate the treatment so as to receive capital gain for some plots and ordinary income for others. In Westchester Development Inc. v. Commissioner, 63 T.C. 198 (1974), the sales of tracts that were subdivided by the taxpayer to sell as sites for construction of single-family homes were sales within the ordinary course of the taxpayer’s business. However, sales of tracts that had not been subdivided or marketed resulted in capital gain. In such a case, it is generally advisable to separate the plots into separate entities to ensure that one parcel’s status does not taint the status of another parcel. It is also important to ensure partnership agreements, investor letters, tax returns and other documents properly reflect language that corresponds to the taxpayer’s intent in holding the property.

More recently, in Boree v. Commissioner, U.S.T.C. 2016-2, a developer with inventory was not successfully able to defend a change in circumstances from dealer to investor property even though there were certain restrictions to the development of the developer’s property. In this case, the taxpayer sold several lots and treated the lot sales as dealer property. According to the taxpayer, there was then a change in facts and there were substantial restrictions placed on the property after which the taxpayer abandoned all efforts to develop and sell in the ordinary course of business. Then, in the final year, the taxpayer sold in one bulk sale the remaining lots. Ultimately the tax court found that, while there were restrictions imposed, those restrictions did not deprive a landowner of all potential uses of the property. In fact, the taxpayer still took action after that point to create a planned development strategy. Additionally, there was nothing that the taxpayer had as evidence that the investment property was segregated from other properties held for sale. Taxpayers should be cognizant that it is difficult to prove change in intent when going from dealer to investor status.

Planning considerations

The dealer versus investor analysis became even more complex in 2013 with the enactment of the net investment income tax under section 1411. Although it is beyond the scope of this article, practitioners should consider the interplay between a dealer or investor classification and the treatment of the property under section 1411.

It is important to be proactive in the consideration of the various factors that the courts have referenced in determining dealer versus investor status. Decisions and actions that occur early in the acquisition phase of real estate investments can have far-reaching implications for the taxability of real estate investments. Taxpayers should consult with their tax advisors to determine the most appropriate classification status—dealer or investor.

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This article was written by Jennifer Seaton and originally appeared on Sep 30, 2022.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/industries/real-estate/the-dilemma-of-dealer-or-investor-classifications-for-real-estat.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

While the most intuitive starting point in establishing a retirement plan is deciding the specific type of plan to adopt, it’s not the only fundamental decision facing employers. Overlooking other factors impacting plan establishment could lead to costly missteps, such as plan disqualification. These factors often have ongoing ramifications and should be revisited on a regular basis.

To avoid common errors, employers should assess considerations including controlled or affiliated service group status of the employer, employee groups eligible for the plan, and service providers who are responsible for administering the plan and ensuring compliance with the Internal Revenue Code and Employee Retirement Income Security Act (ERISA).

Controlled and affiliated service groups

Failing to apply the tax code’s controlled group and affiliated service group rules is a common oversight. Under these complex rules, related employers—both foreign and domestic—are treated as a single employer for certain plan purposes, even if such related employers don’t participate in the plan.

In general, an employee’s service with a controlled group member is counted for plan eligibility and vesting purposes, and the mandatory nondiscrimination tests designed to prevent the plan from disproportionately favoring highly compensated employees must be applied across the employer’s controlled group. These rules pull together entities with certain levels of common ownership or with service relationships. To further complicate the determination, ownership attribution rules apply to spouses, certain family members, estates and trusts, and other relationships.

Crediting service is one issue for these groups. Take, for example, ABC Inc., sponsor of a 401(k) plan. Jane is hired by ABC after working with DEF Co. for three years. ABC is unaware its parent company also owns 80% of DEF. As a result, an operational error occurs when ABC fails to credit Jane with her three years of service at DEF for vesting purposes under the plan.

Employers can prevent common pitfalls by checking the plan’s eligibility provisions to avoid inadvertently sweeping in unintended controlled or affiliated service group members and confirming that only intended employee groups are covered. Where participation by a controlled or affiliated service group member is intended, that member must separately adopt the plan.

Notably, service providers contracted to perform nondiscrimination testing often require the employer to certify its controlled or affiliated service group status and provide a list of other group members. An employer can avoid errors by engaging an accountant or lawyer to perform the analysis underlying the certification.

Eligible employees

An employer is largely free to choose the employee groups covered by the plan, subject to nondiscrimination testing. However, errors often occur regarding the inclusion or exclusion of certain employees under additional rules.

• Excludable employees. Union employees, certain noncitizens, employees under age 21, and employees scheduled to work less than 1,000 hours per year may be excluded from plan eligibility and nondiscrimination testing.

  This last rule prohibits the blanket exclusion of part-time, temporary, and seasonal employees unless the plan language limits the exclusion to those with less than 1,000 hours of service. Further, under a new rule effective in 2024, long-term, part-time employees with at least 500 hours of service per year for three consecutive years of employment must be included in a 401(k) plan for purposes of making elective 401(k) contributions.

• “Leased” employees. Employers often miss that an employee’s service as a so-called leased employee may count for eligibility and vesting purposes under the leasing employer’s retirement plan. For example, a temporary employee’s service with a business while employed by a temp agency must be counted under the employer’s plan if the temp is later hired by that business as a common-law employee.

  Additionally, unless leased employees are expressly excluded from plan eligibility, those who perform substantially full-time services for the business while employed by the leasing organization may be eligible for the plan in the same way as common-law employees.

• Self-employed persons. A self-employed person—such as a sole proprietor, partner, or LLC member who performs services for the sponsoring employer—may participate in the employer’s qualified retirement plan as long as the plan defines the person’s eligible compensation as net income from self-employment, including the partnership distributive share and any guaranteed payments.

  For a partnership, the pitfall lies in not understanding the partners are considered “employees” for retirement plan purposes; therefore, each partner cannot establish their own plan. Rather, the partnership is the sponsoring employer.

Plan operation

Employers typically engage third-party service providers to administer the plan in compliance with applicable rules. But the employer retains ERISA responsibility for selecting them and is responsible for the costs of noncompliance with the tax code. A common pitfall is failing to educate employees involved with the plan on applicable administrative and fiduciary compliance requirements, or to provide an understanding of the services for which they are responsible, versus those contracted out to third-party providers. Fiduciary liability insurance should be considered.

Multiple third parties may provide plan services, such as a CPA firm, third-party administrator, recordkeeper, trustee or custodian, attorney, investment adviser, or payroll provider. The employer should review each service agreement for the specific services provided, minimum performance standards, reasonableness of fees, liability limits, data security, and other provisions.

Plan operational errors inevitably occur due to the complexity and volume of the rules and regulations pertaining to qualified retirement plans. Failing to apply the plan’s definition of eligible compensation is a common error. Employers should check that payroll provider pay codes accurately reflect the compensation elements required by the plan definition to allocate plan contributions, apply statutory limits, and perform nondiscrimination testing.

Another common plan error is the failure to timely remit to the plan amounts deducted from employee payroll for salary deferrals and plan loan repayments. Applicable rules require deposit on the earliest date such amounts may reasonably be segregated from employer assets—often a matter of a day or two—given the employer’s reasonable administrative processes, but in no event later than the 15th business day of the next month. Many employers mistake the “15th business day” rule as a safe harbor deadline, which isn’t the case. The only permissible safe harbor is seven business days for small plans, defined as those with fewer than 100 participants.

When errors do occur, the employer should consult with its service providers for guidance and assistance in taking appropriate corrective actions to avoid putting the plan in jeopardy of losing its tax-qualified status.

The takeaway

Employers looking to adopt a qualified retirement plan have many decisions to make. Taking time to avoid pitfalls relating to their structure and workforce and to gain an understanding of where compliance responsibilities lie will be rewarded with smoother plan operation and avoidance of unnecessary costs.

Reproduced with permission from Copyright 2022 The Bureau of National Affairs, Inc. (800-372-1033) www.bloombergindustry.com. Originally published on Bloomberg Tax and Accounting.

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This article was written by Joni Andrioff, Christy Fillingame, Lauren Sanchez and originally appeared on 2022-09-28.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/business-tax/avoid-these-common-pitfalls-when-establishing-a-retirement-plan.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

If your middle market company is thinking about moving to the cloud, you may have questions about the solution and what’s involved in the cloud adoption process. Below, we answer seven of the most common questions that organizations ask about the cloud.

1. Why should our company move to the cloud now?

From an overall business strategy perspective, here are some of the major advantages of the cloud:

• By reducing capital investment and labor-intensive systems maintenance, cloud-based infrastructure can reduce your costs, increase cash flow and free your IT team for more strategic work.
• You can add capabilities easily and quickly as your business needs change and evolve.
• It simplifies your technology management, allowing your team to gain visibility through a single management portal.
• It consolidates and integrates systems and data with accessibility from anywhere, anytime to increase employee productivity and provide a single, more accurate source of data across the organization.
• Cloud service providers can usually offer your company better security and a team of security professionals who are more highly specialized than your company might be able to afford (or find) on its own.

2. Why is it crucial for our organization to have a strong cloud strategy before we migrate to the cloud?

One of the dangers companies face in moving to the cloud is approaching it as a purely technical exercise. Companies need to have a business reason and strategy for moving to the cloud and then align their IT approach to that.

When companies don’t have a well-developed cloud adoption strategy, they can get halfway into their cloud adoption and realize they made some fundamental mistakes that they can’t get out of or that might require them to start over again. When your company has a strong cloud strategy, you can avoid that costly mistake.

3. Why should our company develop a cloud strategy now instead of later?

Middle market companies need to be more agile than ever to keep up with a rapidly changing business landscape and accelerating technology innovation. Today, a business can move to the cloud with resources such as ETL (extract, transform, load) tools with pre-built connectors that make it easy to migrate to and integrate workloads, infrastructure and applications in the cloud. Once you’re in the cloud, APIs (application programming interfaces) make it easy to integrate applications, including with third-party developers.

Companies today also have widely distributed DevOps teams that need to develop products and services in a more collaborative and efficient manner, test and move products, and support ongoing operations and automation. The cloud can help with that.  

4. Why do so many middle market companies have a hard time managing security in-house?

IT ecosystems have dramatically evolved, becoming increasingly complex and hard to manage. Now, most companies rely on a hybrid of both on-premises and cloud infrastructure to run their businesses, and they have a mix of both on-site and remote employees. Companies may also have multiple offices around the world.

In addition, middle market companies are often at a disadvantage when competing with large enterprises and managed services firms to attract top cloud and cybersecurity talent. In-house teams don’t have the people, the skills or the time to keep up with upgrades, patches and changing regulations, so they wind up just having to do the best they can. But in today’s environment, where cybersecurity threats have become ever present and far more sophisticated, cybersecurity has to be a number-one priority.

5. Because hybrid workforces are here to stay, how can the cloud help us give our employees better access to the applications and data they need to do their jobs?

The cloud is inherently a remote access tool, so it makes it easy for either on-site or remote employees with an internet connection to access and use a company’s applications and data anytime, anywhere and from any device. The cloud also provides all the tools that companies need to control who has access to their applications and data as well as when and, if needed, even from where.

6. How can the cloud help us become and stay more competitive?

In our current business landscape, it’s difficult for middle market companies to recruit and hire all the IT people they need, especially when it comes to network and security specialists.

Fortunately, when companies move to the cloud, the responsibility to hire and retain specialized staff moves to their cloud services provider. This removes much of the competitive hiring pressure from mid-market companies that no longer have to worry that they lack the skills to keep up.

Additionally, the cloud gives middle market companies access to the same enterprise applications and data that larger companies use, providing your business with more flexibility and scalability than a traditional IT infrastructure can offer.

7. What do we need to do to get started with our cloud adoption?

Migrating to the cloud often requires companies to make complex choices, so it’s a process that shouldn’t be taken lightly or done on a whim. An experienced consultant can help identify your company’s biggest needs and challenges, prioritize projects, create a cloud roadmap, help your company research and select the right cloud services provider, and guide you through the entire process of migrating some or all of your company’s IT infrastructure to the cloud.

If your company is planning to move to the cloud, RSM can help. We offer a variety of consulting services to assist you with developing a strong, cohesive cloud adoption strategy to help your company transition to the cloud smoothly, flawlessly and securely.

Download Why the cloud now?

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This article was written by RSM US LLP and originally appeared on Sep 26, 2022.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/digital-transformation/why-the-cloud-now.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

A company’s cloud adoption journey begins with a well-planned strategy. While it can be tempting to want to move quickly to catch up to your competition, organizations that race blindly down a path often end up back at square one with nothing to show for it but wasted time and less money. Being patient and prudent is critical as you create a sound cloud adoption plan and then execute it.

This checklist walks you through the top ten best practices that will help you develop a successful road map.

1. Establish stakeholder buy-ins, and designate a cloud adoption journey champion

Bring-in stakeholders at all affected areas of the business. Generate consensus and buy-in from stakeholders. The need to establish stakeholder communication scheme and addressing conflicts and frictions. The need for complete alignment up, down and across the entire organization (from C-Levels to Management to End Users). Moreover, there is a need to identify and establish a “Champion” resource for the cloud adoption journey.

2. Define your goals

Some companies falter when they think of cloud adoption as a purely technical exercise. Like consumers who buy the latest version of a smart phone simply because it’s new, some companies want to move to the cloud because it’s the latest technology. Before you begin taking any concrete steps toward cloud adoption, you need to define your business objectives. Be sure to ask yourself how your company will benefit by moving to cloud and what you hope to achieve by doing so.

3. Take time to create a plan

A lack of planning can be the fatal flaw for many companies working toward cloud adoption. To avoid this misstep, develop a well-thought-out plan with clear, actionable steps that aligns with your business goals. Be sure it includes a proven and well-defined cloud adoption process and framework. Don’t forget to address the perspectives of all key stakeholders and concerns, including governance, people, platform, security, and operations. It’s also essential to address contingency plans and disaster recovery.

4. Adopt a strategic, forward-looking mindset

As you put your cloud adoption plan into action, it will be important to keep your focus on the future and the goals you want to achieve. Don’t let cognitive biases, like analysis paralysis and the status quo, contribute to stalled decisions. Understand that your cloud adoption journey is going to change the ways your organization works in term of people, processes and tools, and be careful to consider and address any key concerns immediately so they don’t stop your progress.

5. Establish your teams

The next step is to identify the people in your organization who will be responsible for the implementation. Who will best understand the technology? Who should manage the process? Who can ensure that the business goals remain top of mind? These roles each come with unique skill sets in order to ensure a smooth integration. Identify the people who can best fill these roles before you begin taking action, and let them assist in creating your plan. Since they’ll be the ones responsible for executing the plan, getting their input early will help smooth the process.

6. Engage an advisor

With your goals and teams in place, find an advisor that’s experienced in digital transformation and cloud adoption. A knowledgeable consultant like RSM will help you understand each available solution and determine which one is best for your specific business and objectives. Many companies—especially those that rush the process—end up with overbuilt, over-engineered solutions.  By engaging a consultant that specializes in cloud adoption journey, those errors can be avoided before they happen, helping to optimize project costs and efficiency.

7. Conduct your assessments

Now is the time to assess your organization’s existing IT infrastructure and resources, as well as analyze your existing security and risk factors. Many cloud adoption journeys start at this point, but arriving here first with a foundation of business objectives, internal team and outside advisor in place provides for much greater clarity on the assessment results.  RSM advisors have decades of experience with a variety of cloud adoption tools, and our team can run assessments that help calculate what each potential solution will cost in time and resources. Not having an accurate and up-to-date discovery and analysis of current state – leading to capacity/performance/availability challenges and amplified security threats.

8. Identify your top priorities

Based on the assessments and cost analyses, your team should next establish its highest-level priorities and determine which components to implement first. Another fatal flaw of a reckless cloud adoption journey is to try to do everything at once. Cloud adoption can be complex—with security risks along the way—and taking on too much at the same time can lead to mistakes and security exposure. It’s important for the team and your organization to transition in a series of manageable steps. Implement your top priorities first, then work on the lower priorities as bandwidth allows.

9. Develop an implementation solution

With the groundwork laid, it’s finally time to select the best solution for your needs. Consult with your cloud partner to determine which tools will best serve your objectives and which are merely unnecessary expenses. Whether you choose an Infrastructure as a Service (IaaS), Platform as a Service (PaaS) or Software as a Service (SaaS) solution, it’s now easier to identify the best choice after establishing your specific risk factors, human capital, existing infrastructure and priorities. RSM advisors work closely with clients to follow the assessments and select the right solution, then implement the plan.

10. Execute your plan

Finally, engage your project teams and empower them to implement the solution. With the right tools and road map in place, give your teams the support they need to execute a successful cloud adoption journey. If unexpected challenges arise, address them immediately—with a sound plan in place, it will be easier to adapt and adjust. Lean on your internal team and your outside advisor to help you successfully complete your journey.

Download Begin with the end in mind

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This article was written by RSM US LLP and originally appeared on Sep 26, 2022.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/digital-transformation/managing-the-cloud-begin-with-the-end-in-mind.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

You have worked hard to grow your wealth to create security for you and your family. Now, implementing processes for your assets and estate will provide future generations with the resources to continue managing the assets and security you established.

Numerous factors, however, may hinder the ability to successfully transition assets. Here are some of the most common issues in wealth preservation, along with ideas to prevent potential negative impacts on your estate:

1. Income taxes

Unnecessary taxes may result from estate planning that fails to consider other tax implications to you and your spouse, your businesses, family trusts and beneficiaries. Income tax for high net worth families in some cases may be over 50% with state and federal income tax and net investment income tax.

Solution: Have your advisors work together to evaluate all estate, income and other tax considerations, and incorporate the analysis into your estate plan. Understanding these key income tax considerations and planning points can help minimize your tax obligations.

2. Communication

Not communicating your intentions for your estate could, at a minimum, create hurt feelings if a beneficiary receives less than anticipated. On the other end of the spectrum, lack of communication could create ambiguity about your intent and considerable legal fees for estate or trust defense, which are charged against estate or trust assets.

Solution: Communicating your intent during your lifetime and making your intentions clear in your estate documents can significantly reduce any potential surprises to beneficiaries and possible legal fees. Some lawyers use a grantor letter of intent that, while not legally binding, may show more emotionally tied reasons for your decisions to help beneficiaries process your reasoning for their bequest.

3. Asset transition

Holding onto all of your assets in your personal name could subject your estate to taxes unnecessarily.

Solution: It may be best to start gifting assets now to remove asset value growth or life insurance proceeds from your taxable estate. There are numerous methods to gift based on your family structure and dynamics, asset types, and cash flow needs.

As of 2022, you are allowed to transfer $12.06 million, either during your life or upon your passing; this amount is exempt from estate and gift tax. This amount is adjusted for inflation but is set to be cut in half in 2026. If you use the current exemption amount now, the full exemption amount should be excluded from your estate, even after 2026.

In addition, you may give as many individuals as you like up to $16,000 a year without using any of your exemption amount (adjusted for inflation). Qualifying tuition and medical expenses paid directly to institutions are also excluded from using your exemption amount.

The added benefit of starting to transition assets is to educate your children about managing assets and finances. Leading by example and demonstrating preservation strategies will help maintain multigenerational success of assets you worked hard to create for your family. The earlier you start your estate and gift planning, the more financially informed your family will be and tax efficient the plan will be to maximize assets passing to your family.

4. Asset beneficiaries

Not considering which beneficiaries will get which assets may create undue tax consequences for beneficiaries.

Solution: It is more tax effective to give certain assets to certain beneficiaries, and some assets may be better managed by particular beneficiaries. For example, distributions from traditional retirement accounts do not receive a step-up basis and are subject to ordinary income tax rates. This makes retirement accounts a great option for fulfilling charitable intent; or if you have children or grandchildren in lower tax brackets, it may be beneficial to have them receive distributions from these accounts while preserving tax-favored assets for other beneficiaries.

You could also allow the trustee to adjust distributions based on anticipated income tax on the assets a beneficiary receives. Another example is when there are business interests involved; it may be wise to have participating family members whom you trust to carry on the business operations and ensure that they have future control of the business.

5. Charitable legacy

If you have charitable intent, charitable gifting can be a win for the charity and your family.

Solution: Review your assets and charitable intent with your tax advisor to structure an overall plan that optimizes charitable gifts along with potential tax savings for your family. Business or other substantial assets provide various charitable planning opportunities that take time to develop, so let your tax professional know as soon as you begin to think about a business or asset sale that may incorporate a charitable component.

6. Tax changes

Tax policy—through legislation, regulations and court cases—is affecting estate planning on an ongoing basis.

Solution: It is prudent to review your plan with a tax professional periodically or when any major tax changes are enacted. Reviewing your plan helps ensure that it remains as tax efficient as possible and has incorporated any tax policy changes since the last plan update. This also presents an opportunity to review plan provisions and consider other changes in circumstances that may affect the plan’s ability to carry out your wishes, including fiduciary designations.

7. Family changes

Your plan could become outdated when there is a change in your family.

Solution: Review and update your estate plan when your family structure changes to ensure that your goals are still being achieved. A change in family could include marriage, death, divorce, the arrival of grandchildren or a change in active members in a family business.

8. Risk management

Incorporate risk management strategies into your overall wealth plan.

Solution: Determine the level of risk tolerance you have and reevaluate and rebalance your asset holdings on a regular basis. Establish entities, such as trusts and LLCs, to protect assets from creditors. Trusts may also offer asset protection from beneficiary divorces.

In the event that you require liquidity, ensure that you have enough personal cash and liquid assets to avoid having to pull significant amounts out of investments that may have suppressed in value during a recessionary period. Consider the implications of changing interest rates and inflation on your cash needs and asset values.

9. Administrative costs

Avoid unnecessary administrative costs through proper estate planning.

Solution: Use a revocable trust to avoid probate. Ensure any trusts created are properly funded and any asset transfers are correctly documented. This should help avoid the costs of having to go to court for the probate administration process.

10. Business mindset

It may be easy to think that there aren’t as many issues surrounding your individual assets in contrast to the complexities of a business. However, multigenerational wealth transition planning is complex and requires as much attention and oversight as any business to ensure it is done properly and with best practices.

Solution: Have periodic advisory meetings to reassess your goals and update your plan accordingly.  Periodically interview other advisors to confirm that your current advisory committee is being proactive and meeting all of your family goals and needs. Your advisors should be responsive, communicative and proactive in assessing your needs and providing relevant planning opportunities.

Our approach

RSM US LLP professionals are here to help advise you and your family on how to reduce the potential negative implications of factors that may affect your wealth. RSM collaborates with your other advisors, and offers estate plan reviews along with strategies that incorporate numerous techniques that may help maximize tax savings while prioritizing your family goals and wishes.

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This article was written by Abbie Everist, Andy Swanson and originally appeared on 2022-09-22.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/private-client/10-issues-that-affect-wealth-preservation.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

As supply chain impairment has become increasingly permanent in the wake of the COVID-19 pandemic, energy shocks, geopolitical conflicts and other disruptions, many organizations have renewed focus on their supply chain processes and the speed at which they can deliver products to their customers.

While factors such as product cost, location, proximity to market, quality and reliability generally drive decisions related to supply chain, tax ramifications are important too. After all, taxes affect the total landed cost of a product, which factors into profitability. Although foreign taxes and duties and U.S. federal taxes and duties are most commonly considered, the overall state tax impact should not be neglected.

Companies are diversifying their supply chains to dilute the risk of being too reliant either on a small number of suppliers, or suppliers that are too concentrated in select geographic areas. This diversification has affected both foreign and domestic operations, as more organizations consider the safety and stability of suppliers located in the United States and abroad.

Domestically, diversification of the supply chain could affect the location of a company’s workforce, raw materials and supplies, finished goods, and the recharacterization of how transactions are accounted for and defined. In turn, those decisions will affect an organization’s state tax footprint, obligation and opportunity.

For example, consider an organization that locates certain employees and capital in a state to be closer to a specific supplier in which the organization did not previously have a state tax footprint. The following state tax consequences may need to be considered:

• Nexus and state tax filing requirements for state income, sales and use, gross receipt, employment, and property taxes
• Impact or shift regarding state income tax base and value chain optimization
• Choice of entity to be utilized
• Maximizing any available sales tax exemptions, such as manufacturing and research and development exemptions
• Maximizing any available state and local credits and incentives
• Local tax considerations regarding income, gross receipts and property taxes

As companies seek to transform their supply chains and make them more resilient, they need to consider many business and tax issues—and the considerations are dynamic. The impact of supply chain transformation on an organization’s state tax footprint should always be considered as part of an overall business and tax analysis so that decision makers can make informed and effective decisions.

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This article was written by Steve Arluna and originally appeared on Sep 22, 2022.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/business-tax/state-and-local-tax-considerations-when-building-supply-chain-re.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

In the face of growing pressure from policymakers and investors to pause, pivot or even cut its policy rate, the Federal Reserve on Wednesday demonstrated why its independence is the sine qua non of monetary policy.

The Fed raised its policy rate by three quarters of a percentage point, to a range of 3% and 3.25%, at the two-day meeting of the Federal Open Market Committee. At the same time, the FOMC’s forecast of rates, or dot plot, projects that the policy rate will reach 4.4% by the end of the year and a terminal rate, or peak, of 4.6% next year. The moves are designed to bring inflation back in linen with the Fed’s target of 2%.

That forecast almost certainly implies another 125 basis points of hikes by the end of the year.

Once the rate reaches 4.6%, the Fed expects rates to ease to 3.9% in 2024 and fall to 2.9% in 2025. But at the end of that time frame, the policy rate will still be above the long-run estimate of the federal funds rate.

Those increases indicate that monetary policy will remain restrictive over the next three years, implying below-trend growth (1.8%) in the economy over that time to restore price stability.

In announcing its rate hike on Wednesday, the Fed also reduced its growth forecasts for 2022 to 2024 and increased its expectation of unemployment, which it forecast will hit a peak of 4.4% in 2023-24.

The Fed also anticipates that the personal consumption expenditures index, a key inflation gauge, will fall to 5.4% by the end of the year, and that core PCE, which strips out more volatile food and energy prices, will be 4.5%.

The Fed expects that these preferred inflation aggregates will not ease back toward its 2% target until 2025.

The Federal Reserve implied in its dot plot that it intends to follow up the September hike with another 75-basis-point increase at the November meeting and a 50-basis-point hike at the December meeting.

Those increases would bring the policy rate to a range between 4.25% and 4.5% by the end of the year.

This policy path will create the conditions for a stronger dollar and add to capital flows into dollar-denominated assets. And those dynamics, in turn, will create inflation issues among critical U.S. trade partners and most likely lead to financial stress in emerging markets.

Given the broadening out of inflation into services and housing, the Federal Reserve has little choice but to act independently to restore price stability despite the risk that it will drive domestic unemployment higher and tip a soft economy into recession.

Our research indicates that the central bank will need to move rates deep into restrictive terrain, causing an increase in the unemployment rate to 4.7% and lead to a loss of 1.7 million jobs. Those job losses would get the inflation rate back down only to 3%.

To get the inflation rate back to the Fed’s 2% goal, job losses could land well above 5.3 million and result in an unemployment rate of 6.7%, at the upper end of the range.

The peak of unemployment at 4.4% inside the Summary of Economic Projections seems somewhat optimistic given the spread of inflation out into the service sector and the fact that the three-month average annualized pace of rents is roughly 9.4%.

It is difficult to accept that, with the delayed impact of past hikes and those that the Fed is now laying out, unemployment will not move higher. Such a move would be in line with our estimate of the sacrifice ratio required to restore price stability.

The takeaway

To restore price stability to the economy, the Federal Reserve will almost certainty continue to push the policy rate higher next year as it continues to reduce its balance sheet, both of which will create tighter financial conditions and a slower pace of growth.

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This article was written by Joseph Brusuelas and originally appeared on 2022-09-21.
2022 RSM US LLP. All rights reserved.
https://realeconomy.rsmus.com/fed-raises-its-policy-rate-by-75-basis-points-and-sees-more-increases/

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.