Bankruptcy filings, both personal and business, increased by 16.2% in the twelve-month period ending June 30, 2024. Business bankruptcies saw a significant rise of 40.3%, increasing from 15,724 to 22,060 cases. Non-business bankruptcies also grew, reaching 464,553, up from 403,000 the previous year.

One of the most common tax issues faced by debtors during bankruptcy is the recognition of cancellation-of-debt (COD) income. This occurs when a debt is discharged for less than the amount owed, requiring the debtor to recognize the difference as taxable income. While this concept is straightforward in theory, its application can be complex, especially in bankruptcy scenarios. The tax consequences vary significantly depending on factors such as whether the debt is recourse or nonrecourse.

The general rule is that COD income is taxable, but several exceptions and exclusions exist under the tax law. The most relevant for debtors in bankruptcy are the exclusions provided under Section 108(a)(1)(A) for bankrupt taxpayers and Section 108(a)(1)(B) for insolvent taxpayers. These provisions allow debtors to exclude COD income from their gross income under certain conditions.

Insolvency is determined by comparing the fair market value of the debtor's assets to their liabilities immediately before the debt discharge. If a debtor is insolvent, they may exclude COD income, but only to the extent of their insolvency. For bankrupt taxpayers, all COD income can be excluded if the discharge occurs under a Title 11 bankruptcy proceeding. However, these exclusions come with the requirement to reduce certain tax attributes, such as net operating losses and property basis, as a form of deferred tax recognition.

Taxpayers have the option to elect a different order in reducing their tax attributes, which requires careful planning to optimize the tax benefits. Understanding the implications of these exclusions and the associated attribute reductions is crucial for effective tax planning, particularly in times of economic uncertainty when debt restructurings are common.

Overall, the rules surrounding COD income and its exclusions are intricate, requiring a deep understanding of tax law to navigate effectively. Affected taxpayers must be vigilant in learning and understanding these tax rules, as the proper application of exclusions can significantly influence their financial outcomes during bankruptcy. Careful attention to the details of these complex rules is essential during debt workouts and restructurings to ensure that the financial benefits are maximized and potential tax liabilities are minimized.

The political landscape in the United States has recently witnessed significant developments, including President Biden's abrupt withdrawal from the presidential race, the Democratic leaders' selection of Kamala Harris as his replacement, and an assassination attempt on former President Trump. As Harris emerges as the most likely Democratic nominee, it is crucial to understand her stance on key issues, particularly taxation. While we await her official campaign promises, analyzing her past proposals and comments provides valuable insights into her potential tax policies. Here’s a summary of what we know so far and the key questions surrounding her tax stance.

Corporate Tax Rate

The Tax Cuts and Jobs Act of 2017 reduced the corporate tax rate from 35% to 21%. Harris has previously suggested returning the rate to 35%. The direction she chooses could significantly impact the business community and economic landscape.

Introduction of Financial Transaction Tax

During her 2020 presidential campaign, Harris proposed a financial transaction tax (FTT) to fund healthcare coverage. This included taxes on stock, bond, and derivative trades. Although it is uncertain if she will reintroduce this idea, it highlights her approach to leveraging taxes for broad social programs.

Harris’ Other Historical Tax Proposals

Harris has proposed various tax measures in the past, which provide a glimpse into her potential policy directions:

• Top Marginal Income Tax Rate: Increase top marginal tax rate for individuals to 39.6% from 34%.
• Income-Based Premium: A 4% tax on households making over $100,000 for Medicare for All (including all undocumented migrants).
• Repeal of Long Term Capital Gains Tax Rate: Raise rates to align with ordinary income tax rates. Appeal the current preferred long term capital gains tax rate of 20%.
• Estate Tax: Expansion of the current estate tax.
• Financial Transaction Tax: 0.2% on stock trades, 0.1% on bond trades, and 0.002% on derivative transactions.

Kamala Harris’s tax policy platform is anticipated to largely reflect her past proposals.  As more details emerge, it will be essential to monitor how her policies evolve and their implications for businesses and individuals.

Stay informed and prepared as the political landscape shifts.

California Senate Bill 167, signed into law on June 27, 2024, introduces tax changes aimed at addressing the 2024-2025 budget shortfall of $27.6 billion and the projected $28.4 billion deficit for 2025-2026. This budget shortfall is largely due to two significant measures: Starting January 1, 2024, California became the first state to offer health insurance to all undocumented immigrants through Medi-Cal, California’s version of the federal Medicaid program for low-income individuals, regardless of age. Additionally, Governor Gavin Newsom signed a suite of bills to address the homelessness crisis and enhance California’s response to people suffering from mental health issues on the streets, as part of his $22 billion housing affordability and homelessness package.

Senate Bill 167 suspends net operating losses (NOLs) from January 1, 2024, to January 1, 2027, for both corporate and personal income taxes, with exemptions for taxpayers with net business income or modified adjusted income below $1 million. The existing 20-year carryforward period for NOLs is extended by up to three years if the losses cannot be used due to the suspension.

Additionally, Senate Bill 167 limits the use of business credits to $5 million annually from January 1, 2024, to January 1, 2027. This limit applies to both the Corporation and Personal Income Tax laws, though certain personal income tax credits and the low-income housing credit are excluded. The carryover periods for these credits are extended by the number of years they are disallowed.

Senate Bill 175, pending signature, provides relief for businesses affected by the measures in Senate Bill 167. It offers the potential for an early sunset of the NOL suspension and credit limitation if the Director of Finance determines by May 14, 2025, or 2026, that the General Fund money is sufficient without these revenue measures.

서비스 산업에서 팁은 종사자들의 소득의 상당 부분을 차지한다. 레스토랑과 바에서 일하는 서버와 바텐더는 소득의 50-70%를 팁에서 얻으며, 호텔 직원인 벨보이와 하우스키퍼는 약 10-20%를, 발레 파킹 직원과 스파 직원 등은 20-40%의 수입을 팁으로 받는다.

2024년 기준으로 서비스 산업에는 약 1,680만 명의 사람들이 고용되어 있으며, 수백만 명이 팁에 의존하고 있다. 여기에는 250만 명의 웨이터와 웨이트리스, 거의 50만 명의 바텐더가 포함된다. 1965년부터 IRS는 팁을 과세 대상으로 삼아, 직원들이 이를 소득으로 보고하고 고용주가 세금을 원천 징수하도록 요구해 왔다.

최근 공화당의 유력 대선 후보인 도널드 트럼프 전 대통령은 2024년 6월 8일 네바다에서 열린 집회에서, 당선될 경우 서비스 산업 종사자들의 팁 소득을 비과세로 전환하는 연방 법률 변경을 약속했다. 이러한 변화는 서비스 업에 종사하는 많은 사람들에게 세금 부담에서 벗어나도록 도와줄 수 있으며, 물가 상승으로 인한 경제적 어려움을 완화시킬 수 있을 것으로 예상된다. 트럼프가 다시 백악관에 입성할지 여부는 아직 알 수 없지만, 만약 그렇게 된다면 2017년 세금 감면에 포함된 많은 세금 규정들이 연장될 것으로 예상된다. 또한, 경제를 활성화하기 위해 많은 다른 세금 인센티브들이 도입될 것으로 보인다.

하지만·위 공약은 트럼프의 백악관 입성과 공화당의 상·하원석 다수 확보가 필요하기에 일각에서는 위 공약의 이행 가능성 여부에 대한 의구심이 일고 있다. 게다가, 세금 법률에 대한 유일한 권한은 의회가 가지고 있기 때문에 트럼프는 줄어든 세수의 균형을 맞추기 위한 보완 조항을 도입해야 할 것이다.