The Lobb Report Volume 2 – 2024 Business Owner Legal Updates

Authored by Mark Lobb

As with each year, the first quarter requires business owners to focus on the laws passed in the previous year which affect their business and personal concerns and focus on signaling from legislative proposals. This edition focuses on legislative proposals from the federal government and the state of California along with some new laws. Both the U.S. Government and state of California have budget deficits which significantly dictate legislative policy. This is code for higher taxes.

ALERT

Judge Liles Burke of the United States District Court for the Northern District of Alabama has ruled the Corporate Transparency Act (CTA) requiring companies to report beneficial ownership to the Federal Crimes Enforcement Network (FinCEN) is unconstitutional because it exceeds the Constitution’s limits on Congress’ power. The court entered a permanent injunction against the United States and in favor of the National Small Business Association. Judge Burke ruled Congress lacks the power to require companies to disclose personal stakeholder information to Treasury’s criminal enforcement arm.

As we have been reporting, the new federal law (CTA) became effective January 1, 2024. The CTA requires certain business entities (“Reporting Companies”) to report identifying information to FinCEN. Reporting Companies must inform FinCEN about its “Beneficial Owners.” Beneficial Owners includes (1) persons who hold significant equity defined as 25% or more ownership interest, or (2) persons who exercise substantial control over the Reporting Company.

What does the ruling by Judge Burke mean? For starters, it does not mean Reporting Companies should ignore the reporting requirements. Even though a federal court has ruled to enjoin enforcement of the law against the National Small Business Association, does not mean Reporting Companies will not be required to report. The United States will appeal the decision and there will likely be further legal challenges. Stay tuned and we will keep you updated as the legal challenges to the CTA are made.

Taxation

United States

Business Aircraft/Personal Use: At the end of February, the IRS announced plans to begin dozens of audits on business aircraft where personal use is involved. The audits are to be focused on aircraft usage by large corporations, large partnerships and high-income taxpayers. The focus is whether for tax purposes, the use of jets is being properly allocated between business and personal reasons. (IR-2024-46).
Internal Revenue Code section 274(d) requires taxpayers to substantiate by adequate records or by sufficient evidence corroborating the taxpayer’s own statement to following:
1. The amount of such expense or other item,
2. The time and place of the travel or the date and description of the gift.
3. The business purpose of the expense or other item, and
4. The business relationship to the taxpayer of the person receiving the benefit.
The IRS beat up on Mark Warmoth/Weekend Warrior over a decade ago and specifically focused on the lack of contemporaneously kept flight logs containing the information identified in items 1-4 above. The IRS has progressively gotten more stringent over time. I cannot stress enough the need for maintaining as much information as possible on the business/personal use of planes.

California

State Mortgage Interest Deduction: The Legislative Analyst’s Office (LAO) is proposing to eliminate the mortgage interest deduction for second homes and converting it to a tax credit. For example, the credit could be equal to 2% of interest paid on up to $1 million of debt. Most of the $3.5 billion in current deduction benefits go to high income households who, for the most part, don’t need help buying a home, the LAO said. The two changes would increase revenue by more than $1 billion a year.
Entity Minimum Franchise Tax: The LAO is recommending restoration of the $800 minimum franchise tax for first-year businesses for all entities. It is estimated this will generate approximately, $150 million a year to cover the budget deficit.
Net Operating Loss Carry Forward Limitation: The LAO is proposing lawmakers reject the proposal to conform to the 2017 federal tax law limiting net operating loss carry forwards to 80% of subsequent year income. The proposal would apply to years before 2017 while maintaining a 20-year limit. The proposal requires taxpayers to track state and federal carryforwards separately.
Outside of California, states such as Utah are cutting taxes. On Wednesday, Utah cut the personal income tax which is a flat rate from 4.85% to 4.65%. This means Utah is cutting annual revenue of $167 million annually. Utah has a budget surplus.

Estate and Gift Planning

United States

Estate Tax Exemptions: For 2024, the annual exclusion for gifting is $18,000 per donee. The lifetime exclusion is $13.61 million per donor. The Biden Administration has proposed to impose an annual maximum of $50,000 for all annual exclusion gifts and accelerate rolling back the lifetime exemption amount to pre-TCJA levels which will bring the exemption down to about one half of the $13.61 million per donor.
Grantor Payment of Trust Tax: The Biden Administration proposes treating a grantor’s payment of an irrevocable grantor trust’s income taxes as a taxable gift. This is in line with or an extension of a recent IRS Chief Counsel Advice memorandum 202352018 which indicates a modification of an intentionally defective grantor trust allowing the grantor’s payment of a trust’s income taxes to cause the payment of such taxes to be a taxable gift. The CCA is not law, but the Biden Administration tax proposal along with the CCA are clear indications of the current Administration’s views concerning irrevocable grantor trust planning.
Corporate Transparency Act/Trusts: As discussed above, the Corporate Transparency Act requires business entities (“Reporting Companies”) to report identifying information to the Financial Crimes Enforcement Network (“FinCEN”). Reporting Companies must inform FinCEN about its “Beneficial Owners.” Beneficial Owners includes (1) persons who hold significant equity defined as 25% or more ownership interest, or (2) persons who exercise substantial control over the Reporting Company.
Although trusts are not considered Reporting Companies, if a Reporting Company is held in whole or in part by trusts, in addition to having to report the trustee, the trusts grantors and beneficiaries may be considered Beneficial Owners for reporting purposes. These circumstances include (1) when a grantor has the right to revoke the trust or withdraw the assets of the trust, (2) when a beneficiary is the sole permissible recipient of income and principal from the trust, or (3) when a beneficiary has the right to demand a distribution or withdraw substantially all assets from the trust. Executors of estates may also qualify as Beneficial Owners thus requiring reporting.
It must be noted that Reporting Companies have 30 days to report changes in the information previously reported to FinCEN. For instance, if an individual with ownership or control moves or changes their name, the reporting requirement is triggered.

California

Step-up In Basis: California has a very large budget deficit which is estimated to be as high as $73 billion. The Legislative Analyst’s Office (LAO) is looking for “solutions” to cover the deficit. The LAO is considering eliminating a step-up in basis on inherited assets and narrowing the mortgage interest deduction. It is estimated the proposal to eliminate a step-up will raise $200 million a year and increase over time. This will cover a whopping .27% of the budget deficit.

The LAO states that since California eliminated its state estate tax in 2005, the reasoning behind allowing a step-up in basis in inherited assets no longer exists. The step-up allows heirs to reset the basis in an asset to the fair market value at the time of inheritance. This in turn minimizes the amount of capital gain subject to tax. The LAO indicates the rationale for allowing a step-up is to prevent double taxation through estate tax and capital gains tax. Since California does not have an estate tax, the LAO reasons there is no reason to allow a step-up in basis.

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Authored by Mark Lobb

ALERT

Taxation

United States

Business Aircraft/Personal Use: At the end of February, the IRS announced plans to begin dozens of audits on business aircraft where personal use is involved. The audits are to be focused on aircraft usage by large corporations, large partnerships and high-income taxpayers. The focus is whether for tax purposes, the use of jets is being properly allocated between business and personal reasons. (IR-2024-46).
Internal Revenue Code section 274(d) requires taxpayers to substantiate by adequate records or by sufficient evidence corroborating the taxpayer’s own statement to following:
1. The amount of such expense or other item,
2. The time and place of the travel or the date and description of the gift.
3. The business purpose of the expense or other item, and
4. The business relationship to the taxpayer of the person receiving the benefit.
The IRS beat up on Mark Warmoth/Weekend Warrior over a decade ago and specifically focused on the lack of contemporaneously kept flight logs containing the information identified in items 1-4 above. The IRS has progressively gotten more stringent over time. I cannot stress enough the need for maintaining as much information as possible on the business/personal use of planes.

California

State Mortgage Interest Deduction: The Legislative Analyst’s Office (LAO) is proposing to eliminate the mortgage interest deduction for second homes and converting it to a tax credit. For example, the credit could be equal to 2% of interest paid on up to $1 million of debt. Most of the $3.5 billion in current deduction benefits go to high income households who, for the most part, don’t need help buying a home, the LAO said. The two changes would increase revenue by more than $1 billion a year.
Entity Minimum Franchise Tax: The LAO is recommending restoration of the $800 minimum franchise tax for first-year businesses for all entities. It is estimated this will generate approximately, $150 million a year to cover the budget deficit.
Net Operating Loss Carry Forward Limitation: The LAO is proposing lawmakers reject the proposal to conform to the 2017 federal tax law limiting net operating loss carry forwards to 80% of subsequent year income. The proposal would apply to years before 2017 while maintaining a 20-year limit. The proposal requires taxpayers to track state and federal carryforwards separately.
Outside of California, states such as Utah are cutting taxes. On Wednesday, Utah cut the personal income tax which is a flat rate from 4.85% to 4.65%. This means Utah is cutting annual revenue of $167 million annually. Utah has a budget surplus.

Estate and Gift Planning

United States

Estate Tax Exemptions: For 2024, the annual exclusion for gifting is $18,000 per donee. The lifetime exclusion is $13.61 million per donor. The Biden Administration has proposed to impose an annual maximum of $50,000 for all annual exclusion gifts and accelerate rolling back the lifetime exemption amount to pre-TCJA levels which will bring the exemption down to about one half of the $13.61 million per donor.
Grantor Payment of Trust Tax: The Biden Administration proposes treating a grantor’s payment of an irrevocable grantor trust’s income taxes as a taxable gift. This is in line with or an extension of a recent IRS Chief Counsel Advice memorandum 202352018 which indicates a modification of an intentionally defective grantor trust allowing the grantor’s payment of a trust’s income taxes to cause the payment of such taxes to be a taxable gift. The CCA is not law, but the Biden Administration tax proposal along with the CCA are clear indications of the current Administration’s views concerning irrevocable grantor trust planning.
Corporate Transparency Act/Trusts: As discussed above, the Corporate Transparency Act requires business entities (“Reporting Companies”) to report identifying information to the Financial Crimes Enforcement Network (“FinCEN”). Reporting Companies must inform FinCEN about its “Beneficial Owners.” Beneficial Owners includes (1) persons who hold significant equity defined as 25% or more ownership interest, or (2) persons who exercise substantial control over the Reporting Company.
Although trusts are not considered Reporting Companies, if a Reporting Company is held in whole or in part by trusts, in addition to having to report the trustee, the trusts grantors and beneficiaries may be considered Beneficial Owners for reporting purposes. These circumstances include (1) when a grantor has the right to revoke the trust or withdraw the assets of the trust, (2) when a beneficiary is the sole permissible recipient of income and principal from the trust, or (3) when a beneficiary has the right to demand a distribution or withdraw substantially all assets from the trust. Executors of estates may also qualify as Beneficial Owners thus requiring reporting.
It must be noted that Reporting Companies have 30 days to report changes in the information previously reported to FinCEN. For instance, if an individual with ownership or control moves or changes their name, the reporting requirement is triggered.

California

Step-up In Basis: California has a very large budget deficit which is estimated to be as high as $73 billion. The Legislative Analyst’s Office (LAO) is looking for “solutions” to cover the deficit. The LAO is considering eliminating a step-up in basis on inherited assets and narrowing the mortgage interest deduction. It is estimated the proposal to eliminate a step-up will raise $200 million a year and increase over time. This will cover a whopping .27% of the budget deficit.