Issuu

March 26-28, Rosen Shingle Creek, Orlando, Florida

Rudy Giuliani 107th Mayor of New York City

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(1993-2001)

SPRING 2018 VOLUME 12 ISSUE 1

How the Tax Plan Affects Investors There are Big Winners and Losers. I The Effect of Tax Reform on Non-Traded Energy I Market Commentary I ADISA News

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SPRING 2018 VOLUME 12 ISSUE 1

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ADISA EDITORIAL BOARD

1 — President’s Letter

ADISA’s Future is Brighter

Than Ever

Chair I Brandon Raatikka I FactRight, LLC Peter Magnuson I Securities America

2 — Executive Director’s Letter

A Quiet Win

CONTACT INFORMATION ADISA I 10401 N Meridian St., Suite 202 I Indianapolis, IN 46290 Direct: 317.663.4180 I Toll Free: 866.353.8422 Fax: 317.815.0871 I E-mail: adisa@adisa.org John Harrison I Executive Director I 317.663.4172 Tanisha Bibbs I Director of Event Planning I 317.663.4174

4 — How the Tax Plan Affects Investments: There Are Big

Winners and Losers, and the

Potential for Unintended

Consequences is High

Jennifer Fitzgerald I Director of Marketing I 317.663.4175 Tony Grego I Associate Executive Director I 317.663.4173 Erin Balcerzak I Member Services Coordinator I 317.663.4183 Design I DesignMark I Susie Cooper

10 — The Effect of 2018 Tax Reform

Upon Non-Traded Energy

Investments

18 — Market Commentary

January 2018

formerly REISA, formerly the Tenant-In-Common Association. All rights reserved. Readers may copy sections of this publication for personal use. However, it is a violation of U.S. copyright laws to copy substantial portions of the publication for any reason without permission. The Copyright Act of 1976 provides for damages for illegal copying. If you wish to copy and distribute sections of this publication, contact Jennifer Fitzgerald at jfitzgerald@adisa.org.

23 — ADISA News & Events

President’s Letter

ADISA’s Future is Brighter Than Ever By Keith Lampi, President of Inland Private Capital Corporation (IPCC), 2018 ADISA President

Greetings, ADISA members.

As we head into 2018, I am thrilled to be ADISA’s president and look forward to

watching our association succeed even more. I would like to extend my sincere appreciation to the most recent past presidents, particularly John Grady and Mike Bendix, for growing the association into the thriving organization that it is today. My goals for the upcoming year are numerous, but include: • Embracing and leveraging our expansive membership base of product categories represented to drive content and education throughout the association and industry • Focusing on growth in participation among membership, through events and committees, across all key membership categories • Enhancing communication of strategy and activity to broader membership through: • The launch of ADISA’s new virtual resource library—all educational materials including articles, magazines, videos, webinars, and more, will be organized by medium and fully searchable (coming soon!) • Leveraging more technology during our events • Our video series, which provides timely educational content throughout the year • A rebrand of our Due Diligence Forum! This year we will be in New York City, the financial capital of the world—and the Board really wanted to play up how unique this conference is. It is now knows as the Alternative Investment Research & Due Diligence Forum! As you well know, ADISA’s Spring Conference is just a few weeks away (March 26-28) at the Rosen Shingle Creek in Orlando, Florida. We expect between 500 and 600 attendees, with a broker-dealer to sponsor ratio of roughly 1:1.4. Our Conference Planning Committee has put together an outstanding program, including these highlights: • Keynote speaker Rudy Giuliani, the 107th Mayor of New York City (1993-2001) • Educational tracks, focusing on REITs, energy, DPPs, 1031s, broker-dealer/RIA practice, and technology and security • General Session I, featuring special guest Marilyn Mohrmann-Gillis, executive director of the CFP Board for Financial Planning, whose presentation is titled “Diversity Dividend: Why You Should Invest in Her” (Sponsored by ADISA’s Women’s Leadership Forum) • A legislative & regulatory update, featuring speakers from FINRA, the SEC and NASAA • An industry update, with experts speaking on 1031s, Reg A+, energy, REITs, BDCs and interval funds • And back by popular demand, special guest Cheri Tree, who will close out the conference ADISA’s future is brighter than ever, and I could not be more honored to serve on the members’ behalf. We hope to see you in Orlando this spring! �

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Executive Director’s Letter

A Quiet Win By John Harrison, Executive Director, ADISA

I ducked into the lobby of the Old Post Office, now known as the Trump Hotel, in Washington, to take a phone call. Like many I remember when the magnificent Gothic-like stone building was in fact a US Post Office. I had popped in to see if I could find a quiet corner, and, well, I also wanted to see what they had “done to the place.” It is— surprisingly—rather nicely done, not over the top, creative, dignified. Back to the phone call, it was the Real Estate Roundtable’s 1031 Coalition leader’s call, letting us know it was finally over in the Tax Reform legislation battle. We had won; 1031 stays for real estate, but let’s not take any victory laps: a long, quiet behind-the-scenes struggle shouldn’t require it.

I thought back on the past several years of quiet diplomacy by many to make sure Congress knew

the value of Like-kind Exchanges. In my view, Ryan McCormick, of the Real Estate Roundtable is probably the MVP in designing the slow, steady drumbeat. Clearly, the FEA (the Federation of Exchange Accommodators) also had great role. The Ling & Petrova Study (two excellent academics from the University of Florida and Syracuse University respectively) deftly provided the most meat for the tax policy types to chew on. (I was honored to have been an original reviewer of the study.)

What was ADISA’s role? It was, I hope, the strong and steady help needed at the right time. Luckily

Dr. Tom Price, chairman of the House Ways and Means Committee and then the Budget Committee, was my congressman, and Johnny Isakson, Georgia’s noble senator and long-time realtor, my senator. In addition to the many office visits in district and on the Hill, I spent three good hours holed up with them in the Skyclub at Reagan Airport. (If you ever want to grab time with DC bigwigs, schedule a flight out of Reagan Airport on a Thursday afternoon during a snow storm. I do have to report something I overheard happen at the gate: Delta Airlines tried to quietly upgrade Senator Isakson to first class—airlines will frequently do this for members of Congress. He declined the favor, preferring to sit in the back in the middle with his constituents. That tells us something of the man).

It was during that Skyclub conversation that the idea of the LKE pamphlet was born. The strategy

was to get simple facts about the value of LKE’s out to congressional staffers in a fun read—if that is even possible. It was. You can see the resulting quick-read pamphlet which was mailed to all the pertinent congressional tax policy staff at http://www.adisa.org/publications. Several members of ADISA’s leadership helped put together that piece: Catherine Bowman, John Grady, Keith Lampi, and Larry Sullivan.

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Our man on the Hill, Tom Rosenfield, kept us fully warned of impending opportunities this past year; I

was lucky to attend several fund-raising dinners for key Congressmen involved in the issue (be prepared to contribute to those on your own dime, by the way, for no organizational money allowed). Our L & R Committee member assigned to the issue, Larry Sullivan, also kept a finger on the pulse.

Larry reported to us that he’d seen notes from some of the key staffers on the issue, and the Like-

kind Exchange had made that important move from the “pay-for” column over to the “net revenue producer” column. Meaning: it has been accepted that LKEs are in fact not something that can be axed to pay for lost tax revenue, for they themselves produce both tax and district-originating revenue. Indeed, the Ling & Petrova study showed how much states like California gain from LKEs.

In short, we’d been working in a friendly fashion behind the scenes for years for LKEs, and for me

personally since early 2014. There wasn’t a ton of money, ad campaigns, feel-good fly-ins, and other hoopla done on the part of us advocates. It was homework, calculators, word problems, solving the scorecard puzzle, and passing the test. It wasn’t exactly revenge of the nerds, but it was pretty close. Enjoy as quietly as you can. �

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How the Tax Plan Affects Investments: There Are Big Winners and Losers, and the Potential for Unintended Consequences is High By Dan Kern

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Dan Kern, contributor to U.S. News & World Report, is chief investment officer for TFC Financial Management, a wholly independent, fee-only, financial advisory firm based in Boston. Originally published in U.S. News & World Report, Dec. 21, 2017

Congressional approval of a sweeping tax bill provided President Donald Trump with his first significant legislative victory. According to Trump, “this is going to be one of the great gifts to the middle income people of this country that they’ve ever gotten for Christmas.”

Senate Minority Leader Charles Schumer had a contrary view, labeling the bill as a “hefty windfall for the wealthy and only [a] paltry temporary leap for some in the middle class.” As is so often the case in this polarized political environment, the truth probably lies somewhere in between Trump and Schumer’s points of view. The nearly 1,100 page tax bill has major implications for corporations and individuals, but falls short of the simplification promised earlier in the legislative process. Despite claims from Trump and Treasury Secretary Steve Mnuchin that the tax bill would provide a sustainable and significant boost to economic growth, most private sector economists expect a more modest impact. In the words of one economist, the bill is more “carbs than protein,” and will provide a near-term boost to economic growth but not be a catalyst for a new paradigm for growth. As was the case when taxes were cut during the Ronald Reagan and George W. Bush presidencies, incremental growth isn’t likely to fully offset the cost of tax cuts. Consequently, the federal debt will rise. Although the budget

In the words of one economist, the bill is more “carbs than protein,” and will provide a near-term boost to economic growth but not be a catalyst for a new paradigm for growth.

deficit may not rise by a significant amount, long-term issues surrounding

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entitlements such as Medicare and Social Security continue to be unaddressed. Reduction of the maximum corporate tax rate from 35 percent to 21 percent and elimination of the corporate alternative minimum tax will provide significant benefits to many corporations. The U.S. will move from having one of the highest corporate tax burdens in the world to being in the middle of the pack.

Small company stocks, many of which pay close to the statutory maximum tax rate, will get a significant earnings boost. Although the benefit of the tax cut is already partially factored into small company stock prices, the small stock rally may continue into 2018. Certain industries will also benefit from lower tax rates, most notably retailers, financial services companies, health insurers, telecommunications providers and energy refiners. The tax bill moves toward a territorial tax system, taxing companies on profits earned in the U.S. It also provides incentives for companies to repatriate overseas profits from prior years back to the U.S. The positive impact of repatriation primarily will help a small number of companies. Technology companies including Apple (Nasdaq: AAPL), Microsoft Corp. (MSFT) and Oracle Corp. (ORCL), pharmaceutical/biotechnology companies and a couple of major banks are the primary beneficiaries of the repatriation provision. The small number of companies with meaningful overseas cash balances are more likely to pay down debt, buy back stock, or raise dividends than to dramatically increase capital expenditures or add materially to their U.S.-based workforce. Telecommunication providers will be among the companies that benefit from the ability to immediately expense capital investments, but in many cases the new tax rules will pull forward spending that was already planned rather than create a lot of new spending. Highly leveraged companies will be hurt by provisions that limit interest deductibility, though real estate firms and utilities were granted exemptions to those provisions of the new tax code.

Changes to taxation of pass-through organizations such as LLCs and S corporations are among the most complex aspects of the tax bill.

Changes to taxation of pass-through organizations such as LLCs and S corporations are among the most complex aspects of the tax bill. Pass-through entities will receive favorable tax treatment, helping manufacturing and real estate organizations, however, law firms, medical practices, consultants and investment managers are among the entities that wonâ€™t be able to take advantage of the beneficial tax treatment of passthrough income. Personal tax code changes have far-reaching implications, despite being scheduled to expire in 2026. Consumer spending will get a near-term boost, as the majority of taxpayers should benefit from reduced taxes. Longer-term, however, the impact on consumers will be more ambiguous as provisions expire and inflation adjustments become less generous. The increase in the standard deduction will limit the number of households that

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The tax bill moves toward a territorial tax system, taxing companies on profits earned in the U.S. It also provides incentives for companies to repatriate overseas profits from prior years back to the U.S. The positive impact of repatriation primarily will help a small number of companies.

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The near-term boost and front-end loading of economic growth from tax cuts raises the odds that the U.S. economy will overheat, making it likely that interest rates will rise at a more rapid rate in 2018 and 2019.

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choose to itemize deductions, which will reduce the financial incentive to buy a home rather than rent. Expensive real estate markets in high tax states such as California, New York, New Jersey, Connecticut and Massachusetts will see declining demand as a consequence of caps on mortgage interest deductibility and severe reductions in the deductibility of state and local taxes. Reduced supply of homes for sale in those markets may provide a partial offset for the demand loss, as current homeowners may be less likely to sell given the tax changes. The end of the federal penalty for failing to have health insurance means that fewer healthy people will buy insurance and that more uninsured people will seek treatment from hospitals. Insurers and hospitals will bear the brunt of the elimination of the unpopular individual mandate, though it also likely that consumers and corporate insurance buyers will face higher prices, higher deductibles and more restrictive insurance options. The near-term boost and front-end loading of economic growth from tax cuts raises the odds that the U.S. economy will overheat, making it likely that interest rates will rise at a more rapid rate in 2018 and 2019. The front-loaded benefits will likely fade absent structural changes in the supply-side of the U.S. economy. The economy may still struggle to achieve long-term growth of more than 2 percent, given the constraints of debt, deficit and demographic challenges. The durability of the tax bill may also be a relevant issue. The bill passed without any Democratic votes, there will be big winners and big losers resulting from the complex bill, and the potential for unintended consequences is quite high. The combination of these three factors makes a renewed battle over taxes likely whenever the Democratic Party returns to power. ďż˝

The end of the federal penalty for failing to have health insurance means that fewer healthy people will buy insurance and that more uninsured people will seek treatment from hospitals.

Disclosures: Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen or experience. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviserâ€™s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.

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The Effect of 2018 Tax Reform Upon Non-Traded Energy Investments By Brad Updike, LLM, JD, Mick Law P.C.

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Brad is a Director at Mick Law, where his areas of practice include securities law, oil and gas, private equity, conservation real estate, DPP due diligence, taxation analysis relating to securitized financial, and securities advertising practices. He also serves on ADISA’s Board of Directors.

Some circles of the media have characterized the Tax Cuts and Jobs Act (“Act”) as a “clear net positive” for U.S. oil and gas companies, as the fundamental rules relating to intangible drilling cost deductions (“IDCs”), percentage depletion, and carried interests were unchanged. Notwithstanding, financial representatives and investment advisors will be well served to review the modifications to § 461(l) of the Internal Revenue Code (“IRC”), as this tax rule will have an impact upon the timing of drilling related capital expense realizations among certain investors of energy-related investment programs. Also looming within the tax code changes is the ability of certain partnership investors to deduct up to 20% of their qualified business income received from energy program entities. While some investors will find the revisions to IRC § 199A to be helpful, the universe of those that will benefit is more limited that what reps and advisors might perceive.

IRC § 461(l) Limitation on Pass Through Losses IRC § 461(l) provides that a taxpayer’s excess business losses for any year will be disallowed and carried forward as net operating losses. This rule may come into play when such losses exceed certain thresholds, which can occur at times when an investment program passes through large amounts of expensed costs to investors. IDC, the unsalvageable costs incurred when wells are drilled, completed, or worked over, is an example of the capital costs that can implicate the rule. Prior to the passage of the Act, the (a) payment of IDC, (b) presence of an investment basis, and (c) satisfaction of economic performance were required to accrue an IDC income tax deduction, with the working interest exception set forth in IRC § 469 determining whether an investor could treat the IDC as an active or passive deduction. In many cases, the IDC-related deductions for investors of drilling programs ranged from 70-90% of the subscription, depending upon the sponsor capital contribution and the provision for special allocations of IDC to investors within the program’s partnership agreement. The fundamental rules have not changed relating to IDC accruals. The Act, however, imposes a new hurdle that relates to pass through entities for which a taxpayer participates as an “active” partner. For investors who participate in such programs as general partners, the investor’s collective business losses from such active participation entities (referred to as “trades and businesses” in the tax rule) cannot exceed $250,000 for single taxpayers and $500,000 for joint returns. Losses in excess of such thresholds are referred to in the rule as “excess business losses” and must be carried over into future

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years under the net operating loss rules set forth in IRC § 172. While there might be an inclination for reps and advisers to think of this rule as one that negatively affects “big subscriptions” (due to the $500,000 limit imposed upon married couples), we believe that the reach of the rule is more widespread, as it has the ability to affect a diverse group of investors. The following example illustrates this. Taxpayers with net income from other actively managed pass-through businesses will be affected to a lesser degree than those with other active business losses and those whose taxable income is derived exclusively or substantially from wage income. In view of the rule, reps and advisors must be mindful of the client’s total income picture from wages as well as from actively managed pass through entities.

$400,000 wages combined $400,000 pass through loss from the managed businesses $50,000 pass through loss from a real estate holding LLC for which husband participates as a non-managing member $250,000 subscription in XYZ Drill Fund, LP (GP election made) The pass-through loss of XYZ Drill Fund, LP is $200,000 (driven by prepaid IDCs) The real estate loss is dealt with under the passive activity rules in IRC 469.

Husband and Wife Husband is a lawyer and owns and manages a restaurant and a gymnastics gym that made several capital equipment related purchases.

The husband and wife can use $100,000 of the pass-through losses generated from the XYX Drill Fund, LP investment. The combined losses from all active businesses is $600,000, which is $100,000 over the $500,000 maximum loss allowed for a joint return. The remaining $100,000 is treated as a net operating loss and can be carried forward indefinitely.

IRC § 199A Qualified Business Income Deduction Of the two tax rules addressed, this one may be more difficult for reps and advisors to develop an understanding. Starting with the basics, the rule can, in some cases, work to the benefit of investors in oil/gas investment programs depending upon their taxable income and business income from other sources.

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Beginning in 2018, taxpayers who are investors of pass through entities that engage in business activities are entitled to a federal income tax deduction for each taxable year equal to the sum of:

1. The lesser of (a) the taxpayer’s combined qualified business income (“QBI”)

amount, or (b) 20% of the excess of the taxpayer’s taxable income for the taxable year over any net capital gain plus the aggregate amount of qualified cooperative dividends, plus

2. The lesser of (a) 20% of the aggregate amount of the qualified cooperative

dividends of the taxpayer for the taxable year, or (b) the taxpayer’s taxable income (reduced by the net capital gain) (Note: the amount under point (2) is $0 if there are no qualified cooperative dividends, so the rule in point (1) will determine the deduction for most taxpayers). QBI includes the net U.S. business-related taxable income, gain, deduction, and loss with respect to any qualified trade/business. A qualified trade or business is any trade or business other than a “specified service trade or business” or the trade of performing services as an employee. QBI from specified service trades and businesses is excluded if the taxpayer’s taxable income exceeds certain thresholds. A specified service trade or business includes those involving services in the fields of health, law, accounting, actuarial sciences, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners. Pass through entities that acquire working interests in leaseholds and oil/gas wells, or that acquire mineral and/or royalty interests, constitute qualified businesses, and any taxpayer that is not a C corporation may qualify for the deduction. This includes individuals, trusts, and estates. A taxpayer’s combined QBI amount is equal to 20% of the taxpayer’s QBI with respect to each qualified trade or business. Notwithstanding the rule’s

Pass through entities that acquire working interests in leaseholds and oil/gas wells, or that acquire mineral and/or royalty interests, constitute qualified businesses, and any taxpayer that is not a C corporation may qualify for the deduction.

possible benefits to the investors in non-traded oil and gas drilling programs, opportunity funds, and minerals and royalty programs, certain types of income are excluded from QBI consideration. Such types of excluded income include: • Dividends, investment interest income, short-term and long-term capital gains, commodities gains, foreign currency gains, and similar items; • Reasonable compensation paid to a taxpayer by a trade or business for services rendered (possibly applicable if there is a trade/business other than the investment program that generates QBI); • IRC § 707(c) guaranteed payments paid in compensation for services performed by a partner to a partnership (possibly applicable if there is a trade/business other than the investment program that generates QBI);

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• IRC § 707(a) payments for services rendered by a partner with respect to a trade or business (possibly applicable if there is a trade/business other than the investment program that generates QBI); and • Qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income. For non-traded oil and gas programs, QBI is made up of oil/gas production revenue, royalties, and in some cases service or transportation-related fees, less related deductions, expenses, and losses. Thus, certain types of income historically earned in oil and gas programs are excluded, such as capital gains realized from asset sales, and interest earned on debt. Due to the inclusion of production revenue and royalty income in QBI, the IRC § 199A deduction can offer income tax benefits to investors during the operational years when the programs are: drilling and selling oil/gas (e.g., drilling and lease bank programs); providing field-related vendor services or oil/ gas transportation services to other working interest holders (e.g., opportunity funds or midstream focused funds); or collecting royalties from leased properties (e.g., royalty funds).

For taxpayer’s whose taxable incomes do not exceed $157,500 single, or $315,000 married filing jointly, certain special rules relating to wages will not impact their QBI. However, the impact of IRC § 199A upon an investor’s taxes becomes more complicated when the investor’s taxable income exceeds such thresholds. For such taxpayers, the portion of the deduction attributable to 20% of the taxpayer’s QBI cannot exceed the greater of: (a) 50% of the taxpayer’s share of wages paid with respect to the QBI; or (b) the sum of 25% of the taxpayer’s share of such wages plus the taxpayer’s share of 2.5% of the unadjusted basis of qualified property. Where the wage/capital rule is applied, the absence of W-2 income from qualified trades or businesses that generate QBI can have a detrimental impact upon the investor’s ability to realize the benefit of this deduction. The term wages include the total wages subject to withholding, elective deferrals, and deferred compensation paid by the qualified trade or business with respect to employment of the taxpayer. The term qualified property includes tangible property of a character subject to depreciation under section 167 (i) that is held by and available for use in the qualified trade or business, and (ii) which is used at any point during the taxable year in the production of QBI. The wage/capital limitations do not apply to taxpayers with taxable income not exceeding $315,000 (joint filers) or $157,500 (single filers). The phase in of the wage/ capital rule for taxpayers above such thresholds is applied by multiplying a phase in percentage to an amount equal to the difference of (a) 20% of combined QBI, and (b) the amount determined under the wage/capital limitation rule. That amount is then subtracted from 20% of combined QBI to arrive at the allowable deduction amount. The phase in percentage is determined by the following formula:

taxable income – income threshold / $50,000 single or $100,000 joint

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An example of how the phase-in of the wage/capital limits can affect QBI is provided below:

Wife has a qualified business, such that 20% of QBI with respect to the business is $15,000

TAX RETURN

Wife’s share of wages paid by its qualified business is $20,000, and 50% of the W-2 wages with respect to the business is $10,000 The business has nominal qualified property such that 50% of the W-2 wages from the qualified is greater than 25% of the W-2 wages plus 2.5% of qualified property The $15,000 amount is reduced by 60% ((i.e., $375,000 - $315,000) / $100,000) of

Husband and Wife Husband and Wife file a joint return on which they report taxable income of $375,000.

the difference between $15,000 (20% QBI) and $10,000 (wage/capital rule limit), which is $3,000 Husband and Wife may take an IRC § 199A deduction for $12,000 [$15,000 - $3,000]

When the wage limitation is fully phased in, the taxpayer’s QBI will be the lesser of: (a) 20% of the QBI; (b) 20% of taxable income; or (c) the wage limitation with respect to the qualified trade or business. Thus, the absence of W-2 income from a qualified trade or business is very detrimental when the taxpayer’s taxable income exceeds the threshold levels. By way of another example, let’s assume a taxpayer files a joint tax return and has taxable income of $420,000. Included in taxable income is QBI of $75,000. The taxpayer’s share of W-2 wages related to its qualified businesses is $0, and its share of qualified property is $100,000. Note that the taxable income has caused the wage limitation to fully phase in, and as a result, the qualified business deduction will be the lesser of the following:

Taxable Income:

$420,000 x 20% = $84,000

Qualified Business Income: $75,000 x 20% = $15,000 50% W-2 Wages:

$0 x 50% = $0

25% W-2 Wages & 2.5% of Qualified Property:

$2,500

QBI Deduction:

$2,500

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Throwing a twist into the mix of information provided, the specified service trade or business exclusion does not apply to the extent the taxpayer’s taxable income does not exceed certain taxable income thresholds. The application of the specified service trade or business exclusion is phased-in for taxable incomes exceeding $315,000 (joint return) and $157,500 (single filers). In computing the QBI for a specified service trade/ business, the taxpayer takes into account only the applicable percentage of qualified items of income, gain, deduction, or loss, and of allocable W-2 wages and qualified property. That percentage for a taxable year is 100% reduced by the percentage equal to the ratio of the taxable income of the taxpayer in excess of the threshold amount, bears to $50,000 ($100,000 in the case of a joint return). Example:

Taxpayer has an applicable percentage of 40% (1 – (($375,000 - $315,000) / $100,000)) The includible QBI is 40% of $200,000, or $80,000 The includible W-2 Wages is 40% of $100,000, or $40,000 Taxpayer filing joint return has taxable income of $375,000, of which $200,000 comes from a sole proprietor accounting business for which the taxpayer receives wages of $100,000.

The deduction is the lesser of 20% of $80,000 ($16,000) or 50% of $40,000 ($20,000) Taxpayer’s deduction is $16,000

While the deduction will not be as far sweeping as characterized by some media sources, it does present a helpful federal-level income tax deduction for investors in oil and gas programs who fall close to or below the taxable income thresholds after factoring itemized deductions and exemptions. �

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SAVE DATE

ADISA 2018 Annual Conference & Trade Show October 8-10 ARIA Resort & Casino Las Vegas

THE

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Market Commentary January 2018 By Ladenburg Thalmann

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Ladenburg Thalmann Financial Services Inc. is a full service financial company committed to meeting the diverse and changing needs of our clients by providing a full array of innovative, customized financial solutions.

2017 was a year of surprising global growth and a resurgence in investor confidence which pushed stocks higher globally. Economic data continues to be overwhelmingly positive with few negative signals. The labor market remains healthy with the unemployment rate at 4.1%, inflation has been muted with CPI at 2.2% and third quarter GDP has shown its fastest growth in more than two years coming in at an annual rate of 3.2%. The Federal Reserve acted as expected in their December 13th meeting by raising short term rates for the third time this year by 25 basis points, bringing the overall Fed Funds rate to a range of 1.25 - 1.50%. The newly approved tax reform bill has fueled market optimism heading into 2018 which should reaffirm the Feds plan to hike rates next year. With strong momentum going into the New Year and a supportive tax bill for US corporations, we believe the environment is still conducive for taking equity risk, but not without a watchful eye, as interest rates move higher and the economy heats up.

Domestic Equities U.S. stocks posted their best quarter of the year as tax reform came to the forefront of political discussions, with the S&P 500 returning 6.64% in Q4 and 21.83% year-to-date. The overall drop in the corporate tax rate to 21% and opportunity for companies to repatriate cash at a lower 15.5% rate renewed investor confidence in U.S. equities and helped performance throughout the quarter. Along with help from the new tax bill, companies within the S&P 500 experienced robust earnings and sales growth up 7.10% and 5.33% respectively. Although smaller sized stocks posted positive absolute performance for the quarter, they underperformed larger sized stocks due to valuation concerns as the Russell Midcap index returned 6.07% and the Russell 2000 index returned 3.34%. Even as investors continue to question whether stocks can move higher (especially smaller sized stocks), in our view, companies appear to be earning enough to offset their lofty valuations.

International Equities International equities ended the year up 25.03%, beating the S&P 500 by a margin of 3.2%. International equities were supported by parting political clouds and macro tailwinds, including a robust labor market recovery, growing export markets, and improving lending conditions. The Eurozoneâ€™s annual economic growth rate increased 0.6% in the third quarter, representing a gain of 2.5% year

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on year, outpacing that of the United States. Japanâ€™s economy also surprised to the upside to grow at an annualized rate of 2.5% in the third quarter, representing the seventh straight quarter of growth, which registers as its longest expansion since the mid-1990s. While uncertainty remains, we believe the developed international economies are still early on in their economic cycle and have ample room to grow. Emerging markets (EM) had a strong year with the MSCI EM index returning 37.28%. EM equities benefitted from improving EM fundamentals, synchronized global economic growth, a benign U.S. dollar, range bound commodity prices, and cheaper valuations. In the near term, one of the most pertinent downside risks is a stronger dollar from a tightening Fed and expansionary fiscal policy, but we believe EM exports will benefit from a stronger U.S. as well as global economy. In addition, improving fundamentals and cheap valuations will continue to make the space attractive. From a long-term perspective, many EM countries, especially those in Asia, are experiencing a growing middle class and stronger domestic consumption, which will enable them to be more independent from other countries, allowing them to be more stable that their oil producing counterparts. We continue to have an optimistic outlook in the EM space in 2018.

Fixed Income In 2017, fixed income markets performed the opposite of consensus expectations. Despite three Fed rate hikes, the 10-year U.S. Treasury yield ended the year at 2.4%, which was basically where it started the year due to modest growth and inflation. The ECB announced its decision to start weaning off its quantitative easing program in early 2018 by halving the amount of bond buying while promising to keep stimulus for more years. Government intervention imposes upside forces to interest rates via monetary and fiscal policies, but natural economic forces such as demand for yield from both retirees and foreign investors from lower yielding countries help keep rates capped. For instance, when the Austrian government issued an 100-year bond that will yield just 2.1%, 3.5 billion euros of the bond was sold but more than 11 billion euros of the bond was ordered. We believe the projected path for interest rates has shifted upward, but will stay range bound. In terms of sectors, low credit quality bonds continue to outperform high credit quality bonds, benefitting from global economic recovery. As government and municipal bonds offer limited upside, investors continue to search returns in corporate bond, including high yield bonds. We believe fixed income securities will continue to benefit portfolios from a diversification perspective despite low returns.

Alternatives Alternative asset classes lagged during a positive environment for global equities in 2017. Oil prices rebounded following Hurricane Harvey and Irma, with WTI crude ending the quarter at $60.42 per barrel, rising from $51.67 per barrel at the end of the third quarter. The Morningstar Diversified Alternative index was up 0.63% on the quarter and 2.70% on the year, as risk-reducing alternatives were unable to provide the same upside as global equities and fixed income, though they continued to provide valuable downside protection during a year that saw rising asset prices to new highs as well as an increasing

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level of volatility due to geopolitical tension. Hedge fund-like alternatives will continue to play a key role in downside protection and reducing volatility within a portfolio by maintaining low correlation to equity and fixed income markets as we approach a late stage U.S. economy.

Real Estate Real estate has continued to be a positive contributor to the economy in 2017, and should continue to grow as Millennials buy homes, as buyers aged 36 and below have become the largest share of home buyers, according to the National Association of Realtors. Recent data has been positive, with new home sales increasing 17.5% in November, and up 26.6% from a year ago. The NAHB index, a measure of homebuilder optimism and a leading indicator for the housing market, rose to 74 in December, the highest level since the 1990s. Though the data has been positive in nature, tight supply, rising home prices, and the rising cost of borrowing remain headwinds for housing in 2018. ďż˝

Conclusion: 2017 was a surprisingly enjoyable year for investors everywhere and while a feeling of nostalgia hovers over the investment community in 2018, we remind ourselves to continue to invest with caution. There are some key happenings to take place in 2018 which could have a profound impact on financial markets globally such as the decisions of foreign central banks, the effects of the new tax bill and the transition to the new Fed Chair Jerome Powell here at home, to name a few. Despite our view that the economy is in a good place, there are still unknowns that lie ahead, which is why we will continue to stay true to our philosophy and manage our clientsâ€™ portfolios with a sense of prudence and care.

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ADISA

News

Events

2017 ADISA Board of Directors ADISA Presents Auction Proceeds to the ADISA Foundation John Grady Visits ADISA Headquarters 2018 ADISA Spring Conference

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ADISA’s 2018 Board of Directors At its first Board meeting of the year in January, the new ADISA Board, elected by the membership in late 2017, selected its 2018 officers. Keith Lampi of Inland Private Capital Corporation begins his term as the 2018 ADISA president (having been elected president-elect in 2017), and Greg Mausz of Preferred Apartment Communities was elected as the 2018 president-elect and will serve as president in 2019. The other ADISA officers selected were: Peter Magnuson of Ladenburg Thalman as vice president; Ann Moore of International Assets Advisory as secretary; and Mark Kosanke of Concorde Investment Services as treasurer. John Grady of DLA Piper, ADISA’s 2017 president, will serve the Board as its immediate past president. Additionally, Thomas Voekler of Kaplan Voekler Cunningham & Frank was also elected by the Board to serve as a director for a one-year term. The other ADISA 2018 Board of Directors are: Brandon Balkman, Orchard Securities; Andrew Barnum, Cetera Financial Group; Catherine Bowman, The Bowman Law Firm; Brian Buehler, Triton Pacific Securities; Austin Dutton, Bridge Valley Financial; Matt Malone, FS Investments; Vali Nasr, Claraphi Advisory Network; Larry Sullivan, Passco Companies; Kurt Tesh, Kalos Financial; and Brad Updike, Mick Law. Darryl Steinhause, DLA Piper, serves the board as its legal counsel. �

ADISA 2018 Officers

Lampi

Mausz

Magnuson

Moore

Kosanke

Grady

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ADISA Presents Auction Proceeds to the ADISA Foundation At the 2017 Annual Conference & Trade Show, ADISA showcased a silent auction in the Exhibit Hall, where attendees could bid on a variety of items such as sports memorabilia, vacation packages, entertainment, music, wine packages and much more. Proceeds totaled $3,400, and ADISA President Keith Lampi and Treasurer Mark Kosanke presented the check to ADISA Foundation President Brandon Balkman in January.

John Grady, ADISA’s 2017 President, Visits ADISA Headquarters Back in December 2017, outgoing ADISA President John Grady stopped by ADISA Headquarter in Indianapolis for a strategic, endof-year meeting with ADISA staff. While he was in the office, ADISA’s staff also unveiled the “President’s Wall,” with pictures of all past TICA/REISA/ADISA Presidents.

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March 26-28 Rosen Shingle Creek Orlando, FL

ADISAâ€™s Spring Conference provides three days of unparalleled, results driven networking and education that will help individual professionals and businesses grow. The leading alternative and direct investment event of the season is designed for all industry professionals who sponsor, analyze, market, distribute or recommend alternative investments, and will feature key industry experts, educational panels and topical presentations.

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KEYNOTE March 26-28 SPEAKER RUDY GIULIANI 107th Mayor of New York City (1993-2001)

Tuesday, March 27 10:15-11:15 am

Rudolph W. Giuliani, the former Mayor of New York City, was born in Brooklyn, New York. As the grandson of Italian immigrants, he was taught the value of a strong work ethic and a deep respect for America’s ideal of equal opportunity. He attended Bishop Loughlin Memorial High School, Manhattan College, and New York University Law School. After joining the office of the United States Attorney for the Southern District of New York, Giuliani rose quickly through the ranks, becoming the chief of the Narcotics Unit at age 29. In 1983, President Reagan appointed Giuliani as the United States Attorney for the Southern District of New York. Giuliani spearheaded successful efforts against organized crime, whitecollar criminals, drug dealers and corrupt elected officials. Few U.S. Attorneys in history can match his record of 4,152 convictions with only 25 reversals. In 1993, Giuliani was elected Mayor of the City of New York. Campaigning on the slogan “One City, One Standard,” he focused on reducing crime, reforming welfare, and improving the quality of life. In 1997, he was re-elected with 57% of the vote in a city in which Democrats outnumbered Republicans five to one.

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On September 11, 2001, America suffered the worst attack in its history when terrorists crashed planes into the Twin Towers of the World Trade Center. Thousands of New Yorkers were killed, including hundreds of members of the city’s uniformed services, who rushed to the scene to lead the heroic rescue of tens of thousands of people. Having narrowly missed being crushed when the Towers fell, Giuliani immediately began leading the recovery of the city as it faced its darkest hour. Giuliani was widely lauded for his steady hand during challenging times. He was named “Person of the Year” by TIME magazine, knighted by the Queen of England, dubbed “Rudy the Rock” by French President Jacques Chirac, and former first lady Nancy Reagan presented him with the Ronald Reagan Presidential Freedom Award. Limited by New York City law to two terms as mayor, Giuliani founded Giuliani Partners in January, 2002, quickly establishing the professional services firm as a leader in emergency preparedness, public safety, leadership during crises, and financial management. Drawing on his experience in turning a city described as ungovernable into a city that is now a worldwide example of good government and effective management, Giuliani was recognized in the Spring 2002 as “Consultant of the Year” by Consulting magazine. Currently, Giuliani serves as a Senior Advisor to Greenberg Traurig’s Executive Chairman and as the Under his leadership, overall crime was cut by 56%, murder

Chair of the Cybersecurity, Privacy and Crisis Management

was cut by 66%, and New York City—once considered the

Practice. Greenberg Traurig is an international law firm with

crime capital of the country—became the safest large city in

nearly 1900 attorneys worldwide.

America according to the FBI. New York City’s law enforcement strategy has become a model for other cities around the world. This is particularly true of the CompStat statistical accountability program, which won the 1996 Innovations in Government Award from the Kennedy School of Government at Harvard University.

In May of 2003, Giuliani married Judith S. Nathan, who was at the time a Managing Director of Changing Our World, Inc., a national fundraising and philanthropic services company headquartered in New York. Prior to joining Changing Our World, Mrs. Giuliani, a registered nurse with an extensive medical and scientific background, worked with U. S. Surgical Corporation

When Giuliani took office, one of every seven New Yorkers

and Bristol-Myers Squibb. In the aftermath of September 11,

was on welfare. Giuliani implemented the largest and most

2001, Mrs. Giuliani helped coordinate the efforts of the Family

successful welfare-to-work initiative in the country, turning

Assistance Center at Pier 94. Judith was a Founding Member of

welfare offices into Job Centers and reduced welfare rolls by

the Board of Trustees of the Twin Towers Fund, which raised and

640,000—nearly 60%.

distributed $216,000,000 to over 600 recipients. �

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GENERAL SESSION I

SPEAKER Marilyn Mohrman-Gillis is Executive Director of the CFP Board Center

MARILYN MOHRMANGILLIS, ESQ. Executive Director, CFP Board Center for Financial Planning Monday, March 26 5:00-6:00 pm Sponsored by ADISA’s Women Leadership Forum

for Financial Planning. A highly regarded leader within the financial planning community, Mohrman-Gillis was appointed the Center’s first Executive Director in 2016 to lead a profession-wide effort to build a more inclusive and sustainable financial planner workforce. She guides the development and implementation of research and programmatic initiatives focusing on workforce development, diversity, and advancing the profession’s body of knowledge. Mohrman-Gillis joined CFP Board as Managing Director of Public Policy & Communications in 2008. In that role, she developed and oversaw CFP Board’s advocacy initiatives to ensure the visibility and credibility of the CFP® certification with legislators, regulators and other policy makers. Under her tenure, CFP Board became a nationally recognized leader in areas related to investor protection, the delivery of financial advice under a fiduciary standard, and advancing standards to promote competent and ethical financial planning services to the public. Adept at developing strategic partnerships to advance common goals, Mohrman-Gillis helped create the Financial Planning Coalition, which—along with members CFP Board, the Financial Planning Association and the National Association of Personal Financial Advisors—helped influence policy outcomes to benefit the public. On behalf of the Coalition, Mohrman-Gillis was recognized as a key spokesperson in support of the Department of Labor’s 2016 fiduciary rule, testifying at several public hearings including on Capitol Hill. Prior to joining CFP Board, Mohrman-Gillis established an impressive track record of successful advocacy on behalf of the American public during a 30-year career in Washington. She began her career as a litigator in the Washington, DC, office of the law firm Steptoe & Johnson. Mohrman-Gillis has a BA in Psychology from St. Mary’s College, Notre Dame, a MSW from Catholic University and a JD from the Columbus School of Law, Catholic University. �

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MONDAY, MARCH 26 Deconstructing Master Leases BDCs in This Challenging Environment Conservation Easements Fundamentals of DPP Ease of Buying Alts in “Street Names” How to Respond To a Cyberattack Tax and Taxes Conference Kick-Off General Session I: Sponsored By ADISA’s Women’s Leadership Forum, Featuring Marilyn Mohrman-Gillis, Executive Director of the CFP Board for Financial Planning Diversity Dividend: Why You Should Invest in Her For an industry that prides itself on mastering risk management, finding value and uncovering arbitrage opportunities, the financial services sector is falling flat. Why? Because most firms are overlooking one of the biggest investment opportunities ever: women. Research supports the business case for gender parity. Companies with more women in leadership have higher financial returns, increased innovation, greater productivity, and higher employee retention and statisfaction. The CFP Board Center for Financial Planning challenges the financial services sector to invest in her.

SCHEDULE TO DATE AS OF 2/28/2018

TUESDAY, MARCH 27

WEDNESDAY, MARCH 28

General Session II: Legislative & Regulatory Update General Session III: KEYNOTE SPEAKER RUDY GIULIANI

General Session IV: Industry Update

Practice Management for IARs

Broker-Dealer Advisory Council

Late-Breaking New Product Investigation

Marketing for New Sponsors

Best Practices of DPP

Small Offering Success

1031 Due Diligence and Underwriting

General Session V: Cheri Tree

The Next Frontier: Using Technology to Improve the Asset Manager or Broker-Dealer/Shareholder Experience DST Financing Structures Interval Funds: What Are They Good For? Practice Management for Registered Reps Preferred Stock Offering Third Party Oil & Gas Due Diligence Opinions

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SAVE DATE

10401 North Meridian Street Suite 202 Indianapolis, IN 46290

THE

ADISA 2018 AI Research & Due Diligence Forum July 10-11 New York Hilton Midtown 30

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