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Tax Lawyer > Claims of Right Doctrine Lawyer

Claims of Right Doctrine Lawyer

Business owners across the US rejoiced when the Tax Cuts and Jobs Act of 2017 (TCJA) reduced the top corporate tax rate by 40 percent. However, that cut from 35 percent down to 21 percent carries implications you may not expect when you paid taxes on pre-TCJA assets or income. After the law’s effective date, you might find yourself in a situation where your deduction for property returned is the lower rate – yet you already paid at the 35 percent level.

Many business owners are facing such a situation and wondering how the TCJA applies to recognizing, reporting, and paying taxes on income. The claim of right doctrine provides some of the answers, but it can also create serious dilemmas if you do not have in-depth knowledge of the relevant tax laws. For important information on these and related issues, please contact our lawyers at Lehman Tax Law to discuss your situation with a claims of right doctrine lawyer. Some basic information may also be helpful.

Application of IRC 1341 Claims of Right

This provision in US tax laws allows a deduction if you reported income in one tax year, but later had to return it. The section creates a 1341 credit or claim of right, which you can take advantage of by proving: 

  1. You received the asset;
  2. You were able to exercise unrestricted control over the asset; and,
  3. You treated the asset as your own and held yourself out as owner of it.

If you meet all three factors, you may be eligible to deduct the amount paid. Another option might be claiming a tax credit if you repaid more than $3,000, which is preferred because it reduces your tax liability instead of reducing taxable income. 

Claims of Right Under TCJA

The 1341 credit can have profound benefits when you received income pre-TCJA and returned it post-TCJA. In applying the claim of right deduction, you can recalculate your income as if you did not report it at all for purposes of tax liability in the earlier tax year. Your accounting method will determine how to apply the credit to the proper tax year. Therefore:

  • For cash accounting, the applicable tax year is when you issued repayment.
  • If you use the accrual method, you must determine which tax year is more appropriate for the deduction.

Penalties for Misusing Claims of Right Assertions

The IRS warns against the misuse of 1341 credits through Revenue Ruling 2004-29, stating that the key is proper reporting of income in one year followed by later repayment. Improper usage of claim of right could lead to fines and other civil penalties. For criminal violations, the punishment may include hefty fines and incarceration.

Consult with a Claims of Right Doctrine Lawyer About Your Options 

Enactment of the TCJA has raised complex questions regarding the claims of right, which become even more complicated when you try to apply the concepts to your unique circumstances. To ensure you take advantage of all available opportunities, rely on our team at Lehman Tax Law. You can call 561-368-1113 or go online to schedule a free consultation with attorney Richard S. Lehman.

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