The Legal Play Blog

Podcast: Play in new window | Download | Embed

Subscribe Apple Podcasts | RSS | Subscribe:

The 2024 elections have driven intense conversation on a number of issues. Among them are taxes, as both political parties have good reason to pass a new set of tax laws in the near future. Enacted in 2017, many current tax provisions are set to expire a little more than 12 months from now, so the next administration will have to make tax law a focus soon after they settle into the Oval Office.

Let’s review how the 2024 elections may affect taxes, depending on who is in control of the legislative and executive branches.

What Happens if There is No New Tax Bill?

The last major tax bill was passed in 2017, known as the Tax Cuts and Jobs Act. In most instances, it is still the primary tax document governing individual and business tax provisions. And many – but not all – of those provisions are scheduled to sunset at the end of 2025.

That means, theoretically, if no new tax bill is passed by the legislature and signed into law by the President, any provisions that are scheduled to sunset would revert back to what was on the books before the TCJA – effectively back to 2016-era tax provisions.

Thankfully that won’t affect some of the most impactful provisions – corporate tax rates will remain at a flat 21 percent even if the act expires. There are, however, numerous important provisions that would be affected by a pre-2017 rollback, including the child tax credit, the standard deduction, and state and local tax (SALT) deductions.

As both political parties have their own tax agendas to pursue (and constituents to please), it’s highly likely that a new tax bill will be passed before the TCJA expires. As for what a new set of tax laws would include, that would depend on which party has greater control over the legislative process.

What May Happen if the Republicans Largely Influence the Legislative Process During a Tax Bill?

There is a chance that the Republicans will control both the House and Senate following the 2024 elections, which would give them serious negotiation power should a new tax bill come to the floor.

In this theoretical outcome, it’s likely that most of the TCJA provisions set to expire would be extended. That would be the starting point, at least, but it’s likely that certain things like the amount of the standard deduction would be recalibrated to match today’s economic realities. Further, both parties have indicated a willingness to raise the child tax credit in a new tax bill beyond what the TCJA provides for 2025 ($1,700 refundable portion).

In a Republican-majority scenario, the following provisions would probably be preserved along with the tax concepts underpinning the TCJA:

• A larger standard deduction and no personal exemptions
• Lower marginal income tax rates at most income levels
• A larger child tax credit and refundable portion
• A larger estate tax exemption (the TCJA doubled the pre-2017 exemption)
• Additional deductions for small businesses (the TCJA allowed sole proprietorships, partnerships and certain corporations to deduct up to 20 percent of pass-through income)

In addition to the above tax-related provisions, there are many questions surrounding tariffs under a potential Trump administration. Putting aside the economic impacts of tariffs, as there are many and they are difficult for any one person to explain, much of the discussion related to tariffs is centered around whether they can be used to fund government programs – perhaps as a way to offset the cost of continuing tax cuts.

What May Happen if the Democrats Largely Influence the Legislative Process During a Tax Bill?

The Democrats may also have the upper hand in tax law negotiations, depending on how the presidential and Senate/House elections shake out. On the campaign trail, Harris has indicated a desire to raise the corporate tax rate up from 21 percent, but likely not back to the pre-TCJA days of a 35 percent tax rate.

Although the Democrats would surely push for a newly authored and conceived bill – not just a continuation of the TCJA – it’s possible that some of the TCJA’s more popular provisions may remain in place. For example, it appears both parties agree on a larger child tax credit, though it’s unclear where each party stands on exact amounts.

An increased corporate tax rate (relative to the current 21%) is also likely under a Democrat-sponsored bill. There’s a significant chance that Democrats would also push to lift the $10,000 cap on the SALT exemption, though this would favor high-income earners in states with higher state taxes.

And if the tax-related ideas set forth in the Inflation Reduction Act are to be furthered in a new Democrat tax bill, certain industries may benefit from tax-friendly provisions, such as those involved in or allied to green manufacturing.

 As a Reputable Tax Law Firm, We Advocate for a Balanced Budget, Regardless of Who is Elected

Everyone should vote for whom they feel will best represent their interests, regarding taxes or otherwise. However, it’s important to keep tax laws in mind when selecting a candidate, especially if your financial situation would be greatly impacted by the election’s outcome.

If you have questions about tax planning with the 2024 elections coming up, consider scheduling a consultation with an experienced tax attorney that can provide in-depth guidance on optimal tax planning strategies, no matter what your tax situation is and no matter who is writing the tax laws come 2025 and beyond.

Podcast: Play in new window | Download | Embed

Subscribe Apple Podcasts | RSS | Subscribe:

Under Section 363 of the Bankruptcy Code, interested parties are authorized to buy assets in bankruptcy. By doing so, the purchaser is able to acquire the asset “free and clear,” which means any liens or judgements against the asset are not transferred to the asset (and the party purchasing the asset).

This gives would-be buyers opportunities to acquire valuable assets at a steep discount, but there is a process that must be followed to ensure the transaction is completed in accordance with Section 363.

What Assets Can be Purchased in Bankruptcy?

Few assets are off the table if you’re purchasing them during bankruptcy. What is on sale is a matter of discussion between the debtor company (or individual), the court-appointed bankruptcy trustee and the interested third-party buyer. In general, though, all of the following can be sold or purchased free and clear through bankruptcy:

• Real property (land, buildings)
• Equipment
• Vehicles
• Inventory
• Intellectual property, including trademarks and copyrights
• Client lists
• Trade secrets and processes
• Mortgages and lease agreements

In some cases, buyers can even purchase judgements levied against the debtor company, gaining legal grounds to seek repayment from the debtor company.

What is the Process for Buying Assets in Bankruptcy?

Typically, it’s difficult (or outright impossible) to buy assets in bankruptcy due to the presence of liens or judgements against the assets. Tax liens, first liens, second liens and so on determine the priority in which creditors are paid back, should the asset be liquidated. This means if the asset is sold, the liens would then become the responsibility of the new owner, entangling them with creditors they would otherwise rather not deal with.

Instead, third party buyers typically seek a free and clear transaction by leveraging Section 363 of the Bankruptcy Code. Here’s how such a sale under Section 363 would typically proceed:

• Before bankruptcy is filed – Before the debtor files for bankruptcy, they may start marketing the assets in the pursuit of a “stalking horse.” A stalking horse is the initial bidder willing to enter into a purchase agreement, and like a stalking horse sets the pace for other racehorses, a stalking horse bid sets the terms and structure for subsequent bids on the assets. It also sets the floor for the bid amount, so it gives the debtor a degree of certainty before other potential buyers get involved.

  In addition to seeking a stalking horse, the debtor may also start the selling process before filing bankruptcy to ensure the 363-process can be completed quickly.

• Once bankruptcy is filed – As soon as bankruptcy is filed, a bankruptcy court and trustee will be involved in the process. To carry out the 363-sale, the debtor will first need to obtain approval from the court to move forward with the bidding process.

  To do so, the debtor and their trustee will file a motion with the bankruptcy court. This motion will seek approval for the bidding process, along with the deadlines for the auction and following sale. If no stalking horse bidder is present at this time, one may be selected to start the process.

• Approving the bidding process and sale – Once the bankruptcy court receives the motion for a 363-asset sale, it will schedule a hearing, usually a few weeks from the date of the motion. At this hearing, the debtor must provide evidence that the proposed bidding procedures and structure will optimize the sold asset’s value.

  Another hearing will be scheduled once a buyer is identified for the final transaction. At this hearing, the debtor must provide evidence that the selected buyer provided the best or highest bid, and that the auction process is completed without interference from the debtor.

Once the court approves the sale, it can be performed free and clear, so the buyer walks away with a no-strings-attached asset, and the funds raised from the sale are then used to satisfy the debtor’s creditors.

Why Consider Buying Assets in Bankruptcy?

Underpinning every asset purchase in bankruptcy is the pursuit of a good deal. As assets sold in bankruptcy tend to be sold under tight deadlines, debtors are encouraged to liquidate those assets as efficiently as possible to satisfy creditors. As debtors do not have time to perform an extended buyer search, assets are typically sold at a deep discount.

For the buyers, discounted assets can serve strategic or investment needs, including:

• Acquiring assets to assist with entering the industry – For would-be business owners that want to start a business similar to the debtor company, buying assets in bankruptcy can be used to secure valuable equipment or space at a fraction of the cost.

• Acquiring land to expand current business operations – If a neighboring business is looking to expand their operations, acquiring the real property (land or facilities) can be the first step in this expansion.

• Acquiring assets as an investment to “flip” – Sometimes, the best strategic move is to recognize when assets are being sold at well under the value, purchase them and sell them in arbitrage.

Buying Assets in Bankruptcy is a Potentially Lucrative Option for Alert Investors

Buying assets in bankruptcy offers obvious advantages to the buyer, but it must be done in accordance with the Bankruptcy Code to ensure there are no lien-related complications.

If you are looking to acquire assets at an advantage, purchasing them in bankruptcy is an option. However, given the complexities, it is recommended that would-be buyers first consult with an experienced bankruptcy attorney. Their expertise will ensure the transaction is completed in accordance with Section 363, and can also help with vital parts of the process, such as due diligence and asset valuation.

Podcast: Play in new window | Download | Embed

Subscribe Apple Podcasts | RSS | Subscribe:

It is important for taxpayers to understand how partition agreements and an IRS tax filing status are linked. The connection between the two can impact how a married couple files their tax returns and how it could potentially affect the non-debtor spouse.

In the case of married couples, partition agreements are legal documents that define the terms and conditions of the division of property between the two of them. Property can include real estate, bank accounts, and other valuable goods. Examples of partition agreements are prenuptial and postnuptial agreements. Partition agreements are essentially an agreement between the spouses on how to divide ownership and rights to their property. In Texas, any property that is earned or received, with some exceptions like inheritance, is considered community property, meaning both spouses have ownership rights over the whole. A partition agreement is typically used as a way for the spouses to state that they do not want Texas law to dictate ownership of the property, and they want to decide who owns what.

Today, it is not unusual to see couples entering partition agreements after they have married. The reasoning behind this movement is that it can allow the two individuals to have a say in how their property is divided up instead of letting default Texas community property laws decide. Certain pieces of property are defined as separate. This keeps property as “yours and mine” and eliminates the default “ours” factor.

Entering into a Partition Agreement

One of the most common questions we get about partition agreements is why someone would want to enter into one. The short answer is that there are a number of valid reasons, including:

1. People with a second marriage (who have children from a first marriage) may be worried about the consequences upon death (or the incapacitation) of one of the married partners, such that they want some of their money to go to their children. This may or may not occur if it is community property.

1. Married partners that no longer live together but do not wish to legally divorce.

1. In connection where partners are divorced and perhaps there is a reconciliation where the couple decides to reconcile but wants to have boundaries as to what each owns.

1. Estate planning purposes.

1. For creditor protection purposes so that the debts of a debtor-spouse do not attach to the non-debtor spouse, or the assets of a non-debtor’s spouse are not subject to claims from the creditors of a debtor-spouse. This can work fairly well when you partition them, if at the time you partition them there is no real debt problem. It works best if the spouses enter into a partition agreement prospectively so as to avoid the argument that this was done to defraud creditors.

It is worth noting that it can be hard for a creditor to set a partition aside unless the person already has a judgement against them or the partition agreement was signed well after the debt entered into collection actions.

Entering into Partition Agreement Before Marriage and Its Impact on Filing Taxes

If a partition agreement has already been signed, it is important to decide how to file your federal income taxes, especially if one spouse makes significantly more than the other.

If two spouses enter into a partition agreement that they have signed, executed and notarized, it usually does affect how we would advise them to file their tax returns. For example, if a couple has nothing but community property, community income and few debts, there is little reason not to file jointly. But there are financial complications which may need to be considered.

If you have a married couple with a diverse income in which one spouse makes one million dollars annually and the other spouse makes ten thousand dollars, they can still decide to share the income and it will be reported accordingly. This means they can still file a joint return and pay taxes on the whole amount. The benefit to this is typically money saving. Filing jointly often results in paying less tax than if filing separately. Yet it doesn’t have to be done this way. There may be important reasons for a couple to file separately.

Reasons for Changing Filing Status to “Married and Filing Separately” After Signing a Partition Agreement

There are some reasons for a couple to change their filing status to “married and filing separately” when a partition agreement comes into play, including:

• One spouse has a judgement against them that does not include the other spouse

• One spouse files bankruptcy

• One spouse is obligated into making financial disclosures to a government entity or creditor

• If a lesser earning spouse has aggressive creditors pursuing them

The goal is to prevent the debtor-spouse’s creditors from getting to the assets of the non-debtor spouse, especially in a case where the non-debtor spouse earns significantly more than the debtor-spouse. Filing jointly would be unwise in this case as it would give the creditors of the debtor-spouse access to financial information about the non-debtor spouse.

Why is this an issue? When creditors know how much the higher earning spouse makes, they could become much more aggressive in making the lesser earning spouse’s life miserable by threatening to take an annual deposition, demanding they respond to requests for production, or by garnishing what is in known bank accounts that the debtor-spouse may enjoy the benefits of. An aggressive creditor could put extreme pressure on the debtor-spouse to come up with money from somewhere, hoping they will dip into the higher earning spouse’s funds to appease the creditor.

If the creditor is the IRS, it can be a very good idea to file separately, because if the spouses file jointly, the IRS can keep any refund that the couple might have received and apply it towards the debt of the debtor-spouse. This means that any refund the non-debtor spouse would have received for money they alone contributed could be lost and the non-debtor spouse would lose out on the option to receive rightful refunds. By keeping property and debts separate, it can be possible to keep the IRS from withholding or garnishing any funds belonging to the non-debtor spouse.

Partition agreements and an IRS tax filing status are interconnected and can have far reaching implications. The best way to ensure your rights and your assets are protected is by enlisting the help of a trusted and reputable tax attorney before it is too late.