Other Tax-Saving Moves in a Low Interest/Value Time

We are living in a difficult moment. Businesses, families, and individuals are struggling because of the COVID-19 pandemic. And, the struggles are largely not anyone’s fault.

Despite the difficulties, there are rays of light to be found from a planning perspective. I previously wrote about five savings tips when valuations and interest rates are low, such as they are now. Below are five more ideas of things you can do when interest rates and values are low:

1. Convert old Corporations to Partnerships

Typically, in order to terminate a C corporation the company must either actually liquidate all of its assets, thus triggering a tax at the corporate level, or is deemed to have liquidated all of its assets upon distribution of the assets to shareholders. When asset values are high relative to their tax basis this can generate a large tax hit. However, when asset values are low, or the corporate will have other offsetting losses during the year, it may be possible to terminate the corporation in favor of a pass-through entity (such as an LLC taxed as a partnership) without an enormous tax bill. Every case is unique of course, but there may be some older C corporation that are now in a position to pivot to a more efficient tax vehicle, like a pass-through entity. If the corporate stock qualifies as qualified small business stock, then the shareholders have to consider whether the potential tax savings in the short term are better than the potential tax savings from later selling qualified small business stock.

The issue would be the same in terminating an S corporation. The termination would be a deemed liquidation of the corporate assets, and each shareholder would have to recognize their proportionate share of the tax on those gains. If, however, shareholders have losses this year or low taxable income already, it may be the opportune time to make that move. One limitation of an S corporation is the inability to adjust the tax basis of the corporation’s assets when a shareholder dies. That is possible in a partnership structure if the partnership makes a timely 754 election when a partner dies. In that context, the deceased partner’s family receives a tax basis in the partnership interest equal to the fair market value at death, plus, with a 754 election, a tax basis in their share of the partnership’s assets equal to the fair market value at death (on capital gains assets). This can reduce taxes down the road for the inheriting family members if the partnership sells assets but does not terminate after the sale. It can also increase available depreciation deductions for the inheriting family members. Because there is no 754 election for S corporations, you cannot get the same benefits in an S corporation structure unless you terminate the S corporation (triggering a deemed sale of the corporate assets) and change to a partnership. So, the current economic turmoil may present an opportunity to get out of the S corporation structure with a limited tax hit.

2. Expatriate from the US

Sometimes, you have to just end a bad relationship. That is equally true in the case of someone who wants to get out from under the US tax system. In that case, the individual can renounce their citizenship, or give up a green card, to expatriate from the US to another country. Expatriation, however, causes a deemed sale of that individual’s assets. When asset values are low, however, the deemed sale may not have the same bite. That is because the law grants the expatriating individual an exemption from tax of up to $737,000 (inflation adjusted). So gains under $737,000 are sheltered from the tax. Other considerations are also important, of course, such as whether the individual would be a “covered expatriate” and whether they will ever gift or bequeath property to a US taxpayer. So, each expatriate needs to consider their individual circumstances before expatriating.

3. Refinance Debt With Friendlier Lenders

If a company or individual has a lender who is not giving them the message that the lender is willing to work with them through COVID-19 troubles, then it is probably time to find a new lender. With interest rates at historic lows, now is actually the best time to refinance, in some cases, and lock in more favorable terms while changing a difficult lender for a more collaborative lender.

4. Make a late allocation of generation-skipping transfer tax (GST Tax) exemption to a non-exempt trust

When the GST Tax exemption amounts were much lower than the $11.58 million per person exemptions of today (inflation adjusted), some trusts were formed that were not exempt from GST Tax. These non-exempt trusts are tax time bombs, potentially, in that distributions to a beneficiary who is at least two generations below the generation of the transferor of the trust could trigger a 40% GST Tax. While trust values are low and GST Tax exemptions are high, however, the tranferor could (if still alive) make a late allocation of GST Tax exemption to the trust now to make it fully exempt from GST Tax in the future.

5. Low Interest Loan to a Non-Profit (absent private benefit and self-dealing issues of course)

Assuming the loan does not violate any private benefit or self-dealing rules related to non-profits (both of which are way beyond the scope of this post), a charitably-inclined individual or company could make a low-interest loan to a non-profit whose funding has been hurt by COVID-19. The minimum applicable federal rate for May 2020 is 0.25%, per annum, on a loan of less than 3 years. That is virtually a free loan. It is especially true if the loan is an interest only loan with a balloon payment of remaining interest and all of the principal at the end of the term. In that structure, the non-profit could use the loan fund now, pay interest only for two years, and then pay back the loan at the end of 2 years and 364 days when, hopefully, its programs are up and running. Plus, the taxable interest coming back to the lender will be limited to the very low interest rate. If the lender decides to forgive the loan in the future, the lender has the flexibility to do that too. A loan would not generate a charitable contribution deduction for the lender, so the lender would need to determine that a tax deduction is not what is motivating them to make the loan.

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