Tag Archives: tax

How the 2020 Election Might Impact Federal Gift and Estate Tax Law

There has been a lot of discussion about the impact that the upcoming election might have on federal gift and estate tax law. In light of this, we feel that it would be helpful to provide an update of the current situation and a brief summary of some of the planning opportunities that may be beneficial in the current environment. We also want to highlight the recent passage of the SECURE Act and discuss the impact this new law might have on your estate plan.

The current available estate and gift tax exemption is $11.58 million. Generally speaking, this is the amount that can be transferred during lifetime (by gift) or at death before transfer tax is imposed. Under current law, this exemption amount is tied to the rate of inflation and is therefore likely to gradually increase through 2025. If Congress does not act in the interim, then on January 1, 2026, the estate and gift tax exemption will reduce to $5 million, as indexed for inflation.

The Internal Revenue Service issued final Treasury regulations confirming that taxable gifts made between 2017 and 2026, in excess of the exemption amount available on the date of death, will not be “clawed back” into the gross estate for federal estate tax purposes. In other words, if a taxable gift of $11 million is made this year, and in the year of the transferor’s death the exemption amount is $5 million, the transferor’s estate will not pay transfer tax on the excess $6 million that was gifted when the exemption amount was $11 million. The anti-clawback regulations provide unique tax planning opportunities to lock in the temporary increase in the exemption via gifting prior to its reversion.

Since the upcoming elections may yield a political shift in both the executive and legislative branches, the estate and gift tax exemption might be adjusted prior to January 1, 2026. There is also discussion that such a political shift could lead to the imposition of an additional tax on unrealized appreciation upon the transfer of assets by gift or at death and an increase in both marginal gift and estate tax rates. Obviously, we do not know what the upcoming election holds, and we do not know what legislation might be passed in the coming years. Regardless, it seems prudent for those who potentially might have a taxable estate to monitor the situation and consider whether they wish to avail themselves of any planning opportunities before any possible changes are made.

Given the current situation, most people are drawn to strategies that allow them to make a gift in a manner that will (1) lock in the current $11.58 million exemption amount; (2) remove assets, and the appreciation thereon, from their gross estate; and (3) retain some use of the gifted assets after the gift. Some popular strategies that meet these criteria are as follows:

Spousal Lifetime/Limited Access Trust (SLAT): A SLAT is an irrevocable trust established by someone for the benefit of his or her spouse. The general concept is that the gifted SLAT funds remain available for the spouse (and possibly children) during the spouse’s lifetime. A SLAT is structured so that it does not qualify for the marital deduction; thus it utilizes the transferor spouse’s exemption. During the beneficiary spouse’s lifetime, the beneficiary spouse retains use of the funds. When the beneficiary spouse dies, however, such access is lost, and the trust assets are distributed or held in further trust for designated beneficiaries.

Many people like to maximize this strategy by having both spouses create SLATs for the benefit of each other. This is permitted; however, such SLATs must be carefully structured to include enough differences so as not to be deemed reciprocal trusts.

Grantor Retained Annuity Trust (GRAT): A GRAT is an irrevocable trust that is established for a specific term of years. During the term, the grantor retains the right to receive an annual payment from the trust. The term of the GRAT and the amount of the payment can be modified based on how much of the exemption the grantor wishes to utilize. As long as the assets in the GRAT appreciate greater than the Section 7520 rate (currently only 0.4 percent), then there will be assets that can pass to beneficiaries tax-free at the end of the term. A grantor who wishes to utilize a larger portion of his or her exemption through a GRAT would reduce the size of the annual payment that comes back during the term of the GRAT.

Qualified Personal Residence Trust (QPRT): A QPRT is an irrevocable trust funded with the grantor’s personal residence (or secondary home) in which the grantor retains the right to use the residence for a term of years. Upon the expiration of such term (if the grantor survives the term), the ownership of the property will pass to the remainder beneficiaries, either outright or subject to continuing trust.

The establishment of a QPRT will be deemed a taxable gift of the remainder interest to the trust beneficiaries. The value of the taxable gift will be the overall fair market value of the transferred property reduced by the value of the retained interest (i.e., the term of years selected). This allows the grantor to transfer the full value of the residence using only the exemption equal to the value of the remainder interest. After the term of the QPRT ends, the grantor may lease the property back from the remainder beneficiaries for fair market value.

The federal income tax consequences of the aforementioned trusts should also be considered. Each of the trusts, at least for a period of time, is structured as a “grantor trust,” which means that the grantor is taxed on all the income earned by the trust during such time period. This may be beneficial because the income taxes paid by the grantor serve as an additional transfer of wealth to the beneficiaries, free of transfer tax. Another important income tax consequence is that when a gift is made during life, the recipient of the gift receives a “transferred basis” in the asset. This means that the recipient of the gifted asset has the same basis in the asset that the transferor held. Alternatively, if an asset is transferred upon death, the recipient’s basis would be adjusted to the asset’s fair market value, which is generally more desirable for income tax purposes. Therefore, the specific assets utilized for any gifting strategy must be carefully considered.

This is not an exhaustive list of options. For example, those who do not care to retain any interest in the gifted assets can continue to utilize outright gifting directly to a beneficiary or to a trust for the benefit of one or more beneficiaries. The gifted assets could consist of closely held business interests, which might qualify for a valuation discount. If you have previously loaned money to a beneficiary, you might consider forgiving the note and thereby triggering a gift. Some clients are also looking to refinance existing loans at lower current applicable rates. You should speak with your estate planning attorney to determine which techniques are appropriate for you. There are a multitude of options, depending on your intent, family structure, asset holdings, and market outlook.

The SECURE Act and Its Impact

In addition to the possible changes to the transfer tax rules, the recent passage of the SECURE Act has caused a major change in how many retirement plans can be administered and distributed following the account owner’s death. Many of such plans are now subject to a 10-year payout requirement after the death of the account owner. Previously, such accounts could generally be paid out over the life expectancy of the named beneficiary. For many plans, this change will result in an acceleration of the income tax liability following the account owner’s death. Therefore, we also suggest that you review your retirement accounts and the named beneficiaries of such accounts to ensure that the treatment of such assets after your death is consistent with your intent.

If you would like to review the options available in further detail, or if you simply feel that it may be beneficial to review your estate plan in light of the SECURE Act or our uncertain political and estate tax environment, please feel free to contact us. We will be happy to help you protect your intent and preserve your estate for you and your family. 

FINAL OPPORTUNITY TO FILE – 2020 Florida Annual Uniform Business Reports

The deadline to file a 2020 Florida Annual Uniform Business Report for your Corporation, Limited Liability Company, Limited Partnership, or Limited Liability Limited Partnership to maintain its active status with the State of Florida was June 30, 2020. If you have not already filed a Florida Annual Report for your entity for 2020, you may still do so to avoid the administrative dissolution of the entity by filing the report by the close of business on Friday, September 18, 2020, and paying a $400 late fee in addition to the standard filing fee. Failure to file a 2020 Florida Annual Report by Friday, September 18, 2020, for an entity will result in the entity’s administrative dissolution or revocation on September 25, 2020. Entities that are administratively dissolved or revoked may be reinstated; however, such reinstatement will require the submission of a reinstatement application, as well as the payment of a reinstatement fee and the standard annual report fee.

Even if a third party, like Cross Street Corporate Services, LLC, serves as your entity’s registered agent, it is your responsibility to file the Annual Report with the State of Florida. Annual Reports should be electronically filed at the Florida Department of State’s website: www.sunbiz.org. If you need assistance, please contact us.

You may disregard this notice if your entity was formed in 2020 or has already filed a Florida Annual Report for 2020.

Join Us for a Webinar: Employment Law and Tax Developments Businesses Might Have Missed While Focused on COVID-19

Over the last several months there have been developments in employment law and tax not directly related to COVID-19 that you may have missed. While businesses have been focused on responding to COVID-19—learning about the Families First Coronavirus Relief Act, the PPP, and developments with unemployment—the Supreme Court and government agencies have been making decisions that impact the workplace.

We invite you to join us for a complimentary, one-hour Zoom webinar to discuss some of these decisions and how they may impact the workplace.

TOPICS INCLUDE:

  • Expansion of Title VII protection of sex to include sexual orientation and gender identity
  • Expansion of rights of religious employers
  • Changes to certain provisions of the Fair Labor Standards Act
  • Updates from the National Labor Relations Board on workplace investigations and work email
  • Amendment to the Florida Civil Rights Act
  • Tax planning for 2020
  • Tax provisions supporting businesses

Wednesday, August 12
10:00 – 11:00 a.m. 

REGISTER NOW >

PRESENTED BY:

Jennifer Fowler-Hermes
Board Certified Labor & Employment Attorney | Williams Parker

Gail E. Farb
Labor & Employment Attorney | Williams Parker

Beth C. Ebersole
CPA, ABV | Kerkering, Barberio & Co.

Moderator:
Thomas B. Luzier
Board Certified Real Estate Attorney | Williams Parker

With $130 Billion Left, PPP Application Deadline Extended

On July 1, 2020, the House waived through Senate-passed legislation (S. 4116) that extends the deadline to apply for a loan under the Paycheck Protection Program (PPP), the centerpiece of relief under the CARES Act. The PPP provides forgivable loans to certain small businesses to cover payroll and other permissible expenses.

The original deadline to apply for PPP loans was last Tuesday, June 30, 2020. With the President’s signature over the weekend on July 4, 2020, the deadline for businesses to take advantage of the nearly $130 billion in remaining PPP funds is now August 8, 2020. Business owners interested in applying for a PPP loan should contact their local lender about the program. We are happy to discuss the PPP and other available economic relief for your business.

PPP Flexibility Act Expected to Be Signed into Law

On Wednesday, June 3, 2020, the U.S. Senate passed the Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010), which was approved by the House late last week. President Trump is expected to sign the Act into law. As a part of the larger Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, the Paycheck Protection Program (“PPP”) provides loans to small-to-mid-sized businesses suffering from the COVID-19 pandemic. As enacted, the PPP loans are to be forgivable when used for specific business and payroll expenses during a specified timeframe. Any forgiven loan amounts are excluded from businesses’ taxable income. However, due to insufficient funding and lengthier pandemic-related shutdowns, the PPP relief became inaccessible for many businesses.

The changes made to the PPP by the new legislation include:

  • Allowing businesses 24 weeks (or until December 31, 2020, if it comes first) post-loan origination to use loan money that will qualify for forgiveness. This applies to both new and existing loans.
  • Reducing the amount of loan money required to be spent on payroll expenses from 75 percent to 60 percent, allowing more funds to be spent on rent, utility payments, and mortgage interest.
  • Extending the time period for the rehiring exception to forgiveness reduction from June 30, 2020 to December 31, 2020 and adding new exceptions for employers who could not find qualified employees or were unable to restore business operations to February 15, 2020 levels due to COVID-19-related operating restrictions.
  • Extending the loan terms from two to five years, unless otherwise modified by lenders and borrowers.
  • Permitting payroll tax deferment for businesses that receive PPP loans regardless of loan forgiveness. Under the CARES Act and subsequent interpretive guidance, payroll tax deferral could only be utilized up until a business received notification of loan forgiveness.
  • Replacing the six-month deferral of PPP payments due with deferral until the date on which the amount of loan forgiveness is provided to the lender.

The legislation does not clarify the parameters of the required PPP certification that “[c]urrent economic uncertainty makes [a] loan request necessary to support the ongoing operations of the Applicant.” It also does not address the deductibility of expenses paid for by PPP loan funds, as previously discussed in a prior post. Further PPP corrections and guidance are expected.

Join Us for a Webinar on Business Basics

Every day is a new reality, especially in times of crisis, when the only constant seems to be change itself.

Whether dealing with challenges faced from COVID-19 or using the current time to plan new ventures, it is important to plan and implement strategies in line with today’s fluid business environment. Whether starting a new business or confirming that your existing business is on track, knowing the basics can help maximize your success.

Join Williams Parker attorneys Jennifer Fowler-Hermes and Elizabeth Stamoulis, accompanied by Kathy Hargreaves, CPA, CFP®, CPC®, of Kerkering and Barberio, for a virtual and interactive presentation covering:

• Basic business and employment documents
• Protecting intellectual property
• Properly classifying workers to avoid missteps
• Tax implications and proper tax registration

BUSINESS BASIC: GETTING IT RIGHT FROM THE START (OR IN THE MIDDLE)

Friday, June 12
10:00 – 11:00 a.m.

Sign Up >

Our Business Solutions team helps business owners and entities assess and manage risk, advise on tax and compliance issues, provide workout and turnaround guidance, and offer creditor, restructuring, and bankruptcy representation. We work with HR executives to assess potential employment liability; review, update, and advise on employment policies; defend employment law claims; and assist with regulatory guidelines. For those seeing opportunity amidst uncertainty, the firm offers start-up guidance on tax, employment, and intellectual property issues. Its attorneys assist commercial and residential landlords and tenants with abatements, deferments, amendments, forbearance, and help identify remedies, including business interruption insurance and updated lease provisions. Should litigation arise, the team is prepared to advocate on your behalf.

PPP Bonuses, Hazard Pay Count Towards Forgivable Payroll Costs, and Other New Guidance

On May 22, 2020, a week after issuing the application form for the CARES Act’s Paycheck Protection Program (“PPP”) loan forgiveness, the Small Business Administration (“SBA”) released the twenty-six-page interim final rules that provide formal guidance to accompany the application package.

Most of the interim final rules reiterate the substance of the PPP loan forgiveness application, but they also include new pieces of significant guidance such as the inclusion of employee bonuses and hazard pay as forgivable payroll costs when paid to employees earning less than $100,000 a year. Such payments are eligible for forgiveness because, as a supplement to salary or wages, they are considered compensation.

Some of the other significant new guidance includes:

  • a further cap on the forgivable payroll expenses of owner-employees, as not to be confused with self-employed individuals, in an amount that is the lesser of 8/52 of 2019 compensation or $15,385 per employee;
  • application of the above cap across all business, suggesting that someone with an ownership interest in multiple business will be subject to the overall limitation; and
  • safe harbors to protect borrowers from a reduction in full-time employees due to the employees’ actions.

Unsurprisingly, questions remain following the release of the rules, such as the definition of an “owner-employee.” No additional IRS frequently asked questions  have been released to supplement the interim final rules.

IRS Issues Expanded FAQ Guidance on Employee Retention Credit

The Internal Revenue Service (“IRS”) has expanded its FAQ guidance on the Employee Retention Credit (“ERC”), which has been discussed in greater detail in a prior post. Enacted as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, the ERC provides a refundable tax credit to eligible employers for certain employment taxes equal to 50 percent of up to $10,000 in qualified wages paid per employee, effective March 12, 2020 through December 31, 2020. However, employers that received loans under the Paycheck Protection Program (“PPP”) are not eligible for the ERC.

The ERC FAQ was originally posted in late March, and the IRS has since continued to update it. The FAQ now has nearly 100 questions posed and answered on major-issue areas such as:

A more recent update relates to the eligibility of an employer who repays its PPP loan in accordance with the Small Business Administration (“SBA”) requirement that a business recertify in good-faith that the PPP loan was “necessary to support ongoing business operations” (previously discussed here, here, and here). Released May 8, 2020, the IRS FAQ 79 states that an employer that applied for the PPP loan, received payment, and “repays the loan by May 14, 2020 . . . will be treated as though the employer had not received a covered loan under the PPP for purposes of the Employee Retention Credit.” Therefore, the employer will be eligible for the credit if the employer is otherwise an eligible employer.

The original deadline for PPP loan repayment was May 7, 2020, but was extended to May 14, 2020 with FAQ 43 of the SBA’s PPP FAQs. The SBA then further extended the repayment deadline to Monday, May 18, 2020 in SBA FAQ 47, following its release of guidance which relieved borrowers with loans of less than $2 million from the “necessity” recertification. While the IRS ERC FAQ has not been updated to reflect the new May 18 deadline, we can only assume that those employers who do make repayment by this time would qualify for the ERC all the same. We note, however, that implicit in IRS FAQ 79 is that employers who do not voluntarily make timely repayment may not claim the ERC. In other words, any employer who is ultimately forced by the SBA to repay the loan would not be allowed to take the ERC.

While the PPP loan was at the top of most employers’ COVID-relief wish lists, and for obvious reasons, the ERC may be the next best option for those who erred on the side of repayment. We are happy to answer any questions employers that opted for repayment may have.

PPP Loans Less Than $2 Million Deemed Certified in Good Faith; Larger Loans Get Penalty Relief But Remain In Cloud of Repayment Uncertainty

On Wednesday, May 13, 2020, just a day before the deadline to recertify or repay Paycheck Protection Program (“PPP”) loans (previously discussed here), the Small Business Association (“SBA”) made good on its promise to provide further guidance as to what circumstances necessitate repayment with its release of FAQ 46. The new FAQ asks the following question:

“How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?”

The first part of the SBA’s answer reveals a safe harbor for borrowers of PPP loans with an original principal amount of less than $2 million. Borrowers who received loans below this threshold will be deemed to have certified in good faith that the loan was necessary, because they “are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans.” The SBA also admitted that it has bigger fish to fry, as removing these borrowers from the PPP loan pool will allow it to “conserve its finite audit resources and focus its reviews on larger loans.”

As for the $2 million-and-above borrowers, the FAQ goes on to say that they may still have an adequate basis for making the required good-faith certification depending on their circumstances. If, however, the SBA determines by its review that a borrower lacked an adequate basis for its PPP loan, the SBA will seek repayment of such loan and notify the lender that the borrower is ineligible for loan forgiveness. Further, the SBA will not take administrative enforcement action to collect repayment or make referrals to other agencies if the borrower voluntarily repays the loan after receiving notification from the SBA. The SBA did not offer a specific timeframe within which repayment would prevent administrative enforcement.

Borrowers who did receive loans of $2 million or more should consider setting aside enough funds to make a repayment should the SBA require it, though one wonders whether the SBA could use retention of such reserves as a basis to question the necessity—and hence the qualification—of the loan. That seems like an unfair catch-22, motivating “larger” small businesses to stop paying employees after the PPP measuring period ends. We hope the SBA will provide more clarification to help these businesses avoid that dilemma and to encourage businesses to continue deploying funds to keep their workforces in place after the PPP measurement period ends.

The SBA also released FAQ 47 later in the day on May 13, which automatically extends the repayment date to Monday, May 18, 2020. The stated reason for this extension is “to give borrowers an opportunity to review and consider FAQ 46.” The practical significance of FAQ 47 as it relates to the necessary-ness certification is unclear, given the penalty relief provided by FAQ 46.

Why Individuals Should Care About the CARES Act: Retirement Plans and Charitable Contributions

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