Sections 1400Z-1 and 1400Z-2 were added to the Internal Revenue Code of 1986, as amended (the “Code”) by the Tax Cuts and Jobs Act. These new provisions to the Code introduce a multitude of new terms, complexities and traps for the unwary.
The first new term we need to add to our already robust tax vocabulary is the phrase “Qualified Opportunity Zones” (“QOZs”). The Code generally defines QOZs as real property located in low-income communities within the US and possessions of the US. Additionally, to qualify as a QOZ, the property must be nominated by the states or possessions where the property is located and be approved by the Secretary of Treasury.
As we discussed in our February 27, 2018 blog post, the Tax Cuts and Jobs Act ("TCJA") eliminated the deduction for entertainment expenses. Despite commentary to the contrary, we have consistently reported that meals continue to be deductible (subject to the 50% limitation under Code Section 274(n)) post TCJA under Code Section 274(k) as long the meals are not lavish or extravagant, and the taxpayer (or an employee of the taxpayer) is present at the furnishing of the meals. Our position relative to meals is supported by guidance from the Service (IRS Notice 2018-76) issued on October 3, 2018. More importantly, the recently issued guidance focuses on an issue raised in our prior blog post, namely whether meals purchased at an entertainment event are deductible provided the requirements of Code Section 274(k) are satisfied. We suspected that the Service would issue guidance on this issue. It did.
The Service issued proposed regulations corresponding to IRC § 199A today. As discussed in a prior blog post, IRC § 199A potentially allows individuals, trusts and estates to deduct up to 20% of qualified business income (“QBI”) received from a pass-through trade or business, such as an S corporation, partnership (including an LLC taxed as a partnership) or sole proprietorship.
The deduction effectively reduces the new top 37% marginal income tax rate for business owners to approximately 29.6% (i.e., 80% of 37%) in order to put owners of pass-through entities on a more level playing field with owners of C corporations who now have the benefit of the greatly reduced 21% top corporate marginal tax rate under the Tax Cuts and Jobs Act (“TCJA”). The concept sounds simple, but the application is complex. The new Code provision contains complex definitions and limitations, requires esoteric calculations, and is accompanied by many traps and pitfalls.
New York Attorney General Barbara Underwood and New York Governor Andrew Cuomo announced today that the state of New York, joined by the states of Connecticut, New Jersey and Maryland, have instituted a lawsuit against the federal government in the U.S. District Court for the Southern District of New York, seeking to strike the $10,000 cap imposed on the state and local tax (“SALT”) itemized deduction by the Tax Cuts and Jobs Act (“TCJA”) as unconstitutional.
The lawsuit, which specifically names Steven Mnuchin, U.S. Treasury Secretary and David Kautter, Acting Commissioner of the Internal Revenue Service, as defendants, asserts that the SALT cap (previously discussed in an earlier blog post) was specifically enacted by the federal government to target New York and similarly situated states, that it interferes with a state’s right to make its own fiscal decisions, and that it disproportionately adversely impacts taxpayers in those states.
As we have been discussing these past several weeks, the Tax Cuts and Jobs Act (“TCJA”) drastically changed the Federal income tax landscape. The TCJA also triggered a sea of change in the income tax laws of states like Oregon that partially base their own income tax regimes on the Federal tax regime. When the Federal tax laws change, some changes are automatically adopted by the states, while other changes may require local legislative action. In either case, state legislatures must decide which parts of the Federal law to adopt (in whole or part) and which parts to reject, all while keeping an eye on their fiscal purse.
The Tax Cuts and Jobs Act (“TCJA”) will significantly impact merger and acquisition (“M&A”) activity. Although billed as tax reform, the TCJA did not reform or simplify the Internal Revenue Code (“Code”).
Virtually none of the provisions of the TCJA directly impact M&A transactions. Rather, the TCJA added or modified several sections of the Code that indirectly impact transaction structuring, pricing, negotiations and due diligence. Making matters more complex, some of these provisions of the TCJA are temporary.
This blog post briefly highlights several key provisions of the TCJA and the impact on M&A.
Charitable organizations work hard to maintain exempt status. These organizations operate in a highly regulated landscape: In exchange for enjoying freedom from income taxes, they must comply with strict organizational and operational rules. Even before the Tax Cuts and Jobs Act (“TCJA”), adhering to these rules required constant oversight. The TCJA changes the rules, impacting both the operations and funding of these organizations.
On the operational side, we review below: Changes to the rules on unrelated business taxable income and employee fringe benefits, the new excise taxes imposed on executive compensation, and college and university endowments, and changes to substantiation requirements for certain donations.
On the funding side, we review below: How changes to the standard deduction (addressed in more detail in a prior blog post), cash contribution limits, deductions for payments to colleges and universities for the right to purchase athletic event tickets, and the estate tax may impact donors and charitable giving patterns.
The Tax Cuts and Jobs Act (“TCJA”) creates the need for tax planning with respect to several major life-changing activities individuals may encounter, including marriage, divorce, home ownership, casualty losses, medical expenses and parenting. More specifically, the TCJA makes major changes to the existing framework of personal exemptions and itemized deductions, the child tax credit, the tax treatment of alimony and spousal maintenance payments made as a result of divorce, and the alternative minimum tax (“AMT”).
The primary focus of this blog post is the provisions of the TCJA that significantly impact families and individuals. Many of these provisions have been exhaustively reviewed by other commentators in the past several weeks. In those instances, our discussion is brief. Rather, we decided to place the bulk of our discussion on the less obvious provisions of the TCJA that may have significant impact on families and individuals.
The Tax Cuts and Jobs Act (“TCJA”) creates, modifies or eliminates a number of employment and employee fringe benefit related provisions of the Code. Both employers and employees need to be aware of these changes. Accordingly, this installment of our ongoing review and analysis of the TCJA focuses on these employer and employee fringe benefit provisions.
“Neither a borrower nor a lender be…” or at least, if you insist on borrowing (and we understand the appeal), we are here to help you stay abreast of the new rules on deducting interest.
Interest on a business or investment related debt is, in most instances, a deductible expense of the borrower and taxed as income to the lender. With a few exceptions, such as mortgage interest on a personal residence, borrowers generally cannot deduct personal interest. A borrower’s deduction is subject to a number of limitations set forth in Code Section 163. The Tax Cuts and Jobs Act (“TCJA”) has changed some of these limitations.
Before the enactment of the TCJA, nondeductible interest included any interest on a taxpayer’s debt not arising from a trade or business, home mortgage, investment activity, or qualified student loans (in other words, interest arising from those debts was deductible).
Larry J. Brant
Larry J. Brant is a Shareholder in Foster Garvey, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; Washington, D.C.; New York, New York, Spokane, Washington; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long-term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.