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SALE OF CONTRACT RIGHTS

If your client is a business owner who, individually or through his business, owns valuable contract rights and has an opportunity to sell those rights to a third party, when can he or she treat income from such a sale as capital gains?  Under the link below is a blog that provides a brief but excellent discussion of this difficult question.

Here’s the link:

http://www.taxlawforchb.com/2017/07/sale-of-a-contract-capital-gain-or-ordinary-income/

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NEW HAMPSHIRE TAX DEVELOPMENTS

For those interested in New Hampshire state taxation, the following update from CCH will be of interest:

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S.10,New Hampshire—Corporate Income, Utilities Taxes: Correction: IRC Conformity Updated and BPT/BET Rates Reduced,(Jul. 12, 2017)

Governor Sununu of New Hampshire has approved legislation that reduces the tax rates of the business profits tax and the business enterprise tax, updates the state’s conformity with the Internal Revenue Code, increases the IRC Sec. 179 deduction limit, and repeals the electricity consumption tax. The legislation reduces in two steps the business profits tax and the business enterprise tax rates. The business profits tax will be imposed at the rate of 7.7% on the taxable business profits of every business organization for tax periods ending on or after December 31, 2019 and at the rate of 7.5% for tax periods ending on or after December 31, 2021. [A previous story omitted the applicable dates for the rate changes.] Currently, the rate is 8.2%. The rate is scheduled to be reduced to 7.9% for tax periods ending on or after December 31, 2018 if certain state revenue levels were met by June 30, 2017.

The business enterprise tax will be imposed at the rate of 0.6% of the taxable enterprise value tax base for tax periods ending on or after December 31, 2019 and at the rate of 0.5% for tax periods ending on or after December 31, 2021. [A previous story omitted the applicable dates for the rate changes.] Currently, the rate is 0.72%. The rate is scheduled to be reduced to 0.675% for tax periods ending on or after December 31, 2018 if certain state revenue levels were met by June 30, 2017.

The legislation also updates the state’s Internal Revenue Code (IRC) tie-in date for purposes of computing New Hampshire’s business profits tax liability to December 31, 2016 (currently, December 31, 2015). This change applies to tax periods beginning on or after January 1, 2018. It is effective June 28, 2017.

Further, IRC §179 (asset expense election) will be subject to a deduction limit of $500,000 for property placed in service on or after January 1, 2018. Currently, the limit is $100,000 for property placed in service on or after January 1, 2017. These changes are effective January 1, 2018.

The electricity consumption tax is repealed effective January 1, 2019.

Ch. 156 (H.B. 517), Laws 2017, effective July 1, 2017, except as noted above

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NEW ARTICLE ON TAX CHOICE OF ENTITY

Tax choice of entity is a critical task in any LLC formation.  Below is the cite to a new law journal article about LLCs and tax choice of entity:

9 Elon L. Rev. 311
Elon Law Review
2017
Article
Caolan J. Ronan
Copyright © 2017 by Elon University; Caolan J. Ronan
START-UPS: WHY INVESTORS PREFER THE CORPORATE FORM TO THE L.L.C. FOR TAX PURPOSES

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SELF-EMPLOYMENT TAX OF LLC MEMBERS

Most multi-member LLCs are taxable as partnerships.  A key task of lawyers forming LLCs is often to minimize the Self-Employment Tax exposure of the members of these LLCs.  The post under the link below discusses a recent Tax Court case addressing the SET liability of the members of a multi-member LLC whose members were lawyers, and it finds that because all of these functioned like general partners of their multi-member LLC, all were liable for that tax.

However, the post does not discuss the usefulness of Prop. Reg. § 1.1402(a)-2 (the “Prop. Reg.”) in protecting from SET liability the members of multi-member LLCs taxable as partnerships.  The IRS has twice stated in public forums that the Prop. Reg. is its audit guideline for the SET liability of partners in entities taxable as partnerships.  Thus, the Prop. Reg. is a powerful tax-avoidance tool for LLC lawyers and their clients.

Here’s the link:  http://www.taxlawforchb.com/2017/06/self-employment-tax-llcs-the-limited-partner-exclusion/

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S CORPORATION TAXATION

Many LLCs are taxable as S corporations, and far more should be.  The attached post under the link below addresses a couple of fundamental and pervasive S corporation issues about basis and losses.  The post applies, of course, as much to LLCs that are S corporations as to state-law business corporations that are S corporations.

Here is the link:   http://www.taxlawforchb.com/2017/05/s-corps-basis-loss-limitations/

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WHAT EVERY BUSINESS OWNER SHOULD KNOW ABOUT PRIVATE FOUNDATIONS

The post under the link below provides basic information that business owners should know about private foundations.

Here’s the link: http://www.taxlawforchb.com/2017/04/private-foundations-a-primer-for-the-business-owner/

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THE NEW PARTNERSHIP AUDIT RULES

Under the link below is a brief but fairly good post summarizing the new and draconian federal statutory partnership audit rules that, for most multi-member LLCs taxable as partnerships, will become effective on 1-1-18.  A few comments about the post:

  1. Puzzlingly, the post doesn’t mention the key fact that under the above rules, the federal tax on any partnership audit deficiency will be a terrifying 39.6 percent.
  2. The post doesn’t mention that even if your LLC qualifies as a “small partnership” exempt from the rules, you need to elect out of coverage by the rules in your annual federal tax return.
  3. The post suggests that LLCs with members that are trusts and single-member LLCs may still qualify as “small partnerships” under the rules.  Based on certain recent Treasury statements, this suggestion is very probably incorrect.
  4. The post does not describe even briefly the types of audit provisions that the operating agreements of LLCs taxable as partnerships and other partnership entities ought to include.
  5. The post does not address the issue whether tax professionals whose clients are partnership entities should offer or agree to be available to serve as partnership audit “partnership representatives” for their clients.  I think they should, as long as the governing operating agreement  provides them with adequate contractual protection.

Chapter 50A in Drafting Limited Liability Company Operating Agreements, my Wolters Kluwer LLC formbook and practice manual, addresses all of the above issues.  If anyone would like a summary of the chapter by e-mail. I will be glad to provide you with one.

Here is the link to the above post:   http://www.lexology.com/library/detail.aspx?g=6fea3fe5-9c8a-4b37-a766-ab1666cefd36&l=7UML737

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CONTRIBUTING PROPERTY TO A PARTNERSHIP

LLC lawyers are sometimes asked by clients about the tax issues in contributing property to multi-member LLCs taxable as partnerships. The post under the link below provides brief but very helpful advice about deferring federal income tax in these situations.

Here’s the link: http://www.taxlawforchb.com/2017/03/protecting-tax-deferral-for-a-contribution-to-a-partnership/

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GETTING STEPPED-UP BASIS IN ASSET PURCHASES

The new post under the link below provides guidelines on how you can help your clients ensure that they get stepped-up basis in asset acquisitions.

Here’s the link:

http://www.taxlawforchb.com/2017/03/a-buyers-guide-to-acquiring-targets-assets-with-a-stepped-up-basis/

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S CORP ISSUES ON WHICH THE IRS WILL NOT ISSUE PRIVATE LETTER RULINGS

An ever-increasing number of LLCs are making S elections; so LLC accountants who advise their clients about S corporation matters need to follow IRS Subchapter S developments.

Under the link below is a new post about a recent IRS announcement as to three S corporation issues on which the IRS will no longer issue private letter rulings to taxpayers including, of course, LLCs taxable as S corporations and their members.  These issues involve disproportionate distributions, certain types of agreements and other arrangements among shareholders raising single-class-of-stock issues, and certain types of defective S corporation filings.

Here is the link: http://www.lexology.com/library/detail.aspx?g=b82bfc37-1bf2-4217-b510-5afd783485ef&l=7U9VCHQ

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