Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010

                        President Obama signed into law on December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “TRUIRJCA”).  The new tax act puts a little something under the Christmas tree for everyone.

                        1.         Tax Rates.  Everyone is most likely aware that the new law extends the Bush's income tax cuts, the Bill for 2011 and 2012. 

                        2.         Estate Tax.  The bill gives an option in the case of 2010 Decedents.  Currently the Federal estate tax (the "estate tax") is repealed in 2010.  Therefore, for a person dying in 2010, regardless of the size of his or her estate, no estate taxes will be due.  Also, for 2010 there is no "step-up" in basis provision.  Instead, current law grants every decedent a total of $1,300,000 in “step-up” adjustments which the decedent's executor can allocate to appreciated assets owned by the decedent at death.  

                        A.        Repeal is "Repealed" Under the new law; the estate tax repeal is "repealed," so that the estate tax would once again be effective for persons dying in 2010.  However, the exemption amount would be set at $5,000,000 and the top estate tax rate would be 35%.  The $5,000,000 exemption amount would be indexed for inflation after 2011.  As for the income tax issues, because the estate tax is revived, so too are the former "step-up" rules, so that if the estate is subject to the estate tax, all of the estate's assets receive a full "step-up" in cost basis to the value of such assets at the decedent’s death.

                        B.        Opt Out of the Estate Tax.  A special election would be available for all decedents dying in 2010 whereby the estate can "opt out" of the estate tax, meaning that no estate tax would be due for 2010, and the estate would be subject to the 2010 rules as if the TRUIRJCA had not been passed.  For example, estates of decedents whose estates are well in excess of $5,000,000 may wish to opt out of the estate tax and forego the full cost basis “step-up” because the overall tax that would be due on the recognition of gain would be less than the estate tax that would be due on the decedent’s death. 

                        C.        Returns.  As of now, it is not known how the "opt-out" election will be made; the Internal Revenue Service (the "IRS") will eventually publish rules and forms guiding taxpayers on the election.  In addition, should an estate be subject to the estate tax, estate tax returns for estates of decedents dying in 2010 will be due within 9 months after December 17, 2010 (ordinarily, such returns are due 9 months after the decedent's date of death).

                        3.         Gift Tax Achieves Unification.  The gift tax exemption is again unified with the estate tax exemption and is increased to $5,000,000.  Under current law, each individual has a lifetime exemption from the Federal gift tax (the "gift tax") of $1,000,000.  Under the new law, the main change with respect to the gift tax is that as of 2011 the gift tax lifetime exemption amount is "unified" with the estate tax exemption, meaning that the amount of the gift tax exemption increases from $1,000,000 to $5,000,000. 

                        4.         Payroll Tax Cut.  The law includes a temporary employee payroll cut for 2011 which would provide a payroll/self-employment for 2011.  The Social Security tax on wages earned up to $106,800 would be reduced from 6.2% to 4.2%, and the Social Security tax that self-employed individuals pay would be reduced from 12.4% to 10.4%.

                        5.         Business Tax Benefits.  Several tax relief provisions are extended through 2011, including the following:

• Work Opportunity Tax Credit
• Empowerment Zones
• District of Columbia Enterprise Zones
• Indian Employment Credit
• R&D Credit
• New Markets Tax Credit

                        6.         Business Receive a 100% Write-off.  Businesses may deduct 100 percent of new equipment business investments in 2011.

                        7.         Unemployment.  The new law extends unemployment benefits for the next 13 months.

                        8.         Two Year AMT Patch.  An alternative minimum tax patch is retroactively enacted for 2010 and extends through 2011.

                        9.         Disaster Benefits.  The disaster relief provisions are extended through 2011.

                        10.       Tax Breaks for Individuals Retroactively Reinstated and Extended Through 2011.  The following tax breaks for individuals are retroactively reinstated or extended:

• $250 above-the-line deduction for certain expenses of elementary and secondary
• school teachers is extended through 2011;
• election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes is extended through 2011;
• $1,000 child tax credit is expanded through 2012;
• higher education tax credit (the American Opportunity tax credit) is extended through 2012;
• expanded dependent care credit is extended through 2012;
• expanded adoption credit (but not refundability) is extended through 2012;
• increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes is extended through 2011;
• above-the-line deduction for qualified tuition and related expenses is extended through 2011;
• provision that permits taxpayers age 70 1/2 or older to make tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year (additionally, individuals will be allowed to treat IRA transfers to charities during January of 2011 and as if made during 2010) is extended through 2011;
• student loan deduction rules are extended through 2012;
• deduction for mortgage insurance premiums for a qualified residence interest; and
• the Section 1202 exclusion of 100% of gain on Qualified Small Business Stock.

Virginia health-care ruling strikes down key provision of Obama's plan

U.S. District Court Judge Henry E. Hudson struck down on Monday a key facet of the federal health-care reform law. (Jay Paul For The Washington Post)

By Rosalind S. Helderman

Washington Post Staff Writer

Monday, December 13, 2010; 2:39 PM

RICHMOND - A federal judge in Virginia ruled Monday that a key provision of the nation's sweeping health-care overhaul is unconstitutional, the most significant legal setback so far for President Obama's signature domestic initiative.

U.S. District Court Judge Henry E. Hudson found that Congress could not order individuals to buy health insurance.

In a 42-page opinion, Hudson said the provision of the law that requires most individuals to get insurance or pay a fine by 2014 is an unprecedented expansion of federal power that cannot be supported by Congress's power to regulate interstate trade.

"Neither the Supreme Court nor any federal circuit court of appeals has extended Commerce Clause powers to compel an individual to involuntarily enter the stream of commerce by purchasing a commodity in the private market," he wrote. "In doing so, enactment of the [individual mandate] exceeds the Commerce Clause powers vested in Congress under Article I [of the Constitution.]

Hudson is the first judge to rule that the individual mandate is unconstitutional. He said, however, that portions of the law that do not rest on the requirement that individuals obtain insurance are legal and can proceed. Hudson indicated there was no need for him to enjoin the law and halt its implementation, since the mandate does not go into effect until 2014.

The ruling comes in a case filed by Virginia Attorney General Ken Cuccinelli II (R), who said he was defending a new state statute that made it illegal to require people to carry health insurance in Virginia.

"I am gratified we prevailed," Cuccinelli said in a statement. "This won't be the final round, as this will ultimately be decided by the Supreme Court, but today is a critical milestone in the protection of the Constitution."

Federal officials responded that they are confident the statute will ultimately be upheld. A victory for Cuccinelli at this early legal stage means no more for the law's fate than previous rulings that have found the opposite, they have argued.

"We are disappointed in today's ruling but continue to believe - as other federal courts in Virginia and Michigan have found - that the Affordable Care Act is constitutional," Tracy Schmaler, a spokeswoman for the U.S. Department of Justice, said in a statement. "There is clear and well-established legal precedent that Congress acted within its constitutional authority in passing this law, and we are confident that we will ultimately prevail."

At the White House, spokesman Robert Gibbs pointed to the other rulings in favor of the individual mandate. "We are confident that [the individual mandate] is constitutional, he said. "We disagree with the ruling."

According to a new Washington Post-ABC News poll, a slim majority of all Americans - including almost all Republicans - oppose the health-care reform law.  But the legislation's detractors are split on whether and how much of it should be rolled back.

Overall, 52 percent of those polled oppose the overhaul to the health-care system; 43 percent are supportive of it.  Fully 86 percent of Republicans are against the legislation; 67 percent of Democrats support it. Independents divide down the middle, with 47 percent in favor and the same number opposed.

Obama-GOP deal would tax only 3,500 inheritances

By STEPHEN OHLEMACHER The Associated Press  Wednesday, December 8, 2010; 4:45 PM  WASHINGTON -- More than 40,000 estates of between $1 million and $10 million wouldn't have to pay inheritance taxes next year under the deal struck by Republicans and President Barack Obama.  The package would leave only about 3,500 of the largest estates subject to federal taxes next year, a boon for the wealthy that many House Democrats say they can't accept. 

The estate tax has emerged as one of the biggest obstacles to bringing Democrats aboard the tax cuts-employment benefits package negotiated by Obama and GOP leaders in Congress. House Speaker Nancy Pelosi called the lower estate tax "a bridge too far," while others in her caucus said it was a giveaway to the rich that would do little to create jobs. 

The federal estate tax reaches fewer than 1 percent of inheritances, but it has long been a political lightening rod among lawmakers from both parties. Many Republicans want to eliminate the estate tax altogether, derisively calling it a "death tax" that makes it hard for parents to transfer small businesses to their children.  Estate tax opponents got their wish this year, when the tax was temporarily repealed. But the tax holiday will be short-lived because, under current law, the estate tax is scheduled to return next year with a top rate of 55 percent for estates larger than $1 million for individuals and $2 million for married couples. 

The package Obama negotiated would set the top rate at 35 percent and exempt the first $5 million of an individual's estate. Couples could exempt $10 million.  At those levels, the tax would affect just 0.14 percent of all estates in 2011, or about 3,500 estates, generating about $11.2 billion in revenue, according to an analysis by the Tax Policy Center, a Washington research group.  Under the current law, more than 44,000 estates would be taxed next year, generating $34.4 billion in taxes.  Many House Democrats are livid that Obama would give Republicans a major victory on the estate tax, especially when the rates are scheduled to go up so much next year.  "To out of nowhere throw in something that would not have any prospect of passing, I think, either chamber, is stunning," said Rep. Earl Pomeroy, D-N.D. 

The overall tax package would extend for two years a sweeping array of tax cuts scheduled to expire in January, including those for the working poor, the middle class and the rich.  Republicans have lined up to support the overall tax package, looking at the lower estate tax as acceptable considering the rate increases scheduled to take effect under current law. It is a "sensible estate tax agreement," the U.S. Chamber of Commerce said.  The Family Business Estate Tax Coalition, a group working to repeal the tax, said the $5 million exemption for individuals and 35 percent rate "will provide much needed estate tax relief until full repeal becomes possible."

Republicans and business groups have long argued that families often have to sell or close family businesses in order to come up with the cash to pay the federal inheritance tax. Supporters of the tax counter that the impact on family businesses could be reduced with some tax planning.  Sen. Blanche Lincoln, D-Ark., said uncertainty about the estate tax has made it harder for small business owners to invest in their companies. Lincoln, who was defeated for re-election last month, sponsored an estate tax bill with Sen. Jon Kyl, R-Ariz., that was used as a model for the agreement. She said the new agreement will allow small business owners "to invest in their small businesses, farms and ranches, growing those operations and creating jobs." 

Other business groups, however, remain opposed to any federal estate tax.  "President Obama falsely claims that the compromise extends all of the expiring tax relief, when it actually brings the job-killing death tax back to life," said Dick Patten, president of the American Family Business Institute, another group dedicated to repealing the estate tax entirely.

How to Choose State of Incorporation for Start-Ups: A Comparative Study of Delaware, Nevada and Wyoming Legislation: Part I

Posted by

Arina Shulga

I am publishing here my article that I wrote back in April 2010 (with assistance from Leia Glasso, a law school student at Cardozo Law School) regarding where to incorporate a business. I decided to compare Delaware, Nevada and Woyming legislation since I have been receiving many inquiries as to how these three states compare in terms of their business legislation.  I would like to warn, however, that none of the information below contains any legal advice and that I wrote this piece five months ago, so the laws of these states may have changed since then.  That said, I hope you will still find the information below useful!

Introduction

It has become increasingly popular for companies to choose to abandon their home state and decide to incorporate out of state. However, not in all cases incorporating elsewhere represents the best decision for the business. This article discusses some advantages and disadvantages of incorporating in a state other than the home state, specifically focusing on the states of Nevada, Wyoming and Delaware.

Some lawyers are likely to believe that there is less risk of error or surprises when they recommend for their client to incorporate in the home state. This is due to two facts: first, they know the law and the accompanying case law already, and secondly, they are concerned about the cost and inconvenience of litigation in another jurisdiction.1  So when businesses do look out of state, what do they look for? In addition to the types of entities, availability of precedent and reliable court system, incorporation costs, annual fees and taxes, they also check to see how particular states deal with the issues of privacy, managerial liability and antitakeover provisions. This article aims to compare legislation in Delaware, Nevada and Wyoming in each of these areas.

It is commonly known that incorporating in Delaware has numerous advantages (as explained below). 

However, in recent years, other states have "waged aggressive and successful campaigns to attract corporate charters."2  Among these states are Nevada and Wyoming. Small Business and Entrepreneurship Council ranked Nevada, Wyoming and Delaware as numbers 2, 3 and 34, respectively, in its Small Business Survival Index 2008, with lower rankings representing the most business-friendly states.3  So, how do these states really compare from the point of view of an entrepreneur?

Types of Entities

More than 882,000 companies are incorporated in Delaware, including approximately 64% of Fortune 500 companies and more than 50% of all public companies.4  In Delaware, one can incorporate a corporation, a close corporation (limited to 30 shareholders), a limited partnership (LP), a limited liability company (LLC), a limited liability partnership (LLP), a limited-liability limited partnership (LLLP)5 and a statutory trust. It is also possible to form a series LLC, where limited liability protection is provided across several "series", each of which is insulated from the other (like a corporation with subsidiaries).6  Of 121,628 new entities formed in Delaware in 2008, 67% were LLCs, 24% were corporations, 6% were LPs/LLPs and 2% - statutory trusts.7

In recent years the number of companies incorporating in Nevada has skyrocketed: in 1994, 22,704 new companies incorporated in Nevada, whereas in 2006, a total of 84,207 companies incorporated there.8 In Nevada, one can register a corporation, a close corporation (limited to 30 shareholders), an LLC (including a series LLC) 9, an LP, an LLP, an LLLP and a business trust. Out of 84,207 new companies in 2006, 49% were LLCs, 47% were corporations, 3% were limited partnerships and the remaining 1% - limited liability partnerships and business trusts.

In Wyoming, one can form a corporation, a close corporation, an LLC, a close LLC, an LP, a registered limited liability partnership (a general partnership that registers in a limited liability form), an LLLP10 and a statutory trust. Wyoming was the first state to adopt an LLC statute in 1977. Close corporations and close LLCs were created for small or family-owned businesses and, similarly to close corporations, close LLCs include restrictions on interest transfer and withdrawal of capital contributions. 11

In addition to the more traditional entity choices, all three states allow for the creation of LLLPs, and Delaware and Nevada (but not Wyoming) allow creation of series LLCs. Like Nevada and Delaware, Wyoming provides for a formation of close corporations and, singularly, close LLCs, to best protect the interests of small and family-owned businesses.

Part II will compare the states' court systems.

_________________________________

1  Keith Paul Bishop, There are Many Benefits to Incorporating in Nevada, But Tax Avoidance Is not One of Them, LA Lawyer (Nov. 2008).

2  Bishop, supra note 1.

3  Small Business and Entrepreneurship Council, Small Business Survival Index 2008 (13th edition), available at http://www.sbecouncil.org/uploads/sbsi%202008[1].pdf (last visited Mar. 25, 2010).

4  Delaware Division of Corporations 2008 Annual Report (June 29, 2009), available at http://corp.delaware.gov/2008AR.pdf (last visited Mar. 25, 2010).

5  An LLLP is a relatively recent form of entity (currently only 18 states have adopted LLLP statutes), where general partners can also enjoy limited liability for debts and obligations of the limited partnership. In a traditional limited partnership, only the limited partners have limited liability and are not responsible for the debts and obligations of the partnership beyond their capital contributions while the general partners are jointly and severally liable.

6  Each LLC may hold its separate assets, have different purposes, incur liabilities, have different members and managers and enjoy limited liability protection, while the series LLC pays one filing fee and files one yearly income tax return. Delaware was the first state to approve a series LLCs, since joined by eight other states. However, the federal tax treatment of a series LLC has not been fully resolved and there are questions as to the treatment of series LLCs in other states that do not statutorily provide for such entity.

7  See Delaware Division of Corporations 2008 Annual Report, supra note 6.

8  Nevada Secretary of State, Filing Statistics, available at http://nvsos.gov/index.aspx?page=147 (last visited Mar. 25, 2010).

9  See NEV. REV. STAT. § 86.1255, Nev. Rev. Stat. § 86.161(1)(e) (2005).

10  See WYO. STAT. ANN. § 17-14-202, 301, 503(c) (1971).

11  The main characteristics of a Wyoming close corporation include: no more than 35 shareholders, limitations on share transfers, buy-out provisions in case of deceased shareholders, and relaxed corporate governance standards (no need for a board of directors or annual meetings). See "Choice is Yours" available at http://soswy.state.wy.us/Forms/Publications/ChoiceIsYours.pdf (Apr. 2009) (last visited Mar. 25, 2010).

Small Things Come in Small Packages – The 2010 Small Business Jobs Act

I didn’t think I would ever say this, but it can be good to be small.  President Obama’s Small Business Jobs Act (H.R. 5297) is intended to benefit both small businesses and small business lenders.  The House passed the 2010 Tax Act last Thursday and the President sign the Act into law yesterday, September 27, 2010.  Of course the two big tax issues remain at large:  the estate tax and the sun-setting Bush Tax Cuts. 

Frankly, the tax benefits under the 2010 Tax Act are not much to brag about from an overall tax perspective.  Among other things, the 2010 Small Business Jobs Act would:

·         Excluded 100 percent of the gains from the sale of qualified small business stock (“QSBS”) for regular tax purposes.  The AMT would still apply.

·         Allow small businesses carry back general business tax credits for up to five years.

 

·         Allow small businesses to apply the general business credits against the AMT.

·         Establish a Small Business Lending Fund of $30 billion providing capital investments to small community banks for small business lending.

·         Establish a state Small Business Credit Initiative to provide $1.5 billion in grants to existing successful state small business programs.

·         Raise the cap on small business loans to increase lending by $5 billion in the first year after enactment.

·         Allow taxpayers to write off more of the cost of purchases for their business, such as equipment and machinery, in the year the purchase is made.

·         Double the amount of start-up expenditures that may be deducted.

·         Target resources to support the Office of the United States Trade Representative’s small business export promotion and trade enforcement activities to help U.S. small business exports grow in foreign markets and ensure small businesses compete on an equitable playing field.

·         Establish the State Export Promotion Grant Program, which would increase the number of small businesses that export goods to other countries.

·         Allow the SBA to waive or reduce the state-matching share of its funding requirement for up to one year to continue providing technical assistance to underserved communities to start and grow small businesses.

·         Revise Section 6707A of the Tax Code to make the penalty for failing to disclose reportable transactions (tax shelters) proportionate to the underlying tax savings (75 percent of the tax credit claimed).

·         Allow self-employed individuals to deduct health insurance costs for purposes of paying the self-employment tax.   This by the way is not very significant.  Taxpayer with income, after subtracting insurance premiums, is $106,800 or less save 15.3 percent of their premium.  However, taxpayer with income over $106,800 saves only 2.9 percent of your premium.

·         Another provision would remove cell phones from listed property so their cost could be deducted or depreciated like other business property, without onerous record-keeping requirements.

·         The legislation closes certain tax loopholes and reduces the tax gap.  The offsets include requiring information reporting for rental property expense payments and substantial increases in the penalties for failure to file information returns.

Please let me know if you have any questions.