Author Archives: E. John Wagner, II

E. John Wagner, II

About E. John Wagner, II

John is a board certified tax attorney and chair of Williams Parker's Corporate and Tax practices. He represents executives, entrepreneurs, and real estate investors in tax, transactional, capital raising, estate planning, and estate administration matters. John can be contacted at jwagner@williamsparker.com.

SBA Issues Potentially Overbroad Guidance Narrowing PPP Qualification Standards

Lawyers have a saying, “Bad Facts Make Bad Law.”  Recent Small Business Administration guidance regarding the Paycheck Protection Program proves it true in one more case.

Even as Congress moves to approve additional funds to the Paycheck Protection Program, the SBA issued a new FAQ in response to news stories about public companies receiving PPP money.  The FAQ states that “a public company with substantial market value and access to capital markets” may not receive PPP funding.  While understandable with respect to the companies in the headlines, it is concerning that the SBA could apply the guidance more broadly.  Doing so would cause more delays or denial in funding for smaller enterprises, and defeat Congress’ intent to support employee retention by private employers.

This is the new FAQ:

  1. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.

We understand the political motivation behind the guidance.  We also believe applying a strict standard based on a company’s value or a company’s access to outside capital or “other sources of liquidity” is perverse.  Congress intended the PPP to motivate companies to retain employees.  Valuable companies with reserves and access to capital will still furlough or release employees, as demand for their services or products drops.  For even those companies, the PPP is therefore “necessary to support ongoing business operations,” because given the current economic landscape they would not deplete reserves or access other sources of liquidity to retain unprofitable employees.  Understanding Congress wanted employers to retain their employees, we interpret the FAQ narrowly.  We hope the SBA will as well.

Attorney James-Allen McPheeters contributed to this post. 

New IRS Guidance Makes Opportunity Zone Tax Break More Desirable

The Internal Revenue Service has issued updated regulations regarding the Opportunity Zone tax break created by the 2017 tax reform legislation. Investors have proven slow to seek Opportunity Zone investments because of ambiguities and a lack of details in The Tax Cuts & Jobs Act statute and the limited scope of initial guidance issues in October 2018. The new guidance is more sweeping and offers more definite answers to many of the open questions.

Opportunity Zone investments offer two tax benefits:

  • Deferral of capital gain recognition on other assets sold before an Opportunity Zone investment until earlier of (1) sale of the new investment or (2) December 31, 2026.
  • 100 percent elimination of capital gain on the Opportunity Zone investment itself, if held more than 10 years, or reduction of capital gain if held at least five, but not greater than 10 years.

Requirements exist regarding investment timing, legal structure, and investment characteristics. The program generally favors taxpayers with reliable access to emergency liquidity and a longer-term investment horizon.

View the IRS announcement which includes detailed guidance.

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Applicable Federal Rates for October 2018

The Internal Revenue Code prescribes minimum imputed interest rates and time-value-of-money factors applicable to certain loan transactions and estate planning techniques. These rates are tied formulaically to market interest rates. The Internal Revenue Service updates these rates monthly.

These are commonly applicable rates in effect for October 2018:

Short Term AFR (Loans with Terms <= 3 Years)                                          2.55%

Mid Term AFR (Loans with Terms > 3 Years and <= 9 Years)                    2.83%

Long Term AFR (Loans with Terms >9 Years)                                              2.99%

7520 Rate (Used in many estate planning vehicles)                                    3.4%

Here is a link to the complete list of rates.

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Applicable Federal Rates for September 2018

The Internal Revenue Code prescribes minimum imputed interest rates and time-value-of-money factors applicable to certain loan transactions and estate planning techniques. These rates are tied formulaically to market interest rates. The Internal Revenue Service updates these rates monthly.

These are commonly applicable rates in effect for September 2018:

Short Term AFR (Loans with Terms <= 3 Years)                                          2.51%

Mid Term AFR (Loans with Terms > 3 Years and <= 9 Years)                   2.86%

Long Term AFR (Loans with Terms >9 Years)                                             3.02%

7520 Rate (Used in many estate planning vehicles)                                    3.4%

Here is a link to the complete list of rates.

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

IRS Issues Small Business Tax Reform Regulations, Clarifies Combinations of Business Entities

The tax reform legislation Congress passed in December left many details unanswered, especially regarding the small business tax benefit giving some businesses a twenty percent deduction against their income if the businesses satisfy certain employee payroll and property ownership thresholds. On August 8, the Internal Revenue Service issued proposed regulations attempting to address many of the open questions.

One of the biggest questions was whether taxpayers can treat employee payroll and property owned across multiple business entities (like corporation and limited liability companies) as a single combined business for the purpose of satisfying the employee payroll and property ownership tests.

For most types of businesses, the regulations generally would allow aggregation of property and payroll amongst different entities (such as partnerships and S corporations) if the same group of persons own the majority of the business for the majority of the year, the entities satisfy certain integration and interdependence tests, and the taxpayers follow specified filing procedures.

Those rules will not apply to most professional businesses, which are subject to limitations in the use of the small business deduction. These businesses are subject to rules forcing aggregation of income to prevent circumvention of the deduction limitations.

The rules are not fully binding until finalized, but IRS will apply the anti-abuse rules retroactively. Taxpayers can rely on these proposed rules until they are finalized.

We will provide more perspective on these important new rules soon. In the meantime, for more details, you can read the proposed regulations at irs.gov.

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

For Want of a Nail? How Long-Term Capital Gain Eligibility Can Turn on a Single Piece of Paper

An old proverb teaches that the absence of a horseshoe nail can cause the downfall of a kingdom. A recent Tax Court cases suggest a real estate owner’s eligibility for long-term capital gain can turn on something just as trivial:  a single piece of paper.

The Sugar Land case involved real estate businesspersons who, though various entities, held some land for investment purposes and other land for development purposes. During 2008, they decided to abandon development plans for raw land they originally intended to develop. In 2008, they executed an owner resolution expressing their change of intent. Their land holding company subsequently sold most of the property to an unrelated homebuilder in three transactions in 2011 and 2012. The company then sold substantially all the remaining property to related entities in four transactions spanning 2012 through 2016. The related entities developed that land for resale.

The IRS asserted that the 2012 sales should have generated ordinary income instead of long-term capital gain. Despite several factors militating against capital gain eligibility—including nearby development activity by related entities–the Tax Court found that the sales qualified as long-term capital gain. The court identified the 2008 owner resolution as the critical factor showing their intent.

The Sugar Land opinion is a bookend to the Fargo case we discussed in 2015. In Fargo, the Tax Court held that a taxpayer who held land without developing it for over a decade recognized ordinary income on its sale. The court reasoned that the long holding period did not overcome the absence of an owner resolution or other documentation evidencing the abandonment of the owner’s original development plan. The taxpayer could not recognize long-term capital gain.

Lesson learned? Silly or not, documenting the non-development intent for holding raw land can make a big difference in the income tax bill when the property is sold. If you want long-term capital gain, take a few minutes to make sure the owners execute a contemporaneous resolution or governing documents expressing the intent to hold the property for investment, not development. Otherwise you might tell a tale of losing your own financial kingdom, for want of just one piece of paper.

Helpful Resources:

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

When is a Rose Not a Rose? IRS Tries to Plug Carried Interest Loophole by Claiming Roses are Not Flowers

The sweeping tax law passed in December requires partners holding some “carried interests” (partnership interests disproportionately large as compared to the relative capital contributed) to recognize gain at ordinary income tax rates (up to 37%) if their holding periods do not exceed three years, as opposed to the one-year holding period normally required to qualify for 20%-tax-rate long-term capital gain. The idea is that these interests are associated with services — often performed by hedge fund and private equity managers — that don’t carry the investment risk associated with a normal capital asset, and therefore holders of these partnership interests should have to own the interests longer to qualify for a low tax rate.

The statute categorically exempts partnership interests held by “corporations” from the new rules. Without explanation, the IRS announced this week it will take the position that “S corporations” are not “corporations” for the purposes of the carried interest law, even though by definition the opposite is true throughout the Internal Revenue Code. Their interpretation is akin to claiming roses aren’t flowers.

There are common sense reasons why S corporations should not be exempt from the carried interest statute. Because S corporations are pass-through entities, there is no practical difference between an individual owning a carried interest directly, as opposed to owning it through an S corporation. Yet read literally, the statute produces different results in these practically comparable situations.

Still, statutes are supposed to mean what they say. S corporations are corporations, just like roses are flowers. Unless Congress changes the statute, the Internal Revenue Service may have a hard time defending its position in litigation.

See our prior discussion of the new carried interest law:

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Tax Savings Estimator: Qualified Business Income Deduction

If you own a business taxed as a sole proprietorship, partnership, or S corporation, the new Section 199A Qualified Business Income Deduction offers one of the biggest potential tax benefits under the recently-enacted Tax Cuts and Jobs Act. It allows you to deduct up to twenty percent of your business income. If your income exceeds $157,500 ($315,000 for a married joint filer), the deduction is limited by filters tied to your company’s employee payroll and depreciable property ownership. There are other restrictions, but for most business owners our calculator offers a useful, simplified estimate of tax savings from the new deduction.

Curious whether you should change the tax status of your company? Read our analysis here: Should You Reform Your Business for Tax Reform?

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Planning to Live Beyond 2025? How You Can Still Enjoy Estate Tax Reform’s Sunset Special

The just-enacted Tax Cuts and Jobs Act doubles the federal estate, gift, and generation-skipping transfer lifetime tax exemptions through 2025. The exemptions revert to their pre-Act levels on January 1, 2026. Ignoring inflation adjustments, the combined exemptions for a married couple will then fall from over $22 million to $11 million. At the 40% Federal transfer tax rate, a 2026 sunset will increase a married couple’s estate tax by $4.4 million.

Do you want to avoid $4.4 million of estate tax, even if you plan to celebrate the 2026 New Year amongst the living?

A married couple can permanently harvest the increased exemptions by gifting assets with value up to the full $22 million exemption amount before 2026. If you gift into a generation-skipping trust, the exempted assets can pass through many generations free of transfer tax. With valuation discounts for lack of control and lack of marketability still fully available, family business assets are particularly attractive for gifting.

A taxpayer can not use the increased exemption until he or she first make gifts exhausting his or her pre-Act exemption. An individual does not create an additional tax benefit until he or she first gifts about $5.5 million worth of property. A couple does not capture the full additional benefit until they give away property worth over $22 million.

These ordering rules create an obstacle for many, who can not afford to give away that much property. Married taxpayers in that situation may consider funding “Spousal Lifetime Access Trusts.” Each spouse gifts assets to a trust for the other spouse, leaving the gifted assets available to the beneficiary spouse for his or her lifetime. When the beneficiary spouse dies, the remaining trust assets pass to children or other beneficiaries free of estate tax. Persons who created such trusts shortly before 2013, when another legislative sunset almost reduced the lifetime exemptions, can fund their existing trusts with additional gifts.

Many families will wait until 2026 is closer before taking action. Families with sufficient wealth to afford substantial gifting, who also expect estate tax liability even with the increased exemptions, should consider gifting sooner, to remove appreciation in the gifted assets before 2026 from their future taxable estates.

For more information regarding the Tax Cuts and Jobs Act, follow these links:

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Rethinking Large 2017 Year-End Charitable Gifts

With the standard exemption increasing and federal income tax rates generally falling in 2018, accelerating charitable gifts into 2017 may seem like a no-brainer. You might want to think twice if you plan a large charitable gift.

Under current law, the income tax charitable deduction and many other itemized deductions gradually phase out as income increases above $313,800 for married jointly filing taxpayers. The phase out continues until the deductions are reduced by 80%.

The just-enacted Tax Cuts and Jobs Act suspends this limitation, allowing charitable and other itemized deductions without the income-based phase out.  This could cause a 2018 charitable gift to produce a more valuable tax benefit than a 2017 gift, particularly for large gifts.

If you are unsure how to proceed, ask your CPA to run the numbers in both scenarios.  Better to wait a year for the deduction, than to receive a much smaller benefit than you expected.

For more information regarding the Tax Cuts and Jobs Act, follow these LINKS:

https://blog.williamsparker.com/businessandtax/2017/12/18/whats-tax-reform-bill/

https://blog.williamsparker.com/businessandtax/2017/12/18/reform-business-tax-reform/

https://blog.williamsparker.com/businessandtax/2017/12/19/2017-year-end-planning-art-equipment-non-real-estate-1031-exchanges/

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037