Blog

Tuesday, September 22, 2015

PHH Mortgage Fraud

Because Attorney Jason McGrath and this law firm handle foreclosure and mortgage dispute cases on a daily basis, we are well familiar with some of the crazy circumstances which one may encounter when dealing with the big banks and large loan servicers. In this video, Mr. McGrath discusses how the federal government’s lawsuit against PHH Mortgage may be impacting that entity’s ability to handle its business, including its distressed mortgage cases.



https://youtu.be/AJTYGhYNdZw

 

Friday, September 18, 2015

Post-Foreclosure Deficiency Judgments in NC

Because of his extensive work in the area of foreclosures and post-foreclosure lawsuits, Attorney Jason McGrath is frequently asked about whether a foreclosing party/creditor (such as the lender, loan note holder, etc.) will be able to collect money from the borrowers after foreclosure occurs. In this video, which is specifically geared toward such circumstances in North Carolina, Mr. McGrath explains how a recent court decision may impact post-foreclosure deficiency judgment lawsuits in North Carolina.



https://youtu.be/xL-vJ3n7BYw

post-foreclosure

Tuesday, September 8, 2015

Private Mortgage Insurance (PMI) – What is the Borrower Really Paying for?

Private Mortgage Insurance (PMI) – What is the Borrower Really Paying for?



As attorneys who provide a variety of real estate and mortgage related services, including real estate closings and handling real estate disputes, we know that many (most?) borrowers really don’t understand private mortgage insurance. Known as PMI, private mortgage insurance is to benefit the lender, not the borrower – even though the borrower is paying for it.



We’ve advised borrowers about this in various contexts, including when a mortgage insurance company sues the borrower to recover monies the insurance company paid out pursuant to the policy. For more about mortgage insurance companies suing borrowers, including in post-foreclosure situations, click here.



PMI is typically required if the circumstances include a private mortgage loan in which less than 20% of the sales price / appraised value is put down up front. From the lender standpoint, PMI is a very good thing – the borrower has to pay for an insurance policy which names the lender as the beneficiary, with the lender (or whomever ends up owning the loan) potentially being able to make a claim on the policy if the borrower defaults on the loan, and that default results in the lender not being paid back in full.



In most situations, the premium payments the borrower has to make for private mortgage insurance are rolled into the borrower’s monthly “mortgage payment”. The details regarding the original PMI agreement, including the payment amount, are known in advance of the real estate closing. Borrowers / buyers should be asking questions about PMI before closing as compared to after (although better to ask afterwards and know than to not ask at all).



It’s also extremely important to know when you might be able to cancel your PMI – and the related payments, thus decreasing your monthly payment by hundreds of dollars. This sentence will link to our blog on canceling PMI once that is published in the near future; you should subscribe to our blog (see the upper right side of this page to do so) if you’d like to receive that update.  



We encourage all of our real estate clients to be or become informed ones, and we assist in that process. After all, knowledge is power.

Wednesday, September 2, 2015

Mediation

Whether mediation is court ordered, required by some prior contract/agreement, or occurs as a result of parties to a lawsuit agreeing to mediate, mediation is often an excellent opportunity to resolve a lawsuit. In his 19 years as trial lawyer, Jason McGrath has mediated many cases and in this video he explains how mediation works.



https://youtu.be/TiNYEiqgB4Y

If you are facing a lawsuit in North Carolina please fill out our confidential client intake form for legal assistance.

Tuesday, September 1, 2015

Being Sued by a Mortgage Insurance Company for an Insurance Policy you Paid for?

Being Sued by a Mortgage Insurance Company for an Insurance Policy you Paid for?



As attorneys who provide a variety of real estate and mortgage related services, including foreclosures and post-foreclosure disputes, we know that many (most?) borrowers really don’t understand private mortgage insurance. Known as PMI, private mortgage insurance is to benefit the lender, not the borrower – even though the borrower is paying for it.



What makes it worse from the borrower’s perspective is that, in addition to being foreclosed on, a borrower can end up being sued by the mortgage insurance company in relation to the very same policy the borrower paid for. The highly technical terms we use to describe this include:



[caption id="attachment_9288" align="alignleft" width="130"]The Gut Punch The Gut Punch[/caption]

[caption id="attachment_9289" align="alignleft" width="110"]Getting Hit Below the Belt Getting Hit Below the Belt[/caption]

[caption id="attachment_9287" align="alignleft" width="130"]The Double Whammy The Double Whammy[/caption]

 

 

 

 

 

 

We’ve advised and defended borrowers in these cases. The most common fact scenario is this one:




  1. a foreclosure takes place (or sometimes even a short sale or a deed-in-lieu of foreclosure);

  2. the loan is not paid off in full;

  3. the creditor (lender / loan note holder) makes a claim against the private mortgage insurance policy;

  4. the mortgage insurance company pays the creditor to reimburse it for its losses on the loan;

  5. the mortgage insurance company sues the borrower / former homeowner, under the theory of “We only had to pay out on this policy because you didn’t pay the loan off in full, so you owe us”; and

  6. the borrower is shocked, comes to us for help.



We’ve seen cases in which the mortgage insurance company may not actually have paid out the money it was seeking to recover, in which the mortgage insurance company was unable to even produce the insurance policy at issue, and in which the borrower has been assured by the persons involved in the deal (before our involvement) that the borrower was going to be “free and clear” after a foreclosure, short sale, or deed-in-lieu. However, we’ve also seen cases in which the borrower did appear to legally owe the monies being sought by the insurance company.



These cases usually – in our experience and based on our assistance – go away without the borrower having to pay what the mortgage insurance company is seeking. However, each case and each client is different, and no guarantees or predictions can be made. The bottom line is that anyone wanting to reach a settlement with the lender / note holder before the property is disposed of and anyone who has been notified of a claim against them related to PMI should be educated and informed and perhaps seek professional assistance.



 

Tuesday, August 25, 2015

Negotiating with a Bank: Why do I have to Provide My Financials?

Negotiating with a Bank: Why do I have to Provide My Financials?



 

McGrath & Spielberger logo imageThe attorneys in my Firm represent clients against banks and other creditors on a regular basis. Whether it’s in a civil lawsuit, a foreclosure case, a situation which has not yet reached the litigation stage, or a post-judgment matter, negotiations just about always take place. In most all of these cases, we have a conversation with our client like the one below when the time comes to discuss the settlement offer I’m going to make on behalf of the client.



ME: In order to consider a settlement offer, the bank is requiring you to fill out this financial worksheet return it and to provide records such as your most recent 2 months of bank statements – complete, every single page, even the very last page of the bank statement which essentially says nothing.



CLIENT: Well, I don’t want to do that.



ME: I don’t blame you, I wouldn’t want to do it either.



CLIENT: So I don’t have to do it?



ME: Well, you don’t have to do anything – at least not unless there’s a court order or similar that says you have to do it. There’s no court order here which says you have to provide your financials.



CLIENT: Well that’s good.



ME: I agree.



CLIENT: Why does the bank want this stuff?



ME: Mostly so it can make an informed decision as to whether it makes sense to settle – and at what amount – versus pursuing you through the legal system for the full amount. Also, these creditors want to know if you can pay but don’t want to, or truly cannot pay, at least not right now. Of course, they can come after you for years, sometimes even decades. Also, if no settlement is reached, they want a head start on knowing what there might be for them to collect and where it is.



CLIENT: So if I provide my financials, they might use that information against me.



ME: This is true. I hope it doesn’t come to that, and we’re going to work hard to avoid that.



CLIENT: So what happens if I don’t provide my financials?



ME: If you don’t provide them, the bank is not going to consider any settlement offer and/or will assume that you have plenty of money and can pay the entire amount claimed.



CLIENT: Yes but how can the bank make me provide the financials?



ME: Again, at this stage they can’t “make” you – it’s up to you, you can decide what to provide and what not to provide. This is a voluntary negotiation, and each side can more or less choose to do – or not do – what it wants. That means you can decide not to provide your financials, but the bank can then decide not to negotiate with you.



CLIENT: I need to settle this case.



ME: Unfortunately, then, you probably need to provide your financials.



CLIENT: <sigh> Ok.



ME: Don’t worry, we’ll take a look at everything first, analyze how it may impact the settlement negotiations, and bring you up to speed on that before anything gets sent out – for now it’s confidential and privileged between you and us until and unless you direct us to share it with the bank or anyone else.



       Also, we’ll make sure that what we are send to the other side is done so as part of confidential, privileged, and non-admissible settlement negotiations. That will make it harder for the bank to use it against you later, or limit the ways the bank can use it, if a settlement can’t be reached.



CLIENT: This kind of sucks, but I guess I feel a little bit better about it than I did a few minutes ago.



ME: I wish you weren’t in this situation, but we’ll do what we can do. We can never guarantee how a case will go or what the end result will be – nobody can, and we’re not allowed to do that anyhow – but it’s pretty rare that we can’t get something worked out on behalf of a client.



CLIENT: Ok, I’ll get this financial data back to you later this week. .



ME: Great, thanks. We’ll look it over and get back to you with further advice within a few days of you providing that to us. Hang in there.

Monday, August 24, 2015

Summary Judgment

Motions for summary judgment can result in a case being immediately won or lost, and thus are incredibly important. Attorney Jason McGrath explains motions for summary judgment and summary judgments themselves based on his 19 years of experience as a trial attorney.



https://youtu.be/3sqK5FJes7o

If you are facing a lawsuit in North Carolina please fill out our confidential client intake form for legal assistance.

Wednesday, August 19, 2015

Tax Rates on Ordinary Income for Businesses

Tax Rates on Ordinary Income for Businesses



When you decide to start a business venture, there are a myriad of things to consider.  We regularly assist small business owners, especially start-up businesses, walking them through the steps that need to be taken in order to make the business official and legal.  There are many ways a business can be organized and there are both non-tax and tax factors as well as state and local statutory requirements that need to be taken into consideration when embarking on this exciting journey of starting a business.

I previously wrote an article regarding the non-tax factors that should be considered when starting a business.  This article is one of a series of articles that focuses on the tax implications of certain business activities and things you should consider when choosing your business entity.  The most prominent federal tax considerations in choosing a business entity include:



This article discusses the tax rates for businesses and business owners.



Ordinary Income Tax Rates



For most C corporations that have significant taxable income, the corporate income tax rate is essentially a flat rate of 34-35%.  Corporations with smaller amounts of income enjoy lower rates (15-25%) on their first $75,000 of taxable income.  As you can see below, a very small number of small businesses will receive the lower tax rates of 15 and 25%.



corporate tax ratesAdditionally, certain personal service corporations (i.e., lawyers, accountants, architects, and the like) are not entitled to graduated tax rates but receive a flat rate of 35%.  Individuals pay tax at the graduated rates of 15%, 28%, 31%, 36%, and 39.6%.



With a presidential election fast approaching and presidential hopefuls throwing their hat in the ring, you can expect some campaign talk of tax reform.  On the corporate side, Marco Rubio has talked about tax reform that would lower the tax rate for corporations and passthroughs to 25% (although many of the credits and deductions would be eliminated) and allow businesses to expense the cost of their investments 100% in the year of acquisition.  On individual tax reform, Rubio proposes reducing the number of individual tax brackets from 7 to 2 (15% and 35%), eliminate the standard deduction and replace it with a refundable personal credit, and create a $2,500 child tax credit.



Bag with income taxThe relationships among these tax rates can greatly influence the choice of entity.  At one time the maximum individual tax rate on ordinary income peaked at 70% and the top corporate tax rate was 46%, making forming a C corporation an attractive option to avoid the higher individual tax rates.  The difference in rates prompted most business owners to organize their entities as a corporation rather than a pass-through entity because corporate income was taxed at much lower rates.  During these high individual tax rate times, shareholders that wished to withdraw earnings created tax efficient strategies to avoid the double tax (e.g., owner-employees of a C corporation would distribute profits in the form of salary or fringe benefits, which are tax-deductible by the corporation and the fringe benefits are excludable from income of the employee in most situations).  Shareholders also loaned money or leased property to C corporations and withdrew earnings from the corporation in the form of rent or interest payments that were tax deductible as well.  The IRS began to crack down on these strategies and attacked payments of salary or interest as unreasonable compensation or disguised dividends.  Congress fought back by enacting penalties to patrol against excessive accumulations or avoidance of the individual progressive tax rates.  It wasn't hard for a corporation with good tax planning to justify the payment of reasonable compensation and accumulation of earnings on the basis of reasonable business judgment and thereby avoid constructive dividends and the corporate penalty tax.



Now, individuals and corporations are subject to the same top tax rate and dividends and long-term capital gains are both taxed at relatively low rates, the C corporation earnings accumulation strategy is much less compelling.  The parity in the individual and corporate tax rates, in conjunction with the prospect of two levels of tax when a C corporation is sold, provides a greater incentive to use a pass-through entity instead of a C corporation, particularly if the business intends to distribute its earnings currently, does not have owners who work for the firm, or holds assets that are likely to appreciate in value over a relatively short time frame.  It would not be beneficial to organize a venture that invests in passive assets such as real estate or financial assets to operate as a C corporation because the costs of doing so would be prohibitive in light of the double tax.  In some cases, however, C corporations still offer tax savings, especially for businesses able to pay out most of their earnings as compensation to their high-income owners.



For a complete analysis of the tax implications of C Corporations, Partnerships, and S Corporations click here for the Joint Committee on Taxation's publication entitled "Choice of Business Entity: Present Law and Data Relating to C Corporations, Partnerships, and S Corporations."



Attorney Angel Oliver / McGrath and Spielberger, PLLC assists clients with all sorts of tax matters, both federal and state (including but not limited to North Carolina and South Carolina). Click here to contact Ms. Oliver about your tax matter.

Tuesday, August 18, 2015

Mortgage Loans: Recourse versus Non-Recourse and Foreclosure Related Deficiency Judgments

Mortgage Loans: Recourse versus Non-Recourse and Foreclosure-Related
Deficiency Judgments





As attorneys who handle real estate loan closings, mortgage loan disputes, mortgage loan loss mitigation matters, and foreclosure cases, we are frequently asked questions about recourse versus non-recourse loans, foreclosure-related deficiency balances and related legal judgments, and similar issues. The intent of this short article is to provide some information on these topics from our perspective, keeping in mind that our primary jurisdictions of practice are North Carolina and South Carolina (we also practice in FL, GA, OH, and TN).



Recourse mortgage loans versus non-recourse mortgage loans



Although the terms “recourse mortgage loan” and “non-recourse mortgage loan” are not commonly used in North Carolina, they are common nationwide and are often misused and misunderstood. A recourse loan is one which allows the lender (or whomever later acquires the loan) to foreclose upon violation of the loan terms (assuming that a valid deed of trust or similar is in place) and also allows the creditor the additional recourse of pursuing monetary damages from the borrower and any guarantors, etc. if the foreclosure sale proceeds are not enough to cover what is owed to the creditor.



In contrast, a non-recourse mortgage loan is one in which the creditor does not have the right to pursue the borrower and any other potentially obligated parties for monetary damages. Rather the creditor is limited to foreclosing on the property that serves as collateral for the loan (again assuming that a valid deed of trust or similar is in place).



Regardless of which side you are on, lender or borrower, it is absolutely crucial that you know exactly which type of loan is being contemplated or has been entered into. Recourse loans are more common in residential lending as compared to commercial lending, but not so much that any assumptions should ever be made.



Deficiencies and deficiency judgments



A “deficiency” in the mortgage loan context is related to the concept of recourse versus non-recourse mortgage loans. If the net proceeds from a foreclosure sale are not enough to make the creditor whole, and if the loan was a recourse loan, the creditor would typically be entitled to – or entitled to further seek – monetary damages from the borrower, any guarantors, etc.



The amount that the creditor believes it is legally entitled to still recover is typically called the deficiency. The creditor – whether by a separate, post-foreclosure civil lawsuit (the typical process in North Carolina) or by way of the foreclosure litigation itself (South Carolina) – can seek a judgment which states that it is entitled to that amount. This is typically referred to as a “deficiency judgment”.



We regularly assist clients in matters involving, or potentially involving, deficiencies and deficiency judgments. It’s fundamentally important to understand when the creditor may be able to seek the same, and whether doing so is going to make economic sense; sometimes spending $20,000.00 to possibly recover $50,000.00 simply isn’t worth if it some compromise can be reached. Both creditors and debtors may have good reasons to resolve such issues via settlement, but litigation always looms if not.

Friday, August 14, 2015

Responding to a Lawsuit Complaint

Based on his 19 years as a trial lawyer, Attorney Jason McGrath provides some fundamental and important information with regard to responding to a lawsuit after a defendant has been served with a summons and complaint by a plaintiff. His comments are more specific to North Carolina lawsuits, but have a general application nationwide.



https://www.youtube.com/watch?v=qBzkQaQysDQ

If you are in need of legal assistance with a Lawsuit in North Carolina, South Carolina, Tennessee, Georgia or Florida please fill out our confidential client intake form.

Attorney Termination of an Attorney-Client Relationship in North Carolina

Attorney Termination of an Attorney-Client Relationship in North Carolina



This topic came up again at yesterday's Mecklenburg County Bar Solo & Small Firm Section meeting, and I thought I would this publicize the below email exchange between myself and the North Carolina State Bar (ethics counsel). The below is not intended to be a comprehensive guide on this topic, but should be helpful in handling this often tricky situation. Good luck!

===============================



From: Jason McGrath [mailto:jason@McGrathSpielberger.com]
Sent: Sunday, July 06, 2014 2:31 PM
To: Ethics Advice
Subject: Q regarding cessation of work when client not in compliance with the attorney-client agreement

Good afternoon. I would appreciate your guidance on a very fundamental issue: whether there are any prohibitions on ceasing work if client has failed to pay fees as agreed, or has ceased all communication and stopped participating in the matter for a sufficient time. Briefly:


  1. Written and executed attorney-client agreement (“ACA”).

  2. ACA states that included in client’s duties are: (a) the need to pay the fees as agreed; and (b) the need to actively participate and timely communicate with regard to the case.

  3. ACA states that firm/attorney is not required to continue work, unless otherwise required by court order or the rules of professional conduct, if client does not pay as agreed. and/or does not actively participate and communicate.

  4. Client has not paid as agreed, and reasonable efforts to get Client to do so have failed . ..  AND/OR 4(a) Client has ceased participation and is non-responsive, and reasonable follow up efforts have failed to gain contact or response.



As long as firm/attorney is following the agreed-upon terms of the ACA, and there is no court order, etc. to the contrary, is there any reason that firm/attorney cannot cease work on the file, notifying Client of same, due to Client’s non-compliance?

Thank you!

=====================================================================

RESPONSE FROM NC STATE BAR:

Jason,

Thank you for your inquiry.

You need to follow Rule 1.16(c) and (d).

Rule 1.16 Declining or Terminating Representation



(c) A lawyer must comply with applicable law requiring notice to or permission of a tribunal when terminating a representation. When ordered to do so by a tribunal, a lawyer shall continue representation notwithstanding good cause for terminating the representation.

(d) Upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client's interests, such as giving reasonable notice to the client, allowing time for employment of other counsel, surrendering papers and property to which the client is entitled and refunding any advance payment of fee or expense that has not been earned or incurred. The lawyer may retain papers relating to the client to the extent permitted by other law.

In addition, you should send the client a disengagement letter.

A Disengagement Letter Should:


  • Provide reasonable notice.

  • Identify the matter that is the subject of the letter.

  • Clearly state the position of the firm/lawyer in terminating the employment and the reason for the termination.

  • Affirm the current status of the case and remind the client of any pending deadlines. (Recommendations from malpractice carriers are to be careful with statements about exact dates or deadlines because a misstatement can expose the lawyer to a malpractice claim.)

  • If a matter is in court, explain that the lawyer is filing a motion to withdraw and that the lawyer remains counsel of record unless and until the court allows her to withdraw.

  • Encourage the client to seek other legal counsel as soon as possible.

  • Summarize the status of any fees and costs collected and outstanding.

  • Explain any remaining charges for legal fees.

  • Include arrangements for transfer of funds on deposit in the trust account.

  • Include arrangements to transfer client file.

  • Suggest that the client keep copies of any documents you have sent them in the matter.



Please let me know if I can assist you further.

 

Assistant Ethics Counsel

North Carolina State Bar

PO Box 25908

Raleigh, NC 27611-5908

919-828-4620, ext. 238

Please be advised that the contents of this message and any reply may be subject to disclosure under North Carolina law. Informal ethics inquiries and advisories communicated via electronic mail are confidential pursuant to Rule 1.6 of the Rules of Professional Conduct. Attorney Client Assistance Program communications and Lawyer Assistance Program client communications via electronic mail are also treated as confidential pursuant to Rule 1.6 of the Rules of Professional Conduct and N.C. Gen. Stat. 84-32.1.

 

Tuesday, August 4, 2015

Employment Tax Considerations in Starting a Business

Employment Tax Considerations in Starting a Business



When you decide to start a business venture, there are a myriad of things to consider.  We regularly assist small business owners, especially start-up businesses, walking them through the steps that need to be taken in order to make the business official and legal.  There are many ways a business can be organized and there are both non-tax and tax factors as well as state and local statutory requirements that need to be taken into consideration when embarking on this exciting journey of starting a business.

I previously wrote an article regarding the non-tax factors that should be considered when starting a business.  This article is one of a series of articles that focuses on the tax implications of certain business activities and things you should consider when choosing your business entity.  The most prominent federal tax considerations in choosing a business entity include:



This article focuses on the employment tax considerations in starting a business.

rain taxesWhen a principal owner of a business is also a service provider, employment taxes can be an influential factor in choosing the legal form for a business.  Employment taxes are imposed in addition to income taxes on employee wages and on net earnings from self-employment.  For instance, half of the employment tax on wages is paid by the employee through withholding and the other half is paid by the employer, which may deduct the tax as a business expense.  A self-employed individual, such as a sole proprietor or a general partner who derives income from a trade or business conducted by a partnership in which he is a partner, must pay a 15.3% rate (12.4% for social security and 2.9% for Medicare) on self-employment income up to a wage base $117,000 in 2014.  Self-employed taxpayers may take an above-the-line deduction for one-half of self-employment tax paid and an additional 2.9% Medicare tax on all income from self-employment.  In 2013, the Medicare tax rate increased to 3.8% for taxpayers with self-employment income above certain thresholds ($250,000 for a joint return, $125,000 for a married filing separate return, and in any other case $200,000).

S corporations are often used by service providers to avoid the uncapped Medicare portion of self-employment taxes.  For example, Architect, a single taxpayer, has $300,000 of net earnings from self employment and no other earned income.  If he is a sole proprietor, his self-employment tax will be $46,800 ($11,400 in Medicare Tax and $37,200 in Social Security Tax) on the entire $300,000.  That does not include amounts that he will pay for federal income tax.  If the Architect incorporates his business using an S corporation which nets the same $300,000 in income and pays Architect a salary of $300,000, he could potentially save $24,300 in self-employment taxes.  When the company pays him a salary the company pays half of the medicare and social security taxes and takes a deduction for those taxes paid.  If the company pays a portion of the income as a dividend or distribution to Architect instead of as a salary you have to be careful.  In cases where little or no compensation is paid and the S corporation distributes a large dividend to its sole owner, the IRS will likely reclassify all or part of the dividend as wages for employment tax purposes.

Employment taxes may also influence the choice between a limited partnership and an LLC.  Limited partners generally are not subject to self-employment tax on their distributive share of partnership income (apart from salary-like guaranteed payments).  The law regarding the treatment of LLC members was uncertain for some time and created an opportunity for tax avoidance by LLC members who were active in the business.  Regulations were recently passed by Congress in February of 2015 that were originally proposed in 1997 that prevents partners and LLC members who provide more than 500 hours of service for their firms in a taxable year from taking advantage of the limited partner exclusion from self-employment tax.

The employment tax regime is not applied uniformly to service providers who are partners, members of LLCs and LLPs, and S corporation shareholders, and in some respects the law is not crystal clear.  This inconsistency and uncertainty has fueled the growth of one-person S corporations.

Medicare Tax on Unearned Income

Beginning in 2013, a Medicare contribution tax of 3.8% was imposed on the less of (1) net investment income, or (2) modified adjusted gross income (adjusted gross income over a threshold amount of $250,000 for a joint return or surviving spouse, $125,000 for a married individual filing separately, or $200,000 for all other taxpayers).  The tax is effectively an additional income tax, raising marginal rates for high-income taxpayers who have unearned income.  Net investment income is broadly defined to include interest income, dividends, annuities, royalties, rents (other than from an active trade or business), capital gains, less allocable deductions, as well as passive income (within the meaning of the passive loss rules of §469) from trade or business activities and income from the type of active securities and commodities trading often conducted by hedge funds.

Attorney Angel Oliver / McGrath and Spielberger, PLLC assists clients with all sorts of tax matters, both federal and state (including but not limited to North Carolina and South Carolina). Click here to contact Ms. Oliver about your tax matter.

Tuesday, July 28, 2015

Tax Consequences of Distributions in a Business

Tax Consequences of Distributions in a Business



When you decide to start a business venture, there are a myriad of things to consider.  We regularly assist small business owners, especially start-up businesses, walking them through the steps that need to be taken in order to make the business official and legal.  There are many ways a business can be organized and there are both non-tax and tax factors as well as state and local statutory requirements that need to be taken into consideration when embarking on this exciting journey of starting a business.

I previously wrote an article regarding the non-tax factors that should be considered when starting a business.  This article is one of a series of articles that focuses on the tax implications of certain business activities and things you should consider when choosing your business entity.  The most prominent federal tax considerations in choosing a business entity include:



This article will focus on the tax consequences of distributions in a business.

Team work, business conceptA liquidating or nonliquidating distribution from a partnership to a partner generally is treated as a nontaxable return of the partner’s capital.  The partner recognizes no gain until he receives cash exceeding the basis of his partnership interest.  On non-cash property distributions, a partner does not recognize any gain, but defers any gain not recognized when the distribution occurs and recognizes it when he subsequently disposes of the distributed property.  Gain or loss may be recognized under §751(b) of the Internal Revenue Code if the distribution changes the partner's share of certain partnership ordinary income property.  A partner may recognize a loss on a liquidating distribution if the only property he receives consists of cash, unrealized receivables, or inventory.  These rules also apply to LLCs.

Cash distributions from an S corporation generally are considered a nontaxable return of capital up to the shareholder's basis for his stock.  The excess is considered capital gain.  Certain cash distributions may be taxable if they are attributable to earnings and profits accumulated under Subchapter C before the corporation elected to be taxed under Subchapter S.  An S corporation is deemed to sell any distributed property to the shareholder, and the corporation recognizes any gain or loss inherent in the property when the distribution occurs.  That gain passes through to the shareholders and is taxable to them in the year the distribution occurs.  Gain "built-in" to corporate assets when it converts from a C to an S corporation is taxable at the corporate level.

Cash distributions from C corporations are taxable to shareholders as dividends to the extent of the corporation's earnings and profits.  Corporate earnings are subject to double taxation: they are taxable for the corporation when earned, and taxable again for the shareholder when distributed.  A similar double tax is imposed when a C corporation distributes appreciated property; the transaction is treated as if the corporation sold the property for its value and distributed the cash proceeds to the shareholder.

For a complete analysis of the tax implications of C Corporations, Partnerships, and S Corporations click here for the Joint Committee on Taxation's publication entitled "Choice of Business Entity: Present Law and Data Relating to C Corporations, Partnerships, and S Corporations."

Attorney Angel Oliver / McGrath and Spielberger, PLLC assists clients with all sorts of tax matters, both federal and state (including but not limited to North Carolina and South Carolina). Click here to contact Ms. Oliver about your tax matter.

Basis Limitations and the Deductibility of Losses for a Business under the Internal Revenue Code

Basis Limitations and the Deductibility of Losses for a Business under the Internal Revenue Code



When you decide to start a business venture, there are a myriad of things to consider.  We regularly assist small business owners, especially start-up businesses, walking them through the steps that need to be taken in order to make the business official and legal.  There are many ways a business can be organized and there are both non-tax and tax factors as well as state and local statutory requirements that need to be taken into consideration when embarking on this exciting journey of starting a business.

I previously wrote an article regarding the non-tax factors that should be considered when starting a business.  This article is one of a series of articles that focuses on the tax implications of certain business activities and things you should consider when choosing your business entity.  The most prominent federal tax considerations in choosing a business entity include:



This article considers the limitations on the deductibility of losses in a business.



Taxpayers who wish to use losses from a business or investment activity to offset their income from other sources must structure the venture to be taxable as a partnership, LLC, or S corporation.  A partner may generally deduct his share of losses up to the basis of his partnership interest and an S corporation shareholder may deduct losses up to the basis for his stock.  Losses of a C corporation do not pass through to shareholders; they must be carried back or carried over to offset future corporate income.



For ventures that use significant amounts of borrowed funds, a partnership or LLC structure is the preferred organization form because the basis of a partner's interest increases by his share of the partnership's liabilities.  Each partner is treated as if he personally borrowed his share of the partnership's obligations and contributed that amount of cash to the partnership, even if the partnership debt is nonrecourse (i.e., no partner is personally liable for repayment of the debt).  The resulting basis increase enables partners to deduct losses attributable to funds the partnership borrows.



A shareholder's basis for stock in an S corporation does not include corporate liabilities, other than loans the shareholder makes directly to the corporation; therefore, corporate obligations to third parties do not increase a shareholder's basis.  A shareholder can increase the basis of his stock by borrowing funds personally and lending or contributing the proceeds to the corporation.  When the loan must be directly secured by corporate assets, however, this transaction is not possible in practice.



Highly leveraged ventures usually are organized as limited partnerships or LLCs because partners can deduct significant greater losses than S corporation shareholders who make the same out of pocket investment.



Passive Loss Limitations



Losses attributable to nonrecourse liabilities may be restricted under §465 of the Internal Revenue Code (IRC).  Section 465 limits a taxpayer's deductions for losses to the amount he has at risk in the activity at the end of the tax year (i.e., his capital contribution plus liabilities for which he bears personal liability).  This limitation does not apply to qualified nonrecourse financing used in real estate activities.  These rules apply to certain closely held C corporations.



Under §469 of the IRC, certain taxpayers may not deduct losses incurred in passive activities that exceed their income from other passive activities.  This section applies to individuals, estates, trusts, closely held C corporations, and personal service corporations.  An activity is passive if it is a trade or business in which the taxpayer does not materially participate.



These passive loss rules are also applied to partners, LLC members, and S corporation shareholders in a similar fashion.  Each partner or shareholder separately determines whether his income or loss from the activity is passive based on his participation in the activity.  With some important exceptions, a limited partner's share of all partnership income or loss is passive.



The passive loss rules are modified to apply to closely held C corporations in which it may not use passive losses and credits to offset portfolio income but may use them to offset income from an active business.  A closely held C corporation when there are five or less owners that directly or indirectly own more than 50% of the value of the stock for at least the last half of the tax year.



The passive loss limitations apply fully to personal service corporations (a corporation in which its principal activity is performing personal services that employee-owners substantially perform and all of the employee-owners collectively own more than 10% of the value of the corporation's stock).



For a complete analysis of the tax implications of C Corporations, Partnerships, and S Corporations click here for the Joint Committee on Taxation's publication entitled "Choice of Business Entity: Present Law and Data Relating to C Corporations, Partnerships, and S Corporations."



Attorney Angel Oliver / McGrath and Spielberger, PLLC assists clients with all sorts of tax matters, both federal and state (including but not limited to North Carolina and South Carolina). Click here to contact Ms. Oliver about your tax matter.

Wednesday, July 22, 2015

The Tax Implications of Allocations of Income or Loss Items in a Business

The Tax Implications of Allocations of Income or Loss Items in a Business



When you decide to start a business venture, there are a myriad of things to consider.  We regularly assist small business owners, especially start-up businesses, walking them through the steps that need to be taken in order to make the business official and legal.  There are many ways a business can be organized and there are both non-tax and tax factors as well as state and local statutory requirements that need to be taken into consideration when embarking on this exciting journey of starting a business.

I previously wrote an article regarding the non-tax factors that should be considered when starting a business.  This article is one of a series of articles that focuses on the tax implications of certain business activities and things you should consider when choosing your business entity.  The most prominent federal tax considerations in choosing a business entity include:



This article addresses how income and losses are allocated in the different types of businesses.



The owners of a partnership or LLC may establish their shares of each partnership or LLC item through provisions in their partnership or operating agreement.  An allocation provided for in the agreement is respected for tax purposes unless under the tests contained in the Internal Revenue Code Regulations determine that it lacks substantial economic effect.  If you have your operating or partnership agreement carefully drafted by a professional the agreements will ordinarily satisfy these tests making most allocations of partnership or LLC tax items valid.



Investors in a C corporation can create some flexibility for allocating income and capital appreciation among themselves by issuing different classes of common and preferred stock as well as sophisticated debt instruments.



Little flexibility is available to S corporations as an S corporation is permitted to have only one class of common stock.  Although voting rights may differ, preferred stock cannot be used to create different interests in corporate capital and income.  Some differences in the cash flow allocated among S corporation shareholders can be effected if a portion of their capital is provided as loans rather than as capital contributions.  Because of the use of sophisticated hybrid securities may be characterized as a prohibited second class of stock, their use is precluded.



A pass-through tax regime such as a partnership, LLC, or S corporation permits losses to pass through to the owners who devote their time and energy to the business.  The ability of passive investors to deduct losses is often delayed by several Internal Revenue Code provisions designed to curtail tax shelters.  A C corporation is not able to pass through start-up losses to its shareholders, but corporations may deduct losses against their taxable income and carry any excess back or forward as net operating losses.  For start-up companies that raise capital from outside investors, these tax rules are among several factors that may weigh in favor of a C corporation.  Although start-up losses do not pass through as they are realized, most taxable investors would be unable to deduct them currently in any event.  The losses may be used more efficiently as carryforwards to shelter income earned during the early years of a C corporation’s profitability.



For a complete analysis of the tax implications of C Corporations, Partnerships, and S Corporations click here for the Joint Committee on Taxation's publication entitled "Choice of Business Entity: Present Law and Data Relating to C Corporations, Partnerships, and S Corporations."



Attorney Angel Oliver / McGrath and Spielberger, PLLC assists clients with all sorts of tax matters, both federal and state (including but not limited to North Carolina and South Carolina). Click here to contact Ms. Oliver about your tax matter.

Tuesday, July 21, 2015

The 6 Mortgage Loan Companies with the Most Complaints

The 6 Mortgage Loan Companies with the Most Complaints



Based on the Consumer Financial Protection Bureau report covering February thru April, 2015



As attorneysCustomer Service Feedback who are regularly involved in foreclosure and mortgage dispute cases, we pay close attention to large mortgage lenders and mortgage loan servicing entities and the problems which are found in that industry. We regularly file complaints with the Consumer Financial Protection Bureau on behalf of clients when the typical problems we encounter reach beyond the normal depths and reach a level of true ridiculousness. Which mortgage loan institutions are the most frequent offenders, nationally? The market leaders are no surprise, and include Bank of America, Wells Fargo, Chase, Citibank, Ocwen, and NationStar.



Bank of America had the most complaints overall of any national bank, with approximately half of thoDistressed mortgages and foreclosuresse being related to its mortgage lending and loan servicing activities. For February thru April, BoA averaged approximately 400 mortgage loan type complaints per month. On the one hand, with its hands in so many loans, it makes sense that BoA would be among the leaders in complaints; on the other hand, BoA has sold off many loans and the rights to service many loans, and thus its overall loan portfolio is significantly less than what it used to be.



Wells Fargo had fewer complaints with the CFPB overall compared to BoA, but also had approximately 400 complaints per month related to its mortgage lending and mortgage loan servicing activities. In our office, we have seen a significant increase in the number of Wells Fargo loans in distress, and a remarkably high percentage of those have required us to file complaints with the CFPB.



JP Morgan Chase had the sixth most complaints of any institution in the country between February and April. Approximately 40% of those complaints were related to mortgage lending and mortgage loan servicing, which works out to approximately 250 per month.



Although Citibank’s 507 complaints per month put it in seventh place overall, its mortgage lending and mortgage loan servicing complaints were a comparatively small portion of that. Citi averaged less than 150 complaints per month with regard to mortgage loans.



And now we come to Ocwen, wonderfully challenged Ocwen. With regard to mortgage loan complaints only, Ocwen was the national leader, with more than 425 complaints per month. This actually represented a decrease for Ocwen, which could be related to various government agencies forcing Ocwen to reduce its mortgage loan servicing portfolio, including the state of California threatening to outlaw Ocwen from that state all together. Ocwen is perhaps the most inconsistent entity that we regularly deal with in regard to mortgage loan disputes. For the most part, dealing with Ocwen is a nightmare, but once in a while we will have a case that actually works out very smoothly. The most frequent complaint we hear from new clients about their dealings with Ocwen – other than “they gave me the run around” – is that the customer service is outsourced overseas, and many borrowers complain of the customer service representatives not being able to properly understand or speak English.



The company which has come on strong in the last year with regard to mortgage loan servicing complaints is NationStar Mortgage. The number of complaints against it per month is similar to the number against both Bank of America and Wells Fargo. Because NationStar has acquired the servicing for many loans in the last few years, complaints against it are often related to inefficient transitions of loan servicing, including NationStar being unable (or unwilling) to properly service its new loans for months at a time.



Overall, complaints related to mortgage loans were the second most frequent type of complaints that the Consumer Financial Protection Bureau received during this time period. For those of you who are curious, the other four entities which had the most complaints against them during this time period (including complaints of all sorts) included Equifax, Experian, TransUnion, and Capital One. Together, with the six entities named above, these make up our current Hall of Shame.

Tuesday, July 14, 2015

Taxation of Business Income and Loss

Taxation of Business Income and Loss



When you decide to start a business venture, there are a myriad of things to consider.  We regularly assist small business owners, especially start-up businesses, walking them through the steps that need to be taken in order to make the business official and legal.  There are many ways a business can be organized and there are both non-tax and tax factors as well as state and local statutory requirements that need to be taken into consideration when embarking on this exciting journey of starting a business.

I previously wrote an article regarding the non-tax factors that should be considered when starting a business.  This article is one of a series of articles that focuses on the tax implications of certain business activities and things you should consider when choosing your business entity.  The most prominent federal tax considerations in choosing a business entity include:



This article relates to the tax considerations on how income and losses are taxed in various business forms.



tax magnifying glassA partnership or LLC is not a separate tax-paying entity.  Each partner or member is separately and individually taxable on his share of partnership or LLC profits, losses, deductions, and credits.  Each partner or member reports his share of each tax item, and each item retains the same character it had when it was earned or incurred by the partnership or LLC.  Under this pass-through tax regime, the members and partners avoid the double tax imposed on corporate income and the losses incurred by the business may offset income the partner or member has from other sources.



A C corporation is a separate, tax-paying entity.  Its income and profits are taxed at the corporate level when earned, and these amounts are subject to a second tax when they are distributed to the shareholders as dividends.  At the corporate level, dividends are taxed as ordinary income, at the shareholder level dividends are taxed under the capital gains rates.  Dividends were previously taxed to the individual shareholders at ordinary income tax rates.  Tax advisors then devised plans in which to avoid the ordinary income tax rate in preference for the lower capital gains tax rate by devising techniques referred to as "bail outs."  A "bailout" is a distribution of earnings in a transaction such as a redemption of stock, that qualifies as a "sale or exchange," enabling the shareholder to recover all or part of her stock basis and to benefit from preferential capital gains treatment on any realized gains.  In some cases, such as where the shareholder has died and the basis of her stock has been stepped up to its date of death value, the bailout may be accomplished tax free.  Congress responded to these techniques with anti-bailout provisions to ensure that distributions resembling dividends would be taxed as ordinary income.  When dividends and capital gains are taxed at the same preferential rate, the traditional incentive for a bailout almost disappears.  But if capital gains are taxed at much lower rates than dividends, a bailout becomes a viable strategy to reduce the double tax on C corporations and their shareholders.  Currently, dividends and long-term capital gains rates mirror one another, diminishing any type of motivation for bailouts.



Taxation of an S corporation is similar to the treatment of a partnership and LLC.  An S corporation is not a taxable entity; it serves as a conduit through which its income and losses passes through to shareholders.  Each shareholder reports his share of each tax item on his tax return, and these items retain the same character they had when they were earned or incurred by the S corporation.  Although a partnership is never treated as a taxable entity, an S corporation may be taxable if it once operated as a C corporation.  Corporate-level taxation may result if excessive passive-type income is generated by corporation assets or if the corporation disposes of assets that had built-in gains when the S election was made.



For a complete analysis of the tax implications of C Corporations, Partnerships, and S Corporations click here for the Joint Committee on Taxation's publication entitled "Choice of Business Entity: Present Law and Data Relating to C Corporations, Partnerships, and S Corporations."



Attorney Angel Oliver / McGrath and Spielberger, PLLC assists clients with all sorts of tax matters, both federal and state (including but not limited to North Carolina and South Carolina). Click here to contact Ms. Oliver about your tax matter.

Thursday, June 25, 2015

Comparison of Subchapter K v. Subchapter S

Comparison of Subchapter K v. Subchapter S



Balancing stonesBoth Subchapter K and S of the Internal Revenue Code (IRC) are pass-through tax structures in which the members of the entity are taxed for the entity's income, gains, losses, and expenses on their individual tax returns.  That is where the similarities end.  There are several differences discussed below that make Subchapter K seem more taxpayer friendly than Subchapter S.  Much of the popularity of the LLC is attributable to the fact that LLCs offer limited liability to all investors combined with the more flexible partnership tax regime.  In some situations, however, the goals of the business owners may be better achieved with an S corporation.

Subchapter S places very strict restrictions on the ownership and capital structure for S corporations.  S corporations are limited to 100 shareholders (although members of a "family," broadly defined, are counted as one shareholder), and they may not have more than one class of stock.  Additionally, all shareholders much be individual U.S. citizens or residents and other corporations or partnerships cannot be shareholders of the company.  Anyone can be a member or partner of an entity taxed under Subchapter K.

Partnerships and LLCs taxed under Subchapter K may make special allocations of income and deduction items, while shareholders of an S corporation must include corporate income and loss on a pro rata share basis.  Thus, partners/members may agree to share certain income or deductions disproportionately, and the agreement will be respected for tax purposes if it reflects their economic business deal.  Additionally, in most cases, partnerships and LLCs taxed under Subchapter K, can distribute appreciated property in kind without immediate recognition of taxable gain.

In a business with only a few owners, an S corporation may be the entity of choice because the flexibility of Subchapter K is not needed.  S corporations are often used by owners that prefer to conduct their business as a state law corporation instead of a partnership or limited liability company because they are more comfortable with the corporate governance structure.  S corporations are also often used by service providers to minimize their exposure to employment taxes.  S corporations are not viable options in many situations - a business with foreign investors would not be able to make the S corporation election because foreign investors are not permissible S corporation shareholders.  Additionally, many institutional investors (e.g., tax-exempt pension funds and charitable organizations) are discouraged by the tax system from investing in any type of active business that is operated as a pass-through entity.  Venture capital funds, which provide a large source of capital for start-up companies, appear to be more comfortable using the familiar C corporation capitalized with several classes of stock, a structure not available in an S corporation.

For a complete analysis of the tax implications of C Corporations, Partnerships, and S Corporations click here for the Joint Committee on Taxation's publication entitled "Choice of Business Entity: Present Law and Data Relating to C Corporations, Partnerships, and S Corporations."

Attorney Angel Oliver / McGrath and Spielberger, PLLC assists clients with all sorts of tax matters, both federal and state (including but not limited to North Carolina and South Carolina). Click here to contact Ms. Oliver about your tax matter.

Ownership Restrictions Relating to Tax on a Businesses

Ownership Restrictions Relating to Tax on a Business



When you decide to start a business venture, there are a myriad of things to consider.  We regularly assist small business owners, especially start-up businesses, walking them through the steps that need to be taken in order to make the business official and legal.  There are many ways a business can be organized and there are both non-tax and tax factors as well as state and local statutory requirements that need to be taken into consideration when embarking on this exciting journey of starting a business.

I previously wrote an article regarding the non-tax factors that should be considered when starting a business.  This article is one of a series of articles that focuses on the tax implications of certain business activities and things you should consider when choosing your business entity.  The most prominent federal tax considerations in choosing a business entity include:



This article will address the ownership restrictions relating to corporate tax.



An entity (including a limited liability company) may be treated as a partnership for tax purposes regardless of the nature of the business or the number of members or partners.  Thus, the partners or members of the entity may consist of any number of domestic or foreign individuals, corporations, trusts, estates, tax-exempt organizations, or other partnerships.  An unincorporated business entity with more than one owner is taxed as a partnership under Subchapter K of the Internal Revenue Code (IRC) unless it elects to be treated as a corporation.   Partnerships are not treated as taxable entities but the income, gains, losses, and expenses are pass-through to the partners or members who report those items on their individual tax returns.



Certain joint ventures involving passive property or natural resource extraction may elect to be excluded from Subchapter K rules and be treated as co-ownerships.



There are no restrictions on the nature and number of shareholders of a C corporation.  Corporations may engage in any kind of activity permitted by their charters.  Taxation under Subchapter C is not elective for any entity that is incorporated under local law.  Certain unincorporated entities may elect to be treated as a corporation (i.e., an LLC) by electing to be taxed under Subchapter S of the Internal Revenue Code.  The Subchapter S election requires the unanimous consent of all of the corporation's shareholders.



Subchapter S corporations are subject to important limitations on the number and the kind of shareholders they may have.  In order to be able to elect to be taxed under Subchapter S there can be no more than 100 shareholders and all shareholders must be individuals who are US citizens or residents, estates, or certain kinds of trusts.  Corporations, associations, partnerships, LLCs, or foreign nationals cannot be shareholders of an S corporation.



Although a C corporation cannot own stock in an S corporation, an S corporation is permitted to have wholly-owned subsidiaries that are C corporations.



For a detailed comparison of the differences between the tax consequences of Subchapter K and Subchapter S click here.  For a complete analysis of the tax implications of C Corporations, Partnerships, and S Corporations click here for the Joint Committee on Taxation's publication entitled "Choice of Business Entity: Present Law and Data Relating to C Corporations, Partnerships, and S Corporations."



Attorney Angel Oliver / McGrath and Spielberger, PLLC assists clients with all sorts of tax matters, both federal and state (including but not limited to North Carolina and South Carolina). Click here to contact Ms. Oliver about your tax matter.

Monday, June 22, 2015

The Tax Consequences of Capital Contributions in a Business

The Tax Consequences of Capital Contributions in a Business



When you decide to start a business venture, there are a myriad of things to consider.  We regularly assist small business owners, especially start-up businesses, walking them through the steps that need to be taken in order to make the business official and legal.  There are many ways a business can be organized and there are both non-tax and tax factors as well as state and local statutory requirements that need to be taken into consideration when embarking on this exciting journey of starting a business.

I previously wrote an article regarding the non-tax factors that should be considered when starting a business.  This article is one of a series of articles that focuses on the tax implications of certain business activities and things you should consider when choosing your business entity.  The most prominent federal tax considerations in choosing a business entity include:



The first tax consideration I will address is the tax consequence of a capital contribution.

cashCASH CONTRIBUTIONS

When cash is contributed, no gain or loss is recognized, and the contributor's basis for the stock or interest received in the business equals the the amount of cash contributed.

PROPERTY CONTRIBUTIONS

Partnership or LLC

If property is contributed to the business, any gain or loss inherent in the contributed property is deferred until the partnership or LLC sells the asset or the contributing partner/member sells his interest.  The contributing partner/member does not recognize gain or loss at the time of contribution, regardless of his percentage of ownership.  The contributor's basis in the property carries over to the partnership/LLC and it also becomes the basis for the membership/partnership interest the contributor receives for the contribution.  When the contributed property is sold, the gain or loss that was not recognized at the time of the contribution is recognized and allocated to the contributing partner/member.  If the contributed property is distributed to another partner/member within five years of the contribution date, the contributing partner/member recognizes gain or loss on the property.

Corporations

The transfer of appreciated property to a regular or S corporation in exchange for stock is a taxable transaction unless the transferor, together with other parties making contributions at the same time, control the corporation through ownership of at least 80% of its stock.  No gain or loss is recognized if this control requirement is met.  The contributing shareholder's basis for the property carries over to the corporation and also becomes the basis for the stock the shareholder receives in return.

In an S corporation, gain or loss the corporation recognizes when it disposes of the property passes through to the shareholders in proportion to their stock ownership.  Unlike a partnership, the gain or loss is not allocated to the contributing shareholder.

In a C corporation, the corporation is taxable on any gain or loss when the contributed property is disposed of.  There are no current tax consequences to the shareholders.

For a complete analysis of the tax implications of C Corporations, Partnerships, and S Corporations click here for the Joint Committee on Taxation's publication entitled "Choice of Business Entity: Present Law and Data Relating to C Corporations, Partnerships, and S Corporations."

Attorney Angel Oliver / McGrath and Spielberger, PLLC assists clients with all sorts of tax matters, both federal and state (including but not limited to North Carolina and South Carolina). Click here to contact Ms. Oliver about your tax matter.

Tuesday, June 16, 2015

What Factors Should You Consider When Starting a Business?

What Factors Should You Consider When Starting a Business?



When you decide to start a business venture, there are a myriad of things to consider.  You have possibly already chosen the purpose of your venture and what it is you are going to make, do, or sell.  You have probably also played around with what to name your business.  Now what?  Where do you go from here?



We regularly assist small business owners, especially start-up businesses, walking them through the steps that need to be taken in order to make the business official and legal.  There are many ways a business can be organized and there are non-tax factors, tax factors, and state statutory requirements that need to be taken into consideration when embarking on this exciting journey of starting a business.



This article focuses on a few of the non-tax factors that need to be considered.  A follow-up article will discuss the tax factors of organizing your business.  Much of the information in this article relates to the laws in a majority of jurisdictions along with examples of specific instances where North Carolina law is different from the majority of jurisdictions.  The statutory requirements of starting a business are state specific, therefore it is important to seek the assistance of a professional who knows the law in your jurisdiction.  There are also state and local licensing as well as registration requirements that will need to be met depending on the jurisdiction your business will be located in.



In the tables below the entities are listed from the broadest/most flexible to the most restrictive.



limited liability

Limited liability is probably the most sought after attribute of business owners forming a new business venture.  New business owners wish to protect their personal assets from the claims of business creditors.  This can usually be achieved by organizing the venture under a state law that limits the owners' liability to the amount of capital the owner has invested in the entity.  Be very careful when capitalizing the business and applying for loans.  Some lenders may require that the owner(s) of the business provide a personal guarantee for the business obligations, thereby making the owner liable to those creditors of the business and defeating the purpose of the limitation of liability.



management and control

capital structure

transferability of interests

duration of entity

Attorney Angel Oliver/McGrath & Spielberger, PLLC assists clients with all sorts of tax, business, and estate planning matters in North Carolina.  Click here to contact Ms. Oliver about your tax, business, or estate planning matter today. 

Tuesday, April 28, 2015

2015 Small Business Tax Update

2015 Small Business Tax Update



In the height of the economic downturn, Congress enacted several temporary tax incentives to spur economic growth.  Congress votes yearly whether to extend these incentives, make them permanent, or let them expire.  This year, several incentives were kept and some were allowed to expire.  This article provides general information on some of the recent changes that may impact small businesses in the coming year.



Expensing Depreciable Business Assets



small businessInternal Revenue Code (IRC) §179 is stimulus provision for small businesses.  The effect is to permit small businesses to deduct the cost of business assets in the current tax year rather than to capitalize the assets over a period of years.  Congress justified this provision as a subsidy for small businesses.  In 2014, businesses could deduct up to $500,000 in equipment purchases as long as they spent less than $2 million on equipment.  Section 179 was renewed by the House in February and the House voted to make it a permanent part of the IRC.  The fate of the bill now rests with the Senate, if the Senate does not approve the bill, §179 will revert back to the prior amounts of only being able to deduct $25,000 in equipment purchases for 2015.  The House and Senate did not approve to extend this section for 2014 until December so we may not know the true fate of this section until late this year.  You should keep whether or not you would rely on a tax deduction in mind when making large equipment purchases.  You may or may not have the benefit of these large deductions for your purchases for the 2015 tax year.



Bonus Depreciation



Bonus depreciation is where businesses deduct 50% of the adjusted basis of most property acquired during the applicable year up to a maximum of $500,000.  Unlike §179, this deduction was not limited to small businesses.  Businesses were able to deduct a substantial portion of the cost of purchasing equipment and other assets in the year of acquisition.  Proponents of this incentive argued that it would jump-start the economy.  This incentive was also a temporary stimulus provision and is set to expire.  If you are a business looking to make large expenditures on equipment this year, do not rely on potential tax incentives as a factor in your equipment purchasing decisions.  You may not know whether the incentive will be available until December of 2015.  Be cautious in this area and do not be over reliant on tax incentives for equipment purchases.



Affordable Care Act - Employer Mandate



The Employer Mandate of the Affordable Care Act requires all businesses with 50+ full-time employees (working 30+ hours per week) to provide health insurance for their full-time employees or pay a penalty.  The mandate does not go into effect for everyone starting in 2015.




  • For companies that employ 100 or more full-time employees, the employer is required to offer health insurance coverage to 70% of the full-time employees and dependents age 26 and under in the 2015 tax year.  For the 2016 tax year, that percentage increases to 95% of full-time employees and dependents age 26 and under.

  • For companies that employ 50-99 full-time employees, the mandate does not go into effect until 2016 in which the employer must offer health insurance coverage to 95% of full-time employees and dependents age 26 and under.



The penalty for not complying with the mandate is $2,000 per full-time employee over the first 30 employees.  For example, if you have 50 employees and you do not offer any health insurance benefits to them, then your penalty would be $40,000.  Employers who offer insufficient coverage that fails to meet the quality and affordability standards of the Affordable Care Act will pay a penalty of the lesser of either $2,000 per full-time employee, excluding the first 30 employees, or $3,000 per full-time employee who receives federal insurance subsidies.

The mandate also classifies a full-time employee as anyone who works 30+ hours per week.  This is important to consider because your company may have more full-time employees under this classification than under other employment standards.  Therefore, you need to analyze your staffing needs now to determine which category you fit under and which year the mandate will go into effect for your company to avoid paying penalties.

401k Plan Limits

The thresholds for 401k contributions by employees as well as matching contributions by employers have increased slightly.  In 2015, employees exclude up to $18,000 of 401k contributions.  The combined total contribution for employee and employer is $53,000.  This is only a $500 increase in contribution amounts from 2014 but those small amounts build with each employee that you provide matching 401k contributions for.  There's an additional $500 that you can contribute for each employee this year.

Corporate Tax Reform

Corporate tax reform is on the agenda for 2015.  The corporate tax rate is currently 35%.  President Obama wants to lower the corporate tax rate to 28% and wants to pay for that cut in rate with a significant decrease in the amount of deductions and credits that all businesses can utilize in lowering the amount of tax owed.  That could mean that the amount of taxes paid by small businesses, especially those in the pass-through tax structure may pay a lot more in taxes.  Examples of deductions under review include the §199 domestic manufacturing deduction, the depreciations schedule for business equipment, and the advertising deduction.

Attorney Angel Oliver/McGrath & Spielberger, PLLC assists clients with all sorts of tax, business, and estate planning matters in North Carolina.  Click here to contact Ms. Oliver about your tax, business, or estate planning matter today.