Welcome to CPA at Law, helping individuals and small businesses plan for the future and keep what they have.

This is the personal blog of Sterling Olander, a Certified Public Accountant and Utah-licensed attorney. For over eight years, I have assisted clients with estate planning and administration, tax mitigation, tax controversies, small business planning, asset protection, and nonprofit law.

I write about any legal, tax, or technological information that I find interesting or useful in serving my clients. All ideas expressed herein are my own and don't constitute legal or tax advice.

Introduction to Qualified Opportunity Funds

The 2017 Tax Cuts and Jobs Act added sections 1400Z-1 and 1400Z-2 to the Internal Revenue Code. The former provides for the designation of certain low-income communities as "qualified opportunity zones," and the later provides certain incentives for investment in such QOZs. IRS Notice 2018-48 provides a full list of population census tracts designated as qualified opportunity zones; investments within these zones can qualify for the new tax incentive.

The tax incentive permits a taxpayer who has realized a capital gain from the sale of property to an unrelated person to invest all or part of the gain amount into a "qualified opportunity fund" within 180 days of the realization event and elect to defer paying tax on the gain amount so invested. The deferral lasts until the earlier of (a) the date that the taxpayer sells the QOF investment or (b) December 31, 2026.

In addition, if the taxpayer holds the QOF investment for at least five years, ten percent of the deferred gain is permanently excluded from taxation, and if the taxpayer holds the QOF investment for at least seven years, a total of fifteen percent of the deferred gain is permanently excluded from taxation. Finally, if the taxpayer holds the QOF investment for at least ten years, all post-acquisition gain on the QOF investment can be permanently excluded from taxation.

A QOF is an entity organized as a corporation or a partnership for the purpose of investing in QOZ property. Such an entity uses IRS Form 8996 to initially certify that it is organized to invest in QOZ property as well as annually report that it meets the investment standards. Generally speaking, a QOF must hold 90% of its assets in QOZ property or pay a penalty. This tax incentive is a new and important opportunity for many taxpayers with capital gains.

See Maule, 597-2nd T.M., Tax Incentives for Economically Distressed Areas; Qualified Opportunity Zones.

Creating Individual Inherited Retirement Accounts from a Trust Account

As I discussed in a previous post, a trust may be named as the beneficiary of a retirement plan upon the plan owner's death. There are complications and disadvantages of doing so, but there are potentially important reasons to name a trust as a retirement plan beneficiary. For example, naming a supplemental needs trust created for an individual with special needs as a retirement plan beneficiary, instead of the individual, will prevent the individual from ceasing to qualify for means-tested public assistance due to inheriting the retirement account.

Upon the termination of the trust that is the named beneficiary of a retirement account, any amounts remaining can be passed to the remainder beneficiaries of the trust intact, meaning in a manner that is not treated or reported as a taxable distribution from the retirement account. Instead, the transfer is treated as a plan-to-plan transfer to individual accounts established for the remainder beneficiaries of the trust.

In my experience, the custodian of the retirement account often requests a reference to legal authority that would allow the transfer of the retirement account from a trust account to separate account(s) in the individual name of the trust beneficiaries. IRS private letter ruling 200750019 is one such authority wherein the IRS permitted a trust that was a retirement plan beneficiary to be bypassed and separate, inherited IRA accounts established for the trust beneficiaries. While not binding, this ruling indicates that the IRS regularly permits this practice and can help assure a custodian that this practice is permissible.

Fundamental Supplemental Needs Trust Planning

Careful planning is necessary for individuals who have heirs with special needs that qualify for means-tested public assistance. At a minimum, such a plan should include a trust that restricts distributions to any special-needs heir. Any distribution that would otherwise pass to such an heir can only be made for the heir's "supplemental needs," or those needs that are not provided by a government assistance program. This trust provision is necessary to prevent a special-needs heir on means-tested public assistance from ceasing to qualify for such assistance due receiving an inheritance.

Assets subject to a supplemental needs trust are not countable resources for purposes of determining the special-needs heir's qualification for means-tested public assistance. Accordingly, the heir can continue benefiting from their public assistance programs while maintaining the beneficial interest in a supplemental-needs trust. The trust is able to provide benefits that the heir is not already receiving from his or her public assistance program. A trust that is funded solely with assets derived from someone other than the special-needs heir is known as a third-party supplemental needs trust. After the termination of the trust, assets remaining in a third-party supplemental needs trust can be passed to other family members.

If proper planning is not undertaken and a special-needs heir does inherit assets, they have two primary options: Spend down all of the inheritance until the heir qualifies once again for the public assistance program(s), or transfer the inheritance into a first-party or self-settled supplemental needs trust. First-party supplemental needs trusts are funded with assets belonging to the individual with special needs. The key downside of a first-party supplemental needs trust is that upon the termination of the trust, the government must be reimbursed from any property remaining in the first-party trust up to the total amount of medical assistance benefits received by the beneficiary during their lifetime. Accordingly, it is much better if all family members from whom a special needs individual could possibly receive an inheritance complete an estate plan that includes supplemental needs planning provisions.

Don't Subject Legal Services to Utah Sales Tax

A proposed bill in Utah, House Bill 441, would "[impose] a state sales and use tax on amounts paid or charged for services," among many other things. In the bill's current form, this would include a tax on legal services. This is not good public policy.

My practice focus on estate planning. I try to ensure that my bill for an estate plan for someone with limited means is as low as possible. While my fees are not inexpensive, they are lower than what most estate planning attorneys in Utah charge, and I provide far greater value than a general practitioner without a focus on estate planning might charge.

Many individuals still try to save money through a "do it yourself" estate plan or by hiring someone who charges less but has limited estate planning experience. I have many clients involved in estate disputes that arise due to an ineffectual estate plan; these disputes cost thousands of dollars and often could have been avoided if a good estate plan had been implemented in the first place.

A sales tax on legal services would increase the cost of those services, thereby leading more individuals to look for cheaper and less effective options. This would result in more estate disputes that would require significantly more in legal fees to resolve (which dispute fees would be subject to sales tax). Of course, the problems described herein apply not just to estate planning services but other legal services sought by vulnerable individuals such as those dealing with divorce, domestic violence, debt collection, personal injury, criminal charges, landlord problems, and bankruptcy. Please tell your legislator that you oppose a state sales tax on amounts charged for legal services.

Introduction to Forming a 501(c)(4)

In a prior post, I introduced how to form a 501(c)(3) charitable organization. This post introduces how to form a 501(c)(4) organization. Such organizations must be operated exclusively to promote social welfare, or further the common good of the community. This encompasses a much broader range of permissible activities than those in which charities may engage, but the trade off is that contributions to a 501(c)(4) do not qualify for a charitable deduction as do contributions to charities. Another difference is that a social welfare organization, unlike a charity, can have lobbying, or attempting to influence legislation, as its primary activity; it may not, however, have influencing elections as its primary activity.

The first step in establishing a 501(c)(4) organization is to create a legal entity under state law. While a trust and a limited liability company can be used, it usually makes the most sense to form a nonprofit corporation. After the legal entity is formed, the organization's directors need to appoint officers, adopt bylaws, and apply for an employer identification number. While a 501(c)(4) organization is not required to file an exemption application (historically, such applications were submitted on Form 1024, but they are now submitted on Form 1024-A), it must notify the IRS within 30 days of formation of its intent to operate as a Section 501(c)(4) organization by electronically filing Form 8976.

A few final steps and ongoing requirements are worth noting. Prior to soliciting the public for donations, the organization will need to ensure that it has completed the charitable solicitation registration process that most states require. The organization will also need to file some version of IRS Form 990 each year; small social welfare organizations can file the 990-N postcard version online. Social welfare organizations that collect membership dues must notify anyone who pays a membership due of the amount that is attributable to lobbying and which cannot therefore be taken as a business deduction. Finally, the organization will need to ensure that it keeps its corporate entity in good standing, typically by filing an annual report with the state.

How Certain Organizations Can Self-Declare Tax-Exempt Status

There are dozens of tax-exempt organizations under the Internal Revenue Code; the IRS has a list of these on its website, along with the application form that each one files (usually Form 1023 or Form 1024). However, most of these organizations are not actually required to submit an exemption application to the IRS: "[Certain] organizations may self-declare their tax exempt status by operating within the requirements of the applicable code section and filing the required annual returns or notices." In other words, the tax-exempt status of a new organization can often be established simply by filing its first tax return.

Self-declaration is available to cooperative associations, social and recreation clubs, and business leagues, to name a few of the more popular ones. A 501(c)(9) and 501(c)(17) organization may not self-declare. While a 501(c)(4) organization is still not required to file an application (historically with Form 1024 but now with Form 1024-A), a 501(c)(4) can no longer simply self-declare by filing the first tax return. In a future post, I will describe how to form a 501(c)(4) organization. Finally, some 501(c)(3) organizations do not need to file an application or self-declare, whereas all others with gross receipts in excess of $5,000 generally may not self-declare and must apply for exemption.

Self-declaring tax-exempt status has its downsides, most notably that the organization will not receive a determination letter from the IRS. This means that, among other things, the organization will not be publicly recognized as tax-exempt and may not be able to qualify as exempt from certain state taxes. If a self-declared tax-exempt organization does not operate within the requirements of the applicable section of the Internal Revenue Code, it could be vulnerable to an audit by the IRS. Thus, another significant benefit of formally applying for tax-exempt status is giving the IRS notice of how the organization intends to operate and providing an opportunity for the IRS to notify the organization that it is not operating as required by the Code.

Establishing tax-exempt status by self-declaration is generally only advisable for small organizations, such as those eligible to file the Form 990-N (e-Postcard) version of the Form 990. After forming a nonprofit entity under state law and obtaining an EIN from the IRS, a representative of the organization must call the IRS at 877-829-5500 and ask that the organization be allowed to file Form 990-N and then file the form. This is all that is required for a small, eligible organization to be classified as tax-exempt.

50 States' Free Individual Income Tax Return E-Filing

Tax season is coming up, and most people in the U.S. will file a federal and state income tax return. Federal income tax returns can be e-filed for free through the IRS website. While most people do not use this option, all of the popular tax preparation services offer free federal and, in many cases, free state income tax e-filing for lower income families.

If you don't meet the income limitations, however, finding a way to e-file your return for free, particularly your state income tax return, is more difficult. One new option that includes free e-filing for federal and state tax returns is creditkarma.com; however, it is not as robust as other services, as this review has noted.

Fortunately, the department of revenue of many states allows free e-filing directly from the department's website. Since most state income tax returns rely heavily on the taxpayer's federal return, you will need to have already completed your federal return in order to use these services. Linked below are state government websites where state individual income tax returns can be e-filed. This post will be updated as better sources become available; please comment below if you come across broken links or better options than what I currently have:

 Alabama  Illinois  Montana^  Rhode Island^
 Alaska*  Indiana^  Nebraska  South Carolina^ 
 Arizona^  Iowa^  Nevada*  South Dakota*
 Arkansas^  Kansas  New Hampshire#  Tennessee#
 California  Kentucky^  New Jersey  Texas*
 Colorado  Louisiana  New Mexico  Utah
 Connecticut  Maine  New York^  Vermont
 Delaware  Maryland  North Carolina^  Virginia^
 District of Columbia^   Massachusetts^  North Dakota^  Washington*
 Florida*  Michigan^  Ohio  West Virginia^
 Georgia^  Minnesota^  Oklahoma^  Wisconsin
 Hawaii  Mississippi  Oregon  Wyoming*
 Idaho^  Missouri^  Pennsylvania   

* State does not have an income tax
^ State does not offer free online filing directly through the state revenue department's website
# State has an investment income tax in lieu of a traditional income tax