Month: September 2019

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Year-End Tax Planning: Maximizing the Tax Benefits of Charitable Contributions Under the TCJA

Many charities feared that the 2017 Tax Cuts and Jobs Act (TCJA) would have an adverse impact on charitable giving during 2018 and after. The significant increase to the standard deduction available to most individuals means that more taxpayers do not itemize their deductions, including charitable contributions. In effect, “losing” the charitable tax deduction and benefits arguably removes some of the (tax) incentive to contribute for lower and middle income taxpayers.

Many taxpayers can continue to realize the tax benefits from their charitable contributions in a couple of ways. The first, for those taxpayers who are aged 70 ½ and older, and who must take required minimum distributions (RMD) from IRA accounts, is available by directing some or all of the RMD to a charity, which avoids having to realize taxable income on the RMD (and having to treat the contribution as an itemized deduction), thus preserving a tax benefit to the donor.

A second way to realize the benefit is to “bunch” charitable contributions and other itemized deductions (such as property taxes and state and local income taxes) into a particular tax year (e.g., every other year), enabling the taxpayer to itemize and realize tax benefits in that year, while claiming the standard deduction in the “off years.”

For more information, please contact Tom Hammerschmidt in the Firm’s Ann Arbor office at (734) 623-1602 or any of the Firm’s tax specialists located in our Dickinson Wright U.S. offices.

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F Drops: It is Not a Profane Concept for S Corporations!

While partnership vehicles (particularly multi-member LLCs) are ordinarily the flow-through entity of choice, many businesses – especially long-standing closely-held businesses and healthcare businesses – opt for S corporations status. S corporations can present tax efficiency challenges, particularly on the exit of a business. Purchasers rarely desire to acquire an historic corporation (which may end up as a C corporation), but rather prefer to acquire assets to receive a step-up in basis for depreciation purposes. The nature of the business activity may also motivate a desire to retain the historic Employer Identification Number (“EIN”). Offering rollover equity in a tax-efficient manner to S corporation shareholders can present further challenges.

Enter the F reorganization. The U.S. federal income tax law permits tax deferred treatment for certain types of mergers or restructuring. Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended, is one such provision which affords tax deferred treatment a mere change of identity, form, or place of organization of one corporation, however effectuated. In the context of an S corporation, the F reorganization (colloquially referred to as an “F Drop”!) can offer a planning tool. A typical F Drop involves the following steps: (1) the shareholders of an existing S corporation (which we will refer to as “Target”) contribute all their Target shares to a newly formed S corporation holding company (“NewCo”); (2) effective as of the same day as the contribution to NewCo, NewCo makes an election to treat Target as a qualified subchapter S corporation (a “QSub”); and (3) Target/QSub converts to a single member LLC via applicable state law.

What are the consequences?

First, under Rev. Rul. 2008-18, Target retains its EIN. Thus, the F Drop allows Purchaser to retain Target’s EIN (e.g., which is often important because vendor contracts or purchase orders are tied to the Target’s EIN).

Second, if properly structured, the purchaser can be treated as acquiring assets (or receive a basis step-up in its pro rata share of the Target assets) and the historic Target shareholders can receive tax-free rollover equity interests. Since Target is a single member LLC and treated as a disregarded entity for U.S. federal income tax purposes, the purchaser can either acquire a portion of the membership interests or NewCo can contribute Target to a newly-formed LLC in exchange for cash and rollover equity.

There are several different variations of F Drops in addition to the typical structure outlined above. With any F Drop, the order of the steps and the timing of elections is of paramount importance with respect to whether a tax-efficient result can be achieved. There are several traps for the unwary. Thus, consulting a DW is tax attorney is important to avoid turning an F Drop into a profanity. For more information, please contact Peter Kulick (517-487-4729) or any other DW Tax Practice Group attorney.

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Ohio Enacts Sweeping Energy Legislation: HB 6 Bails Out Nuclear, Coal Rolls Back Renewables and Energy Efficiency Opponents Pursue Referendum

Ohio’s longstanding energy policy debate came to a (temporary) conclusion on July 23, 2019, when Governor Mike DeWine (R) signed House Bill (HB) 6 into law.  The bill will have significant consequences for existing electricity resources in the region, as well as Ohio’s renewable portfolio standard and energy efficiency programs.  Of course, that’s only if HB 6 survives a referendum vote.  With the initial paperwork approved as of August 29, 2019, the opponents now have until October 21 to gather enough signatures to get the referendum on the November 2020 ballot for an up-or-down vote.[1]

If HB 6 does go into effect in October 2019, its two main impacts will be: (1) establishing ratepayer-funded subsidies for specified nuclear, coal, and solar resources; and (2) reducing/eliminating Ohio’s statutory renewable and energy efficiency requirements.

Nuclear and Renewable Generation Funds

Newly enacted Ohio Revised Code (R.C.) sections 3706.40-3706.65 will require Ohio’s four electric distribution utilities to collect a total of $150 million per year to support “qualifying nuclear resources” and $20 million per year to support “qualifying renewable resources,” with the funds to be paid out from 2021 through 2028 based on a “credit” of $9 per megawatt-hour.  While the Public Utilities Commission of Ohio (PUCO) will approve the rate design for each utility – subject to statutory rate caps – the Ohio Air Quality Development Authority will take on a new role in approving applications from potential qualifying resources, issuing credits, and reducing or ceasing payments under certain conditions.

Ohio Valley Electric Corporation Cost Recovery

Pre-HB 6, the PUCO had authorized three Ohio utilities with stakes in the Ohio Valley Electric Corporation (OVEC), which operates two coal plants in Indiana and Ohio, to recover the net costs of those plants from ratepayers.  HB 6 replaces that existing cost recovery as of January 1, 2020, requiring the PUCO to create riders to recover OVEC’s net costs from customers of all four Ohio distribution utilities through 2030, subject to statutory rate caps.

Renewable and Energy Efficiency Standards

While adding financial subsidies for specific nuclear, solar, and coal resources, HB 6 cuts back on Ohio’s renewable and energy efficiency standards.  The law reduces the 2026 renewable energy benchmark under R.C. 4928.64 from 12.5% to 8.5%, while eliminating the “solar carve-out” as of 2020 and lowering the compliance baseline.  HB 6 also eliminates any renewable requirement after 2026, leaving the Ohio renewable energy credit market in limbo beyond 2027.

HB 6 likewise cuts back significantly on Ohio’s energy efficiency standard (R.C. 4928.66).  The law eliminates the annual energy savings target after 2020, substituting a cumulative 17.5% benchmark based on 2009-2020 program savings across all four Ohio distribution utilities.  Given historic savings levels, the utilities are likely to achieve that 17.5% benchmark without the need for significant, if any, efficiency programs beyond 2020.  Going forward, utility energy efficiency programs would be voluntary, subject to the approval of the PUCO, although alternative statutory provisions may provide impetus for at least some continuing programs (subject to a significantly expanded opt-out for commercial and industrial customers).

Of course, another pending bill – House Bill 247[2] – may alter this new landscape even more.  But that’s a blog post for another day….

For more information, please contact the attorneys listed below.

  

[1] The Ohio Attorney General’s office certified the referendum summary for the ballot on August 29, 2019 and the Ohio Secretary of State certified the initial 1,000 signatures required as of August 30, 2019.  The HB 6 opponents now have until October 21, 2019 to submit 265,774 signatures of registered Ohio voters (from at least 44 of the 88 Ohio counties, with at least 3 percent of total voters from each of those counties) to place the referendum on the November 2020 ballot.  If the referendum signatures pass that threshold, HB 6 is stayed until an up-or-down vote on Election Day 2020.

[2] HB 247, 133rd General Assembly, https://www.legislature.ohio.gov/legislation/legislation-documents?id=GA133-HB-247.