The global coronavirus pandemic is of course a challenging time.  Many businesses have been hard hit and may not recover.  Unemployment has skyrocketed.  On the other hand, there are many businesses that have been only mildly affected to date.

The conventional wisdom is that the economic pain will continue for some time.  Accordingly, it is an important time to review the terms of your business agreements, such as operating agreements or stockholders’ agreements (and frequently employment agreements).

We expect to see an increase in “business divorces.”  If you or your business partners are separating, the first step in evaluating the consequences is to review the governing agreements between the owners.  Some questions you may ask include:

  1. What happens if you or another owner “quit” or voluntarily terminate employment? This may trigger equity buyout rights by the company or other owners.  It also may trigger severance pay obligations.
  2. Do you have obligations if there is a capital call? In other words, could you be required to contribute money to the business if needed?  Who makes this determination?
  3. What potential liabilities might you be responsible for, including any personal guarantees on bank loans or lines of credit? How easy or difficult will it be to be removed from these types of obligations?
  4. If there is an equity buyout, how will the business be valued? Is an appraisal required, or does the agreement use a formula such as a multiple of sales or profits?  What are the payment terms for any buyout?  Often, this involves the buyer giving the seller a promissory note and paying it over a term of years (eg, three or five years).  What is the interest rate on such a note?  What security is there for the seller if the business is struggling?
  5. What do the agreements say if you or another owner are disabled? This may include salary continuation, or a forced equity buyout.  What happens if an owner dies (for example, is there a mandatory or optional buyout?  On what terms?  Are there “permitted transferees” such that the remaining owners could be partners with the deceased owner’s family?
  6. Can you exit the business and be paid for the value of your equity? Most business agreements do not permit an owner to simply exit, or “put” his or her equity to the company and get paid fair value in return.  You may not have an easy exit, in which case you may be at a disadvantage if you attempt to negotiate a buyout.
  7. What other types of incentive compensation – such as stock options, profits interests – may be affected in the event of a business divorce?
  8. In addition, if you do not have a current business agreement for your business, this may be a time to put one in place, so that you and the other owners have a plan and an agreement. Without an agreement, many of the issues mentioned above can lead to disputes and potential litigation.  It is prudent to work out agreements on these issues when parties are competent and getting along.

Business divorces raise important questions that should be reviewed with your attorney.

 


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

In order to remove any ambiguity occasioned by prior New Jersey Supreme Court Orders, extending the April 1 and May 1 annual tax appeal filing deadlines for regular and revaluation or reassessment district appeals to “30 days after the Governor lifts the State of Emergency” occasioned by the COVID-19 pandemic, respectively, Govenor Murphy has signed into law legislation fixing July 1, 2020 as the appeal deadline for this tax year.  Although this July 1 deadline does not apply to certain limited municipalities located mainly in Monmouth and Gloucester counties, this new deadline will apply for the vast majority of property owners throughout the state.

The passing of this law was intended to provide both property owners and municipalities with the necessary certainty of schedule that will allow all parties, the fair opportunity to decide, on an informed basis, whether to take action. The relevant valuation date for the 2020 tax year is October 1 of 2019 and consideration of property values at that time as compared with the values indicated by their respective 2020 assessments should be reviewed without delay with appropriate real estate valuation experts and counsel experienced in this area of practice.

 


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

As the Covid-19 pandemic has swept across the nation and around the world, those of us who practice in the areas of Wills, Trusts and Estates have noted an increase in calls from clients alarmed by what they are seeing on the news and in their own neighborhoods.  We typically field calls from clients interested in the more sophisticated documents found in the estate planner’s arsenal – Wills, Revocable Trusts, Generation Skipping Trusts, Lifetime Access Trusts, Gifting Trusts and the like.  These days our clients are even more focused on a document that typically does not receive as much attention as these other documents – the advanced directives.

Advanced directives include health care surrogate designations and living wills.  Depending on the state in which you reside these may be combined into a single document (New York and New Jersey for example) or in separate documents such as Florida. In either case, these documents give the client the opportunity to designate certain individuals to make health care decisions for them in the event the client is unable to do so on their own.  In the case of living wills, the clients express their wishes as they relate to the use of life support and under what circumstances they wish to refuse such treatment.

With the very real possibility that some of our clients may be placed on a ventilator in the ICU, our clients have never been more aware or concerned about making sure that their wishes are clearly spelled out.  In the past, these concerns often seemed far into the future but the pandemic has brought them very much to the present.  Today, nothing may be more important than contacting your estate planning professional to confirm that your existing documents are consistent with your wishes or, even more importantly, if you have not considered these issues at all.  It is critical you take the time to thoughtfully consider the content of your advanced directives.

The attorneys at Cole Schotz are prepared to assist you with these difficult decisions as well as any other questions you may have relative to your estate planning needs.

 


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

In light of the coronavirus pandemic and significant economic downturn, this blog post briefly discusses questions that are commonly being asked right now regarding the income tax treatment of cancellation of indebtedness income (“COD”).

The tax code provides that income from the cancellation of indebtedness is taxable, subject to a number of exceptions.  As an example, if a taxpayer has a loan of $100, and the lender forgives $20 of the debt so that the remaining loan balance is $80, then the taxpayer has $20 of taxable COD income.  This is often an adverse result for the borrower as it results in phantom income, that is, taxable income without corresponding cash to pay the tax.  In addition, COD income is taxed at ordinary income rates.

On the other hand, if the lender merely modifies the debt, for example by extending the maturity period, reducing the interest rate or agreeing to other forbearance, there generally is not COD income, and instead, from a tax perspective, the parties have to determine whether a “significant modification of a debt instrument” has occurred and whether it is taxable.

If a borrower has COD income, the borrower then must consider the various exceptions to immediate taxation.  There are several ways to eliminate recognition of COD income, but all require careful review to ensure relief will be granted.

Bankruptcy offers relief from COD income, but that is often a path of last resort.

In addition, COD income is not recognized if and to the extent that a taxpayer is insolvent.  In other words, a taxpayer is insolvent if the taxpayer’s liabilities are greater than fair market value of his or her assets.  Reliance on this exemption generally requires getting an appraisal or other third-party support for fair market value.

Cancellation of accrued but unpaid business interest may also escape taxation provided a tax deduction was not taken for this amount.  There is an exception to COD income for income that would otherwise give rise to a deduction, such as interest which generally is income to the lender and deductible by the borrower.

The owner of business real estate may take advantage of an exception to COD income rules for “qualified real property business indebtedness.”  This allows the real estate owner to reduce the basis of other depreciable real property rather than recognizing the COD income and serves as a deferral technique.  The fair market value of the mortgaged real estate and the tax basis of their depreciable real estate are key factors in determining the value of this approach.

A partnership can admit its lender as a new partner in consideration for cancelling debt and not recognize COD income.  Thus, a “debt for equity” swap is often a way to avoid COD income.  The fair market value of the newly issued partnership interest must match the amount of cancelled debt, and a review of other partnership tax rules affecting the impact of liabilities on a partner is needed to ensure full benefit can be achieved.

If a taxpayer has nonrecourse debt on a property secured by a mortgage, and transfers property to a lender in satisfaction of the debt (usually a “deed in lieu of foreclosure”), different tax treatment applies.  This is treated as a deemed taxable sale of the property for an amount equal to the mortgage debt even if the fair market value of the property is less than the amount of the debt.  Capital gain, and not COD income, results.  For example, if a $10M mortgage is secured by real estate with a tax basis of $2M and a value of $7M, then $8M of taxable gain results ($10M mortgage minus $2M basis).  This is often an adverse result.

If a taxpayer has recourse debt secured by a mortgage, and transfers the property to a lender in satisfaction of the debt, the transaction is bifurcated into two taxable events.  First, there is a deemed taxable sale of the property, with capital gain equal to the excess of the value of the property minus its tax basis.  Second, there is cancellation of the recourse debt in excess of the value of the property, with COD income equal to the amount of the debt minus the value of the property.  In the example from the previous paragraph, there would be $5M of capital gain ($7M minus $2M) and $3M of COD income ($10M minus $7M).

This is a highly technical area of US tax law.  Each borrower’s facts must be carefully considered.  State income tax treatment of COD income may be different than the federal tax treatment.  In sum, a tax analysis relating to COD income issues is usually critically important to avoid adverse tax results when debt is being modified or forgiven.

 


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

Businesses dealing with the present economic downturn may find relief from taxation and potential tax refund options under existing tax law as recently amended by the CARES Act.

Unlocking the Benefits of Net Operating Loss (“NOLs”) Carrybacks: The 2017 Tax Act eliminated the ability to carryback NOLs generated in 2018 and later years.  The CARES Act now allows for carrybacks of NOLs generated in 2018, 2019 and 2020 for up to five years to get a tax refund.  The IRS recently extended the filing deadline for expedited refund of 2018 NOLs to June 30, 2020, which also makes it easier to get a refund.

Qualified Improvement Property (“QIP”) Tax Benefits Resurrected: Prior to the 2017 Tax Act, improvements made to property leased by retail businesses and certain other taxpayers could be depreciated over 15 years.  The 2017 Tax Act renamed these categories of eligible assets as QIP, but inadvertently eliminated the ability to treat it as 15-year recovery property eligible for the new 100% bonus depreciation rules.  The CARES Act fixed this issue (known as the “Retail Glitch”) by treating QIP as 15-year property eligible for bonus depreciation, effective retroactively as of Sept. 27, 2017.

The IRS recently announced that qualifying taxpayers can elect to take bonus depreciation on QIP by filing amended returns (or administrative adjustment requests or Form 3115 change of accounting method) for their 2018, 2019 or 2020 returns.  Taking this step could produce refunds and much needed cash for these types of businesses.

Partnership Relief in Getting CARES Act Benefits:  The IRS recently issued Rev. Proc. 2020-23, which temporarily allows eligible partnerships to file amended partnership returns rather than file an administrative adjustment request, which was much more cumbersome.  This change will allow partnerships to take advantage of the QIP, NOL and other tax benefits afforded by the CARES Act.

Limits on Business Interest Deductions Relaxed:  The 2017 Tax Act added a limit on deductibility of business interest.  Starting in 2018, business interest deductions can generally only offset 30% of the taxpayer’s adjusted taxable income (“ATI”).  The CARES Act increases the 30% limitation to 50% for 2019 and 2020 and made other changes to lessen the adverse impact of this rule.

The Takeaway:  Affected taxpayers should consider the CARES Act tax law changes to reduce their current tax exposure and obtain potential tax refunds.  Let us know how we can help you to take advantage of these opportunities.

 


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.