DGC Enewsletter 1-10

Donations to Haiti Relief Funds Deductible on 2009 Tax Returns
On Friday, January 22nd, President Obama signed a bill that would allow taxpayers to deduct donations to Haiti earthquake relief victims on their 2009 tax returns. Donations must be cash contributions made to qualified U.S. organizations between January 12, 2010 and February 28, 2010 specifically for the relief of victims in the areas affected by the January 12th earthquake. Cash contributions include those made by text message, check, credit card or debit card. For contributions by text message, the legislation contains a provision which permits a telephone bill providing the organization’s name, date and amount of the contribution to suffice as documentation. Taxpayers have the option of deducting these qualified contributions on either their 2009 or 2010 returns.

Taxpayers should note that non-cash contributions such as food and clothing do not qualify for this special rule and that donations made to foreign organizations generally are not deductible.

Use Smart Leasing Strategies to Negotiate Tenant Improvements
By Bob Calzini, CPA

Given the current state of the real estate market, landlords need to consider all possible options related to lease negotiations. When entering into a lease, one of the most significant items to negotiate can be tenant improvements. In the not so distant past, many landlords paid for the entire cost of the improvements, or gave the tenant a construction allowance toward the cost of the improvements. Now credit is tight and capital for improvements is scarce, so it is in the landlord’s best interest to be strategic about these negotiations.

With the recent expiration of the “bonus” depreciation rules, the landlord no longer has the ability to deduct half of the costs of the improvements in the first year. So what else can the landlord do to gain the best tax result for the dollars they plan on spending? Here are a few suggestions:

Amortize the Cost
One option available is a lease inducement payment. The benefit to the landlord is that the costs may be amortized over a much shorter life than a typical construction allowance. The downside is that the landlord has no control over how the dollars are spent by the tenant. Nor is the tenant required to spend the money on the improvements. However, depending on the property, this may be a viable option since the improvements are virtually worthless in terms of value by the time a typical commercial lease expires.
Share the Cost
In a situation where the tenant and landlord agree to share the cost of the improvements, there is potential for additional savings based on who pays for specific improvements. For example, if there is certain equipment that needs to be installed in a bio-medical space, or a clean room, the landlord can identify those improvements and specifically pay for those. There is then the possibility of depreciating those costs over shorter lives and accelerating the tax deductions. With proper planning, the tax savings can be significant.
Time the Cost
Again, there are options you can employ to offset the cost with tax savings. DGC recently assisted a client who was negotiating a moderate level of improvements with an existing tenant. By having the opportunity to assist before a final decision was made, DGC was able to save the client $35,000 in current tax dollars just by adjusting the timing of the completion of the improvements.

Getting your advisor(s) involved in the early stages of the lease negotiation process is crucial. Their expertise, especially with regard to changing tax laws, can tip the scale in your favor. For lease negotiation advice, contact your DGC representative.

Roth IRA Conversions 101
By Laura Barooshian, CPA

Beginning in 2010, if you have a traditional IRA, you have the ability to convert it to a Roth IRA, regardless of your income level. Historically, this ability was only available for those with adjusted gross income under $100,000.

Converting to a Roth triggers taxable income for the amount you convert. However, after the conversion, the Roth IRA grows tax-free (versus the tax-deferral of a traditional IRA). Any qualified distributions from the Roth after age 59? are also not taxable. Another benefit of the Roth is that there are no minimum required distributions once you’ve reached age 70?. Thus if you do not need to take distributions during retirement, the funds can continue to grow tax free. Any Roth IRA funds inherited at your death will continue to be income tax-free to your beneficiaries.

Roth Conversion Basics

A Roth conversion is treated as a taxable distribution from your traditional IRA because you’re deemed to receive a taxable payout from your traditional IRA. However, you will not be subject to any penalty even if you are under age 59? at the time of the conversion. You can convert all or a portion of your traditional IRA to a Roth. In deciding whether to do a Roth conversion, the current tax cost must be weighed against the future benefits of a Roth. To properly analyze this decision, there are a number of factors to consider including the following:
If you expect your current tax rate to be lower now than in the future, you may lean towards a conversion. Most expect tax rates to increase in the near future, but no one can predict tax rates at any given time. You would also need to consider your income level at retirement. Even though tax rates may increase, many people have reduced income at retirement so may not be impacted by the higher tax brackets.
The number of years to retirement may impact your decision. The further you are from retirement, the longer the Roth is allowed to build tax-free.
Will you need the funds during retirement? If no, the Roth is appealing since there are no requirements to take distributions from the Roth as there are with a traditional IRA.
Are funds available to pay the tax on the conversion without depleting the IRA account? If IRA funds are needed to pay the tax, the depletion of the IRA may outweigh the benefit of a conversion. Additionally, if any IRA funds are not converted to the Roth account, they would be subject to a 10% penalty if you are under 59?.
If the current value of your IRA is depressed due to recent market activity, it may be an excellent time for a conversion. Ideally, you would want to convert when your IRA is at the lowest value.

Special Rule for 2010 Only
For Roth conversions occurring in 2010 only, there is an option to report the income entirely in 2010 or report 50% in each of 2011 and 2012, subject to tax at the tax rates in effect in those years. With the anticipation of higher tax rates in the near future, the option to defer to 2011 and 2012 may not be beneficial. However, the decision needs to be made in the context of your own personal tax situation and may be advantageous for some.

You Can Reverse a Roth Conversion
Another great thing about the Roth conversion strategy is you can change your mind after the fact. If you convert in 2010, you could have until as late as October 15, 2011 to recharacterize (unwind) your 2010 converted account. For example, if you convert a traditional IRA into a Roth in early 2010 and the value of the account declines, you have until October 15, 2011 (the extended due date of the 2010 tax return) to recharacterize some or all of the account back to a traditional IRA. It’s as if it never happened.

The decision to convert is not straightforward and may be appropriate for some, but not others. It is also dependent on each person’s specific tax situation. We will be addressing this issue with our clients during this upcoming tax filing season and throughout the year. If you would like to address this issue earlier, especially if you believe your accounts to be at a low value now, contact your DGC representative. We welcome the opportunity to work with you to ensure a well-informed and thoughtful decision.

Landlord and Tenant Collaboration in Challenging Economic Times
By Mike Brown and Duncan Gratton of FHO Partners

As the US economy moves toward recovery – despite lingering concerns about stock market volatility, tight credit markets, consumer spending and employment numbers – businesses still face diffi cult decisions about how to allocate scarce resources that can signifi cantly impact their real estate decisions. In good times and bad, a smooth interaction between commercial landlords and tenants is vital to the successful execution of a leasing transaction. Given current conditions in the commercial real estate market, landlord and tenant cooperation is more important then ever in reaching a deal.

In this challenging business environment, landlords should have a good understanding of their competition as well as tenant needs, and tenants should know as much as possible about their landlord. Knowledge is power in today’s market. For all parties to reach a fair and satisfying result, landlord and tenant brokers must educate their clients about the reality of the market landscape. Softening offi ce markets across the country have dramatically increased available offi ce space for lease, while at the same time fewer tenants are interested in leasing it. This dynamic creates downward pressure on rental rates.

Commercial real estate transactions in the current economy often feature a dramatic dichotomy of competing interests between tenants and landlords. Tenants tend to be extremely conservative about their present and future real estate needs. Whether relocating or renewing a lease, their appetite for capital outlay has substantially diminished. Many tenants are looking to minimize real estate expenditures in response to revenue reductions by subleasing excess space, using space more effi ciently or offering employees new fl exibility via programs like hoteling or work-from-home.

For landlords, market competition and a glut of available space is the driving force behind their decision making process. Many landlords fi nd themselves capital constrained, and have limited cash on hand to fund tenant improvements and base building costs. Despite these challenges, landlords remain focused on maintaining the value of the real estate.

Several unique concerns for tenants and landlords have materialized as a result of the ongoing commercial real estate downturn. We fi nd three major issues are recurring roadblocks in today’s leasing environment:

Tenants’ heightened concerns about their landlord’s fi nancial viability:

With imminent commercial foreclosures and credit in short supply, tenants are scrutinizing the fi nances of potential landlords.
To overcome this challenge, landlords should take a proactive approach to fully informing potential tenants of the fi nancial circumstances at play.

The need to manage the expectations of deal economics:

Capital constraints are making large tenant improvement allowances a thing of the past. “As is” transactions are more frequent, which can be advantageous for tenants due to lower occupancy costs.
With uncertainty and stagnation permeating the commercial real estate market, it is important for landlords to understand their competition.

Leasing vacant space is exceptionally diffi cult in this environment:

As both parties struggle to identify new business prospects, while simultaneously experiencing a shortfall of cash and credit, fi nding fl exible and creative solutions to reaching a deal are critical.
A knowledgeable and experienced commercial real estate broker will play a key role in educating both tenants and landlords about the current economic realities of the market.

In light of these challenges, if a deal is to be consummated, both tenants and landlords must be willing to compromise on certain issues. To the extent that cooperation and expectation management can be part of the leasing process, a reasonable solution is far more achievable. Despite these competing interests, finding the middle ground is essential to finding a fair solution for both landlord and tenant. Brokers should work towards this goal by educating their clients and offering realistic solutions to move towards a compromise, and ultimately a deal.

FHO Partners is a commercial real estate firm providing brokerage and transaction management services to multi-market, national and international corporate real estate portfolios, both owned and leased. For more information, visit www.fhopartners.com.

Feb. 4 – Prince Lobel – The Anatomy of a Wage and Hour Disaster
Feb. 17 – Greater Boston Chamber of Commerce - Executive Forum
Feb. 23 – Greater Boston Chamber of Commerce – Women’s Networking Breakfast
Feb. 25 – Association for Corporate Growth (ACG) – DealMakers 2010 Outlook Conference