Recently, our very own Matthew Eyet, Esq. talked with Rose Davidson, host of Talking with the Experts, a vodcast for business owners, about various hot-button business planning issues including Paycheck Protection Program (PPP) loans and estate tax under the new administration.
You can find the full conversation here, but we have put together a few key takeaways below.
Many businesses have applied for PPP loans, and issues with the first draw loans from the spring of 2020 are now in the news again as federal prosecutors have committed resources to going after fraud.
However, as Matthew emphasized, PPP loans aren’t the only type of loan out there. Economic injury disaster loans (EIDL) also exist, and businesses can qualify for both. In fact, between state and federal relief programs, there are many layers of support available to businesses. It’s possible for businesses to find relief from, five or more different local state and local federal sources.
Matthew and Rose also delved into estate tax and possible legal changes under the Biden administration.
Matthew explained step-up in basis, which has been receiving some press attention lately: If a farming couple in Iowa bought their land for $100,000, but it grows to be worth $10 million by the time of their deaths, then the asset of the farmland has appreciated significantly—yet there is no liquidity to pay the estate tax because it’s a farm. The step-up in basis means that the inheritors of the farm will not be taxed on the gains in value, so long as the property is held in the name of an individual until their death.
The reverse is also true: You can’t claim a loss if your property depreciates from $10 million to $100,000. “Hold on to the appreciated assets until you die and sell the ones that depreciated before you die,” Matthew advised.
Another area of concern when it comes to changing tax laws is the amount of the gift and Estate tax exemption lifetime, which are currently set at a gift of 11.7 million per person. If the value of your entire estate doesn’t exceed $11.7 million, then you don’t pay federal estate tax on it when transferring the assets to the next generation (although you may have to pay state tax). Married couples get to each use the unused portion of the other’s exemption. Once you cross the threshold, you’re facing a flat tax rate of 40%.
Fourteen years ago, the lifetime exclusion amount was only $1 million—a significant difference. Will the Biden Administration succeed in shifting the threshold again? We can’t say, but it helps to be prepared.
As Matthew and Rose discussed, there are many forms of federal and state relief available to businesses. If you have questions about loan forgiveness, especially if you didn’t have much in payroll expenses—or if you have questions about planning for changes in estate tax—then we recommend consulting a qualified professional such as Matt to help navigate the monies you will encounter through the process.
At Eyet Law, we offer concierge legal services by providing full-spectrum support for our clients in tax law, estate planning, business law, and civil litigation. Questions? Contact us.
When you’re involved in litigation, keeping all the possible outcomes in mind is part of the job. It’s a key part of building a strong case. But for attorneys and their clients, there’s little that’s more frustrating than having the defendant declare bankruptcy during the proceedings.
There are times when there’s a legitimate cause to declare bankruptcy, but sometimes it’s used as a legal tactic. Often clients are told that there’s nothing that can be done once their adversary files bankruptcy—they have to cut their losses and accept pennies on the total dollar value of their claim.
It has proven to be an effective tactic, especially for several high-profile real estate moguls and business entrepreneurs who have been known for using the bankruptcy code as a strategic litigation maneuver in various types of lawsuits.
But at Eyet Law, we know there are ways to handle improper bankruptcy filings that are being used solely for litigation maneuvering purposes.
An illegitimate bankruptcy claim?
As we mentioned, it’s a question that a lot of attorneys have rebuffed in the past, saying that there wasn’t anything that you could do about it. However, we’ve been successful at forcing the nefarious-acting adversary to prove the legitimacy of its claim in this very situation. Let’s look at a recent case.
Eyet Law handled a case where a founding business partner was frozen out of his business by his co-founders/former partners. We filed a lawsuit on behalf of the ousted partner against two of the ex-partners as well as the business entity. Despite the entity having generated one million+ dollars of net profit during the prior year, the entity waited until the day before the Order to Show Cause hearing in state court to file for Chapter 11 business bankruptcy, followed by a notice of removal to federal district court of the claims against the principal of the Company.
Ultimately, this case became a matter of principle for us. We wanted to help make sure that the estate of the deceased was able to receive their rightful interest in the business, and couldn’t let this tactic deprive them of the funds.
A bankruptcy claim doesn’t have to mean the lawsuit ends
Because the defendants had filed for bankruptcy, the case moved from the traditional litigation channels of state and federal district court to federal bankruptcy court. The day prior to when we were supposed to be in court together, we learned the defendants had petitioned for their case to be moved from state court to federal court.
Typically, this has been used as a procedural method to short circuit lawsuits. Once cases move to federal bankruptcy court, there’s often little you can do. We knew better though. By proving that the bankruptcy claim was one that had zero independent legal merit, we were able to keep the action against the principals alive through normal litigation channels.
New approach to an old problem
Because bankruptcy filings during litigation have often been written off, taking a new approach to this old problem can surprise even the most-seasoned bankruptcy professionals.
At Eyet Law, we see things a little differently.
Business owners and investors regularly file for bankruptcy. While this can be the cost of doing business, when it’s done with the intention of avoiding litigation, it’s important to hold them accountable.
In fact, this was such a noteworthy approach that we were frequently told by those in the industry that they were watching to see the outcome. Should the case not be able to continue in bankruptcy court, it would send a clear message that it couldn’t be used to avoid litigation.
This is our goal: to advocate for clients and work effectively within the legal system to get the outcome you deserve. Because when it comes down to it, this is a litigation issue, not a bankruptcy issue.
When facing court cases like this, clients often get discouraged at the perceived setback. That’s understandable, but we always impress upon our clients the importance of remaining resilient. If you’re dealing with a lawsuit and your adversary has declared bankruptcy, don’t give up just yet. Instead, contact the experienced litigators at Eyet Law to discuss what your options are.
COVID-19 has brought significant financial challenges to many communities and caused historic disruptions for businesses. Congress’s relief response includes provisions that run through the tax code. For both individuals and businesses, this means there are some key considerations for year-end tax planning.
Cares Act Impact on Business Taxes
The Coronavirus Aid, Relief, and Economic Security (CARES) Act accelerated the timeline created by the Tax Cuts and Jobs Act (TCJA). In turn, this repealed the Corporate Alternative Minimum Tax (AMT) and allowed corporations to claim all their unused AMT credits in the tax years beginning in 2018, 2019, 2020, and 2021. The CARES Act allows corporations to claim all remaining AMT credits in either 2018 or 2019. This gives companies several different options to file for quick refunds, of which the fastest method for many companies will be filing a tentative refund claim on Form 1139.
Additionally, the CARES Act included a provision allowing businesses to use current losses against past income for more immediate refunds. Net operating losses (NOLs) in tax years beginning in 2018, 2019, and 2020 can be carried back five years for refunds against prior taxes.
Losses from years with lower tax rates can offset income from previous years with higher tax rates, however, carrying back NOL to a specific year may impact the application of other IRS provisions for that year. It’s important to note that this carryback provision is mandatory unless an election is made. To opt-out, a formal election statement must be filed along with a 2020 return or an amended return must be filed for previous years.
Social Security Taxes and the CARES Act
The CARES Act also allows employers to defer paying their 6.2% share of Social Security taxes for the remainder of 2020, and for self-employed individuals to defer payment of certain self-employment taxes. This applies to taxes required to be remitted between March 27, 2020, and December 31, 2020.
The deferred amount is due in two parts with the first half due by December 31, 2021, and the second half due by December 31, 2022. This can provide a liquidity benefit, but the impact on deductions should be considered. Businesses can’t deduct their share of payroll taxes until paid. Therefore, there may be some benefits for paying early to take the deduction in 2020, such as increasing an NOL for the provision benefits discussed above.
PPP Expenses and Taxes
Initially, some states ruled that expenses paid for with PPP funds are not eligible deductions. It was originally unclear whether Congress would agree, but the Consolidated Appropriations Act, 2021 put these concerns to rest and confirmed that otherwise deductible business expenses paid for with a forgiven PPP loan are deductible.
Cares Act Impact on Individual Taxes
For individuals, the CARES Act directed the IRS to issue stimulus checks of up to $1,200 per taxpayer and $500 per qualified child dependent earlier this year. These payments were paid based on 2018 or 2019 tax returns, but are structured as advances of 2020 tax credits. Because of this, the amount received may not match the amount of credit calculated on a 2020 return. If the 2020 credit calculation is less than what was received, there is no requirement to pay it back; however, if the amount received was less than the credit calculated for 2020, it can be claimed as an additional refund.
Additionally, the CARES Act offers two opportunities for charitable taxpayers in 2020. Individuals who do not itemize their charitable contributions will be allowed an “above the line” deduction of up to $300 in 2020. For those who do itemize, the CARES Act increases the limit on charitable deductions to 100% of the individual’s Adjusted Gross Income (AGI) for cash contributions made to public charities in 2020.
Individuals can also exclude up to $2 million (or $1 million if not married filing jointly) of Cancellation of Debt income from qualified principal residence indebtedness that is canceled in 2020 because of their financial condition or decline in value of the residence. Debt canceled after December 31, 2020 can still qualify, only if discharged pursuant to a written agreement entered into prior to January 1, 2021.
The CARES Act allows eligible individuals to withdraw up to $100,000 from qualified retirement plans during 2020 without incurring the standard 10% early distribution penalty. These taxable distributions can be included in gross income ratably over three years. Taxpayers may re-contribute the withdrawn amounts to a tax-qualified plan or IRA at any time within three years after the distribution, with these repayments being treated as a tax-free rollover and not subject to that year’s cap on contributions.
Calculating the CARES Act Impact on Your Taxes
As new bills begin to pass, lawmakers are still considering further stimulus and economic recovery legislation. With new information constantly coming forth, sitting down with an experienced tax attorney or CPA can keep businesses and individuals on track to take advantage of all tax-beneficial opportunities.
Johnson & Johnson (J&J), the international pharmaceutical company whose headquarters are right down the road from the Eyet Law office, has won a $56 million dollar tax case before the Supreme Court of New Jersey that poses broad implications for tax law interpretation.
The case, the result of a long process of appeals, carries implications for how tax law may be interpreted. It clarifies requirements for New Jersey taxpayers from 2011 to 2020 and, importantly, delivers new insight into how courts might read ambiguous tax laws.
Johnson & Johnson, headquartered in New Jersey, is insured by Middlesex Assurance Company Limited (MACL). MACL, which is based in Vermont, was established to insure Johnson & Johnson.
MACL was formed solely to provide insurance coverage for Johnson & Johnson. Because of this, they’re categorized as a “non-admitted insurer” in New Jersey, which refers to insurance companies that offer coverage without being licensed to undertake insurance business in that state. As such, they operate under different regulations.
A decade ago, Congress passed the Non-admitted and Reinsurance Reform Act (NRRA) of 2010 which streamlined how non-admitted insurers could be taxed for out-of-state insurance premiums by states.
This move gave the insured’s state of residence the sole right to tax premiums for all coverage nationwide instead of granting tax rights to wherever there was nexus. For Johnson & Johnson, this meant that New Jersey alone could pass laws levying taxes on their out-of-state non-admitted insurance premiums (called an Independent Procurement Tax, or IPT), which they did in 2011.
Initially, Johnson & Johnson followed suit and paid IPT premiums in New Jersey for all nationwide premiums. But, in 2015, they filed for a refund for coverage outside of New Jersey, arguing that amendments did not, in fact, levy taxes on nationwide coverage.
How the Courts Responded
The New Jersey Division of Taxation initially rejected their case, stating that the 2011 amendment wasn’t clear and that the legislative intent appeared to be for IPT to apply to all non-admitted insurance acquired by New Jersey entities nationwide as per the NRRA.
Johnson & Johnson responded by appealing to the Superior Court of New Jersey, Appellate Division. The Appellate Division determined that:
The statute didn’t clearly levy IPT for out-of-state coverage
Legislative intent didn’t clearly show otherwise
In situations of ambiguity, courts should lean in the favor of taxpayers.
Although a portion of the New Jersey amendment expanded the law’s scope to all nationwide coverage, the law only specified that this applied to surplus lines policies — a type of policy that is historically taxed like other non-admitted policies in New Jersey but which isn’t the type of coverage Johnson & Johnson acquired from MACL.
The Division of Taxation and the Department of Banking and Insurance (DOBI) countered by appealing to the Supreme Court of New Jersey. Their argument stated that the amendment should be read to apply to all non-admitted coverage, not just surplus lines coverage, and that when in doubt the courts should give deference to their regulatory interpretations. The Supreme Court followed the Appellate Division’s reasoning and rejected this argument.
Unpacking the Argument
“Surplus lines policy” isn’t defined in statutes, though “surplus lines insurer” is: any insurer that offers insurance regulated by the surplus lines law. Because non-admitted insurance is typically regulated like surplus lines insurance, the laws governing it are located in a section of the surplus lines law, and so this definition of “surplus lines insurer” arguably includes insurers who offer other non-admitted insurance as well.
Additionally, the laws governing surplus lines coverage had also been amended elsewhere to include nationwide premiums. As a result, interpreting the statute in question to apply to just those taxes would be to read the new language as duplicative, and therefore a legal nullity. Courts usually avoid these interpretations, given that they are ostensibly not what the legislature intended.
Altogether, the Supreme Court and Appellate Court found that this was not enough to determine the statutory language was unclear and the language clearly applied the nationwide scope of the tax to “surplus lines policy” premiums only. However, the courts held that even if the law was unclear the tax still wouldn’t apply, as the taxpayer should get the benefit of the doubt in such circumstances.
The Tax Takeaway
For most taxpayers, the key takeaway here is the guidance on how courts evaluate cases when tax statutes are unclear. In this situation, the courts determined the relevant statutes to be clear. However, another principle came into play: when in doubt, find in the taxpayer’s favor rather than defaulting to the Division of Taxation’s interpretations.
Although one of the major themes of 2020 is remote working, retail is an industry that had adapted to remote work long before the pandemic. From Etsy craft barons to direct-to-consumer startups, retail broke out of the brick-and-mortar mold with an e-commerce boom starting in the late 1990s.
Ambiguity in tax laws allowed remote sellers to avoid paying sales taxes in states. However, this changed in 2018 when the United States Supreme Court declared in South Dakota v. Wayfair that individual states could require online sellers to pay state sales tax on their sales.
Under this ruling, states are able to pass laws allowing them to collect sales taxes from remote sellers. Most states have put the legal framework for this into place, including New Jersey.
To get the full picture of how sales and use tax applies to remote sellers in New Jersey, check out Eyet Law founder Matt Eyet’s comprehensive FAQ from 2019 in the prestigious Practical Law journal. Read on below for the key points.
Remote Sellers: Who Pays and For What Reason?
Particularly important to remote sellers is the concept of nexus. It’s the connection they have with a state, and it determines who pays taxes. Nexus can be the revenue a remote seller makes through sales in a state (economic nexus), a certain amount of sales referred from in-state business partners (click-through nexus), or through a party that facilitates a retail sale (marketplace nexus).
In New Jersey, there’s an economic threshold that determines economic nexus. Sellers have economic nexus if:
The remote seller’s gross revenue from eligible sales delivered into New Jersey during the current or prior calendar year exceeds $100,000; or
The remote seller conducted 200 or more separate eligible transactions during the current or prior calendar year.
New Jersey also has established a click-through nexus standard which creates a rebuttable presumption that a remote seller has nexus in New Jersey if that remote seller:
Enters into an agreement to compensate a New Jersey independent contractor or representative for referring customers via a link on its website or otherwise to that out-of-state seller; and
Has sales from referrals to customers in New Jersey over $10,000 for the prior four quarterly periods ending on the last day of March, June, September, and December.
Finally, the third type of nexus which renders a remote seller’s sales into New Jersey taxable is marketplace nexus. Importantly, in this scenario where the remote/marketplace seller makes sales through a marketplace facilitator (such as Amazon), the remote/marketplace seller doesn’t need to collect and remit sales tax as that burden falls on the marketplace facilitator. Marketplace sellers and facilitators, however, can agree to a different arrangement for the collection and remittance of sales tax.
Registration and Tax Compliance
Because of the Wayfair decision, remote sellers need to register with tax authorities in states where they have nexus for tax purposes. New Jersey is a full member of the Streamlined Sales and Use Tax Agreement, which reduces tax compliance burdens on sellers. But while tax compliance may be simplified, remote sellers need to be mindful of penalties. New Jersey imposes penalties for late filing or payment and failure to file or pay.
Remote retail is a major part of the retail economy, but just as technology shifts standards and best practices, so do tax laws. Paying state sales and use tax is part of the new normal for remote sellers.
Don’t let this change catch you off guard. For a comprehensive overview of how New Jersey sales and use tax applies to remote sellers, take a look at Matt Eyet, Esq.’s guidance for 2019, as well as an updated version for 2020 in Practical Law.