Have you bought stock in a company that later dropped in value? While you may prefer to forget such an ill-fated investment, at least you can claim a capital loss deduction on your tax return. Here are the rules that apply when a stock you own is sold at a loss or becomes completely worthless.

Stock sales produce capital losses

Stocks are capital assets and produce capital gains or losses when they’re sold. Your capital gains and losses for the year must be netted against one another in a specific order, based on whether they’re short-term (held one year or less) or long-term (held for more than one year).

If, after netting, you have short-term or long-term losses (or both), you can use them to offset up to $3,000 of ordinary income ($1,500 for married taxpayers filing separately). Any loss in excess of this limit is carried forward to later years, until all of it is either offset against capital gains or deducted against ordinary income in those years, subject to the $3,000 limit. If you have both net short-term losses and net long-term losses, the net short-term losses are used to offset ordinary income before the net long-term losses are used.

If you’ve realized capital gains during the year from stock or other asset sales, consider selling some of your losing positions to offset the gains. A good tax strategy is to sell enough losing stock to shelter your earlier gains and generate a $3,000 loss, since this is the maximum loss that can be used to offset ordinary income each year.

Wash sale rule

If you believe that a stock you own will recover but want to sell now in order to lock in a tax loss, be aware of the wash sale rule. Under it, if you sell stock at a loss and buy substantially identical stock back within the 30-day period before or after the sale date, you can’t claim the loss for tax purposes. In order to claim the loss, you must buy the new shares outside of the period that begins 30 days before and ends 30 days after the sale of the loss stock.

Worthless stock

In some cases, stock you own may have become completely worthless. If so, you can claim a loss equal to your basis in the stock, which is generally what you paid for it. The stock is treated as though it had been sold on the last day of the tax year. This date is important because it determines whether your capital loss is long-term or short-term.

Stock shares become worthless when they have no liquidation value, because the corporation’s liabilities exceed its assets, and no potential value, because the business has no reasonable hope of becoming profitable. A stock can be worthless even if the corporation hasn’t declared bankruptcy. Conversely, stock may still have value even after a bankruptcy filing, if the corporation continues operating and the stock continues trading.

You may not discover that a stock has become worthless until after you’ve filed your tax return for the year of worthlessness. In that case, you can amend your return for that year to claim a credit or refund due to the loss. This can be done for seven years from the date your original return was due, or two years from the date you paid the tax, whichever is later.

Special situation

Other rules may apply. For example, if you’re a victim of a Ponzi-type investment scheme, you may be able to mitigate your financial loss by taking advantage of special tax relief available. Let us know if you have any questions.

© 2023

Under tax law, businesses can generally deduct advertising and marketing expenses that help keep existing customers and bring in new ones. This valuable tax deduction can help businesses cut their taxes.

However, in order to be deductible, advertising and marketing expenses must be “ordinary and necessary.” As one taxpayer recently learned in U.S. Tax Court, not all expenses are eligible. An ordinary expense is one that’s common and accepted in the industry. And a necessary expense is one that’s helpful and appropriate for the business.

According to the IRS, here are some advertising expenses that are usually deductible:

• Reasonable advertising expenses that are directly related to the business activities.
• An expense for the cost of institutional or goodwill advertising to keep the business name before the public if it relates to a reasonable expectation to gain business in the future. For example, the cost of advertising that encourages people to contribute to the Red Cross or to participate in similar causes is usually deductible.
• The cost of providing meals, entertainment, or recreational facilities to the public as a means of advertising or promoting goodwill in the community.

Facts of the recent case

An attorney deducted his car-racing expenses and claimed they were advertising for his personal injury law practice. He contended that his racing expenses, totaling over $303,000 for six tax years, were deductible as advertising because the car he raced was sponsored by his law firm.

The IRS denied the deductions and argued that the attorney’s car racing wasn’t an ordinary and necessary expense paid or incurred while carrying on his business of practicing law. The Tax Court agreed with the IRS.

When making an ordinary and necessary determination for an expense, most courts look to the taxpayer’s primary motive for incurring the expense and whether there’s a “proximate” relationship between the expense and the taxpayer’s occupation. In this case, the taxpayer’s car-racing expenses were neither necessary nor common for a law practice, so there was no “proximate” relationship between the expense and the taxpayer’s occupation. And, while the taxpayer said his primary motive for incurring the expense was to advertise his law business, he never raced in the state where his primary law practice was located and he never actually got any legal business from his car-racing activity.

The court noted that the car “sat in his garage” after he returned to the area where his law practice was located. The court added that even if the taxpayer raced in that area, “we would not find his expenses to be legitimate advertising expenses. His name and a decal for his law firm appeared in relatively small print” on his car.

This form of “signage,” the court stated, “is at the opposite end of the spectrum from (say) a billboard or a newspaper ad. Indeed, every driver’s name typically appeared on his or her racing car.” (TC Memo 2023-18)

Keep meticulous records

There are no deductions allowed for personal expenses or hobbies. But as explained above, you can deduct ordinary and necessary advertising and marketing expenses in a bona fide business. The key to protecting your deductions is to keep meticulous records to substantiate them. Contact us with questions about your situation.

© 2023

Under tax law, businesses can generally deduct advertising and marketing expenses that help keep existing customers and bring in new ones. This valuable tax deduction can help businesses cut their taxes.

However, in order to be deductible, advertising and marketing expenses must be “ordinary and necessary.” As one taxpayer recently learned in U.S. Tax Court, not all expenses are eligible. An ordinary expense is one that’s common and accepted in the industry. And a necessary expense is one that’s helpful and appropriate for the business.

According to the IRS, here are some advertising expenses that are usually deductible:

• Reasonable advertising expenses that are directly related to the business activities.
• An expense for the cost of institutional or goodwill advertising to keep the business name before the public if it relates to a reasonable expectation to gain business in the future. For example, the cost of advertising that encourages people to contribute to the Red Cross or to participate in similar causes is usually deductible.
• The cost of providing meals, entertainment, or recreational facilities to the public as a means of advertising or promoting goodwill in the community.

Facts of the recent case

An attorney deducted his car-racing expenses and claimed they were advertising for his personal injury law practice. He contended that his racing expenses, totaling over $303,000 for six tax years, were deductible as advertising because the car he raced was sponsored by his law firm.

The IRS denied the deductions and argued that the attorney’s car racing wasn’t an ordinary and necessary expense paid or incurred while carrying on his business of practicing law. The Tax Court agreed with the IRS.

When making an ordinary and necessary determination for an expense, most courts look to the taxpayer’s primary motive for incurring the expense and whether there’s a “proximate” relationship between the expense and the taxpayer’s occupation. In this case, the taxpayer’s car-racing expenses were neither necessary nor common for a law practice, so there was no “proximate” relationship between the expense and the taxpayer’s occupation. And, while the taxpayer said his primary motive for incurring the expense was to advertise his law business, he never raced in the state where his primary law practice was located and he never actually got any legal business from his car-racing activity.

The court noted that the car “sat in his garage” after he returned to the area where his law practice was located. The court added that even if the taxpayer raced in that area, “we would not find his expenses to be legitimate advertising expenses. His name and a decal for his law firm appeared in relatively small print” on his car.

This form of “signage,” the court stated, “is at the opposite end of the spectrum from (say) a billboard or a newspaper ad. Indeed, every driver’s name typically appeared on his or her racing car.” (TC Memo 2023-18)

Keep meticulous records

There are no deductions allowed for personal expenses or hobbies. But as explained above, you can deduct ordinary and necessary advertising and marketing expenses in a bona fide business. The key to protecting your deductions is to keep meticulous records to substantiate them. Contact us with questions about your situation.

© 2023

Recently, the IRS announced 2024 indexing adjustments to the applicable dollar amount used to calculate employer shared responsibility penalties under the Affordable Care Act (ACA).

Although next year might seem a long way off, it’s best to get an early start on determining whether your business is an applicable large employer (ALE) under the ACA. If so, you should also check to see whether the health care coverage you intend to offer next year will meet the criteria that will exempt you from a penalty.

The magic number

For ACA purposes, an employer’s size is determined in any given year by its number of employees in the previous year. Generally, if your company has 50 or more full-time employees or full-time equivalents on average during the previous year, you’ll be considered an ALE for the current calendar year. A full-time employee is someone who provides, on average, at least 30 hours of service per week.

Under the ACA, an ALE may incur a penalty if it doesn’t offer minimum essential coverage that’s affordable and/or fails to provide minimum value to its full-time employees and their dependents. The penalty in question is typically triggered when at least one full-time employee receives a premium tax credit for buying individual coverage through a Health Insurance Marketplace (commonly referred to as an “exchange”).

Next year’s penalties

The adjusted penalty amounts per full-time employee for failures occurring in the 2024 calendar year will be:

• $2,970, a $90 increase from 2023, under Section 4980H(a), “Large employers not offering health coverage,” and
• $4,460, a $140 increase from 2023, under Sec. 4980H(b), “Large employers offering coverage with employees who qualify for premium tax credits or cost-sharing reductions.”

The IRS uses Letter 226-J to inform ALEs of their potential liability for an employer shared responsibility penalty. A response form — Form 14764 (“ESRP Response”) — is included with Letter 226-J so that an ALE can inform the IRS whether it agrees with the proposed penalty. A response is generally due within 30 days. Be on the lookout for this letter so that you’re prepared to promptly review and respond if the IRS contacts you.

Questions and ideas

Careful compliance with the ACA remains critical for companies that qualify as ALEs. Growing small businesses should be particularly wary as they become midsize ones. Our firm can answer any questions you may have about your obligations as well as suggest ways to better manage the costs of health care benefits.

© 2023

Are you concerned that some of your beneficiaries might squander their inheritances or simply aren’t equipped to handle the financial responsibilities that come with large sums of money? You don’t have to hold on to your assets until the day you die with the hope that your heirs will change their ways by that time. Instead, consider using a spendthrift trust that can provide protection, regardless of how long you live.

As with other trusts, a spendthrift trust may incorporate various tax benefits, but that’s not its primary focus. Indeed, this trust type can help you provide for an heir while protecting assets from his or her potentially imprudent actions.

Spendthrift trust in action

Generally, a spendthrift trust’s assets will consist of securities such as stocks, bonds and mutual funds, and possibly real estate and cash. The appointed trustee manages the assets.

The terms of the trust restrict the beneficiary’s ability to access funds in the account. Therefore, the beneficiary can’t invade the trust to indulge in a wild spending spree or sink money into a foolhardy business venture. Similarly, the trust assets can’t be reached by any of the beneficiary’s creditors.

Instead of having direct access to funds, the beneficiary usually receives payments from the trust on a regular basis or “as needed” based on the determination of the trustee. The trustee is guided by the terms of the trust and must adhere to fiduciary standards.

Be aware that the protection isn’t absolute. Once the beneficiary receives a cash payment, he or she has full control over that amount. The money can be spent without restriction.

Role of the trustee

Depending on the trust terms, the trustee may be responsible for making scheduled payments or have wide discretion as to whether funds should be paid, and how much and when. Designating the trustee is an important consideration, especially in situations where he or she will have broad control.

Although it’s not illegal to name yourself as trustee, this is generally not recommended. More often than not, the trustee will be an attorney, financial planner, investment advisor or someone else with the requisite experience and financial acumen. You should also name a successor trustee in the event the designated trustee dies before the end of the term or otherwise becomes incapable of handling the duties.

Other key considerations

There are several other critical aspects relating to crafting a spendthrift trust. For example, will the trustee be compensated and if so, how much? You must also establish how and when the trust should terminate. The trust could be set up for a term of years or termination may occur upon a specific event (such as a child reaching the age of majority).

Finally, try to anticipate other possibilities, such as enactment of tax law changes, that could affect a spendthrift trust. A word to the wise: This isn’t a do-it-yourself proposition. We’d be pleased to assist you when considering a spendthrift trust.

© 2023

You generally must pay federal tax on all income you receive but there are some exceptions when you can exclude it. For example, compensatory awards and judgments for “personal physical injuries or physical sickness” are free from federal income tax under the tax code. This includes amounts received in a lawsuit or a settlement and in a lump sum or in installments.

But as taxpayers in two U.S. Tax Court cases learned, not all awards are tax-free. For example, punitive damages and awards for unlawful discrimination or harassment are taxable. And the tax code states that “emotional distress shall not be treated as a physical injury or physical sickness.”

Here are the facts of the two cases.

Case #1: Payment was for personal injuries, not physical injuries

A taxpayer received a settlement of more than $327,000 from his former employer in connection with a lawsuit. He and his spouse didn’t report any part of the settlement on their joint tax return for the year in question. The IRS determined the couple owed taxes and penalties of more than $119,000 as a result of not including the settlement payment in their gross income.

Although the settlement agreement provided the payment was “for alleged personal injuries,” the Tax Court stated there was no evidence that it was paid on account of physical injuries or sickness. The court noted that the taxpayer’s complaint against the employer “alleged only violations of (state) labor and antidiscrimination laws, wrongful termination, breach of contract, and intentional infliction of emotional distress.”

The taxpayer argued that he had a physical illness that caused his employer to terminate him. But he didn’t provide a “direct causal link” between the illness and the settlement payment. Therefore, the court ruled, the amount couldn’t be excluded from his gross income. (TC Memo 2022-90)

Case #2: Legal malpractice payment doesn’t qualify for exclusion

This case began when the taxpayer was injured while at a hospital receiving medical treatment. She sued for negligence but lost her case. She then sued her attorneys for legal malpractice.

She received $125,000 in a settlement of her lawsuit against the attorneys. The amount was not reported on her tax return for the year in question. The IRS audited the taxpayer’s return and determined that the $125,000 payment should have been included in gross income. The tax agency issued her a bill for more than $32,000 in taxes and penalties.

The taxpayer argued that the payment was received “on account of personal physical injuries or physical sickness” because if it wasn’t for her former attorneys’ allegedly negligent representation, she “would have received damages from the hospital.” The IRS argued the amount was taxable because it was for legal malpractice and not for physical injuries. The U.S. Tax Court and the 9th Circuit Court of Appeals agreed with the IRS. (Blum, 3/23/22)

Strict requirements

As you can see, the requirements for tax-free income from a settlement are strict. If you receive a court award or out-of-court settlement, consult with us about the tax implications.

© 2023

You generally must pay federal tax on all income you receive but there are some exceptions when you can exclude it. For example, compensatory awards and judgments for “personal physical injuries or physical sickness” are free from federal income tax under the tax code. This includes amounts received in a lawsuit or a settlement and in a lump sum or in installments.

But as taxpayers in two U.S. Tax Court cases learned, not all awards are tax-free. For example, punitive damages and awards for unlawful discrimination or harassment are taxable. And the tax code states that “emotional distress shall not be treated as a physical injury or physical sickness.”

Here are the facts of the two cases.

Case #1: Payment was for personal injuries, not physical injuries

A taxpayer received a settlement of more than $327,000 from his former employer in connection with a lawsuit. He and his spouse didn’t report any part of the settlement on their joint tax return for the year in question. The IRS determined the couple owed taxes and penalties of more than $119,000 as a result of not including the settlement payment in their gross income.

Although the settlement agreement provided the payment was “for alleged personal injuries,” the Tax Court stated there was no evidence that it was paid on account of physical injuries or sickness. The court noted that the taxpayer’s complaint against the employer “alleged only violations of (state) labor and antidiscrimination laws, wrongful termination, breach of contract, and intentional infliction of emotional distress.”

The taxpayer argued that he had a physical illness that caused his employer to terminate him. But he didn’t provide a “direct causal link” between the illness and the settlement payment. Therefore, the court ruled, the amount couldn’t be excluded from his gross income. (TC Memo 2022-90)

Case #2: Legal malpractice payment doesn’t qualify for exclusion

This case began when the taxpayer was injured while at a hospital receiving medical treatment. She sued for negligence but lost her case. She then sued her attorneys for legal malpractice.

She received $125,000 in a settlement of her lawsuit against the attorneys. The amount was not reported on her tax return for the year in question. The IRS audited the taxpayer’s return and determined that the $125,000 payment should have been included in gross income. The tax agency issued her a bill for more than $32,000 in taxes and penalties.

The taxpayer argued that the payment was received “on account of personal physical injuries or physical sickness” because if it wasn’t for her former attorneys’ allegedly negligent representation, she “would have received damages from the hospital.” The IRS argued the amount was taxable because it was for legal malpractice and not for physical injuries. The U.S. Tax Court and the 9th Circuit Court of Appeals agreed with the IRS. (Blum, 3/23/22)

Strict requirements

As you can see, the requirements for tax-free income from a settlement are strict. If you receive a court award or out-of-court settlement, consult with us about the tax implications.

© 2023

Once upon a time, life insurance played a much larger part in an estate plan than it does now. Why? Families would use life insurance payouts to pay estate taxes. But with the federal gift and estate tax exemption at $12.92 million for 2023, far fewer families currently are affected by estate tax.

However, life insurance remains a powerful tool for providing for your loved ones in the event of your untimely death. The amount of life insurance that’s right for you depends on your personal circumstances, so it’s critical to review your life insurance needs regularly in light of changing circumstances.

Reasons to reevaluate

Consider reevaluating your insurance coverage if you’re:

• Getting married,
• Getting divorced,
• Having children,
• Approaching retirement, or
• Facing health issues.

The right amount of insurance depends on your family’s current and expected future income and expenses, as well as the amount of income your family would lose should you pass away.

The events listed above can change the equation, so it’s a good idea to revisit your life insurance needs as you reach these milestones. For example, if you get married and have kids, your current and future obligations are likely to increase significantly for expenses related to childcare, mortgage, car payments and college tuition.

As you get older, your expenses may go up or down, depending on your circumstances. For example, as your children become financially independent, they’ll no longer rely on you for financial support.

On the other hand, health care expenses for you and your spouse may increase. When you retire, you’ll no longer have a salary, but you may have new sources of income, such as retirement plans and Social Security. You may or may not have paid off your mortgage, student loans or other debts. And you may or may not have accumulated sufficient wealth to provide for your family.

Periodic reassessment a must

There are many factors that affect your need for life insurance, and these factors change over time. To make sure you’re not over- or underinsured, reassess your insurance needs periodically and especially when your life circumstances change. We can help you determine whether you have an adequate amount of life insurance coverage.

© 2023

Even though it may not be top of mind when you’re developing or revising your estate plan, it’s important to consider how bequeathing assets to your family might affect them. Why? Because when your heirs receive their inheritance, it becomes part of their own taxable estates. Giving a loved one permission to create an inheritor’s trust can help avoid this outcome.

The trust in action

In a nutshell, an inheritor’s trust allows your loved one to receive the inheritance in trust, rather than as an outright gift or bequest. Thus, the assets are kept out of his or her own taxable estate. Having assets pass directly to a trust benefiting an heir not only protects the assets from being included in the heir’s taxable estate, but also shields them from other creditor claims, such as those arising from a lawsuit or a divorce.

Because the trust, rather than your family member, legally owns the inheritance, and because the trust isn’t funded by the heir, the inheritance is protected. The reason is because everything you gift or bequeath to the trust (including growth and income from the trust) is owned by the trust, and therefore can’t be treated as community property. An inheritor’s trust can’t replace a prenuptial or postnuptial agreement, but it can provide a significant level of asset protection in the event of divorce.

With an inheritor’s trust, your heir can also realize wealth building opportunities. If you fund an inheritor’s trust before you die, your loved one can use a portion of the money to, for example, start a new business. A prefunded inheritor’s trust can also own the general partnership interest in a limited partnership or the voting interest in a limited liability company or corporation. If you decide to fund the trust now, your initial gift to the trust can be as little or as much as you like.

Talk to your heirs first

As you draft or revise your estate plan and consider who to pass your assets to, it’s a good idea to talk to family members first. Determine if they would accept the bequests and then inform them of their option of creating an inheritor’s trust. Turn to us to help determine whether an inheritor’s trust is right for your situation.

© 2023

If you want to share some of your wealth with your grandchildren or great grandchildren — or if your estate plan is likely to benefit these generations — it’s critical to consider and plan for the generation-skipping transfer (GST) tax. Designed to ensure that wealth is taxed at each generational level, the GST tax is among the harshest and most complex in the tax code. It’s also among the most misunderstood.

ABCs of the GST tax

To ensure that wealth is taxed at each generational level, the GST tax applies at a flat, 40% rate — in addition to otherwise applicable gift and estate taxes — to transfers that skip a generation. The tax applies to transfers to “skip persons,” including your grandchildren, other relatives who are more than one generation below you and unrelated people who are more than 37½ years younger than you.

There’s an exception, however, for a grandchild whose parent (your child) predeceases you. In that case, the grandchild moves up a generation and is no longer considered a skip person.

Allocation rules

Even though the GST tax enjoys an inflation-adjusted lifetime exemption in the same amount as the lifetime gift and estate tax exemption ($12.92 million for 2023), it works a bit differently. For example, while the gift and estate tax exemption automatically protects eligible transfers of wealth, the GST tax exemption must be allocated to a transfer to shelter it from tax.

The tax code contains automatic allocation rules designed to prevent you from inadvertently losing the exemption, but it can be dangerous to rely solely on these rules. In some cases, the exemption isn’t automatically allocated to transfers that may trigger costly GST taxes. And in others, the exemption is automatically allocated to transfers that are unlikely to need its protection, wasting those exemption amounts.

3 types of GST tax triggers

Three types of transfers may trigger GST taxes:

1. “Direct skips” — transfers directly to a skip person that are subject to federal gift and estate tax,
2. Taxable distributions — distributions from a trust to a skip person, or
3. Taxable terminations — for example, if you establish a trust for your children, a taxable termination occurs when the last child beneficiary dies and the trust assets pass to your grandchildren.

As noted above, the GST tax doesn’t apply to transfers to which you allocate your GST tax exemption. In addition, the GST tax annual exclusion — which is similar to the gift tax annual exclusion — currently allows you to transfer up to $17,000 per year to any number of skip persons without triggering GST tax or using up any of your GST tax exemption. Note, however, that transfers in trust qualify for the exclusion only if certain requirements are met.

Plan carefully

If your estate plan calls for making substantial gifts, either outright or in trust, to your grandchildren or other skip persons, be sure to allocate your GST tax exemption carefully. We can help you devise a strategy that leverages the exemption and minimizes your GST tax liability.

© 2023

President Biden has released his proposed budget for the federal government for the 2024 fiscal year. The budget, which aims to cut the deficit by nearly $3 trillion over 10 years, includes numerous provisions that would affect the tax bills of both individuals and businesses. While most of these proposals stand little chance of enactment with a Republican majority in the U.S. House of Representatives, they shed light on the Democrats’ priorities as they prepare for the 2024 election season. This will become critically important as the next administration will need to deal with the expiration of TCJA (the “Trump Tax Cuts”).

Individual tax provisions

The proposed budget includes tax provisions that would affect taxpayers of various income levels. In particular, it would make the following changes:

Tax rates. The proposal would reinstate the top individual tax rate of 39.6% for single filers earning more than $400,000 ($450,000 for married couples).

Net investment income tax (NIIT). The NIIT on income over $400,000 would include all pass-through business income not otherwise covered by the NIIT or self-employment taxes. The budget also would increase both the additional Medicare tax rate and the NIIT rate by 1.2 percentage points. Thus, the Medicare tax rate would be 5% for earnings above $400,000, and the NIIT rate would be 5% for investment income above $400,000.

Capital gains tax. The highest capital gains rate now is 20% (or 23.8% if the NIIT applies). For individuals with taxable income of more than $1 million, the budget proposes that capital gains be taxed at ordinary rates, with 37% (or 40.8% with the NIIT) generally being the highest rate — or 39.6% (or 43.4% with the NIIT) if the top tax rate is raised.

Child tax credit (CTC). This proposal would expand the CTC and make it fully refundable and payable in advance on a monthly basis. For eligible parents, the credit would increase from $2,000 to $3,000 for children age six and older and $3,600 for children under age six.

The proposal also would establish a “presumptive eligibility” for determining when a taxpayer is eligible to claim a monthly specified child allowance or receive a monthly advance child payment. After a taxpayer establishes presumptive eligibility for a child, that child would be treated as a specified child of the taxpayer for each month during the period of the taxpayer’s presumptive eligibility.

Premium tax credits (PTCs). The American Rescue Plan Act expanded eligibility for healthcare insurance subsidies to taxpayers with household incomes above 400% of the federal poverty line for 2021 and 2022. It also reduced the applicable contribution percentage (the percentage of household income a taxpayer must contribute toward a healthcare insurance premium). The Inflation Reduction Act (IRA) extended the expansion through 2025. The proposed budget would make this expansion permanent.

Cryptocurrency taxation. The proposal would amend the “wash-sale” rule to cover digital assets. The rule prohibits the deduction of a loss when the taxpayer acquires “substantially identical” investments within 30 days before or after the sale date.

Minimum wealth tax. The proposal would impose a minimum 25% tax on total income, generally inclusive of unrealized capital gains, for all taxpayers whose assets exceed liabilities by more than $100 million. According to the White House, the tax would apply to only the top 0.01% of taxpayers.

Gift and estate taxes. The proposal would close loopholes related to certain trust arrangements. Specifically, the changes would affect grantor-retained annuity trusts and charitable lead annuity trusts.

Business tax provisions

The proposed budget’s tax provisions target numerous issues of interest to businesses, including:

Corporate tax rates. The proposal would trim back the large cut made to the corporate tax rate in the Tax Cuts and Jobs Act (TCJA). It would hike the tax rate for C corporations from 21% to 28% — still significantly less than the pre-TCJA rate of 35%. In addition, the effective global intangible low-taxed income (GILTI) rate would increase to 14%. Overall, with other proposed changes, the effective GILTI rate would rise to 21%.

Global minimum tax. The proposal would repeal Base Erosion and Anti-Abuse Tax (BEAT) liability, replacing it with an “undertaxed profits rule.” In conjunction with the GILTI regime, the rule would ensure that income earned by a multinational company, whether parented in the United States or elsewhere, is subject to a minimum rate of taxation regardless of where the income is earned.

Stock buyback excise tax. The IRA created a 1% excise tax on the fair market value when corporations buy back their stock, with the goal of reducing the difference in the tax treatment of buybacks and dividends. The proposal would quadruple the tax to 4%.

Carried interest loophole. A “carried interest” is a hedge fund manager’s contractual right to a share of a partnership’s profits. Currently, it’s taxable at the capital gains rate if certain conditions are satisfied. The budget proposes to close this loophole.

Like-kind exchanges. Owners of certain appreciated real property can defer the taxable gain on the exchange of the property for real property of a “like-kind.” The proposal would allow the deferral of gain up to an aggregate amount of $500,000 for each taxpayer ($1 million for married couples filing a joint return) each year for like-kind exchanges. Under this proposal, any like-kind gains in excess of $500,000 (or $1 million for married couples) in a year would be recognized in the year the taxpayer transfers the real property.

Low-income housing tax credit. The budget proposes to expand and enhance the largest federal incentive for affordable housing construction and rehabilitation.

The elephant in the room

The budget proposal doesn’t address many of the temporary tax provisions of the TCJA that have expired or are set to expire in the next few years. The increased standard deduction, reduced individual tax rates, qualified business income deduction for pass-through businesses, and limit on the state and local tax deduction are among the numerous provisions scheduled to expire at the end of 2025 — potentially affecting the tax liability of a wide swath of taxpayers. We’ll keep you informed if there’s significant movement on this front.

© 2023