“In addition,” Hoffman said, “if real estate or operating businesses are put into an LLC, taxed as a pass-through entity instead of a sole proprietorship, they may be eligible for the 20% deduction under Section 199A, or for the pass-through entity tax workaround for the limitation on the deductibility of state taxes for individuals and trusts.”
“We have discussions with our clients who currently have an entity in place to determine if a pass-through entity election on the state level will be advantageous,” said Cindy Levine Ostrager, a CPA and partner at CohnReznick in New York. “If so, this election will allow for a state income tax deduction on the federal level. Each state has their own rules regarding the income that qualifies and whether other state PTE tax is creditable.”
These techniques come with a lot of nuances. “Look at what assets you have that you don’t need for your own long-term needs,” Hemsley said. “A transfer means you generally can no longer use them for your own benefit. While the controlling member can withhold distributions of cash flow, the cash flow still belongs to the transferee, not the transferor.”
Get a qualified appraisal of the assets. “The IRS will want a legitimate value of the transfer for reporting purposes, especially if there will be a discount,” Hemsley said. “Back-of-the-napkin estimates won’t do.”