Author Archive

Business Transfers and Changing Tax Rules

Wednesday, December 7, 2016 @ 10:12 AM
Author: Steven Ness

Last Thursday, December 1, 2016, there was a hearing before IRS regulators concerning the potential elimination of discounting the value of transferred business interests, a significant estate planning business succession technique often used in the transfer of closely held or family owned businesses.
In October, the IRS has issued proposed regulations to Section 2704 of the Internal Revenue Code that could dramatically reduce the ability to utilize well accepted discounting techniques used in valuing business interests being transferred. Specifically, these proposed regulations would likely restrict the application of “lack of control” or “lack of marketability” discounts when determining the value of the business interest being transferred. The loss of this technique creates serious tax implications, affecting taxation of capital gains, gift tax exemptions and estate taxes.
Although the 2016 federal estate tax exemption is $5,450,000, per person, that cap is subject to change by either congressional or Presidential pressure. If long recognized discounting method, relating to the accepted value of transferred business interests is lost, owners of family and closely held business could be paying more taxes as a result of a business transfer.
Since 1990, when Section 2704 was enacted by Congress, the IRS has attempted to close estate and gift discounting. Until now, that attempt by the IRS has been unsuccessful. The new proposed regulations use the authority granted under Section 2704(b)(4), which gives the IRS the authority to provide in regulations in determining the value of the transfer of any interest in a corporation or partnership to a member of the transferor’s family, if such restriction has the effect of reducing the value of the transferred interest . . . but does not ultimately reduce the value of such interest to the transferee.”
There are questions as to whether the proposed regulations exceed the regulatory authority of the IRS, and while the promulgation of these regulations will likely be challenged, that challenge would be well after the proposed regulations are effective.
If these changes are adopted as written, they will have a direct impact on estate planning considerations for owners of family controlled entities. These new regulations will effectively eliminate discounts for lack of control or marketability in valuing these interests. While there may still time to complete transfers before the proposed regulations become effective, that preemptive planning may be for naught. If planning individual dies within three years of the transfer and after the new regulations are effective, the transfer could still be taxed under these new regulations.
It is however, a double-edged sword. Given that the current federal estate tax exemption is $5,450,000, there is only a limited population that will ever be subject to this federal estate tax. That limited application of federal estate taxes, coupled with the current step-up in basis rules, benefits tax payers, who cannot be subjected to the taxing authorities attempts to apply discounts to that stepped-up bases. As an example, a business owner who dies and passes his or her business interest to the next generation, passes along a business interest with a higher value, providing an increased step-up in basis.

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DOL Overtime Rule Changes on Hold

Wednesday, November 23, 2016 @ 10:11 AM
Author: Steven Ness

U.S. Department of Labor’s new unlegislated rules (to become effective on December 1) regarding overtime pay were indefinitely halted.  On November 22, 2016, a federal judge temporarily blocked the Department of Labor from implementing and enforcing a final rule that would have altered the way workers are classified as exempt from overtime pay under the Fair Labor Standards Act (FLSA).  A temporary sigh of relief for many small and medium sized businesses with “hybrid executives” who perform a variety of tasks/functions.

While this means the implementation of the rule has been delayed, and it will not go into effect on December 1, 2016 as expected, it could easily be implemented in the near future. Proactive employers that already implemented policies consistent with the new rules may have a difficult time reversing those new policies.  It is always prudent, if unsure, to consult legal counsel for additional guidance.

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States Sue DOL on Overtime Changes

Friday, September 23, 2016 @ 09:09 AM
Author: Steven Ness

Officials from 21 states sued the U.S. Department of Labor Tuesday over a new rule that would, on December 1, 2016, make an estimated 4.2 million salaried workers (generally executive, administrative and professional employees) eligible for overtime pay. The protesting states are slamming the measure as a federal government overreach by the Obama Administration. Critics claim the measure will cripple small businesses.
States involved include Alabama, Arizona, Arkansas, Georgia, Indiana, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Nebraska, Ohio, Oklahoma, South Carolina, Texas, Utah and Wisconsin, and the governors of Iowa, Maine and New Mexico.

The Eastern Texas district where the lawsuit was filed is known as a “rocket docket” court where cases move along quickly.
The lawsuit came the same day that the U.S. Chamber of Commerce and more than 50 other business groups filed a legal challenge against the same regulation.

Reported by: MICHELLE RINDELS Associated Press
Read more at: http://www.startribune.com/21-us-states-sue-to-block-expansion-of-overtime-pay-law/394173931/

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New Minnesota Estate and Gift Tax Laws

Thursday, June 6, 2013 @ 10:06 AM
Author: Steven Ness

At the end of May the Minnesota Governor signed a bill into law that will impact people who reside in Minnesota and those who claim their residence in another state but own property in Minnesota.  Minnesota is now the second state (after Connecticut) to impose a gift tax. The new law also imposes a Minnesota estate tax for all property located in Minnesota held in pass-through entities (an LLC, Sub S Corp or partnership). Some key provisions provide:

  1. A Minnesota gift tax of 10 percent will be imposed on certain taxable gifts made by Minnesota residents and non-residents owning property located in Minnesota.

·         Beginning on June 30, 2013, Minnesota residents and non-residents will be subject to Minnesota gift tax on all transfers of real property located within Minnesota and transfers of tangible personal property that is customarily kept in Minnesota at the time the gift is executed. In addition, Minnesota residents will also be subject to Minnesota gift tax on transfers of intangible assets (e.g., cash, securities, business interests).

 ·         Each person has a lifetime exemption of $1,000,000 from the Minnesota gift tax. The Minnesota gift tax only applies to transfers that are treated as taxable gifts for federal gift tax purposes. As a result, certain gifts that are not subject to the federal gift tax – including transfers falling under the annual exclusion cap ($14,000 in 2013), gifts to spouses, charitable gifts and certain transfers for educational or medical purposes – will not be subject to the Minnesota gift tax.

 ·         This may be particularly important for people who have not yet taken advantage of their $5,000,000 federal gift, estate and generation-skipping transfer tax exemptions (indexed for inflation to $5,250,000 in 2013)

 

  1. Unlike many other states, Minnesota still has an estate tax on taxable estates that exceed $1,000,000 (with a top tax rate of 16%). Beginning in 2013, individuals who die resident in Minnesota or those who own property located in Minnesota will be required to include in their Minnesota taxable estate taxable gifts made within 3 years of death.

 

  1. For people dying after December 31, 2012, who own a pass-through entity (such as an LLC, S Corp or partnership) the location of real or tangible personal property held in the entity will be determined as though the entity does not exist. This means that property located in Minnesota held in pass-through entities will be subject to estate tax.

 ·      Under prior law, a non-resident owner of an interest in a pass-through entity that owned real estate, inventory or equipment in Minnesota was not subject to Minnesota estate tax on that property. The new law will subject such property to Minnesota estate tax, even if the business owner or investor has no other connection to Minnesota and even if the business entity is organized and operated in another state.

·         Non-Minnesota residents who may have previously transferred Minnesota situated property to a pass-through entity, in order to avoid the Minnesota estate tax, should to review these transfers. This is no longer an effective way to reduce or avoid Minnesota estate taxes.

·         Since the new law does not apply to Minnesota-situated property owned by C Corporations people owning pass through entities will want to consider whether a conversion to a C Corporation is appropriate.

At this point in time, the new law does not include a similar provision for Minnesota gift tax. After June 30, non-residents may be able to continue making gifts of interests in pass-through entities owning Minnesota property, without triggering a Minnesota gift tax. It must be remembered that any such gifts made within 3 years of death will be included in the gifting individual’s Minnesota taxable estate. People who desire to complete gifts of Minnesota situated assets should consider doing so as soon as possible.  It is anticipated by many that the Minnesota gift tax provisions will be modified to align with the new Minnesota estate tax provisions in one of the next legislative sessions.

 

 

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It May Be Time to Review Your Estate Plan

Wednesday, March 6, 2013 @ 09:03 AM
Author: Steven Ness

For more than a decade the estate planning landscape has been foggy at best.  During that entire period, existing laws created “automatic” changes that many tax and legal professionals found difficult to predict.  The passing of the American Taxpayer Relief Act of 2012 (the “2012 Act”) at the close of 2012, finally makes the estate and gift tax laws “permanent,” meaning that they are not scheduled to expire, be repealed or rolled back. This is a significant change because since 2001 taxpayers and their advisers have had to plan based on an uncertain statutory framework.

The 2012 Act sets the estate tax exemption amount at $5 million. This is the amount of money that can pass estate tax free to any individual without triggering federal estate tax.  Since this exemption amount will be adjusted for inflation, the exemption amount in 2012 was actually $5.12 million and it is predicted to rise to $5.25 million this year.

The 2012 Act unifies the estate tax with the gift tax, making the lifetime gift tax exemption amount also equal to $5 million (adjusted for inflation). The generation-skipping tax (“GST”) exemption amount is also set at $5 million (adjusted for inflation). As a result, a person can gift over $5 million during life ($10 million between spouses) and not trigger any transfer tax.

The maximum estate and gift tax rate was increased from 35% to 40%.

The “portability” of exemptions between spouses has been permanently extended so that a surviving spouse will be able to utilize his or her last deceased spouse’s unused exemption amount. This does require the filing of a federal estate tax return, but with proper elections built into a carefully prepared estate plan, a surviving spouse can protect up to $10 million (adjusted for inflation) if his or her deceased spouse did not utilize any of his or her exclusion amounts.

While the exemption amounts are high and portability enables a surviving spouse to use both spouses’ exemptions, there are still many reasons why planning during life is very important, including:

  1. All appreciation on gifted assets escapes federal and state estate taxes. For this reason, it still may make sense to make lifetime gifts if you anticipate that assets may appreciate and/or grow to a level that exceeds the exemption amounts.
  2. While the federal exemption amount is $5 million, the Minnesota estate tax exemption amount is still $1 million. A $10 million estate may not be subject to federal estate tax but will be subject to approximately $1 million in Minnesota estate tax.  Proper planning can reduce or eliminate this $1 million state estate tax exposure.
  3. While the estate tax exemption is portable, the state level estate tax exemption and the federal GST exemption are not portable. If not properly planned for, these valuable exemptions can be wasted, costing significant tax dollars.

Steven E. Ness is an estate planning attorney for Business Law Center, PLC in Bloomington, Minnesota.

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Tax Savings for Companies Selling in Foreign Countries

Friday, February 1, 2013 @ 01:02 PM
Author: Steven Ness

An Interest Charge Domestic International Sales Corporation (commonly called an “IC-DISC”) is a unique tax savings entity, available to U.S. companies that have substantial sales to foreign countries, which includes sales to Canada and Mexico. An IC-DISC reduces tax liability by converting a portion of export income, which is taxable at ordinary income rates as high as 35% into qualified dividends generally taxed at 15%.

In short, an IC-DISC is a tax-exempt, domestic “paper” C corporation set up to receive commissions on the company’s export sales. The IC-DISC must have its own bank account, keep separate accounting records and file U.S. tax returns. But this separate entity need not have an office, employees or tangible assets nor is it required to perform any services.

To qualify as and IC-DISC a U.S. corporation must:

1. Be incorporated in one of the 50 states or District of Columbia;
2. File an election with the IRS to be treated as an IC-DISC for federal tax purposes (the application can be found at http://www.irs.gov/pub/irs-pdf/i1120icd.pdf);
3. Maintain a minimum capitalization of $2,500;
4. Have a single class of stock;
5. Meet a qualified export receipts test and a qualified export assets test;

Meeting a qualified export receipts test and a qualified export assets test indicates that at least 95% of an IC-DISC’s gross receipts and assets must be related to the export of property whose value is at least 50% attributable to U.S. produced content. Some services, such as engineering and architectural services related to construction projects outside the U.S. may also generate qualified export receipts.

The internal processes followed by an IC-DISC can be summarized as follows:

1. An owner-managed exporting company organizes a new C corporation and applies for qualification as a tax-exempt IC-DISC;
2. The exporting company pays IC-DISC a commission;
3. The exporting company deducts commission from ordinary income taxed at 35%;
4. The IC-DISC pays no tax on the commission;
5. The shareholders of the IC-DISC must pay income tax on dividends at a qualified rate of 15%;
6. The result is 20 percent tax savings on commissions.

Steven E. Ness is a busienss attorney with Business Law Center in Minneapolis Minnesota

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Will Minnesota Tax Your Estate?

Tuesday, July 10, 2012 @ 08:07 AM
Author: Steven Ness

The State of Minnesota imposes a tax on the estates of individuals who are residents of the state when they die or who own tangible property in MN when they die. The taxable estate is generally the fair market value of the estate on the day the decedent died, less deductions (e.g., transfers to a surviving spouse and charitable bequests) and an exemption mount, which is $1 million for unmarried individuals. The tax is imposed under a graduated rate schedule on the taxable estate.  The tax rates range from 0.8% to 16%. For the 16 years ending December 31, 2001, the MN estate tax was directly linked to the federal tax as a “pickup” or “soak-up” tax equal to the credit allowed under federal estate tax for state death taxes. As a pickup tax, the MN tax imposed no additional tax burden on estates. For each dollar of state tax paid, federal tax was reduced by an equal amount.

However, U.S. Congress repealed this credit in 2001, the MN legislature chose to continue imposing the estate tax under the rules in effect before Congress repealed the credit. As a result, the MN estate tax now is a stand-alone tax.  Many people, including some estate planning practitioners, drafted their estate plan around the federal estate tax and ignored the impact of Minnesota’s estate tax rules.  All estate plans, especially estate plans created prior to 2002, should be reviewed, and may need to be modified to recognize Minnesota’s lower taxable estate threshold.

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