Lancaster Law Blog : Lancaster PA Lawyer & Attorney : Russell Krafft & Gruber Law Firm : Pennsylvania : Lancaster's Legal Link

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This blog has made several posts regarding covenants not to compete. Covenants not to compete are generally viewed as positive steps for businesses to protect their interests and prevent key employees from leaving and taking clients with them. A recent federal district court opinion, Howard v. United States, suggests that consideration of future tax ramifications for professional services providers that incorporate and subsequently sell their practices are now necessary.

On July 30, 2010, a federal district court in Washington held that a dentist’s covenant not to compete he signed with his own practice, a C-Corporation, converted his goodwill, which is ordinarily personal, into a corporate asset. The effect of converting his otherwise personal goodwill to a corporate asset was that upon sale of his practice, his goodwill was taxed at the corporate level, then taxed again when it was distributed as a dividend to him. If his goodwill had been considered personal it would have been taxed once as a long-term capital gain, which is currently taxed at a lower level than a dividend which is taxed as ordinary income.

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Since it was enacted on March 23, 2010, the Patient Protection and Affordable Care Act (the “Act”) has been quite the topic of conversation. While many of the Act's tax provisions focus on providing various health care related tax incentives, it also raised the maximum amount of the adoption credit to $13,170 per child for 2010. The maximum for 2009, was $12,150. The Act also made the adoption credit refundable, which means that qualifying taxpayers will receive the credit even if they do not owe any tax for that year.

The adoption credit is generally available to cover various expenses incurred as a result of the legal adoption of a child under the age of eighteen. Qualified expenses include fees, court costs and attorney fees directly related to legally adopting the child. Traveling expenses, including meals and lodging while away from home in connection with the adoption, are also included in the credit. The credit is not available to taxpayers who are adopting a spouse’s child or to the extent that they are reimbursed under an employer or government program. For example, if a taxpayer incurs $11,000 in qualified expenses and $6,000 of those expenses are reimbursed to the taxpayer, only $5,000  of the expenses may be covered by the credit. However, certain expenses incurred by an employer for certain qualified adoption expenses may be excluded from the employee's gross income under Section 137 of the Internal Revenue Code.