Tax

Delinquent Taxpayers May Need to Rethink Travel Plans

By Jeffrey Davine

A taxpayer with a “seriously delinquent tax debt” may be in for a surprise if he or she has overseas travel plans.  This is because the IRS has begun implementing its authority to instruct the State Department to pull delinquent taxpayers’ passports.

In 2015, Congress passed the Fixing America’s Surface Transportation Act, (“FAST”).  In this context, FAST should be renamed “STOP” because it added Section 7345 to the Internal Revenue Code, which authorizes the IRS to disclose certain tax information to the State Department concerning taxpayers who owe the IRS more than $50,000.  Armed with this information, the State Department may revoke, deny, or place limitations on, the delinquent taxpayer’s passport.  (more…)

Section 199A: Deal Considerations When Buying or Selling a Partnership or LLC Interest

By Daniel M. Cousineau

Internal Revenue Code section 199A attracted immediate attention when it was enacted last December, since it created a new tax benefit.

Section 199A allows individuals to deduct up to 20% of the “qualified business income” from certain types of businesses operated in “pass-through” form. Partnerships, limited liability companies, S corporations and sole proprietorships meet this definition because there is no corporate level tax and the earnings from the business pass through to the owners for tax purposes.

While the intent of Section 199A was to generally put business owners operating in pass-through form on the same footing as businesses who received a reduced 21% federal corporate tax rate, the complexity of the rules left many questions in need of clarification.

On August 8, 2018, the Treasury Department issued proposed regulations addressing some of these questions. One such clarification is the extent to which a buyer of a pass-through entity can avail themselves of the 20% deduction. (more…)

Is Everyone Now an Employee in California?

By Jeffrey Davine

On April 30, 2018, the California Supreme Court issued its opinion in Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County.  It is likely that this case will drastically alter the landscape in California as to how workers are classified.  From a tax perspective, the result could be significantly increased costs and administrative burdens for businesses operating in California.

Worker Classification.
For tax purposes, workers are divided into two categories- employees and independent contractors.  The tax withholding and reporting obligations with respect to each category of worker are substantially different and significant dollars can turn on how a worker is classified. (more…)

#MeToo Can Be #Costly

Photo credit: iStock.com/Maximusnd

By Jeffrey Davine

General Rule- Deduction for Settlement Payments.

If an employer settles a claim made by an employee (or former employee), the employer may generally claim a deduction for the amount that is paid to the employee to resolve his/her claims.  The expense is treated as an ordinary and necessary business expense and a deduction may be claimed pursuant to Section 162(a) of the Internal Revenue Code.

For example, if an employer pays an employee $25,000 to settle the employee’s claims for back wages, emotional distress, and age discrimination, the employer may deduct the $25,000 on its tax return (the employer’s tax reporting obligations with respect to the $25,000 payment and how the payment should be allocated among the claims made by the employee are topics for a different article). (more…)

Has Your Partnership or LLC Agreement Been Updated to Comply with the New Tax Rules?

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By Robin Gilden and Daniel Cousineau 

The new partnership audit rules substantially change the audit procedures for partnerships (including multi-member LLCs) and may require that you update certain provisions within your partnership or LLC agreement to maintain compliance.

In partnership audits, the IRS has historically adjusted the returns of partners, rather than the partnership, because partnerships do not actually pay an entity level tax but pass through their income and losses to the partners. The Bipartisan Budget Act of 2015 (the “Act”) substantially changed these rules for partnerships with tax years beginning after December 31, 2017.

Under the Act, the IRS will examine partnerships and make any adjustments at the partnership level in the year that the audit is completed rather than the year under review. The partnership will pay the tax, interest and penalties on any underpayments at the highest statutory rate for each partner’s distributive share of the underpayment (i.e., the highest corporate rate for corporate partners and the highest individual rate for individuals). This change in the rule shifts the cost of the adjustment to the partners holding a partnership interest at the time of the audit rather than those partners who held a partnership interest in the year of underpayment. (more…)

The Tax Cuts and Jobs Act

updated logoi
The Tax Cuts and Jobs Act released by the Conference Committee, that resolved differences in the versions of the Act passed by the Senate and the House of Representatives, is almost certain to be signed into law by the President.  You can read our preliminary summary of this far-reaching tax legislation here, but these are the highlights:

Individuals

  • Tax brackets are adjusted, with the maximum rate reduced from 39.6% to 37%.
  • The mortgage interest deduction on a principal residence is limited to debt of $750,000 (down from $1 million).
  • Several itemized deductions are reduced or eliminated, including state and local taxes (“SALT”) in excess of $10,000.
  • The standard deduction is doubled to $12,000 for single individuals and $24,000 for joint filers.
    More on provisions affecting individuals

Estate and Gift Tax (more…)

The White House Framework for Tax Legislation

White House

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By David Wheeler Newman

On September 27, the White House released a document called the “Unified Framework for Fixing Our Broken Tax Code,” containing an outline prepared by the administration plus the senior Republican members of the tax-writing committees of Congress. The Framework is far less detailed than previous proposals for structural tax reform, but is instead described as a “template” which the authors intend for Congress to use to prepare actual legislation. This template calls for new tax rates for individuals and businesses and would create a territorial international tax system.  Some key headlines:

Estate Tax.  The Framework calls for a repeal of the estate tax.  In announcing the tax plan, the President said that repeal would overwhelmingly help farmers and small business owners.  However, most farm families are not actually affected by the estate tax, which only applies to estates valued at over $5.49 million.  The nonpartisan Tax Policy Center projects that estate tax of $19.95 billion will arise from Americans dying in 2017, of which about $30 million, or 00.15%, will be paid by the estates of farmers and small business owners.

The Framework would also repeal the generation skipping transfer tax. The proposal is silent on the gift tax. (more…)

New Partnership Audit Regime and Partnership M&A Transactions

business man financial inspector and secretary making report, calculating or checking balance. Internal Revenue Service inspector checking document. Audit concept.

Photo credit: iStock.com/IndypendenZ

By Charles Kolstad and Robin C. Gilden

Background:

Congress has changed the way partnership[1] audits will be conducted in the future. Beginning with tax years starting on or after January 1, 2018, audits will still be done at the partnership level; however unlike current practice where adjustments and additional tax payments are made at the partner level, under the new rules the adjustments and additional tax payments will in many cases now be done at the partnership level with the payments made in the year the tax audit is finalized. The changes were made to make it easier for the IRS to audit partnerships.

The new rules raise a number of unanswered questions in the M&A arena all of which require a significant rethinking of the way partnership M&A transactions are structured and documented. There are likely to be significant differences in the responses to the Open Issues set out below between a transaction involving a LLC, which would survive as a separate legal entity after the acquisition, and a limited partnership which would terminate and not exist as a separate legal entity after the acquisition as it would only have one member. (more…)

California State Board of Equalization Gutted

By Jeffrey D. Davine

The Taxpayer Transparency and Fairness Act of 2017

Established by the California Constitution in 1879, the California State Board of Equalization (the “BOE”) has been the agency charged with administering most of the taxes imposed by California.  In addition, the BOE was the tribunal whose function was to decide taxpayer appeals of decisions by the California Franchise Tax Board (the “FTB”) concerning income tax matters.  All of this is about to change with the passage of AB 102.  AB 102, which is named the “Taxpayer Transparency and Fairness Act of 2017” (the “Act”), was signed into law by Governor Brown on June 27th.  The Act effectively cuts the legs out from underneath the BOE.

Background

In March of this year, the California Department of Finance issued a derisive report asserting that the BOE misallocated tax revenues, used BOE employees to assist elected BOE members with political activities, and attempted to improperly affect BOE audits.  In response, and at the urging of the Governor, the Act was passed by the California Legislature. (more…)

Proposed IRS Regulations Could End Most Valuation Discounts for Family Entities

By Allan Cutrow, Jeffrey Eisen and S. Eva Wolf

On August 2, 2016, the Treasury Department issued proposed regulations under Section 2704 of the Internal Revenue Code. The proposed regulations, if adopted in their current form, essentially will eliminate all minority discounts or lack of control discounts and lack of marketability discounts for transfers between family members of interests in family-controlled businesses.

The proposed regulations accomplish this result in complex ways. But here are some points to consider as you decide whether to act quickly.

  1. The regulations are “proposed.” This means that they are not currently in effect. The Internal Revenue Service has scheduled a public hearing on the regulations in Washington, DC on December 1, 2016. They take effect when the IRS announces that they are “final.” Thus, these regulations could take effect shortly after the hearing, sometime in 2017, years from now, or never (in theory). The IRS may change the regulations in meaningful ways before adopting them as final. (more…)