The possible tax landscape for businesses in the future - business consulting services in baltimore md - Weyrich, Cronin & Sorra

The possible tax landscape for businesses in the future

Get ready: The upcoming presidential and congressional elections may significantly alter the tax landscape for businesses in the United States. The reason has to do with a tax law that’s scheduled to expire in about 17 months and how politicians in Washington would like to handle it.

How we got here

The Tax Cuts and Jobs Act (TCJA), which generally took effect in 2018, made extensive changes to small business taxes. Many of its provisions are set to expire on December 31, 2025.

As we get closer to the law sunsetting, you may be concerned about the future federal tax bill of your business. The impact isn’t clear because the Democrats and Republicans have different views about how to approach the various provisions in the TCJA.

Corporate and pass-through business rates

The TCJA cut the maximum corporate tax rate from 35% to 21%. It also lowered rates for individual taxpayers involved in noncorporate pass-through entities, including S corporations and partnerships, as well as from sole proprietorships. The highest rate today is 37%, down from 39.6% before the TCJA became effective.

But while the individual rate cuts expire in 2025, the law made the corporate tax cut “permanent.” (In other words, there’s no scheduled expiration date. However, tax legislation could still raise or lower the corporate tax rate.)

In addition to lowering rates, the TCJA affects tax law in many other ways. For small business owners, one of the most significant changes is the potential expiration of the Section 199A qualified business income (QBI) deduction. This is the write-off for up to 20% of QBI from noncorporate entities.

Another of the expiring TCJA business provisions is the gradual phaseout of first-year bonus depreciation. Under the TCJA,100% bonus depreciation was available for qualified new and used property that was placed in service in calendar year 2022. It was reduced to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and 0% in 2027.

Potential Outcomes

The outcome of the presidential election in three months, as well as the balance of power in Congress, will determine the TCJA’s future. Here are four potential outcomes:

  1. All of the TCJA provisions scheduled to expire will actually expire at the end of 2025.
  2. All of the TCJA provisions scheduled to expire will be extended past 2025 (or made permanent).
  3. Some TCJA provisions will be allowed to expire, while others will be extended (or made permanent).
  4. Some or all of the temporary TCJA provisions will expire — and new laws will be enacted that provide different tax breaks and/or different tax rates.

How your tax bill will be affected in 2026 will partially depend on which one of these outcomes actually happens and whether your tax bill went down or up when the TCJA became effective years ago. That was based on a number of factors including your business income, your filing status, where you live (the SALT limitation negatively affects taxpayers in certain states), and whether you have children or other dependents.

Your tax situation will also be affected by who wins the presidential election and who controls Congress because Democrats and Republicans have competing visions about how to proceed. Keep in mind that tax proposals can become law only if tax legislation passes both houses of Congress and is signed by the President (or there are enough votes in Congress to override a presidential veto).

Look to the future

As the TCJA provisions get closer to expiring, and the election gets settled, it’s important to know what might change and what tax-wise moves you can make if the law does change. We can answer any questions you have and you can count on us to keep you informed about the latest news.

© 2024

 

Six tax issues to consider if you’re getting divorced - cpa in bel air md - Weyrich, Cronin & Sorra

Six tax issues to consider if you’re getting divorced

Divorce entails difficult personal issues, and taxes are probably the farthest thing from your mind. However, several tax concerns may need to be addressed to ensure that taxes are kept to a minimum and that important tax-related decisions are properly made. Here are six issues to be aware of if you’re in the process of getting a divorce.

1. Personal residence sale

In general, if a couple sells their home in connection with a divorce or legal separation, they should be able to avoid tax on up to $500,000 of gain (as long as they’ve owned and used the home as their principal residence for two of the previous five years). If one former spouse continues to live in the home and the other moves out (but they both remain owners of the home), they may still be able to avoid gain on the future sale of the home (up to $250,000 each), but special language may have to be included in the divorce decree or separation agreement to protect this tax exclusion for the spouse who moves out.

If the couple doesn’t meet the two-year ownership and use tests, any gain from the sale may qualify for a reduced exclusion due to unforeseen circumstances.

2. Pension benefits

A spouse’s pension benefits are often part of a divorce property settlement. In these cases, the commonly preferred method to handle the benefits is to get a “qualified domestic relations order” (QDRO). This gives one former spouse the right to share in the pension benefits of the other and taxes the former spouse who receives the benefits. Without a QDRO, the former spouse who earned the benefits will still be taxed on them even though they’re paid out to the other former spouse.

3. Filing status

If you’re still married at the end of the year, but in the process of getting divorced, you’re still treated as married for tax purposes. We’ll help you determine how to file your 2024 tax return — as married filing jointly or married filing separately. Some separated individuals may qualify for “head of household” status if they meet the requirements.

4. Alimony or support payments

For alimony under divorce or separation agreements that are executed after 2018, there’s no deduction for alimony and separation support payments for the former spouse making them. And the alimony payments aren’t included in the gross income of the former spouse receiving them. (The rules are different for divorce or separation agreements executed before 2019.) This was a change made in the Tax Cuts and Jobs Act. However, unlike some provisions of the law that are temporary, the repeal of alimony and support payment deduction is permanent.

5. Child support and child-related tax return filing

No matter when the divorce or separation instrument is executed, child support payments aren’t deductible by the paying former spouse (or taxable to the recipient). You and your ex-spouse will also need to determine who will claim your child or children on your tax returns in order to claim related tax breaks.

6. Business interests

If certain types of business interests are transferred in connection with divorce, care should be taken to make sure “tax attributes” aren’t forfeited. For example, interests in S corporations may result in “suspended” losses (losses that are carried into future years instead of being deducted in the year they’re incurred). When these interests change hands in a divorce, the suspended losses may be forfeited. If a partnership interest is transferred, a variety of more complex issues may arise involving partners’ shares of partnership debt, capital accounts, built-in gains on contributed property and other complex issues.

A range of tax challenges

These are just some of the issues you may have to cope with if you’re getting a divorce. In addition, you may need to adjust your income tax withholding, and you should notify the IRS of any new address or name change. There are also estate planning considerations. We can help you tackle the financial issues involved in divorce.

© 2024

 

Cash or accrual accounting: What’s best for tax purposes? - tax accountants in Alexandria - Weyrich, Cronin & Sorra

Cash or accrual accounting: What’s best for tax purposes?

Your businesses may have a choice between using the cash or accrual method of accounting for tax purposes. The cash method often provides significant tax benefits for those that qualify. However, some businesses may be better off using the accrual method. Therefore, you need to evaluate the tax accounting method for your business to ensure that it’s the most beneficial approach.

The current situation

“Small businesses,” as defined by the tax code, are generally eligible to use either cash or accrual accounting for tax purposes. (Some businesses may also be eligible to use various hybrid approaches.) Before the Tax Cuts and Jobs Act (TCJA) took effect, the gross receipts threshold for classification as a small business varied from $1 million to $10 million depending on how a business was structured, its industry and whether inventory was a material income-producing factor.

The TCJA simplified the definition of a small business by establishing a single gross receipts threshold. It also increased the threshold to $25 million (adjusted for inflation), expanding the benefits of small business status to many more companies. For 2024, a small business is one whose average annual gross receipts for the three-year period ending before the 2024 tax year are $30 million or less (up from $29 million in 2023).

In addition to eligibility for the cash method of accounting, small businesses enjoy simplified inventory accounting, exemption from the uniform capitalization rules and the business interest deduction limit, and several other tax advantages. Be aware that some businesses are eligible for cash accounting even if their gross receipts are above the threshold, including S corporations, partnerships without any C corporation partners, farming businesses and certain personal service corporations. Also, tax shelters are ineligible for the cash method, regardless of size.

Potential advantages

For most businesses, the cash method provides significant tax advantages. Because cash-basis businesses recognize income when it’s received and deduct expenses when they’re paid, they have greater control over the timing of income and deductions. For example, they can defer income by delaying invoices until the following tax year or shift deductions into the current year by accelerating the payment of expenses.

In contrast, accrual-basis businesses recognize income when it’s earned and deduct expenses when they’re incurred, without regard to the timing of cash receipts or payments. That means they have little flexibility to time the recognition of income or expenses for income tax purposes.

The cash method also provides cash flow benefits. Because income is taxed in the year it’s received, it helps ensure that a business has the funds it needs to pay its tax bill.

For some businesses, however, the accrual method may be preferable. For instance, if a company’s accrued income tends to be lower than its accrued expenses, the accrual method may result in lower tax liability than the cash method. Other potential advantages of using the accrual method include the abilities to deduct year-end bonuses paid within the first 2½ months of the following tax year and to defer taxes on certain advance payments.

Issues when switching methods

Even if your business would enjoy a tax advantage by switching from the accrual method to the cash method, or vice versa, it’s important to consider the administrative costs involved in making the change. For example, if your business prepares its financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP), it’s required to use the accrual method for financial reporting purposes.

Does that mean you can’t use the cash method for tax purposes? No, but it would require the business to maintain two sets of books. Changing accounting methods for tax purposes may also require IRS approval. Contact us to learn more about each method.

© 2024

 

Are you unfairly burdened by a spouse’s tax errors? You may qualify for “innocent spouse relief” - accountant in alexandria va - Weyrich, Cronin and Sorra

Are you unfairly burdened by a spouse’s tax errors? You may qualify for “innocent spouse relief”

Navigating the complexities of tax law can be difficult, especially when faced with an unexpected tax bill due to the errors of a spouse or ex-spouse. The reason for such a bill has to do with the concept of “joint and several” liability. When a married couple files a joint tax return, each spouse is liable for the full amount of tax on the couple’s combined income. Therefore, the IRS can come after either spouse to collect the entire tax — not just the part that’s attributed to one spouse or the other. This includes any tax deficiency that the IRS assesses after an audit, as well as any penalties and interest.

There may be relief

In some cases, spouses are eligible for “innocent spouse relief.” This generally involves an individual who was unaware of a tax understatement that was attributable to his or her spouse. To qualify, you must show that you didn’t know about the understatement and that there was nothing that should have made you suspicious. In addition, the circumstances must make it inequitable to hold you liable for the tax.

This relief is available even if you’re still married and living with your spouse. In addition, individuals may be able to get relief for tax deficiencies on joint returns if they’re divorced, widowed, legally separated or living apart.

Recent court cases

Not surprisingly, the issue of innocent spouses is frequently litigated. Here are some cases from this year:

  • Taxpayer wins. In one case, it was undisputed that a married couple’s joint tax return included an understatement of tax. The IRS and the wife agreed that she didn’t know, or have reason to know, that the correct amount of taxes wasn’t paid. She wasn’t involved in her now ex-husband’s employment or business activities. He concealed his finances from her and kept separate bank accounts. The U.S. Tax Court weighed all factors and found it would be inequitable to hold her liable for the deficiency. Her request for innocent spouse relief was granted. (TC Memo 2024-26)
  • Taxpayer loses. In another case, a widow argued that if she paid the taxes owed by her deceased husband, she’d suffer economic hardship. Her annual income, she testified, was far below the poverty line and her assets were insufficient to pay the taxes. However, she failed to provide evidence to support her income or the value of her two homes. Records showed that while her income taxes remained unpaid, she enjoyed significant benefits, including several expensive vacations and the purchase of a luxury vehicle. The U.S. Tax Court denied her request for relief. (162 TC No. 2)

An “injured spouse”

In addition to innocent spouse relief, there’s also relief for an “injured spouse.” What’s the difference? An injured spouse claim asks the IRS to allocate part of a joint refund to one spouse. In these cases, all or part of an injured spouse’s refund from a joint return is applied against past-due federal tax, state tax, child or spousal support, or a federal nontax debt (such as a student loan) owed by the other spouse. If you’re an injured spouse, you may be able to recoup your share of the refund.

A challenging process

Whether, and to what extent, you can take advantage of the above relief depends on the facts of your situation. If you’re interested in trying to obtain relief, there’s paperwork that must be filed and deadlines that must be met. We can assist you with the details.

Also, keep “joint and several liability” in mind when filing future tax returns. Even if a joint return results in less tax, you may choose to file a separate return if you want to be certain you’re responsible only for your own tax. Contact us with any questions or concerns.

© 2024

 

Understanding taxes on real estate gains - tax accountants in washington dc - Weyrich, Cronin and Sorra

Understanding taxes on real estate gains

Let’s say you own real estate that has been held for more than one year and is sold for a taxable gain. Perhaps this gain comes from indirect ownership of real estate via a pass-through entity such as an LLC, partnership or S corporation. You may expect to pay Uncle Sam the standard 15% or 20% federal income tax rate that usually applies to long-term capital gains from assets held for more than one year.

However, some real estate gains can be taxed at higher rates due to depreciation deductions. Here’s a rundown of the federal income tax issues that might be involved in real estate gains.

Vacant land

The current maximum federal long-term capital gain tax rate for a sale of vacant land is 20%. The 20% rate only hits those with high incomes. Specifically, if you’re a single filer in 2024, the 20% rate kicks in when your taxable income, including any land sale gain and any other long-term capital gains, exceeds $518,900. For a married joint-filing couple, the 20% rate kicks in when taxable income exceeds $583,750. For a head of household, the 20% rate kicks when your taxable income exceeds $551,350. If your income is below the applicable threshold, you won’t owe more than 15% federal tax on a land sale gain. However, you may also owe the 3.8% net investment income tax (NIIT) on some or all of the gain.

Gains from depreciation

Gain attributable to real estate depreciation calculated using the applicable straight-line method is called unrecaptured Section 1250 gain. This category of gain generally is taxed at a flat 25% federal rate, unless the gain would be taxed at a lower rate if it was simply included in your taxable income with no special treatment. You may also owe the 3.8% NIIT on some or all of the unrecaptured Section 1250 gain.

Gains from depreciable qualified improvement property

Qualified improvement property (QIP) generally means any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service. However, QIP does not include expenditures for the enlargement of the building, elevators, escalators or the building’s internal structural framework.

You can claim first-year Section 179 deductions or first-year bonus depreciation for QIP. When you sell QIP for which first-year Section 179 deductions have been claimed, gain up to the amount of the Section 179 deductions will be high-taxed Section 1245 ordinary income recapture. In other words, the gain will be taxed at your regular rate rather than at lower long-term gain rates. You may also owe the 3.8% NIIT on some or all of the Section 1245 recapture gain.

What if you sell QIP for which first-year bonus depreciation has been claimed? In this case, gain up to the excess of the bonus depreciation deduction over depreciation calculated using the applicable straight-line method will be high-taxed Section 1250 ordinary income recapture. Once again, the gain will be taxed at your regular rate rather than at lower long-term gain rates, and you may also owe the 3.8% NIIT on some or all of the recapture gain.

Tax planning point: If you opt for straight-line depreciation for real property, including QIP (in other words, you don’t claim first-year Section 179 or first-year bonus depreciation deductions), there won’t be any Section 1245 ordinary income recapture. There also won’t be any Section 1250 ordinary income recapture. Instead, you’ll only have unrecaptured Section 1250 gain from the depreciation, and that gain will be taxed at a federal rate of no more than 25%. However, you may also owe the 3.8% NIIT on all or part of the gain.

Plenty to consider

As you can see, the federal income tax rules for gains from sales of real estate may be more complicated than you thought. Different tax rates can apply to different categories of gain. And you may also owe the 3.8% NIIT and possibly state income tax, too. We will handle the details when we prepare your tax return. Contact us with questions about your situation.

© 2024

 

Working remotely is convenient, but it may have tax consequences - tax accountant in alexandria va - Weyrich, Cronin and Sorra

Working remotely is convenient, but it may have tax consequences

Many employees began working remotely during the pandemic and continue doing so today. Remote work has many advantages for employers and employees, and as a result, it’s here to stay in many industries. But it may also lead to some tax surprises, especially if workers cross state lines.

Double taxation may occur

It’s not unusual for employees to work remotely for an employer in another state. For some businesses, remote work has become a permanent arrangement that allows employees to live and work further away from a physical office.

If you live in one state and work remotely for an employer in another state, familiarize yourself with the tax laws in both states and determine how they may affect you. For example, you may need to file income tax returns in both states, which could result in increased — or even double — taxation.

Here’s the problem: A state generally has the power to tax the incomes of people who are domiciled in it as well as people who reside there. Domicile is a state of mind and is often based on a person’s intent to make a location his or her “true, fixed, permanent home.” Residency is based on physical presence in a state for a certain amount of time (typically, 183 days per year).

It’s possible to be domiciled in one state and a resident of another. For example, let’s say you have a permanent home in one state where your job is located and a vacation home in another state. Your employer allows employees to work remotely, so now you spend more than 200 days per year living and working at your vacation home. The state where your permanent home is located considers you to be domiciled there, but the state where your vacation home is located views you as a resident. So you may be subject to taxes on the same income in both states. You could avoid double taxation if one or both states provide credit for tax paid to other states. But your tax bill may still increase if, for example, one state’s income tax rate is significantly higher than the other state’s rate.

Complications for employers

From an employer’s perspective, allowing employees to work remotely may create obligations to withhold and remit income and payroll taxes in several states. Plus, having employees in other states may be sufficient to establish “nexus” with those states, potentially triggering liability for their income, franchise, gross receipts, or sales and use tax. In addition to the expense of tax reporting in multiple states, this may increase an employer’s overall tax liability. There are other complications as well.

Business expense deductions

Under current law, employees generally can’t deduct unreimbursed job-related expenses. Years ago, employees could claim certain costs as miscellaneous itemized deductions, which are deductible to the extent they exceed 2% of adjusted gross income. But those deductions were eliminated for 2018 through 2025.

Remote workers typically aren’t eligible for the home office deduction either. That deduction is generally limited to self-employed business owners. Prior to 2018, employees could claim the deduction if, among other things, they worked at home “for the convenience” of their employers. But that deduction was also eliminated for 2018 through 2025.

Employers may reimburse remote workers for their business expenses according to an “accountable plan” that requires employees to substantiate expenses and meet other requirements. Properly reimbursed expenses are deductible by an employer and excludable from an employee’s income.

Be aware of the consequences

If you’re a remote worker or own a business that employs remote workers, be sure you understand the tax implications. In some cases, you may be able to take steps to minimize them. But even if you can’t, it’s important to know what to expect.

© 2024

 

Be aware of the tax consequences of selling business property - tax preparation in bel air md - weyrich, cronin and sorra

Be aware of the tax consequences of selling business property

If you’re selling property used in your trade or business, you should understand the tax implications. There are many complex rules that can potentially apply. To simplify this discussion, let’s assume that the property you want to sell is land or depreciable property used in your business, and has been held by you for more than a year.

Note: There are different rules for property held primarily for sale to customers in the ordinary course of business, intellectual property, low-income housing, property that involves farming or livestock, and other types of property.

Basic rules

Under tax law, your gains and losses from sales of business property are netted against each other. The tax treatment is as follows:

1. If the netting of gains and losses results in a net gain, then long-term capital gain treatment results, subject to “recapture” rules discussed below. Long-term capital gain treatment is generally more favorable than ordinary income treatment.

2. If the netting of gains and losses results in a net loss, that loss is fully deductible against ordinary income. (In other words, none of the rules that limit the deductibility of capital losses apply.)

The availability of long-term capital gain treatment for business property net gain is limited by “recapture” rules. Under these rules, amounts are treated as ordinary income, rather than capital gain, because of previous ordinary loss or deduction treatment.

There’s a special recapture rule that applies only to business property. Under this rule, to the extent you’ve had a business property net loss within the previous five years, any business property net gain is treated as ordinary income instead of long-term capital gain.

Different types of property

Under the Internal Revenue Code, different provisions address different types of property. For example:

  • Section 1245 property. This consists of all depreciable personal property, whether tangible or intangible, and certain depreciable real property (usually real property that performs specific functions). If you sell Section 1245 property, you must recapture your gain as ordinary income to the extent of your earlier depreciation deductions on the asset.
  • Section 1250 property. In general, this consists of buildings and their structural components. If you sell Section 1250 property that’s placed in service after 1986, none of the long-term capital gain attributable to depreciation deductions will be subject to depreciation recapture. However, for most noncorporate taxpayers, the gain attributable to depreciation deductions, to the extent it doesn’t exceed business property net gain, will (as reduced by the business property recapture rule above) be taxed at a rate of no more than 28.8% (25% plus the 3.8% net investment income tax) rather than the maximum 23.8% rate (20% plus the 3.8% net investment income tax) that generally applies to long-term capital gains of noncorporate taxpayers.

Other rules apply to, respectively, Section 1250 property that you placed in service before 1987 but after 1980 and Section 1250 property that you placed in service before 1981.

As you can see, even with the simple assumptions in this article, the tax treatment of the sale of business assets can be complex. Contact us if you’d like to determine the tax implications of transactions, or if you have any additional questions.

© 2024

 

Closing a business involves a number of tax responsibilities - tax accountant in baltimore county md - Weyrich, Cronin and Sorra

Closing a business involves a number of tax responsibilities

While many facets of the economy have improved this year, the rising cost of living and other economic factors have caused many businesses to close their doors. If this is your situation, we can help you, including taking care of various tax responsibilities.

To start with, a business must file a final federal income tax return and some other related forms for the year it closes its doors. The type of return that must be filed depends on the type of business you have. For example:

  • Sole Proprietors will need to file the usual Schedule C, “Profit or Loss from Business,” with their individual returns for the year they close their businesses. They may also need to report self-employment tax.
  • Partnerships must file Form 1065, “U.S. Return of Partnership Income,” for the year they close. They also must report capital gains and losses on Schedule D. They indicate that this is the final return and do the same on Schedule K-1, “Partner’s Share of Income, Deductions, Credits, etc.”
  • All Corporations need to file Form 966, “Corporate Dissolution or Liquidation,” if they adopt a resolution or plan to dissolve an entity or liquidate any of its stock.
  • C Corporations must file Form 1120, “U.S. Corporate Income Tax Return,” for the year they close. They report capital gains and losses on Schedule D and indicate this is the final return.
  • S Corporations need to file Form 1120-S, “U.S. Income Tax Return for an S Corporation,” for the year of closing. They report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.
  • All Businesses may need to be filed other tax forms to report sales of business property and asset acquisitions if they sell the business.

Tying up loose ends with workers

If you have employees, you must pay them final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit employee income, Social Security and Medicare taxes can result in full personal liability for what’s known as the Trust Fund Recovery Penalty.

If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”

You may face more obligations

If your business has a retirement plan for employees, you’ll generally need to terminate the plan and distribute benefits to participants. There are detailed notice, funding, timing and filing requirements that must be met when terminating a plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for employees.

We can assist you with many other complicated tax issues related to closing your business, including debt cancellation, use of net operating losses, freeing up any remaining passive activity losses, depreciation recapture, and possible bankruptcy issues.

You also must cancel your Employer Identification Number (EIN) and close your IRS business account. In addition, you need to keep business records for a certain amount of time.

If your business is unable to pay all the taxes it owes, we can explain the available payment options to you. Contact us to discuss these responsibilities and get answers to any questions.

© 2024

 

Federal court rejects FTC’s noncompete agreement ban-cpa in harford county md-Weyrich, Cronin & Sorra

Federal court rejects FTC’s noncompete agreement ban

In April 2024, the Federal Trade Commission (FTC) approved a final rule prohibiting most noncompete agreements with employees. The ban was scheduled to take effect on September 4, 2024, but ran into multiple court challenges. Now the court in one of those cases has knocked down the rule, leaving its future uncertain.

The FTC ban 

The FTC’s rule would have prohibited noncompetes nationwide. In addition, existing noncompetes for most workers would no longer be enforceable after it became effective. The rule was expected to affect 30 million workers.

The rule includes an exception for existing noncompete agreements with “senior executives,” defined as workers earning more than $151,164 annually who are in policy-making positions. Policy-making positions include:

  • A company’s president,
  • A chief executive officer or equivalent,
  • Any other officer who has policy-making authority, and
  • Any other natural person who has policy-making authority similar to an officer with such authority.

Employers couldn’t enter new noncompetes with senior executives under the new rule.

Unlike an earlier proposed rule issued for public comment in January 2023, the final rule didn’t require employers to legally modify existing noncompetes by formally rescinding them. Instead, they were required only to provide notice to workers bound by an existing agreement — other than senior executives — that they wouldn’t enforce such agreements against the workers.

Legal challenges

On the day the FTC announced the new rule, a Texas tax services firm filed a lawsuit challenging the rule in the Northern District of Texas (Ryan, LLC v. Federal Trade Commission). The U.S. Chamber of Commerce and similar industry groups joined the suit in support of the plaintiff. Additional lawsuits were filed in the Eastern District of Pennsylvania (ATS Tree Services, LLC v. Federal Trade Commission) and the Middle District of Florida (Properties of the Villages, Inc. v. Federal Trade Commission).

The Ryan case is the first to reach judgment. On August 20, 2024, the U.S. District Court for the Northern District of Texas held that the FTC exceeded its authority in implementing the rule and that the rule was arbitrary and capricious. It further held that the FTC cannot enforce the ban, a ruling that applies on a nationwide basis.

Notably, in July 2024, the U.S. District Court for the Eastern District of Pennsylvania denied the plaintiff’s request for a preliminary injunction and stay of the rule’s effective date. It found the plaintiff didn’t establish that it was reasonably likely to succeed in its argument against the ban. By contrast, on August 14, 2024, the U.S. District Court for the Middle District of Florida granted the plaintiff a preliminary injunction and stay. That plaintiff requested relief only for itself, though, not nationwide. But the Ryan ruling means the FTC can’t enforce the ban at all unless it prevails on appeal.

An appeal would be before the conservative U.S. Court of Appeals for the Fifth Circuit, which has become a favorite destination for challenges to President Biden’s policies. Although the court often sides with the challengers, it’s also regularly been reversed by the U.S. Supreme Court.

An FTC appeal could face an uphill battle regardless, though, in light of a recent Supreme Court ruling that reversed the longstanding doctrine of “Chevron deference.” Under that precedent, courts gave deference to federal agencies’ interpretations of the laws they administer. According to the new ruling, however, it’s now up to courts to decide “whether the law means what the agency says.”

The bottom line

For now, the FTC’s noncompete ban remains in limbo and won’t take effect on September 4, 2024. But that doesn’t mean noncompetes aren’t still vulnerable to attack. For example, some private parties are using anti-trust laws to challenge such agreements. And an FTC spokesperson has indicated that the Ryan ruling won’t deter the agency “from addressing noncompetes through case-by-case enforcement actions.”

© 2024

Planning your estate? Don’t overlook income taxes - Estate Planning CPA in Elkton MD - weyrich, cronin and sorra

Planning your estate? Don’t overlook income taxes

The current estate tax exemption amount ($13.61 million in 2024) has led many people to feel they no longer need to be concerned about federal estate tax. Before 2011, a much smaller exemption resulted in many people with more modest estates attempting to avoid it. But since many estates won’t currently be subject to estate tax, it’s a good time to devote more planning to income tax saving for your heirs.

Important: Keep in mind that the federal estate tax exclusion amount is scheduled to sunset at the end of 2025. Beginning on January 1, 2026, the amount is due to be reduced to $5 million, adjusted for inflation. Of course, Congress could act to extend the higher amount or institute a new amount.

Here are some strategies to consider in light of the current large exemption amount.

Using the annual exclusion

One of the benefits of using the gift tax annual exclusion to make transfers during your lifetime is to save estate tax. This is because both the transferred assets and any post-transfer appreciation generated by those assets are removed from your (the donor’s) estate.

As mentioned, estate tax savings may not be an issue because of the large exemption amount. Further, making an annual exclusion transfer of appreciated property carries a potential income tax cost because the recipient receives your basis upon transfer. Thus, the recipient could face income tax, in the form of capital gains tax, on the sale of the gifted property in the future. If there’s no concern that an estate will be subject to estate tax, even if the gifted property grows in value, then you might want to base the decision to make a gift on other factors.

For example, gifts may be made to help a relative buy a home or start a business. But a donor shouldn’t gift appreciated property because of the capital gains that could be realized on a future sale by the recipient. If the appreciated property is held until the donor’s death, under current law, the heir will get a step-up in basis that will wipe out the capital gains tax on any pre-death appreciation in the property’s value.

Spouses now have more flexibility

Years ago, spouses often undertook complicated strategies to equalize their estates so that each could take advantage of the estate tax exemption amount. In many cases, a two-trust plan was established to minimize estate tax. “Portability,” or the ability to apply the decedent’s unused exclusion amount to the surviving spouse’s transfers during life and at death, became effective for estates of decedents dying after 2010. As long as the election is made, portability allows the surviving spouse to apply the unused portion of a decedent’s applicable exclusion amount (the deceased spousal unused exclusion amount) as calculated in the year of the decedent’s death. The portability election gives married couples more flexibility in deciding how to use their exclusion amounts.

Valuation discounts

Be aware that it may no longer be worth pursuing some estate exclusion or valuation discount strategies to avoid inclusion of property in an estate. It may be better to have the property included in the estate or not qualify for valuation discounts so that the property receives a step-up in basis. For example, the special use valuation — the valuation of qualified real property used for farming or in a business, based on the property’s actual use rather than on its highest and best use — may not save enough, or any, estate tax to justify giving up the step-up in basis that would otherwise occur for the property.

If you want to discuss estate planning or income tax saving strategies, contact us.

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