Monday, October 17, 2016

Minimizing Federal Income Tax on Sale of Qualified Small Business Stock

By J. Troy Terakedis & Brian K. Kim

A taxpayer who is considering the sale of certain stock may have the opportunity to exclude or defer part or all of the gain on such sale. To be eligible for the exclusion or deferral, such stock must be “qualified small business stock” (QSBS). To qualify as QSBS, the taxpayer must have acquired the stock at its original issue from a corporation with aggregate gross assets of $50 million or less. Generally, stock issued by most technology startups is a prime candidate for the potential QSBS treatment.

Under Section 1202 of the Internal Revenue Code (IRC), a taxpayer may be able to partially or entirely reduce (i.e., exclude) the gain on the sale of QSBS. Depending on the acquisition date of the QSBS, the exclusion amount can range from 50% to 100% under the current legislative framework. To qualify for the Section 1202 exclusion, among other conditions, the taxpayer must have held the QSBS for more than 5 years.

Under IRC Section 1045, a taxpayer also has the opportunity to rollover (i.e., defer) the gain on the sale of QSBS into new QSBS within 60 days after the sale. The taxpayer must have held the QSBS being sold for more than 6 months to qualify for the Section 1045 rollover.

If you are considering the sale of QSBS or for more information, please contact J. Troy Terakedis (614-744-2589) or Brian K. Kim (614-591-5464) in our Columbus, Ohio office.

Monday, October 10, 2016

IRS Allows Taxpayers to Self-Certify Waiver of Missed 60-Day Retirement Plan/IRA Rollover Deadline

By Jordan Schreier

A taxpayer who receives a distribution from a qualified retirement plan or IRA can continue the tax deferred status of the amounts distributed by rolling over the distribution to another qualified plan or IRA within 60 days from the date of the distribution. When the rollover does not occur by the 60th day, the ability to defer taxation is lost. However, under limited circumstances, the IRS permits a waiver of the 60-day rule if the failure to timely complete the rollover was due to events beyond the control of the taxpayer and the taxpayer applies for an expensive ($10,000) IRS private letter ruling.

In August 2016, the IRS broadened the opportunity for waiver by authorizing taxpayers to self-certify the reasons for waiver of the 60-day rule and allowing the IRA custodian or plan administrator receiving the late rollover to rely on the self-certification. Under the new procedure, self-certification is only permitted for limited reasons. These are:

  • Financial institution error
  • Misplaced and uncashed distribution check
  • Distribution mistakenly deposited in ineligible account
  • Severe damage to taxpayer’s principal residence
  • Death of a member of taxpayer’s family
  • Serious illness of taxpayer or member of taxpayer’s family
  • Taxpayer incarceration
  • Restrictions of a foreign country
  • Postal error
  • Distribution due to IRS levy and proceeds of levy returned to taxpayer
  • Party making the distribution delayed providing information the receiving plan administrator or IRS custodian needed to complete the rollover.
There are a number of other requirements for the self-certification to be valid, including that the rollover be completed as soon as practicable after one of the listed circumstances no longer prevents the rollover. Completion of the rollover within 30 days satisfies this requirement. The self-certification rule is an important opportunity for taxpayers who did not rollover their distributions within 60 days but want to continue to the tax deferral of the amounts distributed.

For more information, please contact Jordan Schreier in our Ann Arbor, Mich. office at 734-623-1945.

Monday, October 3, 2016

Grantor Retained Annuity Trusts (GRATs)

By Jeff Gehring

Although the Federal Reserve continues to threaten to raise interest rates, current rates issued by the IRS applicable to estate planning transactions remain at historically low levels. For October, the long-term AFR is 1.95%, and the Section 7520 rate, which is essentially the IRS’s assumed rate of return, is only 1.6%. Such low rates make Grantor Retained Annuity Trusts (GRATs) and sales to grantor trusts very attractive because any appreciation in the value of the transferred assets in excess of the IRS’s assumed rate will accrue to the beneficiaries free of transfer tax. New proposed regulations issued by the IRS could severely limit the discounts applied to transfers of family business interests in the future. Therefore, the time is right for clients to use GRATs and grantor trust sale techniques to transfer business interests out of their taxable estates.

The current low interest rates make a Qualified Personal Residence Trust (QPRT) less attractive because the low assumed rate of return produces a lower retained interest, thereby generating a larger taxable gift on the larger remainder interest. Thus, while a QPRT may still be an attractive technique for a home owned in an appreciating real estate market, the current economics of a QPRT are less favorable than a GRAT.

As the end of the year approaches and clients consider year-end tax planning, please keep interest rate sensitive techniques in mind because they may be more favorable in 2016 than they will be next year. If you have questions regarding the above techniques, please contact Jeff Gehring in our Lexington, Ky. office at 859-899-8713.

Monday, September 26, 2016

Life Insurance Policy Review

By Judy Fertel Layne

Do you have a life insurance policy with cash surrender value that you no longer need? Because of changes in the estate tax, changes in your family situation or other reasons, you may have a policy that you no longer need. If you no longer want or need the death benefit, you can cash in the policy and receive the cash surrender value for your current use. You will only have to pay tax on that part of the cash surrender value that exceeds the premiums you’ve paid into the policy. Now may be a good time to review your existing policies and consider whether you have adequate life insurance or even more life insurance than you feel you need.

For more information, please contact Judy Fertel Layne in our Troy, Mich. office at 248-433-7563.

Monday, September 19, 2016

Reviewing Estate Planning on a Regular Basis

By Elizabeth Brickfield

All of us avoid discussing or thinking about uncomfortable issues as we live our lives. Nowhere is this more evident than in the estate planning area. Estate planning is not merely about minimizing transfer (or income) taxes or deciding who receives which assets, it addresses such basic issues as who will raise my children, who do I want to make medical and financial decision for me when I cannot, including end of life decisions.

In our estate planning practice, we see the effects of failing to make these decisions, as well as failing to consider the ramification of the planning when advising clients (or making these decisions for ourselves). The most important aspects of decision making concern the selection of the individuals to whom we entrust the decision making and the ability of these individuals to carry out our intentions. These considerations include being candid with ourselves and our estate planners about our wishes and our beneficiaries’ and fiduciaries’ abilities to respect themselves and each other. Hoping that beneficiaries who had difficulties getting along with each other will change after the parents’ death will simply cause an estate plan to fail. Selecting the eldest child to be a fiduciary because of tradition may further resentment. Failing to explain why assets are being left to certain individuals or charities can lead to hurt feelings. Selecting a heavy handed fiduciary will only lead to the courtroom doors. Naming a health care fiduciary who disagrees with your wishes may cause wishes to be ignored.

Equally important, is to ensure that the carefully created documents are available and accessible when they are needed. With changing family arrangements, increase longevity, more mobile frames and fewer marriages, it is important that your plans be known to those who have been selected to carry them out. Nevada, for example, has a registry where health care directives can be filed, an additional safety net for placing documents where they can be readily found.

The most successful estate plans are based on communication and confidence. Communication with our loved ones about our wishes and concerns and confidence in the ability of those we have selected to carry them out.

For further information, please communicate with Elizabeth Brickfield in our Las Vegas, Nev. office at 702-550-4464.

Monday, September 12, 2016

Generating the Most Benefit from your Charitable Contributions

By Thomas D. Hammerschmidt

Many people support their favorite local charities or those that address medical research or treatment in a particular area, maybe as a result of an illness or death of an acquaintance or family member, for example, the ALS Association or the American Cancer Society.

However, many people also donate to charities that are less known to them, including in response to telephone or U.S. Mail solicitations, as part of their annual charitable giving “budget.”

There are a number of internet resources that allow people to research charities for information on the portion of contributions actually used for charitable purposes, as opposed to the payment of excessive salaries, administration costs or the services of outside fundraisers.

Check out the Nonprofit Explorer resource maintained by Pro Publica, for example, at, or the research tool at You can also access your state’s Attorney General’s office to “vet” a charity before you donate.

For further information, please contact Thomas D. Hammerschmidt in our Ann Arbor, Mich. office at 734-623-1602.

Tuesday, September 6, 2016

Passive Activity Loss Limitations – Keep Records to Avoid Loss of Income Tax Deductions

By Les Raatz

Thirty years ago, Congress passed the Tax Reform Act of 1986. Within the Act, the Passive Activity Loss (PAL) rules limited the ability of taxpayers to take income tax loss deductions from business or rental real estate activity unless the taxpayer “materially participates” by satisfying certain tests based on hours worked in the activity. Depending on the activity, the annual required hours are 750, 500, or as low as 100. If the government disputes the taxpayer’s loss deduction, then it is up to the taxpayer to prove material participation, which may be difficult and time consuming if reconstructed years later. The regulations state:

“The extent of an individual’s participation in an activity may be established by any reasonable means. Contemporaneous daily time reports, logs, or similar documents are not required if the extent of such participation may be established by other reasonable means.”

But the best method is keeping contemporaneous logs of work done.

There are many other PAL rules. Careful structuring of ownership and operations and in making tax elections may assist minimizing the PAL loss limitations, as well as avoiding the new 3.8% Net Investment Income Tax, which applies many of the same rules.

To learn more, please contact Les Raatz in our Phoenix, Ariz. office at 602-285-5022 or another member of the DW Tax Specialists.