The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides various relief provisions for individuals, including provisions that benefit individuals in relation to their retirement plans and that provide an increase in allowable charitable deductions. Continue reading
The Treasury Department will extend the deadline for filing income tax returns from April 15, 2020 to July 15, 2020. This brings the income tax filing deadline in line with the deadline for paying income tax, which was extended just days ago by IRS Notice 2020-17. The filing extension was announced in a tweet by Treasury Secretary Steven Mnuchin before noon today, Friday, March 20. According to Secretary Mnuchin, “[a]ll taxpayers and businesses will have this additional time to file and make payments without interest or penalties.” We expect more details soon.
Tax inversions have been in the news for several years now, but almost always in the context of a public US company reincorporating in a foreign country to achieve lower tax rates on non-US source income. However, there is another type of inversion, the S corporation inversion, that does not involve any foreign countries but can be an elegant solution to a problem faced my many small and medium-sized businesses operated as S corporations.
Many businesses start as S corporations for good tax reasons, but later in their lifecycle want to convert to a tax partnership (such as an LLC taxed as a partnership) for a variety of business and tax reasons. For example, perhaps a private equity fund or foreign investor (which are both impermissible S corporation shareholders) want to invest in the business and become owners. Another example is where an S corporation wants to grant an equity interest to a key employee in exchange for their past and future services. Oftentimes, the best approach in this case is to grant the employee a “profits interest” in the business, but S corporations cannot grant such interests, while tax partnerships can. Simply converting or merging the S corporation into an LLC taxed as a partnership is not satisfactory, because that transaction would trigger the taxable liquidation of the S corporation.
One method to convert to a tax partnership tax-free, without undergoing an inversion, is the “LLC drop-down,” which entails the S corporation forming a wholly-owned LLC, that is initially a disregarded entity for tax purposes, and transferring all of the S corporation’s assets and business to the new LLC. Once this is accomplished, the new investors can invest in the business by investing into the new LLC, which will become a tax partnership. However, this restructuring is deceptively simple, because migrating the S corporation’s business to the new LLC can create many issues, including (1) migrating employees, payroll, and benefit plans to the new LLC; (2) opening new operating and payroll bank accounts for the new LLC; (3) consulting with insurance agents to obtain coverage for the new LLC; (4) assigning customer, lease, vendor, and other key agreements to the new LLC, which oftentimes requires the counterparty’s consent; (5) transferring or obtaining new licenses and permits for the new LLC to operate the business; and (6) obtaining lender consent.
These headaches can oftentimes be avoided by utilizing an S corporation inversion. The S corporation inversion is accomplished by having the shareholders of the S corporation (“Old S”) transfer their stock to a newly formed S corporation (“New S”) in exchange for all the stock of New S. Old S immediately makes an election to be a qualified subchapter S subsidiary, and so Old S will be disregarded for tax purposes. New S then forms a wholly-owned LLC, which is initially disregarded for tax purposes, and then merges Old S into the new LLC, with new LLC as the survivor of the merger. The merger is without tax consequences, because it’s a merger of two entities, Old S and LLC, that are disregarded for tax purposes. Furthermore, by operation of the Florida merger statute, all of the assets, liabilities, contracts, and legal relationships of Old S transfer to LLC and in most circumstances no third party consents are required. Now the old business is in a new LLC that can take on new investors in a tax partnership format and without many of the headaches of migrating a business to a new legal entity. For guidance on this structure, see Treasury Regulation Section 1.1361-5(b)(c), Example 2.
We are pleased to announce the publication of the sixth issue of our firm magazine, Requisite. This issue focusses on succession planning for family businesses of all sizes. We feature an interview with Ken Feld, the CEO of Feld Entertainment (which owns Ringling Bros. and Barnum & Bailey Circus and Disney on Ice). He is the second generation of his family to run the business and is transitioning its control to the third generation. You will also find articles covering some of the emotional and technical challenges to creating a great succession plan. And we consider an underappreciated connection between Henry David Thoreau and his family’s business.
There are many different options for structuring the sale or purchase of a closely-held business, and determining the best option depends on several factors. The presentation linked below discusses some of the key points to consider when selling or acquiring a business. It also describes some of the most common types of transactions and their respective advantages and disadvantages. Lastly, the presentation looks at certain financing arrangements used in connection with a sale or purchase as well as methods to protect the interests of the parties following the closing of the transaction.
Here is a link to the presentation: http://williamsparker.com/docs/default-source/presentations/legal-considerations-for-structuring-business-sale-or-acquisition.pdf?sfvrsn=4
As the baby-boomer generation ages, an increasing number of family businesses will be experiencing transitions in ownership and/or management. Not all of these transitions will be successful; popular studies indicate that only 30% of family businesses survive beyond the first generation. In some cases, a transition may be undermined by a disconnect between the owner’s estate plan and the business’ succession plan. A transition can be both successful and profitable, however, with patience, persistence, and proper planning.
John Wagner and Doug Elmore recently discussed techniques that can help align a business succession plan with an estate plan at a joint meeting of the Gulf Coast Chapter of the of Florida Institute of CPAs and the Suncoast Chapter of the Financial Planners Association. Here is a link to their presentation materials:
Striking a Balance: Aligning the Business Succession Plan With the Estate Plan
The Supreme Court’s decision authorizing nationwide same-sex marriage further extends marital rights. But some extraordinarily-tax-motivated same-sex couples may make the same choice that some opposite-sex couples have made for years, to avoid marriage to take advantage of tax planning opportunities married couples cannot.
Marriage brings with it many tax benefits, especially under the federal income tax for families of all income levels with a single wage earner, and under the federal estate and gift tax, where even wealthy spouses are allowed unlimited tax-free transfers between themselves. But married couples are also treated as “related parties” under the Internal Revenue Code. Related party treatment prevents spouses from engaging in many tax motivated transactions that unmarried persons—even those who for all practical purposes function like a married couple—cannot.
For example, unmarried persons who co-own a corporation can more freely engage in redemption transactions in which their corporate share income tax basis offsets distribution income. Married couples are more restricted in this regard. Unmarried persons can buy and sell property between themselves free of related-party rules that re-characterize lower-tax long-term capital gain as higher-tax-rate ordinary income or prevent the purchaser from re-depreciating purchased assets. Members of unmarried couples can serve as counterparties in tax-deferred 1031 exchanges, whereas married couples are restricted in this regard.
The number of persons who would avoid marriage for tax reasons is limited. In our experience, however, some individuals—particularly those with substantial real estate holdings–take these tax planning opportunities into account when deciding whether to marry under the law, even if they are committed in their hearts. Those taxpayers turn Congressional policy on its head, causing tax laws intended to prevent abusive tax avoidance by closely connected individuals into an unintended deterrent to marriage.