McKonly & Asbury's Affordable Housing Team recently had the privilege of hosting a picnic for the residents of Westminster Place at Queen Street in York, Pennsylvania. Approximately two dozen residents participated, along with some staff of Presbyterian ...

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Picnic at Westminster Place at Queen Street

McKonly & Asbury's Affordable Housing Team recently had the privilege of hosting a picnic for the residents of Westminster Place at Queen Street in York, Pennsylvania. Approximately two dozen residents participated, along with some staff of Presbyterian Senior Living, the developer/manager of the property. 

Picnic line 2

Held in the community room at the apartment building, the McKonly & Asbury team arrived with food and beverages for all. Lunch was followed by Bingo, which was a hit with the residents.

 

Picnic bingo group 2After the festivities, our team got a tour of the building which included one resident opening her apartment for us to visit. We enjoyed learning about the amenities, services, and activities provided at Westminster Place at Queen Street, but our favorite part was meeting and interacting with the residents.

Picnic bingo calling 2

McKonly & Asbury believes in building purpose through profits, using our firm’s strengths and resources to make giving back an integral part of who we are.

McKonly & Asbury is a leader in accounting and consulting for affordable housing developments in Pennsylvania. For more information, please visit our web-site or contact affordablehousing@macpas.com The clients that we serve provide over 7,000 units of safe, quality, affordable housing.


McKonly & Asbury Delivers School Supplies and Backpacks

McKonly & Asbury and GN Management, Inc. partnered together to help children and families living at GN’s Boiling Springs Apartments prepare for the upcoming school year.

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McKonly & Asbury believes in building purpose through profits, using our firm’s strengths and resources to make giving back an integral part of who we are. Our team was excited to collaborate with GN Management, Inc. to collect and assemble back to school supplies.

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McKonly & Asbury team members collected school supplies throughout the summer at its Camp Hill and Lancaster office locations to donate to the families living at Boiling Springs Apartments, a general occupancy affordable housing community in Boiling Springs. Members of the firm’s Service Committee and Affordable Housing Team, traveled to the property recently to hand out the school supplies to students and their families. Donations included 36 backpacks filled with school supplies including water bottles, calculators, notebooks, and more.


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McKonly & Asbury is a leader in accounting and consulting for affordable housing developments in Pennsylvania. For more information, please visit our website or contact affordablehousing@macpas.com.

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Registration is Open! McKonly & Asbury Fall Affordable Housing Seminar

2018 Fall Save the Date

Registration is now open for McKonly & Asbury’s next Affordable Housing Seminar to be held on Thursday, October 11, 2018.

You won’t want to miss this seminar! It is full of hot topics in the Low-Income Housing Tax Credit industry.

We are excited to once again welcome A.J. Johnson as our speaker. A.J. will be covering two sets of topics and you may choose to attend just the morning or afternoon session or both!

Morning Session:

  • Income Averaging
  • Opportunity Zones
  • IRS Form 8823
  • IRS Form 8609
  • Occupied Rehab Issues

Afternoon Session:

  • File Management and Documentation for LIHTC Properties. This part of the seminar will cover the important, but often overlooked, role that file management and documentation play in the success of tax credit properties. Detailed discussion of how to organize a file, the documents required for each file, setting up the “Property Notebook,” and acceptable forms of verification for all issues relating to eligibility are covered. The course also includes a full review of resident eligibility issues, with particular emphasis on the documentation of income.

This seminar will also include a light breakfast, lunch, and networking.

Attendees are eligible for 5.5 “Specialized Knowledge” Continuing Professional Education Hours. The morning training is appropriate for senior management staff, developers, and others involved in structuring low-income housing tax credit deals. The level of content is Intermediate to Advanced and a basic understanding of the LIHTC program is the only prerequisite. The afternoon training is appropriate for management staff, developers, owners, and others involved in maintaining LIHTC compliance. The level of content is basic and there are no prerequisites.

More Information:

Date: Thursday, October 11, 2018

Time: 9:00AM – 3:30PM (registration and a light breakfast begin at 8:30 AM)

Location: Giant Community Center – inside the Giant Food Store at 3301 East Trindle Road, Camp Hill, PA 17011

Fee: 

$195 for full day (includes lunch)
$100 for morning (does not include lunch)
$100 for afternoon (does not include lunch)

We hope to see you there!

Click here to register.

If you have any questions, please contact events@macpas.com or call Melissa Roberson, Marketing Manager with McKonly & Asbury, at (717) 972-5822.

 

 

 


TCJA Interest Expense Limitation: Affordable Housing Partnerships Have Interesting Decision Regarding Depreciation

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The Tax Cuts and Jobs Act (TCJA), signed into law in December 2017, provides new rules limiting the deduction of business interest expense for tax years beginning after December 31, 2017. A taxpayer’s annual deduction for business interest expense is limited to the sum of:

  1. The taxpayer’s business interest income for the tax year
  2. 30% of the taxpayer’s Adjusted Taxable Income
  3. The taxpayer’s floor plan financing interest (not applicable to affordable housing)

The limitation applies to all taxpayers, except for certain small business taxpayers that meet the gross receipts test, and to certain trades or businesses that are excluded.

What does this have to do with depreciation? Read on to find out.

Adjusted Taxable Income For a typical affordable housing partnership, 30% of the taxpayer’s Adjusted Taxable Income would be the largest factor in determining the deductibility of interest expense. Adjusted Taxable Income is defined as taxable income of the taxpayer without regard to the following:

  • any items not properly allocated to a trade or business
  • any business interest or interest income
  • any NOL
  • any section 199A
  • any depreciation, amortization, or depletion*

*For tax years beginning after December 31, 2017 and before January 1, 2022

Let’s see an example.

For the tax period December 31, 2017, ABC partnership has business interest income of $100, taxable income before limitation of $0.  Included in this taxable income is $5,000 of interest expense, and $5,000 of depreciation expense. In 2017, under prior law the taxable income would be $0, as there would be no limitation on business interest expense. Assuming the same facts in 2018, ABC’s taxable income before limitation is $0. However ABC’s Adjusted Taxable Income is $9,900 ($0 + $5,000 interest expense – $100 interest income + $5,000 depreciation expense). ABC’s business interest expense is then limited to 30% of adjusted taxable income ($2,970) plus its business interest income of $100 for a total interest deduction of $3,070. As ABC’s total business interest expense is $5,000, ABC will have $1,930 of nondeductible interest expense. ABC’s taxable income will then be $0 + $1,930. Using the same facts in 2022, ABC will not get the benefit of the $5,000 depreciation expense. ABC’s adjusted taxable income will be $4,900.  ABC’s nondeductible interest, and taxable income will be $3,430.

 

12/31/17

12/31/18

12/31/22

Business Interest Income

$100

$100

$100

Adjusted Taxable Income

   

Taxable Income Before Limitation

$0

$0

$0

Business Interest Expense

$5,000

$5,000

$5,000

Business Interest Income

$(100)

$(100)

$(100)

Depreciation (Before 1/1/2022)

$5,000

$5,000

$0

Adjusted Taxable Income (ATI)

$9,900

$9,900

$4,900

X 30%

 

$2,970

$1,470

Sum of Interest Income and 30% of Taxpayer's ATI

 

$3,070

$1,570

Business Interest Expense

$5,000

$5,000

$5,000

Deductible Interest (Interest Income + 30% ATI)

$5,000

$3,070

$1,570

Nondeductible Interest Carried Forward

$0

$1,930

$3,430

Taxable Income After Limitation

$0

$1,930

$3,430

As you can see in the example above, where historically this partnership would not have taxable income, the taxpayer now would have taxable income due to the interest limitation. Although the nondeductible interest expense is carried forward, if the taxpayer’s taxable income is consistent from year to year, it would be a number of years before the suspended deductions could be realized. As stated before however, the limitation applies to all taxpayers except for those that meet the gross receipts test, or those that are in certain trades or businesses.

What does this have to do with depreciation? We are getting closer. First let’s look at the exemptions.

Gross Receipts test. An exemption from these rules applies for certain small business taxpayers (other than tax shelters) with average annual gross receipts for the three-tax year period ending with the prior tax year that do not exceed $25 Million. Tax Shelters for the purposes of this definition includes any syndicate, defined as any partnership if more than 35 percent of the losses of such entity during the taxable year are allocable to limited partners. A typical affordable housing ownership structure would fall under this definition, and as such would not receive the benefit of the exemption for certain small businesses.

Certain Trades or Businesses. For purposes of the business interest limitation, the trade or business definition does not include any electing real property trade or businesses. If ABC were to make this election, they would not be subject to the business interest limitation.

However this irrevocable election comes with some consequences. Making the election requires the electing real property trade or business to use the Alternative Depreciation System (ADS) to depreciate any of its non-residential real property, residential rental property, and qualified improvement property. ABC’s residential rental property which normally would be depreciated over 27.5 years using the Modified Accelerated Cost Recovery System (MACRS), under ADS would now be depreciated over 30 years.

Finally, we made it to depreciation.

Affordable housing partnerships have an interesting decision regarding depreciation. If the partnership elects to be a real property trade or business for purposes of the interest income limitation, they will not be subject to potential nondeductible interest. The cost of this is extending the depreciable life of the building by 2.5 years. If the partnership foregoes the election, they will be able to depreciate their residential rental property over 27.5 years but will be subject to the business interest limitation. Let’s compare this to our initial calculation.

For purposes of our example above, let’s assume the depreciable property value is $137,500. The annual depreciation using MACRS over 27.5 years would be $5,000. If ABC were to depreciate that property using ADS over 30 years, the annual depreciation would be $4,583. The deferred depreciation by making the election would be $417. Compare the $417 deferred depreciation using ADS to the interest no longer disallowed of $1,930 and in 2018 they will increase their deductions by $1,513 with the election. In 2022 and beyond, without the benefit of the depreciation addback in the adjusted taxable income, the benefit would be $3,013.

 

12/31/17

12/31/18

12/31/22

Business Interest Income

$100

$100

$100

Adjusted Taxable Income

   

Taxable Income Before Limitation

$0

$0

$0

Business Interest Expense

$5,000

$5,000

$5,000

Business Interest Income

$(100)

$(100)

$(100)

Depreciation (Before 1/1/2022)

$5,000

$5,000

$0

Adjusted Taxable Income (ATI)

$9,900

$9,900

$4,900

X 30%

 

$2,970

$1,470

Sum of Interest Income and 30% of Taxpayer's ATI

 

$3,070

$1,570

Business Interest Expense

$5,000

$5,000

$5,000

Deductible Interest (Interest Income + 30% ATI)

$5,000

$3,070

$1,570

Nondeductible Interest Carried Forward

$0

$1,930

$3,430

Taxable Income After Limitation

$0

$1,930

$3,430

    

Depreciation Over 30 Years

 

                 $4,583

               $4,583

Depreciation Deferred with Election

 

                     $417

                   $417

Net Benefit of Election

 

                 $1,513

               $3,013

As you can see in 2018, the election allows ABC to deduct the full $5,000 of interest expense, providing additional interest expense of $1,930. However depreciating the property over 30 years reduces their annual depreciation expense in 2018 by $417. The net benefit of this election in 2018 is $1930 - $417 = $1,513. In 2022 and beyond, the election allows ABC to deduct the full $5,000 of interest expense, providing additional interest expense of $3,430. The deferred depreciation expense remains $417. The net benefit of this election in 2022 and beyond is $3,430 - $417 = $3,013.

However, what if ABC's rental real estate was $2,750,000 and their interest expense is now $50,000? In that case, ABC’s annual depreciation would be $100,000 per year under MACRS, and ABC’s interest expense is would be $50,000. In 2017, $50,000 would be deductible. In 2018, $45,070 would be deductible, and $4,930 would be carried forward. The same property under ADS would have depreciation expense of $91,667. A difference from MACRS of $8,333. If ABC were to make the election, ABC would gain the $4,930 of interest expense, but defer $8,333 in depreciation for a net loss of deductions of $3,403. In 2022, once ABC loses the benefit of depreciation for purposes of adjusted gross income, if they were to make the election, they would gain the $34,930 of interest limitation and continue to defer the $8,333 for an increase in deductions of $26,597.

In this scenario the benefit of the election would only occur after depreciation is no longer added back after 1/1/2022.

 

12/31/17

12/31/18

12/31/22

Business Interest Income

$100

$100

$100

Adjusted Taxable Income

   

Taxable Income Before Limitation

$0

$0

$0

Business Interest Expense

$50,000

$50,000

$50,000

Business Interest Income

$(100)

$(100)

$(100)

Depreciation (Before 1/1/2022)

$100,000

$100,000

$0

Adjusted Taxable Income (ATI)

$149,900

$149,900

$49,900

X 30%

 

$44,970

$14,970

Sum of Interest Income and 30% of Taxpayer's ATI

 

$45,070

$15,070

Business Interest Expense

$50,000

$50,000

$50,000

Deductible Interest (Interest Income + 30% ATI)

$50,000

$45,070

$15,070

Nondeductible Interest Carried Forward

$0

$4,930

$34,930

Taxable Income After Limitation

$0

$4,930

$34,930

    

Depreciation Over 30 Years

 

               $91,667

             $91,667

Depreciation Deferred with Election

 

                 $8,333

               $8,333

Net Benefit (Cost) of Election

 

               $(3,403)

             $26,597

    

As we can see with this example, the cost of the property, the period the property is in service, and the amount of interest income and expense all play a part in determining whether ABC should elect out of the business interest limitation.  Although the election is for the deductibility of interest expense, close consideration should be made regarding how this will affect the depreciation throughout the life of the property.  The cost of the residential rental property, in relation to the interest expense will determine whether to make the election and when the benefit will be realized. If you have any questions regarding the new limitations on business interest expense please feel free to contact us at affordablehousing@macpas.com.


Save the Date!

2018 Fall Save the Date

Make plans to join us for a day of training with A.J. Johnson! Topics and registration details to be announced.

 

 




Copyright © 2017 McKonly & Asbury, LLP. | info@macpas.com | 717-761-7910
415 Fallowfield Road, Camp Hill, PA 17011

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