Tag: taxes

Why is Section 962 Back in the Spotlight? [Podcast]

In this podcast, international tax and estate planning attorneys Megan Ferris and Paul J. D’Alessandro, Jr. provide an overview of how individuals and corporations are taxed under the GILTI regime and discuss why section 962 has come back into the spotlight in a post-2017 Tax Act world.

Transcript:

PAUL D’ ALESSANDRO

Good morning, everybody, and welcome to our first Bilzin Sumberg Tax Talk podcast. My name is Paul D’Alessandro, and I’m a tax associate here with our international private client group. I focus my practice on inbound planning and estate planning for international high net worth individuals. I’m here today with my colleague, Megan Ferris.  How are you doing this morning, Megan?

MEGAN FERRIS

Hi, Paul. My name is Megan Ferris. I am an international tax associate with Bilzin Sumberg in Miami, Florida. I focus primarily on inbound and outbound tax structuring for businesses, typically closely held businesses. Our hope with this podcast is to bring you current issues related to various tax, trust, and estate matters.

PAUL D’ ALESSANDRO

Thanks, Megan, and I think we have a great topic for you this morning. Our first topic to kick off our podcast series. And we’re going to be talking about Section 962 and why it’s come back into the spotlight as of late. So, I think we’re going to hop right into it. And, Megan, I think a good way to start would be, can you give us a quick overview of the way individuals and corporations are taxed under the new GILTI regime in a post-2017 Tax Act world?

MEGAN FERRIS

Sure. Generally speaking, and especially when it comes to CFCs, the Tax Cuts and Jobs Acts of 2017, or the Tax Reform Act, treats U.S. corporations much more favorably than U.S. individual shareholders. First, at a high level, individuals are taxed in the U.S. on their ordinary income at graduated rates up to 37%, plus an extra 3.8% net investment income tax on their passive income. Corporations, on the other hand, are taxed at a flat 21% rate on their net taxable income.  Next, the Tax Reform Act introduced a handful of new across border taxes and anti-deferral measures.  One of these is Section 951A which, is called Global Intangible Low Tax Income, or GILTI, as you referred to it, which basically applies to the active operating-income of the CFC.  Now pre-tax reform, this income would not be taxed to the CFC’s U.S. shareholders until it was distributed, but today that income is taxed annually at the shareholder’s ordinary income rate.  Congress, however, went a step further by introducing Section 250, which gives U.S. corporations, and only U.S. corporations, a 50% deduction on their GILTI income and that essentially results in a 10.5% tax rate.  But wait, there’s more. U.S. corporations can also take a foreign tax credit for up to 80% of the foreign taxes paid by the CFC. So essentially, if the CFC paid at least a 13.2% tax rate, or specifically a 13.125% tax rate in its local country, then a U.S. corporate shareholder can use foreign tax credits to offset its entire U.S. income tax liability for that underlying GILTI income.  And that’s great for corporations.  An individual shareholder, on the other hand, has no Section 250 deduction and no foreign tax credit for taxes paid by the CFC.  The individual pays up to 37% U.S. tax on GILTI, end of story.  So, as you can see, the disparity between individual and corporation taxation can be quite dramatic.  And I guess that brings us back to the theme of today’s podcast, which is how some individual tax payers might use Section 962 to avail themselves of these benefits that are available only to domestic corporations.

PAUL D’ ALESSANDRO

Thanks, Megan. So that was a great overview I think of the general operating rules for the taxation of offshore income in a post-2017 Tax Act world. So as Megan alluded to, and our next question here in our podcast is, what is a 962 election, and how might an individual consider using the 962 election?

MEGAN FERRIS

Right.  So, in short, Section 962 allows individual U.S. shareholders of CFCs to elect to be taxed as domestic corporations. The election is available to direct and indirect shareholders of CFCs, so if an individual owned their interest through a partnership or certain trusts, they would still be able to make the election.  So now I’ll get into the mechanics of the election, but first I think it would help to give some historical context. Section 962 first became effective beginning in the tax year 1963 along with the rest of subpart F. Back then, the top individual tax rate in the U.S. was 91%, and the top corporate rate was 52%. So if you think we have it bad today, just be thankful we’re not in the 1960s.  Anyhow, with the introduction of subpart F and the new concept of taxing the U.S. individual shareholder on a CFCs income that the shareholder didn’t actually receive, Congress decided to give taxpayers a break and the means of reducing that current tax burden to the lower corporate tax rate of then only 52%. In addition, taxpayers were permitted to claim deemed paid tax credits under Section 960 for foreign taxes that were paid by that CFC. Now the legislative history under Section 962 tells us that, and I quote, “The purpose of Section 962 is to avoid what might otherwise be a hardship in taxing a U.S. individual at high bracket rates with respect to earnings in a foreign corporation which he does not receive. Section 962 gives such individuals assurance that their tax burdens with respect to these undistributed foreign earnings will be no heavier than they would have been had they invested in an American corporation doing business abroad.”  So, as far as tax policy goes, that’s a breath of fresh air for the taxpayers. Okay, now the mechanics.  This is how a U.S. individual is taxed under a Section 962 election. First, the individual is taxed on amounts that are included in gross income under Section 951a and now Section 951A, which is GILTI, at a corporate tax rate, which are currently 21%. Second, the individual is entitled to a deemed paid foreign tax credit under Section 960 with respect to the subpart F or GILTI inclusion as if the individual were a domestic corporation. Third, when an actual distribution of earnings is made from amounts that were already included in the U.S. shareholder’s gross income under Sections 951a and Section 951A, and just a reminder Section 951a is subpart F income, 951A is GILTI, those earnings are included in gross income again, but only to the extent that they exceed the amount of U.S. income tax paid at the time of the Section 962 election.  So, if an individual initially used foreign tax credits to offset his or her entire U.S. tax liability related to GILTI income in the year that the income was reported, then when the income is actually distributed, it will be includable again as dividend income. If the underlying CFC is in a treaty jurisdiction, then that individual will benefit from qualified dividend rates, which are currently 20% plus a 3.8% tax on passive income, that brings us to a total U.S. effective tax rate of 23.8%.

PAUL D’ ALESSANDRO

Interesting, Megan. So it seems like there’s definitely some benefits to be gained potentially under Section 962, but how does an individual taxpayer make a Section 962 election?

MEGAN FERRIS

An individual would typically file a Section 962 election with his or her timely filed tax return for the year to which the election relates, although in certain circumstances, case law would permit a retroactive election. The election is made on an annual basis, meaning each year you have the option to make the election or not, and you also have the opportunity to miss it, so be careful about that. Once made, the election applies to all Section 951a and 951A, included to the U.S. shareholder for all CFCs for that year.

PAUL D’ ALESSANDRO

So that’s an interesting point there you made at the end and something our readers — our listener’s rather, might want to pick up on.  The election applies to all CFCs that are owned by the individual.  So keep that in mind when you’re analyzing Section 962 and whether it makes sense to make the election based on your facts and circumstances.  So I think we kind of gave an overview here of Section 962 and why it matters now.  But what we’re going to do now is drill really down into the pros and cons of 962, what are the benefits to be gained, and what are some of the drawbacks as well by making the selection. So, Megan, do you want to start by taking us through the benefits of the 962 election?

MEGAN FERRIS

Sure. If the circumstances are right for the taxpayer, then the benefits should certainly outweigh any drawbacks for making this election. For example, the subpart F inclusions and the GILTI inclusions, and those are under Section 951a, and Section 951A are subject to tax at the lower corporate tax rate, which is now 21%.  There is a 50% deduction available for the GILTI inclusions. With a Section 962 election, an individual can take a credit for up to 80% of the foreign taxes paid by the CFC to offset the tax paid on the subpart F and the GILTI.  But keep in mind that the individual would still be subject to tax on any Section 78 gross-up based on foreign taxes.  With the Section 962 election, there is no corporate restructuring required that would otherwise take time and money to implement.  There’s no impact on the other shareholders of the CFC, whether there’s domestic shareholders or foreign shareholders.  And finally, there’s no double tax on the future sale of the CFC. Now on the downside, when those previously taxed earnings are distributed, they are taxed again to the extent that the distribution exceeds the tax paid on the initial inclusion.  Now, if the CFC is not in a treaty country, then under Smith v. Commissioner, ordinary tax rates would apply because the dividends are treated as coming from the CFC and not from the deemed U.S. corporation.  And lastly, on the downside, any basis increase in CFC stock as a result of the subpart f or GILTI inclusion is limited to the amount of tax paid on the inclusion.  So, I’ll give an example.  We recently did some tax planning for a client, an individual U.S. tax resident who owned an S corporation that, in turn, owned a Mexican CFC.  The CFC operates hotels throughout Mexico and pays a 30% income tax in Mexico on its net income.  From the U.S. federal tax perspective, that CFC’s operating income is all GILTI income to our client.  And so under his existing structure, the GILTI would flow up to him, and he would be subject to 37% tax on that income without any offset for the Mexican taxes paid.  We recommended making a Section 962 election, which he did.  Now, under his current structure, the client is treated, for U.S. federal income tax purposes, as if the GILTI is earned by a domestic corporation.  U.S. tax is fully offset with the foreign tax credits for the next to get income taxes paid.  And when CFC eventually distributes the income, the client is taxed on their distribution.  However, because the U.S. and Mexico have an income tax treaty in effect, the clients benefit from qualified dividend rates, which total 23.8%.  So in effect, we helped our client reduce his effective U.S. federal income tax rate with respect to GILTI from 37% to 23.8%.

PAUL D’ ALESSANDRO

So there you have it; 962 potentially can result in a lower effective tax rate for an individual, you get the benefit of the lower corporate tax rate, the 50% GILTI deduction, the 80% indirect foreign tax credit.  On the downside, you have to watch out for actual distributions because there’s less PTI than there would have been otherwise.  So a little bit of balancing based on the facts and circumstances to see if 962 is going to make sense in your case. I think we’re going to wrap up now.  Megan, you alluded to it earlier, but, you know, why has Section 962 come back into the spotlight this past year or two, and really when might a person consider making a 962 election?

MEGAN FERRIS

That’s a great question, Paul.  Now, in the decade since Section 962 was passed, it was rarely used planning tool unless the CFC was located at a high tax treaty country, like Mexico or France.  But fast forward to February 1, 2018, when tax reform became effective, now everything has changed because the corporate tax rates dropped from 35% to 21%.  And the effective tax rate on GILTI emerged at 10.5% for U.S. corporations.  Now finally, it’s an attractive option because even when you account for the 23.8% shareholder level dividend tax, the effective tax rate is still lower with a Section 962 election than if the CFC shares were treated as owned directly by the individual.  As far as U.S. tax planning goes, the Section 962 election can be an incredibly useful and cost-saving tool for the taxpayer who fits the profile that I alluded to, and that would be a U.S. shareholder of a CFC that generates GILTI or subpart F income where CFC has foreign taxes paid in this local country where the CFC is located in a treaty jurisdiction.  Now these individual U.S. shareholders can take advantage of the lower corporate tax rate, they can take advantage of the 50% deduction for GILTI income, and they can obtain a foreign tax credit for foreign taxes paid by the CFC, all without any restructuring required.  On the other hand, if the CFC is not organized in a treaty jurisdiction, then the election may not result in a net benefit to the taxpayer.  Now, in this case, it might make more sense to forego the Section 962 election in lieu of interposing an actual UFC corporation which would feature the same mechanical benefits of the Section 962 election, but it would also open the door to taking advantage of the dividends received deduction on distributions from the CFC.  Alternatively, the taxpayer might consider setting up a flow-through structure, and that would also permit the use of foreign tax credits to offset the GILTI inclusions, although the GILTI inclusions would generally be subject to the higher individual tax rate.

PAUL D’ ALESSANDRO

So those are some great points you made, Megan, and I’ll just piggyback off a few of them before we wrap up here. Section 962, I think you’re going to want to look at whether your CFC is in a treaty jurisdiction versus a non-treaty jurisdiction, as Megan said.  The 962 election is more beneficial when you’re in a treaty jurisdiction because you can take advantage of the lower qualified dividend income rates of 23.8%.  Like anything else in tax planning, I think you have to do a little bit of modeling when you’re looking at 962, and by that I mean you have to see if you’re in a situation where your client is going to be looking to pull dividends out of his CFC on a regular to semi-regular basis, or whether the income realization event is really going to be had upon exit when an individual is going to sell shares in a CFC. In that case, 962 is going to provide some benefit there simply by providing deferral in the years where you’re not taking distributions.  And I think a final point worth noting, and Megan touched on this; there’s been a lot of talk about simply having an individual drop their CFC shares into a parent USC corporation to achieve a lot of these results that we’ve been talking about.  That sounds great in theory, but it cannot always be done tax-free in the foreign country where the CFC is located.  Many times, contributing those shares to a U.S. corporation is a taxable event in that foreign country, and it could even result in that foreign country’s own CFC laws now applying to the U.S. parent corporation.  So 962, in that case, could also serve a tremendous benefit by avoiding all those foreign taxes and local taxes that would otherwise be triggered by dropping shares into an actual U.S. parent C corporation.  And with that, I think we’ve concluded our first podcast.  I hope you all enjoyed it and found it useful.  We‘re going to be looking to bring everybody more timely tax topics and hopefully more useful planning tips over the next few months and in the next year.  Megan, is there anything you want to say before we sign off?

MEGAN FERRIS

Thanks, Paul. I think you made some great points just to wrap up there.  And again, yeah, I hope everybody enjoyed this. I hope they can take some of these points and integrate them into their practices, and I hope you continue to tune in and listen to us as we bring you more current tax topics that might apply to your own practice.

PAUL D’ ALESSANDRO

Okay.  Very good. And with that, we’re signing off. Happy holidays and a happy new year to everyone, and we’ll see you next time.

 

© 2020 Bilzin Sumberg Baena Price & Axelrod LLP

More tax guidance on the National Law Review Tax Law page.

Chicago and Cook County Amusement Tax

In previous posts, we have explored several local Illinois taxes, including the Chicago Personal Property Lease Transaction Tax and Cook County Parking Lot Tax. Also notable is the Chicago and Cook County Amusement Tax, which can apply more broadly than taxpayers often anticipate. Specifically the scope of the amusement tax has been expanded over the last few years to non-traditional amusements, including electronically transferred television shows, movies, videos, music, and games.

Imposition of The Amusement Tax

Although the Chicago and Cook County amusement tax are imposed similarly on taxpayers, they are independently administered taxes that feature key differences. Both the Chicago Amusement Tax Ordinance (“Chicago Ordinance”) and Cook County Amusement Tax Ordinance (“Cook County Ordinance”) impose the tax “upon the patrons of every amusement” within the city or county, but require the owner, manager, or operator of the amusement to collect the tax from each patron and remit the tax to the Chicago Department of Finance (“Chicago Department”) or the Cook County Department of Revenue (“Cook County Department”).[1] Further, both Ordinances define “amusement” as “any exhibition, performance, presentation or show for entertainment purposes”.[2]

Where the Chicago and Cook County Ordinances deviate, however, are the examples used to define “amusement”, the rates of tax, and applicable exemptions. For example, although the Ordinances provide similar examples of qualifying amusements, including a motion picture show, athletic contest, or any theatrical, musical or spectacular performance, the Chicago Ordinance also includes “paid television programming” viewed within or outside the home.[3] In contrast, the County Ordinance does not include such language. Additionally, whereas the Chicago Ordinance imposes the amusement tax at a rate of 9 percent of the admission fees or other charges paid for the privilege to enter, witness, view or participate in the amusement, the County Ordinance imposes the tax at a rate of 3 percent (unless a lower rate applies, as addressed below).[4]

Further, the Chicago and Cook County Ordinances often exempt different activities. For example, although both Ordinances exempt admission fees to witness in person “live theatrical, live musical or other live cultural performances that take place in any auditorium, theater or other space”[5] with a certain limited capacity (“Small Venue Exemption”), the Ordinances include a different capacity limitation. Under the Chicago Ordinance, the Small Venue Exemption renders the amusement tax inapplicable where the maximum capacity of the venue, including all balconies and all sections, is not more than 1,500 persons.[6] In contrast, under the Cook County Ordinance, the Small Venue Exemption only applies where the venue has a capacity of not more than 750 persons.[7] Further, if the venue has a capacity of more than 750 persons, but fewer than 5,000 persons, the Cook County amusement tax applies at a rate of 1 percent rather than the general rate of 3 percent.[8] This serves as a notable example of where the Ordinances may appear to be substantially similar but in fact feature key differences. Additionally, whereas the City clarified in a 2004 Amusement Tax Ruling that “primarily educational” activities are not taxable amusements, Cook County has not released similar guidance.[9] The result is that depending on the nature of the activity, amusement tax may apply in one but not both jurisdictions.

Identifying Taxable “Admission Fees”

A contested issue in applying the amusement tax in both Chicago and Cook County is the amount that compromises the taxable “admission fees or other charges paid for the privilege to enter, witness, view” such amusement.[10] For example, in 2014, the Illinois Court of Appeals held that under the Cook County Ordinance, for club seats and luxury suites to Chicago Bears home football games, “admission fees or other charges” include the amenities available to holders of club seat tickets and tangible personal property included in the luxury suite admission price, not just the value of the home seat games.[11] The Court determined that because a fan cannot witness a game from a club seat without paying the club privilege fee and annual licensing fee, it is not possible to separate the “other charges” from the fee paid to enter the stadium.[12] As a result, the Illinois Appellate Court determined the full price paid by club seat holders and luxury suite licensees is subject to the County’s amusement tax. This decision may lead to efforts by the Chicago Department and Cook County Department to expand a taxpayer’s taxable base beyond the mere value of a “seat”. For example, both the County and the City have been aggressive in their application of the amusement tax to service fees despite clear language in the Ordinances that exempts separately stated optional charges.[13]

Expanding the Scope to Electronically Transferred Amusements

The Chicago Department has recently become aggressive in its expansion of the scope of the Chicago Ordinance. In a 2015 Amusement Tax Ruling, the Chicago Department asserted that the amusement tax is imposed “not only [on] charges paid for the privilege to witness, view or participate in amusements in person but also charges paid for the privilege to witness, view or participate in amusements that are delivered electronically.”[14] As a result, the Chicago Department intended to clarify that the Chicago amusement tax applies to fees or charges for the following if delivered in the City: (1) watching electronically delivered television shows, movies or videos; (2) listening to electronically delivered music; and (3) participating in games, on-line or otherwise.[15] Although treated with resistance by taxpayers[16], the implication is that the City Department has the authority to impose the amusement tax on users of streaming services such as Netflix and Spotify, and online gaming, such as PlayStation. Following the Mobile Telecommunication’s Sourcing Conformity Act[17], the amusement tax applies to customers whose residential street address or primary business address is in Chicago, as reflected by their credit card billing address, zip code or other reliable information.[18]

Further, as explored briefly above, the Chicago Ordinance treats “paid television programming” as a taxable amusement.[19] “Paid television” means programming that can be viewed on a television or other screen, and is transmitted by cable, fiber optics, laser, microwave, radio, satellite or similar means to members of the public for consideration.[20] Additionally, an “owner” includes “any person operating a community antenna television system or wireless cable television system, or any other person receiving consideration from the patron for furnishing, transmitting, or otherwise providing access to paid television programming.”[21]

In 2014, the Chicago Department began auditing and assessing amusement tax on a number of restaurants and bars located through the City who subscribed to paid satellite television programming and who did not collect the amusement tax[22]. In a move to clarify the application of the tax, in November 2016, the Chicago Department released an Informational Bulletin that provided additional information to business subscribers of satellite television regarding their obligation to collect and remit the Chicago amusement tax. As a result, bars, restaurants and any other businesses that subscribe to satellite television are required to remit the Chicago amusement tax on charges paid for satellite television services used in Chicago.

Applicability to Ticket Resellers and Agents

An area of uncertainty within both the Chicago and Cook County amusement tax is the potential applicability to ticket resellers and agents. The issue dates back to 2006 when the Chicago Department amended the Chicago Ordinance to require not only a “reseller” but also a “reseller’s agent” to collect and remit amusement tax.[23]This amendment set the stage for the Chicago Department to attempt to collect the tax from StubHub as a reseller’s agent. StubHub is an internet auction listing service that operates a “platform” where it charges buyers and sellers a fee to buy and sell ticket to various events.

On appeal to the Illinois Supreme Court, the Court entered a significant decision for online auctioneers, holding that municipalities may not require electronic intermediaries to collect and remit amusement taxes on resold tickets.[24] The basis of the Court’s ruling is that although the Illinois Ticket Sale and Resale Act (the “Act”) [25]gives municipalities the authority to require sellers and resellers of tickets to collect the amusement tax, municipalities do not have the authority to require internet auction listing services, such as StubHub, to collect the tax.[26] Although both the Chicago and Cook County Ordinance still define an “operator” as a person who “sells or resells a ticket”, the Stubhub decision resulted in the removal of the term “reseller’s agent” and “auctioneer” from the Chicago Ordinance.[27]

Conclusion

Although the Chicago and Cook County amusement tax are similarly imposed, there are notable differences between the applicability of the Chicago and Cook County Ordinances. These differences are particularly noteworthy with respect to potential exemptions and electronically transferred amusements. Accordingly, taxpayers should not assume that because the amusement tax applies in one locality, it applies in both Chicago and Cook County.

[1] Municipal Code of Chicago (“M.C.C.”) § 4-156-020(A), 4-146-030(A); Cook County Ordinance (“C.C.O.”) § 74-392(a), 74-395(a).

[2] M.C.C. § 4-156-010; C.C.O. § 74-391.

[3] M.C.C. § 4-156-010.

[4] M.C.C. § 4-156-020; C.C.O. § 74-392.

[5] The Chicago and Cook County Ordinance define “live theatrical, live musical or other live cultural performance” identically as a “live performance in any of the disciplines which are commonly regarded as part of the fine arts, such as live theater, music, opera, drama, comedy, ballet, modern or traditional dance, and book or poetry readings. The term does not include such amusements as athletic events, races, or performances conducted as adult entertainment cabarets.” M.C.C. § 4-156-010; C.C.O. § 74-391. In this regard, the Chicago Department and Cook County Department appear to play the role of an art critic, defining which activities qualify as “fine arts”. See a prior post exploring the issue in the context of disc jockeys.

[6] M.C.C. § 4-156-020(D).

[7] C.C.O. § 74-392(d).

[8] C.C.O. § 74-392(f)(1).

[9] Chicago Amusement Tax Ruling #1, ¶ 2.

[10] M.C.C. § 4-156-020; C.C.O. § 74-392.

[11] Chi. Bears Football Club v. Cook County Dep’t of Revenue, 16 N.E.3d 827, 835 (2014).

[12] Id. at 834. In determining the full price paid by club seat ticket holders and luxury suite licensees is subject to the amusement tax, the Court affirmed the reasoning of the court in Stasko v. City of Chicago, 997 N.E.2d 975, 993 (2013)(holding that the Chicago Ordinance applied because purchasing the permanent seat license was a prerequisite to viewing the game).

[13] M.C.C. § 4-156-020(H); C.C.O. § 74-392(e)(3).

[14] Chicago Amusement Tax Ruling #5.

[15] Chicago Amusement Tax Ruling #5, ¶ 8.

[16] The Chicago amusement tax, as it applies to certain electronically delivered amusements, such as paid television, was challenged but held by the Cook County Circuit Court to be constitutional in Labell v. City of Chicago, Case No. 15 CH 13399 (Cook Cnty. Cir. Ct. May 24, 2018). In this application, the amusement tax is often derisively referred to as the “ Cloud Tax” or the “Netflix Tax“.

[17] 35 ILCS 638.

[18] Chicago Amusement Tax Ruling #5, ¶ 13.

[19] M.C.C. § 4-156-010.

[20] Id.

[21] Id.

[22] For additional background regarding the Department’s efforts to collect the Chicago amusement tax from satellite providers, see a prior post.

[23] Under the Chicago Ordinance, a reseller’s agent is a “person who, for consideration, resells a ticket on behalf of the ticket’s owner or assists the owner in reselling the ticket. The term includes but is not limited to an auctioneer, a broker or a seller of tickets for amusements, as those terms are used in 65 ILCS 5/11-42-1, and applies whether the ticket is resold by bidding, consignment or otherwise, and whether the ticket is resold in person, at a site on the Internet or otherwise.” M.C.C. § 4-156-010 (amended May 24, 2006).

[24] City of Chicago v. Stubhub, Inc., 979 N.E.2d 844, 845 (2011).

[25] 720 ILCS 375/0.01 et seq. (2010).

[26] Stubhub, Inc., 979 N.E.2d at 857.

[27] M.C.C. § 4-156-010; C.C.O. § 74-391.

 

© Horwood Marcus & Berk Chartered 2019. All Rights Reserved.

Death and Taxes: House Bill Eliminates “Death” Tax in 2024

On November 2, 2017, the U.S. House of Representatives’ Ways and Means Committee released its proposal for tax reform via the Tax Cuts and Jobs Act. The House’s draft legislation contains a number of provisions that, if enacted, would significantly change the wealth transfer landscape, including the total repeal of the estate and generation-skipping transfer taxes as of January 1, 2024.

Under the proposal, commencing on January 1, 2018, the individual lifetime gift and estate tax exemption amount will be doubled to $10 million ($20 million for married couples), indexed for inflation—$11.2 million per person in 2018 ($22.4 million for married couples). This increase in the exemption amount also applies to the generation-skipping transfer tax.

The draft legislation calls for a total repeal of the estate and generation-skipping transfer taxes as of January 1, 2024, while preserving the ability of beneficiaries to obtain a basis adjustment as to inherited property. Although the gift tax is set to remain in place, a reduction in the rate from 40% to 35% is provided for. Similarly, the annual exclusion—scheduled to increase to $15,000 per individual in 2018 ($30,000 for married couples who elect to split their gifts)—looks certain to survive.

This post was written by the Tax, Estate Planning & Administration  of Jones Walker LLP., © 2017
For more Family, Estates & Trusts legal analysis, go to The National Law Review

Key Tax Changes in the American Health Care Act

The American Health Care Act (“AHCA”), passed by the House of Representatives on May 4, 2017, repeals many of the taxes added by the Affordable Care Act (“ACA”) and makes changes to other tax rules.  Some of the notable changes proposed to be made to the Internal Revenue Code are:

            1. The individual mandate to maintain health insurance and the employer mandate to offer health insurance remain in the Code, but the taxes are “zeroed out” effective retroactively to 2016.

            2. The following taxes, fees, credits and limitations are repealed as of the year shown below:

·         The net investment income tax (NIIT) (2017)

·         The 0.9% additional Medicare tax (2023)

·         The small employer health insurance credit (2020)

·         The $2500 limitation on contributions to a health flexible spending account (FSA) (2017)

·         The annual fee on branded prescription drug sales (2017)

·         The medical device excise tax (2017)

·         The annual fee on health insurance providers (2017)

·         The elimination of a deduction for expenses allocable to the Medicare Part D subsidy (2017)

·         The 10% tanning salon tax (June 30, 2017)

            3.         The “Cadillac” tax on high cost health plans is delayed until 2026.

            4.         Individuals may be reimbursed for over-the-counter medications under a health savings account (HSA), health FSA or a health reimbursement arrangement (HRA) (2017).

            5.         The penalty tax on withdrawals from an HSA not used for a qualified medical expense is reduced from 20% to 10% (2017).

6.         The bill would replace the current ACA premium tax credit with a new refundable, advanceable tax credit effective January 1, 2020.  The credit could be applied toward the cost of any eligible health insurance coverage, whether purchased on or off the Exchange.  The credit is age-based as follows:

Age

Annual Credit

Under 30

$2,000

30 – 40

$2,500

40 – 50

$3,000

50 – 60

$3,500

60 and over

$4,000

The maximum credit for a family is $14,000. The credit is adjusted each year by CPI + 1%.

The credit is phased out depending on the individual’s modified adjusted gross income (MAGI) for the year.  It begins phasing out for an individual with income of $75,000 ($150,000 for joint filers) by $100 for every $1,000 in income above those thresholds.  The MAGI dollar limitations are also indexed for inflation beginning in 2021.              To be eligible to claim the credit, the individual must be covered by “eligible health insurance,” not be eligible for “other specified coverage” (including employer coverage or a government sponsored health program) and be a U.S. citizen or a qualified alien.

7.         The bill would make the following changes to health savings accounts, effective in 2018:

§  The maximum contribution to an HSA would be increased to the out-of-pocket maximum (in 2017, $6,550 for self-only and $13,100 for family coverage).  Under current law, HSA contributions are limited to $3,400 for self-only and $6,750 for family coverage.
§  Both spouses could make a “catch-up” contribution to the same HSA.  Under current law, each spouse must have his or her own HSA.
§  If an HSA is established within 60 days after coverage under a high deductible plan begins, the individual could be reimbursed for medical expenses incurred within that 60-day period.  Under current law, an individual cannot be reimbursed for any expense incurred before the HSA is established.

The bill now moves to the Senate where significant changes are expected.

This post was written by Cynthia A. Moore of  Dickinson Wright PLLC.

“Do You Want Liability With That?” The NLRB McDonald’s Decision that could undermine the Franchise Business Model (Part II)

 

McBrayer NEW logo 1-10-13

 

Yesterday’s post discussed the decision of NLRB’s General Counsel to hold McDonald’s Corp. jointly responsible with its franchise owners for workers’ labor complaints. The decision, if allowed to stand, could shake up the decades-old fast-food franchise system, but it does not stop there. The joint employer doctrine can be applied not only to fast food franchises and franchise arrangements in other industries, but also to other employment arrangements, such as subcontracting or outsourcing.

This decision could also impact the pricing of goods and services, as franchisors would likely need to up costs to offset the new potential liability. Everything from taxes to Affordable Care Act requirements could be affected if the decision stands.

If you are a franchisor and are currently in what could be determined to be a joint employer relationship, consider taking steps to further separate and distinguish your role from that of your franchisee. While franchisors should always take reasonable measures to ensure that franchisees are in compliance with applicable federal and state employment laws, they should take care to not wield such force over them to give the appearance of a joint-employer relationship.

We will be following the NLRB decision and keep you updated as the issue progresses.

ARTICLE BY

Luke A. Wingfield
 
OF 
McBrayer, McGinnis, Leslie and Kirkland, PLLC

Same Sex Marriages: Are You Filing Your Taxes Properly?

Poyner Spruill

 

In late 2013, I met with my first same sex couple clients since the U.S. Supreme Court overruled the Defense of Marriage Act (DOMA) last year.  If you recall, DOMA  was the federal law barring the federal government from recognizing same sex marriages legalized by states.  It was ruled unconstitutional by the U.S. Supreme Court as violative of the Fifth Amendment.  The IRS issued a statement on August 29, 2013 that provided that same sex couples legally married in a jurisdiction that recognizes their marriage would be treated as married for federal tax purposes regardless of the laws of their domiciliary state.  As a result, same sex couples married in a state that legally recognizes their marriage will be entitled to the estate and gift tax marital deduction, and they must also file their federal income tax returns with the status of married or married filing separately.  (The Department of Labor issued a similar statement in Technical Release No. 2013-4, meaning that for purposes of ERISA, legally married couples are treated as married, regardless of the laws of their domiciliary state.)

North Carolina does not recognize same sex marriage as valid, so for purposes of North Carolina taxes, where does that leave our North Carolina-residing same sex couple clients that were legally married in another state?  NCDOR directive PD-13-1 provides that “Because North Carolina does not recognize same-sex marriage as valid… individuals who enter into a same-sex marriage in another state cannot file a North Carolina income tax return using the filing status of married. Such individuals who file a federal income tax return as married must each complete a separate pro forma federal return for North Carolina purposes with the filing status of single  to determine each individual’s proper adjusted gross income, deductions and tax credits allowed under the Code for the filing status used for North Carolina purposes.”

My clients are considering getting married in a state that recognizes same sex marriage, but they want to understand the legal implications for them if they do.  They are concerned about the “marriage penalty” for federal income tax purposes and the complexity of having different laws and rules for federal and  state purposes. They do not have an estate tax problem, so the availability of the unlimited estate tax marital deduction is of no consequence to them. However, they are considering retitling the house currently owned by one of them into their joint names.  I cautioned them that such transfer would constitute a taxable gift to the extent the value of the interest transferred exceeded the donor owner’s $14,000 annual exclusion. In fact, one partner’s use of funds for the benefit of the other in excess of the donor-partner’s annual exclusion in any year will require the donor-partner to file a gift tax return. If they are legally married, there would be no taxable gifts in those circumstances due to the unlimited marital gift tax deduction. My clients each have a 401(k) plan, so if they were to marry, under ERISA, they must be designated beneficiary of each other’s accounts unless the spouse waives that right.

As an advisor, if you have same sex couple clients who have been married in a state that recognizes same sex marriage and they have paid taxes or used exemptions (income, gift or estate tax) based on separate status, you may consider whether they can and should file amended returns based on married filing status to recoup taxes or exemptions. And they should be advised to revisit their beneficiary designations and their estate planning documents if they have not done so already.

Article by:

Westray B. Veasey

Of:

Poyner Spruill LLP