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.

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

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%.

Additionally, 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.

The 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."

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

 McGrath & Spielberger, PLLC provides legal services in Florida, Georgia, North Carolina, Ohio, South Carolina, and Tennessee, as well as in some Federal courts. The Firm offers full scale representation, as well as limited scope services, as appropriate for the situation. Please be advised that the content on this website is not legal advice, but rather informational, and no attorney-client relationship is formed without the express agreement of this law firm. Thank you.

Tuesday, August 18, 2015

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

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.

McGrath & Spielberger, PLLC provides legal services in Florida, Georgia, North Carolina, Ohio, South Carolina, and Tennessee, as well as in some Federal courts. The Firm offers full scale representation, as well as limited scope services, as appropriate for the situation. Please be advised that the content on this website is not legal advice, but rather informational, and no attorney-client relationship is formed without the express agreement of this law firm. Thank you.

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.

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.