Are sexual harassment settlement payments tax deductible?

As we look closer at Trump’s new Tax Cuts and Jobs Act of 2017 we ask; Are sexual harassment settlement payments tax deductible? Are inventors’ tax rates going up while composers and musicians continue to get a break?

Changes for Corporations – A Summary

Denial of Deduction for Settlements Subject to a Nondisclosure Agreement Paid in Connection with Sexual Harassment or Sexual Abuse – Effective for amounts paid or incurred after the date of the Act’s enactment, no deduction for any settlement, payout, or attorney fees stemming from a sexual harassment or sexual abuse matter if the payments are subject to a nondisclosure agreement of any kind. Interestingly, all payments made prior to 1/1/18 are still tax deductible and going forward, the denial of the deduction only applies to those payments made in connection with a nondisclosure agreement.

Corporate Tax Rate – Effective 1/1/18, a flat 21% tax rate applies to all corporations. This replaces progressive rates from 15% for corporations with revenue up to $50,000, and quickly increasing up to 39% on corporations with taxable income over $100,000.

Alternative Minimum Tax (ATM) – This has been repealed. Is a break only for corporations with over $7.5 million in annual revenues.

Expensing and Depreciation – The maximum amount that can be expensed has increased from $510,000 to $1,000,000. Generally, all tangible business assets are subject to the favorable tax treatment of expensing and/or depreciation. The Act expands the definition of “qualified property” to include film, television and theatre productions released broadcasted or staged after September 27, 2017.

Real Estate Depreciation – The Act replaces the old 39-year (nonresidential) and 27.5-year (residential) recovery periods with a new 15-year recovery period. This doubles the benefit of the depreciation deduction which should help to boost real estate values.

Net Operating Loss Deduction – The Act eliminates net operating loss carrybacks, except for farming businesses.

Like Kind Exchanges – The Act limits like-kind exchanges to “real property that is not held primarily for sale.”  Must have longer-term ownership and investment as the primary objective. An exception is provided for any exchange, “if either the property being exchanged or the property received is exchanged or received on or before December 31, 2017.”

Entertainment Expenses – Under the old law, an employer may deduct up to 50% of expenses relating to meals and entertainment and there were nice tax-free benefits that employers could provide for employees such as housing and meals provided for the convenience of the employer on the business premises of the employer and certain qualified transportation fringe benefits.

Under the Act, these tax-free benefits are restricted and deductions are revised as follows: Employers cannot deduct expenses related to entertainment, amusement, or recreation; membership dues for a club organized for business, pleasure, recreation, or other social purposes; or a facility used in connection with any of the above.

The current 50% limit on the deductibility of business meals is expanded to meals provided through an in-house cafeteria or otherwise on the premises of the employer.

Deductions for employee transportation fringe benefits (e.g., parking and mass transit) are denied, but the exclusion from income for such benefits received by an employee is retained.

No deduction is allowed for transportation expenses that are the equivalent of commuting for employees (e.g., between the employee’s home and the workplace), except as provided for the safety of the employee.

After Dec. 31, 2025, the Act disallows employer deductions for expenses associated with meals provided for the employer’s convenience on, or near, the employer’s business premises through an employer-operated facility that meets certain requirements.

Intellectual Property as a Capital Asset – The Act effective raises tax rates on inventors. They no longer get capital gains 20% tax rate treatment. Beginning in 2018, gain or loss from the sale or exchange of a self-created patent, invention, model or design, or secret formula or process is treated as ordinary income. The election to treat musical compositions and musical works as a capital asset is, however, preserved.

If you have any questions or would like to schedule a free consultation, please contact us at (360) 876-6425 or by email.

We hope these tax tips are helpful.

From Seward & Associates, Attorneys at Law, PC and The Law Offices of Richard D. Seward

The Tax Cuts and Jobs Act of 2017 is now the “law of the land” starting in 2018

Tax laws have significantly changed with the passage of The Tax Cuts and Jobs Act of 2017. Our focus in this article is on the impact of this new law on individuals. Future newsletters will address the impact on Corporations, Pass-Through Entities, Trusts & Estates and Exempt Organizations.

Changes for Individuals – A Summary

  • Capital Gains rates remain at 20%
  • The Obamacare surtax of 3.8% on net investment income remains
  • The Medicare .9% surtax on wages and other ordinary income remains
  • The “Kiddie Tax” is new. It taxes minors like they are a trust. Rates start at 37% on unearned income over $12,500 annually
  • No more retroactive re-characterization of contributions to IRAs, as traditional or as Roth, or visa-versa
  • Personal exemptions were merged into the doubled Standard Deduction
  • The “Teacher Deduction” was doubled from $250 per year to $500 per year maximum deduction for classroom supplies
  • The Mortgage Interest deduction remains available on loans up to $1,000,000, but for homes acquired after 1/1/18, the mortgage amount is reduced to $750,000 and the deduction of HELOC interest has been eliminated
  • No more miscellaneous deductions or deductions for tax preparation fees
  • No more moving expense deduction except for Armed Forces members forced to move under military order

If you have any questions or would like to schedule a free consultation, please contact us at:

Port Orchard Office: (360) 876-6425

Seattle Office: (360) 509-4329

We hope these tax tips are helpful. Wishing all of our clients and friends a Prosperous New Year! From the Law Offices of Seward and Associates, Attorneys at Law

The Tax Cuts and Jobs Act of 2017. Key year-end tax planning tips.

Tax law changes are coming so we have some key year-end tax planning tips and summaries of The Tax Cuts and Jobs Act of 2017.

Our focus in this article is this proposed law and the potential major changes to both the income tax laws and the estate and gift tax laws that we can likely expect. See our planning tips below.

Changes to Income Tax Laws – A Summary

  • Corporate rates – corporate tax rates are reduced to a flat 20% rate which is 2.5% below the average marginal rate for corporations worldwide. The intention is to make US corporations more competitive in the global marketplace. To partially pay for this, Congress increased the tax rate for C Corporations with taxable income up to $50,000 a year from 15% to 20%, but for most, rates will go down. If your income tax rates will be decreasing, then accelerate income to the current year to take advantage of the lower tax rates while you can.
  • The Section 179 expense – This deduction allows expensing the full cost of assets used in a trade or business. It will be increased from a current maximum deduction of $500,000 to a maximum deduction of $5,000,000 through 2022 with a 50% bonus for new property (except for depreciable real property). So, you can buy that jet or a fleet of bulldozers now.
  • Section 1031 “like kind” real estate exchanges – If you are contemplating a Section 1031 “like kind” exchange – Complete the transaction as soon as possible as there will be severe limits to the benefits of this section going forward.

Changes to Estate & Gift Tax Laws – A Summary

The Estate & Gift Tax is a tax on the transfer of wealth from one generation to the next. It is a transfer tax (also known as the “death tax”) collected at the time of the transfer of the assets. In our view, this is a voluntary tax because it can be avoided through proper planning. There are four “pillars” of the transfer tax and they are: 1) the gift tax, 2) the estate tax, 3) the GST or generation skipping tax, and 4) the step up in basis at death.

Estate Tax Planning

  • Basis Planning – Basis planning is one of the most important planning strategies for assets that have appreciated over the years and have a low-cost basis, including assets in trusts or limited liability companies. It is important that these assets are included in the gross estate to eliminate the income tax on the appreciation. Inclusion in the taxable estate at death will give your beneficiaries a step up in basis to the fair market value of the asset at the time of death and save significant income taxes for your spouse or your children, including elimination of income taxes on deferred gains on 1031 “like kind” real property or long-term appreciation on other assets.
  • Federal Estate Tax Planning – The federal estate tax exclusion will be increased, in pre-inflation adjustment terms, from $5,000,000 to $10,000,000 per person or $20 million for a couple. [1] Adjusted for inflation that would be approximately $22.4 million that a couple can pass on to their children, tax free. The estate and gift tax will be completely repealed in 2024. These changes make federal estate tax planning irrelevant for 99.8% of the population.
  • Washington Estate Tax – With the doubling of the federal estate and gift tax exemption amounts, a shift is taking place. We as estate planners now focus on planning for clients to help them avoid the Washington Estate Tax. This tax impacts small to medium size estates in the $2 million to $5 million range, as well as large estates. This tax starts at 9% of the gross taxable estate over $2 million and escalates to 20% for larger estates. Family limited liability companies with marketable securities can no longer be used as a tax advantaged transfer of wealth if the principles retain the benefit of the underlying assets. [2]
  • Consider an Installment Sale and Keep All Options Open – If you have Washington estate tax exposure and you have assets that you expect will appreciate in value over the next 5 to 10 years, then you might consider moving these assets out of your estate or at least freezing the value of these assets. We can help. We recommend considering an installment sale of the assets. This is especially advantageous if interest rates rise. The sale is typically to a defective irrevocable grantor trust set up by the client as both grantors and trustees. The client receives an installment promissory note and receives interest and principal payments on the note. The client also pays income taxes on the income to the trust and on the note interest. This freezes the value of the “asset” in the client’s estate but more importantly, it gives the client the “best of all worlds” with 3 clear options: 1) if the client wants to make an outright gift, the note is forgiven, 2) if client wants to cancel the transaction, the note is called and the transaction is rescinded, or 3) if the client is happy with the transaction, he can do nothing and complete the sale.

If you have any questions or would like to schedule a free consultation, please contact us at (360) 876-6425 or by email.

1. The “exclusion amount” is equal to the amount of assets you can transfer and use “unified credits” to pay the tax. The credits are now portable from one spouse to the other surviving spouse.

2. Families would gift discounted membership units to children while retaining control of the entity and its assets.

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New tax cuts are “pending” and investment diversification as an asset protection strategy is more important than ever.

Have you considered diversifying your investments from the stock market to income-producing real estate?

We are seeing increased investment in income producing real estate such as apartments. The investment vehicle of choice for protection of business and personal assets and preferred tax treatment is the single member limited liability company (“LLC”) [1].

Single member LLCs – This entity is disregarded by the IRS for income tax purposes so all the tax benefits flow through to the member/investor on his or her 1040 personal tax return. The LLC files no tax return. Tax benefits include depreciation and interest deductions to offset the taxable rental income. Depreciation is a valuable non-cash deduction and it is based on the full purchase price excluding the land. The deduction is based on the premise that the improvements have a limited useful life so the investment is returned pro-rata over the useful life of the asset through depreciation deductions. This also lowers the tax payer’s basis in the property which increases the taxable gain on sale. That is where the magic of IRS Section 1031 comes into play.

IRS Section 1031 Like-Kind Exchanges – 1031 exchange tax deferral is available on sale if the net proceeds are reinvested in a qualifying “like kind” replacement property generally within 6 months of the sale. [2]The theory of tax deferral is that it is more of a theoretical gain if the investment continues in similar replacement property. This theory ignores the “step-up” in basis that is gained when the investor dies, and the “gain” avoids tax entirely. With the pending “tax cuts” this tax benefit may well be the first “offset” to go away.

Positive Leverage – With 75% positive leverage, a typical investment example follows:

A Typical Transaction:

A $1,000,000 purchase price, determined at a .06 capitalization rate, would look like this at the closing:

1) $250,000 cash down (this can be bifurcated into 5 LLC’s investing $50,000 each) and;

2) $750,000 in debt at a 4% interest rate, secured by the Property.

In this example, there is positive leverage on the $750,000 in debt of 2%. This is possible in the early years if interest rates stay at these historically low levels.

We are available to answer any questions you may have and we offer free consultations for anyone interested in discussing these investment diversification options. Call us at (360) 876-6425.

1. The 2003 Ashley Albright, Debtor, Case No. 01-11367 in the United States Bankruptcy Court for the District of Colorado made it more difficult for single-member LLCs where the member is in Chapter 7 to protect the business assets of the LLC from the trustee. Protection still exists from most creditors and personal assets continue to be protected from creditors of the LLC.

2. Property held for investment or for use in a trade or business qualify and the “like kind” requirements are very broad in terms of the kinds of real estate that qualifies. For example, an easement can be sold and reinvested in a fee interest.

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