Tax Cuts and Jobs Act Disallows Deductions for Many Payments Due to Violation of Civil and Criminal Law

Posted in Internal Revenue Code, IRS, Tax Cuts and Jobs Act

A provision in the new tax law greatly expands the scope of the disallowance of deductions for fines and penalties paid to government agencies. The new law disallows a tax deduction for any payment made to a government entity where the payment was made in relation to a violation of law or the investigation of a violation. Furthermore, it will disallow a deduction for payments made to third parties at the direction of a government agency. This deduction disallowance will make it costlier for a company to investigate and settle claims of violation of laws and regulations brought by federal, state, or local agencies or a foreign government. It will potentially touch a wide array of controversies that involve claims or actions alleging the violation of laws, including securities, employment, environmental, Foreign Corrupt Practice Act, white collar, whistleblower, healthcare, insurance, gaming, government contracts, or any other regulated industry. Under a literal reading of the statute, it could also apply to qui tam actions brought by private parties under a false claims (whistleblower) or private attorney general act. Any proposed settlement or consent order should be analyzed to determine whether it can be structured to limit the application of this new tax law.

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Greenberg Traurig Will Sponsor and Host Washington Women’s Leadership Initiative (WWLI) Event

Posted in Event, Firm News

On March 7, 2018, Greenberg Traurig’s Northern Virginia office will host the WWLI event featuring Dr. Sachiko Kuno, the founder and visionary creative behind Halcyon House.  Dr. Kuno will share her journey from entrepreneur to philanthropist and the inspiration behind Halcyon House, an environment for artistic and social innovators to transform their inspiration into impact for a better world. As part of this message, she will speak about the importance of self-efficiency.

Please find more details about the event here.

To register for this event, click here.

IRS Announces March 2018 Applicable Federal Rates and 7520 Rates

Posted in Applicable Federal Rates (AFRs), IRS

The Internal Revenue Service (IRS) publishes a monthly update to the applicable federal rates (AFRs) and 7520 rates.

Planning professionals and their clients should take note of fluctuations in these rates and be mindful of planning opportunities that come with rate changes.

The AFR is calculated by the IRS under Section 1274(d) of the Internal Revenue Code (Code) and is used for many purposes. One of its most common applications is to establish the minimum interest rate that can be charged on an intra-family loan without income or gift tax consequences. These “safe harbor rates” are dependent upon two factors: (i) the term of the loan and (ii) the frequency of compounding of interest.

For these purposes:

  • Demand notes and notes with a term of three years or less are considered short-term obligations;
  • Notes with a term of more than three years but less than nine years are considered mid-term obligations; and
  • Notes with a term of more than nine years are considered long-term obligations.

The AFR rates for March 2018 and the preceding six months are as follows:

The 7520 rates are used to calculate the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest. They are calculated by the IRS under Code Section 7520 (hence, the name “7520 rates”) and are always 120 percent of the AFR for mid-term obligations with semi-annual compounding.

The 7520 rates for March 2018 and the preceding six months are as follows:

Rates are typically published by the 20th day of each month and provide planning opportunities for certain estate planning vehicles which are interest rate sensitive. For example:

  • Lower rates are generally preferable for intra-family loans, grantor retained annuity trusts (GRATs), installment sales to grantor trusts, and charitable lead annuity trusts (CLATs).
  • Higher rates are generally preferable for qualified personal residence trusts (QPRTs) and charitable remainder annuity trusts (CRATs).

As rates continue to change, advisors and clients should maintain an open dialogue so that clients can take advantage of any planning opportunities tied to increasing or decreasing rates.

Taxpayers Bear Risk of State’s Proposals to Counter Elimination of SALT Deduction

Posted in IRS, State Tax

Several states are considering proposals in an attempt to reduce the impact of federal tax reform’s $10,000 limit on state and local tax (SALT) deductions. In New York, the Governor’s budget proposal includes establishing two charitable organizations (one for health care and one for education) that will enable taxpayers to make a contribution to those funds and receive a credit for 85 percent of the amount donated to offset SALT liabilities. California’s SB 227 similarly creates a charitable organization (California Excellence Fund) and provides a credit against the California income tax for contributions made. Oregon has a similar proposal pending and New Jersey’s Governor indicated that his state is looking into such a plan as well. All of these proposals would give taxpayers the opportunity to make the charitable contribution and get a federal tax deduction and reduce their SALT liability which would be subject to the $10,000 limitation.

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California Proposes Legislation to Impose Sales and Use Tax on Services

Posted in Sales Tax, State Tax

Recently proposed legislation would require sellers to collect sales and use tax on the sales price of certain services to California businesses.

On Feb. 5, 2018, California Senator Robert Hertzberg introduced a bill, which if enacted, would impose sales and use tax on purchases of services by businesses for benefit and use in California, effective Jan. 1, 2019.  For services that benefit or are used by the purchaser’s California and non-California operations, a share of the services would be apportioned to California.  The proposed tax rate has not yet been determined.  Notably, the tax would not apply to purchases of services by individuals.

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Whistleblower Claims Taxpayer Avoided New York Estate Tax on Change of Domicile to Florida

Posted in Estate Tax, Tax Planning

He may be dead but his troubles are not over. In a unique Qui Tam case under the New York False Claims Act, the failure to file a New York estate tax return and pay estate tax was claimed to be fraudulent because the decedent, as of the date of his death, had not actually changed his domicile to Florida from New York.1 The case was commenced by a former employee of the decedent physician’s medical practice. The employee alleged that although the physician had sold his home in New York and taken steps to change his domicile from New York to Florida, all of these acts were fraudulent and intended to evade the New York estate tax. For individuals who have or are contemplating changing their state tax residence from New York, this development emphasizes the importance of understanding the ways that New York can challenge such a tax planning technique. It also highlights how easy it might be for a third party to tip-off the New York Department of Taxation if the guidelines to change the state of tax residence have not been followed.

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Tax Cuts and Jobs Act (TCJA) Changes to Tax-Advantaged Bonds

Posted in Tax Cuts and Jobs Act

The president signed the Tax Cuts and Jobs Act (the 2017 Tax Legislation) into law on Dec. 22, 2017.  The 2017 Tax Legislation made direct changes to the tax rules for tax-advantaged bonds, including eliminating advance refunding bonds and tax-credit bonds, and made other changes that will indirectly effect tax-advantage bonds, including reducing corporate tax rates and eliminating alternative minimum tax on corporations.  This legislation is the most comprehensive tax legislation since 1986.  Congress’ expedited passage of this significant legislation set precedent:  the legislation went from first introduction of the House bill to enactment in just over seven weeks.  As a result, the legislation left significant unanswered questions.  There is speculation about tax legislation in 2018, including a technical corrections bill to address some of these open issues and an infrastructure bill that may include additional changes to the tax-advantaged bond rules.  Putting this potential legislation aside, this GT Alert addresses certain implications and questions that arise from the enacted 2017 Tax Legislation.

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IRS Announces February 2018 Applicable Federal Rates and 7520 Rates

Posted in Applicable Federal Rates (AFRs), Internal Revenue Code, IRS

The Internal Revenue Service (IRS) publishes a monthly update to the applicable federal rates (AFRs) and 7520 rates.

Planning professionals and their clients should take note of fluctuations in these rates and be mindful of planning opportunities that come with rate changes.

The AFR is calculated by the IRS under Section 1274(d) of the Internal Revenue Code (the Code) and is used for many purposes.  One of its most common applications is to establish the minimum interest rate that can be charged on an intrafamily loan without income or gift tax consequences.  These “safe harbor rates” are dependent upon two factors: (i) the term of the loan and (ii) the frequency of compounding of interest.

For these purposes:

  • Demand notes and notes with a term of three years or less are considered short-term obligations,
  • Notes with a term of more than three years but less than nine years are considered mid-term obligations, and
  • Notes with a term of more than nine years are considered long-term obligations.

The AFR rates for February 2018 and the preceding six months are as follows:

The 7520 rates are used to calculate the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest.  They are calculated by the IRS under Code Section 7520 (hence, the name 7520 rates) and are always 120% of the AFR for mid-term obligations with semi-annual compounding.

The 7520 rates for February 2018 and the preceding six months are as follows:

Rates are typically published by the 20th day of each month and provide planning opportunities for certain estate planning vehicles which are interest rate sensitive.  For example:

  • Lower rates are generally preferable for intra-family loans, grantor retained annuity trusts (GRATs), installment sales to grantor trusts and charitable lead annuity trusts (CLATs).
  • Higher rates are generally preferable for qualified personal residence trusts (QPRTs) and charitable remainder annuity trusts (CRATs).

As rates continue to change, advisors and clients should maintain an open dialogue so that clients can take advantage of any planning opportunities tied to increasing or decreasing rates.

Impact of the Tax Cuts and Jobs Act on Real Estate

Posted in Government, Income Tax, Real Estate, State Tax, Tax Cuts and Jobs Act

The following is a summary of the real estate provisions of the Tax Cuts and Jobs Act (TCJA) signed into law by President Trump on Dec. 22, 2017.

Individual Rates (Temporary)

General tax rate and bracket reductions for individuals (top rate of 37 percent applies to income above $600,000 for joint filers, $500,000 for single filers). Increases the AMT exemption level and AMT exemption phase-out level. New rates and AMT rules expire after 2025. The 3.8% net investment income tax remains in effect.

Itemized Deduction Limit (Temporary)

Miscellaneous itemized deductions, previously subject to the two percent floor (e.g., investment management fees), are no longer deductible. Expires after 2025.

Corporate Tax Rate (Permanent)

Flat 21 percent tax rate for C corporations; repeals the corporate AMT.

Disallowance of Deductions for State and Local Income Tax and Property Tax (Temporary)

  • Limited to $10,000 per year.
  • No limit for real property taxes paid or accrued in connection with a trade or business. However, state income taxes that are payable by a non-corporate investor in a pass-through entity are subject to this $10,000 aggregate deduction limitation. For example, assume that Jeff is a 50 percent member of an LLC which owns an office building in Illinois. The LLC pays $200,000 in real property taxes, and has total net income of $500,000. Jeff’s 50 percent share of the property taxes ($100,000) is fully deductible for federal income tax purposes, but the Illinois income taxes that he pays on his 50 percent share of the net income (the state tax on his $250,000 share of the profits), along with (i) any other state income taxes he pays and (ii) any real property taxes he pays that are not associated with a trade or business, are subject to the $10,000 limit on state and local taxes that would be allowed as a deduction
  • Expires after 2025

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U.S. Supreme Court to Hear Arguments on Whether Physical Presence is Required for Sales and Use Tax Purposes

Posted in Sales Tax, State Tax

U.S. Supreme Court grants certiorari in South Dakota v. Wayfair, et al.

The U.S. Supreme Court will review the validity of a South Dakota law which requires remote retailers to collect the state’s sales and use tax even if the retailer does not have a physical presence there. If this state law is upheld by the high court, it may result in a tidal wave of similar legislation around the country, requiring online retailers who do not already do so to collect and remit tax and be subject to audits by state and local taxing authorities.

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