Maximizing the Value of your Carried Interest

After the passage of the 2017 Tax Cuts and Jobs Act (ACT), many people are wondering how to maximize the value of their carried interest. There are some changes in the ACT that might affect how you proceed when selling or transferring your carried interest to achieve long-term capital gain treatment. These rules apply to taxable years ending after December 31, 2017.

Perhaps you’ve heard of the new three-year holding rule but you’re not sure if it applies to you.

Distributions and gains passed thru to you because of your carried interest
To receive long term capital gain rates (20%) on gains or distributions associated with your carried interest from the fund, the underlying investment at the fund level must be held for more than three years.

Sale or redemption of your Carried interest
If you decide to redeem or sell a portion or all your carried interest, your interest must be held for more than three years to get the long-term capital gain rate treatment.

Additional guidance from the IRS is needed to see if the underlying investments at the fund level must also be considered when you sell or redeem your interest.

Planning Point: The good news is that if stock is distributed to you and it has not yet met the three-year requirement, you can use the fund’s purchase date of the stock and hold on to it until it satisfies the three-year requirement to achieve long-term capital gain rates.


Prior to the ACT, when you gifted your carried interest to a non-charity, typically your accountant would inform you that you may incur some gift taxes or if the proper structure was in place, no gift taxes at all.

Now, with the passages of the new ACT, you may get a call from your accountant asking you to not only pay gift taxes, but income taxes as well.

What? Income taxes? Yes.

Now, when you sell, transfer or gift your carried interest to a person related to you, you may recognize a short-term capital gain.

How much? Well, it’s complicated. That’s tax simplification.

Who is this person related to you? Well, that’s changed too. Now it includes not only your relatives but your colleagues, vendors and current or former employees.

Planning Points: Make sure that you talk to your tax advisor before making the transfer. Try to do the transfer on January 1 or December 31 when the fund can value the fund assets.


These rules apply to individuals, trusts and estates, but not corporations.

Planning Point: It may be possible to hold the carried interest in an S Corporation and avoid these rules.


The ACT only applies to partnership interest (which may include limited liability companies) that hold entities that raise or return capital from investors (VC’s, PE’s and hedge fund managers), investing in, disposing of, or developing securities, commodities, cash options or derivatives, (investment fund managers) and real estate held for rental or investment.

Entities not subject to the ACT

Farmers that hold land in which they actively farm are not subject to these new rules.
Additionally, these rules generally should not apply to “profit interest,” granted to service providers who are employed by a related but separate entity (e.g. a management company).

The rules also do not apply to gains attributable to any asset not held for portfolio investment on behalf of third-party investors. We will have to wait for more guidance for this definition.

There are still many unanswered questions regarding these new rules, with hopefully more guidance coming from the IRS and Congress. Practically speaking, if you’re involved in investments, and hold the assets for more than three years, then these new rules will not have much impact. Furthermore, California has not adopted these rules.

However, there are still numerous traps for the unwary. At GROCO, we assist high net worth clients and their families with wealth creation, family transfers, taxes and charitable giving. Please give me a call at 510-797-8661 if you need assistance or have questions on these new rules or would like to know how to make, keep and/or transfer your wealth.

Apple Gives in to UK Demands, Agrees to Pay Huge Tax Bill

The ongoing battle between Apple and the UK over unpaid taxes appears to finally be coming to a head. The tech giant announced recently that it has agreed to pay the UK £137 million ($185 million) in extra taxes.  Part of the payment will help cover interest that has been adding up since 2015.

Apple, which operates two main subsidiaries in the UK, said it understands the importance of paying taxes and that it does “pay all that we owe according to tax laws and local customs in the countries where we operate.” Apple also stated that as the largest taxpayer in the world it is regularly audited and this payment represents the settlement it reached with HM Revenue and Customs, the UK tax body.

According to the company the payment helps cover the corporate income tax from previous years that occurred because of increased business in the UK. While $185 million might not seem like much for a company that’s worth 100’s of billions of dollars, it is significant given the fact Apple has always proclaimed to pay all of its taxes.

The company says it is the largest taxpayer in the world after shelling out $35 billion in corporate taxes over the last three years. It also claims to have an effective tax rate of 21 percent on its foreign earnings. This is the second time in recent months that Apple has agreed to pay back taxes in Europe. In December, the company agreed to pay Ireland $15.4 billion in overdue taxes.
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How Californians Can Protect Their Home From Crime & Reduce Their Home Insurance Costs

By. Cassandra June

From theft, burglary, arson and vandalism, the types of property crime homeowners need to protect their homes from is a worrying list of felonies. 2016 saw property crime in California creep above 1 million instances; a scary and shocking statistic for anyone who owns a home. Finding yourself the victim of a crime is a scary and difficult time where finding ways to stay positive can be difficult, but knowing that you’ve taken steps to protect your home by holding a home insurance policy is a relief for many.

Home insurance

One of the first things any homeowner should do when they purchase a property is obtain home insurance. While it can be costly, there are ways to save on your home insurance, and it’s a brilliant product to utilize, should your property be involved in a crime.

If your property is damaged following a crime, your insurer will arrange for repairs and replacement of household goods to ensure that you and your family aren’t at a loss. Although, some items are invaluable and can’t simply be replaced, home insurance does provide you with the reassurance that generic items, such as televisions and laptops, will be replaced should a thief steal these.

Secure windows and doors

Leaving doors and windows open or unlocked makes your home an easy target to thieves. Therefore, it’s important that you remember to close and lock them when you leave your home – even if you’re only popping to the shop and back. Additional locks for windows can be installed in addition to existing locks. Whilst, door chains can provide additional security too. Other ways to maximize the security of your windows and doors is to install window bars, sensors and reinforced glass. Aside from ensuring your home is protected from criminals, making your windows and doors extra secure can also result in lower home insurance costs.

Alarm system

Installing an alarm system and CCTV can reduce the cost of your home insurance premium and deter criminals from selecting your home as the one to burgle or vandalize. Insurers will offer you a lower premium as alarms are a great way of reducing damages, so be sure to purchase a good quality, dependable alarm.

Home insurance is a remarkable product which many Californians are already benefiting from. However, by ensuring your home has top-class security features, you can be sure of a safer home and lower home insurance costs.


Best and Worst Tax States for Businesses

Where is the best place to call home? That all depends on the criteria you’re using to judge. So what if you’re looking to start a business or move your business and you want to find a tax-friendly location for your business? It turns out that where you locate your company can have significant implications.
According to the Tax Foundation, these are the 10 states with best tax climate when it comes to corporate or business taxes.
1. Wyoming
2. South Dakota
3. Alaska
4. Florida
5. Nevada
6. Montana
7. New Hampshire
8. Utah
9. Indiana
10. Oregon
So what makes these 10 states so tax-friendly? In most cases it’s the lack of a major tax. For example, all of these states forgo one or more of the following taxes: individual income tax, the corporate tax, or the sales tax.
On the other hand, these are the 10 worst states for the business tax climate.
41. Rhode Island
42. Louisiana
43. Maryland
44. Connecticut
45. Ohio
46. Minnesota
47. Vermont
48. California
49. New York
50. New Jersey
These states share several tax traits, including having non-neutral, complex taxes with high rates, including property taxes and high individual income taxes. The Tax Foundation also ranked New Jersey 36th in unemployment insurance tax, 42nd in corporate business taxes, 46th in sales taxes, 48th in individual income taxes and
dead last in property taxes.
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Will New Tax Plan Hurt California Home Owners?

While it still remains to be seen if the new tax proposal from House republicans ever gets through the Senate and reaches the president, many taxpayers are still concerned about the consequences. One of the largest groups in this category is homeowners in California, not to mention builders and realtors, as well.

So what’s the reason for the concern? There are actually several. For starters, the House bill would hurt any taxpayer that itemizes his or her deductions and uses the mortgage interest deduction. That’s because that deduction is now in question under the new proposal. The threshold would be reduced from $1.1 million to $500,000.

The bill would also completely eliminate this deduction for vacation homes, while the Senate bill would actually keep it. And lastly, while the House would cap the property tax deduction at $10,000, the Senate proposal would completely cut it.

Because California has such high-priced housing already, these limits and changes would hurt many residents even more. “In a high-priced state where we’ve already got a shortage of homes for sale, this simply traps people in their homes longer,” said Steve White, a Studio City broker who is president of the state Realtors association. Fewer people will move and that will just exacerbate the home shortage.

This is sure to be a hot-button topic for lawmakers as they continue trying to move this bill through. However, many California residents are already pushing their congressman to vote against it.

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Personal Details You Should Never Share at Work

Have you ever been around a person that feels like he or she needs to tell you everything about his or herself? You know, the kind of person that reveals way too much information. We all have many sides to our lives and our personalities. Sharing those things with our family members or closest friends might be OK, but revealing some of those things at work can do a lot of damage.

So what kinds of things should you avoid bringing up while you’re at work?

Politics – you’re almost always better off checking your political views at the door. Politics play such a big part of peoples’ lives and sharing your beliefs could end up damaging work relationships with others who don’t feel the same way.

Negative feelings towards co-workers – no matter where you work, you will always have coworkers that just don’t cut it. It’s inevitable. However, no matter how incompetent someone is, you should not share your feelings about him or her with others. This will likely cause your coworkers to have negative feelings towards you.

Discontent with your job – if you hate your job, keep it to yourself. This is another complaint that will cause your coworkers to feel negatively about you. It will also bring down company morale. You shouldn’t reveal that you’re looking for another job either. This could get you fired very quickly.

Your wild past – people like to brag about how wild they used to be and all the crazy things they used to do. Perhaps that’s ok for a night out on the town, but ultimately, it will lead coworkers to doubt you and your ability to be responsible and make good choices.

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Treasury Secretary Claims Only Millionaires Will See Higher Taxes

Now that the House has released its tax reform bill and passed it, the ongoing war of words is really ramping up. Of course, opposing sides both have a lot to say regarding how the bill will affect taxpayers, including which taxpayers it will benefit and which ones it will hurt. That’s a debate that won’t be settled until the bill actually passes, if it ever does.

Recently, Treasury Secretary Steve Mnuchin, claimed that the purpose of the bill is to make simplify things for taxpayers. He also said that the only taxpayers that will see an increase in their tax bill would be those that make a million dollars or more. The plan is already being met with opposition from high-tax states like California and New York, which would really get pinched by the loss of the state and local tax deduction.

Others are calling the tax bill a tax hike for the middle class. And several studies have already come out against Mnuchin’s claims. For one, the Tax Policy Center stated that most of the benefits would accrue to the top 1 percent by 2025. The Center said that would mean upper-middle-class taxpayers would see an increase and the middle and lower class would see minimal benefits.

This is yet another arguing point between both sides of the issue, the result of which remains to be seen. Mnuchin said he believes the bill will reach the president before Christmas.

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Seattle’s High-Earner Tax Facing Opposition in Court

There are only seven states in the U.S. that don’t charge income tax, and Washington State is one of them. However, that all changed earlier this year, for some taxpayers in the state, when lawmakers in Seattle created what amounts to being an income tax on the wealthy.

Those who favor the tax say it’s necessary in order to help fund many of the city’s livability issues, such as public transportation, and affordable housing.The new law only applies to individual who make more than $250,000 a year and to couples that make more than $500,000 a year. The 2.25 percent tax also only applies to the portion of their income over those amounts. So far, the city is not collecting the tax even though it has been approved.

Those who oppose the law have taken matters into their own hands by taking the city to court. By approving the tax, Seattle went against a state Supreme Court precedent from the 1930’s, when the government amended the state Constitution to include an extremely wide definition of property.

Rob McKenna, who is representing the plaintiffs in the lawsuit, says there is “another clause in the state Constitution, which mandates all property be taxed the same.” Therefore, all income should be taxed uniformly. Thus, because state law doesnot allow an income tax, cities are not allowed to impose one.

And so far, the court agrees. A King County Superior Court ruled last week that the tax is illegal. However, the battle is not over. The city has already said it plans to appeal the decision to the state Supreme Court, where the matter was expected to end up all along.

What Does it Mean to be a Leader in the Age of A.I.? -Part 1

By Steven Singer CPA, Partner at GROCO, 510-797-8661

With the advent of artificial intelligence (A.I.) and machine learning, it’s time to re-evaluate how we hire, train and lead our employees.

The ability to do a job faster or cheaper will no longer be what sets an organization apart from its competitors, but rather the ability of organizations and its human component to critically and strategically think for the organization and its customers.

With improved critical thinking, machine learning and A.I., an organization will be able to move faster and more effectively than its competitors making it both more interesting and challenging for its human workforce and valuable to its customers.

In an A.I. environment, co-workers will be expected by its customers and the organization to work in teams, improve communication with customers, come up with original thoughts and strategies, explain how A.I. came to its conclusions and implement their strategies. Objectives of the organization and its customers probably will not change (e.g. enhanced customer and trusted relationships, bottom and top line growth). However, the way the organization uses its human components will change dramatically.

What does it mean to critically think? According to the Foundation for Critically you and your co-workers should be able to:

  • Raise vital questions and problems, formulating them clearly and precisely
  • Gather and assess relevant information, using abstract ideas to interpret it effectively
  • Come to well-reasoned conclusions and solutions, testing them against relevant criteria and standards
  • Thinking open-mindedly within alternative systems of thought, recognizing and assessing, as needs to be, their assumptions, implications, and practical consequences
  • Communicate effectively with others (in teams) in figuring out complex solutions

How to go about implementing and dealing with co-workers who are unfamiliar or unable to cope with the new paradigm?

  • Link their compensation and future to these management objectives so they realize the importance of these new organizational directives.
  • Identify your stars who understand and employ “critical thinking” methods and encourage them to lead by giving them authority and autonomy to do so.
  • Recognize, embrace and communicate this as a cultural shift that will enhance the well- being and livelihood of everyone involved.
  • Be prepared to promote team members that exhibit these skills and counsel out those who can’t adopt.
  • Prioritize these skill sets as a core competency of new hires.
  • Make it as a top goal for your organization
  • Hire the right professionals

Stay tuned for part two!

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Decision Making in Your Family Business: A Guide for Owners

Group decision making is a topic that has spawned many academic studies, books, and white papers.  It is never easy to get a group of human beings to make a decision together.  It’s hard enough for a single individual to make a decision!  Add to the mix more people with their cultural differences, values, needs, desires, positioning, and familial relationships and you’ve got a natural recipe for deadlock.  We are often asked what the best way is for families to make important decisions together.  To answer this, let’s consider some of the overarching goals and pitfalls to avoid when making any major decisions together:


  • Preserve Familial Relationships
  • Build Cohesion
  • Freedom from political warfare
  • Avoid outside intervention in decision making


  • Conflicts and tensions/destruction of family
  • Legal challenges/frustrated family members
  • Marriage Conflict
  • Feeling marginalized with “nothing to lose” thinking
  • Battles and defections

Academia has given us a multitude of models for decision making in organizations and families.  Here are six decision making styles frequently used in family businesses.

  1. Autocratic. The family leader decides unilaterally and announces the decision to everyone else.
  2. Consult. The decision is almost made, but the leader seeks reactions from others before announcing the final decision.
  3. Recommend. The leader solicits input from everyone else before deciding.
  4. Majority. Majority vote with leader having one vote and no veto power.
  5. Consensus. Everyone reaches agreement after discussion.
  6. Delegation. The decision making is delegated to someone with clear parameters of freedom.

Most people, when asked, will say that majority rule is the most fair and proper way to make decisions. Americans naturally believe that our democracy is superior to any other political system ever devised so why not use it in our family? Yet consider how you’d feel after a presidential election if your candidate didn’t win. You’re likely to experience a range of emotions ranging from mildly annoyed to furious.
Now, imagine you’re in the minority in a family or family business decision that affects you on a deeply personal level. What if a decision you strongly disagreed with was forced down your throat against your will? How well would that work in a family setting? Are you starting to see the problem with autocratic and majority decision making styles? Some people or groups of people are inevitably going to be disappointed.

Experience has shown that the best way to make decisions in families is to choose Style #5: Consensus. “What?!”you might be thinking. “How can anyone get anything done? I could never get my family to agree on what to have for dinner,let alone the direction of our business.”Without a doubt, building consensus in a family takes a lot of time, effort, and requires patience and good communication skills, but it’s very much worth the effort!

Consensus is the only one of the five decision making styles that simultaneously builds unity, maintains unity, requires unity, and creates a family of listeners and collaborators.

Nordstrom is a well-known family business that has achieved tremendous success through the use of a consensus style of decision making. For the last 69 years they have had co-presidents, a leadership method that requires unanimous decisions in order to move forward. Given Nordstrom’s history of success and strong brand, that’s quite a recommendation for the consensus style, don’t you think?

‘Who should get a voice in family decision making?
Here are some recommended qualifications to consider when deciding if a family member is ready to be included in major family business decisions:
• Are they emotionally mature?
• Do they contribute to the process?
• Are they flexible?
• Are they informed?
• Are they prepared?
• Are they trusting and trustworthy?
• Are they able to put needs of the group ahead of needs of self?

As you can see, armed with the right tools and the right attitude, family decision making does not need to be contentious. To the contrary, it can be
something that unifies your family while it facilitates decisions that increase the long-term success of the family and its enterprises.