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BHBM Tax Law Alert | “Accredited Investor” Definition + SALT Workaround

Posted on by Baldwin, Haspel, Burke & Mayer


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SEC Expands the Definition of “Accredited Investor”

The SEC recently issued a final rule (Release No. 33-10824) that made changes to the definition of “accredited investor,” which will allow additional individuals and entities to invest in private offerings. Previously, an individual was required to have an annual income of at least $200,000, joint income of $300,000, or have a net worth exceeding $1,000,000 (excluding primary residences) in order to qualify as an accredited investor.

The revised definition in Rule 501, Regulation D under the Securities Act of 1933 allows individuals with professional knowledge, experience or certification to qualify under the definition of “accredited investor.” Specifically, individuals that hold a Series 7, 65, or 82 license will qualify to participate in private offerings. In addition, the revised definition includes individuals who are “knowledgeable employees” with respect to investments in a private fund and adds the term “spousal equivalent” so that such individuals may pool their finances for the purpose of qualifying as accredited investors.

The SEC also made changes to certain entities and institutions that may qualify as accredited investors. The list of entities that now qualify includes:

  • Limited liability companies with $5 million in assets and rural business investment companies (RBICs);
  • Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries that own investments of more than $5 million; and
  • “Family offices” with at least $5 million in assets under management and their “family clients.”

The final rule becomes effective 60 days after publication in the Federal Register.

SALT Cap Pass-Through Workaround Remains Following IRS Rules

In 2017, the Tax Cuts and Jobs Act (the “TCJA”) limited the federal income tax deduction for taxpayers’ state and local tax payments to $10,000 (the “SALT Cap”). Numerous states have passed legislation to enable a workaround whereby taxpayer payments could potentially be converted from state and local tax payments to charitable contributions.

The IRS recently issued final regulations (the “Regulations“) on the treatment of payments made to charitable organizations in return for consideration, including in return for state and local tax credits. The Regulations: (1) provide safe harbors under IRC §162 affecting the treatment of payments that businesses make to entities described in IRC §170(c); (2) provide a safe harbor under IRC §164 for payments to entities described in IRC §170(c) by individuals who itemize deductions and receive, or expect to receive, a state or local tax credit in return; and (3) update the regulations under IRC §170 to address how the quid pro quo principle applies to donors who receive benefits from a third-party in exchange for contributions.

However, perhaps most notably, the Regulations do not address a strategy enacted by Louisiana and other states that allows owners of pass-through entities to mitigate the impact of the SALT Cap by paying income tax at the entity level instead of on their personal taxes. In 2019, the Louisiana Legislature passed SB 223, which provides an election for entities taxed as S corporations and partnerships for federal income tax purposes to be taxed at the entity level for Louisiana income tax purposes, rather than at the individual shareholder/member level.

By shifting the state income tax burden of pass-through entities to the entity level and away from the owners, SB 223 prevents pass-through owners from being hindered by the SALT Cap. Please note that once made, the election is permanent until the Louisiana Department of Revenue terminates the election due to a material change in circumstances, such as a significant change in federal tax law.

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The information contained within this newsletter does not constitute legal advice and is not intended to create an attorney-client relationship. You should consult an attorney for individual advice regarding your own particular situation.



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