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each party jointly and severally liable for
High-net-worth couples and those owning the tax.
family businesses often have extended and Evaluate income tax impact of
complicated divorce proceedings. asset transfers
Communicating with legal counsel
early will avoid surprise tax liabilities
earnings before interest, depreciation, and allow for thoughtful tax planning,
and amortization (EBIDA) are $1.5 Personal Financial Planning including maximization of tax savings
million. Company X has $50 million for both parties.
in outstanding debt. Interest expense Tax planning issues to Sec. 1041(a) provides that no gain or
on the debt is approximately $3 million consider when assisting loss is recognized on a transfer of prop-
per year. During 2022 the company clients in a divorce erty from an individual to, or in trust
purchased $1 million of computer Navigating a divorce can be an emotion- for the benefit of, a spouse or a former
equipment and elected to take bonus al experience for clients, and assisting spouse, but only if the transfer is inci-
depreciation under Sec. 168(k). For them can likewise be poignant for their dent to a divorce. Sec. 1041(c) defines
its 2022 tax year, Company X will be tax advisers, particularly when the ad- a transfer of property as incident to a
limited to an interest expense deduction viser has a long-established relationship divorce if it occurs within one year after
of $150,000. See the table “Interest with both spouses. Once a client notifies the date the marriage ends or is related
Expense Limitation for 2022.” you they are contemplating a divorce to the cessation of the marriage.
and any potential conflict-of-interest Temp. Regs. Sec. 1.1041-1T(b),
By way of comparison, the table matters are resolved, it is important to Q&A-7, defines a property transfer as
“Interest Expense Limitation for 2021” swiftly meet and address tax planning is- related to the cessation of a marriage if
illustrates what the interest expense sues. It is imperative to collaborate with the transfer is pursuant to a divorce or
limitation would be if the same facts the divorce attorneys and investment separation instrument and the transfer
and circumstances took place during advisers so that the time frame to plan occurs not more than six years after
the 2021 tax year, when depreciation, and structure optimal tax outcomes for the date the marriage ends. Transfers
amortization, and depletion were not the parties is addressed and deadlines not pursuant to a divorce or separation
considered in the computation of ATI. are met. instrument and transfers occurring
As can be seen, under the same facts Parties should discuss the timing of more than six years after the end of
and circumstances, the expiration of Sec. the divorce. They can file an income tax the marriage are presumed not to be
168(j)(8)(A)(v) results in an increased return jointly if married on the last day related to the cessation of the marriage.
federal tax liability of $63,000. of the tax year, resulting in significant Taxpayers can rebut this presumption
tax savings, if they agree the return is by showing that the transfer was made
Planning accurate. Signing a joint return makes to effect the division of property owned
Because of the change in the ATI
calculation, practitioners should
consider if an eligible client could
qualify to be an electing real property
trade or business or an electing farming
business. The practitioner must weigh
the cost of adopting the ADS method
of depreciation for tax purposes with
IMAGE BY OLEMEDIA/GETTY IMAGES interest limitation provisions should be
the effect of the changes in the Sec.
163(j) rules. The change in the business

addressed with clients in connection
with other tax planning strategies.
From Benjamin Buckner, CPA,
Hughes Pittman & Gupton LLP,
Raleigh N.C.

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