With the “Tax Cuts and Jobs Act” being passed in Congress last December, there have been many questions raised about how it will affect the tax returns of individuals, corporations and other business entities. Who stands to gain and who stands to lose? Beyond the speculation about tax status, the new bill will affect other aspects of living and doing business.
Most of the public discussion regarding the effects of the new tax law on divorce has focused on the change made in the taxation of spousal maintenance or contractual alimony payments for the payor and payee. The new law mandates that, for divorces finalized after Dec. 31, 2018, the spouse paying contractual alimony or spousal support payments, will no longer be able to deduct those payments from his or her taxable income. And the recipient of contractual alimony or spousal support will no longer be required to pay taxes on the payments.
This sounds like a win for the individual receiving contractual alimony or spousal maintenance payments, but the law cancels out one of the prime motivators for the higher-earning spouse to agree to pay in the first place—or may motivate him or her to fight for a lower payout. It is extremely important to have qualified legal representation to recommend what is the best route moving forward for you and your family.
What not as commonly discussed, is how the new tax law will affect business valuation.
The valuation of a private business as an asset is often a highly contested issue in a divorce. The new law increases the cash flow of certain kinds of businesses due to the lower C corporation tax rate (reduced from 35 percent to 21 percent) and also as a result of the change in status of businesses in which the taxes on earnings are paid by the owner, not the company—pass-through arrangements—such as partnerships, limited liability companies, S corporations, and sole proprietorships. What does this mean to parties involved in a divorce? Both provisions can increase the value of the business. But the exact amount of the increase in value, and whether it is significant or not, probably won’t be known until the business’ first tax return is filed under the new law.
When dealing with investments such as partnership interests, it is important to determine if the interest to be awarded is subject to cash calls to fund the ongoing expenses of the investment. A good example of this would be the cash calls associated with a working interest in oil and gas properties. Divorcing spouses, without their own ongoing source of earned income, may find it difficult, if not impossible, to fund ongoing cash calls. Failure to make these calls often results in the diminishment or complete forfeiture of an investor’s interest.
Any other prior marital agreements, such as prenuptial and post-nuptial contracts, will also need to be re-examined considering the effects of the new tax reform law.
The new law will affect many other aspects of divorce and no two divorce cases are alike. You need an experienced family law expert to navigate you through this process and identify what specifically pertains to your individual situation. As a board-certified family law expert with over 25 years of legal expertise, Mark L. Scroggins can efficiently and effectively shepherd you through the entire divorce process from start to finish. Scroggins Law Group is dedicated to providing Frisco and North Texas with aggressive yet compassionate legal counsel. If divorce is something you are contemplating, please contact us for a consultation at 214-469-3100. Or for answers to more questions on all thing’s family law, find us online at www.scrogginslawgroup.com. Click on the link below to view a discussion with Mr. Scroggins about these subjects.