The post The Lobb Report Volume 2 – 2024 Business Owner Legal Updates appeared first on A law firm committed to the legal needs of businesses and entrepreneurs.
]]>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.
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.
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:
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.
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.
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.
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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]]>The post Information to Successor Trustee Following Death of Grantor appeared first on A law firm committed to the legal needs of businesses and entrepreneurs.
]]>Authored by Kristin Gifford
To administer the Trust upon the death of a Grantor, the following are duties required of the Successor Trustee:
The above list is not exhaustive and will be case specific. Therefore, upon the death of a Grantor, Lobb & Plewe, LLP recommends that you speak with an attorney as soon as possible.
Lobb & Plewe, LLP
10785 W Twain Avenue, Suite 250
Las Vegas, NV 89135
702-622-8451
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]]>The post The Lobb Report – January 2024 Business Legal Updates appeared first on A law firm committed to the legal needs of businesses and entrepreneurs.
]]>Authored by Mark Lobb
We hope you had a great end to 2023. There are a host of new laws and to be mindful of as we move into 2024 with some dangerous landmines to avoid.
In this edition, we provide you with an overview of new laws and reporting requirements and the potential impact of these new laws on your business operations, along with expert insights into emerging trends, and practical advice for business owners.
We hope you find this newsletter to be a valuable resource and an insightful guide as you continue to build and expand your business.
FinCen Reporting: In this edition is an article by my law partner Sara regarding new reporting requirements for closely held entities. You must read this article. The Corporate Transparency Act (CTA) came into effect January 1, 2024. The CTA requires you report the beneficial owners of your entities. If you do not complete the new reporting on time, you can be subject to a $500 per day penalty and potential criminal prosecution. We can help you with your reporting, but you must contact us if you want assistance. You will be receiving Spam mail and e-mail from lawyers and other opportunists telling you to pay them to do your reporting. We highly recommend you do not use unknown third parties to do your reporting.
Non-compete Agreements: It is now unlawful to include a non-compete in an employment contract or a standalone non-compete agreement. A violation of the prohibition on non-compete agreements also constitutes unfair competition under California’s Unfair Competition Law, Business & Professions Code Section 17200.
The new law also requires employers to individually notify by mail or email all current employees and any former employees employed after Jan. 1, 2022, that any agreements they signed in violation of Section 16600 are unenforceable. The notice must be provided by February 14, 2024, and failure to provide the notice can constitute unfair competition under California’s Unfair Competition Law.
PAGA/Arbitration Agreements: According to data maintained by the California Department of Industrial Relations, the number of PAGA notices filed has increased exponentially over the past two decades. The number grew from 11 notices in 2006, to 4,530 in 2014, and to 7,780 in 2023. In California, it is not a question of whether a company will be sued under PAGA, but when the company will be sued. Arbitration agreements continue to be upheld, however, the law on arbitration agreement continually shifts as the result of court rulings. It is imperative to continually have your company employee arbitration agreements updated to keep in step with the changes emanating from case law. A well drafted and properly entered into arbitration agreement can substantially limit PAGA liability exposure.
Estate Planning in 2024: The federal lifetime estate, gift and GST applicable exemption amounts are $13,601,000 for an individual and $27,220,000 for a married couple. These dollar figures represent the amount of wealth each individual can transfer during their lifetime or the amount excluded from tax at death which currently are assessed at a rate of 40 percent.
Furthermore, each year, individuals are entitled to make gifts using the “Annual Exclusion Amount” without incurring gift tax or using any of their applicable lifetime exemption amount against estate and gift taxes. The Annual Exclusion Amount for 2024 is $18,000 per donee.
On January 1, 2026, the lifetime exemption will be cut in half. The only to preserve the elevated exemption level is to use it before the end of 2025. Waiting until 2025 to complete planning to use up the exemption is not recommended. At the very least, your structure should be in place by the end of 2024 so that in 2025, the only action item will be funding of the estate planning structure.
Income Tax Basis Planning: DO NO WAIT UNTIL 2025 to COMPLETE ESTATE PLANNING. There are a lot of issues to address. For instance, when determining whether it is prudent to gift a certain asset to apply against the lifetime exemption, it is important to consider the basis of the asset. There is a tradeoff in using the increased exemption amount during lifetime to gift assets to others, as opposed to retaining appreciated assets until death to receive a stepped-up income tax basis.
Gifted assets do not get a step-up in basis upon death. IRS Revenue Rule 2023-02 confirms this previously well-established result. Prioritizing high-income tax basis assets for lifetime gifting to use up the exemption is important. Gift the high-income tax basis assets and retain low-basis assets in the taxable estate if a gifting strategy is to be employed.
This is but one example of issues which will have to be resolved before the end of 2025.
Swap or Buy-Back of Appreciated Low Basis Assets from Grantor Trusts: Most business owners and wealthy individuals we meet already have irrevocable grantor trusts. If such a trust has already been funded with a low-basis asset, the grantor can swap or buy back the assets in exchange for high-basis assets or cash. With the swap or purchase of the asset back from the grantor trust for fair market value, no gain or loss is recognized. As discussed above, on the grantor’s death, the purchased or reacquired asset with the low basis will be included in the taxable estate and receive a step-up in basis equal to fair market value. This eliminates the income tax cost to the beneficiaries. swapped assets.
2024 Federal Income Tax Rates:
There are presently seven individual income tax brackets, with a maximum rate of 37%. The 37% tax rate affects single taxpayers whose income exceeds $609,350 in 2024, and married taxpayers filing jointly whose income exceeds $731,200. Estates and trusts reach the maximum 37% rate with taxable income of more than $15,200.
The threshold for the imposition of the 3.80 percent surtax on net investment income and the 0.90 percent Medicare surtax on earned income is $200,000 for single taxpayers, $250,000 for married taxpayers filing jointly, and $15,200 for trusts and estates in 2024.
On January 19, 2024, the Ways and Means Committee made a significant bipartisan move by approving the Tax Relief for American Families and Workers Act of 2024 (“TRA”).
Three provisions in the TRA involve extensions of policies that were in effect as of 2021, but which have expired or are beginning to phase out. These include the following:
Deduction for Research and Experimental Expenditures. Until 2021, businesses could fully deduct R&E expenditures in the year the business incurred the expenditures. Beginning in 2022, businesses were required to amortize R&E performed domestically over five years and non-domestic R&E over 15 years. In the case of a $10 million expenditure on domestic R&E in 2022, $1MM of the cost would be allocated as a deduction in 2022, $2MM each year would be deducted from 2023 to 2026, and the final $1MM would be deducted in 2027.
The TRA will bring back full deductibility of domestic R&E expenditures. Instead of having to allocate 2024 R&E expenditures between 2024 and 2029, businesses will be able to deduct the full 2024 R&E expenditure immediately in the 2024 tax year.
The change will only be in effect for the 2024 and 2025 tax years before expiring. The changes will apply retroactively to 2022 and 2023.
Bonus Depreciation for Short-Lived Capital Assets. The Tax Cuts and Jobs Act of 2017 allowed “bonus depreciation” for equipment, machinery, and certain other qualified assets with a depreciation recovery period of 20 years or less. Bonus depreciation was enacted in tax year 2018, but under current policy gradually sunsets between 2023 and 2026 before fully phasing out in 2027.
The TRA temporarily pauses the gradual phase-out of bonus depreciation in 2024 and 2025 and retroactively eliminates the partial phase out in 2023. Again, the changes are temporary and retroactive.
Under current law, in 2023, businesses were allowed 80 percent of bonus depreciation, and that percentage is currently set to decline by 20 percentage points each year. Under the TRA, businesses have access to 100 percent bonus depreciation through 2025 and then the phaseout restarts. The allowable bonus depreciation will drop to 20 percent in 2026 before fully expiring in 2027.
Increased Interest-Deduction Limitation. Currently, there is a limitation on the amount of interest expenses businesses may deduct. Interest expenses cannot exceed 30 percent of earnings before interest and taxes (“EBIT”). Currently, the deduction limitation decreases as the volume of a businesses depreciation and amortization increases. The TRA removes depreciation and amortization from the interest limit calculation, thus restoring the limitation of 30 percent of earnings before interest, taxes, depreciation, and amortization (“EBITDA”). This was the rule in place at the end of 2021. Again, the interest expense deduction provision expires at the end of 2025 and is retroactive to 2022.
Increase in Limitation on Expensing of Depreciable Assets. Under current law, businesses can deduct up to $1MM of qualifying short-lived capital expenses placed in service during a year. The $1MM of allowable Section 179 deductions is reduced dollar for dollar once companies’ qualifying expenses surpass $2.5MM.
The TRA increases the maximum allowable Section 179 deduction from $1MM to $1.29MM and increases the $2.5MM threshold to $3.22MM. Inflation adjustments apply to these amounts beginning after 2024. This is intended to be a permanent change.
In March of last year the Biden Administration released its tax proposals for fiscal year 2024 in the General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals (the “Green Book”). The Green Book is not proposed legislation and will not pass through Congress. However, the Green Book provides a vision with respect to the priorities the Biden Administration wishes to pursue in the event the 2024 election yields favorable results for the Democratic party.
Individuals: The Green Book proposes significant changes with respect to the taxation of capital gains and the taxation of accumulated wealth. It includes a return to the 39.6% top marginal tax rate as well as increasing the net investment income tax and Medicare tax by an additional 1.2% each. Furthermore, it proposes a 25% minimum tax, inclusive of unrealized gains, for individuals whose total net worth exceeds $100MM and imposes an annual reporting requirement on these individuals.
Corporations and Partnerships: The proposals at the entity level are similar to past Biden Administration proposals. The Green Book proposes to raise the corporate tax rate from 21 percent to 28 percent and targets corporate stock transactions, as well as address the so-called “carried- interest loophole.”
Trusts and Estates: The Administration proposes significant changes in the areas of estate and gift tax. It proposes the following:
There will not be significant tax policy changes in 2024. The TRA is helpful for businesses, but short-lived. The Green Book is nothing more than a projection of what the Biden Administration would like to implement if it could. In this election year there will be no major changes as it concerns taxation.
Regarding estate planning, it is imperative to finalize a structure in 2024 at a very minimum. If you already have a structure in place, keep in mind the lifetime exemption will go up one more time next year before it drops down to about one half of the current exemption level. Existing structures will need to be updated to take advantage of the increased exemption levels.
As we navigate our way through 2024, our firm will do our best to keep you updated on changes in laws, new laws and strategic moves business owners can make to protect assets, be tax efficient and efficiently execute succession planning.
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]]>The post Corporate Transparency Act Disclosure Requirements appeared first on A law firm committed to the legal needs of businesses and entrepreneurs.
]]>Authored by Sara Mostafa
The following intends to summarize the requirements for compliance with the new beneficial ownership reporting requirement of the federal Corporate Transparency Act. Feel free to reach out to Lobb & Plewe, LLP with any questions.
In 2021, Congress passed the Corporate Transparency Act, which creates a new beneficial ownership information reporting requirement. With this new requirement, the U.S. government intends to deter miscreants from hiding or profiting from their illegal gains obtained through shell companies or other opaque ownership structures. The federal Financial Crimes Enforcement Network (FinCEN) launched the BOI E-Filing website for reporting beneficial ownership information (https://boiefiling.fincen.gov) on January 1, 2024.
A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file its initial BOI report. A reporting company created or registered in 2024 will have 90 calendar days to file after receiving actual or public notice that its creation or registration is effective. A reporting company created or registered on or after January 1, 2025, will have 30 calendar days to file after receiving actual or public notice that its creation or registration is effective.
There are two types of reporting companies:
Certain entities are exempt from the reporting requirements under limited exemptions.
A “beneficial owner” is an individual who either directly or indirectly:
(1) exercises substantial control over the reporting company, or
(2) owns or controls at least 25% of the reporting company’s ownership interests.
A reporting company is obligated to report:
A reporting company also must indicate whether it is filing an initial report, or a correction or an update of a prior report.
For each individual who is a beneficial owner, a reporting company must provide:
The reporting company must also report an image of the identification document used to obtain the identifying number in item 4.
For each individual who is a company applicant (i.e., the individual who directly files the document that creates or registers the reporting company and the individual who is primarily responsible for directing or controlling the filing), a reporting company (formed on or after January 1, 2024) is obligated to provide:
The reporting company must also report an image of the identification document used to obtain the identifying number in item 4.
If the company applicant works in corporate formation—for example, as an attorney—then the reporting company must report the company applicant’s business address. Otherwise, the reporting company must report the company applicant’s residential address.
The following are a few examples of changes that would require an updated beneficial ownership information report:
If you correct a mistake or omission made in your beneficial ownership information reporting within 90 days of the deadline for the original report, you may avoid being penalized. However, you could face civil and/or criminal penalties if you disregard your beneficial ownership information reporting obligations.
A person who willfully violates the BOI reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues. That person may also be subject to criminal penalties of up to two years’ imprisonment and a fine of up to $10,000. Potential violations include willfully failing to file a beneficial ownership information report, willfully filing false beneficial ownership information, or willfully failing to correct or update previously reported beneficial ownership information.
Please follow the below link for an exhaustive Small Entity Compliance Guide published by FinCEN.
BOI Small Compliance Guide v1.1 (fincen.gov)
References:
Beneficial Ownership Information Reporting: Frequently Asked Questions, Financial Crimes Enforcement Network, https://www.fincen.gov/boi-faqs, (accessed January 10, 2024).
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]]>The post The Lobb Report – October 2023 Business Owner Updates appeared first on A law firm committed to the legal needs of businesses and entrepreneurs.
]]>Authored by Mark Lobb
Welcome to the October version of The Lobb Report. This edition covers tax deadlines, business owner taxation, estate planning and employment law issues.
In this edition, you can expect a comprehensive overview of an upcoming Supreme Court case along with recent legislative changes and their potential impact on your business operations, expert insights into emerging trends, and practical advice for business owners. We are committed to delivering content that is not only informative but also actionable, equipping you with the knowledge and resources you need to thrive in today’s dynamic business environment.
We hope you find this newsletter to be a valuable resource and an insightful guide as you continue to build and expand your business.
Additional Tax Filing Extensions: In February of this year the IRS extended tax filing and payment dates until October 16, 2023, for almost all California residents. Residents of Lassen, Modoc, and Shasta counties were not provided extensions. California fell in line and granted the same extensions. California taxpayers received extensions to file and pay their 2022 income taxes, 2022 gift taxes, estate tax returns falling due in 2023, and 2023 estimated income tax payments. Some time-sensitive tax actions, including some Section 1031 exchange deadlines were also extended.
In the afternoon of October 16, the IRS issued Notice 2023-189. This notice further extends the October 16 tax filing and payment deadlines to November 16, 2023. Shortly after the Notice was issued, California granted the same extensions, including the deadlines for Section 1031 exchanges.
Wealth Tax: During the 2023 spring legislative sessions, progressive lawmakers in California, Hawaii, Illinois, Maryland, Minnesota, New York, and Washington announced plans to implement wealth taxes. None of those initiatives became law, but the dance is not over. Wealth taxes have political charm and no matter how many times such taxing schemes have failed in the past, they will not go away anytime soon.
A common theme with the states contemplating a wealth tax is a combination of already high taxes and population decline. High on both lists are California, New York, Hawaii and Minnesota. Could there be a correlation to taxing the rich and a population decline? Why would anyone move away from California or Hawaii?
Several European countries implemented versions of a wealth tax in the 1990’s. By the end of 2018, just three European countries still imposed an annual net wealth tax. Those countries were Norway, Spain, and Switzerland. However, the reality is that by 2018, the “tax” was no longer a traditional wealth tax but rather a higher tax rate on certain income or certain assets and not on total net worth. An OECD report notes that net wealth taxes faded because (1) administrative difficulties, (2) noncompliance, and (3) undesired emigration.
A progressive talking point in favor of a wealth tax is focused on leveling the playing field of income inequality. Proponents note that wealth taxes can reduce income inequality by reducing the accumulation of large amounts of wealth by individuals. Although in theory this is a logical outcome, it has not worked in any meaningful way. Wealthy people simply move to a more favorable taxing jurisdiction, thus reducing the tax base of the wealth tax jurisdiction.
From 1989 to 2017, France had a “solidarity tax on wealth” which was an annual progressive wealth tax on net assets above €800,000 for those with total net worth of €1,300,000 or more. The marginal rates ranged from 0.5% to 1.5%. It is estimated that 60,000 millionaires left France between 2000 and 2016 because of the tax.
There is a case pending with the U.S. Supreme Court titled Moore v. United States. It is speculated that a taxpayer victory could end the ability of a state to impose a wealth tax and prevent the taxing of unrealized gains. The decision in Moore should be published in 2024.
Wealth taxes have not only failed but create a wealth drain on the taxing jurisdiction imposing the wealth tax. When a politician pushes a wealth tax slogan, it has nothing to do with reducing income inequality or even raising meaningful revenue because neither result will occur for any sustainable period. The wealthy move away and the jurisdiction collects less in taxes.
Buy-Sale Agreements: It is imperative business owners understand the proper use and structuring of life insurance in the context of buy-sale agreements. In Connelly v. Internal Revenue Serv. the IRS assessed $1 million in taxes on an estate which could have been avoided with proper planning.
Crown C Corp. was owned by Michael and his brother Thomas A. Connelly, who was the director of Michael’s estate after he died. When Michael was alive, the brothers established a stock purchase agreement allowing either brother to purchase the other brother’s shares in the company upon death of the other person. The company could redeem the shares if an offer from the surviving brother was declined. Crown C Corp. took out an additional $3.5 million in life insurance on both brothers.
Following Michael’s death, the company used the $3.5 million from the life insurance proceeds to redeem his shares in the company for $3 million, utilizing the remaining $500,000 for company operations. Thomas reported the redemption of the shares in the estate’s taxes but didn’t report the life insurance proceeds redeemed by the company, which increased the value of Crown C.
The IRS asserted Crown was worth $3 million more than the estate reported due to the receipt of the insurance proceeds upon Michael’s death, issuing a deficiency of $1 million. The deficiency was upheld by the US District Court for the Eastern District of Missouri. The Court ruled the life insurance proceeds were a significant asset that must be included in the company’s valuation.
Caste Discrimination: On October 7, 2023, Governor Gavin Newsom vetoed proposed bill SB 403. This Bill sought to ban discrimination based on caste under the Fair Employment and Housing Act (FEHA), Unruh Civil Rights Act, and California Education Code. As mentioned in the last Lobb Report, this Bill was completely unnecessary because existing statutes already prohibit discrimination based on several categories, including sex, race, religion, disability, ancestry, etc. and state law specifies these statutes should be “liberally construed.”
Fresno and Seattle have each banned discrimination based on caste. Employers in those cities need to amend their policies and training programs to incorporate prohibitions of discrimination based on caste.
Additional California Employment Laws: On October 4, 2023, Governor Newsom signed SB 616 into law which changes the rules on sick leave. The new law goes into effect January 1, 2024.
The new law increases the annual accrual of sick leave to 40 hours, with an accrual cap of 80 hours. The law specifies that employers must provide 24 hours of sick leave by the 120th day of employment and provide an additional 16 hours by the 200th calendar day of employment for a total of 40 hours.
Previously, the law also allowed employers to limit usage of paid sick leave to 24 hours per year. This limitation has also been increased to 40 hours. Furthermore, the law previously allowed employers to forgo the accrual and carryover method by frontloading the full amount of sick leave on an annual basis. Most employers use this “frontloading” method instead of accrual. “The full amount” was previously defined as 24 hours. Starting in 2024, the definition will be increased to 40 hours.
Employers must reinstate unused paid sick leave to employees rehired within one year of separation unless paid sick leave was cashed out. The amount of paid sick leave available must be listed on an itemized wage statement. Paid sick leave must be paid on the payday for the next regular payroll period after the sick leave was taken.
Another Senate Bill (Senate Bill 848) which takes effect on January 1, 2024, will require businesses to grant eligible employees up to five days off following a qualifying reproductive loss event. This new law guarantees time off from work following a miscarriage or other reproductive loss. The term “reproductive loss event” is defined to mean a failed adoption, failed surrogacy, miscarriage, stillbirth, or unsuccessful assisted reproduction. The law does not specifically include abortion in the list of qualifying events.
The new law prohibits employers from retaliating against employees who take time off after a reproductive loss event. Employers will be required to maintain employee confidentiality relating to reproductive loss leave. The new law does not require the leave time to be paid.
If an employee experiences more than one reproductive loss event within a twelve-month period, the employer is not obligated to grant a total amount of reproductive loss leave time in excess of twenty days within a twelve-month period.
There have been many other new employment laws passed this year which will be effective in 2024. It is imperative to have employee manuals and training programs revamped.
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]]>The post When to Consider Placing Life Insurance in a Trust appeared first on A law firm committed to the legal needs of businesses and entrepreneurs.
]]>Authored by Haley Price
Life insurance can play a critical role in protecting the financial well-being of loved ones in the event of an individual’s passing. One strategic approach to maximize the benefits of life insurance is to hold the policy in a trust. Whether or not you should put your life insurance in a trust depends on your specific financial situation, goals, and estate planning needs. The following are some potential benefits and considerations for holding life insurance in a trust:
The decision whether to hold life insurance in trust should be based on your individual needs, goals, and circumstances. Placing life insurance in a trust can reduce estate tax liability, provide additional creditor protection, provide control over distribution, and address complex family dynamics. To determine the best approach for you, it is essential to work with an experienced estate planning attorney and/or financial advisor who can assess your circumstances and provide tailored guidance.
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]]>The post The Lobb Report – September 2023 Business Owner Updates appeared first on A law firm committed to the legal needs of businesses and entrepreneurs.
]]>Authored by Mark Lobb
Welcome to the September version of The Lobb Report. The California legislative session ended on September 14. There have been major changes in employment laws but no major new tax laws. There are three separate ballot initiatives which are significant when it comes to tax increases which I will discuss in future Lobb Reports. Also, there is a senate bill (SB 770) which could move the state toward a single payor healthcare system with significant future tax ramifications for businesses.
This month’s edition focuses on new entity federal filing requirements along with some key new California employment laws.
Corporate Transparency Act: The effective date of the Corporate Transparency Act (CTA) is January 2024. Affected entities should be aware of the CTA requirements and begin preparing for the new reporting rules.
The stated goal of the CTA is to establish a central registry of beneficial owners of legal entities to provide transparency and combat money laundering and illicit financial activities by those who control smaller unregulated businesses. It is estimated the CTA will affect more than 32 million entities.
Domestic entities that are subject to reporting include C and S corporations, limited liability companies (LLCs), and other entities formed by the filing of a document with a Secretary of State or similar office. Foreign entities that are registered to do business in any state or tribal jurisdiction are also subject to the reporting requirements.
Certain entities are exempt from the definition of a “Reporting Company.” Exempt entities include:
Most all LLCs formed to hold real estate, intellectual property, or other property will be subject to reporting. Furthermore, although trusts are not currently subject to reporting, trusts that own or control at least 25% of a Reporting Company, and trustees who exercise substantial control over a Reporting Company are subject to reporting.
If a trust owns an interest in a Reporting Company, depending on the language of the trust, it may be necessary to disclose the trustee, the beneficiary, the grantor, or some combination of the foregoing.
Reporting Companies must disclose the legal name of the entity, any trade name associated with the business, the business address, certain jurisdiction information, and the US Internal Revenue Service taxpayer identification number associated with the entity.
Reporting Companies must also disclose certain personal information of the following:
The required disclosures for beneficial owners and company applicants include legal name, date of birth, current address, and an image of an identification document with a unique identifying number such as a passport.
As stated above, Reporting Companies created or registered before January 1, 2024, must file the initial BOI reports by January 1, 2025. Forming a non-exempt entity before the end of 2023 will result in not having to report until January 1, 2025.
The following is a checklist of considerations as we approach 2024:
Sara and David in our office can assist you in pulling the information together and making sure your filing is compliant.
California Minimum Wage Increase to $20 an Hour: Most California employers think the minimum wage is going to go from $15.50 in 2023 to $16 an hour in 2024. In part, that thought process is correct from a technical standpoint. However, AB 1228 which I discussed in my last Lobb Report has been negotiated by the Unions and Fast-Food Industry Representatives. The result is that the minimum wage for fast-food employees is to be raised to $20 an hour effective 2024. The Assembly and Senate immediately passed the legislation and Governor Newsome will soon sign the bill into law.
If fast-food employees receive a minimum wage of $20 an hour it is logical to conclude that all entry level employees who normally earn a minimum wage will receive $20 an hour. There is no reason to believe that an entry level person will work at a job other than in the fast-food industry if the wage is $4.00 an hour more in the world of fast-food. The fast-food representatives cut the deal with the Union representatives to avoid other draconian measures in the proposed AB 1228 which measures were negotiated out of the final version of the bill. The Unions have effectively taken control of decision making in Sacramento and leveraged one industry to affect all employers in California.
Employee Non-Compete Agreements: On September 1, 2023, California passed a new law which provides that any contract that is void under California law is unenforceable regardless of where and when the employee signed the contract.
In California, non-compete agreements with California employees are typically void. California Business and Professions (“B&P”) Code Section 16600 provides “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
In B&P section 16600.5 the new law states that “Any contract that is void under this chapter is unenforceable regardless of where and when the contract was signed.” The new code section goes on to include the following rules:
* An employer or former employer shall not attempt to enforce a contract that is void under this chapter regardless of whether the contract was signed, and the employment was maintained outside of California.
* An employer shall not enter into a contract with an employee or prospective employee that includes a provision that is void under this law.
* An employer that enters a contract that is void under this chapter or attempts to enforce a contract that is void under this law commits a civil violation.
* An employee, former employee, or prospective employee may bring a private action to enforce this law for injunctive relief or the recovery of actual damages, or both.
* Prevailing employee, former employee, or prospective employee in an action based on a violation of this law shall be entitled to recover reasonable attorney’s fees and costs.
The law is effective January 1, 2024. If your company has non-compete agreements in place, you should consider rescinding them immediately.
There is another bill which is waiting for the Governor’s signature. California AB 1076 voids all employment non-compete agreements no matter how narrowly tailored. This bill includes a notice requirement. Employers will be required to notify current and former employees in writing by February 14, 2024, that any noncompete clause or agreement they had entered are void.
It will now be common for plaintiff lawyers to add a claim in employee lawsuits alleging a violation of the new non-compete ban to trigger the attorney fees provision. Out-of-state employers will be disinclined to hire California employees. Furthermore, California employers will not be able to enforce out-of-state non-compete agreements.
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]]>Authored by David Kotik
During a recent conversation with a client, the question arose as to whether California currently imposes an estate tax. In response, we confirmed that California does not impose an estate tax. It is worth noting that California has previously imposed an estate tax, and there is no certainty that an estate tax will again be imposed. However, California’s repeal of the estate tax occurred through a ballot initiative known as Proposition 5 in 1982.
Despite being repealed in 1982, there have been attempts to reinstate an estate tax in California. A recent example occurred in 2019 when California State Senator Scott Wiener (D-San Francisco) announced the introduction of Senate Bill 378. Senate Bill 378 would have created a California estate tax modeled on the federal estate tax but with a lower exemption rate of $3.5 million or $7 million for a married couple. The tax rate was to be 40%. Mr. Wiener’s bill did not have support and died.
There are currently 16 states and the District of Columbia which have an estate or inheritance tax and one state has both. The states with an estate tax include Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania had an inheritance tax which is a tax to be paid by a beneficiary on the inheritance. Maryland has both an estate tax and an inheritance tax.
As mentioned before, at some point California may once again have an estate tax; it is likely a matter of time. Fortunately, of the states with an estate or inheritance tax, none of them are prime destinations for Californians migrating to other states. The primary destinations for our clients have been Nevada, Utah, Arizona, Texas, Florida, Idaho, and Tennessee.
With recent efforts made in California to reintroduce an estate tax coupled with the sunsetting provisions of the Tax Cuts and Jobs Act (“TCJA”), it has never been more important to tackle estate tax planning issues. There are various tools that can be implemented to minimize an individual’s federal estate tax liability through thoughtful planning tools. Feel free to reach out to one of our skilled team members to explore planning options tailored for both you and your family.
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]]>The post The Lobb Report – August 2023 Business and Business Owner Updates appeared first on A law firm committed to the legal needs of businesses and entrepreneurs.
]]>Authored by Mark Lobb
The August edition of the Lobb Report covers a wide range of topics for business owners from employment law to tax to asset protection. I hope you are having a profitable summer.
The content this month is focused heavily on new employment laws in California. A few years back I polled my clients and in order of their concerns in doing business in California were (1) employee liabilities, (2) taxation, and (3) regulatory issues. I thought taxes would be number one, but I was wrong. The Unions continue to dominate Sacramento legislation and it is forcing employers to automate or leave the state. Below are discussions regarding succession planning, caste discrimination, employee onboarding, employee arbitration agreements, I-9 changes, and monetized installment sales.
ESOPs: There was some panic over the past month about the viability of Employee Stock Ownership Plans (ESOPs) and the use of Incomplete Non-Grantor Trusts (INGs). It is good to be concerned, but do not abandon ship.
The News Release (IR 2023-144) issued on August 9, 2023, from the IRS is not a cause to avoid consideration of implementing an ESOP or fretting because you have already sold to an ESOP. I received some panic driven e-mail after the News Release. The IRS is going after improper valuations, abusive loans and other misdeeds which have nothing to do with legitimate ESOPs.
In the news release the Service states concerns about:
The Biden Administration and Congress are not against ESOP’s. For instance, Congress encouraged more ESOPs last year when it passed the broad retirement plan overhaul package dubbed SECURE Act 2.0. Under the Secure Act, the Department of Labor has launched an initiative to promote worker-owned businesses and has created the Division of Employee Ownership to support employee ownership. The IRS is simply trying to eliminate abuse and that is what is addressed in the News Release referenced above.
INGs: A great tool used by residents of some high tax states is the Incomplete Non-Grantor Trust. For instance, a business owner in California would fund stock in a Nevada ING and have the ING sell the stock to a third party. With this structure, California would not tax the proceeds from the sale of the stock. However, in July California passed a new law (SB 131) to eliminate this tax mitigation.
Is the use of Incomplete Non-Grantor Trusts for California residents dead? In my opinion, the answer is “no.” Although the new law seeks to substantially limit the use of INGs, I am not convinced the text of the new law accomplishes the intent of the legislators who voted for it or the governor who signed it into law.
As written, the new statute violates the due process clause. Taken literally, the state can tax a trust which is established by a non-resident, with a non-resident trustee and with discretionary resident beneficiaries or non-resident beneficiaries. The United States Supreme Court in Kaestner ruled in 2019 that such a law to violates the due process protections in the Constitution.
Provisions of SB 131 relating to INGs are set forth in California Revenue and Taxation Code 17082. The law imposes tax on INGs of a “qualified taxpayer” which is defined as “a grantor of an incomplete gift non-grantor trust.” What if the grantor was a non-resident at the time the gifting was completed, and the trust has an independent non-resident trustee, and the distributions are discretionary? What protections or benefits are being provided to the grantor relative to the trust or the trust itself? Take Connecticut as a contrast. Connecticut taxes resident trusts or estates which would exclude taxing of the trust structure described above. I am not suggesting California would seek to tax the example trust structure set forth above, but the language in the statute seems to allow it.
Next, the plain language of the statue states that it will not tax the trust income if the trust donates 90% of its distributable net income (DNI) to a charity. If there is nominal DNI and 90% of the nominal DNI is distributed to a charity in a year in which there is a large capital gains event, the capital gains will not be taxed by California.
I see other problems with SB 131, but the two items above are reasons why planners and clients should not completely ignore the use of INGs. INGs also still provide tax mitigation when selling certain subchapter C corporation stock as well as asset protection.
You may not think “caste” discrimination is an issue with your company. Think again. There is a bill which will likely become law that claims to be focused on “caste,” but goes much further and has the potential of creating a new avenue for extensive employee lawsuits for all businesses in California.
In July the California Senate approved SB 403 making “caste” a protected class within the state’s anti-discrimination statutes. The bill was amended and approved by the California Assembly on August 10, 2023. The bill will likely be signed into law by Governor Newsom.
Under the law, “caste” is defined as an “individual’s perceived position in a system of social stratification on the basis of inherited status,” which may be characterized by the following factors:
What does the bill mean to California employers? Technically, under current laws including the Fair Employment and Housing Act, provisions in the Education Code, and provisions in the Civil Code, discrimination on the basis of enumerated “protected characteristics” are prohibited. The people the bill seeks to protect are already protected.
The scope of the law seems to go far beyond caste-based discrimination. For instance, the concept of “social exclusion on the basis of perceived status” could mean almost anything in the context of someone not socially engaging with another. What does “perceived status” mean? What is “social exclusion?” There likely will be a fair amount of litigation brought as the result of the ambiguity of such terms.
California employers will need to revise their policy manuals and training programs to incorporate provisions and information regarding caste-based discrimination if and when this bill becomes law.
A recent California Court of Appeals decision (Alberto v. Cambrian Homecare) invalidated an employee arbitration agreement which an employee signed during the onboarding process.
In Alberto, the employee was required to sign a confidentiality agreement during the onboarding process along with a mandatory arbitration agreement. The court found that the separate arbitration agreement should be read together with the confidentiality agreement in determining conscionability. The court then held that because the confidentiality agreement was unconscionable, so too was the arbitration agreement.
What was wrong with the confidentiality agreement? The confidentiality agreement required the following:
Employers should review all onboarding documents to ensure reasonableness and enforceability. If one document used in the onboarding process is deemed unconscionable, the courts may well hold all documents in the onboarding process to be unenforceable. Importantly, many employers are still requiring employees to sign non-compete agreements which are not in compliance with California law. Such an agreement could cause the employee arbitration agreement to be invalidated.
IRS Proposed regulations released on August 3, 2023, identify monetized installment sale transactions and substantially similar transactions as listed transactions. A listed transaction is one in which the IRS requires to be separately disclosed because it has the potential to be a tax avoidance transaction. Material advisors and participants in these listed transactions are required to file disclosures with the IRS and will be subject to penalties for failure to disclose.
A transaction is “substantially similar” if it is expected to obtain the same or similar type of tax consequence and is either factually similar or based on the same or similar tax strategy.
I have written about monetized instalment sales in the past as they have been listed as a part of the IRS Dirty Dozen for the past three years. If you participated in a monetized installment sale or a transaction which may be deemed “substantially similar,” you need to consult with your tax advisors and monitor the status of the proposed regulations.
On July 24, 2023, the Office of Administrative Law approved the California Civil Rights Council’s proposed modifications to the regulations applicable to employer use of criminal history. The modifications will be effective October 1, 2023.
The regulations apply to employers. The new regulations expand the definition of “employer” to include “any entity that evaluates an applicant’s conviction history on behalf of an employer, or acts as an agent of an employer, directly or indirectly.”
California employers should note the following:
The regulations continue to require an employer to advise in the final decision letter of the individual’s “right to contest the decision by filing a complaint with the Civil Rights Department.” The regulations still do not require an employer to disclose to the applicant or employee its specific analysis of the criminal history, although an employer can choose to do so.
As an addendum to this, on August 21, 2023, the California Supreme Court ruled that an employer’s business entity agents can be held directly liable under FEHA for employment discrimination when the business entity agent has at least five employees and carries out FEHA regulated activities on behalf of an employer. This means professional screening companies can be held liable as the employer of the person being screened. The case is Raines v. U.S. Healthworks Medical Group. The Raines court reiterated that under FEHA, the term “employer” includes “any person regularly employing five or more persons, or any person acting as an agent of an employer, directly or indirectly…”
The reach of employee liabilities continues to expand. The scope of laws creating employer liability seems to grow monthly. The definition of “employer” continues to expand beyond the immediate employer making the class of “defendants” much larger and more enticing for plaintiff lawyers to bring actions.
I hope you have a great September. If there are certain topics you would like discussed, please let me know.
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]]>Authored by Mark Lobb
“Play by the rules but be ferocious.” (Phil Knight). This edition of the Lobb Report provides you with some new rules.
In the dynamic world of commerce, laws concerning businesses and business owners are evolving, impacting how closely held companies operate. As a responsible business owner, staying abreast of changes in the law is not only crucial for compliance but also essential for safeguarding the longevity and success of the enterprise.
Welcome to another month of our legal updates tailored specifically for business owners. Here, we aim to provide you with timely and relevant information on recent legal developments that may impact your business operations, responsibilities, and overall legal landscape.
The information presented here seeks to serve as a valuable resource to help you navigate through the complexities of the legal world. From shifts in labor laws, taxation updates, intellectual property regulations, data protection measures, to corporate governance guidelines – our goal is to keep you up to date.
While the information provided here is comprehensive and accurate to the best of our abilities, it should not be considered as legal advice, but rather guidance so you can seek legal advice if you see any new rule or rule change specific to your situation.
PAGA took effect on January 1, 2004, deputizing “aggrieved” employees to act on behalf of the state of California to bring claims for violations of the California Labor Code on behalf of other alleged aggrieved employees. PAGA allows employees to collect civil penalties on behalf of themselves and others with 25% of the collective penalties distributed to alleged aggrieved employees and the other 75% distributed to the state of California.
In Adolph, the California Supreme Court places limits on litigating representative claims when there are arbitrable individual PAGA claims. The Court states that if the arbitrator determines the plaintiff is not aggrieved, the plaintiff can “no longer prosecute non-individual claims due to lack of standing.” The arbitrator must first find a PAGA plaintiff is an “aggrieved employee” before a case may proceed on a representative basis in the trial court. If a plaintiff loses the individual PAGA claim in arbitration, the plaintiff should lose standing to pursue that claim in a representative capacity in the trial court. Employers in California should seek to have all employees sign arbitration agreements and enforce and compel arbitration of individual PAGA claims under properly drafted arbitration agreements.
Lobb’s Comments: PAGA does not exist to protect or make whole employees. The employees receive very little out of a PAGA settlement. PAGA is a disguised tax on employers. The state of California has no interest in limiting the impact of this tax on employers and although the courts may provide periodic assistance to employers through certain decisions, PAGA will continue to drive employers out of California which certainly has an impact on employees. Adolph provides a tool for employers to combat the PAGA tax, but only through the voter initiative process will any real relief be provided.
There are still reasons to use INGs, but there are few states left where INGs can be used to avoid state tax. For instance, if you own C corporation stock, under certain circumstances, you can substantially avoid paying federal tax using INGs. INGs are asset protection trusts and are valuable estate planning tools. If you are interested in using INGs, they still provide value. If you have an ING you should consult with us to determine the future use of the ING. Also, the new law does not eliminate the use of a complete gift non-grantor trust to eliminate California state tax.
owners of closely held corporations. Decisions regarding the structuring of compensation require detailed consideration.
A recent Tax Court decision addressed a corporate deduction for bonuses paid to its CEO [Clary Hood, Inc. v. Commissioner, No. 22-1573 (4th Cir. May 31, 2023)]. In Clary, the Tax Court disallowed a portion of a corporation’s IRC section 162 deduction for bonuses paid to the CEO. The Tax Court applied a multifactor test to determine that not all of the CEO’s compensation was attributable to personal services. The court noted that the corporation had never paid dividends and compared the compensation against that paid to executives at other companies. (The appellate court vacated and remanded the Tax Court’s imposition of an underpayment penalty, finding that the reasonable-cause defense should have applied based on advice received from third-party accountants).
Executive compensation issues can be complicated and there are many factors to consider when determining how that compensation should be taken by stakeholders working in the company.
To qualify, taxpayers must enter into closing agreements and pay all tax, interest, and reduced penalties between July 10 and November 17. The amount of reduced or eliminated penalties depends on how far taxpayers are in contacts, audits, assessments, or resolutions with the FTB or IRS regarding the transactions.
Under the settlement resolution notice, taxpayers completing a closing agreement would avoid the non-economic substance transaction understatement penalty, which is 40% of the understatement, or 20% if it is adequately disclosed. They will not get hit with fraud penalties, reportable transaction accuracy-related penalties, or increased interest. They will have to deal with California’s large corporate understatement penalty, if applicable along with previously imposed penalties for failure to include reportable transactions information on their tax return, but retain the ability to file a claim for refund of that penalty or ask the FTB chief counsel for penalty relief.
The following should be noted:
If you have a micro-captive insurance company, California’s settlement offer may not be the best option if the company is not being audited or in the dispute process. No matter what, having a strategic wind-down process is important.
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