This article is the marvelous work of our current law clerk Kieran O’Day, who will be finishing his stint with us shortly and heading on to clerk with the Supreme Court for the State of Wisconsin!

COVID-19 has caused unprecedented illness across the country and has sparked Congress and federal agencies into swift action. In our last COVID-19 post, we discussed the Safer At Home Order that is in effect across the entire state. In this two post series, we will discuss what happens when employees get sick with, have to take care of a family member because of, or have to care for a child due to a closure because of COVID-19. The Families First Coronavirus Response Act went into effect April 1, 2020 and provides two distinct but related COVID-19 related paid leave provisions. This first post relates to both the Emergency Family and Medical Leave Expansion Act, which is an expansion of the Family Medical Leave Act (FMLA) medical leave and the Emergency Paid Sick Leave Act, which allows for sick leave outside of FMLA leave. Our second post of this series discusses the Department of Labor’s (DOL) guidance on the FFCRA.  By way of these posts, we hope to inform employers and employees of the requirements and effects of these two paid leave provisions.

Generally, both provisions apply to “covered employers.” Covered employers are those that have 500 employees or less. There are potential exemptions to certain employers with fewer than 50 employees and certain reinstatement exemptions for employers with fewer than 25 employees. Employees are defined broadly under the FFCRA as all full time, part time, or contract employees of an employer.

Emergency Family and Medical Leave Expansion Act

 Who does it apply to?

 This section of the FFCRA loosens the requirements for obtaining FMLA leave if it is connected to the COVID-19 pandemic. This section provides leave if:

  • The employee has been employed by the covered employer for at least 30 days; and
  • The “employee is unable to work (or telework) due to a need for leave to care for the son or daughter under 18 years of age of such employee if the school or place of care has been closed, or the child care provider of such son or daughter is unavailable, due to a public health emergency.”

There are some important things to note with these two requirements. First, the 30-day employment period is significantly lower than the required employment period under standard FMLA leave. Typically, employees are not eligible for FMLA leave until they have been with the employer for 12 months, who have worked at least 1250 hours in the last 12 months, and at a location where at least 50 employees are employed within 75 miles. The only time related requirement under the FFCRA is that the employee be employed for at least 30 days.

Next, note that this expanded FMLA leave only apples if the employee is unable to work or telework because the employee has to take care of their son or daughter because the son or daughter’s school has closed due to COVID-19. As of this post, public and private K-12 schools in Wisconsin are closed through the expiration of the Safer At Home Order.

Finally, Under the FFCRA, a public health emergency is defined as “an emergency with respect to COVID-19 declared by a Federal, State, or local authority.”

 What do eligible employees receive?

If an employee is unable to work because they are taking care of a child they are eligible for the following benefits:

  • Up to 12 weeks leave, 10 weeks paid with the first two weeks unpaid at
  • Not less than 2/3 of the employee’s regular rate of pay (as defined by the Fair Labor Standards Act (FLSA)) for the number of hours that the employee would otherwise be normally scheduled to work.

Under the FFCRA, the maximum amount of paid leave compensation an employee may receive is $200 per day or a total of $10,000 in the aggregate. It is important to note that the maximum number of weeks an employee can get is 12 weeks, however, if schools reopen or the employee is otherwise able to begin working again, the leave period will conclude.

Do I have to restore my employees who took leave?

The short answer: Probably. Section 104(a)(1) of the FMLA requires employees who have taken leave be restored to the same position they had prior to taking leave, or one that is “equivalent.” An equivalent position is “a job that is virtually identical to the original job in terms of pay, benefits, and other employment terms and conditions.” Implying that Section 104(a)(1) applies in all other circumstances, the FFCRA makes an exception for employers that employ fewer than 25 employees under certain circumstances.

If such an employer is able to show that:

  • The employee took leave under the FFCRA;
  • The employee’s position when leave commenced does not exist due to economic conditions or other changes in operating conditions of the employer that are caused by a public health emergency (COVID-19) during the period of leave;
  • The employer makes reasonable efforts to restore the employee to a position equivalent to the position the employee had when the leave commenced, with equivalent employment benefits, pay, and other terms and conditions of employment; and
  • If the reasonable efforts above fail, the employer makes reasonable efforts during the 1-year contact period if an equivalent position becomes available.

The 1-year contact period begins at the earlier of the end of the public health emergency (COVID-19) or the date 12 weeks after the employee commenced the employee’s leave. It is important to note that the FFCRA is due to expire at the end of 2020, however, the contact period extends for one year regardless of when in the year it occurs.

Emergency Paid Sick Leave Act

 The second leave provision that the FFCRA provides is sick leave completely separate from the leave provided above for COVID-19 related issues.

 Who does this leave apply to?

The leave provided under this section is much broader and provides leave for any employee that is employed by a covered employer under six (not one) circumstances. The six available circumstances are:

  • The employee is subject to a Federal, State, or local quarantine or isolation order related to COVID-19
  • The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19
  • The employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis;
  • The employee is caring for an individual who is subject to an order as described in (1) or has been advised as described in (2);
  • The employee is caring for a son or daughter of such employee if the school or place of care of the son or daughter has been closed, or the child care provider of such son or daughter is unavailable, due to COVID-19 precautions; or
  • The employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor.

Note that unlike the FMLA expansion, this leave does not have any minimum employment requirement. Any employee who meets any of the above six circumstances is eligible for the emergency paid sick leave.

What are these employees eligible for?

The FFCRA splits the compensation plan under the emergency paid sick leave depending on the reason for which the employee is taking the leave.

If the employee is taking leave for reasons (1), (2), or (3), the employee is eligible for 80 hours (two weeks) of paid sick time for full time employees or, for part time employees, a number of hours equal to the number of hours that such employee works on average over a 2-week period.

Paid sick time is defined by the FFCRA in the following ways:

  • The rate is calculated based on the employee’s required compensation under sub (B) and the number of hours the employee would otherwise be normally scheduled to work except;
  • Under reasons (1), (2), and (3) the employee is provided the employee’s regular rate of pay provided that it does not exceed $511 per day or $5110 in the aggregate; and
  • Under reasons (4), (5), and (6), no less than two thirds of the employee’s regular rate of pay provided the amount does not exceed $200 per day or $2000 in the aggregate.

Employer Requirements/Prohibitions/Reimbursement

 What do I have to do?

 The FFCRA requires notice of these new employee rights. Think of the standard employment posters employers are required to have displayed. These posters are available through the Department of Labor (DOL) here.

Can I make an employee find a replacement prior to providing them leave?

No. This is expressly prohibited by the FFCRA.

 Can I make an employee use that employee’s other available leave benefits first?

 No. The FFCRA expressly prohibits employers from forcing employees to take other available, accrued leave prior to providing leave under the Act. However, the FFCRA also expressly allows employees to utilize other accrued leave prior to taking emergency paid sick leave, so they may end up with greater than 80 paid hours if they elect to do that.

How will I be repaid for providing leave?

The FFCRA states that employers will be provided tax credits for providing emergency paid sick leave or emergency family and medical leave.  The Internal Revenue Service has issued guidance on what tax credits it will provide and if employers will be eligible for refunds.

 How much notice do my employees need to provide?

The FFCRA states that an employee must provide the employer with a signed statement that supports the need for paid sick leave. That statement must include:

  • The employee’s name;
  • The date(s) for which leave is requested;
  • The COVID-19 qualifying reason for leave; and
  • A statement representing that the employee is unable to work or telework because of the COVID-19 qualifying reason.

While this documentation is required, employers cannot request documentation beyond the above. If employers attempt to require additional documentation such as proof of diagnosis or proof of symptoms, the employer could risk running afoul of the Americans with Disabilities Act, which limits the amount of medical information employers can request or demand from employees.

Navigating the new legislation and all of the regulations and rules that are set to come with it from the DOL and IRS will be confusing and time-consuming, but the attorneys at Schober, Schober & Mitchell, S.C. are staying up to date. Follow our COVID-19 blog posts on as we will continue to update as more guidance comes down from the federal and governments. Please contact our offices at 262-785-1800 or visit our website to talk to the business law attorneys regarding the new leave requirements or any of the new laws centered around COVID-19.

Small businesses have been substantially affected by the rippling effects COVID-19 has had our society and the actions taken by federal, state, and municipal authorities to help minimize the spread of the virus in the United States. In Wisconsin, Governor Tony Evers issued a Safer at Home order on March 24, 2020 which classified some businesses as “essential”, allowing them to continue to operate, while classifying others as non-essential, prohibiting them from continuing operations, with some very limited exceptions. With the economic downturn this virus has caused, even “essential” businesses are hurting, resulting in employee layoffs and the legitimate possibility of businesses defaulting on ongoing overhead obligations such as rent, utilities, or mortgage payments.

To combat the potentially catastrophic effects this sudden economic downturn has had on small businesses, their owners, their employees, and the American economy as a whole, the Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act), was enacted into law on March 27, 2020.

The CARES Act is over 880 pages. However, this post will focus only on the portion of the CARES Act that applies to small businesses in the form of small business loans through the Paycheck Protection Program. The intent of this program is to simultaneously assist small businesses by helping them avoid defaulting on ongoing overhead obligations, while also encouraging employers to retain and pay employees—thereby ensuring that employees can continue to support themselves and their families. While a loan may not seem much like a “stimulus,” there is potential for forgiveness of the loan so long as the business receiving the loan meets certain standards regarding employee retention and continued payment of those employees.  The rest of this post will summarize the basic points of how this loan program works for small businesses.

How Does the Loan Work?

  • Who is Eligible? Eligible businesses are those that have less than 500 employees, and also includes very small businesses, such as sole proprietors, independent contractors, and self-employed individuals. The business must also certify to the lending bank in writing that the uncertainty of current economic conditions makes the loan necessary to support its ongoing operations, acknowledge that the loan funds will be used to retain workers and maintain payroll, or make mortgage payments, lease payments, and utility payments. Additionally the business cannot get multiple Paycheck Protection Program loans and must make a certification to that effect to the lending bank.
  • Where does my business get the loan? Local banks/financial institutions will be the sources of the funds. The funds are authorized under the SBA 7(a) program, which is typically used for startups, business acquisitions, and other SBA funded loans. Remember, the SBA does not pay the money directly to the business, they just provide a guarantee to the bank up to a certain percentage of the loan amount. In this crisis, for loans granted under the Paycheck Protection program, the loans are going to be backed 100% by the SBA (up from typically lower percentages). This means that if the business defaults on the loan, the SBA will reimburse the bank for their loss.
  • How much interest will my business be charged? Interest rates cannot exceed 4%. Subsequent regulations have been issued since the original posting of this article. The interest rate on PPP loans will be 1%. 
  • How much of a loan can my business get? The maximum loan amount is $10 Million, but will be limited to 2.5 times the business’ average total monthly payments for payroll costs during the 1 year period before the date of the loan. If the business hasn’t been in business for a year, the loan amount is limited to 2.5 times the average monthly payroll costs incurred by the business during the period of January 1, 2020 through February 29, 2020.
  • What is included in “payroll costs” for determining how much my business can borrow?
    • Salary, wages, commission or similar compensation (except to the extent that an employee’s salary, wage or commission exceeds $100,000.00 annually, determined based on prorating the amount that would be paid from February 15, 2020 to June 30, 2020);
    • Payment of cash tip or equivalent;
    • Payment for vacation, parental, family, medical, or sick pay (except for those amounts paid for paid leave under the Families First Coronavirus Response Act, because those amounts are credited against an employer’s payroll tax liability);
    • Allowance for dismissal or separation;
    • Payment required for provision of group health benefits, including insurance premiums,
    • Payment of any retirement benefit;
    • Payment of state or local tax assessed on the compensation of employees; and
    • Sum of payment of any compensation to any sole proprietor or independent contractor not to exceed $100,000.00 per year prorated over the period of February 15, 2020 to June 30, 2020.
    • Subsequent regulations have been issued since the original posting of this article. Independent Contractor pay is not included for purposes of determining payroll costs.
  • What can the loan funds be used for?
    • payroll costs (as defined above);
    • Payments of interest on mortgage obligations but NOT principal incurred prior to February 15, 2020;
    • Rent obligations for obligations incurred prior to February 15, 2020;
    • Utility costs for utility service beginning prior to February 15, 2020;
    • Interest on any other debt obligations that were incurred prior to February 15, 2020.
  • Are personal guarantees required and will collateral be required? The SBA will not require any personal guarantee from the business owner. This does not mean that the particular bank will not require a personal guarantee or require the pledging of collateral!
  • Aren’t there fees with SBA loans? There is no (or to the extent possible) fee for the SBA loan;
  • Will there be a penalty if my business pays back the loan early? There is no prepayment penalty;
  • How long does my business have to pay it back? The loan amortization will be over no longer than a 10 year period if the loan is not forgiven. Subsequent regulations have been issued since the original posting of this article. The loan will be due in 2 years with monthly payments not due for six (6) months. 

How would loan forgiveness work?

Businesses in financial trouble due to the COVID-19 crisis may be thinking, why would I take on more debt right now? A critical part of the Paycheck Protection program is eligibility for loan forgiveness for the loans issued under this program. This may be an extremely useful resource for qualifying businesses wishing to take advantage of this program. However, businesses contemplating obtaining the loans should make sure they understand what they are getting into prior to taking on the loan.

  • How much of the loan can be forgiven? A business seeking a Payroll Protection Program loan can have its loan forgiven up to the amount (but not exceeding the loan amount) equal to costs incurred and payments made by the business during the period starting with the date the loan is made and 8 weeks after that, for the following expenses:
    • payroll costs (as defined above);
    • payment of interest on a mortgage obligation (the mortgage must have been in place before February 15, 2020);
    • payment of rent (under a lease arrangement entered into prior to February 15, 2020); and
    • payment of utilities (service must have begun prior to February 15, 2020).
    • Note: the initial SBA application for Paycheck Protection Program loans indicates that “due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.”
  • Is the forgiveness of debt taxable income? If there is loan that is forgiven, it is NOT included in gross income for income tax purposes (forgiveness of debt generally is taxable as income).
  • Are there limits on the forgiveness? There are limits/standards that must be met for the business to receive forgiveness on the loan for payment of the above amounts:
    • Employee retention: the amount of forgiveness for the above payments will be reduced if the business has fewer full time equivalent employees during the 8 week period after the loan is issued compared to the business’ average monthly full time equivalent employees during the period of February 15, 2019-June 30, 2019, or, if the business wasn’t open during that period, compared to the average number of full time equivalent employees per month during the period of January 1, 2020 through February 29, 2020. It is not clear from the Act what the SBA defines as a “full time employee equivalent”, as well as how part time employees fit within that definition. The SBA will need to issue guidance on these definitions in its regulations that are forthcoming.
    • Employee Compensation. The amount of forgiveness will also be reduced by every dollar of pay reduction of more than 25% of the employee’s normal wages/salary paid during the most recent full quarter that the employee was employed before the covered period. (For employees making $100,000.00 or more annually, the reduction would only occur to the extent those employees had their pay reduced less than 75% of $100,000.00).
    • Tipped workers: The Act states a business with tipped employees “may receive forgiveness for additional wages paid to those employees”. Unfortunately, this language is far from clear on how this will work. Does this mean that the business must pay an equivalent to 75% of average tips to those tipped employees in order to avoid reduction in loan forgiveness? Further guidance from the SBA will be needed on this point in upcoming regulations.
    • Exemption for Re-hires. The Act also allows for a grace period for the business to get employee employment levels and employee compensation levels to a position where they would be eligible for the forgiveness without regard to the reductions described above. If the employee reduction and/or the compensation reduction occurs between February 15 and April 26, 2020, so long as the business has eliminated the reduction in employment of employees or reduction in pay by June 30, 2020 then there shall not be a reduction in the loan forgiveness. This allows businesses that may have already laid off employees or reduced employee pay to get employment levels and pay levels back up to appropriate levels and still qualify for forgiveness.
    • Subsequent regulations have been issued since the original posting of this article. Not more than 25% of the forgiveness can be based upon non-payroll costs. 

Final Thoughts

  • The Payroll Protection Program under the CARES ACT provides small businesses the possibility of avoiding defaulting on mortgage payments, rent, and utility obligations, while also ensuring that their employees continue to get paid. Overall, it is a great help for both businesses and employees alike during this extremely difficult time.
  • However, businesses should understand that this program is done via a loan. Businesses should not go into the loan process expecting to automatically get loan forgiveness. There is risk that they may not qualify for the forgiveness (or may not qualify for 100% forgiveness), and therefore will have debt to pay back, though it will be over a 10 year period at a maximum of 4% interest.
  • Businesses will have to take extra care with their record-keeping to ensure that that they maximize their likelihood of obtaining loan forgiveness as these records will be heavily scrutinized in order for businesses to obtain that forgiveness. Additionally, businesses should understand that detailed records of the business, especially related to employees, must be kept in order to qualify for forgiveness.
  • Because some provisions are not entirely clear and need further explanation from the SBA, there may not be answers on these questions before a business needs the funds. If businesses take the plunge with a loan, they should understand the risk that they may not necessarily qualify for loan forgiveness. The subsequent regulations may have impact on eligibility.  Further, banks may not necessarily be able to provide substantial guidance on forgiveness eligibility until those regulations are issued. Businesses getting loans before regulations are issued should keep this in mind and understand the risk.
  • With the initial SBA application and now issued regulations on the PPP indicating the loans are payable over 2 years, and that not more 25% of the forgiven amount can be for non-payroll costs, businesses should understand how much they may have to pay back, the monthly payment amounts if that were the case, and also determine what their anticipated payroll and non-payroll costs will be, so they can more accurately project the extent of forgiveness they will receive. If they will not receive complete forgiveness, businesses should determine how the projected monthly payments will affect cash flow.
  • Practically speaking, this Act doesn’t change the fact that some businesses’ operations are substantially or completely reduced due to Stay at Home orders. As such, there may not be any work for employees or the same level of work for those employees. With that being said, the Payroll Protection Program may allow businesses to keep paying employees even if they are not working so the business can qualify for forgiveness for other overhead costs necessary to be paid to keep the business in business. Business owners will have to make the decision as to whether they wish to continue to make payments to those employees despite no or reduced services being provided in order to obtain loan forgiveness.

The attorneys at Schober Schober & Mitchell, S.C. are keeping up to date on the quickly changing laws regarding the COVID-19 crisis. Overall, we feel that the Payroll Protection Program under the CARES Act will be of benefit to many of our small business clients and hope that this will help all businesses weather this storm. We are available and happy to assist businesses who have questions on how they may be able to take advantage of this Paycheck Protection Program, as well as compliance with the other flurry of laws that have been passed recently related to COVID-19. Contact me, Attorney Jeremy M. Klang at and any of our business attorneys at 262-785-1820, or by visiting our website at

This article, appearing in the January 9, 2019 Business Law Blog of the State Bar of Wisconsin, is brought to you through the consent of the following author, together with the permission of the Business Law Blog of the State Bar of Wisconsin. We are pleased to bring this article of significant importance to you from such an expert. We hope you enjoy this!

Thomas J. Nichols, Marquette 1979, is a shareholder with Meissner Tierney Fisher & Nichols S.C., Milwaukee, where he focuses his practice on business and tax law. 


James W. DeCleene,Marquette 2015, is an attorney with Meissner Tierney Fisher & Nichols S.C., Milwaukee, where he focuses his practice on business and tax law.

New 2017 Wisconsin Act 368 allows S corporations and partnerships to be taxed at the entity level – meaning potential tax savings for their owners. Thomas J. Nichols and James W. DeCleene discuss the act and its tax implications.

Included among the bills just passed by the Wisconsin Legislature is new 2017 Wisconsin Act 368(Act), sponsored and championed by Sen. Howard Marklein, a certified public accountant.

This Act contains provisions that allow pass-through entities – including S corporations, partnerships, limited liability companies, and other entities treated as partnerships under the Internal Revenue Code – to elect to be taxed at the entity level.

Why would people want to do that?

Because under the Tax Cuts and Jobs Act, the deduction of state income, property, and other taxes imposed at the individual level is limited to a maximum of $10,000 per return – but taxes imposed on pass-through entities are deductible at the entity level, and therefore reduce income passed through to the shareholders or other owners, thereby effectively making those taxes deductible.1

Net Savings

The economics work like this: Taxpayers subject to the top individual income tax rate of 7.65 percent in Wisconsin applicable to taxable income over $336,200 on a joint return and $168,100 on a separate return for calendar year 2018 are likely to have property taxes and income taxes on their nonpass-through income of at least $10,000. Thus, the state income taxes that they pay on their income from pass-through entities are effectively nondeductible.

These new provisions allow pass-through entities to elect to be taxed at the entity level at a flat rate of 7.9 percent (the Wisconsin corporate income tax rate).2

You probably see where this is going. A nondeductible 7.65 percent tax costs precisely that – namely 7.65 percent. However, a federal top-bracket owner of a pass-through entity that qualifies for the new 20-percent (federal only) deduction for qualified business income under section 199A of the Internal Revenue Code is subject to a top federal rate of 29.6 percent ([1 – 20%] X 37% = 29.6%).

This means that a deductible 7.9 percent tax costs only a net 5.56 percent ([1 – 29.6%] X 7.9% = 5.56%) after you take into account the deduction for state income taxes at the entity level.

If, for whatever reason, the business owner is not entitled to the 20-percent section 199A deduction, the overall net tax cost of the 7.9-percent state income tax actually goes down to approximately 4.98 percent ([1 – 37%] X 7.9% = 4.98%).

Bottom line: Profitable Wisconsin business owners could achieve after-tax savings of approximately 2.09 percent (or almost 2.7 percent for businesses that do not qualify for the section 199A deduction).

Tax Treatment

The actual tax effects of this election are specified in the Act.

As noted above, a flat tax of 7.9 percent is imposed at the entity level.3 Income, losses and deductions that would otherwise be passed through to S corporation and partnership owners are excluded for purposes of determining their taxable income at the individual level for Wisconsin.4

However, the basis in their respective ownership interests (stock in the case of S corporations and partnership interests for noncorporate entities) are still increased and decreased to reflect income or loss at the entity level, the same as they would be if no election had been made.5 And the distribution of “earnings and profits” accumulated during years in which this election is in effect would not be treated as dividends for Wisconsin (or federal) tax purposes.6

Net income and situs of income for entities making this election is computed and determined as if no election had been made.7 It is just taxed at the entity level, rather than at the owner level.8 Thus, an S corporation or partnership owned 100 percent by Wisconsin resident shareholders or partners would be taxed on 100 percent of its entire net income, even if some of that net income was apportioned or otherwise allocated out-of-state.

However, for example, an S corporation with two shareholders – a resident shareholder owning 60 percent of its stock and a nonresident shareholder owning the other 40 percent of its stock – and that has 90 percent of its income apportioned or allocated out-of-state would pay tax only on 64 percent of its income (60% X 100% + 40% X 10% = 60% + 4% = 64%).

Since the net income of S corporations and tax partnerships electing under these new provisions will be taxed at the entity level, they are eligible to credit against that tax the net income or franchise taxes paid at the entity level in other states, as well as individual income taxes paid at the entity level on composite returns filed in other states, to the extent such credited taxes are attributable to shareholders or partners who are Wisconsin resident individuals, estates, or trusts.9

Similarly to individuals, this credit is subject to an overall cap based upon the 7.9 percent tax rate imposed on the corresponding income.10

Significantly, such income, franchise, and composite taxes paid by electing S corporations or partnerships should not qualify for credit at the individual shareholder or partner level anyway, because the corresponding income will now not be reported at the individual level for Wisconsin tax purposes.11

It should also be noted that only resident individuals, estates or trusts are eligible for such credits in the first instance.


Although the election is likely to be quite beneficial for numerous Wisconsin businesses, there are circumstances where it might not be advisable.

For example, S corporations and tax partnerships where a substantial amount of the pass-through income is subject to Wisconsin tax at substantially less than the top 7.65 percent rate might not benefit enough from the deductibility in order to offset the cost of having to pay tax at the higher 7.9 percent rate.

Similarly, it may not be advisable where S corporations, partnerships, or their respective shareholders and partners are eligible for credits, such as the manufacturing and agriculture credit, which reduce their effective Wisconsin tax rate.13

The only credits allowed to S corporations and partnerships electing under these new provisions are the credits for franchise, income, and composite taxes described above.14

Also, S corporations and partnerships with substantial out-of-state owners might not benefit if those owners are not allowed a corresponding exclusion or credit at the individual level in their home state for the income tax that is now being paid at the entity level here in Wisconsin.

The election may not be typically advisable for S corporations and partnerships that are experiencing losses, because there would be no deductible state taxes to begin with, and such losses would effectively be wasted.15

However, as explained below, this election may be made on or before the due date or extended due date of the relevant S corporation or partnership return.16 Thus, taxpayers and their accountants will have the opportunity to determine whether the election is beneficial and worth the extra compliance costs before committing to this regime. Taxpayers can even revoke the election within this same timeframe if they subsequently change their mind.17


The election procedure itself mirrors the existing election for S corporations to opt out of “tax-option” status entirely for Wisconsin purposes only.18 However, it must be made each year, and will presumably be in some form of check-off or attachment on the Wisconsin return.

Just as with the existing Wis. Stat. section 71.365(4)(a) “opt out” election, this new election will also require the consent of persons owning more than 50 percent of the shares for an S corporation and more than 50 percent of the capital and profits for a tax partnership, though any such consent should be able to cover some or all future years.

The new election is available for S corporations starting with taxable years beginning on or after Jan. 1, 2018. Partnerships will only be eligible for taxable years beginning on or after Jan. 1, 2019.19 Thus, some year-end tax planning for S corporations now may be appropriate, but not essential given the optional nature of this relief.

Summary: A New Opportunity

Lawyers and accountants should be apprising their S corporation and tax partnership clients of this new opportunity.

For profitable businesses, the after-tax savings could be significant. S corporations are eligible immediately for 2018 taxable years; partnerships are not eligible until next year.


1 I.R.C. §164(b)(6); H.R. Rep. No. 115-466, at 260 n.172 (2017) (Conf. Rep.) (“[T]axes imposed at the entity level, such as a business tax imposed on pass-through entities, that are reflected in a partner’s or S corporation shareholder’s distributive or pro-rata share of income or loss on a Schedule K-1 (or similar form), will continue to reduce such partner’s or shareholder’s distributive or pro-rata share of income as under present law.”).

2 Wis. Stat. §§ 71.365(4m)(a), 71.21(6)(a)

3 Wis. Stat. §§ 71.365(4m)(a), 71.21(6)(a)

4 Wis. Stat. §§ 71.05(10)(dm), 71.36(1), 71.365(4m)(b), 71.21(6)(b)

5 Wis. Stat. §§ 71.365(1)(a), 71.21(6)(d)4

6 Wis. Stat. § 71.05(6)(a)14

7 Wis. Stat. §§ 71.365(4m)(d)1., 71.21(6)(a)

8 Wis. Stat. §§ 71.365(4m)(b), 71.21(6)(b)

9 Wis. Stat. § 71.07(7)(b)3

10 Wis. Stat. § 71.07(7)(c)

11 Wis. Stat. § 71.07(7)(b)1

12 Id.

13 See, e.g., Wis. Stat. § 71.07(5n)

14 Id.

15 Wis. Stat. §§ 71.05(10)(dm), 71.365(4m)(b), (d)3., 71.21(6)(b), (d)2

16 Wis. Stat. §§ 71.365(4m)(a), 71.21(6)(a)

17 Wis. Stat. §§ 71.365(4m)(c), 71.21(6)(c)

18 Compare Wis. Stat. section 71.365(4)(a), with Wis. Stat. sections 71.365(4m)(a) and 71.21(6)(a).

19 2017 Wisconsin Act 368 § 21(1)​

This article, appearing in the January 18, 2019 Business Law Blog of the State Bar of Wisconsin, is brought to you through the consent of the following author, together with the permission of the Business Law Blog of the State Bar of Wisconsin. We are pleased to bring this article of significant importance to you from such an expert. We hope you enjoy this!

Michael J. Lokensgard, U.W. 1993, is a shareholder with Godfrey & Kahn, S.C., in Appleton, where he practices corporate, public finance, and commercial real estate law.



The Tax Cuts and Jobs Act of 2017 contained a powerful new tax incentive, albeit one of limited duration, intended to funnel capital to distressed communities. Michael Lokensgard discusses the details of investing realized capital gains into Qualified Opportunity Zones – census tracts that meet the U.S. Treasury Department’s definition of “low income.”

Passed in the waning days of 2017 and taking effect Jan. 1, 2018, the Tax Cuts and Jobs Act made significant changes to provisions of the Internal Revenue Code dealing with the treatment of capital gains.

On the one hand, the Act took away the ability to defer capital gains on the sale of tangible and intangible personal property by limiting capital gain deferral under Section 1031 to gains from the sale of real property only.

On the other hand, the Act established a new set of incentives for the investment of realized capital gains into “Qualified Opportunity Zones” — census tracts that meet the U.S. Treasury Department’s definition of “low income.”

According to the Treasury Department listing, there are 120 designated Qualified Opportunity Zones spread throughout the State of Wisconsin.

Requirements of the Opportunity Zone Program

Under the new program, a taxpayer may, within 180 days after recognizing a capital gain, reinvest that gain into a Qualified Opportunity Fund (QOF). Under the program’s proposed regulations, only long-term capital gains appear to be eligible to be reinvested in a QOF. The amount of gain which the taxpayer seeks to defer must be invested as cash.

The QOF may be organized as a corporation or partnership for tax purposes, but may not be a disregarded entity.

The QOF then invests in a Qualifying Opportunity Zone Business (QOZB), either directly or through an intermediate entity.

A QOZB is a business that meets these requirements:

  • Substantially all of the QOZB’s owned or leased property is “Qualified Opportunity Zone Business Property,” which is defined as tangible property (i) purchased after Dec. 31, 2017, and (ii) the use of which must occur within the Qualifying Opportunity Zone.

    In addition, to be considered as Qualified Opportunity Zone Business Property, the QOF must either commence the use of the property at the same time that the QOF commences operation, or the QOF must substantially improve the property within 30 months of the property’s acquisition by the QOF.

  • At least 50 percent of the QOZB’s income is derived from the “active conduct of a trade or business” within the Qualified Opportunity Zone.
  • A substantial portion of any of the QOZB’s intangible property is used in the conduct of business with the Qualified Opportunity Zone.
  • Less than five percent of the average of the aggregate unadjusted basis of the QOZB’s property is attributable to “nonqualified financial property,” as that term is defined in Section 1397C(e) of the Internal Revenue Code.

At least 90 percent of the QOF’s assets much be invested in a QOZB. The 90 percent holding requirement is tested every six months, including at the end of the QOF’s tax year.

If the 90 percent requirement is not met, the QOF is subject to monetary penalties. As is the case with many other tax incentives, certain businesses, such as public private golf courses, massage parlors, tanning salons, gambling facilities, racetracks, and liquor stores are not eligible QOZBs.

Benefits of the Opportunity Zone Program

Assuming that the alphabet soup of program’s requirements can be met, the taxpayer can reap significant benefits, including:

  • deferral of capital gains tax on the taxpayer’s original invested capital gain until the earlier of the date that the QOF investment is sold or Dec. 31, 2026;
  • if the QOF investment is maintained for at least five years, the taxpayer can permanently exclude a portion of the original invested capital gain from tax, which would effectively result in a 10 percent gain reduction if the QOF investment is held for at least five years, and a 15 percent gain reduction if the QOF investment is held for at least seven years; and
  • if the QOF investment is maintained for at least 10 years, the taxpayer can increase the basis in his or her interest in the QOF to 100 percent of its fair market value on the date of sale, effectively exempting the capital gain from the ultimate sale of the QOF interest from tax.

Taxpayers Should Move Quickly

Because of the various deadlines and required holding periods, taxpayers wishing to take full advantage of the new program will have to move quickly. Capital gain needs to be initially invested in a QOF within 180 days of recognition.

In order to receive the benefit of the reductions in capital gains tax noted above, the taxpayer must invest by Dec. 31, 2019 (to be eligible for the 15 percent reduction), or by Dec. 31, 2021 (to be eligible for the 10 percent reduction).

In order to receive the benefit of the complete exemption from capital gains tax for the sale of a QOF investment maintained for at least 10 years, the investment must be made by Dec. 31, 2028, which is the sunset date of the program.

Comparing Benefits with Traditional Deferral

In two important respects, the program provides a comparative benefit to the more traditional method of capital gain deferral under Section 1031 of the Internal Revenue Code.

First, while 1031 exchanges require that the entire value of the relinquished property be reinvested, a taxpayer need only invest the actual amount of his or her capital gain in a QOF, meaning that gain deferral is available for a potentially much smaller investment.

Second, while 1031 exchanges are now limited to exchanges of real property, almost any capital gain, whether from real or personal, tangible or intangible property, may be invested in a QOF.

Proposed Regulations

Proposed regulations for the Opportunity Zone program were issued Oct. 19, 2018, and in many respects, were extremely favorable to investors. While the statute required that the IRS promulgate rules for the certification of COFs, the proposed regulations indicate that QOFs may self-certify (unlike, for example, the much more rigorous certification requirements for community development entities under the New Market Tax Credit program).

The regulations also allow a QOF up to 31 months to actually deploy funds by investing in a Qualified Opportunity Zone, while at the same time providing immediate gain deferral for funds invested in the COF.

By defining “substantially all” for purposes of determining the amount of a QOZB’s owned or leased property which must be located within a Qualifying Opportunity Zone as 70 percent, the regulations permit a QOZB to hold significant assets outside of a Qualified Opportunity Zone.

Unresolved Issues

One of the biggest issues not resolved in the proposed regulations is the definition of “active conduct of a trade or business” for purposes of determining whether a business qualifies as a QOZB.

“Active conduct of a trade or business” has no single definition within the Internal Revenue Code. For example, in the context of tax-free spinoffs, “active conduct of a trade or business” requires that a taxpayer be engaged in active and substantial management and operational functions.

By contrast, in the context of New Market Tax Credits, “active conduct of a trade or business” requires only that the taxpayer reasonably expect to generate revenues within a certain period following an initial investment.

Further complicating matters, the Internal Revenue Code provisions dealing with enterprise zones, which are the source for several other definitions applicable to the Opportunity Zone program, specifically exclude the rental of residential real estate from the definition of “qualified business.”

Given the purposes of the Opportunity Zone program, utilizing the New Market Tax Credit definition of “active conduct of a trade or business” would make greater sense, as it would facilitate redevelopment by permitting the development and leasing of property on a triple net basis, which would likely not be permitted using a more restrictive definition.

Additionally, as the creation of affordable housing is a major issue for many low-income areas, it would be odd to exclude residential leasing from the permissible business functions of a QOZB. The final rules, when issued, will hopefully provide some further guidance with respect to this issue.

Conclusion: A Powerful New Tool

The Opportunity Zone program is a powerful new tool for the deferral and potential reduction of capital gains while incentivizing investment in the most distressed areas of the country.

Because the proposed regulations are so flexible, however, the degree to which investments made under the program will actually target the low-income communities that they are intended to benefit remains to be seen.

This article, appearing in the March 20, 2019 Business Law Blog of the State Bar of Wisconsin, is brought to you through the consent of the following author, together with the permission of the Business Law Blog of the State Bar of Wisconsin. We are pleased to bring this article of significant importance to you from such an expert. We hope you enjoy this!

Emory Ireland, Stanford 1969, is a partner in the Milwaukee office of Foley & Lardner LLP, where he practices banking and finance law.

Two recent cases held that a description of collateral in a financing statement was inadequate, because it referred to a description of collateral in a separate document, but did not attach that document.

This is an important issue, because failure to include an adequate description of collateral in a financing statement can leave a creditor’s security interest unperfected, making it vulnerable to the claims of subsequent secured parties who file complying financing statements and to avoidance by a trustee or debtor in possession if the debtor goes into bankruptcy.

The result can be substantial financial losses, which can run into the millions of dollars.

At Issue: The Description of Collateral

The First Circuit Court of Appeals recently held, in a case decided under the former version of Article 9 of the Uniform Commercial Code, that the description of collateral in a financing statement was inadequate when it referred to a security agreement attached as an exhibit, and the security agreement did not describe the collateral except by reference to another document which was not attached to the security agreement or the financing statement.1

It is important that this case was decided under the former version of article 9, because article 9 then required a financing statement to contain “a statement indicating the types, or describing the items, of collateral.” The First Circuit reasonably concluded that the financing statement at issue did not meet that standard.

The result should be different under the current version of article 9, which provides that a collateral description is sufficient “if the identity of the collateral is objectively determinable.”

The identity of collateral is objectively determinable if it is contained in a separate document that is identified in the financing statement, even if that document is not attached and does not appear in the public record.

Notice Filing

Article 9 establishes a system of notice filing, and the financing statement is certainly enough to put third parties on notice that there may be security interest in the assets of the debtor, even if it refers to a separate document for the description of collateral. It would easy enough for any interested third party to ask the debtor for a copy of the document that describes the collateral, just as the third party would have to inquire further to ascertain the amount of the debt and other important information that is not required to be included in a financing statement.

The official comment to section 9-502 clearly describes the system of notice filing:

  1. Notice Filing. This section adopts the system of “notice filing.” What is required to be filed is not, as under Pre-UCC chattel mortgage and conditional sales acts, the security agreement itself, but only a simple record providing a limited amount of information (financing statement)….

The notice itself indicates merely that a person may have a security interest in the collateral indicated. Further inquiry from the parties concerned will be necessary to disclose the complete state of affairs. Section 9-210 provides a statutory procedure under which the secured party, at the debtor’s request, may be required to make disclosure. However, in many cases, information may be forthcoming without the need to resort to the formalities of that section.

Unfortunately, the Bankruptcy Court for the Central District of Illinois has held that the description of collateral in a financing statement was not adequate even under the current version of article 9 when it referred to the collateral described in a separate security agreement and did not attach a copy of the security agreement.2

I believe that case was wrongly decided for the reasons indicated above, and it is currently on appeal to the Seventh Circuit.

This is an important issue. Stay tuned for further developments.


1 In re the Financial Oversight and Management Board for Puerto Rico, —-F.3d—-, 2019 WL 364029 (2019)

2 In re 180 Equipment, LLC, 2018 WL 4006294 (Bankr. C.D. Ill. 2018). Foley & Lardner LLP represents the secured party in the appeal to the Seventh Circuit of the decision in this case.

This article, appearing in the May 7, 2019 Business Law Blog of the State Bar of Wisconsin, is brought to you through the consent of the following author, together with the permission of the Business Law Blog of the State Bar of Wisconsin. We are pleased to bring this article of significant importance to you from such an expert. We hope you enjoy this!


Steve Mroczkowski, Chicago Kent 2010, is an attorney with Carlson Dash, Pleasant Prairie, where he concentrates his practice in commercial and business litigation, construction law, mechanic’s liens, and bond claims. 

A recent Court of Appeals case drove home a point: That choice of law provisions matter. Steve Mroczkowski discusses the case, which also proves the importance of front-end negotiations.

The Court of Appeals for the Seventh Circuit recently drove home a point that lawyers tell clients all the time when drafting contracts: choice of law provisions matter.

They can matter immensely, in fact, as in the case of Sanchelima International, Inc. v. Walker Stainless Equipment Co., LLC1 – to the tune of $778,306.70.

In Sanchelima, the court was required to apply Wisconsin law that – while established in 1978 and contrary to a majority of others states’ view on limitations of consequential damages – remained binding Wisconsin precedent.

Sanchelima v. Walker: Background

Sanchelima sued Walker for an alleged breach of an exclusive distribution agreement. Pursuant to the contract, Sanchelima would be Walker’s exclusive distributor of dairy silos in 13 Latin American countries. Walker agreed not to sell silos to third parties in those countries. However, Walker did exactly that – and Sanchelima sued.

The contract contained certain limited remedies provisions through which (i) Sanchelima’s remedies against Walker were limited to the amounts paid under purchase orders and, (ii) Sanchelima waived any liability for consequential damages.

It also stated that Wisconsin law would apply.

Walker claimed that the limited remedies provisions were fatal to Sanchelima’s claims. Sanchelima argued that the limited remedies provisions violated UCC §2-719 and its Wisconsin corollary, Wis. Stat. section 402.719, which provides:

(2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in chs. 401 to 411.

(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.

Wisconsin’s Dependent Approach Still the Law

Wisconsin follows the dependent approach when analyzing contractual limited remedy provisions. A minority of jurisdictions follow this approach, and there has been a trend away from it. However, it is still the law in Wisconsin.

Under the dependent approach, if a litigant proves that a limited remedy fails of its essential purpose under UCC §2-719, any accompanying disclaimer of consequential damages is per se unconscionable.

The district court held that because the limited remedy provisions in the contract provided, essentially, no relief for Walker’s breach of the exclusivity provision, it failed of its essential purpose – and was thus unconscionable. Therefore, the court could consider other UCC remedies – i.e., consequential damages for lost profits (which was specifically disclaimed in the voided contract provisions). After a bench trial, the court entered judgment against Walker, and Walker appealed.

A Try for the Independent Approach

Walker asked the Seventh Circuit to review the Wisconsin Supreme Court’s decision in Murray v. Holiday Rambler, Inc.2 and deviate from it. In the alternative, Walker asked the court to certify a question to the Wisconsin Supreme Court so it could revisit its decision in Murray, given the modern trend away from the approach adopted by the Murray court.

Walker wanted – and would likely have benefited from – a shift to the more-popular independent approach to contractual limited remedy provisions.

Under this approach, even if a limited remedy fails of its essential purpose, a consequential damages disclaimer is not automatically unconscionable. The litigant asserting so must still prove procedural and substantive unconscionability to invalidate it.

Thus, Sanchelima would have had to demonstrate not only that the limited remedy provision in the contract at issue was substantively no good and deprived it of a remedy against Walker, but also that something procedurally (during contract negotiations or the like) was unconscionable. This would have put more of an onus on Sanchelima, and, while we do not know, may have resulted in a different case outcome.

Trendy is not Unsettled

However, the Seventh Circuit did not need to go there. Generally, federal courts sitting in diversity can decide cases involving unresolved issues of state law by predicting how a state’s high court would rule.

Because Murray is good law in Wisconsin, the issue presented to the Seventh Circuit was not unresolved. It may be contrary to a current and recent national trend, but the Court noted, it was not unsettled.

The court also could not (as demanded by Walker) certify a question to the Wisconsin Supreme Court requesting that it revisit its holding in Murray. Such certification is allowed only where there is no controlling precedent in the decisions of the state appellate and supreme courts. Clearly, that was not the situation faced by the Seventh Circuit. The Seventh Circuit noted, “If Wisconsin is to adopt the independent approach, its own courts must do so.”

Lesson: Time on Front-end Negotiations Is Well Spent

Hindsight is always 20-20, but the Sanchelima case is a good reminder that spending time to negotiate contractual terms on the front end, and that, as lawyers, explaining their consequences to our clients is time well spent.


1 No. 18-1823 (April 10, 2019)

2 265 N.W.2d 513 (Wis. 1978)

This article, appearing in the April 18, 2019 Business Law Blog of the State Bar of Wisconsin, is brought to you through the consent of the following authors, together with the permission of the Business Law Blog of the State Bar of Wisconsin. We are pleased to bring this article of international importance to you from such experts. We hope you enjoy this!

Patricia J. LanePatricia J. Lane, Chicago 1986, is a partner with Foley & Lardner LLP, Milwaukee, where she specializes in the finance practice area.

Louis E. WahlLouis E. Wahl IV, Minnesota 2012, is an associate with Foley & Lardner LLP, Milwaukee, where he specializes in the finance practice area.

In 2021, the London Interbank Offered Rate – the benchmark reference rate that underpinned hundreds of trillions of dollars of finance contracts for three decades – will no longer be used. Patricia Lane and Louis Wahl IV discuss the cessation of what has been called “the world’s most important number,” and offer recommendations for addressing its cessation in credit agreements, securities, and other finance contracts.

In July 2017, the United Kingdom’s Financial Conduct Authority (FCA) announced that it and the panel banks whose submissions are used to determine the London Interbank Offered Rate (LIBOR) will only sustain LIBOR until the end of 2021.

The FCA declined to provide a successor reference rate for LIBOR, leaving it to the international finance community to select a successor to what has been called “the world’s most important number.”

The magnitude of the situation cannot be overstated – it is estimated that LIBOR cessation has the potential to disrupt $200 trillion of U.S. dollar LIBOR contracts, ranging from consumer auto loans to derivatives, including $4 trillion of syndicated loans and $500 billion of collateralized loan obligations.

Suffice it to say, a transition from LIBOR presents the finance industry with a monumental, arguably unprecedented challenge.


In the United States, a new reference rate has emerged as the preferred successor to LIBOR, the Secured Overnight Financing Rate (SOFR).

SOFR is an overnight, secured reference rate administered by the Federal Reserve Bank of New York. It broadly measures the cost of borrowing cash overnight with U.S. Treasuries as collateral, and therefore reflects fewer risks than unsecured rates. On the other hand, LIBOR is an unsecured reference rate and tends to be higher than secured rates to reflect counterparty risk.

SOFR is based entirely on transactions in the U.S. Treasury repurchase market, and encompasses a robust underlying market (about $750 billion per day). In contrast, LIBOR is only partially based on actual transactions and encompasses a much smaller market (for example, the average daily trading volume for three-month LIBOR is less than $1 billion per day).

Moreover, the process for determining SOFR is relatively more transparent compared with LIBOR’s. One notable drawback of SOFR is that it tends to be more volatile than LIBOR, especially at month and quarter-end dates, by virtue of it being tied to U.S. Treasury bill issuances.

Suggestion: Use Fallback Language

While there is increasing momentum for SOFR to replace LIBOR and notable SOFR-based debt issuances closed in Q4 2018 and early Q1 2019, the market has not yet widely adopted SOFR (or a variation thereof) as LIBOR’s successor. Until that time, affected parties need to implement interim plans immediately.

For credit agreements, securities, and other finance contracts using LIBOR as a reference rate and with obligations maturing beyond 2021, we recommend that LIBOR fallback language be incorporated therein to address LIBOR cessation.

If a finance contract already includes fallback language, check to see whether the existing language merely addresses the temporary unavailability of LIBOR (for example, if the relevant LIBOR screen rate is unavailable) as compared to the permanent unavailability of LIBOR. Until recently, fallback language addressed only the former. Such legacy language is inadequate to provide a workable solution when LIBOR becomes permanently unavailable.

Fallback Language: What’s Necessary

To address LIBOR cessation, fallback language should at a minimum provide that, in the event LIBOR becomes permanently unavailable or is no longer a widely-accepted benchmark for new indebtedness or obligations, the contracting parties will endeavor to establish an alternate rate of interest to LIBOR that gives consideration to the then-prevailing market convention for determining a rate of interest for transactions of that type, and that the parties will enter into an amendment to the subject agreement to appropriately incorporate such alternate rate of interest.

Such fallback language should permit other adjustments to the terms of the finance contract that might be required to ensure that the parties are in the same economic position once the fallback language is triggered, including appropriate adjustments to the spread.

In addition, fallback language may need to address the mechanics and approval thresholds to amend the subject finance contract to give effect to the alternate rate of interest and other related terms.

This last point becomes particularly relevant in the context of finance contracts that require the consent of multiple parties (such as syndicated credit agreements and indentures), so a streamlined amendment process should be included with respect to the replacement of LIBOR.

Conclusion: Update Your Contracts and Monitor Market Developments

Given the size and scope of LIBOR usage as a reference rate throughout the finance industry, it is essential that affected parties update their credit agreements, securities, and other finance contracts with appropriate fallback language, and actively monitor market developments regarding SOFR and its possible replacement of LIBOR as the preferred reference rate for finance transactions.

The following article by James N. Phillips appeared in the February 13, 2019 issue of the Business Law Section Blog of the State Bar of Wisconsin and is being reposted from that site with the permission of the author and the State Bar of Wisconsin.

Jim Phillips, Iowa 1979, is a shareholder in the Milwaukee office of Godfrey & Kahn, S.C., where he practices tax and corporate law.

Section 1202 of the amended Internal Revenue Code of 1986 allows exclude up to 100 percent of the gain on sale of stock held more than five years, if such stock meets the definition of “qualified small business stock.” Jim Phillips discusses some of the requirements and traps of Section 1202.

An owner of C corporation stock may be able to exclude up to 100 percent of the gain on sale of stock held more than five years, if such stock meets the definition of “qualified small business stock” (QSBS) under Section 1202 of the Internal Revenue Code of 1986, as amended.

The gain might also be excludable from Wisconsin tax if the corporation is a qualified Wisconsin business and the requirements of Wis. Stat. section 71.05(25)(b) are met.

Given the significantly lower federal income tax rate on C corporation income (21 percent) compared to the federal income tax rate on flow-through income of S corporations and LLCs (37 percent or 29.6 percent, depending on whether the 20 percent deduction of Section 199A applies), the availability of the Section 1202 exclusion can, in some cases, tip the scales toward C corporation status when evaluating the proper choice of entity.

Here is a summary of the requirements and traps of Section 1202.

Section 1202 Offers Partial or Total Exemption from Tax for Certain Capital Gains

Section 1202 exempts from tax a specified percentage of a taxpayer’s gains from the sale of QSBS provided the taxpayer held the QSBS for more than five years (among other requirements discussed below).

The applicable exemption percentage for stock acquired on or after Sept. 27, 2010, is 100 percent. For stock acquired earlier, the exemption may be 50 percent or 75 percent, depending on the taxpayer’s stock acquisition date.

Congress has repeatedly changed the amount of the Section 1202 exemption with varying effective dates. For stock for which the 100 percent exclusion applies, the excluded gain is not a preference under the alternative minimum tax (AMT).

For other exclusion percentages, a portion of the excluded amount is an AMT preference.

The table below summarizes the interaction of Section 1202, AMT, and other code provisions.


Date of Stock Acquisition § 1202 Tax Exemption Percentage § 1202 Capital Gain Rate Effective Capital Gains Rate Effective Net Investment Income Tax Rate Effective AMT Tax Rate AMT rate savings vs. 23.8% regular capital gain rate
On or after Aug. 11, 1993, but before Feb. 17, 2009 50% 28% 14% 1.9% 14.98% 6.92%
On or after Feb. 17, 2009, but before Sept. 27, 2010 75% 28% 7% 0.95% 8.47% 14.38%
On or after Sept. 27, 2010 100% 28% 0% 0% 0% 23.8%

For example, assume that individual X acquired $1 million of Y corporation stock in 2019, and Y stock is a capital asset in X’s hands. If the Y stock is not QSBS and X sells it in 2026 for $6 million, then X realizes a gain of $5 million. In that case, X could potentially owe federal income taxes of $1.19 million ($5 million gain x 23.8 percent capital gains rate).

However, if the Y stock were QSBS in X’s hands, then X’s entire Section 1202 gain on the sale would be excluded and X would owe no federal income taxes attributable to the sale. Thus, X would have tax savings of $1.19 million. This would be in addition to the lower C corporate income tax rate over the 6-year period. However, choice of entity is usually not just a current or future tax rate issue. A number of factors need to be considered: expected dividend distributions, the flexibility of structuring a potential future sale as an asset sale, estate planning considerations, etc.

Requirements for the Section 1202 Exemption

For stock in a corporation to qualify for the exemption in Section 1202(a), the following requirements must be satisfied:

  • Five year holding period – the taxpayer must have held the stock for at least five years.
  • Shareholder other than a corporation – the taxpayer claiming the Section 1202 exclusion must not be a corporation.
  • Acquisition at original issuance for cash or services – the taxpayer must have acquired the stock at its original issuance either (i) in exchange for money or other property (not including stock) or (ii) as compensation for services provided to the corporation. However, this requirement is waived in certain cases. For instance, if QSBS is transferred by gift or at death, the donee or heir, respectively, steps into the donor or decedent’s shoes for purposes of the Section1202 original issuance requirement and five year holding period.
  • Domestic C Corporation – the stock must be a corporation created or organized in the U.S. or any State that is taxed under subchapter C of the Code.
  • Gross Asset Test – The aggregate gross assets of the corporation prior to and immediately after the taxpayer acquires the stock must not exceed $50 million. For this purpose, aggregate gross assets includes the amount of cash and the combined adjusted bases of other property held by the corporation. However, the adjusted basis of any property contributed to the corporation is determined as if the basis of such contributed property were equal to its fair market value at the time of contribution.
  • Qualified Active Business – The corporation must have conducted a “qualified trade or business,” which is defined in the negative to exclude the following types of businesses:
    • any business involving performing services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any business where the principal asset of the business is the reputation or skill of its employee(s),
    • any banking, insurance, financing, leasing, investing, or similar business,
    • any farming business (including the business of raising or harvesting trees),
    • any business involving the production or extraction of products of a character with respect to which a deduction is allowable under section 613 or 613A, and
    • any business of operating a hotel, motel, restaurant, or similar business.

Additionally, the corporation must be an “eligible corporation,” which primarily excludes a regulated investment company, REIT, REMIC or cooperative.

  • 80 percent of assets by value used in a qualified active business – At least 80 percent of the corporation’s assets must have been used in the active conduct of one or more qualified trades or businesses during “substantially all” of the taxpayer’s holding period for the shares.

Common Situations that Prevent Stockholders from Taking Advantage of the Section 1202 Exclusion

Stock redemptions may cause all stock not to be QSBS

Given that the Section 1202 exclusion is designed to incentivize new business investment, the code has two provisions designed to prevent the exclusion from applying when newly issued stock is simply a replacement of a prior investment.

Stock is not QSBS if at any time during the four-year period beginning two years before the stock was issued, the issuing corporation purchases more than a de minimis amount of its stock from the taxpayer or a person related to the taxpayer. Redeemed stock exceeds a “de minimis amount” only if (i) the amount paid for it is more than $10,000 and (ii) more than 2 percent of the stock held by the taxpayer and related persons is acquired.

Under the second provision, stock is not QSBS, if during the two-year period beginning one year before the stock was issued, the corporation repurchased stock in one or more transactions (i) each of which involves a repurchase of more than $10,000 of stock where more than 2 percent of all outstanding stock by value is repurchased and (ii) the sum of all repurchases during the two-year period have a value, at the time of redemption, in excess of 5 percent of the aggregate value of all the corporation’s stock at the beginning of the two-year period.

Large rounds of venture capital financing may cause the corporation to fail the qualified active business test or the gross asset test

The qualified active business test requires that during “substantially all of the taxpayer’s holding period” at least 80 percent (by value) of the corporation’s assets must be used in active conduct of a one or more qualified trades or businesses. Subject to certain allowances for working capital and financing research and experimentation, this means that if more than 20 percent of a corporation’s assets become cash or other non-qualified assets immediately after a venture capital round of financing or at any other time, such corporation may fail this “substantially all” test.

Additionally, in order for stock to qualify as QSBS, the aggregate gross assets of the corporation cannot exceed $50 million at either (i) any time prior to the taxpayer’s stock acquisition date and (ii) immediately after the taxpayer’s stock acquisition date.

Contributions of appreciated property in exchange for stock are subject to further limits

For purposes of the requirement that a qualified small business have aggregate gross assets of $50 million or less, aggregate asset value is generally measured as cash plus the adjusted basis of the other assets. However, the basis of any property contributed to the corporation is deemed to be equal to its fair market value (FMV) for purposes of this gross asset test.

The contribution rule also affects a shareholder’s basis in his QSBS and the calculation of gain on later sale. When a shareholder has contributed property to a qualified small business, the shareholder’s basis in her QSBS is also deemed to be the FMV of the contributed property at the time of contribution, even though for all other tax purposes, the shareholder has carryover basis in her stock equal to her adjusted basis in the contributed property. Only future appreciation is eligible for the Section 1202 exclusion.

Stock must be acquired at original issuance to qualify for Section 1202

Generally, a shareholder must acquire stock at original issuance in exchange for cash or other property or as compensation for the stock to qualify as QSBS. A purchase from an existing shareholder will not qualify for the exclusion.

This strict rule is relaxed a bit, however, in the realm of corporate reorganizations. When a shareholder exchanges QSBS for other stock in a tax-free reorganization, such as a merger or stock for stock acquisition, the new stock received by such shareholder can qualify as QSBS with the holding period tacking. However, the exception only applies to the built-in gain in the stock at the time of the tax-free reorganization. Future gains in the stock received do not qualify for the Section 1202 exclusion, unless the new corporation is also a qualified small business.


Image result for public domain images navigationSmall business owners looking to sell their business in the near future need to be prepared for the complexities that will arise during the exit process. One complexity is the tangled web that comes with the Buyer of the business obtaining a loan backed by the Small Business Administration 7(a) program. Buyers of businesses are using the SBA 7(a) program in business acquisitions more and more frequently. The terms of the SBA financing package are favorable to Buyers compared to conventional financing, and due to a change in the SBA’s rules in early 2018, more Buyers are eligible for SBA financing because the down payment requirement minimum is now only 10% of the loan cost. Because the SBA is a federal government program backed by federal dollars, there are necessarily many rules and regulations that affect a Buyer’s eligibility for SBA backing as well as each individual lender’s underwriting process.

These complexities not only affect Buyers, but also affect Sellers, often impacting the flexibility of the terms of the transaction that would otherwise be available to the parties in a cash deal or even purely Seller financed transaction.  The reality of the market also makes SBA financing a common component of most small business sales.

While a cash transaction is ideal for a Seller looking to liquidate his or her equity in the business and carry no risk of reliance upon the success or failure of the business post-closing, cash buyers are scarce, and finding a cash Buyer may be difficult, especially if the Seller has legacy interests in transitioning to the next generation of the family or a top level employee that doesn’t have the financial wherewithal to pay cash.

On the other hand, a Seller financed deal  is a substantial risk to the Seller because it involves the Seller continuing to bear the risk of success or failure of the business post-closing to get paid, but without giving the Seller any direct control over the business operations.

The SBA 7(a) financed transaction may be an ideal middle ground for the Seller who wants to maximize the amount of cash received at closing, wishes to avoid the risk of Seller financing, but who doesn’t have a Buyer with the cash or that can qualify for conventional financing.

When negotiating a letter of intent or even the final purchase contract with a Buyer using the SBA 7(a) program, the Seller should know how the SBA 7(a) program may affect his or her goals and preferred terms of the transaction before even entertaining a deal involving such financing. Contemplating these issues  before signing a letter of intent or a purchase contract is critical for the Seller because it allows the Seller to pre-emptively deal with the issues at a time where the Seller still has significant leverage in the negotiations.

Here are some items of which a Seller should be aware before signing a letter of intent or purchase contract with an SBA Buyer:

Minimum Buyer’s Equity.

The SBA 7(a) program requires the Buyer to come to the table with 10% of his or her own money to pay toward the total loan cost (which includes the entire purchase price of the business and some SBA and lender fees and costs). For example, in a $2M transaction, this means that the Buyer will need over $200,000.00 from his or her own pocket to be able to close the deal. As a Seller, determining whether the Buyer has sufficient assets to meet the 10% down payment requirement is important to know before the Seller expends significant costs proceeding with a transaction.

Even if the Buyer doesn’t have the 10% in cash, the SBA will allow the Buyer to use a Seller financed promissory note for up to 5% of the down payment requirement. So, on a $2M transaction, if the Buyer only has $100,000.00 to put down, if agreeable to the Seller, the Buyer could execute a promissory note of $100,000.00 to the Seller to meet the 10% down payment requirement.

But, there’s a catch! No payment can be made by the Buyer on that $100,000.00 note during the entire term that the note to the bank is outstanding (typically 10 years). Not only that, but the bank providing the Buyer the financing will surely require that that note to the Seller (and any liens on collateral securing that loan) be subordinated to all of the bank’s notes and liens for the purchase, putting the Seller second in line to collect from the Buyer in the event of default. In transactions with much of the purchase value being in goodwill, this puts the Seller at a significant of risk of not receiving the 5% of the purchase price to be paid on that note if the Buyer were to default.

In light of this, when negotiating the letter of intent or contract, it is advisable for the Seller to obtain and analyze the Buyer’s financials to determine the likelihood of the Buyer being able to meet the equity requirements to go through with the transaction, as well as to determine the likelihood of the Seller being able to collect on any Seller financing that is involved in the transaction in the event of default.

Post-Closing Employment and Health Insurance

As a Seller, the SBA 7(a) program prohibits you from staying on as an officer, director, stockholder or key employee of the business after the Closing (though allows the Seller to be paid as a consultant for up to 12 months after closing for management transition purposes only). This is especially important for business owners who are not yet eligible for Medicare, yet need to have health insurance to bridge the gap until they are Medicare eligible. In a non-SBA financed transaction, the seller may stay on as an employee eligible to obtain benefits given to all other full-time employees, one of which is the group health insurance plan. An SBA rule prevents that arrangement.

The alternatives are to obtain such insurance out of pocket on the open market via an individual plan, or, if the Seller has a spouse that is employed and is offered health insurance, obtaining insurance through the spouse’s plan. Since having health insurance is so critical, finding a cost-effective way to bridge the gap from the date of a sale of the business to the date of Medicare eligibility is a major concern for many business Sellers.

Where a post-closing employment arrangement which includes health care can be structured into the deal in non-SBA transactions, it’s paramount for a Seller to be aware of this restriction on post-closing employment from the beginning of the negotiations of an SBA transaction, especially in negotiations of price or interest rate on an allowable Seller note. This additional out-of-pocket cost for health insurance should be accounted for by the Seller in these negotiations. In the very least, the Seller needs to have a plan in place for health insurance after the sale.

Required Independent Valuations

The SBA requires that where the parties are related (either by family or a close relationship such as a key employee, or co-owner), that an independent appraisal be conducted to justify the loan amount and/or purchase price. The SBA also requires this in transactions where the initial appraisal or purchase price allocation shows that the purchase price less fixed assets equals $250,000.00 or more. For many businesses, this latter scenario is common, as much of its value is in goodwill (typical in-service oriented businesses or where the price is based heavily on sales numbers, not the value of fixed assets). Often in the initial stages of negotiations, the Buyer may forego the cost of an appraisal and merely justify the purchase price based upon a review of the Sellers’ financials.

If the appraisal report determines the value of the business is a lower price than the agreed upon purchase price, in order for the transaction to occur, the bank may require that the Buyer infuse additional equity (either with cash or via a Seller standby note for the difference), or possibly allow an additional, non-standby Seller note to cover the difference between the appraised price and the agreed upon purchase price.

Often, when the independent appraisal is required by the bank, the parties are already under contract, with the Buyer obtaining a financing commitment being a contingency to closing. Where the contract has already been signed or a letter of intent heavily negotiated, there are costs that have been incurred by the parties in getting to that point. These sunk costs may make it a hard decision for the Seller to determine whether he or she is willing to walk away from the deal, and gives the Buyer leverage by threatening to walk. This may force the Seller to begrudgingly accept a lower price or unfavorable terms to accommodate the appraisal. The seller may not have been willing to accept these terms if they were contemplated before signing the letter of intent or purchase contract.

Taking pre-emptive steps to avoid getting into this position before signing the letter of intent or purchase contract can help avoid these outcomes. One good way to do so is for the Seller to obtain an independent valuation themselves prior to entering into a contract or letter of intent. Often Sellers have a rough idea of how much they believe their business is worth. It’s possible that that price is accurate, but sometimes the Seller’s idea may be completely unrealistic.

Getting a reality check on price via an independent valuation may save everyone’s time and money before signing a letter of intent or purchase contract. Or, if the Seller has a particular price in mind for his or her retirement that doesn’t match the valuation, if the Seller can afford to do so, knowing the realistic price ahead of time will give Seller the knowledge of how to get that desired price. The Seller may elect to hold onto the business for a period of time to earn enough income to bridge the gap between the valuation and the desired price, or take the time to look for a non-SBA Buyer willing to pay that price. If the conditions for an SBA required independent appraisal are present, having a realistic idea of price before signing a letter of intent or purchase contract will allow a Seller to avoid those outcomes or at least plan accordingly.

Contract to Closing Timing.

It’s also important for the Seller that the Buyer choose a lender that is reputable and experienced with the SBA 7(a) process. Some banks are deemed “preferred” lenders, which essentially means that the lender can make all of its own underwriting decisions without the requirement of the SBA going through an additional and independent underwriting process (which takes more time). A Seller looking to avoid a long, drawn out financing contingency period and get a deal closed quickly is advised to insist upon the Buyer using a preferred SBA lender from the start of the negotiation process and in the letter of intent or purchase contract if the deal is to be SBA financed.

The business attorneys at Schober Schober & Mitchell, S.C. are experienced in all types of privately held Wisconsin business purchase and sale transactions, including transactions involving SBA financing. Though the focus of this blog post is on Sellers, the business attorneys with Schober Schober & Mitchell, S.C. represent both Buyers and Sellers in such transactions. When considering buying or selling a business, it’s important to have an experienced attorney advising you at the beginning stages of the negotiations all the way through closing. Whether you’re a Buyer or Seller, the business attorneys at Schober Schober & Mitchell, S.C. will be happy to assist with your transaction. Contact me at or call me at 262-569-8300 to talk to me about how we can help you navigate through your deal.

This article was first posted by Benjamin Streckert on the State Bar of Wisconsin Business Law Section blog and is being used here with the permission of the State Bar of Wisconsin and its author.

Benjamin Streckert, Minnesota 2017, is an attorney with Ruder Ware in Wausau, where he concentrates his practice on various business transactional matters.

Did you know that the “full and equal enjoyment” requirement of the Americans with Disabilities Act also applies to websites maintained by places of public accommodation? Benjamin Streckert discusses the issue and provides tips for websites to become more accessible to those with disabilities.

Did you know that the Americans with Disabilities Act (ADA) applies to the websites as well as the physical facilities of places of public accommodation​?

A review of court dockets around the country shows that plaintiffs are filing an increasing number of lawsuits against companies alleging that their websites are not “accessible” to individuals with disabilities as required by the ADA.

In 2017, plaintiffs filed 814 website accessibility lawsuits in federal court alone, according to the ADA Title III website. This trend is not only a national one – these types of lawsuits are being threatened in Wisconsin as well. Businesses would be well advised to get out ahead of the potential threat.

The Americans with Disabilities Act

According to the ADA, a disability includes “a physical or mental impairment that substantially limits one or more major life activities.” Title III of the ADA prohibits discrimination by a “place of public accommodation” against individuals with disabilities.

Although business owners and managers may want to consult with an attorney to determine if their business qualifies, hotels, restaurants, theaters, grocery stores, pharmacies, offices of health care providers, museums, golf courses, banks, and many other areas open to the community generally qualify as places of public accommodation. These places are required to provide “full and equal enjoyment of [their] goods, services, privileges, advantages or accommodations” to people with disabilities.

Application to Websites

The ADA mandates that brick and mortar locations have certain ramps, counter heights, and other accommodations, so as to ensure that individuals with disabilities have access to full and equal enjoyment of the facilities and the services offered inside of them.

However, many people are not aware that the “full and equal enjoyment” requirement also applies to websites maintained by places of public accommodation. An individual with a disability must be able to equally access a website or mobile application with the aid of a commonly used assistive technology.

A good example of this is that a visually impaired person must be able to navigate a website using a screen reader. Screen readers are software programs that allow users to read the text displayed on a computer screen with a speech synthesizer or braille display. Not all websites are conducive to, or compatible with, screen readers, however.

In fact, websites must have very specific characteristics in order to be compatible with screen readers and other tools used by those with various disabilities.

Legal Standard for Accessibility

Currently, there is no definitive standard for accessibility. But the World Wide Web Consortium’s Web Content Accessibility Guidelines Version 2.0 with AA (intermediate) success criteria (WCAG 2.0 AA) has become the presumptive standard.

Websites that conform with WCAG 2.0 AA are generally deemed ADA compliant. Although not an exclusive list, in order to conform to WCAG 2.0 AA, websites must have capabilities that include:

  • captions for any videos;
  • certain levels of color contrast and minimum font sizes;
  • clear labels and section headings;
  • audio descriptions for video content;
  • allowing keyboard-only navigation (i.e., navigation without a mouse);
  • using icons and buttons consistently; and
  • automatically suggesting fixes when users make input errors.

Maintaining a website that conforms to WCAG 2.0 AA requires periodic updates.

Consequences of a Non-ADA Compliant Website

If a place of public accommodation’s website does not conform to the above standards, both the United States Department of Justice and private citizens can bring suit.

The Department of Justice can obtain monetary damages, attorneys’ fees and costs, monetary penalties, and a court order requiring an institution to bring its website into compliance. An individual may not obtain money damages, but he or she can obtain a court order requiring the institution to bring its website into compliance and recover attorneys’ fees and costs. The costs to a noncompliant organization can be significant.

Action Steps

Given recent ADA litigation trends, and so as not to be an easy target for an accessibility suit, places of public accommodation should consider:

  • Engaging a consultant with experience in WCAG 2.0 AA when building a new website or modifying an existing website;
  • Posting an accessibility statement offering technical assistance for disabled customers on the website home page;
  • Ensuring that customer complaints regarding accessibility issues are addressed promptly;
  • Hiring a vendor with extensive knowledge of WCAG 2.0 AA to conduct a compliance audit of the organization’s current website;
  • Building WCAG 2.0 AA compliance provisions into agreements with website designers and web service providers; and
  • Scheduling periodic updates to make sure websites keep up with ever-changing standards and technological specifications.

Proactively taking the above action steps can help mitigate the risk of an ADA suit.