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.

 

On April 9, 2020, the IRS extended certain additional key tax deadlines affecting payments from both individuals and businesses due to the impact of the COVID-19 pandemic. Notice 2020-23 expanded upon prior IRS guidance that extended the dates for taxpayers to file Federal tax returns and render tax payments by creating a general extension to July 15, 2020, for all taxpayers that have a deadline – whether that deadline applies to a filing, a payment or other action – that falls in the period occurring on or after April 1, 2020, and prior to July 15, 2020, without incurring a late-filing penalty, late-payment penalty or interest.

This includes an extension of time for “performing a time-sensitive action,” which includes the 180-day period for a taxpayer to invest in a Qualified Opportunity Fund (QOF), as well as the 45-day identification period and the 180-day exchange period deadlines for like-kind exchanges under Section 1031 of the Internal Revenue Code. This relief applies automatically and does not require taxpayers to contact the IRS or file any interim documentation to obtain this relief.

These milestone dates were cast in stone under pre-COVID-19 conditions.  However, in the declaration of the COVID-19 pandemic as a federal disaster under the Stafford Act, instructions were given to the Secretary of the Treasury to provide relief from tax deadlines due to COVID-19.

Despite what appears to be the good intentions of the IRS, further clarification of the extended deadline provided under Notice 2020-23 may be necessary with regard to its effect on like-kind exchanges as there is a lack of clarity as to whether this supersedes the guidance set forth in Revenue Procedure 2018-58, which already provided that the last day of a 45-day identification period and the last day of a 180-day exchange period that fall on or after the date of a federally declared disaster be “postponed by 120 days or to the last day of the general disaster extension period authorized by an IRS News Release or other guidance announcing tax relief for victims of the specific federally declared disaster, whichever is later.”  Notice 2020-23 states that it “amplifies Notice 2020-18, 2020-15 IRB 590 (April 6, 2020), and Notice 2020-20, 2020-16 IRB 660 (April 13, 2020)” but does not otherwise reference any other notice or Revenue Procedure. The Notice allows for an extension to July 15, 2020, rather than the 120-day extension, which would have been longer.

 


 

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.

On April 9, 2020, the IRS updated its guidance originally provided in Notice 2020-18, Additional Relief for Taxpayers Affected by Ongoing Coronavirus Disease 2019 Pandemic, to provide extension relief to taxpayers in response to the coronavirus emergency.  In addition to the prior extension of time for the filing and payments with respect to federal income tax returns (Forms 1040, 1120, 1120-S and 1065) and federal gift tax returns (Form 709) until July 15, 2020, the IRS has now also postponed a variety of additional federal tax form filings and payment obligations that were due between April 1, 2020 and July 15, 2020.

In Notice 2020-23, the IRS extended the relief until July 15, 2020 for federal estate tax returns (Form 706), including estate tax returns that are filed in order to make portability elections under Revenue Procedure 2017-34, the information form to report the basis in assets received from a decedent (Form 8971), income tax returns for estates and trusts (Form 1041), and exempt organization business income tax returns and private foundation returns (Forms 990-T and 990-PF).  In addition, the updated guidance extended the due date until July 15, 2020 for estate tax payments of principal or interest that would have been due between April 1, 2020 and July 15, 2020 as a result of elections made under Sections 6166, 6161 and 6163 of the Internal Revenue Code, and the annual recertification requirements under Section 6166 of the Internal Revenue Code.  Associated interest, additions to tax, and penalties for late filing or late payment will be suspended until July 15, 2020.  First and second quarter estimated federal income tax payments for exempt organizations, individuals, estates and trusts and corporations are both now due on July 15, 2020.


 

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.