Sherbert CPA, PC is a full service CPA firm and is a premier provider of accounting, tax, consulting, development, and management services to the real estate tax credit industry. We perform services for clients nationwide.
Investors and creditors often need assurance that the financial statements accurately represent the financial position of an entity. There are several levels of assurance which can be expressed related to the financial statements of an entity.
Partnership taxation is extremely complex with numerous issues to address, including:
- Partner basis issues
- Allocation of profits and losses in accordance with partnership agreements and basis limitations
- Considerations of inside basis versus outside basis
- Section 754 “step-up/step-down” elections and Section 743(b) & Section 734(b) Basis Adjustments
- Debt classification as recourse versus non-recourse versus qualified non-recourse
- Filing of Schedule M-1 versus Schedule M-3
- Partner Minimum Gain
In addition, many of our partnership clients have tax credits associated with them. These require the proper preparation/filing of:
- Form 8609, one time filing for Low-Income Housing Tax Credits. Our expertise allows us to maximize first year credits and, thus, maximize credit equity.
- Form 8609-A, Annual Filing during the 15-Year Compliance Period for Low-Income Housing Tax Credits
- Calculation of allowable first year Low-Income Housing Tax Credits and the resulting Deferred First Year Low-Income Housing Tax Credits to be reported in Year 11
- Form 3468 for Historic Rehabilitation Tax Credits
- Inclusion of Applicable National Park Service (NPS) forms to be attached to tax returns for Historic Rehabilitation Tax Credits
- Preparation and filing of lease pass-through elections for lease pass-through deals with Historic Rehabilitation Tax Credits
- Many states also have corresponding tax credits. Each state and type of credit must be analyzed to determine the necessary forms and filing requirements.
In addition, the 2017 Tax Cuts and Jobs Act created the Opportunity Zone Program:
- Opportunity Zone compliance requirements must be considered for both a Qualified Opportunity Fund and for a taxpayer who is deferring capital gains under the Opportunity Zone Program.
- Specific filing requirements such as required forms, elections, etc. must be analyzed and prepared and included with a timely filed tax return for both a Qualified Opportunity Fund and a taxpayer who is deferring capital gains under the Opportunity Zone Program.
Fortunately, we prepare hundreds of partnership tax returns each year. As a result, we have the knowledge, experience and expertise to competently prepare the required tax filings.
Here’s What You Get…
- If we have performed an audit of your financial statements, we will take the financials from the audit, and then analyze and make any necessary tax basis adjusting entries to arrive at taxable Net Income (Loss).
- If we have not performed an audit of your financial statements, we will obtain the accounting information from you. We will then analyze the information, prepare any adjusting journal entries that need to be made and obtain your approval of the adjusted financials.
- We will enter the financial information into our tax return software and prepare the appropriate tax forms to be included with your tax return.
- We will analyze and prepare for inclusion with the tax return any of the appropriate tax elections required for your tax return.
- We will analyze tax basis capital accounts, tax basis, minimum gain and provisions contained within the partnership agreement to ensure that the allocation of profits and losses are being appropriately handled.
- Your tax return will be checked by our computer software to identify potential problems.
- Once prepared, the financials and tax return are detail reviewed by a Tax Manager to ensure that all the necessary forms, filings and elections have been included as well as ensuring that adjusting entries have been properly handled.
- We will then provide a draft of the tax return to you, as well as to any investors that require it.
- Upon obtaining your approval and/or the approval of your investors, the tax forms are assembled and made ready for mailing to you for filing or made ready for electronic filing.
- A Tax Partner will perform a final review of the tax return prior to filing of the tax return.
Tax planning is crucial for partnerships and corporations given the complexity of the nature of the tax code:
- We monitor the constantly changing tax law and work with clients to plan for changes and the potential impacts.
- Tax legislation contains many provisions that partnerships should plan for which should be analyzed to ensure the partnership and its partners receive the maximum benefits, not just for the current year, but throughout the life of the partnership.
- Another challenge for partnerships that have tax credit property associated with them is dealing with the end of the compliance period. Historic Rehabilitation Tax Credit projects have a 5-year compliance period, while Low-Income Housing Tax Credit projects have a 15-year compliance period.
- We prepare an analysis using legal agreements and financial projections in order to lay out the tax consequences to the project developer and investor of the put option (or other disposition method) being exercised.
- We work with developers on the options available to the project. Options available include: Right of First Refusal, Re-syndication of the project for additional Low-Income Housing Tax Credits and Qualified Contract analysis.
Tax planning is also crucial for individuals:
- We can show how to use both federal and state tax credits to significantly lower tax liability.
- We can use your personal financial statements, expected income (loss) from investments and anticipated major transactions to determine appropriate tax planning strategies, and determine your expected taxable income.
- We will advise you on how changes in the tax code and regulations could impact your tax liability.
- We will advise you of opportunities available to you, such as tax credits and opportunity zone investments.
An audit provides the highest level of assurance; when conducted in accordance with auditing standards generally accepted in the United States of America, audits require planning and performance of the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence regarding the amounts and disclosures in the financial statements. The procedures selected depend on the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making these assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design appropriate audit procedures. Based on our findings, we issue a report on whether the financial statements are fairly stated and free of material misstatements.
An Audit Allows You To…
- Satisfy stakeholders, such as investors and lenders, as to the credibility of published information.
- Facilitate the preparation of tax returns and related required investor tax reporting.
- Comply with banking covenants.
- Comply with operating agreements.
A review conducted in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants requires primarily the performance of analytical procedures applied to financial information and various inquiries made of the entity’s management. A review does not require an evaluation of the entity’s internal controls and is substantially less in scope than an audit. A review report expresses limited assurance that there are no material modifications that should be made to the financial statements.
Why might a business request a review engagement?
Management, lenders, or investors may not require the level of assurance provided by an audit. The limited assurance provided by a review may be sufficient for the users of the financial statements and will require less work and expense than an audit.
In compiling financial statements for an entity, we present information that is the representation of management in the form of financial statements and express no opinion or assurance on these statements. Compilations are the most cost-effective method of reporting, if the lack of assurance expressed is acceptable to the financial statement users. Banks often require compilations from an independent CPA as part of their lending covenants.
Why is a compilation necessary? Banks often require compilations from an independent CPA as part of their lending covenants.
Sherbert CPA, PC has experienced staff to perform various types of cost certifications and provide the reports that are required to be certified by a CPA.
Benefits to our clients include:
- Expertise in the tax credit industry
- Maximized tax credits through knowledge, experience, and application of the tax credit sections of the Internal Revenue Code
- A comprehensive analysis of actual project costs to determine which costs to include in the eligible basis in order to maximize tax credits
- The reputation and relationships developed over time with industry investors who have confidence in our reporting
- Timely investor equity installments prepared by our knowledgeable and experienced staff
Our experience in the industry allows us to understand the costs that are eligible for tax credits which maximizes the tax credit basis for your project.
Cost certifications are required to be performed for several types of real estate projects that include:
- Low-Income Housing Tax Credit Cost Certification (8609): submitted to the state agency where project is located.
- HUD Contractor’s Cost Certification: required on HUD financed projects that have a related party General Contractor or where the General Contractor’s contract is a cost plus contract.
- HUD Mortgagor’s Cost Certification: required on HUD financed projects to determine the HUD approved costs.
- Qualified Rehabilitation Expenditure Cost Certification: required by most investors in historic tax credit projects.
In addition, certain states have a state historic tax credit that requires a specific cost certification to be submitted to the state for approval and issuance of the state tax credits.
Many CPA firms will help structure a deal for a developer only to disappear during the construction phase and then re-appear at the end to perform a cost certification or the annual audit and tax returns. We believe it is important for us to stay involved throughout the entire development process; we call this process Development Monitoring.
Basically, we make sure you set up your accounting system properly, then you provide us either quarterly or with each construction draw, a copy of the draw, along with backup invoices, your accounting trial balance (we prefer QuickBooks but can work with any program), and your sources and uses schedule. We take this information and organize it to ensure transactions are accounted for properly, budgets are maintained, and pertinent information is included to perform the cost certification.
As another option for developers desiring additional oversight during the construction period, we can also provide more comprehensive construction draw processing with cooperation with Sherbert Consulting, Inc.
This process results in 3 major benefits:
- We will understand the project better, which allows us to better prepare your audits, tax returns, or other professional services that you may need.
- We will be able to restructure a deal sooner if there are budget overruns or construction delays.
- We have your information organized better, so we can efficiently and effectively prepare the final cost certification.
A large equity contribution is usually based on receipt of the cost certification. With our Development Monitoring process, your cost certification will be prepared sooner. This will allow you to receive your equity sooner in order to pay down debt and save on financing costs. Our typical turn-around time on a cost certification is 1 to 2 months, which is 1 to 4 months quicker than most of our competitors.