On March 20, 2020, the Internal Revenue Service (“IRS”) and the U.S. Department of Labor announced that small and midsize employers can begin taking advantage of two new refundable payroll tax credits, designed to immediately and fully reimburse, dollar-for-dollar, the cost of providing Coronavirus (COVID-19) related leave to their employees. This relief to employees and small and midsize businesses is provided under the Families First Coronavirus Response Act (the “Act”), signed into law on March 18, 2020. All employers with fewer than five hundred (500) employees may take advantage of these credits if the employers provide employees with paid leave, either for the employee’s own health needs or to care for employee’s family members.
The Act created the refundable paid sick leave credit and the paid child care leave credit for eligible employers. Eligible employers are businesses and tax-exempt organizations with fewer than five hundred (500) employees that are required to provide emergency paid sick leave and emergency paid family and medical leave under the Act. Eligible employers will be able to claim these credits based on qualifying leave they provide employees between the Act’s effective date (April 1, 2020) and December 31, 2020 (the Act also provides equivalent credits to self-employed individuals under similar circumstances).
Paid Sick Leave Credit
For an employee who is unable to work (including telework) as a result of the COVID-19 pandemic, eligible employers may receive a refundable sick leave credit for sick leave at the employee’s regular rate of pay, up to five hundred eleven dollars ($511) per day and five thousand one hundred ten dollars ($5,110) in the aggregate, for a total of ten (10) days—equivalent to eighty (80) hours or two (2) full-time weeks on the job. For an employee who is caring for someone with Coronavirus, or is caring for a child because the child’s school or child care facility is closed, or the child care provider is unavailable due to the Coronavirus, eligible employers may claim a credit for two-thirds (2/3) of the employee’s regular rate of pay, up to two hundred dollars ($200) per day and two thousand dollars ($2,000) in the aggregate, for up to ten (10) days. The Coronavirus Aid, Relief, and Economic Security Act signed into law on March 27, 2020 (the “CARES Act”), updates the paid sick leave and child care leave provisions of the Act. Click here for more information on the CARES Act tax summary: https://shuffieldlowman.com/tax-update-cares-act-tax-provisions/.
Child Care Leave Credit
Eligible employers who provide child care leave pay because their employees are unable to work because of a need to care for a child whose school/child care facility is closed or whose child care provider is unavailable due to the Coronavirus may receive a refundable child care leave credit. This credit is equal to two-thirds (2/3) of the employee’s regular pay, capped at two hundred dollars ($200) per day or ten thousand dollars ($10,000) in the aggregate (note that up to ten (10) weeks of qualifying child care leave can be counted towards the child care leave credit).
Health Insurance Coverage
In addition to the sick leave credit and the child care leave credit discussed above, eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the sick leave and/or child care leave period.
Payment of Credits
When employers pay their employees, they are required to withhold from their employees’ paychecks federal income taxes and the employees’ share of Social Security and Medicare taxes. The employers then are required to deposit these federal taxes, along with the employer’s share of Social Security and Medicare taxes, with the IRS. Eligible employers who pay qualifying sick and/or child care leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and/or child care leave that they paid, rather than deposit them with the IRS. If there are not sufficient payroll taxes to cover the cost of qualified sick and/or child care leave paid, employers will be able to file a request for an accelerated payment from the IRS. Additional information on this process will be disclosed in forthcoming IRS guidance. The CARES Act updates the payroll provisions of the Act.
Small businesses with fewer than fifty (50) employees will be eligible for an exemption from the leave requirements relating to school closings or child care unavailability where the requirements would jeopardize the ability of the business to continue. The Department of Labor will provide guidance to explain and articulate this exemption in the near future.
ShuffieldLowman’s Corporate and Tax team is here to help clients during this uncertain time. We can answer your questions, assist you in overcoming the current obstacles, and help navigate the proverbial waters of the new tax laws.
On Friday, March 27, 2020, Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act provides updates to the Families First Coronavirus Response Act (signed into law on March 18, 2020) and also provides a number of temporary and permanent changes to the Internal Revenue Code (“IRC”). The analysis below summarizes the relevant tax provisions of the CARES Act.
Employer Tax Credit
The CARES Act would add an employment tax credit for each calendar quarter equal to fifty percent (50%) of qualified wages paid to each eligible employee for that calendar quarter, up to ten thousand dollars ($10,000) per employee for all calendar quarters. An employer is eligible for this credit if the operation of the trade or business is fully or partially suspended during the calendar quarter due to orders of a governmental authority as a result of COVID-19. Employers are also eligible for this credit if in the first calendar quarter in which the employer has a reduction of gross receipts of more than fifty percent (50%) in a calendar quarter as compared to the same calendar quarter in the prior year, and eligibility for the credit continues in each calendar quarter as long as the employer has a reduction of gross receipts of more than eighty percent (80%) reduction of gross receipts from the calendar quarter in the prior year.
For employers with more than one hundred (100) full-time employees, qualified wages are only those wages paid to employees during the period that the employees are not providing services due to COVID-19. For employers with one hundred (100) or fewer full-time employees, all employee wages paid during the applicable period qualify for the credit, whether or not the employee is providing services to the employer. The amount of the credit is reduced by any credits allowed under Sections 7001 or 7003 of the Families First Coronavirus Relief Act. Lastly, employers are not eligible for this credit if the employer receives any small business interruption loans pursuant to section 1102 of the CARES Act.
Extension Payment of Employer Payroll Taxes
Employer payroll taxes for the period beginning on the date the CARES Act is enacted until the end of the year are deferred. Fifty percent (50%) of those taxes are deferred until December 31, 2021, and the remaining fifty percent (50%) are deferred until December 31, 2022—similar provisions apply to self-employed individuals, however, fifty percent (50%) of the self-employment tax still needs to be remitted on the existing deadlines.
Modification of Net Operating Losses
The Tax Cuts and Jobs Act (the “TCJA”), which was enacted in 2017, eliminated net operating loss carrybacks for certain years. Under the TCJA, Net Operating Losses (“NOLs”) arising after 2017 could be carried forward indefinitely, but were limited to eighty percent (80%) of taxable income in the relevant period. These rules were changed by the CARES Act to allow NOLs arising in tax years 2018, 2019 and 2020 to be carried back five (5) years. In addition, the eighty percent (80%) limitation created by the TCJA has been eliminated for tax years beginning before January 1, 2021, temporarily allowing NOLs to offset up to one hundred percent (100%) of a taxpayer’s current taxable income. Taxpayers cannot carryback back NOLs to offset foreign subsidiary earnings deemed repatriated under IRC section 965; however, taxpayers can elect to exclude any tax years in which the foreign earnings were included in gross income from the calculation of the five (5) year carryback period. Lastly, Real Estate Investment Trusts (“REITs”) will not be able to carry back losses, and losses may not be carried back to any REIT year.
Temporary Modification of Limitation on Losses for Taxpayers Other Than Corporations
As a result of the TCJA, a non-corporate taxpayer’s ability to deduct excess business losses was limited during tax years beginning after December 31, 2017 and before January 1, 2026. Excess business losses are the amount by which the total deductions attributable to all of a taxpayer’s trades or businesses exceed such taxpayer’s total gross income and gains attributable to those trades or businesses plus two hundred fifty thousand dollars ($250,000) ($500,000 in the case of a joint return). The CARES Act amends this limitation so that it applies only to taxable years beginning after December 31, 2020; therefore, excess business losses that would otherwise be disallowed for taxable years 2018 through 2020 will be permitted.
Modification of Credit for Prior Year Minimum Tax Liability of Corporations
The corporate alternative minimum tax (“AMT”) was repealed by the TCJA; however, corporate alternative minimum credits were made available as refundable credits over several years, ending in 2021. The CARES Act accelerates the ability of companies to recover those refundable AMT credits by amending IRC Section 53 to accelerate the corporation’s ability to recover one hundred percent (100%) AMT credits beginning in 2019.
Temporary Modifications of Business Interest Expense
The amount of a taxpayer’s business interest expense allowable as a deduction is limited under IRC section 163(j) to thirty percent (30%) of the taxpayer’s adjusted taxable income; however, the CARES Act temporarily increases the amount of interest expense businesses are allowed to deduct to fifty percent (50%) for 2019 and 2020. Additionally, taxpayers may elect to use their 2019 adjusted taxable income in place of their 2020 adjusted taxable income for purposes of applying the interest expense limitation.
Qualified Improvement Property Fixes
The CARES Act makes technical corrections to IRC Section 168(k) to treat qualified improvement property as fifteen (15) year property for depreciation purposes and makes said properties eligible for bonus depreciation. These corrections are retroactive to the effective date of the TCJA (January 1, 2018).
Refundable Tax Credit for Individuals
The CARES Act provides up to a twelve hundred dollar ($1,200) refundable tax credit for individual filers ($2,400 for joint filers), with additional amounts of five hundred dollars ($500) per child in certain cases. The bill requires the Internal Revenue Service to refund or credit these amounts as quickly as possible, but in no event will any such refund or credit be allowed after December 31, 2020. These amounts are reduced for taxpayers with seventy-five thousand dollars ($75,000) or more in adjusted gross income for individual filers ($150,000 or more for joint filers), and completely phased out above ninety-nine thousand dollars ($99,000) for individual filers ($198,000 for joint filers).
With the sudden changes to several aspects of the law there is added confusion regarding what programs/relief are available; however, ShuffieldLowman’s Corporate and Tax team is here to help clients navigate these changes and to answer questions to assist clients in making those important business decisions.
ShuffieldLowman attorney Jordan Horowitz also contributed to this post
In December of 2017, the U.S. Congress established the Qualified Opportunity Zone (“QOZ”) program, designed to help economically-distressed communities where new investments, under certain conditions, may be eligible to generate preferential tax treatment for investors. Investments made in these designated QOZs through a qualified legal entity referred to as Qualified Opportunity Fund (“QOF”) are intended to provide much-needed new investment and capital into economically depressed communities throughout the United States and Puerto Rico. In short, the QOZ program is an economic development tool designed to spur economic development, revitalize communities in need, and create jobs in distressed communities by attracting new investments in exchange for select income tax benefits.
In general, here is how the QOZ program operates. If an investor disposes of assets (e.g., stocks, real estate, an operating business), on or after Dec. 22, 2017, which triggers taxation of capital gains to the investor, then such investor may seek to utilize the QOZ program. The investor can either create or locate a QOF to invest a portion of its transaction proceeds (e.g., cash) within 180 days of the divestment (sale) transaction date. Once capitalized, the QOF must, in turn, invest a certain minimum amount of its assets (directly or indirectly) into an operational business or real property located in a QOZ. The QOF oversees and manages the investment in the QOZ until the QOF decides to divest from the QOZ investment at a future date. In exchange for this QOZ investment, the QOF receives certain income tax benefits that it passes along and up-the-chain to its owners and investors.
As you can imagine, the rules and regulations governing QOZs and QOFs are complicated and require detailed analysis; the previous paragraph is a rather simple summary of a QOZ transaction. Below is a list of some very important highlights to keep in mind when considering an investment using the QOZ program.
- The QOZ program is designed to provide three (3) tiers of income tax benefits to investors:
- The investors can defer income taxation on prior capital gains that are invested in a QOF until the earlier of December 31, 2026 and the date on which the investment in a QOF is relinquished (known as the capital gain deferral piece).
- If the investor holds the investment in the QOF for longer than 5 years then there is a 10% bonus exclusion of the deferred income taxation on the prior capital gains. If the investor holds the investment in the QOF for longer than 7 years then the bonus exclusion bumps up to 15% (known as the tax basis step-up piece).
- If the investor holds the investment in the QOF for no less than 10 years, then the investor is eligible to liquidate or cash-out from the QOF free of income taxation on any new tax gains generated from appreciation of this QOF investment (known as the non-recognition of new taxation piece).
- Only capital gains (although both long-term and short-term) are eligible for deferral under the QOZ program. Ordinary income (non-capital gains) is not eligible for deferral under the QOZ program. However, all capital gains are eligible for roll-over into a QOF. The QOZ program is not limited to gains from real estate, stocks or any specific asset or transaction, and a pot of various sources of capital gains can be used to invest in a QOF. In other words, an investor can dispose of many different assets in various transactions and trigger capital gains from these items, and then invest all (or a portion of) these capital gains into a QOF to receive the income tax benefits.
- An investor can defer payment of capital gain taxation to the latest date of Dec. 31, 2026, so long as such prior capital gains are invested into a QOF within 180 days of the divestment (sale) transaction that triggered the tax gain. The S. Internal Revenue Service (“IRS”) clarified that the clock for the 180-day period for investing the capital gains in the QOF begins for most taxpayers on the date the capital gains would be recognized for U.S. federal income tax purposes. For individuals, this rule means the date on which the dispositions of assets trigger capital gains taxation. For partnerships, the 180-day period begins to run on the date the partnership disposes of assets triggering capital gains taxation. But, if the partnership does not reinvest its capital gains in a QOF, then the partners may reinvest their allocable share capital gains, and the 180-day period for each partner begins on the last day of the partnership’s tax year in which such disposition of assets occurred. This partnership rule also applies to S corporations (but not C corporations).
- Only the amount of the capital gains must be invested into a QOF to defer all the income taxation related to them. There is no requirement that all cash received by an investor from the disposition of assets must be reinvested in a QOF to receive the income tax benefits; just an amount of assets (e.g., cash) equal to the amount of the prior capital gains.
- Think of a QOF as an investment vehicle, whether a partnership or a corporation, that acts as the funnel for the various investors to collect money and other assets to invest it into the QOZs. The QOF can be a new or existing entity, and could be an entity created by the investor solely to invest its money and assets. A QOF becomes qualified with the IRS by self-certifying that it is a QOF and filing IRS Form 8996 (Qualified Opportunity Fund) with its federal income tax return. For example, a QOF could be a newly-formed Florida limited liability company that is organized by the investor, capitalized by the investor and at least one other person, taxed as a “partnership” for U.S. federal income tax purposes, and invests its money by acquiring QOZ property.
- The QOF must acquire, own and hold QOZ property to generate the income tax benefits. However, the QOF is not required to utilize all its cash and assets to acquire, own and hold QOZ property, but there is a minimum threshold that must be satisfied by the QOF. Also, there are strict limitations and rigorous requirements surrounding the QOZ property acquired, owned and held by the QOF.
- Current operating income generated from an investment in a QOF is subject to income taxation, and does not receive any special tax exceptions or tax exclusions.
- An investor does not need to live, work or have a business in a QOZ to receive the income tax benefits. All the investor must do is invest prior capital gains into a QOF and elect to defer the taxation on such capital gains pursuant to the U.S. federal tax code.
- For an investor to receive the full array of QOF taxation benefits, the latest date (according to the current S. federal tax code requirements) by which capital gains must be invested into a QOF is Dec. 31, 2019.
- For an investment to comply with and satisfy the requirements of the QOZ program, the investment must be an equity ownership interest in the QOF. Loaning money to a QOF (i.e., debt instruments) is not an eligible investment for purposes of the QOZ program.
- The income tax benefits generated by the QOZ program are not mutually exclusive of other tax benefits under the S. federal tax code, such as New Markets Tax Credits (NMTCs), Low-Income Housing Tax Credits (LIHTCs), and section 1031 like-kind exchanges (assuming some capital gains are triggered by the transaction). The QOZ program could be combined with other programs.
- The QOZs were designated by the Governor of Florida prior to March of 2018, and QOZs represent specific “census tracts” located within low-income communities. Here is a website link to a map showing the various QOZs within the State of Florida:
As you can see, the rules and regulations governing QOZs and QOFs are complicated and require very detailed analysis. All facts and circumstances should be taken into consideration when considering, and prior to making, an investment into a QOF using the QOZ program. Should you have any questions regarding the QOZ program, please feel free to contact Nathaniel Dutt, Esq. at ndutt@SLLaw.com or Jordan Horowitz, Esq. at jhorowitz@SLLaw.com, or either at 407-581-9800.
Congress recently passed the Tax Cut and Jobs Act (“TCJA”) earlier this year, the largest revision to the tax code in thirty (30) years. Among the many changes are significant increases in the Estate, Gift, and Generation-Skipping Transfer (GST) tax exclusion amounts. In effect, this means that fewer families will be subject to such transfer taxes and that many estate plans will need to be updated to properly address the new law. The changes under the TCJA present an important opportunity for high net-worth individuals and families to review their current estate planning documents and ensure that their plan is properly tailored to achieve their goals.
Overview of Changes
The most significant change is the doubling of the unified Estate and Gift tax exclusion amount – the combined amount that individuals can give away during life or at death before paying transfer taxes – from $5.59 million to $11.18 million per person. The new tax law also preserves “portability,” a surviving spouse’s ability to retain any estate or gift exclusion unused by a deceased spouse, meaning that for married couples, the exclusion is effectively $22.36 million. This exclusion is inflation adjusted, but current law provides that this doubled exclusion sunsets December 31, 2025, after which estate taxes are slated to revert to current levels.
The new law also increases the amount each person can make exempt from the GST tax. As with the estate and gift tax exclusion, the new GST exclusion will increase from $5.59 million to $11.18 million per person (in 2018 as indexed for inflation). Unlike with the estate and gift tax, however, there is no “portability” for GST taxes. Thus, each spouse must use their own GST exclusion before they pass.
In addition to the changes made by the new tax bill, 2018 also brings a routine increase in the annual exclusion from the Gift tax to $15,000 per person, per year. This annual exclusion allows each individual to make a gift of $15,000 to any other individual (and in some cases trusts) without reducing their lifetime Estate and Gift tax exclusion amount.
Review of Your Estate Plan
The changes in the Estate, Gift and GST tax law mean that many estate plans should be revised to take advantage of tax changes, ensure existing tax formulas still achieve the intended results, or simplify complex planning that is no longer necessary and shift a focus towards income tax planning for beneficiaries. There are also certain planning opportunities that you may want to explore.
First, the increased exclusion amount may be an opportunity to unwind complex planning that may no longer be needed to minimize transfer taxes. For instance, many estate plans created under assumptions of prior law provide that at the death of the first spouse, the deceased spouse’s assets are divided into two (2) separate trust shares: a Marital Trust for the benefit of the surviving spouse and a Credit Shelter Trust that may benefit the surviving spouse, your children and/or grandchildren, or combinations of those people. For married couples with large estates, this technique defers payment of any Estate tax until the passing of the second spouse. The trade-off is that the Credit Shelter Trust may not benefit the surviving spouse solely and the income tax basis of the Credit Shelter Trust is locked into place upon the first spouse’s death. Many couples who used such techniques to minimize Estate tax prior to the new increased exclusion amounts will prefer for the surviving spouse to retain greater control of assets and plan for the remainder beneficiaries to receive a step-up in income tax basis for all of the assets upon the surviving spouse’s passing. ShuffieldLowman can assist you with weighing that control over the asset protection and the certainty of the Credit Shelter Trust to determine what is best for each family.
As mentioned above, another scenario involving Marital and Credit Shelter Trusts may play out in other plans containing “formula gifts.” Certain estate plans leave assets up to the Estate tax exclusion amount to a Credit Shelter Trust for the benefit of children or grandchildren and leave assets in excess of that amount to a Marital Trust for the benefit of the spouse. Because the Estate tax exclusion amount is now so large, this could mean unintentionally disinheriting the spouse and leaving all assets to the Family Trust or just leaving significantly less to the surviving spouse than intended.
Next, we do not know if the federal increased exclusion amounts will not be extended and will in fact expire in 2025, which is what the TCJA provides. Under a subsequent administration the exclusion amounts may even return to the lower levels of the past that existed for most of the 2000s. If either of these events does indeed occur, then the current increase in the exclusion amounts provides a temporary, “use it or lose it” opportunity to transfer assets outside your taxable estate, thereby “locking in” the current exclusion amount before it is reduced and freezing values from future appreciation. This estate tax planning might involve increased contributions to Irrevocable Trusts such as Irrevocable Life Insurance Trusts, Intentionally Defective Grantor Trusts (IDGTs), sales to these types of trusts, forgiveness of intra-family promissory notes, or other wealth transfer vehicles. You may want to consider further planning using the increased exemption amounts to remove assets from the estate.
Finally, some clients may even wish to use the increased exclusion amount to unwind prior planning and bring assets back into their gross estate to obtain a step-up in basis in those assets to fair market value at the time of their death. This type of planning is geared toward reducing income tax liability of your beneficiaries upon the sale of the inherited assets.
These are just a few examples of the many ways in which the TCJA may affect your estate plan. The TCJA makes significant changes to the Estate, Gift and GST tax regimes. If your estate plan was implemented under previous law, it would be beneficial to review your plan to ensure it accomplishes your current goals in light of these changes. If you would like a comprehensive review of your estate plan, contact ShuffieldLowman today.
The IRS announced on Tuesday, March 13, 2018 that it was ending its Offshore Voluntary Disclosure Program on September 28 of this year. It stated that they were alerting taxpayers now to give those taxpayers with undisclosed foreign income or assets a chance to come clean before then. More than 56,000 taxpayers have already done so, but the disclosures have tapered off with only 600 in 2017.
The IRS will continue its off-shore tax enforcement as a top priority. Future disclosures will proceed under the traditional Criminal Investigation voluntary disclosure program, but that program requires that all taxes AND penalties be paid and does not offer the 27 ½ % penalty available under the OVDP. Other programs, such as the Streamlined Filing Compliance Program and delinquent FBAR filings, etc. will remain in force for an indeterminate amount of time for those who may qualify. But if you have unreported off-shore income, your time is running out.
The IRS has announced two new and highly sophisticated approaches to criminal tax enforcement. The first, called the “data initiative”, sounds similar to the data analysis first used by FinCen to uncover money laundering operations. It will consist of data analysis from information provided by field offices throughout the country. This will allow the IRS to identify areas of non-compliance that have nationwide impact and use its resources to coordinate investigations and provide greater support to the field agents. It will also help to deal with decreasing personnel and resources due to budget constraints. The initial projects will focus on international tax enforcement, employment tax and SEC microcap fraud. It is also expected to identify new areas of non-compliance and start investigations in these new areas.
The second “new” program will be a specialized group of agents already experienced in international tax enforcement. Their expertise will provide specialized skills and knowledge in this area of enforcement. Their efforts, along with the Department of Justice, international tax partners and information gathered from the Bank Secrecy Act, FATCA, whistleblowers, the Offshore Voluntary Disclosure Programs, the Panama Papers, etc., will allow them to identify, through data analysis, new or continuing non-compliance in the international area. Initially, the group will consist of 10 to 12 special agents working out of the Washington D.C. field office. Others will be located at “strategic” locations around the country.
These new programs should give further incentive to those who have yet to avail themselves of the Offshore Voluntary Disclosure programs to give further serious consideration to doing so. Time continues to run out for those continuing to believe they will not be discovered.