Lotzar Law Firm P.C.

Legal talent that pays for itself.
480.905.0300 x103 8687 E. Via de Ventura, Suite 115 Scottsdale, Arizona 85258

What is an IRC Section 1031 Exchange Process in Phoenix?

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1031 exchange process in phoenixAn IRC Section 1031 Exchange is also called a like-kind exchange. A 1031 Exchange will allow you to shield the gains from the sale of a business or an investment property by reinvesting the funds in a similar type of asset.

A 1031 Exchange is a powerful tool for investors who wish to increase the value or scope of their investment portfolios without incurring tax expenditures on the gains from selling existing assets.  However, there are specific requirements that must be fulfilled to benefit from a 1031 exchange and it is essential that you follow the required procedures in order to realize the tax benefits. The Lotzar Law Firm, P.C. can represent clients in Scottsdale, Phoenix and throughout Arizona and guide them through the 1031 Exchange Process to protect their profits.

Understanding a IRC 1031 Exchange

When a business or investment property is sold for a profit, the sale normally triggers tax liability. However, a like-kind exchange makes it possible to defer the taxes that would normally be paid as part of the sale.

The proceeds must be invested in a similar property, but can include like-kind property in addition to liabilities, cash and other property that is not like-kind. However, 1031 Exchanges do not apply to certain kinds of property or assets including:

  • Stocks, Bonds and Notes
  • Inventory
  • Stock in trade
  • An ownership interest in a Partnership
  • Certificates of Trusts
  • Other debts/securities

The property or assets that you sold and the property or assets being purchased must be similar enough to actually qualify as “like-kind” property. The IRS defines like-kind property as property that has the “same nature, character or class.”  The quality of the specific items is not relevant. For example, selling an inexpensive property and realizing the gains on it can make it possible for you to enter into a like-kind transaction for the purchase of other types of real estate that is more valuable or that has a higher cost.

Both real and personal property can qualify for like-kind exchanges, but cannot be considered like-kind to each other.

In addition to restrictions regarding what qualifies as “like-kind” property, it is also important to understand the time limits associated with completing your transaction.  You have 45 days from the date of the sale of the property to identify potential replacement properties in writing. The replacement property must also be received and the exchange completed within 180 days of the earlier date of the sale of the exchanged property or the due date of the income tax return for the year in which the property is sold.

Lotzar Law Firm, P.C. can help clients with the 1031 Exchange Process in Phoenix to ensure they comply with requirements and protect their tax advantages. Call today to speak with a member of our legal team and learn more.

Can a Nonprofit Organization in Maricopa County Make Political Contributions?

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nonprofit organization in maricopa countyNonprofit Organizations face restrictions on their operating activities in order to maintain 501(c)(3) status. One of those restrictions relates to making political contributions or participating in political campaigning activities. The Internal Revenue Service (IRS) is strict about enforcing rules related to political contributions and campaigning activities and your organization could lose its tax-exempt status if it fails to follow the rules.

The Lotzar Law Firm, P.C. represents many Boards of Directors and leaders of 501(c)(3) Charitable Organizations in Maricopa County and throughout Arizona. We can provide comprehensive advice on your rights and restrictions on political activities and can assist you in other aspects of operating your organization in compliance with the law. You do not want to jeopardize your nonprofit status and should always speak with a lawyer before making decisions that could put your nonprofit organization in Maricopa County at risk.

Political Contributions and Nonprofit Organizations

Nonprofits operating as 501(c)(3) operations are forbidden from directly or indirectly participating in any type of campaigning activity. Nonprofits not only cannot donate money to political organizations or candidates, but they cannot have any involvement whatsoever in campaigning either on behalf of or in opposition to any candidate for any elective public office.

Political candidates include anyone who is running for office on the state, federal or local level. This includes not just presidential elections, but also any type of elected official including school board members; country trustees; mayors and city supervisors.

Campaign activities are also defined broadly and nonprofits are restricted in taking any type of stance on an election or even appearing to support a particular candidate. The IRS will use a “Facts And Circumstances” Test in order to assess whether your 501(c)(3) violated any of the laws related to campaign funding or participation. This involves considering both the current political situation as well as other activities done by your organization when assessing whether your actions constituted campaigning or not.

In some past cases, for example, the IRS determined that political campaigning for a candidate could include inviting a candidate to speak with the organization; or publishing materials or information about a candidate using the funds of the nonprofit organization. If the executive director or board members make any statements in their official capacity or in a way that represents the interests of the nonprofit, this too can lead to revocation of nonprofit status.

Violating the rules on campaigning or political contributions can trigger the revocation of the 501(c)(3)’s nonprofit status, so do not take any chances. If you have any questions about whether your nonprofit’s actions are within the bounds of the law, always contact the Lotzar Law Firm, P.C. for the legal advice you need to make an informed choice.

What is a Cost Segregation Study in Scottsdale? Is It Worth It?

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costsegregationCost Segregation Study is the process of separating out the value of your personal property from the value of real property.  The non-structural elements of a business as well as indirect construction costs and certain exterior improvements to land may all be considered personal property but are frequently grouped together as part of “land improvements” and thus considered real property assets. By segregating out these items and having them correctly classified as personal property, you can accelerate depreciation in order to achieve tax savings.

Determining whether to conduct a Cost Segregation Study can be a complex question, as you need to ensure that the savings you will realize outweigh the expense associated with conducting the study and the possible risk of an audit and penalties. The Lotzar Law Firm, P.C. can help you to evaluate your situation and to determine if a Cost Segregation Study would be beneficial based on the specifics of your investments and assets in personal and real property.

Understanding a Cost Segregation Study

A Cost Segregation Study can be performed on buildings that have been purchased, constructed, remodeled or expanded. The building must have been purchased or work must have been done after 1987.

The study will be performed by reviewing architectural drawings, mechanical plans, electrical plans and blueprints of the building. The goal is to identify and separate out personal property and assets from the fixtures of the land that constitute real property.  Soft costs, such as expenditures on architecture or engineering fees, are also considered in the Cost Segregation Study and are distributed among the different components of the building.

Once the personal property is identified and separated out, depreciation can be accelerated when filing income taxes in order to achieve tax savings.  Tax payments will generally be lower earlier in the life of the property when a Cost Segregation Study is performed, which can free up funds for investing or for maintaining operations when a business is relatively new.

However, a Cost Segregation Study is not always worth it, despite the tax savings. It is essential that the savings be worth the expense of having the Cost Segregation Study performed.  The study should be performed by an experienced professional, such as a construction engineer, in order for the Internal Revenue Service to accept it as proper documentation. You will need to pay the fees for this professional to protect yourself from an audit and to ensure that an accurate assessment is made of the value of personal property.

An experienced real estate attorney at the Lotzar Law Firm, P.C. can help you to decide if you should conduct a Cost Segregation Study in Scottsdale and can guide you through the process while advising you on benefits and risks. Call today to learn more.

Nonprofit Organization Application in Phoenix: How long does it take to receive a determination letter from the Internal Revenue Service related to IRC Section 501(c)(3) organization status?

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nonprofit organization application in phoenixWhen you apply for 501(c)(3) status, you will receive a Determination Letter from the Internal Revenue Service (“IRS”) alerting you that your status has been approved if your organization qualifies for 501(c)(3) status.  The IRS issues Determination Letters only to those organizations that qualify for 501(c)(3) status.

The length of time that it can take in order to receive this letter will vary depending upon the circumstances. To ensure you obtain your approval in as timely a manner as possible, it is essential that you provide the IRS with all required documentation and information they need to approve your organization as a nonprofit organization. The Lotzar Law Firm P.C. can help you to complete your application so your organization will have the best chance of being approved in a timely manner.

Receiving a Determination Letter from the IRS

When applying for 501(c)(3) status, you must include Form SS-4 to apply for an Employer Identification Number, as well as:

  • Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code
  • Form 2848, Power of Attorney and Declaration of Representative if someone other than the principal officer is representing the organization on issues that are related to the application.
  • Form 8821, Tax Information Authorization, if you wish the IRS to be able to provide application information to someone other than a principal officer.

Form 1023 must be filed within 27 months of the time the organization is legally formed. However, if the organization is not a Private Foundation, it does not have to file Form 1023 unless it takes in gross annual receipts of more than $5,000. If it exceeds this threshold, then the form must be filed within 90 days of the tax year in which the money is collected.  Provided the organization files by the deadline and meets the requirements, it can generally be recognized as tax-exempt from the date that it is created even if it has not yet received its Determination Letter.

The period of time that passes before a Determination Letter is received will vary, but it can be several months. If your application is “merit closed,” the IRS will likely inform you of its decision in under a month.  A letter that your organization has been “merit closed” is not a “determination letter.”  When an application is completed in full and the case can be closed right away, the process also moves quickly. However, if the application is more complex, it can take as long as 8 to 12 months before the Determination Letter is received.

Providing all appropriate information is the best way to ensure that you receive your Determination Letter in a timely manner.  An experienced attorney at Lotzar Law Firm, P.C. will help you to complete your non profit organization application in Phoenix so you can get your nonprofit tax-exempt status approved.

Business Entity Formations in Maricopa County: What factors should be Considered in Choosing the Type of Entity for My Business?

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business entity formations in scottsdaleWhen starting a new business venture, it is essential to operate your business as the correct entity in order to reduce liability risks, protect your investment, and ensure appropriate tax treatment.  There are many factors that affect which business entity is right for you and it is advisable to speak with an experienced attorney when forming your business.

Lotzar Law Firm, P.C. has extensive experience with start-up companies of all sizes. Our attorneys can assist both for-profit and nonprofit operations to select the right business structure and to complete all initial requirements associated with forming the appropriate business entity.

Factors to Consider in Choosing a Business Entity

When choosing the appropriate business entity, factors to consider include:

  • The number of business owners: The simplest business structure, Sole Proprietorship, can have only one owner. The owner and the business are the same legal entity. For any business operated with two or more parties, an alternative business structure such as Limited Liability Company (LLC); Limited Liability Partnership (LLP); C-Corporation or S-Corporation will need to be formed.  C-Corporations are the organizational structure that makes transferring ownership interests easiest and S-Corporations do not have the ownership restrictions that limit ownership in other business entities, including S-Corporations.
  • Liability protections:  Sole Proprietorships and Partnerships provide no liability protection to owners. If the business is sued or goes into debt, the individual business owners can become responsible for the debts and liabilities. LLCs and LLPs can provide some liability protection, but the broadest protection will require the formation of an C-Corporation or a S-Corporation. Both C-Corporations and S-Corporations allow for the business to operate as an entirely separate legal entity, and the losses of owners are generally limited only to the amount invested.
  • Operational complexities:  All business entities other than Sole Proprietorships will require paperwork to be filed with the state.  This paperwork will typically need to be filed both when the organization begins operations and on an annual basis.  C-Corporations and S-Corporations generally have the most complexities in terms of paperwork and can have higher fees for annual operations.
  • Taxation: Most business entities, including S-Corporations and Partnerships, will allow the business to pass through profits and losses to owners. This means that income and losses are declared on the individual tax returns of the company’s owners. For C-Corporations, the company is taxed, and individual owners may also be taxed on distributions, dividends and profit sharing.  An attorney may be able to help avoid this type of double taxation, but this is not always possible.

Getting Legal Help with Business Entity Formations in Maricopa County

These are just a few of the myriad considerations associated with choosing the appropriate business form. It is always best to consult with an experienced attorney for assistance in deciding on the correct business structure for your needs.  Contact Lotzar Law Firm, P.C. today for help forming your business.

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