What is a Retainer?

A retainer is an upfront payment from a client to ensure your availability for legal services over a specified period. It provides your firm with working capital and demonstrates the client’s commitment to the engagement. However, retainers are not straightforward income—they come with strict handling rules.

There are several types of retainers, each with its own financial and ethical considerations:

1. Advance Fee Retainers

These are prepayments for billable services. You draw down the retainer balance as you complete work for the client. Any unused funds must be refunded if the engagement ends.

2. General Retainers

These are flat fees paid to secure your availability during a specific period. Unlike advance fees, these retainers are typically non-refundable, regardless of the services provided.

3. Special or Security Retainers

These act as a security deposit. The funds remain the client’s property until you earn them through completed work. These retainers must be held in trust and handled with care.

Trust Accounts and Retainers

No matter the type of retainer, client funds must be kept separate from your firm’s operating funds. In most jurisdictions, retainer payments must be deposited into an IOLTA (Interest on Lawyers Trust Account) or a similar client trust account. Interest earned on these accounts often supports legal aid programs or public services.

Key Rules for Trust Accounts:

• Deposit All Retainer Funds Into Trust: Do not place retainer funds directly into your firm’s operating account.
• Transfer Earned Funds Only: Move funds from the trust account to your operating account only after completing billable work.
• Avoid Commingling: Never mix earned and unearned funds in the same account.

Billing Against Retainers

When you complete work for a client:

1. Invoice the client detailing the services provided.
2. Draw down the retainer to cover the billed amount.
3. Transfer the earned portion from the trust account to your operating account promptly.

Regularly reconcile your trust account to ensure accuracy and transparency. Provide clients with detailed statements showing how funds are used and the remaining balance.

Tax Considerations for Retainers

Retainer funds are not taxable income until they are earned and transferred to your operating account. This distinction is critical:

• Unearned Retainers: Remain client property and should not be reported as income.
• Earned Retainers: Count as income once work is completed, invoiced, and funds are transferred.

If the engagement ends with unused retainer funds, these must be refunded promptly, along with a final accounting statement. Holding on to unearned funds is unethical and could lead to malpractice claims.

Best Practices for Managing Retainers

To manage retainer funds effectively and ensure compliance, follow these best practices:

1. Use Clear Engagement Letters
   Define retainer terms explicitly in your engagement agreements. Include details about the retainer amount, refund policy, usage terms, and expectations for replenishing funds.
2. Reconcile Accounts Frequently
   Regularly review your trust accounts to verify accuracy and prevent errors.
3. Maintain Transparent Communication
   Keep clients informed about retainer usage, balances, and whether additional funds are needed.
4. Leverage Legal Accounting Software
   Use modern tools to automate tracking, invoicing, and reporting. These systems can help separate client funds, manage trust account reconciliations, and generate accurate statements.
5. Handle Refunds Promptly
   If an engagement ends, refund unearned funds quickly. Include an itemized statement showing how the retainer was used.

The Core Principle: It’s Not Your Money Until It’s Earned

The golden rule of retainer management is simple: client funds are not yours until you’ve earned them by delivering services. Mishandling these funds, whether intentionally or due to negligence, can damage your practice’s reputation and lead to legal or ethical repercussions.

While legal accounting may not be the most glamorous part of your profession, it is essential for protecting your practice, maintaining compliance, and building trust with your clients. By handling retainers with diligence, transparency, and adherence to ethical standards, you can ensure your law firm’s financial stability and reputation remain strong.

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Historical Foundation with Modern Implications

The Sixteenth Amendment fundamentally changed the federal government’s taxing power by removing previous Constitutional constraints. Before this amendment, Congress faced strict limitations on its taxing authority, requiring different types of taxes to be either uniformly imposed or apportioned among states. The amendment’s simple yet powerful text reads: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.”

How this applies today

Today, this amendment’s impact extends far beyond its historical context. It serves as the foundation for our entire modern tax framework, encompassing everything from the current federal income tax structure to complex corporate tax regulations. Its influence reaches into international tax treaties, provides the basis for digital economy taxation, governs investment income taxation, and shapes the intricate relationships between state and federal tax systems. This comprehensive reach demonstrates how a century-old amendment continues to provide the legal backbone for our evolving tax landscape.

Contemporary Debates

While historical debates centered on state securities and sovereignty, modern discussions focus on:

• Federal taxation of digital assets and cryptocurrencies
• International corporate tax agreements
• Remote work taxation across state lines
• Platform economy income reporting
• Global minimum tax initiatives

State-Federal Balance in Modern Times

The relationship between state and federal taxing powers remains relevant today, particularly in areas such as:

• Remote worker taxation
• Interstate commerce
• Digital marketplace taxation
• State tax credits and federal deductions
• Multistate business operations

The rise of remote work has created unprecedented tax complexities, as employees working from different states than their employers raise questions about which state has the right to tax their income. For example, during the COVID-19 pandemic, many states had to revisit their tax policies when millions of workers suddenly began working across state lines, leading to potential double taxation issues and complex compliance requirements for both employers and employees.

Interstate commerce has become even more intricate with the explosion of e-commerce and digital marketplaces. The Supreme Court’s landmark South Dakota v. Wayfair decision in 2018 revolutionized how states can tax online sales, allowing them to require out-of-state sellers to collect and remit sales tax even without a physical presence in the state. This decision has led to a complex web of state-level economic nexus laws that businesses must navigate, highlighting the ongoing tension between state taxing powers and federal oversight of interstate commerce.

Digital marketplace taxation presents its own unique challenges in the state-federal balance. States are increasingly implementing marketplace facilitator laws, requiring platforms like Amazon, Etsy, and eBay to collect and remit sales tax on behalf of their sellers. Meanwhile, the federal government grapples with providing consistent guidance on digital asset taxation, including cryptocurrencies and NFTs, creating a complex landscape where state and federal authorities must coordinate their approaches to avoid conflicting regulations and undue burdens on businesses.

The interplay between state tax credits and federal deductions also remains a crucial consideration for businesses and individuals alike. Many states offer various tax incentives for activities like research and development, job creation, or renewable energy investments, while the federal government provides its own set of deductions and credits. Understanding how these intersect and complement each other has become essential for effective tax planning and compliance.

Business Impact Today

For modern businesses, the Sixteenth Amendment’s legacy manifests in:

• Corporate tax structures
• International business taxation
• Investment income reporting requirements
• Cross-state business operations
• Federal tax compliance obligations

Looking Forward

As our economy continues to evolve with technological advancements and globalization, the Sixteenth Amendment’s broad grant of federal taxing power remains crucial in addressing new challenges:

• Taxation of digital services
• International tax cooperation
• Emerging financial instruments
• Virtual currency transactions
• Cross-border digital commerce

Understanding this constitutional foundation helps business owners and taxpayers better navigate today’s complex tax environment while appreciating how historical tax principles continue to shape modern fiscal policy.

Remember: While the amendment’s language may be from 1913, its implications continue to evolve with our changing economy, making it as relevant today as it was when first ratified.

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In this article, we’ll delve into why partnering with a Certified Public Accountant (CPA) is crucial for your law firm’s financial well-being. We’ll explore the specific ways CPAs can streamline your bookkeeping, optimize cash flow, and empower you to make informed financial decisions for your practice.

Beyond Bookkeeping: The Value of a CPA for Law Firms

While some law firms might rely on in-house bookkeepers for basic tasks, a CPA brings a whole new level of expertise to the table. Here’s how:

• Specialized Knowledge: Law firms operate in a complex financial landscape. CPAs possess a deep understanding of legal accounting principles, including trust accounting regulations, retainer agreements, and lawyer compensation structures. This specialized knowledge ensures your finances are handled accurately and compliantly.
• Streamlined Bookkeeping: Law firms often juggle multiple accounts – operating expenses, client trust accounts, and attorney compensation – which can lead to bookkeeping headaches. A CPA can implement efficient systems for recording transactions, reconciling accounts, and generating accurate financial reports. This frees up valuable time for your staff to focus on billable hours and client service.
• Enhanced Cash Flow Management: Law firms can experience unpredictable cash flow due to retainer agreements, billing cycles, and client payment delays. A CPA can analyze your financial data to identify cash flow trends and develop strategies for optimizing collections and managing expenses. This proactive approach ensures you have the liquidity needed to run your practice smoothly.
• Strategic Tax Planning: Tax implications are a constant consideration for law firms. A CPA can help you navigate complex tax laws, identify deductions and credits, and develop tax-saving strategies. This not only reduces your tax burden but also helps maximize your firm’s profitability.
• Financial Reporting and Analysis: Regular financial reporting is essential for monitoring the health of your law firm. CPAs can create customized reports that provide insights into profitability, partner compensation, and overhead costs. By analyzing these reports, you can make informed decisions about resource allocation, pricing strategies, and the overall direction of your firm.
• Risk Management and Internal Controls: Law firms are especially vulnerable to fraud and errors due to the handling of client funds. A CPA can help you implement strong internal controls, such as segregation of duties and regular account reconciliations. This minimizes financial risks and protects your firm’s reputation.
• Succession Planning and Business Valuation: Many law firms are structured as partnerships. A CPA can assist with succession planning by analyzing your financial situation and developing strategies for a smooth transition when partners retire or leave the firm. Additionally, CPAs can provide business valuations that are crucial for mergers, acquisitions, or buyouts.

Why Bookkeeping is Especially Crucial for Law Firms

Law firms have unique bookkeeping requirements compared to other businesses. Here’s why having a system in place is essential:

• Trust Accounting: Law firms are required to maintain separate trust accounts for client retainer funds. These accounts must be meticulously tracked and reported on to ensure compliance with ethical rules. A CPA can ensure your trust accounting procedures are accurate and meet all legal guidelines.
• Time Tracking and Billing: Accurately tracking billable hours and generating invoices is vital for law firm revenue. A CPA can help you establish efficient timekeeping systems and ensure your billing practices are compliant with ethical guidelines.
• Partner Compensation: Law firm partner compensation structures can be complex, often involving profit-sharing agreements. A CPA can help design a fair and transparent compensation system that aligns with your firm’s performance.

The Bottom Line: A CPA is an Investment in Your Law Firm’s Success

Partnering with a CPA is not just about bookkeeping; it’s about investing in the long-term financial health and growth of your law firm. By leveraging a CPA’s expertise, you can achieve:

• Increased Efficiency: Streamlined bookkeeping processes free up your staff to focus on billable work and client service.
• Improved Cash Flow Management: Proactive strategies ensure you have the resources needed to run your practice smoothly.
• Enhanced Profitability: Tax planning and cost-saving strategies maximize your bottom line.
• Reduced Risk: Strong internal controls minimize the risk of fraud and errors.
• Informed Decision Making: Data-driven insights empower you to make sound financial decisions for your firm’s future.

We understand the specific needs of law firms. We offer a personalized approach, working closely with you to develop a customized accounting plan that supports your firm’s unique goals and growth strategies. Contact us today for a consultation and let us show you how we can be your trusted financial partner on the road to success.

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Unconscionable Contracts Explained

An unconscionable contract is a fancy legal term for an agreement so one-sided that no reasonable person would ever agree to it. Think high-pressure sales tactics targeting vulnerable people, or a contract with terms so tilted in your favor it looks suspicious.

Here’s what makes a contract potentially unconscionable:

• Extreme unfairness: The contract heavily favors one party, often due to unequal bargaining power. Imagine a small business owner pressured into signing a contract with ridiculous terms by a much larger corporation.
• Unequal footing: One party might be in a weaker position due to things like financial hardship, limited knowledge, or mental incapacity.

Courts Decide, Not Juries:

Unlike most lawsuits, a judge, not a jury, decides if a contract is unconscionable. They’ll consider several factors, including:

• Market Value: A huge difference between your price and the fair market value of the goods or services raises red flags.
• Circumstances: The judge might consider the buyer’s situation (financial, mental state) when evaluating fairness.

The Jones v. Star Credit Corporation Case: A Real-World Example

In 1969, a couple (the Joneses) bought a freezer for $300 but ended up financing it for a staggering $1,234.80! The judge ruled the contract unconscionable due to the massive price difference, highlighting the importance of fair market value.

The Takeaway for Business Owners:

Understanding unconscionable contracts protects you from bad actors trying to exploit loopholes. Here’s how to safeguard your business:

• Clear & Fair Contracts: Use well-written, balanced contracts that clearly outline terms and pricing.
• Transparency is Key: Be upfront about pricing and avoid misleading sales tactics.

By taking these steps, you can build strong client relationships based on trust and avoid the headache of potential lawsuits. Remember, a little legal knowledge can go a long way in protecting your business!

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Law firms present a unique set of challenges that a regular CPA might not fully grasp. That’s why having an accountant who specializes in the legal world is a unique advantage for your practice, here’s why:

1. We Understand the Legal Landscape:

Law firms operate differently from other businesses. We deal with complex trust accounts, retainer agreements, and unpredictable revenue streams. A regular accountant might be unfamiliar with these nuances, leading to inaccurate bookkeeping or missed opportunities for tax optimization specific to the legal industry.

2. Financial Data Management – Your Secret Weapon:

Lawyers are brilliant legal minds, but finance might not be their forte. We take care of the tedious tasks like data entry, bill payments, and payroll processing, freeing up your valuable time to focus on what matters most – winning cases and serving your clients. We also implement robust financial reporting systems, providing you with real-time insights into your firm’s financial health.

3. Smarter Financial Planning for Informed Decisions:

Beyond basic bookkeeping, we analyze your firm’s financial trends. We can identify areas where you’re losing money or missing out on potential revenue. This objective data helps you make informed decisions about resource allocation. For example, based on historical data, we can advise you on which types of cases are most profitable and help you strategically plan your caseload.

4. Tax Filing Made Easy (Well, Easier):

Tax season doesn’t have to be a nightmare. We understand the intricacies of tax laws specific to law firms, ensuring you claim all eligible deductions and credits. We’ll handle complex tax filings like partnership returns and ensure you stay compliant with the IRS.

5. Managing Outside Parties – A Balancing Act:

Law firms often work with a network of external vendors like expert witnesses, paralegals, and investigators. We streamline the process of managing payments to these entities, ensuring timely invoices and accurate record-keeping.

6. Payroll Processing – A Smooth Operation:

Payroll shouldn’t be a source of stress for your firm. We handle payroll processing, tax withholdings, and employee benefits administration, ensuring your employees are paid accurately and on time.

7. Choosing the Right Tools – Technology for Efficiency:

The right accounting software can significantly increase your firm’s efficiency. We understand the specific needs of law firms and can recommend the best accounting software and cloud-based solutions to streamline your financial operations and improve data accessibility.

8. Streamlined Invoicing and Chasing Payments:

Accurate and timely invoicing is crucial for any business, but especially for law firms. We can implement a robust invoicing system that ensures timely billings and clear communication with clients. Additionally, we can provide strategies for effectively collecting outstanding client fees, minimizing bad debt and improving your cash flow.

9. Reconciliation – Finding Every Penny:

Reconciling bank statements and client trust accounts can be a tedious task. We ensure all your financial records are accurate and up-to-date, even with clients who may be slow to respond to reconciliation requests.

10. Partnering Through Challenges:

Let’s be honest, sometimes clients refuse to pay their bills. We can help you navigate these challenging situations, offering strategies for collecting overdue fees and protecting your firm’s financial interests. We also work with you to develop contingency plans for unforeseen events that might impact your cash flow.

Beyond the Numbers – A Trusted Advisor:

A specialized law firm accountant is more than just a number cruncher; we become trusted advisors for your legal practice. We understand your unique goals and challenges, providing expert financial guidance that empowers you to make strategic business decisions. We’ll work alongside you to ensure your firm achieves long-term financial stability and positions itself for growth.

So, if you’re a lawyer bogged down by the burden of financial management, consider partnering with an accountant who speaks your language – one who understands the intricacies of the legal world and can help your firm thrive. Remember, investing in specialized accounting services is an investment in your firm’s future success.

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Mobile Collaboration Tools

With many law practices including remote services, it’s becoming imperative for team members collaborate in real-time, especially if they are in different locations. Moreover, access should also be available even if the device is not the one “normally” used to obtain the information. Using the computer in the hotel lobby should not be a barrier to teamwork. 

Several benefits to mobile collaboration tools are:

• Shared Backup and Storage
• Virtual Conferencing (Zoom, Google Meets, etc.)
• Shared Documents (Google Drive, Dropbox, etc.)

While many software products offer free versions that are perfect for small firms just getting started, as the practice grows investing in a business or corporate option will provide greater benefits and flexibility. 

Accounting and HR Functions

As the firm grows and/or adds different locations accounting and human resource departments cease to be in the same facility as the rest of the staff. This can cause major confusion when it comes to dealing with the billing of clients and paying of the staff. 

Integrating Quickbooks software can improve the functionality of both departments. One of the best attributes of the program is improved billing. The software makes it easy to set client-specific rates, import transactions from bank statements, generate reports, and more. Imagine being able to pull up the profit and loss report without having had to spend hours wrangling with the numbers. Not to mention being able to pinpoint where improvements to the practice’s cash flow can be made.

As for HR concerns, Becky might hire the staff, but Suzanne has to make sure they get paid. No one sits behind a stack of timesheets to calculate the payroll anymore. Moreover, the old ways of making adjustments for each individual employee were time-consuming. Simply inputting the information necessary for each member of staff will keep the payroll on track and keep the office compliant with federal regulations. 

Several benefits of Quickbooks include:

• Simplified Payroll (paper or direct deposit, deductions, ect.)
• Reduced Accounting and Payroll Expenses
• Scalable Solutions

Understanding how updating the technology of a law practice can be intimidating at first. However, there are ways to get around misunderstanding and ensure that the entire team is fully integrated into the new processes. Overall, not improving the technology means losing time and money; two things no business can afford to lose too much of.

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As if the existing complexity of 1031 were insufficient, it turns out that there are variations on the standard like-kind exchange which taxpayers may choose to conduct. One of these variations is known as a “reverse exchange.” Given the advantages which this variation can confer in certain contexts, reverse exchanges have become increasingly common. Let’s look more closely at the mechanics of reverse exchanges and then discuss some of the unique benefits of this type of transaction.

Basic Mechanics

In a standard – or “delayed” – exchange, the original property owned by the taxpayer is disposed of prior to the acquisition of the replacement property. In a reverse exchange, the order is flipped, and the replacement property is acquired first and the original property (the “relinquished property”) is sold subsequent to the acquisition of the replacement property. Superficially, this process seems simple, but other aspects of this variation make it considerably more complicated than a standard exchange.

Under current tax law, taxpayers are not permitted to simultaneously hold title to both the relinquished property and the replacement property. This makes intuitive sense, because simultaneous ownership of both properties would conflict with the basic exchange concept. In order to solve this problem, the entity facilitating the exchange for the taxpayer – referred to as the “qualified intermediary” – develops a separate corporate entity which exists solely to temporarily hold title to the replacement property prior to the disposition of the relinquished property. In 1031 nomenclature, the replacement property is “parked” in the entity and then title to the replacement property is transferred to the taxpayer after the relinquished property is sold. This parking arrangement has been approved by the IRS; in fact, the IRS has issued specific guidelines regarding the mechanics of these transactions.

Reverse exchanges also require more documentation and preparatory work compared to standard exchanges. The fees for these transactions are typically much higher given the additional complexity involved.

Unique Benefits

Reverse exchanges carry unique benefits for investors. Perhaps the most important of these benefits is the timing of the acquisition of the replacement property. The impetus for a reverse exchange usually relates to the desirability of the replacement property; the investor needs to close on the replacement property immediately, or else face the possibility of either losing it to another investor or receiving inferior financing. In some cases, investors know exactly which replacement property they want to acquire and simply haven’t arranged a buyer for their replacement property; but in many other cases, reverse exchanges are a response to market trends.

Another key benefit of reverse exchanges is the effective elimination of the identification requirement. In standard exchanges, replacement property ordinarily must be identified within 45 days after the closing of the relinquished property; reverse exchanges solve this issue from the outset because the replacement property is acquired first. Though it may seem like an easy enough rule to comply with, more than a few exchanges have failed simply because the investor could not properly identify a new property within the specific time window.

There’s much, much more to reverse exchanges, but this serves as a good introduction. In the future, we will go over the structure of reverse exchanges in greater detail and discuss further why they are uniquely beneficial for investors in many cases.

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In recent installments, we have discussed some of the legal and political issues surrounding the income tax. Upon reviewing these installments, there can be little doubt that the history of taxation in these United States is quite complex. Though the Congress has always had a power to tax, the precise scope of its taxing power has evolved in tandem with various social, economic and military events. The taxing power of the Congress was clarified a great deal by the sixteenth amendment – by way of this amendment, the Congress gained the power to tax income “from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

Before the sixteenth amendment, the Congress was limited in its ability to lay and collect “direct” taxes. Article 1, Section 2, Clause 3 of the U.S. Constitution states that direct taxes must be apportioned among the states according to their respective numbers; the rationale of this provision was to ensure that no state was disproportionately – and therefore unfairly – burdened by an oppressive tax system.

Every type of tax can be classified as being either a direct or indirect tax. Broadly speaking, a direct tax is one paid by the individual (or business entity) to the government; it is aimed specifically at the person who is paying the tax. By contrast, an indirect tax is one levied upon a transaction, it is not targeted to a specific individual. Sales tax, use tax and value added tax are all examples of indirect taxes. Historically, U.S. tax law regarded tax on labor (or wages) as an indirect tax.

Prior to the opinion made in Pollock v. Farmers’ Loan & Trust Co. (1895), tax on income derived from property (i.e. from real estate, stocks, bonds, etc.) was not considered a direct tax. The Pollock case overturned this consideration and ruled that such a tax was a type of direct tax and that therefore the income tax provision of the Wilson-Gorman act was unconstitutional. In effect, the Pollock decision made it essentially impossible for the government to impose a federal income tax without a constitutional amendment. The sixteenth amendment, which was ratified in 1913, was a direct response to the Pollock ruling: the politicians in the Congress came to understand the full implications of Pollock and so the sixteenth amendment simply did away with the longstanding requirements concerning direct taxes.

When viewed in proper historical context, the sixteenth amendment was a political act of truly monumental significance. Through this act, the dichotomy of direct and indirect taxes – a dichotomy which had shaped our system of taxation throughout our nation’s entire history – was suddenly made to have no meaning at all. Immediately subsequent to this act, the Revenue Act of 1913 was passed, and the progressive income tax system which we have come to know so well was implemented.

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Cost basis is a tax concept which is used for determining the true amount which has either been gained or lost from the sale of a given commodity. When you sell property, basis is used to compute the correct amount of tax which is owed from the sale. Though cost basis is a relatively simple concept, it can be a bit difficult to apply in some situations. In this essay we will discuss the fundaments of the concept and explain why it can be a bit trickier than it may seem upon first glance.

Simple Definition

The IRS provides a simple definition of cost basis on its 551 publication: “Basis is the amount of your investment in property for tax purposes. Use the basis of property to figure depreciation, amortization, depletion and casualty losses. Also use it to figure gain or loss on the sale or other disposition of property. … The basis of property you buy is usually its cost.”

Thus, in its simplest form, cost basis is the purchase price of your property. In the real world, however, cost basis is more subtle as the value of property tends to change over time; also, not all property is acquired through sale, and in cases where it is not acquired through sale computing cost basis is less straightforward.

Practical Definition

If a person buys an item — say a piece of furniture, such as a sofa — for $100, then $100 is the cost basis of the item (the sofa) at the outset. If the person decides to sell the sofa at a later date for $100, and the sofa has retained its original value of $100, then no tax is owed because no profit was realized. However, if the person managed to sell the sofa for $150, then a capital gain has been realized and therefore a tax is due (on the $50 of profit).

In other words, cost basis is a mechanism which is intended to offset one’s investment in property so that an individual is not unfairly taxed. If an individual were taxed for a sale even when no profit was realized, the commercial world would literally be turned topsy-turvy.

However, as mentioned previously, the computation of cost basis is not always straightforward. Seldom does the value of property remain fixed; in many cases the value fluctuates over time as the market goes up and down. An asset’s basis can decrease or increase depending on the way its value fluctuates over the course of its life. If an asset either improves or declines in value it acquires an adjusted basis which is then used to compute the correct amount realized from its sale.

Manner of Acquisition

When property is not acquired through a traditional sale the determination of its cost basis is more involved. For instance, when property is acquired through inheritance, the cost basis of the property is its fair market value at the time of the decedent’s death. And when property is transferred by gift or trust, the cost basis can either be directly carried over from the donor (i.e. transferred basis or carryover basis) or it can be the fair market value of the property. Hence, these other means of acquiring assets add complexity to the determination of cost basis.

Final Thoughts

Basis is a foundational concept in U.S. tax law as it is used constantly to determine the true amount owed from sales. Although it is simple to understand in its most basic applications, it can be a bit subtle depending on the particular circumstances. We will explore this interesting concept in greater depth in a later post.

Cost basis is particularly relevant for owners of real estate. Readers who own real estate should consider viewing the following presentation on the tax issues of real estate ownership

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EB-5 investors are foreign investors who have chosen to take part in the EB-5 visa program. The EB-5 visa was initially created as part of the Immigration Act of 1990. The EB-5 visa program created an incentive for foreign nationals to invest money in the United States: after investing a significant quantity of money (minimum of $500,000), the foreign investor would receive conditional permanent residency status. The goals of the EB-5 program were to stimulate economic development and promote domestic job creation.

Since 1990 there have been numerous changes to the program. These changes were made so as to encourage more EB-5 applicants and promote more investment in the U.S. economy.

Washington State and EB-5 Investment

Since its inception, a number of areas within the U.S. have benefitted disproportionately from the EB-5 visa program. The state of Washington plays a major role in attracting EB-5 investors. In point of fact, Seattle-based firms have recruited more than 10% of the total number of EB-5 investors who have been approved for green cards. When put in perspective, this figure is truly spectacular.

Foreign investors have funded many significant projects in the Seattle area and have played a major role in promoting the general health of the Seattle economy.

Tax Implications

Because of their unique situation, EB-5 investors have a particular set of tax issues which they need to address. Once they obtain conditional permanent residency, EB-5 investors are subject to federal income tax on their worldwide income; they are liable for other types of taxes as well, such as estate, gift and capital gains taxes. Given their relatively complicated tax situation, it is always important for EB-5 investors to seek out a qualified tax professional so that they can develop an optimal tax strategy.

Huddleston Tax CPAs has a history of assisting EB-5 investors and is conversant with their particular concerns and needs.

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Check out this video to learn more

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