2018 Tax Act & Opportunity Zones Update

1. June 6, 2019 PRESENTED BY: Don Warrant, CPA Dave Barrett, CPA Update on the 2018 Tax Act & Opportunity Zones

2. Don L. Warrant, CPA • 30+ years of public accounting experience • Specializes in tax planning and incentives for the real estate industry • Tax specialty services practice leader • State and Local tax practice leader • Cost Segregation practice leader

3. David, R. Barrett, CPA • 35+ years of public accounting experience • Director in Freed Maxick’s Tax Practice • Provides clients with specialized tax research, planning and representation services • Frequently quoted in local publications and has made numerous appearances on radio and television programs • Named in Money Magazine’s listing of the best tax practitioners in the country

4. Freed Maxick’s Real Estate Practice • Entity structuring and incentive planning (LIHTC, NMTC, HTC, State and local grants, abatements, exemptions, etc.) • Financial modeling and due diligence • Engineered tax services • Cost Segregation Studies • Repairs and Maintenance studies • Energy efficiency studies • Traditional assurance and tax services

5. AGENDA • Depreciation and expensing • Qualified Business Income (QBI) deduction • Business loss limitations • Interest expense limitations • Qualified Opportunity Zones

6. Depreciation & Expensing

7. Qualified Improvement Property • Non-structural improvement to interior portions of nonresidential buildings placed in service after the date the building was first placed in service (COO date). • Excludes enlargement of a building, elevators or escalators, or the internal structural framework of a building. • Generally includes tenant improvements that are treated as real property. • Currently assigned to a 39-year property and not eligible for bonus depreciation, subject to technical corrections to treat as 15-year property and eligible for bonus depreciation.

8. Bonus Depreciation • For property acquired before Sept. 28, 2017: • Qualified property is generally tangible property with a recovery period of 20 years or less, including computer software, the original use of which begins with the taxpayer. • Includes qualified improvement property (39-year recovery period) • 50% of cost basis may be deducted in the year placed in service • Can election out class-by-class • Can create or increase a tax loss • Phases-out over 2-years starting in 2018 (50%, 40%) • Excludes property subject to the alternative depreciation system • Property is generally treated as acquired no later than the date a written binding contract for the property’s acquisition is first entered into. • Special rules determine the acquisition date of constructed property

9. Bonus Depreciation • For property acquired after Sept. 27, 2017: • Adds used property (excludes any carry-over basis) • Excludes qualified improvement property (pending technical corrections) • Excludes the following businesses when average annual gross receipts exceed $25 million: • Businesses with floor-plan financing • Real property trades or business and farming businesses who elect out of the new limitation on business interest • 100% deduction or upon election, 50% for first tax year ending after Sept. 27, 2017 • Phases out over 4-years starting in 2023 • Guidance provided in proposed regulations

10. Section 179 Expense Election • Property placed in service before Jan. 1, 2018: • Qualified property is generally tangible, depreciable, personal property, computer software, and “qualified real property” • Cannot create or increase a tax loss • $510,000 expense limitation • $2.030 million beginning of phase-out • Property placed in service after Dec. 31, 2017: • Eliminates qualified real property • Adds as eligible property: • Qualified improvement property; • The following improvements to non-residential real property: roofs, HVAC, fire protection and alarm systems, security systems • Tangible personal property used predominately in furnishing lodging • Beds, furniture, kitchen appliances, equipment • $1 million expense (inflation adjusted)

11. Cost Recovery Periods Effective for property placed in service in taxable years beginning after Dec. 31, 2017, the TCJA made the following changes to recovery periods (in years): Prior Law New Law MACRSADSMACRSADS • Residential rental buildings 27.5 40 27.5 30 • Qualified improvement property 39 40 15 ** 20** ** The Act inadvertently omits language in section 168(e)(3)E and (g) providing a recovery period for QIP for cost recovery purposes.

12. QBI Deduction

13. QBI Deduction • The Act provides that for taxable years beginning after 2017 and before 2026, an individual taxpayer generally may deduct 20% of QBI from a partnership, S corporation, or sole proprietorship, as well as 20% of aggregate qualified REIT dividends and qualified PTP income, under new section 199A. • 20% deduction based on the lesser of QBI or adjusted taxable income. • Effectively reduces the top individual tax rate from 37% to 29.6% • Limitations begin to apply when taxable income exceeds $157,500 ($315,000 for MFJ) • Greater of 50% of W-2 wages, or • 25% of W-2 wages and 2.5% of the acquisition cost of qualified property. • Determined after applying other loss limitations (basis, at-risk, PAL rules)

14. Business Loss Limitations

15. Net Operating Loss • Losses incurred in tax years beginning after Dec. 31, 2017 • Unlimited carry over • Limited to 80% of taxable income • Losses incurred in tax years ending after Dec. 31, 2017** • No carry back **Technical corrections may change to tax years beginning after Dec. 31, 2017.

16. Excess Business Losses • The Act provides that, for any taxable year beginning after 2017 and before 2026, any excess business loss of a taxpayer other than a corporation is not allowed for the taxable year and excess business losses not allowed are carried forward and treated as part of the taxpayer’s net operating loss under the NOL rules. • Applies when the combined losses allowed from all business activities for the tax year exceed $250,000 ($500,000 for married couples filing jointly). • Example: • Single Taxpayer has $300,000 of investment income and $300,000 of business losses. • Before the TCJA, the taxpayer could offset the $300,000 of investment income by the $300,000 of business losses. • After the TCJA, the taxpayer owes tax on $50,000 of investment income and the $50,000 excess business loss carries forward as a business net operating loss.

17. Interest Expense Limitations

18. Business Interest Expense • Business interest expense is limited to the sum of • Business interest income, • 30% of adjusted taxable income, and • Floor plan financing interest paid by certain vehicle dealers. • Addback depreciation, amortization and depletion before 2022 • Unlimited carry forward • Small business exception. Average annual gross receipts are $25 million or less for the three-tax-year period ending with the preceding tax yearand not a “syndicate”. • Electing real property trade or business exception. Businesses that develop, redevelop, construct, reconstruct, acquire, convert, rent, operate, manage, lease, and/or broker real property can elect out but must use the ADS method to depreciate their non-residential real property, residential rental property, and qualified improvement property.

19. Qualified Residence Interest • Qualified residence: • Principal residence and one other residence selected for the year • Includes a house, condominium, cooperative, mobile home, house trailer, or boat. • Home acquisition indebtedness • Indebtedness incurred to acquire, construct, or substantially improve a qualified residence that is secured by the residence. • Maximum indebtedness is $750,000 ($375,000 for single filers) for indebtedness incurred after Dec. 14, 2017. • Exceptions: • 2017 binding contracts that closed by March 31, 2018 • Refinancing indebtedness incurred before Dec. 15, 2017 up to the outstanding loan balance as of the time of refinance.

20. Qualified Home Equity Indebtedness • Indebtedness other than home acquisition indebtedness secured by a qualified residence. • No deduction for alternative minimum tax purposes • No deduction for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026 (previously, up to $100,000 of indebtedness could be treated as qualified home equity indebtedness). • Election to apply interest tracing rules • Reduces self-employment income, self-employment tax, and AGI • Election is made by reporting the interest on the appropriate line of the tax return. Reg. § 1.163-10T(o)(5) • Advisable to include an election statement with the return, but not required

21. Qualified Opportunity Zones

22. Overview • New tax incentive program to promote investment in certain low-income communities designated by the IRS as Qualified Opportunity Zones (QOZ) • Listed in IRS Notice 2018-48 • https://www.cdfifund.gov/pages/opportunity-zones.aspx • Three tax incentives: • Defer paying taxes on capital gain from the sale or exchange of appreciated assets by investing such gain in a Qualified Opportunity Fund (QOF) within 180 days following such sale or exchange. Such gain may be deferred until the earlier of (i) when the investment is sold or exchanged, or (ii) December 31, 2026. • Investors receive a step-up in basis equal to 10% of the original deferred gain if the QOF investments is held for at least 5-years, with an additional 5% basis step-up if the investment is held for 7-years. These basis step-ups can result in permanent exclusion from taxation of up to 15% of the originally deferred gain • If the investor holds the investment in a QOF for at least 10-years, an elective basis adjustment provides a permanent exclusion from taxation for any appreciation in excess of the deferred gain.

23. QOF • Any investment vehicle organized as a corporation or a partnership for the purpose of investing in QOZ property (other than another QOF) that holds at least 90% of its assets in QOZ property. • Self certification as a QOF • 90% asset test • Determined by the average percentage of QOZ property on the last day of the first 6-month period of the taxable year of the fund, and the last day of the taxable year of the fund. • Monthly penalty for failing the 90% asset test • Based on the IRC Section 6621(a)(2) underpayment rate • Distributed to each partner when organized as a partnership • Penalty is waived upon showing of reasonable cause

24. QOZ Property • QOZ stock. Any stock in a domestic corporation that is acquired after Dec. 31, 2017, at original issue in exchange for cash, and either was a QOZ business or is being organized as a QOZ business. • QOZ partnership interest. Any capital or profits interest in a domestic partnership acquired after Dec. 31, 2017 solely in exchange for cash, and either the partnership was a QOZ business or is being organized as a QOZ business. • QOZ business property. Tangible property used in a trade or business of a QOF, acquired after Dec. 31, 2017 by purchase from an unrelated person, and either the original use originates with the QOF, or the QOF substantially improves the property over a self-selected 30-month period.

25. QOZ Business • At least 70% of all tangible property owned or leased is QOZ business property • At least 50% of the total gross income is derived from the active conduct of a trade or business • At least 40% of the intangible property is used in the active conduct of any such business • Less than 5% of the average unadjusted basis of property is attributable to nonqualified financial property • Stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, annuities, and other similar property • Excludes golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetracks, or other facilities used for gambling, or any store whose principal business activity is the sale of alcoholic beverages for consumption off premises

26. IRC Section 1031 Comparison

27. EXAMPLE OCT 1, 2019 - Susie sells AAPL stock for $1,500,000 - Cost basis = $500,000, Gain = $1,000,000 WITHIN 180 DAYS - Susie invests the gain (i.e. $1,000,000) into an QOF OCT 1, 2024 - $100,000 of Susie’s gain on the AAPL stock sale is “forgiven” OCT 1, 2026 - An additional $50,000 of Susie’s gain is “forgiven” DEC 31, 2026 - The remainder of Susie’s gain on the AAPL stock sale is (i.e. $850,000) “triggered” DEC 31, 2028 - Susie sells her interest in the QOF for $2,500,000 - No federal income tax is owed on $1,500,000 of appreciation

28. EXAMPLE (cont.) SUMMARY- Total gain realized = $2,500,000 - Amount subject to federal tax = $850,000 - Federal tax paid = $202,300 (23.8% x $850,000) - Federal tax avoided = $392,700 (23.8% x $1,650,000) NOTE If the FMV of the original $1,000,000 investment had decreased by $100,000 to $900,000 as of Dec 31, 2026, then tax is due on $900,000 minus Susie’s tax basis of $150,000 = $750,000. OBSERVATION If New York follows federal law, then the New York tax paid on Dec 31, 2026 = $74,970 (8.82% x $850,000) and the New York tax avoided = $145,530 (8.82% x $1,650,000). The combined federal and New York tax avoided = $538,230 ($392,700 + $145,530).

29. Illustrative QOZ Tax Deferral Timeline and Tax Benefits Capital gains proceeds (2) For gains invested by 12/31/2021 (3) For gains invested by 12/31/2019 (4) Assumes long-term capital gains tax rate of 23.8%

30. Quantifying the OZ Program federal tax benefits HYPOTHETICAL COMPARISON OF A FULLY TAXED INVESTMENT TO A QOF INVESTMENT Assuming investor has realized capital gain of $1,000,000 and can reinvest it in QOF within 180 days. QOF INVESTMENT ECONOMICADVANTAGES: IRR Increase:+4.1% | EM Increase:+0.9x| 93% increase inprofit | 67% taxsavings | $417,608 tax saved Assuming 100% long-term capital gains at rate of 20% + 3.8% NIIT. Excludes state income tax. (2) $850,000 x 23.8% (1) Blended rate assuming 50% long-term capital gains of 23.8% and 50% short term capital gains at 39.6%. Excludes state income tax and the additional 3.8% tax on net investment income; (2) At a 15% step-up in basis, paid 12/31/2026 per OZ tax legislation; (3) Gross after-tax return before QOF General Partner compensation and fundoverhead

31. Thank You This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services. This document does not constitute audit, tax, consulting, business, financial, investment, legal or other professional advice, and you should consult a qualified professional advisor before taking any action based on the information herein. Freed Maxick CPAS, P.C., its affiliates and related entities are not responsible for any loss resulting from or relating to reliance on this document by any person.