Attention Independent Contractors & Real Estate Owners

Attention Independent Contractors & 

Real Estate Owners!

PCC Training Series: Tax Cuts, Jobs Act & The Dynamex Decision

Are You Familiar with the California Supreme Court’s decisions to restrict the ability to designate workers as Independent Contractors? Have you dug deep into understanding the fine lines within the new Tax Cuts and Jobs Act? 

At Pacific Coast Commercial it is our goal to ensure our team members are provided with the right resources and information to create greater opportunities within the commercial real estate industry.In our recent training series, Aldrich Advisors, an accounting, wealth and consulting firm, educated our team members on how the tax cuts and jobs act, paired with the Dynamex vs. Supreme Court ruling will impact their clients, individual taxes, and the real estate business as a whole.  

Photo: Andrew Davidson, CPA (Left), Hannah Mane, CPA, CVA, Brendan Hollis, CPA, Vince Provenzano (Right)
Understanding the new laws and Dynamex decision in its entirety is not easily relayed, however, we would like to provide our readers with some of the most important aspects in a nutshell… 

- Under the law, there are numerous changes to the individual income tax, including the income level of individual tax brackets, lowering tax rates, and increasing the standard deductions, and family tax credits while the personal exemption and itemized deductions are reduced or eliminated.

- Those who itemize will have fewer expenses to deduct and a higher standard to cross. 

- Before the tax reform bill took effect, about 30% of taxpayers itemized deductions on Schedule A, instead of taking the standard deduction associated with their filing status. However, the TCJA has a large impact on itemized deductions, as several itemized deductions have been eliminated or modified.

Real estate entities in particular will witness one of the more significant changes, which is why it's critical that you prepare now for the affect this historical bill will have on real estate property owners.
  • Land and property depreciation has been retained and the alternative depreciation system period for residential property has been shortened. Although homeowners will no longer carry a lot of the financial advantages through the new tax laws, this is a huge win for the commercial real estate industry. One of the key features to investing in real estate is depreciation. This is because under U.S. accounting rules real estate loses value, even though it tends to rise in market value.
  • For qualified property placed in service between September 28, 2017, and December 31, 2022, the TCJA increased the first-year bonus depreciation percentage to 100% (up from 50%). The 100% deduction is allowed for both new and used qualified property. These include, qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. 
  • These types of properties are eligible for 15-year straight-line depreciation and are, therefore, also eligible for the alternative of 100% first-year bonus depreciation. Contact Pacific Coast Commercial Agents to learn how you can take advantage of this property depreciation tax deduction.
 - Changes in the carried interest deduction--one must now hold assets for three years instead of only one--will benefit real estate funds substantially more than other types of managed funds.The lucrative 1031 tax free exchange rules that were on the initial chopping block were retained. Section 1031 allows real estate investors to defer capital gains taxes if they are using the money to purchase another property.

 - The mortgage deduction has been reduced to $750,000 dollars for new homeowners, but the deductibility of current mortgage debt up to $1 million is still protected. 

- Under the new law, the standard deduction nearly doubles to $12,000 for individuals and $24,000 for married couples filing jointly. This means that far fewer people will save money by itemizing deductions – including the mortgage deduction. Translation: one of the major incentives for buying a home is now gone. 

- LLC and independent contractors can now deduct 20 percent of qualified business income. In other words, if you operate as an LLC, you may be eligible to pay taxes on just 80 percent of the total amount you earn. 

Although the new tax cuts and jobs acts would most likely incentivize workers to take up jobs as independent contractors because of the new 20 percent deduction, the California Supreme Court has now rewritten the standard for determining whether someone is deemed an employee or independent contractor through the Dynamex decision. 

California’s Dynamex Decision:

- Could potentially jeopardize businesses that utilize independent contractors, such as Real Estate Professionals. 

- The test for establishing whether someone is categorized as an employee of a company or independent contractor is now far more rigid.

 - The Borello test is replaced with the ABC test that an employer must satisfy to prove the individual is NOT an employee. The test states:

(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. 

What This Means for California Business/Real Estate Professionals 

- If a person was previously designated as an Independent Contractor but no longer fits into the ABC test, they will not reap the benefits of the 20 percent deduction from business income or the lower income tax rate on a sole proprietor’s income.

- Employer will now bear the responsibility of paying Social Security, payroll taxes, unemployment insurance taxes, and state employment taxes, provide workers compensation insurance, comply with the endless labyrinth of sate and federal statures governing the wages, hours, and working conditions of employees. 

- The National Association of REALTORS worked throughout the tax reform process to ensure as many real estate professionals as possible would benefit from the tax cuts, however, California brokers may no longer apply. 

With the passage of the Tax Cuts and Jobs Act (“Act”), there is much concern, as well as confusion, as to the impact the new legislation has on both businesses and individuals alike. At Pacific Coast Commercial our mission is to deliver specialized commercial real estate services, and we believe the only way to achieve this goal is to ensure our team is trained and knowledgeable on every forefront that could benefit or hinder our clients’ business goals.







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