Should Donald Trump’s (or Anyone Else’s) Net Operating Losses Really Be Getting So Much Attention?

Daniel Willingham

By Daniel Willingham



Perhaps the most talked-about subject of the Tax Code right now is the allowance of net operating losses (NOLs). This is no doubt due in large part to the October 1 New York Times article that claims Donald Trump recognized roughly $915 million in losses on his 1995 tax returns, giving rise to his ability to use NOLs to offset taxable income in other years.

Like many stories we hear from the media, the truth about NOLs is much more complex than most pundits have suggested. It is interesting that in all the chatter surrounding NOLs, I have yet to hear a single commentator cite Tax Code Section 172, which does have the heading “Net Operating Loss Deduction.”

Section 172 defines NOLs as the excess of deductions over gross income. Because a deduction by definition reduces taxable income, when a taxpayer’s deductions are greater than his income in a given year, he needs to apply the deductions against income in other tax years. Otherwise, the taxpayer would completely lose a deduction to which he is entitled solely because he did not receive enough income. Continue reading »

Separate Spousal Tax Liability for Missouri Income Taxes

Marcia Swihart Orgill

By Marcia Swihart Orgill



If a married couple files a joint federal income tax return, both spouses are jointly and severally liable for the full amount of federal income tax liability for that tax year. Joint and several liability means the Internal Revenue Service can collect the full amount of income tax from either or both spouses, regardless of whether the income tax liability is attributable to the separate income of only one spouse.  A divorce does not prevent the IRS from collecting the entire unpaid income tax liability from either of the spouses.  Under certain circumstances, a spouse may obtain relief from joint and several tax liability by timely filing Form 8857 and proving a claim for innocent spouse relief, separate liability or equitable relief.

By contrast, a married taxpayer who files a combined Missouri income tax return is liable only for the amount of Missouri income tax liability attributable to his or her own income. A taxpayer’s  separate income includes his or her earned income such as wages, income from his or her own separately owned property, and his or her portion of income from jointly owned property, such as interest from a jointly owned financial account.

Missouri law requires a married couple who files a joint federal income tax return to file a combined Missouri income return.  The income of each spouse is reported separately on the combined return. The Missouri tax due on each spouse’s income is separately determined and then added together and reported on the return.

However, in assessing unpaid income tax liability, the Missouri Department of Revenue does not track which spouse’s income gave rise to the liability. Instead, in practice the Missouri Department of Revenue assesses the entire income tax liability against each spouse, even if the tax liability is only attributable to the income of one spouse. Continue reading »

All Married Couples in Missouri Filing Joint Federal Returns Must Also File Joint State Returns

Misty A. Watson

By Misty A. Watson



Married couples in Missouri who file joint federal tax returns, including those not recognized as married by the state but recognized as married in other states, must also now file jointly in the state of Missouri.

Governor Jay Nixon issued the executed order clarifying that, under Missouri law, couples filing joint federal income tax returns must also file joint state returns.

Click here to read more.

Posted by Attorney Misty A. Watson. Watson’s practice focus is estate-related: planning, administration, and probate. She creates trusts, wills, financial, and health care powers of attorney, guardianships, and conservatorships.

Lack of Guidance Leaves Married Gay Couples in Uncertain Tax Position

Misty A. Watson

By Misty A. Watson



Almost every expert out there is weighing in on the legal implications of last month’s Supreme Court decision striking down the Defense of Marriage Act (DOMA). Unfortunately, the IRS has not issued guidance regarding how married couples treat income in states that do not recognize their marriage, whether the IRS will allow income tax returns to be amended for the previous three years, or whether the IRS will allow married couples to file as married in states that do not recognize the marriage.

While IRS guidance is likely on the way, affected couples may have to sort through a confusing minefield of regulations for some time yet.

For more information, contact a qualified tax advisor, and go to “For some gays in America, a legal victory becomes a tax headache.”

Posted by Attorney Misty A. Watson. Watson’s practice focus is estate-related: planning, administration, and probate. She creates trusts, wills, financial, and health care powers of attorney, guardianships, and conservatorships.

 

Is This by Consent? Changes to Missouri Supreme Court Rule Affect Use of Non-party Subpoenas

David R. Bohm

By David R. Bohm



Part of a series on issues related to Manufacturers, Distributors and International Trade

Co-authored by David R. Bohm and David A. Zobel

A major change involving subpoenas to non-parties has hit the business world in the state of Missouri.

A new amendment to the Missouri Supreme Court Rules now requires non-party record custodians to physically appear at deposition to produce subpoenaed items, unless all parties to the litigation have agreed that the subpoenaed party may produce the items without appearing.

The amendment changes the prevailing practice where parties send out subpoenas to third parties with a letter explaining that they will be excused from appearing at deposition if they produce the requested items along with what is known as a business records affidavit.

Rule 57.09, as amended, now requires parties to first obtain consent from all other parties to the litigation before a subpoenaed witness may produce documents without attending the deposition. This agreement must be communicated to the witness in writing. Absent this agreement, a witness must appear to produce subpoenaed items at deposition.

What does this mean to you? If you receive a subpoena, you may only produce the documents to the party serving the subpoena without appearing at deposition if that party represents to you in writing (e.g., in a letter) that all other parties have consented to production of the docume

nts without need for you to appear at the deposition. Such a letter should protect you from allegations that you improperly produced records by mail, instead of bringing the documents to the deposition. You do not need to see the actual agreement. If you have any questions as to whether you can simply mail the documents, instead of appearing at deposition, you should either call your attorney for advice or simply wait and bring the documents at the time and place designated in the subpoena.

Continue reading »

Importance of Maintaining Formalities with Your LLC: It Will Affect Your Deductions

Patrick J. Murphy

By Patrick J. Murphy



Many individuals establish LLCs and then operate a business as if it was an extension of themselves, commingling funds and not following proper formalities. A recent Tax Court decision provides a sobering realization for individuals who fail to properly title their assets and follow the required formalities. In this case, the court found that a taxpayer’s purchase of an RV did not increase the amount he had at-risk in the LLC because he could not show the LLC owned or used the RV. As a result, deductions he had taken based upon that amount at-risk were disallowed by the IRS.

In Estate of Roberts v. CIR, the taxpayer had established an LLC to lease equipment to his S corporation. He lent money to the LLC, which issued him a promissory note in that amount. With the proceeds of the loan, the LLC purchased an RV. However, there were several issues with the RV’s ownership and use. Even though the RV was titled in the name of CTI Leasing, it was not titled in the name “CTI Leasing, LLC,” the company’s legal name. The EIN on the car title belonged to his S corporation. The RV was not on the LLC’s depreciation schedule. The taxpayer used the RV for his own purposes. Lastly, there was no record that the LLC ever used the RV, because there was no written lease between the LLC and the S corporation concerning the RV.

As a result, the IRS concluded, and the Tax Court confirmed, there was no evidence that the LLC owned the RV or used it. Because the taxpayer could not show that the LLC owned or used the RV, the taxpayer was unable to claim tax deductions based upon the LLC’s capital at-risk in connection with the RV.

There are a few items to take away from this case:

  1. You should always properly title your corporate assets and use the corporate title LLC, Corp., or Inc., as the case may be.
  2. If you have multiple business entities, you must keep assets of each entity separate from other assets. If you lease an asset among entities, you must have a proper lease in writing executed by both entities.
  3. It would be much cheaper for the taxpayer to seek the guidance of an accountant or attorney when completing these transactions than suing the IRS in Tax Court for the disallowed tax deductions.

These days, with Legal Zoom and other ready-to-order LLCs, people are buying assets and operating businesses without knowing the consequences of their actions. Before you enter into large transactions, it is important to understand the formalities that must be followed in order to receive the intended tax consequences.

Posted by Attorney Patrick J. Murphy, CPA. As both an attorney and a CPA, Murphy’s practice includes sophisticated estate planning approaches as well as corporate transactions and advice in mergers and acquisitions, buy/sell agreements, corporate structuring, and real estate transactions for small to medium-sized businesses.

The IC-DISC: An Underutilized Tax Savings Provision

Marcia Swihart Orgill

By Marcia Swihart Orgill



Part of a series on issues related to Manufacturers, Distributors and International Trade

There is an increasingly wide divide between Democrats and Republicans on a multitude of issues. However, both parties agree that exports are a key to economic growth.

Last year, President Obama announced his goal to double U.S. exports by 2015, and Republican leaders indicated their desire to work with the President to expand trade to key allies. To encourage exports, the President issued a National Export Initiative that focuses on helping small to mid-sized U.S. businesses export their products and services.

The extension of the qualified dividend rates through 2012 also provides U.S. exporters with the opportunity to save taxes by establishing an Interest-Charge Domestic International Sales Corporation (IC-DISC).

Yet many export companies that could benefit from the tax savings of an IC-DISC fail to do so. According to some estimates, only about 6,000 businesses–a small portion of those that qualify—take advantage of the tax savings of an IC-DISC.

Capitalizing on these tax savings could give Missouri export companies a leg up on their competition. A key to increasing profitability is working smarter not just harder. Less taxes means more money that can be injected into the business to fuel growth and increase profitability.

Candidates for an IC-DISC

Privately held C-Corporations and pass through entities, such as S-Corporations, partnerships and LLCs, that could benefit from the tax savings of an IC-DISC include:

  • Manufacturers and distributors of U.S. manufactured products with more than 50% U.S. content and a destination outside of the U.S.,
  • Architectural and engineering firms with projects outside of the U.S.,
  • Software developers of computer software that is licensed for reproduction outside of the U.S.,
  • Agricultural and mineral producers that export products outside the United States, and
  • Lessors of new or used U.S. made products to third parties for use outside of the U.S.

Continue reading »

IRS Publishes Guidelines for Domestic Partners and Same-Sex Spouses

Misty A. Watson

By Misty A. Watson



The IRS has published guidelines for domestic partners in community property states and same-sex spouses in California.

Each year, many LGBT couples must complete two separate and completely different tax returns. For states recognizing same-sex marriage or allowing the registration of domestic partners, the couple may be able to file jointly for their state tax return. Then, due to the provisions of the federal Defense of Marriage Act, the couple must individually complete separate federal tax returns.

The IRS guidelines help with couples in which an individual may be eligible for head of household status and clarify that each member of the couple must file a separate tax return.

For more information, click here:Questions and Answers for Registered Domestic Partners in Community Property States and Same-Sex Spouses in California.”

Posted by Attorney Misty A. Watson. Watson’s practice focus is estate-related: planning, administration, and probate. She creates trusts, wills, financial, and health care powers of attorney, guardianships, and conservatorships.

ROBS Transactions as a Financial Investment Tool: Legal Traps for the Unwary

Brian S. Weinstock

By Brian S. Weinstock



Over the last few years, ROBS transactions have dramatically increased which means that the funds being used to capitalize these transactions has significantly increased too. I wrote about ROBS transactions last June in a post called “ROBS transactions: the Department of Labor and IRS Regulation.”

Recently, Mr. Alan Lavine interviewed me for an article in Financial Advisor Magazine about ROBS transactions with regard how they are being used as financial investment tools and whether investors should participate in this type of transaction. The article, “Rolling Over, Starting Up,” appears in the in the December 2010 issue. The article’s subtitle is: Clients can tap into retirement savings to start new businesses, but there are legal traps for the unwary.

It was an honor to be quoted by Mr. Lavine who is an accomplished author and syndicated columnist. Mr. Lavine and his wife, Gail Liberman, wrote Rags to Riches which was featured on Oprah and hit two best seller lists.

Will There be a 3.8% Sales Tax When You Sell Your Home?

Patrick J. Murphy

By Patrick J. Murphy



With the passing of the health care bill, there are a number of new tax code provisions and many people are concerned about how these new provisions will affect them. One of these new tax code provisions is the 3.8% Medicare tax that applies to “net investment income,” which is such items as interest, dividends, annuities, royalties, rents, and net gain on the sale of property (like your primary residence). One of the misconceptions about the new 3.8% Medicare tax is that it will affect a number of people when they sell their primary residence for a gain. Fortunately, this new tax will only affect a small percentage of people who are high income taxpayers.

One reason the new tax will not impact many taxpayers is the current exemption for gain on the sale of your primary residence. For single individuals, they are able to exclude the first $250,000 in gain from the sale of their primary residence. For married couples, the first $500,000 in gain from the sale of their primary residence is excluded. As a result, depending upon the taxpayer, the first $250,000 or $500,000 may be excluded from gross income and would not be subject to the 3.8% tax. The only individuals who should be concerned about the 3.8% Medicare tax is individuals who sell a second home or a have a very large gain on the sale of their primary residence.

Another reason that the new 3.8% Medicare tax will not affect many people is that it only applies to high income individuals. The tax will only be incurred when a single individual has adjusted gross income over $200,000 or when a married couple filing jointly has adjusted gross income over $250,000. Only a small percentage of taxpayers earn incomes over these threshold amounts, even for taxpayers who sell their primary residence for a gain over the $250,000/$500,000 exemption.

Therefore, due to the $250,000/$500,000 income exemption and the tax’s income thresholds, the only individuals who will be affected by this tax are high income taxpayers. If you believe you may be subject to the 3.8% Medicare tax due to a sale of your primary residence or otherwise, it is important that you speak with your tax attorney or accountant to develop a tax planning strategy to minimize the impact of this new tax. The goal behind the tax planning will be to minimize your adjusted gross income through such strategies as recognizing losses at the time you sell your primary residence or purchasing municipal bonds which pay tax-exempt interest. Through proper planning, you can minimize the impact of this new tax.