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Building Success: An EisnerAmper Real Estate Blog

The Time is Now to Obtain Information for Your Multi-Employer Pension Disclosure

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August 26, 2014

By Ed Opall, CPA

Opall, EdAll contractors (“employers”) utilizing union labor must participate in multi-employer pension programs.  Employers pay monthly contributions based on hours worked by each covered employee at the contractual rate.  Beyond making their required payments, employers have no control over the financial management of the union plans that affect its funding status.  Many union plans are severely underfunded, and the general public has concerns that employers have contingent exposure for these obligations.   In response to this concern, the Financial Accounting Standards Board (“FASB”) issued a pronouncement for years beginning in 2012 requiring certain financial statement disclosures, including information to be obtained from each union. 

The Pension Protection Act of 2006 requires unions to certify the funding status of the plan annually.   Funding notices are required to be released 120 days after the end of the plan year and designate vital information on its funding status, whether the plan is endangered or at a critical status, and if surcharges are imposed by the Pension Benefit Guarantee Corp.  The funding status is defined as follows:

  • Green – 80% or more funded
  • Yellow – more than 65% and less than 80% funded
  • Red – less than 65% funded

Companies are required to disclosure the information in its financial statements in a tabular format for all plans that are considered to be significant. That information includes:

  • The legal name of each plan
  • Each plan’s employer identification number and plan number
  • The most recently available certified zone status provided by each plan (see above)
  • The expiration date of each union’s current collective bargaining agreement
  • Whether a funding improvement plan has been implemented, the employer paid a surcharge, and whether there are minimum contributions required for future periods
  • For each period presented in the financial statements, the amount of employer contributions to each plan and whether the company provided more than 5% of total contributions to any plan 

The FASB pronouncement notes that companies shall disclose each plan’s information based on its most recent public filings.  During 2012 and 2013, companies have gotten familiar with the requirements and have adopted processes to obtain this information timely.

Rather than wait until the year-end reporting season to obtain this information, we recommend that companies begin gathering the information as soon as possible. The unions’ business offices are required by law to release this information to participating employers upon request; however, they are not required to release it quickly.  A process should begin each fall to request and follow up on requested information well before company financial reporting deadlines.

The FASB pronouncement has also enhanced disclosure requirements for significant changes in employer contributions from year to year for business combinations and divestitures, changes in contractual employer contribution rate, and significant changes in the number of employees in a plan.  We recommend that the disclosure requirements be considered as early as possible in the financial reporting plan during the coming year. In addition, employers must disclose the amount of contributions to multi-employer plans that provide postretirement benefits other than pensions.

With FASB requiring more information reliant on third-parties in your disclosures, the best course of action is to prepare now. Create a process to collect the required information well ahead of the year-end, and your company will be well-positioned for meeting financial reporting deadlines.

The Advantages and Hurdles of Being a Real Estate Professional

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August 14, 2014

By Mariana Moghadam, CPA  

Moghadam, MarianaOver the past year, qualifying as a real estate professional has become more important, and even more difficult than it ever was in the past. Since 1994, the issue has been significant, mainly to those taxpayers (including many of our clients) who have rental real estate losses that they want to offset against their earned or active or investment income.

However, beginning in 2013, being treated as a qualified real estate professional has also become critical for those individuals with rental real estate gains. After all, if the income from rental real estate (including any gains from the sale of property) is considered non-passive under IRC sec. 469, then that income is not going to be subject to the new 3.8% tax on net investment income.

Background

Since 1986, most rental activities are “per se” considered passive. Because this imposes a hardship on real estate professionals, an exception to the rule was carved out for those real estate professionals who meet the criteria of IRC sec. 469(c)(7):

  • More than one-half of the taxpayer’s personal services are performed in real property trades or businesses in which he or she materially participates; AND
  • The taxpayer works more than 750 hours in real property trades or businesses in which he or she materially participates.

In other words, the rental real estate activities will continue to be treated as passive gains and losses, unless the taxpayer materially participates in each of those rental real estate activities.

The Gragg Case

A recent court decision in California, involving husband-and-wife taxpayers, Charles and Delores Gragg, illustrates some of the hurdles in receiving the tax status of qualified real estate professionals [Gragg v. U.S., 113 AFTR 2d 2014-XXXX (N.D. Cal.)].

The Graggs owned two real estate rental properties that incurred losses in 2006 and 2007. In jointly-filed returns, the Graggs deducted those losses from their otherwise taxable income. After all, Mrs. Gragg’s full-time occupation as a real estate professional should have entitled the couple to offset their earned income with losses from rental real estate activities.

The IRS did not dispute the fact that Mrs. Gragg was a qualified real estate professional in both 2006 and 2007. However, the Service disallowed the losses based on the fact that Mrs. Gragg did not materially participate in the particular rental activities that generated those rental losses. As a result, the District Court for the Northern District of California agreed with the IRS, concluding that Mrs. Gragg’s work as a real estate agent and her ownership of rental real estate were separate and distinct activities that cannot be considered together.The Hurdles

It is not surprising that the IRS audited the Graggs’ returns. In recent years, the Service has a track record of examining the returns of would-be qualified real estate professionals.

In this case (like so many others), Mrs. Gragg provided the court with her estimates of the amount of time she spent on the couples’ rental activities. Since the hours she spent on the rental activities were “overall” estimates rather than contemporaneous time logs and calendars, the court agreed with the IRS that Mrs. Gragg’s estimates were not a “reasonable means” of documenting her material participation in the rental activities.

Adding Insult to Injury

Even if Mrs. Gragg’s participation in the rental activities had exceeded 750 hours in a year, the Graggs would have been required to make a “grouping” election under IRC sec. 469(c)(7)(A)(ii) to treat the two separate real estate rental properties as one “activity.” As a result, the court held that the two rental properties should be treated as separate activities for tax purposes.

The Bottom Line

With situations like the Graggs, it has become commonplace for the IRS to disallow the deduction of real estate rental losses. Court decisions in the past several years have upheld the Service’s insistence on contemporaneous substantiation to prove material participation in real estate rental activities.

As a result, those taxpayers who are considering treating their rental losses (or, in 2013 and forward, their rental gains) as non-passive should be certain they have appropriate records and, if necessary, have made a grouping election. As always, it makes sense to discuss these situations with your tax advisor prior to filing any tax return involving real estate rental activities.

Upcoming EisnerAmper Real Estate Private Equity Summit Featured in Real Estate Weekly

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The second annual EisnerAmper Real Estate Private Equity Summit will take place on October 1st in New York. Organizers expect more than 500 real estate investors, owners, and industry leaders to come together once again at the McGraw-Hill Conference Center to hear from real estate and private equity speakers, including Keynote Sam Zell, chairman of Equity Group Investments. Real Estate Weekly just covered the all-day event on their website. Find out more about our event here.
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