Gyrodyne is
not
subject to an entity level income tax but rather is treated as a partnership for tax purposes, with its items of income, gain, deduction, loss and credit being reported on the Company
’s information return, on Form
1065,
and allocated annually on Schedule K-
1
to its members pro rata. Flowerfield Properties Inc. (“FPI”) is a wholly owned subsidiary of the Company. FPI is a “C” corporation. Any income generated by FPI is subject to a corporate level tax, therefore FPI files separate federal and state income tax returns. The only asset owned by FPI is the investment in The Grove.
Prior to
January 1, 2018,
when the IRS audits a partnership tax return, the IRS generally determines tax adjustments at the partnership level, but is required to collect any additional taxes, interest and penalties from each of the partners.
The Bipartisan Budget Act of
2015
(the
“2015
Act”) changed this procedure for partnership tax audits and audit adjustments for partnership returns of large partnerships for fiscal years beginning after
December 31, 2017.
Pursuant to the
2015
Act, if any audit by the IRS of our income tax returns for any fiscal year beginning after
December 31, 2017
results in any adjustments, the IRS
may
collect any resulting taxes, including any applicable penalties and interest, directly from Gyrodyne. IRS tax audit assessments on tax years beginning
January 1, 2018
will require Gyrodyne to bear any tax liability resulting from such audit, as opposed to passing it through to our shareholders, unless we elect to push out the tax audit adjustments to our shareholders once it has been calculated at the company level.
Tax legislation signed into law on
December 22, 2017,
makes numerous changes to the tax rules. For example, the top federal income tax rate for individuals is reduced to
37%,
there is a new deduction available for certain Qualified Business Income, that reduces the top effective tax rate applicable to ordinary dividends from REITs to
29.6%
(through a
20%
deduction for ordinary REIT dividends received) and various deductions are eliminated or limited. Most of the changes applicable to individuals are temporary. There are only minor changes to the REIT rules (other than the
20%
deduction applicable to individuals for ordinary REIT dividends received). To date, the Internal Revenue Service has issued only limited guidance on the changes made by the new legislation. It is unclear at this time whether Congress will address these issues or when the Internal Revenue Service will issue additional administrative guidance on the changes made by the new legislation.
As of
December 31, 2017
and
2016,
Statements of Net Assets include federal and state tax current receivables of
$12,544
and
$32,293,
respectively. As of
December 31, 2017
and
2016,
the Statements of Net Assets also include potential net operating loss carryback benefit, from its investment in the Grove, of
$73,085
and
$85,000,
respectively.
The Company does
not
expect to receive any further distributions from the Grove. As a result, the Company received a tax refund of
$73,085
(the aforementioned tax benefit) in early
2018
following its filing of the net operating loss carryback claim.