ABI Journal

Tax Cuts and Jobs Act and Bankruptcy Estate Taxes

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Copyright © American Bankruptcy Institute Tax Cuts and Jobs Act: Bankruptcy Estate Tax Considerations March 2019 BY MARK DENNIS T ax compliance can be an unwelcome burden for trustees and debtors in possession (DIPs), potentially adding cost, complexity and delay to chap- ter 7 and 11 estate administration. The Tax Cuts and Jobs Act (TCJA) is the largest tax law overhaul since the Tax Reform Act of 1986, and trustees, debtors and their professionals should be aware of how these changes might affect bankruptcy estates. Although the impact of several of the changes is small and favorable, an important change relating to the treatment of net operating losses (NOLs) will make it more difficult for bankruptcy estates to offset taxable income and tax-de- ductible expenses, potentially increasing tax liability. Individual Estate Filing Threshold Both chapter 7 and 11 individual bankruptcy estates continue to be required to obtain their own sepa- rate tax identification numbers. Prior to the TCJA, income tax return filing requirements were governed by § 6012 (a) (8) of the Internal Revenue Code (IRC), whenever "gross income exceeds the exemption amount plus standard deduction." The TCJA has removed personal exemptions, and the new IRC § 6012 (f) (1) modifies the threshold to the new standard deduction only, as defined in IRC § 63. IRC § 63 (c) (7) contains new, special rules for taxable years 2018 through 2025, increasing the standard deduction to $12,000 for married-filing-separately individual taxpayers, which is now the statutory filing threshold for individual chapter 7 and 11 bankruptcy estates for the 2018 tax year. "Gross Income" continues to be defined in IRC § 61 (a) as "all income from whatever source derived," including interest, dividends, rents, royalties, business income and gains derived from dealings in proper- ty. A determination of whether the estate has a gain requires knowledge of the tax basis in the asset and an accounting for the sale, including selling costs. Sales of debtors' primary residenc- es might result in gains that can be excluded pursuant to IRC § 121, theoretically relieving the estate of a filing requirement. However, estates might still be required to file a tax return for these sales if a 1099S is issued to the bankruptcy estate. 1 Trustees and debtors might still wish to file bankruptcy estate returns even if the $12,000 threshold is not met to, 1 "Sale of Your Home," IRS (last updated Feb. 1, 2018), available at irs.gov/taxtopics/tc701 (last visited Jan. 23, 2019). Mark Dennis Dennis & Company, PC Greenwood Village, Colo. Exhibit 1 2017 2018 Ordinary Income 18,000 18,000 Standard Deduction (6,350) (12,000) Personal Exemption (4,050) 0 Taxable Income 7,600 6,000 Tax Liability 760 600

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