Planning Well in Advance of a Transaction

From a tax and estate planning perspective, the most valuable opportunities often arise well before a business is formally brought to market. Early planning allows business owners to take advantage of strategies that may no longer be available once a transaction becomes imminent.

One key consideration is ownership structuring. Reviewing how the business is held, whether individually, through entities, or in trust, can uncover opportunities to improve tax efficiency and facilitate wealth transfer. For example, transferring minority interests in a business to irrevocable trusts for family members, when valuations are lower and before a sale is anticipated, may reduce future estate tax exposure. These strategies, often referred to as “pre-sale gifting,” can allow appreciation to occur outside of the owner’s taxable estate.

Trust planning also plays an important role. Properly structured trusts can provide asset protection, centralized management, and multigenerational wealth planning benefits. However, timing is critical. Once a letter of intent is signed or a sale becomes highly probable, the IRS may scrutinize transfers more closely, potentially limiting the effectiveness of these strategies.

From the deal side, “early” really means early. By the time a letter of intent is signed, the framework of the transaction is often set, and leverage begins to shift. Preparing in advance—cleaning up corporate records, evaluating contracts, and aligning ownership—can prevent delays and preserve negotiating strength.

Just as importantly, early coordination with tax counsel ensures that the business is positioned in a way that supports both marketability and tax efficiency. Buyers will conduct extensive diligence, and a well-prepared seller is better equipped to maintain momentum, avoid surprises, and command stronger terms.

Planning During the Transaction

Once a transaction is underway, the process moves quickly and becomes highly structured. Negotiations typically focus on key terms such as purchase price, representations and warranties, indemnification, and, critically, deal structure.

One of the most significant structural decisions is whether the sale will be an asset purchase or a stock purchase. Buyers often prefer asset deals for liability protection and tax benefits, while sellers frequently favor stock deals for cleaner exits and capital gains treatment. Navigating this tension is a central part of the negotiation process.

In addition, deal mechanics such as earnouts, rollover equity, and escrow arrangements can materially impact both risk allocation and overall value. These terms should be evaluated not only from a legal perspective, but also in light of their tax consequences.

That’s where tax planning continues to play a critical role during the deal itself. The structure of the transaction directly affects how proceeds are taxed, and careful analysis can help align the interests of both buyer and seller.

For example, in an asset sale, buyers may receive a step-up in tax basis, which can be highly valuable. However, sellers (particularly C corporations) may face double taxation. In a stock sale, sellers often achieve more favorable capital gains treatment, though buyers may be wary of inheriting liabilities.

Tax elections can sometimes bridge this gap. Certain elections allow the parties to achieve a hybrid result; providing buyers with basis step-up benefits while preserving favorable tax treatment for sellers. These opportunities require proactive analysis and close coordination with deal counsel.

A Coordinated Approach Delivers Better Outcomes

A successful transaction is not just about getting to closing—it’s about getting there efficiently, with minimal disruption and maximum value; and making sure you actually keep that value when it’s all said and done.

Together, a coordinated team of advisors can align transaction execution with tax efficiency and long-term wealth planning. Business owners who engage counsel early (and maintain that collaboration throughout the process) are best positioned to achieve a successful and well-planned exit.

For those considering a future sale, the takeaway is clear: start planning early, stay engaged throughout the process, and ensure your advisors are working together every step of the way.

For more information or to seek counsel from our Business & Corporate or Taxation practice groups, please reach out to request a consultation or call us at 216-696-1422.

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Initial Meeting: “What Are The Basics?”

My initial client meetings typically involve those who are considering an attorney for estate planning, business planning, and/or tax planning. In this meeting, my job is to ask the right questions.

If you keep reading, and you find yourself thinking any of the following:

1. “I should probably know the answer to that.”
2. “We’ve been meaning to deal with this.”
3. “That sounds uncomfortably relevant.” 

Then, now is a good time for us to chat; a thoughtful and honest conversation about where you are and where you want to go.

Big-Picture & Goals: “Why Are We Here?”

When meeting with a new client, I like to get a handle on the big picture. The following questions are things to consider:

1. What prompted you to come in or reach out now? (A perfect answer would be, “I read an interesting blog that helped explain what I need and how to prepare in a comfortable way.”)
2. What are your top concerns when you think about your finances, family, or business?
   • Minimizing taxes
   • Protecting assets
   • Taking care of family
   • Maintaining control
   • Avoiding future disputes
   • All of the Above
3. What is it that you really want to fix?

The preliminary overview is often targeted at what you are specifically worried might go wrong if you don’t get a plan in place.

A whole host of reasons can be the initial trigger, be it a new child, the sale or impending sale of a business, realizing your “plan” is partly in a drawer at the office and partly in a three-ring binder from 1998, or you had a recent combative probate experience with a family member. 

Whatever the reason, we can first zero in on whether we’re solving an urgent problem, doing preventative planning, or cleaning up something that no longer fits.

Estate Planning: “Who Gets What, When, and How Much Drama Is Allowed?”

When it comes to estate planning, it’s really about people, hence the complications. Estate planning is very personal, and while I try to reassure clients that “I’ve seen it all,” it can be intimidating to share such intimate details.

When setting the stage for estate planning, I typically ask about:

1. Your spouse (current, former, or blended-family situations)
2. Your kids (ages matter, so do personalities)
3. Anyone you consider “family,” even if the law disagrees

Understanding the players involved helps create an overarching structure for effective planning.

When it comes to beneficiaries, the following are some examples of “special circumstances”:

1. Minor children
2. Special needs
3. Addiction issues
4. Spendthrifts
5. Someone who really shouldn’t receive a large lump sum at 25

Analyzing these aspects is important because equal is not always fair, and fair is not always tax efficient. Planning lets you protect people not only from themselves, but also from creditors, bad influences, or bad decisions.

Then we get to some of the harder choices – deciding who you trust to handle money and make decisions.  Even the best structured plans in the world can fail if the wrong person is in charge. Proper estate planning translates real life into a plan that works even when emotions run high, and you’re not around to explain yourself. Remember, estate planning isn’t just about assets; it’s about people with assets, and people can be…unpredictable.

Business Planning: “How’s the Money Made and Who Could Mess It Up?”

When it comes to business, I go right to structure. I want to know:

1. Entity type (LLC, S Corp, C Corp, Partnership, Sole Proprietorship)
2. Ownership (Individual, Trust, Multiple Parties)
3. Documented governance (Who’s in charge)
4. Undocumented governance (Who thinks they’re in charge)

These preliminary questions are important because entity structure affects taxes, liability, estate planning, and succession planning. The wrong structure can quietly cost you tens of thousands of dollars a year.

I then ask about current business succession planning; the proverbial, “What happens if something happens?” This something includes (among others) disability, incapacity, retirement, and (unfortunately) death.  If the business depends solely on one person and there’s no plan, the family may inherit a mess instead of an asset.

My personal advice is that a business can be a powerful wealth-building tool or a planning disaster if it’s ignored. In analyzing the business, I try to focus on the following:

1. Where taxes might show up
2. Where risk lives
3. Where planning opportunities are hidden

More often than not, this is the point in a meeting where a client says, “I didn’t realize that mattered.”

Tax Planning: “What Are You Paying & Why?”

Once I get to the tax planning piece, people often say, “I have a CPA, and they handle that.”  And that’s a great start. I like CPAs, and I work with them often. Having a team of good advisors is key because tax planning is proactive and comprehensive, not simply compliance-driven.

I’ll ask questions about how you make your income:

1. W-2?
2. Business Income?
3. Investments?
4. Real Estate?
5. A mix?

This is important because income is taxed differently.  Efficient tax planning involves legally shifting, timing, or characterizing income to reduce annual tax exposure; not just reporting income accurately on a return.

I’ll also be interested in what you own, be it real estate, investment accounts, retirement plans, life insurance, business interests, you name it.  These all become relevant for tax planning because taxes aren’t just important when you earn money, it’s also important when you sell, gift, inherit, or (again, unfortunately) die.

Good tax planning also gets at what’s keeping you up at night. It could be paying too much tax, leaving a mess for heirs, losing control, the IRS, or a business partner. An appropriate tax plan isn’t always the most technically efficient; it’s also whatever helps you sleep at night. Remember, for tax planning, we focus on what’s next, not what’s already happened. The earlier the conversation, the more options you usually have.

The Final Question: “What Does Success Look Like For You, and How Do We Get There With Minimal Tax, Risk, and Regret?”

This answer really requires honesty, context, and sometimes confronting what you’ve been avoiding.  That’s where I come in to guide you, by turning big questions into clear answers with a plan that works. If you’re thinking about answers and want guidance, let’s talk.

For more information or to seek counsel from our Taxation group, please reach out to request a consultation or call us at 216-696-1422.

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As is typical when Congress changes the tax law, the new rules are complicated in practice, and each taxpayer should consult their personal tax advisor as to the optimal way to file their income tax returns. But note that while the filing date for personal tax returns is not until April 15^th of next year, the decisions you make in November and December of this year will establish the “facts” of your possible allowable 2025 tax deductions. This is because individual taxpayers are on the cash method of accounting. This means that to claim a tax deduction for 2025, you must make a payment by December 31, 2025. In the case of a gift of appreciated stock to a charity, the gift must be completed by December 31, 2025.

How the New Tax Rules Change Tax Planning for Itemized Deductions

Beginning for tax year 2025, for taxpayers with an adjusted gross income of less than $500,000 (but subject to phaseout for adjusted gross incomes above $500,000), the cap on state and local itemized deductions has increased to $40,000 from the prior limit of $10,000. As an example, consider a taxpayer with $15,000 of real estate taxes plus $25,000 of state and local income taxes paid ($40,000 total tax bill). Under the prior law, the taxpayer who itemized their deductions was limited to deducting only $10,000 of those taxes that they paid. But under the 2025 rules, the taxpayer would be eligible to claim itemized deductions for $40,000 of state and local taxes. Since that amount is greater than the 2025 standard deduction amounts, the taxpayer should choose to itemize deductions. In these facts, if the taxpayer also makes charitable contributions in 2025, all the charitable contributions made in 2025 will reduce taxable income and save the taxpayer federal tax dollars.

This means that taxpayers who pay state and local income and property taxes plus mortgage interest at or near the amount of the standard deduction may want to consider itemizing in 2025 and make charitable contributions in 2025 to maximize their 2025 federal tax deductions.

Note that for tax years after 2025, the charitable contribution rules change and establish a “floor” before taxpayers may itemize charitable contributions. This means that itemizing taxpayers cannot deduct charitable contributions until their charitable contributions exceed 0.5% of their adjusted gross income. In 2025, taxpayers are not yet subject to the “floor” for charitable contributions, and charitable donations are subject to the existing rules. Because the “floor” has not yet taken effect, taxpayers may consider making larger charitable contributions in 2025. To the extent these charitable deductions go unused in 2025, the deductions can be carried forward. This strategy is called “bunching.” To the extent “bunching” makes sense for you, please consult with your tax advisor. 

Also note that the prior tax law about contributions of appreciated stock to a charity remains unchanged. So, if a taxpayer has low basis stock with a significantly higher market value, the taxpayer can contribute that stock “in-kind” (i.e., without selling it) to the charity. In such a case, the taxpayer can claim a charitable deduction equal to the market value of the stock on the date of contribution without having to pay any income tax on the built-in tax gain. As an example, if the taxpayer held public stock that they had purchased for $100 per share with a market price of $250 on the date of contribution, the taxpayer could contribute, say, 100 shares to the charity. The charity would sell the stock for $25,000, and the taxpayer would get a tax deduction of $25,000. The difference between the market price and the cost basis of $100 per share would not be taxed. 

While everyone’s individual tax situation is different, itemizing may make sense for you. As such, please consult with your tax advisor before taking any tax positions.

For more information or to seek counsel from our Taxation practice group, please reach out to request a consultation or call us at 216-696-1422.

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Start Succession Planning Early

Planning well in advance allows business owners to explore various tax-efficient strategies. Early planning helps mitigate potential tax liabilities and provides ample time to implement changes.

Utilize Family Gifting

Transferring ownership through gifting can be an effective way to reduce estate taxes. The IRS allows annual tax-free gifts up to a certain limit per recipient, which can be used to gradually transfer ownership to family members.

Establish a Trust

Trusts, like Grantor Retained Annuity Trusts and Intentionally Defective Grantor Trusts, can be utilized to transfer business assets during life while minimizing gift/estate taxes. These trusts allow appreciating assets to pass to beneficiaries with reduced tax consequences.

Employee Stock Ownership Plan

An employee stock ownership plan (ESOP) allows business owners to sell their shares to employees, providing tax benefits such as deferral of capital gains tax and no entity-level tax. ESOPs can also enhance employee motivation and retention, ensuring the company’s legacy continues.

Plan for Capital Gains Tax

When selling a business, understanding the capital gains tax is crucial. Structuring the sale as an installment sale can spread the tax burden over several years, potentially lowering the overall tax rate.

Engage Professional Advisers

Consulting with a team of tax advisers, estate planners and legal professionals ensures that business owners are aware of the latest tax laws. This helps to tailor advice and maximize tax efficiency.

Effective business succession planning requires a proactive approach to managing tax implications. By utilizing these strategies, business owners can ensure a seamless transition while preserving the financial health of their enterprise.

For more information or to seek counsel from our Taxation group, please reach out to request a consultation or call us at 216-696-1422.

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In celebration of National Small Business Month, we proudly recognize the contributions of small businesses in our community. McCarthy Lebit is committed to supporting entrepreneurs and business owners with trusted legal guidance through every stage of their journey, from formation to growth and beyond. As a law firm deeply connected to the small business community, we’re proud to serve as trusted advisors and advocates for business owners throughout the region.

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Implications of Tax Cuts and Jobs Act (TCJA)

A significant issue surrounding the Tax Cuts and Jobs Act (TCJA) is the expiration of many tax provisions at the end of the calendar year 2025, commonly referred to as the “Sunset.” Much of the financial press has concentrated on the potential impact of the Sunset on the federal estate tax exemption amount. The current federal estate tax exemption is $13.99 million per person for 2025. If the Sunset occurs, this exemption will be reduced to approximately $7 million per person starting in 2026.

Estate & Income Tax Plans for the Future

In addition to estate tax changes, there are a number of income tax changes that will be impacted by the Sunset.  The top individual income tax rate will increase from 37% to 39.6%. Additionally, the $10,000 exemption for the deduction for state and local taxes will expire.

Although it is premature to determine what Congress will do, it is advisable to consider how to address potential estate tax liability through transfers to family members or charities in calendar year 2025. High-net-worth clients who have not yet utilized the existing estate tax exemption should act promptly to utilize the exemption available in 2025, rather than delaying further. If Sunset occurs, clients who do not act may miss the opportunity to transfer significant value under the existing exemption amount.

Regarding income tax planning, consider whether there is a benefit to accelerate income in the calendar year 2025, if possible.

Congressional Uncertainty & Impact on Tax Policy

Of course, all of this depends upon what Congress and the new administration will pursue relating to tax policy in calendar year 2025. In May 2024, the nonpartisan Congressional Budget Office estimated that extending all of the provisions of TCJA adds $4.6 trillion to the deficit over 10 years (2025-2034). Even with Republican control of Congress, the narrow majority may lead some Congressional members to express concerns about the deficit impact of extending all provisions of the TCJA. This situation then leads to “pay for” discussions where tax measures would need to be offset by corresponding tax increases or spending reductions. All of this leads to great uncertainty as to the future of tax planning beyond 2025. Before the change in administrations, the Office of Tax Analysis in the Treasury released its estimates on January 10, 2025, detailing the tax breaks scheduled to Sunset.

Treasury’s first scenario estimated that if all of individual and estate tax provisions to TCJA are extended for an additional ten years, that cost would equate to a $4.2 trillion price tab. The $4.2 trillion estimate would rise to as much as $5.5 trillion depending on which business tax provisions of TCJA are extended.

Review Buy/Sell Agreement

Those persons who have active businesses and buy/sell agreements should review those agreements to confirm that the valuation mechanism reflects the current value of the business. Additionally, they should review the buy/sell arrangement itself. A review of the arrangement has taken a more prominent role in light of the Supreme Court’s decision last year regarding valuation of a business for estate tax purposes when business-owned life insurance was payable to the corporation to effectuate a buy/sell agreement. This type of arrangement is referred to as the “redemption agreement”. The case is Connelly v. United States. In this unanimous decision, the United States Supreme Court held that corporate-owned life insurance on the life of a deceased shareholder, acquired for the purpose of redeeming the deceased shareholder’s stock, increased the value of that stock.

In this particular case, two brothers entered into a buy/sell agreement. The buy/sell agreement was funded with life insurance owned by the corporation. The Internal Revenue Service, in valuing the business, increased the business’ valuation by the amount of life insurance that was payable to the corporation.

There are two approaches for a buy/sell agreement among business owners. The first is the redemption or entity purchase agreement, where the business itself is obligated to purchase the deceased owner’s stock. The alternative is what is referred to as the “cross purchase agreement,” where the obligation to purchase is among the business owners and not the business. In this case, an agreement funded by life insurance will not increase the value of the deceased’s ownership by including the life insurance the value of the business entity when the insurance proceeds are payable to the entity itself.

Update Beneficiary Designations

This is also the appropriate time for reviewing beneficiary designations. This relates to any assets that pass by way of beneficiary designations such as pension plan benefits, IRAs, annuities, and life insurance. Not only is it imperative that there be a primary beneficiary designated in any such account but also do not overlook contingent beneficiary designations as well.

New Rules for “Catch-Up” Contributions

Finally, a new rule in the qualified plan area, a “catch-up contribution.” This new rule permits individuals attaining ages 60-63 in 2025 to make a catch-up contribution of $11,250 to an employer plan, such as a 401(k) plan.

To learn more about tax planning considerations or to seek counsel from our Taxation or Trusts & Estates groups, please reach out to request a consultation or call us at 216-696-1422.

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Year-round tax planning allows you to not only react to tax deadlines but to actively manage your financial affairs in a way that maximizes tax efficiency. Below are some key benefits of adopting a proactive approach to your taxes throughout the year.

Prevent Surprises

High-income individuals often experience fluctuations in income due to bonuses, stock sales, rental property income, or capital gains from investments. Without careful planning, these variations can lead to unexpected tax bills, penalties, or underpayment of taxes.

We are subject to a progressive income tax system, and high earners may find themselves in the top tax brackets.  Year-round tax planning assures that you’re withholding the correct amount of state and federal taxes based on your evolving income throughout the year. Regularly reviewing your financial situation with a tax professional can help you avoid underpayment penalties and spread tax obligations more evenly.

Maximize Available Deductions and Credits

A primary advantage of year-round tax planning is the ability to maximize available deductions and credits. Taxpayers who wait until the end of the year may miss out on valuable opportunities to reduce their taxable income. Through proactive planning, you can take full advantage of deductions related to charitable giving, healthcare costs, mortgage interest, and retirement contributions.

For example, Ohio taxpayers can benefit from the Ohio CollegeAdvantage 529 savings plan, which offers a deduction of up to $4,000 per beneficiary per year (with unlimited carryforward). Consistently contributing to this plan year-round, instead of making a lump-sum payment at the end of the year, helps you maximize this deduction while also growing tax-free savings for educational expenses. Similarly, reviewing your charitable contributions early on allows you to strategize how much you can give to maximize your tax benefits while supporting causes important to you.

Plan for Retirement

Tax planning and retirement planning are deeply intertwined. High-income earners can benefit from year-round tax planning to maximize contributions to tax-advantaged retirement accounts such as IRAs, 401(k)s, and Roth IRAs. While these accounts provide valuable tax-deferred or tax-free growth, the key to maximizing their benefits lies in making regular contributions throughout the year, rather than waiting until year-end.

Contributing to traditional retirement accounts can reduce your taxable income today, which is especially valuable for those in higher tax brackets. Alternatively, if you anticipate being in a lower tax bracket during retirement, converting some of your traditional IRA assets into a Roth IRA may be an advantageous strategy. A Roth IRA allows for tax-free growth and withdrawals, but this conversion needs to be planned to avoid triggering a large tax bill all at once.

Estate Planning Strategies

For those looking to preserve wealth for future generations, year-round tax planning is critical for effective estate and gifting strategies. Although Ohio does not have an estate tax, federal estate taxes may apply to larger estates. Proactive tax planning throughout the year allows you to take advantage of the annual gift tax exclusion ($18,000.00 in 2024) and reduce the size of your taxable estate while providing financial support to loved ones.

In addition, establishing trusts or family-limited partnerships can help you protect your assets and minimize future tax burdens. These strategies require careful planning and ongoing adjustments to remain in compliance with tax laws and the preservation of your wealth.

Align Goals with Taxes

Lastly, year-round tax planning helps align your overall financial strategy with your tax goals. Whether you’re focused on building wealth, saving for retirement, or funding a business venture, a proactive tax plan helps you identify opportunities for tax savings that support your broader financial aspirations. For high-income earners, these strategies are essential in maintaining financial growth while minimizing the tax burden.

Tax planning is not just a once-a-year exercise; it’s a year-round process that offers significant benefits for high-income earners. By staying ahead of tax obligations and working with financial professionals who understand the ever-changing tax laws, you can maximize deductions, avoid penalties, and ensure your financial goals are met in the most tax-efficient way possible. Proactive planning is key to keeping more of what you earn and building a secure financial future.

To seek counsel from our Taxation group, please reach out to request a consultation or call us at 216-696-1422.

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Navigating Asset Transactions

Asset transactions have unique contours when compared against a stock deal. From the buy-side, buyers may depreciate assets based on purchase price. However, the downside is business successor liability. Under state law, buying assets may keep the buyer on the hook for unpaid state taxes. From the sell-side, asset sales likely create capital gain treatment. This is beneficial because of the capital gain rate break. However, sellers of assets may have potential “depreciation recapture.” To reiterate, it is crucial to emphasize that seasoned advisers, armed with extensive expertise, possess a range of potential planning opportunities designed to proactively mitigate and address the various tax risks inherent in such transactions.

Deciphering Complexity of Stock Sales

Stock sales, compared to asset deals, are generally more complex. Depending on the business entity form, the Code blesses some transaction structures as tax-free. On the one hand, buyers may choose stock deals for “tax-free reorganization treatment.” A tax-free reorganization is a creature of the Code and requires tax counsel. Sellers generally receive capital gain treatment on the sale of corporate stock. All in all, stock deals are complex, but advisers have levers in the Code to manage parties’ interest in a transaction.

Engaging an Expert for Strategic Deal Structuring

Before inking a letter of intent, engaging a skilled adviser to structure your deal ensures the most value is captured at the bargaining table. Advisers with both tax and transaction acumen have tools in their toolkit to bring a transaction to life while mitigating downstream tax liabilities. These experienced professionals not only navigate the complexities of deal structuring but also assess potential risks and opportunities, providing comprehensive guidance to optimize the overall outcome of the transaction.

For more information or to seek counsel from McCarthy Lebit’s Mergers & Acquisitions attorneys, please reach out to request a consultation or call us at 216-696-1422.

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The Inflation Reduction Act purports to raise more than $700 billion in revenue, including more than $300 billion from new corporate tax regimes and $25 billion from reinstated Superfund taxes on petroleum products. Certain large U.S. corporations will now be subjected to a 15% tax on “adjusted financial statement income” (different from traditional adjusted taxable income) beginning next year. This new tax on financial statement income is not applicable to S-corporations, RICs or REITs, but rather applies to traditional C corporations with earnings in excess of $1 billion over an applicable 3-year period. Additionally, because of differences in book and tax income computations, it is possible those corporations may lose other deductions they have historically benefitted from in calculating their tax liabilities.

This new tax regime essentially constitutes a rebirth of the corporate alternative minimum tax (“AMT”) on the largest of corporations. In addition to the AMT, the bill also creates a new Internal Revenue Code Chapter 37 and Section 4501, imposing a new excise tax on publicly traded corporations taking shares into treasury. The tax liability under these new laws will equal 1% of the repurchased stock’s fair market value and is not deductible to the corporation paying the tax. The tax is, however, offset by the issuance of new stock in the same tax year, and is subject to certain other exceptions that may reduce or eliminate the tax.

Beyond its stated revenue objectives, the bill also addresses climate change by establishing plans to cut greenhouse gas emissions by 40% from 2005 levels. This constitutes the largest investment in fighting climate change ever promoted in the United States. The bill makes billions of dollars available to boost green energy industries, including incentives to accelerate the domestic production of solar panels and provides other benefits to electric car producers in the United States.

Finally, the Inflation Reduction Act of 2022 will allow for price negotiations of Medicare prescription drugs. Under this bill, pharmaceutical manufacturers will negotiate with the federal government to determine the maximum price for certain prescription drugs and insulin products. Failure of a pharmaceutical manufacturer to participate in these negotiations will force the manufacturer to pay an excise tax rate which will be applied to all sales by the manufacturer, producer, or importer of products. The tax rate will be initially set at 65% and will increase incrementally up to 95% if there is a failure to meet compliance standards. In addition, the bill provides a $2,000 cap on out-of-pocket drug costs for seniors enrolled in Medicare Part D.

If you have any questions about how this bill may impact you, or your business, please contact Kimon Karas or one of our tax and corporate attorneys to discuss by requesting a consultation or giving us a call at 216-696-1422.

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• Reforming Business and International Taxation;
• Supporting Housing and Urban Development;
• Modifying Fossil Fuel Taxation;
• Strengthening Taxation of High-Income Taxpayers;
• Supporting Families and Students;
• Modifying Estate and Gift Taxation;
• Closing Tax Loopholes;
• Improving Tax Administration and Compliance;
• Modernizing Rules, Including those for Digital Assets; and
• Improving Benefits Tax Administration.

While this article focuses on some of the proposed changes that have the greatest potential to impact our clients, it is important to note the FY2023 Budget remains just a proposal at this stage. We anticipate further changes and refinements as the political and legislative processes move forward.

The FY2023 Budget proposes to raise the corporate income tax rate to 28%. Previously, Donald Trump’s TCJA replaced a graduated corporate tax schedule (with most corporate income then taxed at a marginal and average rate of 35%) with a flat income tax of 21% applied to all C corporations. The Greenbook states, “Raising the corporate income tax rate is an administratively simple way to raise revenue to pay for the Biden Administration’s infrastructure proposals and other longstanding fiscal priorities.” Thus, it is the goal of the Biden Administration to increase corporate taxes to partially pay for some of the costs associated with its programs and initiatives.

Further, with respect to trade and business, the FY2023 Budget seeks to incentivize bringing jobs that are currently offshore back to the United States. The FY2023 Budget proposes a general business credit equal to 10% of the eligible expenses paid or incurred in connection with onshoring a U.S. trade or business. The hope is that this tax benefit will result in significant onshoring.

Beyond corporations, the FY2023 Budget addresses partnerships as well. Partnerships are currently permitted to make a Section 754 election to adjust the basis of property when certain distributions of property are made to a partner. This election allows the partnership to “step-up”, or increase, the basis of non-distributed property. These rules create perceived loopholes where partnerships with related partners can design transactions to shift basis from non-depreciable assets to depreciable assets, resulting in immediate increases to depreciation deductions. The FY2023 Budget proposes to reduce the ability of related parties to use a partnership to shift basis among themselves by applying a matching rule that would prohibit any partner in the partnership that is related to the distributee-partner from benefiting from the partnership’s basis step-up until the distributee-partner disposes of the distributed property in a fully taxable transaction. The FY2023 Budget further states that the Treasury will have the authority to draft rules associated with this proposal.

With respect to the stated goal of supporting housing and development, the FY2023 Budget seeks to make the New Markets Tax Credit permanent. The New Market Tax Credit is an up-to-39% credit for qualified equity investments made to acquire stock in a corporation, or a capital interest in a partnership, that qualifies as a community development entity. The FY2023 Budget proposes to make this credit permanently available to foster continued investments in low-income communities, with a goal of revitalization and increased opportunity for residents.

With respect to high-income taxpayers, the Greenbook states, “Substantial revenues come from strengthening the taxation of high-income taxpayers.” And so the FY2023 Budget proposes to increase the top marginal rate sooner than previously planned. The current top rate for individuals is 37% and is scheduled to revert to 39.6% in 2026, after provisions of the TCJA sunset. The FY2023 proposal seeks to increase the top rate to 39.6% in 2023 rather than waiting for 2026. The current top tax rate applies to single taxpayers with income over $539,900 or married filing joint taxpayers with income over $647,850. However, the FY2023 Budget proposes to apply the top rate to those taxpayers earning over $400,000 (single) or $450,000 (joint).

Currently, the top income tax rate applied to qualified dividends and long-term capital gains is only 20%. The FY2023 Budget proposal suggested increasing the top rate on such transactions to align with the top ordinary income tax rate, which again is currently 37% but proposed to increase to 39.6%. Unlike the income rate adjustments above, the proposed tax increase on qualified dividends and long-term capital gains would only apply to taxpayers with income over $1 million ($500,000 married filing separately). The Greenbook provides a reason for this change by stating, “Preferential tax rates on long-term capital gains and qualified dividends disproportionately benefit high-income taxpayers and provide many high-income taxpayers with a lower tax rate than many low- and middle-income taxpayers.”

The FY2023 Budget proposal is also seeking to adjust the tax treatment of property. Currently, property gifted or transferred at death is subject to a basis step-up and is generally not taxed until a “realization” event occurs, such as a sale. The FY2023 Budget is now, however, proposing to treat transfers of appreciated property by death or by gift as a “realization event” and therefore subject to capital gains tax. Additionally, it proposes to impose a 20% minimum tax on total income, including unrealized capital gains, for the wealthiest taxpayers, defined as taxpayers having more than $100 million in assets.

To support families and students, the FY2023 Budget desires to make adoption tax credits refundable and allow certain guardian ships to qualify. Currently, the law provides two (2) tax benefits to taxpayers that adopt children: (a) a nonrefundable 100% tax credit for a limited amount of qualified expenses incurred in connection with the adoption; and (b) an exclusion from gross income of a limited amount of qualified adoption expenses paid or reimbursed by an employer under an adoption assistance program. The FY2023 Budget seeks to lower the costs of adoptions and make adoption more accessible to lower- and moderate-income families. Therefore, the proposal is to make the adoption credit fully refundable. This beneficial tax treatment would also be extended under the proposal to families that enter into a guardianship arrangement with a child.

The FY2023 Budget also addresses certain trust vehicles commonly used in tax planning strategies. For example, it is currently possible to create a short-term grantor retained annuity trust (“GRAT”) that zeros out after it has made its periodic distributions over a defined term. Biden is proposing that GRATs be required to have a minimum 10-year life and remainders of at least 25% of the value of assets contributed to the GRAT. These changes would impact common GRAT strategies. The proposal would also prohibit the grantor from engaging in tax-free exchanges of assets in the trust, which was another common tool used to lock in a GRAT’s appreciation by replacing appreciated securities with cash equivalents. These strategies are commonly employed with high-net-worth individuals as a means of reducing the value of a taxable estate.

Grantor trusts received further attention in the FY2023 Budget proposal whereby, if the trust was not fully revocable at the time of creation (i.e., taxable) then any sales between the grantor and the trust would now be taxable. Finally, if the grantor were to pay any income tax on the trust’s income and gains, then it would be treated as a taxable gift.

In addition to raising revenue, the FY 2023 Budget proposal also focused on changing the administration of trusts and estates. For estates, if no executor or administrator is appointed, then any person with actual or constructive control of the decedent’s property would be deemed a “statutory executor” for estate tax purposes. The IRS would be charged with drafting and adopting rules to address any potential conflicts that may arise in the event of there being multiple individuals qualifying statutory executors. Currently, trusts are not required to report their asset values. The Biden Administration is proposing to require reporting by trusts that have assets with a value greater than $300,000 or gross income over $10,000.

The FY2023 Budget is also proposing to have assets that are held in trust or partnerships to be “marked to market” every 90 years, beginning with a look back to January 1, 1940. Marking an asset to market means recording its value at the then prevailing current fair market value and treating it as a recognition event for tax purposes. The first recognition event would occur in 2030. Transfers to or from most trusts or partnerships would also constitute recognition events subject to tax.

As stated above, it is critical to note these changes are merely a proposal from the Biden Administration and constitute talking points at this time. These changes have not been put forward in any sort of bill or legislation and neither open debate nor political negotiation have taken place. We will continue monitoring activity in Washington D.C. to be ready to discuss personal planning with clients.

Should you have any questions about tax planning or strategy, please contact one of our tax attorneys by requesting a consultation or by giving us a call at 216-696-1422

The post US Department of Treasury: Proposed 2023 Federal Budget Will Close Tax Loopholes to Offset Spending appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

You did it! You completed your estate plan. Now that you have your plan in place, is it safe to mentally file it under “things I don’t need to worry about”?

How often should you update your estate plan? Jen Hallos, a Principal in our Trust & Estates and Taxation practice groups, recommends that, outside of certain events, clients should generally review their plan every four to five years. This review should occur more frequently for high-net-worth individuals. But this does not mean you repeat the entire process every handful of years. Having a foundation for your estate plan ensures that most future changes will require minimum attention.

Every several years, Jen sends a summary to her clients that details their current plan. At that time, she lets them know what has changed in the law since the plan was last updated, and she informs them if those changes have affected their plan. Additionally, she inquires about significant life changes that should be reflected in their plan. Some life changes will require more immediate attention than every four to five years.

Examples of life changes that should be reported upon their happening include the birth of a child, a divorce, a notable income event, the death of an individual listed in the plan, or the start of a new business, to name a few. In order to properly protect the assets of the client, these events should be accounted for in a timely manner.

Clients often ask whether an out-of-state move invalidates their Ohio based estate plan. The short answer is no, but Jen suggests that just because relocating doesn’t invalidate the document, doesn’t mean you shouldn’t update your plan. The Full Faith and Credit Act essentially says that states will honor the laws of other states as long as the documents were completed in accordance with the law of the state in which the document was created. However, depending on where the individual moves, an update to their plan could be as simple as adding an amendment that says the document is now governed by the state law of the new residence. Consulting with your attorney regarding your change in address can be beneficial in case there are laws to be aware of in your new state. For example, some states have a state estate tax. Ohio does not have this tax, but the state you are moving to might, and you want to be sure that your plan provides for the managing of that.

Overall, not changing your plan to reflect life events, such as moving out of state or experiencing an income event, will not invalidate the document. However, without updating it, the document may no longer service you in your best interest based on the laws of your new state or in consideration of your new situation.

Please reach out to request a consultation, give us a call at 216-696-1422, or visit Jen’s bio for her contact information to reach out to her directly.

The post Preparing for Certainties in Life (Death & Taxes): Part 3 appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.