DGC Enewsletter 6-10

Planning a New Investment? Think Tax Strategy - Part I
By Laura Barooshian, CPA and Sarah Muraco, CPA

It is always exciting when you invest in a new business opportunity. During this exciting time it is important to keep a few tax planning strategies in mind. Proper tax planning in the beginning will help you realize your goals in the end.

Your first question should be: What is my exit strategy? It may seem a little early in the game to be talking about your exit strategy but realistically it is very important to think about what your plans are. Determining what your exit strategy is will have an impact on the type of investment you make and the structure of your investment upfront. It is important to make your investment goals and exit strategy known to your advisors so they can help you achieve those goals.

Your second question may be: What rate of return am I expecting? Obviously the monetary rate of return is a factor in any investment. However, some additional factors which affect your return and should be considered are:

Are you making a one-time investment or will you be called upon to make additional contributions and, if so, are you prepared to do so?
Are you planning on a short term or long term investment? It is important to remember under current tax law that short term gains will be taxed at higher rates than long term gains. However, you must also consider your personal tax situation. For example, while usually a long term gain would be more beneficial because it is taxed at a lower tax rate than a short term gain, any gains you realize could be offset against loss carry forwards from prior years. You may want your tax advisor to prepare projections to quantify the tax impact of your investment decisions.
What will the cost of tax compliance be relating to this investment? It could be that additional tax filings or returns will be required to disclose your new investment. Consideration should be given to compliance costs as well as any additional taxes or annual filing fees.
Do you eventually plan to pass this investment to your heirs or to a charitable organization? It is important to make this known to your advisors and to thoroughly discuss the best vehicle for making sure your investment plus any earnings are passed to the intended beneficiary and not to the taxing authorities.

Once you have decided on the type of investment you would like to make the next step is to structure how that asset should be held. Our next issue of DGC Connections enewsletter will contain Part II of this series.

Please contact any member of your DGC team to discuss questions you may have relating to the tax implications and considerations of making a new investment.

Real Estate Update: Life (Slowly) Returning to the Hotel Market
By Bill Jenczyk, CPA

A recent article in the Wall Street Journal reports that there are some signs of renewed life in the hotel market. There have been 78 hotel sales for the first four months of 2010, as compared with 52 sales in the first four months of 2009. Distressed properties are starting to move, and there is cash ready to be invested. Additional signs of life are reflected in improving occupancy as both vacation and business travel begins to rebound.

These signs of life don’t mean that all is right with hotels. Although conditions appear to be improving, occupancy remains well below the level necessary for many hotels to operate profitably. RevPAR is expected to improve at a relatively slow pace, and ADR is actually expected to drop a bit over the short term. As with other sectors in the commercial real estate market, maturing debt with limited refinancing opportunities looms over the future of many hotel properties. Competition for guests remains very strong as hotels labor to improve occupancy.

This is the time when owners should work with their advisors to discuss issues such as the repercussions of a troubled debt restructuring, debt forgiveness or a foreclosure action. Firms like DGC, which specialize in real estate, can also help maximize the tax benefits of your hotel investment through the use of proper depreciable lives and the most current information on the treatment of repairs and maintenance costs as period expenses rather than as depreciable assets. Our hotel audit team helps clients identify opportunities that may lead to cost savings and/or better use of advantageous tax provisions.

After several years of challenging times for hotel owners and managers, it appears that there are signs of a rebound on the horizon. Contact DGC today to see how we may be of assistance.

IRS May Use Questionnaire to Trigger 401(k) Plan Audit
By Debra Dyleski-Najjar, Esq. and Charles G. Humphrey, Esq.

In May 2010, the IRS announced a Compliance Check Questionnaire Project for 401(k) Plans. Under the Project, the IRS randomly selected 1,200 401(k) Plan Sponsors who filed a Form 5500 in 2007 to participate in the Compliance Check Questionnaire Project. Responses are due within 90 days. Failure to respond or to provide complete information will result in further enforcement action, including examination of your plan. Responses which raise red flags also may lead to a plan audit. Even if your plan was not selected for this year’s audit, it is prudent to use the Questionnaire to conduct a self audit to allow you to identify potential problems and to correct them prior to an enforcement audit.

The IRS Employee Plans Compliance Unit (EPCU) initiated the Project to take a comprehensive look into 401(k) plans. It is seeking to determine potential compliance issues, gain a better understanding of the reasons for non-compliances, and determine potential plan operational issues. In a recent baseline study of 79 market segments, the EPCU found that 401(k) plans are by far the most non-compliant type of retirement plan.

Plan sponsors who received a letter notifying them of selection for participation in the Project must complete the Questionnaire online by accessing the IRS website. However, it would be prudent to print the form, gather all of the data necessary to complete the form, and have the form reviewed by legal counsel prior to submitting the form on line. Legal review would allow the sponsor to identify potential problems, particularly operational failures, and to correct such problems by seeking relief under the IRS and/or Department of Labor voluntary correction programs. In fact, the EPCU specifically advises plan sponsors to either self-correct or submit an application under the Voluntary Correction Program if the Audit Questionnaire reveals mistakes. If and when an actual audit commences, options for correction under the voluntary relief programs are foreclosed.

In completing the Questionnaire, all responses should be based on the information relating to the 2008 Plan Year. The Questionnaire categories are:

Demographics
401(k) plan participation
Employer and employee contributions
Top heavy and nondiscrimination rules
Distributions and plan loans
Other plan operations
Automatic contribution arrangements
Designated Roth features
IRS voluntary compliance programs
Plan administration

All sections may not apply to all 401(k) plans. The Questionnaire is available at: http://www.irs.gov/pub/irs-tege/epcu_401k_questionnaire.pdf.

The IRS has emphasized that the Questionnaire represents a compliance check. It is not an audit or investigation. However, if you received a letter, it is important that you respond and that you respond accurately. If you do not respond accurately or supply information inconsistent with information provided on the 2008 annual return for your plan, you can expect an audit and detailed scrutiny of your plan.

Because the tax advantages of qualified plan status could be lost with an inadequate or compromising response on the Questionnaire, any employer that sponsors a 401(k) plan would be well advised to self audit and to assure that company personnel (in addition to its outside service providers) understand the plan and the sponsor’s duties under ERISA. Employer training and employer oversight of service providers is essential to avoiding inadvertent violations in this complex benefits area and to avoiding fiduciary liability, fines and potential plan disqualification. Notably, a similar "voluntary" reporting scheme has been used by OSHA for many years to target employers for inspections. It is commonly known as the "Site Specific Targeting Program." Thus, like the OSHA Program, we anticipate that the Questionnaire will lead to targeted 401(k) plan audits by the Department of Labor and by the IRS.

If you have any questions about this IRS Project or would like assistance with a self-audit or fiduciary training, contact your DGC representative.

About the Authors
The Najjar Employment Law Group, PC is an AV rated, boutique labor, employment and ERISA law firm established by Debra Dyleski-Najjar, Esq., its managing partner and president. Ms. Najjar has practiced employment law for over twenty-five (25) years. She is a frequent author, lecturer, counselor, and trainer on employment and benefits compliance issues.

June 29 - Real Estate Finance Association – Industry Leaders Series
June 29 - Greater Boston Chamber – Boston After Five
July 13 - ENET Susnet Cruise of Boston Harbor and Networking Cruise
July 14 - Society for Marketing Professional Services – Golf Tournament at Granite Links
July 14 - Boston Business Journal – CFO of the Year Awards
July 15 - Cambridge Chamber - Summer BAHsh