Business, Corporate and Tax Law
- January 2013 – Estate Tax Law Changes
- November 2011 – Social Media In the Workplace
- November 2011 – FDIC Insurance Update
- April 2011 – Bank and Credit Card Fees
- April 2011 – Choosing an Executor for Your Will
- April 2011 – Season Tickets Cannot Be Seized
- December 2010 – 2010 Tax Relief Passed; Bush-Era Tax Cuts extended for 2 years; Estate Tax Relief Provided
- December 2010 – Pennsylvania Decennial Report
- October 2010 – Overview of the tax changes in the 2010 Small Business Jobs Act
- April 2010 – Start Your Own Business: 50 Things You’ll Need to Do
- April 2010 – Business Plan Basics
- April 2010 – Tax Breaks For College Costs
- January 2010 – FDIC Insurance Update
- November 2009 – Home Buyer Tax Credit
- October 2009 – Life Insurance Policy Rescinded
- October 2009 – Federal Tax Update
- July 2009 – E-mails Can Modify Contracts
- July 2009 – Income Tax Trap For Employer Owner Life Insurance
- June 2009 – Choosing the type of Entity for a New Business
- May 2009 – Retaining Tax Records For Pennsylvania Pass Through Entities
- March 2009 – Special Carryback Provisions Added For Small Businesses
- December 2008 – Cyber Insurance For Businesses
- November 2008 – Contract Or Letter Of Intent
- October 2007 – Computer Fraud And Abuse Act Update
- October 2007 – IRS Gets Tough On Deferred Compensation
- April 2007 – Doing Business On The Web-Clickwrap Agreements
- November 2006 – The Dangers Of Employee Internet Use
- November 2006 – Deducting The Business Use Of Your Home
- April 2006 – AEDs Help Treat Heart Attacks
- April 2006 – ADA Protects Employees With Cancer
- January 2006 – Employee Or Independent Contractor?
- June 2005 – Business Startup – Should You Be A “Franchise Player”?
- April 2005 – Business Liable For Not Investigating Credit Complaint
- April 2005 – Minimize Your Risk Of Identity Theft
With time actually expired to avoid substantial increase in tax rates from the sunset of the Bush 2001 tax cuts, Congress reached an agreement on tax legislation January 1, 2013. After 12 years of temporary provisions, the estate tax component was made permanent and has again unified the estate and gift tax provisions.
The estate tax, gift tax and GST tax exemptions are now each $5 million per individual (indexed for inflation from 2011 so that the 2013 rate is approximately $5,250,000 – exact amount pending IRS confirmation). A number of Treasury proposed changes to estate planning techniques limiting the use of family limited partnerships and valuation discounts, GRATs and grantor trusts were not enacted (But don’t assume that they won’t be added at some future date as part of “revenue raising” without changing tax rates). Concern over a possible “claw-back” from having made gifts in excess of the new exemption amount remain an academic issue as the exemption amount was maintained (actually increased due to inflation) so that there is no concern of being subject to an estate tax exemption less than lifetime gifts that were exempted. For those who took the opportunity to make lifetime gifts which will remove future income and appreciate (potentially with income tax benefits through grantor trusts) and lock in generation skipping transfer (GST) exemption, the planning will produce the desired effects and shield the income and appreciation from future estate taxes. The increase in the exemption due to inflation will allow additional gifts for those who are so inclined.
Portability of a spouse’s unused estate exemption at death was also made permanent, increasing flexibility in planning for many couples. The requirement to timely file a federal estate tax return (with relaxed valuation rules on property qualifying for a marital deduction) is retained to obtain use of the spouse’s unused exemption. (The current provisions provide that the date to file the Federal Estate Tax Return (Form 706) is a strict date (9 months from the date of death with an extension of 6 months if timely requested). For those wanting to use maximum GST exemptions, there is NOT portability of the GST exemptions so credit shelter trusts or other use of the GST exemption during lifetime or on the death of the first spouse will continue.
For those who have been waiting for the estate tax to become permanent to modify their estate plans, they can now do so and not put off updating their estate plan to another day.
With a permanent estate tax regime enacted, it is important that all individuals review their existing Wills (and revocable trusts) to insure that the results the documents will yield are their desired plan.
For many, the increase of the exemption and making portability of the spouse’s unused exemption permanent, will allow for more simplified estate plans that will not need to create a credit shelter trust or bypass trust upon the death of the first spouse. For those that have plans which are tied to the amount of the credit shelter for trusts at their death or funding GST transfers, a careful review will be needed to determine the effect of the increased exemption amounts.
Please contact us to schedule a time to review your existing documents with you and evaluate the impact of the changes in the estate and gift tax laws.
Income Tax Law Changes:
While estate tax planning may have become simplified, income taxes will become more complicated. For most, income tax rates will increase, special treatment for qualified dividends will cease and limitations on itemized deductions will be reinstated. The provisions are not as Draconian as some of the proposals that were floated during the Presidential election and are still lower than the pre”Bush tax cut” era.
Left unresolved in the last minute deal regarding the estate tax and income tax rules are the spending provisions that were to have been addressed as part of a budget deal addressing income and spending. Whether Congress and the President will find a method to address these issues in a timely fashion or if last minutes crisis workouts become the new policy method, we will need to wait and see.
Key provisions effecting income taxes in the Tax Bill are:
- A new 39.6% income tax rate beginning at $450,000 for joint filers and $400,000 for singles.
- Increase in the top capital gain rate to 20% (plus a new 3.8% surtax on investment income and gains on investment income over $250,000 or $200,000 for singles) for those in the 39.6%. The 15% rate continues for income between the 25% tax bracket and the 39.6% bracket.
- Personal exemption (last year $3,800 per person) phases out and itemized deductions are limited at adjusted income above $300,000 (or $200,000 for singles).
- AMT relief to index the AMT exemption was made permanent (it has been an annual patch since it was enacted).
A large number of tax breaks for special situations were extended and other proposals to raise additional revenue and to address perceived inequities such as “carried interest” were not enacted.
Please contact us to discuss any specific provisions or questions you may have about the new law.
The prevalence of social media, including postings that are meant for employment-related topics in particular, has led to an increase in litigation on the subject between employees and their employers. The scenarios leading the parties to the courtroom are as varied as one might imagine. A company fires a worker over her criticisms of the boss that she posted on Facebook. Repeated attempts by a manager to “friend” a female employee on Facebook eventually leads to allegations of sexual harassment. A disappointed job applicant sues when a job offer is retracted after a hiring manager turns up something about the applicant on Twitter that the manager finds disturbing.
In addition to scenarios in which a worker loses his or her job because of something appearing in social media, litigation may ensue against an employer if its supervisory officials go too far in digging for dirt by this means. For example, two restaurant workers won a monetary settlement after having sued their former employer for gaining access to postings on a password-protected Myspace page set up as a chat group for employees only. What was found on the page eventually led to the workers’ termination. The case was settled after a jury found that the employer had violated the federal Stored Communications Act (SCA).
The employees’ managers had violated the SCA by knowingly accessing the chat group on Myspace without authorization. Although a fellow employee had provided her login information to one of the company’s managers, she had not authorized access to the chat group by any of the company’s managers. She also felt that she had been coerced into giving her password to her manager, as she felt that she would have been in trouble if she had not done so.
Using the employee’s password, the company’s managers accessed the chat group on several occasions, although it was clear on the website that the chat group was intended to be private and accessible only to invited members. Finally, the managers continued to access the chat group even after realizing that the employee had reservations about having provided her login information.
Since email first came on the scene, similar cases have arisen over what was or was not appropriate when employees used their company-provided computers for sending emails. One preventative measure for employers has been to create a clear written policy on the subject, followed up by informing and training the employees. Likewise, an employer’s best protection against potential liability stemming from social media may be to establish a policy that clearly spells out the ground rules for the use of social media.
Last summer, a law was enacted that raised the standard maximum deposit insurance amount (SMDIA) to $250,000. The law made permanent a previous temporary increase to $250,000 from the former maximum limit of $100,000. The new permanent maximum limit should especially benefit consumers who figure to have more than $100,000—such as in multiyear certificates of deposit—in their bank beginning in 2014, when the temporary hike in the maximum limit had been scheduled to expire.
The insurance limit is not per person but applies per depositor, per insured depository institution, for each account ownership category. A person’s single account will be insured up to the new permanent maximum amount, but so will his or her share of all joint accounts, as well as any other of his or her accounts in other ownership categories.
Another legislative change, which went into effect on the last day of 2010, creates a new temporary insurance category that will fully insure all funds, regardless of the dollar amount, but only in checking accounts that pay no interest to the account holder. An example of a possible application of this new insurance is an account in which an individual who has just sold a home temporarily parks the large proceeds from the sale in that account, understanding that no interest will be earned. Funds held in attorney IOLTA trust accounts also provide full insurance for all amounts on deposit. As the law now stands, this change is temporary, in that the new insurance account category is set to expire at the end of 2012.
In the last year, new Federal Reserve Board rules have reined in the ability of banks and other financial institutions to impose charges and fees for some of their services. Issuers of credit cards generally cannot increase the interest rate on a card for one year after the account is opened. Consumers will no longer be charged a fee when a transaction causes an account to exceed its credit limit, unless the consumer has agreed in advance. For “subprime” cards, held by those with a limited or bad credit history, the total initial fees cannot exceed 25% of the card’s initial credit limit, with the exception of fees for late payments, for exceeding the credit limit, or for returned payments due to insufficient funds.
With these and other tightened regulations, it is predictable that financial institutions will gravitate toward other means of enhancing revenues through new or increased fees, and with new or more demanding requirements placed on consumers. In such a climate, consumers are well advised to brush up on some strategies for minimizing the financial hits from the institutions:
- If your bank decides to add or raise a minimum balance requirement for your account, consider whether you would do just as well with a “no frills” account that would have no such requirement, and likely no maintenance fee. The tradeoff may be a monthly limit on the number of checks that you can write, or on the number of ATM or debitcard transactions.
- The return from interest-bearing accounts today is barely an improvement on keeping your money under the mattress. It might be smarter to use a free account that pays no or very little interest, instead of an account that pays a slightly higher interest rate but also comes with a monthly fee. The monthly fee could well be greater than the meager return on the interest-bearing account.
- It is not exactly riveting reading material for most people, but make yourself promptly check your accounts online or check your paper account statements for errors, or for fees or account changes you may not have been expecting. In the same vein, monitoring the activity on your debit or ATM card will help you promptly report a problem if the card is lost or stolen, thereby limiting your liability.
- Many banks offer a free “alert service,” meaning that the bank will send you an email or text message notifying you when there has been a significant transaction on your account or if your balance drops below a certain threshold. Such a “heads up” could allow you to shift funds among your accounts to avoid overdrawing an account.
- If overdrawing an account is a recurring event, consider changing from overdraft coverage to cheaper alternatives, such as linking a savings account to a checking account, arranging for an overdraft line of credit, or, for a shortterm shortage of cash, applying for a small loan.
- ATM fees may not be crippling, but they can add up. Try to stick mainly with your own institution’s ATMs, where there generally is no charge. If your bank allows getting some cash back on a debitcard transaction at no charge, that is an alternative to an ATM for getting small amounts of cash.
The designation of an executor for a will is one of the critical steps in effective estate planning. The executor will be the individual responsible for the administration of the estate. The executor is not involved in financial affairs during your lifetime. That role is either an agent appointed under a Power of Attorney or a Trustee under a Living (or Revocable) Trust. After probating the Will (that is, filing it of record with the Register of Wills or Clerk of Court), the executor, with the assistance of the estate attorney, must gather all of the testator’s (i.e. you – the person who makes the will) assets, settle all taxes and debts and costs of administration and distribute the assets in accordance with the terms of the will. Good recordkeeping will be essential because an accounting will have to be filed. Creditors’ claims will have to be dealt with, and estate tax returns may have to be filed.
In short, the job of the executor is a substantial responsibility and can be very time-consuming, especially when it comes to large or complicated estates. Depending on the number of heirs involved and relationship among the heirs, substantial time may also be spent keeping peace among the heirs during the estate administration. So that a suitable candidate can be named, the testator should take into account a variety of factors. These include the trustworthiness, sound judgment (both business and dealing with the personal issues that the heirs will face following the testator’s death), financial acumen, age, and physical and mental capacity of the proposed executor. Also since the beneficiaries (your heirs) will want to know what is happening with the Estate administration and why the process takes so long, the executor should be someone who communicates well and does not have personal issues with any of the heirs which would interfere with effectively advising the heirs of the status of estate administration. More than one executor can be named by the testator, and these co-executors can share the duties of administering the estate. When more than one executor is being named, it is necessary to consider the logistics of the co-executors working together. Often documents will need to be signed by all of the executors and while overnight mail has made this easier, it can still be very time consuming and expensive.
In the case of married couples, the first instinct may be simply to name the other spouse as the executor and be done with it. While this may work just fine in some cases, the decision deserves more thought as to all of the ramifications of choosing your spouse as the executor. Will your surviving spouse be up to fulfilling all of the executor’s responsibilities so soon after suffering such a loss? If the spouses are about the same age, will the surviving spouse be too frail, physically or mentally, to do the job when the time comes, perhaps many years after the executor has been named? Sometimes an adult child, a sibling, niece, or nephew, or a close and trusted friend may be a better choice or able to assist as a co-executor. The flip side of naming someone other than the surviving spouse, how the surviving spouse will feel about the potential intrusion of another person into their financial affairs.
For families where there is a second marriage, the issue of the relationship between the surviving spouse and children from a prior marriage or among children from more than one marriage needs to be considered.
The job of executor will be substantially easier if you have kept complete and accurate records of the assets that will comprise the estate. Upon naming the executor, you should review general information with the executor. Another seemingly obvious matter that is often overlooked is simply making sure that the executor knows the location of all of the important papers relating to the estate and understands your desires and intent regarding any special or unusual assets.
As for payment for the executor’s services, if the estate is very simple, and especially if the executor is also a major beneficiary of the estate, additional compensation may not be necessary. Otherwise, the Will may provide for a fee for the executor, which may be calculated as a flat fee, an hourly fee, or a percentage of the estate assets. If one of several children is being named, you should consider whether they want to specify any provisions about compensation.
Don’t forget an even more elementary first step: asking for the consent of the prospective executor, no matter how close a relationship there may be between the individuals. For the benefit of all concerned, the executor must be willing, not just able, to carry out the important responsibilities that come with this job.
As experienced estate planners we are able to discuss with your the numerous pros and cons in the selection of executors (and successors, in case the first choice is not able to serve) to be named in your Will. As with all steps in preparing your estate plan, your individual situation needs to be considered to determine the right choice for you. We strongly recommend that you review your Will annually (or sooner if personal of family situations have changed) and every four years or so with us to determine if any changes are needed, including the selection of Executors (and Trustees, if trusts are created in the Will as well.) If you haven’t reviewed or updated your estate plan documents for some time, contact us to set up an appointment and start the process.
When a taxpayer failed to pay his federal income taxes, the IRS issued a levy against him. Among his possessions was a block of 16 season tickets for a professional sports team. He also had paid a deposit per seat as a “personal seat license,” on top of the cost each year for the season tickets themselves.
The IRS wanted to seize and sell the season ticket renewal right, treating it as a form of “property or rights to property” under federal law. The sports team objected but did say that if it received a levy it would pay out the taxpayer’s deposit for the personal seat licenses. The team’s policy provided that the right to renew season tickets was not transferable and that if a ticket holder did not renew, the tickets would pass to the next person on a very long waiting list of people seeking season tickets.
In issuing an Advisory Opinion in favor of the sports team’s position, the IRS found no precedents on the precise issue, but it borrowed from bankruptcy cases in which the bankruptcy trustee sold the taxpayer’s season ticket renewals as property of the estate. In that context, the decisive factor was the team’s policy—if the team treated a right to renew as transferable, it was “property,” but if, as in the case at hand, it did not allow transfers, the right to renew was not a property right that could be sold.
As a result, the IRS could not touch the taxpayer’s right to renew his tickets to satisfy the taxes owed, but it could go after the personal seat licenses for which the taxpayer had paid a deposit. A tax lien would attach to them, putting the IRS into the taxpayer’s shoes and allowing the IRS to terminate the season tickets and receive a refund of the personal seat licenses deposit. The people next in line on the waiting list were no doubt very pleased.
The rules for dealing with collection by the IRS are very fact specific and often also depend on state property law (and in this case the team policy in determining what was “property”). We have substantial experience in working with the IRS to address assessment, collection, installment agreements and some cases, compromise regarding tax liabilities. If you owe the IRS (or a state tax agency) contact us today to discuss how we can assist you.
2010 Tax Relief Passed; Bush-Era Tax Cuts extended for 2 years; Estate Tax Relief Provided
With days to spare in 2010, Congress has finally passed tax legislation which extends the “Bush-era” tax cuts, provides tax breaks for business and individuals, patches the AMT for the next 2 years and provides significant estate tax relief (also for the next 2 years.) The legislation was the result of tax compromises between Senate Republicans and the President. While some provisions, especially the estate tax compromise were squawked at by House Democrats, the bill was passed by the House without change.
The stage for this need to extend provisions and patch the tax code was set up in 2001 when that tax relief package (the Bush-era tax cuts) contained a provision that all of its provisions would expire on December 31, 2010 causing the pre 2001 tax rates and provisions to be renewed for 2011 and beyond. Much of the current proposal extends the current tax rates for another 2 years; leaving the tax relief debate to be repeated again in 2 years. The only difference will be that the debate will then be during a Presidential election in which tax policy is likely to be a major issue.
Highlights of the tax relief are:
· Individual income rates, including capital gain rules and qualified dividend rates remain the same through 2012 (a top rate of 35% on ordinary income and 15% on qualified dividends and long term capital gain.
· The alternative minimum tax (AMT) is “patched” by increasing the exemption amount for 2010 and 2011. The extension leaves tax year 2012 to be like 2010 when most everyone, including the IRS, assumed a patch would be enacted before year-end and would not cause widespread triggering of increased taxes due to AMT.
· Estate Tax Relief. The bill increases the federal estate tax exemption to $5 million per person and includes a “portability” provision to allow the full $10 million per couple and lowers the tax rate to 35%.
o The estate, gift and generation skipping transfer (GST) provisions are reunified so the $5 million exemption applies to all of the taxes. The provisions are retroactive to January 1, 2010 resolving a debate as to how GST made in 2010 would be addressed. Estate of persons dying in 2010 will be allowed an election to choose between extended provisions or the current law providing for no federal estate tax and carryover basis of assets (except for 2010, a “step-up” of basis is generally allowed on assets taxed in a federal estate). This removes the need for estates of persons dying in 2010 where the taxable estate is less than $5 million from needing to determine what the decedent’s basis in the assets was.
o The estate tax provisions significantly enhance the pre2009 rules and will offer planning opportunities in 2011 and 2012. Please contact us for more details and how these provisions may benefit you and your family.
· Increases business depreciation for equipment placed in service after September 8, 2010.
· Cuts Employee payroll taxes by 2% for 2011 only. This provision applies only to the employee portion of payroll tax, the employer portion remains unchanged.
· Extends various tax breaks through 2011.
Your business may receive a letter from the Commonwealth of Pennsylvania about the need to file a Decennial Report during 2011. Pennsylvania requires certain businesses to file the Decennial Report every 10 years during the years ending in 1 (e.g. 2011) for the purpose of identifying business names or marks that are no longer in use so that they may be reissued and placed back into the stream of commerce.
All domestic and foreign (not formed in Pennsylvania) profit and nonprofit corporations, limited liability companies, limited partnerships, limited liability partnerships that are not also limited partnerships, business trusts, insignias and “marks used with articles and supplies” that have not made a new or amended filing with the Pennsylvania Corporation Bureau from January 1, 2002 through December 31, 2011 are required to file the report during 2011. Fictitious names and trademarks are not required to make decennial filings. That means that all Companies formed after January 1, 2002 are not required to file this year. Also there are several exceptions to the filing requirements.
The failure to file the report (if the entity was required to file it) before December 31, 2011, results in the entity no longer having exclusive use of its name on or after January 1, 2012. While the business entity continues to exist, its name becomes available for any corporation or other association registering to do business in the Commonwealth of Pennsylvania which may request it.
If you receive a letter or if you are not sure if your entity needs to file a decennial report, please contact us and we can determine of you need to file and take care of preparing the report for you (and updating information with the Department of State.)
The recently enacted 2010 Small Business Jobs Act includes a wide-ranging assortment of tax breaks and incentives for businesses. Here’s a brief overview of the tax changes in the Small Business Jobs Act.
Enhanced small business expensing (Section 179 expensing). To help small businesses quickly recover the cost of capital outlays, small business taxpayers can elect to write off these expenditures in the year they are made instead of recovering them through depreciation. Under the old rules, taxpayers could generally expense up to $250,000 of qualifying property—generally, machinery, equipment and software—placed in service in during the tax year. This annual limit was reduced by the amount by which the cost of property placed in service exceeded $800,000. Under the Small Business Jobs Act, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment limit to $2,000,000. The Small Business Jobs Act also makes certain real property eligible for expensing. Thus, for property placed in service in any tax year beginning in 2010 or 2011, the $500,000 amount can include up to $250,000 of qualified leasehold improvement, restaurant and retail improvement property.
Extension of 50% bonus first-year depreciation. Before the Small Business Jobs Act, Congress already allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property placed in service in 2008 or 2009 by permitting the first-year write-off of 50% of the cost. The Small Business Jobs Act extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (as well as 2011 for certain aircraft and long production period property).
Boosted deduction for start-up expenditures. The Small Business Jobs Act allows taxpayers to deduct up to $10,000 in trade or business start-up expenditures for 2010. The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000. Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out threshold.
100% exclusion of gain from the sale of small business stock Ordinarily, individuals can exclude 50% of their gain on the sale of qualified small business stock (QSBS) held for at least five years (60% for certain empowerment zone businesses). This percentage exclusion was temporarily increased to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011. Under the Small Business Jobs Act, the amount of the exclusion is temporarily increased yet again, to 100% of the gain from the sale of qualifying small business stock that is acquired in 2010 after September 27, 2010 and held for more than five years. In addition, the Small Business Jobs Act eliminates the alternative minimum tax (AMT) preference item attributable to such sales.
General business credits of eligible small businesses for 2010 get five-year carryback. Generally, a business’s unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. Under Small Business Jobs Act, for the first tax year of the taxpayer beginning in 2010, eligible small businesses can carry back unused general business credits for five years instead of just one. Eligible small businesses are sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.
General business credits of eligible small businesses not subject to AMT for 2010. Under the AMT, taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits, such as the credit for small business employee health insurance expenses, can be used to offset AMT liability. The Small Business Jobs Act allows eligible small businesses to use all types of general business credits to offset their AMT in tax years beginning in 2010.
Deductibility of health insurance for the purpose of calculating self-employment tax. The Small Business Jobs Act allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.
Cell phones no longer listed property. This means that cell phones can be deducted or depreciated like other business property, without onerous recordkeeping requirements.
S corporation holding period for appreciated assets shortened to five years. Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for 10 years or face a built-in gain tax at the highest corporate rate of 35%. The 2010 Small Business Jobs Act temporarily shortens the holding period of assets subject to the built-in gains tax to 5 years if the 5th tax year in the holding period precedes the tax year beginning in 2011. In an exception to this rule, the American Recovery and Reinvestment Act of 2009, enacted in February 2009 shorted the time period to 7 years form 2009 and 2010. S corporations that are subject to the built-in gains tax that are considering the sale of assets should review if selling in 2011 will avoid the tax.
New tax break for long-term contract accounting. The Small Business Jobs Act provides that in determining the percentage of completion under the percentage of completion method of accounting, bonus depreciation in 2010 is not taken into account as a cost. This prevents the bonus depreciation from having the effect of accelerating income.
Limitation on penalty for failure to disclose certain reportable transactions. The Small Business Jobs Act generally limits the penalty to 75% of the decrease in tax resulting from the transaction, retroactively to penalties assessed after Dec. 31, 2006. Minimum and maximum penalties apply.
Revenue raisers. These tax breaks come at a cost. To mention a few of these unfavorable provisions, information reporting will generally be required for rental property expense payments made after Dec. 31, 2010, and increased information return penalties will be imposed.
Please keep in mind that this describes only the highlights of the some of changes in the Small Business Jobs Act. If you would like more details about any aspect of the new legislation, please do not hesitate to call or contact us .
(Reprinted with permission from Nolo Press)
From insurance to accounting to taxes, here’s what you need to do to start a business.
Thinking about starting a business? You’re not alone. Every year, thousands of Americans catch the entrepreneurial spirit, launching small businesses to sell their products or services. Some businesses thrive; many fail. The more you know about starting a business, the more power you have to form an organization that develops into a lasting source of income and satisfaction. For help with the beginning stages of operating a business, the following checklist is a great place to start.
Evaluate and Develop Your Business Idea
1. Determine if the type of business suits you.
2. Use a break-even analysis to determine if your idea can make money.
3. Write a business plan, including a profit/loss forecast and a cash flow analysis.
4. Find sources of start-up financing.
5. Set up a basic marketing plan.
Decide on a Legal Structure for Your Business
6. Identify the number of owners of your business.
7. Decide how much protection from personal liability you’ll need, which depends on your business’s risks.
8. Decide how you’d like the business to be taxed.
9. Consider whether your business would benefit from being able to sell stock.
10. Research the various types of ownership structures:
- Sole proprietorship
- C Corporation
- S Corporation
11. Get more in-depth information from a self-help resource or a lawyer, if necessary, before you settle on a structure.
Choose a Name for Your Business
12. Think of several business names that might suit your company and its products or services.
13. If you will do business online, check if your proposed business names are available as domain names.
14. Check with your county clerk’s office to see whether your proposed names are on the list of fictitious or assumed business names in your county.
15. For corporations and LLCs: check the availability of your proposed names with the Secretary of State or other corporate filing office.
16. Do a federal or state trademark search of the proposed names still on your list. If a proposed name is being used as a trademark, eliminate it if your use of the name would confuse customers or if the name is already famous.
17. Choose between the proposed names that are still on your list.
Register Your Business Name
18. Register your business name with your county clerk as a fictitious or assumed business name, if necessary.
19. Register your business name as a federal or state trademark if you’ll do business regionally or nationally and will use your business name to identify a product or service.
20. Register your business name as a domain name if you’ll use the name as a Web address too.
Prepare Organizational Paperwork
- Partnership agreement
- Buyout agreement (also known as a buy-sell agreement)
- Articles of organization
- Operating agreement
- Buyout agreement (also known as a buy-sell agreement)
23. C Corporations:
- Pre-incorporation agreement
- Articles of incorporation
- Corporate bylaws
- Buyout agreement (also known as a buy-sell agreement or stock agreement)
24. S Corporations:
- Articles of incorporation
- Corporate bylaws
- Buyout agreement (also known as a buy-sell agreement or stock agreement)
- File IRS Form 2553, Election by a Small Business Corporation
Find a Business Location
25. Identify the features and fixtures your business will need.
26. Determine how much rent you can afford.
27. Decide what neighborhood would be best for your business and find out what the average rents are in those neighborhoods.
28. Make sure any space you’re considering is or can be properly zoned for your business. (If working from home, make sure your business activities won’t violate any zoning restrictions on home offices.)
29. Before signing a commercial lease, examine it carefully and negotiate the best deal.
File for Licenses and Permits
30. Obtain a federal employment identification number by filing IRS Form SS-4 (unless you are a sole proprietorship or single-member limited liability company without employees).
31. Obtain a seller’s permit from your state if you will sell retail goods.
32. Obtain state licenses, such as specialized vocation-related licenses or environmental permits, if necessary.
33. Obtain a local tax registration certificate, a.k.a. business license.
34. Obtain local permits, if required, such as a conditional use permit or zoning variance.
35. Determine what business property requires coverage.
36. Contact an insurance agent or broker to answer questions and give you policy quotes.
37. Obtain liability insurance on vehicles used in your business, including personal cars of employees used for business.
38. Obtain liability insurance for your premises if customers or clients will be visiting.
39. Obtain product liability insurance if you will manufacture hazardous products.
40. If you will be working from your home, make sure your homeowner’s insurance covers damage to or theft of your business assets as well as liability for business-related injuries.
41. Consider health & disability insurance for yourself and your employees.
Set Up Your Books
42. Decide whether to use the cash or accrual system of accounting.
43. Choose a fiscal year if your natural business cycle does not follow the calendar year (if your business qualifies).
44. Set up a recordkeeping system for all payments to and from your business.
45. Consider hiring a bookkeeper or accountant to help you get set up.
46. Purchase Quicken Home and Business (Intuit), QuickBooks (Intuit) or similar small business accounting software.
Set Up Tax Reporting
47. Familiarize yourself with the general tax scheme for your business structure. (See Tax Savvy for Small Business, by attorney Frederick Daily.)
48. Familiarize yourself with common business deductions and depreciation. (See Deduct It! Lower Your Small Business Taxes, by attorney Stephen Fishman.)
49. Obtain IRS Publications 334, Tax Guide for Small Business, and 583, Taxpayers Starting a Business.
50. Obtain the IRS’s Tax Calendar for Small Businesses.
As you can see, starting a business involves making quite a few initial decisions and getting policies and paperwork in place. For more information about and help with starting a business, consult the following Nolo resources: Legal Guide for Starting and Running a Small Business, by attorney Fred Steingold; Wow! I’m in Business, by attorneys Richard Stim and Lisa Guerin; or Quicken Legal Business Pro (software).
Reprinted with permission from the publisher, Nolo, Copyright 2009, http://www.nolo.com
For more information on the type of Legal Structure see Choosing the type of Entity for a New Business and Choice of Entity Under Pennsylvania Law .
Contact us to discuss how we can help you start your own business.
All business plans must show two things: a winning idea and a clear shot at a profit.
A good business plan has two goals: It should describe the fundamentals of your business idea and provide financial data to show that you will make good money. Beyond that, the content of your business plan depends on whether it’s for potential investors or a financial projection just for yourself.
How Will You Use Your Business Plan?
Depending on whether you’re trying to attract investors or are creating a blueprint for your own use, a business plan can take somewhat different forms.
If you will use your business plan to borrow money or interest investors, you should carefully design your plan so that it sells your vision to skeptical people. Normally this means your business plan should include:
- a persuasive introduction and request for funds
- a statement of the purpose of your business
- a detailed description of how the business will work (including what your product or service will be, whether you’ll have employees, who will supply your goods, and where you will be located)
- an analysis of your market (who your customers are)
- an evaluation of your main competitors
- a description of your marketing strategy (how your business will reach plenty of customers and fend off your competitors)
- a résumé setting forth your business accomplishments, and
- detailed financial information, including your best estimates of start-up costs, revenues and expenses, and your ability to make a profit.
Together, all the parts of your plan should reveal the beauty of your business idea. You want to show potential lenders, investors, or people you want to work with that you’ve hit upon a product or service that customers really want. In addition, you should prove that you are exactly the right person to make your fine idea a roaring success.
Funding the Venture Yourself
If you’re not looking for outside money, your financial projections will be the most important part of your business plan. These projections will tell you the cost of your products or services, the amount of sales revenue and profit you can anticipate, and, perhaps most importantly, how much you’ll have to invest or borrow to get your business off the ground.
Because you won’t use your plan to ask for money, you can create an informal business plan that omits some of the elements listed above. For example, you don’t need to worry so much about making a sales pitch or a slick presentation, and you may decide to skip the résumé of your own business accomplishments, but think twice before leaving out too much. Any new business will need to introduce itself to people — for example, suppliers, contractors, employees, and key customers — and showing them part or all of your business plan can be a great way to do it.
Forecasting the finances of your business may seem intimidating or difficult, but in reality it’s not so bad. Good planning consists of making educated guesses as to how much money you’ll take in and how much you’ll need to spend — and then using these estimates to calculate whether your business will be profitable. Here are the financial projections you should make:
- A break-even analysis. Here you’ll use income and expense estimates to determine whether, in theory at least, your business will bring in enough money to meet its costs.
- A profit-and-loss forecast. Next, you’ll refine the sales and expense estimates that you used for your break-even analysis into a formal, month-by-month projection of your business’s profit for the first year of operations.
- A cash flow projection. Even if your profit-and-loss forecast tells you that your business will have higher revenues than expenses — in other words, that it will be profitable — those numbers won’t tell you if you’ll have enough cash on hand from month to month to pay your rent or buy more inventory. A cash-flow projection shows how much money you’ll have — or how much you’ll be short — each month. This lets you know if you’ll need a credit line or other arrangement to cover periodic shortfalls.
- A start-up cost estimate. This is simply the total of all the expenses you’ll incur before your business opens. If you need to pay off these costs during the first year or two of business, they should be included in your month-to-month cash-flow projection.
Again, no matter who your audience is, you should be as thorough as possible when calculating your break-even analysis and profit-and-loss forecast. The last thing you want is to experience the very real misery of starting a business that never had a chance to make a solid profit.
Getting Started on Your Business Plan
Your best bet is to follow a self-help business plan book that shows you how to conduct the financial forecasts described above. Two good bets are Business Plan Pro, by Palo Alto Software, and How to Write a Business Plan, by Mike McKeever (Nolo).
Reprinted with permission from the publisher, Nolo, Copyright 2009, http://www.nolo.com
Once you have a draft of your business plan and are ready to take the next steps to starting your own business contact us to get assistance with legal issues and making your dream business a reality.
Persistently increasing college costs may have joined death and taxes as inevitable facts of life. Still, it is usually possible to soften the blow of escalating costs of higher education by taking advantage of an assortment of income tax breaks provided by the federal government. The options and their ramifications for your tax bill are not as simple as they might be, so it may be prudent to get some professional advice. Given the large sums of money at stake, you do not want to leave any smart moves unmade for lack of information and timely advice.
American Opportunity Tax Credit
This year, the American Opportunity Tax Credit effectively replaces the Hope Scholarship Credit. Taxpayers spending at least $2,000 for tuition, fees, books, and materials for higher education can save $2,000 in taxes with a dollar-for-dollar credit. Expenses over $2,000 bring an additional tax credit of 25 cents on the dollar, and, if expenses reach $4,000, there is a maximum credit of $2,500. The credit is available per student, so that a family with more than one college student can achieve even larger total benefits. Up to 40% of the American Opportunity Tax Credit is refundable, so that some of the tax credit may be received as a tax refund if the credit for which the taxpayer qualifies exceeds his or her income tax liability. This credit phases out for taxpayers with a modified adjusted gross income between $80,000 and $90,000 ($160,000 and $180,000 for married couples filing jointly).
Lifetime Learning Credit
While the American Opportunity Tax Credit is limited to the first four years of education after high school, the Lifetime Learning Credit, as the name suggests, may be claimed for any year of higher education, such as years spent in graduate or professional schools. Another distinction between the two credits is that the Lifetime Learning Credit is available for any course of study relating to job skills at an accredited school, whereas the American Opportunity Tax Credit requires that the student be enrolled at least on a half-time basis. The phaseout income ranges are lower than for the American Opportunity Tax Credit, by margins of $30,000 for individuals and $60,000 for married couples filing jointly.
Calculated at 20 cents on the dollar, the Lifetime Learning Credit maxes out at $2,000, for $10,000 in tuition and related expenses. It is not refundable. Unlike the American Opportunity Tax Credit, which is determined per student, the Lifetime Learning Credit is calculated per taxpayer, so any one taxpayer has the above maximum no matter how many individuals in a family are studying at the postsecondary level. A taxpayer may not use both credits for the same student in the same year, but different credits may be used for different students’ expenses in the same year.
Tuition and Fees Deduction
A tax credit, by shaving off the actual tax bill, does more for a taxpayer’s bottom line than a deduction, which only reduces the income on which the tax will be imposed. Still, there is a third option in the form of a tax deduction for tuition and related fees, although it cannot be used in the same year for the same student as either of the tax credits previously described. This deduction, which is available even for taxpayers who do not itemize deductions, can be as large as $4,000 for modified adjusted gross incomes up to $65,000 ($130,000 for married couples filing jointly). The deduction is cut in half for even one dollar above those incomes, and disappears altogether when the income levels top $80,000 ($160,000 for married couples filing jointly). Another limitation on this deduction is that it cannot be claimed for expenses paid with money from a Section 529 plan or withdrawals from a Coverdell Education Savings Account.
Many planning opportunities are available to families and extended families (aid to grandchildren, etc.) to pay for education costs. Contact us to learn more about how to incorporate these opportunities in your financial plans.
In October 2008, Congress increased the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor per insured bank. The limit is scheduled to return to $100,000 on January 1, 2014 except IRAs and other certain retirement accounts, which will remain at $250,000 per depositor.
The “per depositor” rules allow a person various alternatives to effectively raise the applicable limit for the customer’s collection of deposits at any one institution. The FDIC rules define 8 classes of depositor and the rules can apply separately to different ownership categories. Ownership categories include single accounts, joint accounts, revocable trust accounts and irrevocable trust accounts and certain retirement accounts.
There also are other recent changes that favor depositors in insured institutions. For example, it used to be that the only beneficiaries under a revocable trust account who qualified for additional deposit insurance coverage were the account owner’s spouse, child, grandchild, parent, or sibling. Now an account owner can name almost any beneficiary, such as a more distant relative, a friend, or a charitable organization, and each beneficiary will still benefit from the additional coverage.
The FDIC’s temporary Transaction Account Guarantee Program provides depositors with unlimited coverage for noninterest-bearing transaction accounts at participating FDIC-insured institutions. (You need to check with your institution if they are participating in this program) Noninterest-bearing checking accounts include Demand Deposit Accounts (DDAs) and any transaction account that has unlimited withdrawals and that cannot earn interest. Also included are low-interest NOW accounts (NOW accounts that cannot earn more than 0.5% interest) and certain attorney trust (IOLTA) accounts. This unlimited insurance coverage is temporary and will remain in effect through June 30, 2010.
If you have questions or concerns about FDIC insurance coverage for your deposits, please contact us to learn more about your coverage and what you can do to be fully insured.
As we discussed in our recent newsletter several major pieces of legislation are pending in Congress which have significant tax implications. The first of these to pass Congress was signed by the President on November 6, as H.R. 3548, the ”Worker, Homeownership, and Business Assistance Act of 2009.”
The new law extends and generally liberalizes the tax credit for first-time homebuyers, making it a much more flexible tax-saving tool. It also includes some crackdowns designed to prevent abuse of the credit.
Homebuyer credit basics. Before the new law was enacted, the homebuyer credit was only available for qualifying first-time home purchases after April 8, 2008, and before December 1, 2009. The top credit for homes bought in 2009 is $8,000 ($4,000 for a married individual filing separately) or 10% of the residence’s purchase price, whichever is less. Only the purchase of a main home located in the U.S. qualifies. Vacation homes and rental properties are not eligible. The homebuyer credit reduces one’s tax liability on a dollar-for-dollar basis, and if the credit is more than the tax you owe, the difference is paid to you as a tax refund. For homes bought after Dec. 31, 2008, the homebuyer credit is recaptured (i.e., paid back to the IRS) if a person disposes of the home (or stops using it as a principal residence) within 36 months from the date of purchase.
Before the new law, the first-time homebuyer credit phased out for individual taxpayers with modified adjusted gross income (AGI) between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase.
The new law makes four important changes to the homebuyer credit:
(1) New lease on life for the homebuyer credit. The homebuyer credit is extended to apply to a principal residence bought before May 1, 2010. The homebuyer credit also applies to a principal residence bought before July 1, 2010 by a person who enters into a written binding contract before May 1, 2010, to close on the purchase of the principal residence before July 1, 2010. In general, a home is considered bought for credit purposes when the closing takes place. So the extra two-months (May and June of 2010) helps buyers who find a home they like but can’t close on it before May 1, 2010. They can go to contract on the home before May 1, 2010, close on it before July 1, 2010, and get the homebuyer credit (if they otherwise qualify). Note that certain service members on qualified official extended duty service outside of the U.S. get an extra year to buy a qualifying home and get the credit; they also can avoid the recapture rules under certain circumstances.
(2) The homebuyer credit may be claimed by existing homeowners who are “long-time residents.” For purchases after November 6, 2009, you can claim the homebuyer credit if you (and, if married, your spouse) maintained the same principal residence for any 5-consecutive year period during the 8-years ending on the date that you buy the subsequent principal residence. For example, if you and your spouse are empty nesters who have lived in your home for the past ten years, you are potentially eligible for the credit if you “move down” and buy a smaller townhome. The credit is also available to buyers who are spending more on a new home than their existing home (subject to an upper limit). There’s no requirement for your current home to be sold in order to qualify for a homebuyer credit on the replacement principal residence. Thus, the replacement residence can be bought to beat the new deadlines (explained above) before the old home is sold. For that matter, you can hold on to your prior principal residence in the hope of achieving a better selling price later on, but the new property must be used as a principal residence to receive the credit.
The maximum allowable homebuyer credit for qualifying existing homeowners is $6,500 ($3,250 for a married individual filing separately), or 10% of the purchase price of the subsequent principal residence, whichever is less.
(3) The homebuyer credit is available to higher income taxpayers. For purchases after November 6, 2009, the homebuyer credit phases out over much higher modified AGI levels, making the credit available to a much bigger pool of buyers. For individuals, the phaseout range is between $125,000 and $145,000, and for those filing a joint return, it’s between $225,000 and $245,000.
(4) There’s a new home-price limit for the homebuyer credit. For purchases after Nov. 6, 2009, the homebuyer credit cannot be claimed for a home if its purchase price exceeds $800,000. It’s important to note that there is no phaseout mechanism. A purchase price that exceeds the $800,000 threshold by even a single dollar will cause the loss of the entire credit.
The new purchase price limitation applies whether you are buying a first-time principal residence or are a qualifying existing homeowner purchasing a replacement principal residence.
Other homebuyer credit changes. The new law includes a number of new anti-abuse rules to prevent taxpayers from claiming the homebuyer credit even though they don’t qualify for it. The most important of these are as follows:
… Beginning with the 2010 tax return, the homebuyer credit can’t be claimed unless the taxpayer attaches to the return a properly executed copy of the settlement statement used to complete the purchase of the qualifying residence.
… For purchases after Nov. 6, 2009, the homebuyer credit can’t be claimed unless the taxpayer has attained 18 years of age as of the date of purchase (a married person is treated as meeting the age requirement if he or his spouse meets the age requirement).
… For purchases after Nov. 6, 2009, the homebuyer credit can’t be claimed by a taxpayer if he can be claimed as a dependent by another taxpayer for the tax year of purchase. It also can’t be claimed for a home bought from a person related to the buyer or the spouse of the buyer, if married.
… Beginning with 2009 returns, the new law makes it easier for the IRS to go after questionable homebuyer credit claims without initiating a full-scale audit.
The tax law still gives you the extraordinary opportunity to get your hands on homebuyer credit cash without waiting to file your tax return for the year in which you buy the qualifying principal residence. Thus, if you buy a qualifying principal residence in 2009 you can treat the purchase as having taken place this past December 31, file an amended return for 2008 claiming the credit for that year, and get your homebuyer credit cash relatively quickly via a tax refund. Similarly, you can treat a qualifying principal residence bought in 2010 (before the new deadlines) as having taken place on December 31, 2009, and file an original or amended return for 2009 claiming the credit for that year.
What also hasn’t changed is the need for getting expert tax advice in negotiating through the twists and turns of the new beefed-up homebuyer credit. Please contact us today for details on how the homebuyer credit can help you, your family members, or your customers.
Failure to Disclose Information on Application
A business executive was answering questions for an application for a $3 million life insurance policy that named as the beneficiary a company he had started with others. He answered in the negative when asked the common question as to whether he “[e]ngaged in auto, motorcycle or boat racing, parachuting, skin or scuba diving, skydiving, or hang gliding or other hazardous avocation or hobby.” In fact, on about 20 occasions, the executive had gone heli‑skiing, which involves skiing down remote mountain trails after being dropped off by a helicopter.
Only three months after the policy was issued, the executive was killed in an avalanche while heli‑skiing. The tragedy for his survivors and former business partners was compounded in the courtroom when a federal appeals court upheld the life insurer’s rescission of the life insurance policy on the ground of a misrepresentation on the application.
A reasonable person in the position of the life insurance policy applicant would have known that his heli‑skiing avocation constituted a hazardous activity, as that term was used in the application. The applicant clearly was aware of the heightened avalanche risks associated with heli‑skiing, as compared to resort skiing. He had routinely signed waivers to that effect whenever he engaged a company that made arrangements for such excursions. It was hardly necessary for the insurer to point out, in making this argument, that heli‑skiing commonly involves rescue and survival training and the use of specialized lights and breathing devices meant to increase one’s chances of surviving an avalanche.
About three weeks after the executive had completed the insurance application by telephone, an underwriter making calls for the insurer called him with some follow‑up questions, including the same inquiry about “any hazardous activities.” This time, the executive mentioned in the conversation that he enjoyed skiing and golf, among other things, but still there was no mention of heli‑skiing. Nor did the executive show any concerns or confusion over what the term “hazardous activities” meant. The beneficiary under the rescinded policy unsuccessfully sought to use this exchange to argue that the life insurer was chargeable with knowledge of the insured’s concealment of his heli‑skiing avocation, and thus was precluded from seeking rescission.
The court ruled that the insured’s “skiing” statement, when combined with the negative responses to the general question of whether he engaged in hazardous activities, would not have put a prudent underwriter on notice of the need to investigate further. Otherwise, any report by an applicant of a generally low‑hazard recreational activity, such as wrestling, juggling, or fishing, would unreasonably require the insurer to investigate the myriad possible “extreme” variants of such activities.
Instead, to make an insurer legally chargeable with knowledge of an undisclosed fact, generally it must be shown that it had knowledge of evidence indicating that the applicant was not truthful in answering a particular application question. In this case, there was no such “red flag” that might have allowed the policy beneficiary to avoid the consequences of the executive’s untruthfulness.
Also see Income Tax Trap For Employer Owner Life Insurance for more information about Employer Owned Life Insurance.
A Number of Recent Developments but no Major Tax Legislation; Estate Tax Legislation Deadline Looms
Anticipated income and estate tax legislation to address the sunset of the 2001 Tax Act has not been addressed while Washington remains focused on health care legislation. Some temporary measures are expected to be adopted, especially regarding estate taxes where the estate taxis to “repealed” for one year beginning January 1, 2010 and the pre 2001 law ($1,000,000 exemption per person and 55% top estate tax rate) revived January 1, 2011. If no new comprehensive tax bill can be adopted, most expect the 2009 rates and exemptions to be extended for at least one year and deal with the issue next year. We will update any new developments.
There have been several major developments over the last few months that may affect you or your business.
Pension And IRA 2009 Waiver Of Required Minimum Distributions
The IRS has issued additional guidance on the waiver of 2009 required minimum distributions (RMDs). It provides transition relief through Nov. 30, 2009, so that a plan won’t be treated as having an operational failure for allowing waivers of 2009 RMDs and related payments before being amended, and rollover relief for 2009 RMD waivers and related payments. In general, retirement plan or IRA withdrawals that were made despite the 2009 RMD waiver won’t face tax if rolled over to a retirement plan within 60 days. Similar rules apply to IRAs. The new guidance includes an extension of the 60-day rollover period to Nov. 30, 2009, for certain distributions. The rollover relief gives older taxpayers an unusual opportunity to correct an inadvertent mistake that otherwise would unnecessarily increase their taxable income for 2009. It also give some individuals a “retroactive” chance to reduce their tax bill if their financial circumstances have improved during the course of 2009.
New Rules Issued Aimed At Increasing Retirement Savings.
The Administration has issued guidance on a number of issues designed to increase retirement savings. Three revenue rulings, four notices, and new IRS website explanations make it easier for employers to provide for automatic retirement plan enrollments and automatic contribution increases, permit unused leave to be converted into retirement savings, give employees a clearer understanding of rollover options, and permit income tax refunds to be used to purchase U.S. Savings Bonds. The new developments will, to be sure, make it easier for employers to offer automatic enrollments, and enhance the chances that taxpayers won’t spend their lump-sum payouts. However, the real trail blazers are the ruling that permits the dollar value of unused paid time off to be contributed to a 401(k) plan, and Treasury’s new policy of allowing taxpayers to funnel tax refunds directly into U.S. Savings Bonds. Please contact us to get more information on these new developments and how you or your business can use these new benefits.
Roth IRA Not An Eligible S Corporation Shareholder
Roth IRA was not an eligible S corporation shareholder. The Tax Court, addressing a new issue, agreed with the IRS that a Roth IRA can’t be the shareholder of an S corporation. As a result, the corporate taxpayer was taxable as a C corporation for the year involved. Had the Court agreed with the taxpayer, the corporation’s earnings would have escaped taxes altogether. They would not be taxed each year as they passed through to the Roth IRA (the corporation’s sole shareholder) and, if applicable Roth IRA requirements were met, would not be taxed when withdrawn from the Roth IRA. The Court prevented that result but the decision was not unanimous. Some judges dissented and others wrote their own concurring opinions.
For more about Roth IRA’s and allowable S corporation shareholders please contact us .
We send e‑mails so casually and with such informality, even in the business environment, that it is easy to forget that they may carry significant legal consequences. It is only prudent to bear in mind that even e‑mails written in the most conversational style may create legal obligations no less binding than a more conventional written agreement laden with legalese and signed with all formalities.
If a business wants to entirely avoid the possibility of having e‑mails treated as binding amendments to existing contracts, the best approach is to be as clear and direct as possible on the subject by including language in contracts to the effect that e‑mails do not count as signed writings for purposes of any contract amendments.
A recent case on point involved an individual who sold his public relations firm to a global communications company. The deal included an employment contract under which the seller was to continue as chairman and CEO of the new company for three years. Soon, the new company was losing money and the seller was presented with the option of either leaving or taking on new responsibilities.
E‑mail then entered the picture when an employee of the communications company sent yet another option to the seller in an e‑mail that spelled out how the seller would allocate his time. The seller replied by e‑mail that he enthusiastically accepted that proposal. For his part, the representative of the communications company replied by e‑mail that he was thrilled with the seller’s decision to accept the new offer. In both e‑mails the sender had typed his name after the message.
The seller later had a change of heart and sued to enforce the terms of the original employment agreement. An appellate court ruled against him on the ground that the exchange of e‑mails on the new employment proposal constituted a binding amendment to the employment agreement. This was so even though the original agreement required that any changes had to be in the form of signed writings.
The court reasoned that the e‑mails effectively were signed writings because the parties’ names appeared at the end of the e‑mails, signifying an intent to authenticate the preceding contents of the messages. Likewise, the e‑mails also were signed writings for purposes of the Statute of Frauds, which requires certain contracts to be in writing in order to be enforceable. In short, when the seller and his e‑mail correspondent clicked “send” and “reply,” they were sealing a new deal that the seller could not avoid even though it was in an electronic form.
Generally the recipient of life insurance proceeds at the death of an insured is not subject to income tax on the proceeds. In 2006, in response to concerns about large corporations and banks purchasing life insurance on rank and file employees as a tax benefited investment for the benefit of the employer (in some situations apparently without even the employee’s knowledge) an exception to the tax exemption of life insurance proceeds was enacted for certain employer owned life insurance(“EOLI”). That is, the new legislation makes the proceeds of certain employer owned life insurance subject to income tax. Although the law became effective August 17, 2006, the IRS only recently issued guidance in connection with this provision. While there are still a number of situations in which an employer can own life insurance on an employee and not be taxed on the proceeds, certain notices and consents must be issued and obtained BEFORE the policy is issued.
Definition of an EOLI
A life insurance policy is an employer owned life insurance contract (“EOLI”) if all of the following applies:
- the owner is engaged in a trade or business.
- The owner (or a related person) is directly or indirectly a beneficiary of the policy
- A the time the policy is issued the insured is an employee of the owner or a related person (“an applicable policyholder”).
- The policy is issued after August 17, 2006 or a grandfathered policy (issued before August 17, 2006) has a material increase in the death benefit or other material change
- The insured is a US citizen or resident.
EOLI can include entity owned buy-sell life insurance, split dollar life insurance, key man life insurance, creditor life insurance and insurance related to employer paid compensation arrangements and can apply where the insured is a partner or owner of a wholly owned entity. It also includes situations where the owner is a sole proprietorship. Policies insuring officers and directors are included even if the person insured is not an “employee”.
Requirements to obtain tax free treatment
Life insurance benefits from an EOLI are still tax-free where required written notice and consent provisions have been satisfied (before the policy is issued) and the insured employee meets one of the following requirements:
- The insured is an employee at any time during the 12 month period prior to the death of the insured;
- At the time the policy is issued the insured was a director or meets the definitions for “highly compensated employee” (as defined in Code Section 414 (q) or “highly compensated individual” (as defined in Code Section 105;
- If proceeds are used to purchase an equity interest in the “applicable policyholder” from a family member of the insured, the designated beneficiary of the insured under the policy, a trust established for the benefit of a family member or designated beneficiary, or the estate of the insured, then proceeds are tax free to the extent used for such purpose; or
- To the extent that proceeds are paid to a beneficiary who is a member of the family of the insured, an individual who is the designated beneficiary of the insured under the contract (other than the applicable policyholder), a trust established for the benefit of such member of the family or designated beneficiary or the estate of the insured.
The written notice and consent requirements that must be met before the policy is issued are that the employee must:
- Be notified in writing that the applicable policyholder intends to insure the employee’s life and the maximum face amount for which the employee could be insured at the time that policy is issued;
- provides written consent to being insured under the policy and allow such coverage to continue after the employee terminates employment
- is informed in writing that the applicable policyholder will be a beneficiary of any proceeds payable upon the death of the employee.
Actual knowledge of the employee about the life insurance policy cannot be substituted for the statutory requirement that the notice and consent be “written”.
The recent IRS notice clarifies a number of issues including:
- That the definition of employee includes a partner or LLC member. A life insurance contract owned by a sole proprietor on his or her own life is not an EOLI.
- For the exception on the purchase of an equity interest in the applicable policyholder to apply the death benefits must be paid or used by the due date, including extensions, of the tax return for the taxable year of the applicable policyholder for the taxable year in which the death benefits are received.
- A single notice and consent document may be used for multiple policies
- Split dollar policies owned by a trade or business is an EOLI. This would include endorsements split dollar arrangement and could include collateral assignment split dollar if the trade or business is deemed to be the owner of the policy.
- The requirements for written notice and consent apply to a wholly owned business entity in which the sole owner is the covered employee.
IRS form 8925 is required to be filed by every applicable policyholder owning one or more EOLI contracts issued after August 17, 2006. The form is required to be filed annually and attached to the applicable policyholder’s income tax return.
For more information for about employer owned life insurance and notice and consent requirements, please contact us .
Having decided to start a new business either by yourself or with someone else, the next daunting task is to determine the type of the entity to use for the new venture. The chart below shows the different types of entities currently available in the Pennsylvania and provides a brief explanation of the entity and some major pros and cons of that entity type over other types.
There is no single entity type that is best for all situations. The right type of entity for a particular venture depends on many factors involving the business the entity is intended to conduct, the number of owners that will be involved in the business, where the business will be operated and conduct business, tax issues and other personal factors about the owners.
Choosing the wrong form of any for your business can have may negative impacts on your business, including, increasing your tax liability, limiting or losing liability protection for you or your business, increasing your reporting requirements to one or more states or other jurisdictions, just to name a few. Depending on title to property and business licenses, it may be difficult, time consuming and expensive to change the form of entity later.
After reviewing the chart and explanation of the entity types, please contact us to learn more about selecting the right entity for your business and how we can help you get started today.
Ask about our fixed-price plans for new entity formations.
When considering how long to retain business and tax records, shareholders in Pennsylvania S corporations and partners in partnerships also need to consider special rules applicable to Pennsylvania pass through entitles (S corporations, partnership and LLC that don’t pay their own tax but the income or loss from the business “pass through” to the shareholders, partners or members.
The accompanying articles about Pennsylvania Tax Benefit Rule and Pennsylvania Personal Income Tax record keeping requirements for S corporation shareholders are examples of the additional type of issues that need to be considered before discarding old tax returns for Pennsylvania business entities.
The Tax Benefit Rule involves the manner in which “basis” is calculated in a year when the S corporation incurs a loss. Because of the manner in which Pennsylvania tax personal income, some or all of the loss may not be able to be utilized for a tax year and if proper records are maintained will not reduce the taxpayer’s basis in the S corporation. Basis is deducted from the sale price when the stock in the corporation is sold or liquidated. Without the ability to use prior losses (or more accurately not have basis reduced by unutilized losses) the sale or liquidation transaction may produce a tax gain in the year of the sale even where there are little or no cash proceeds from the transaction. Since Federal income tax applies different rules, very often the results will differ significantly and often the issue is not discovered until the Pennsylvania income tax returns are prepared. The results can also be different for individual shareholders of the same company where they (or their spouse) have different type of income in past years.
So how long do you need to keep tax records where you own an interest in a Pennsylvania pass through entity – At least as long as you own an interest in the pass through entity.
Pennsylvania S Corporations – Record Keeping Requirement for Distributions to Shareholders
Pennsylvania allows S corporations to file a separate election when the corporation wants to be taxes as an S corporation for Federal income tax and does not wish to be a Pennsylvania S corporation. Before 2006, Federal S corporations had to file a separate election to be taxed as a Pennsylvania S Corporation. Now S corporations that do not want to be Pennsylvania S corporations need to file an election NOT to be taxed as a Pennsylvania S corporation. (REV-976).
Where a Federal S corporation has not always been a Pennsylvania S corporation, distributions from accumulated earnings may be a taxable distribution for Pennsylvania.
Due to the possibility of not always being a Pennsylvania S corporation and significant differences between Federal and Pennsylvania computation of Accumulated Adjustment Account (AAA) , it is important that Pennsylvania AAA be tracked in addition to Federal AAA.
Maintenance of historic tax records of the S corporation will assist in tracking AAA and the potential taxability of distributions from the S Corporation.
Unused “S” Corporation Losses Allowed to Offset Future Income (February 2008)
Pennsylvania Tax Benefit Rule Saves Client Over $20,000
Wiener and Wiener LLP was able to achieve a reduction of assessed Pennsylvania personal income tax by over $20,000 through application of the Tax Benefit Rule on behalf of an individual Pennsylvania taxpayer.
The taxpayer was a shareholder in a Company taxed as a pass-through entity (Partnership, LLC or S Corporation) which had substantial losses over a number of years. Under Pennsylvania income tax rules, the taxpayer could not utilize the losses in the year they occurred because he did not have other income in that class of income. (Pennsylvania does not allow losses from one “class of income” to offset income in other classes of income). That is the loss from the S corporation could not offset salary income. In the Company’s final year, it recorded a substantial gain. The Company had attempted to record the gain to allow offset against other losses in its final year. On assessment, Pennsylvania Department of Revenue disallowed the offset and assessed additional income tax to the individual taxpayers based on their share of ownership in the Company.
Our firm was retained to review the additional income tax assessment. We determined that the taxpayer could utilize Pennsylvania’s Tax Benefit Rule. The Tax Benefit Rule provides that unused losses in a pass-through entity do not reduce basis and therefore can result in a lower gain or, in this case, a loss on the disposition of the interest in the pass-through entity.
In order to effect the changes, the corporate accountant filed an Amended Corporate Return to more properly reflect the final year transactions and an Amended Personal Tax Return was filed for the taxpayer to pick up the changes from the pass-through entity and then apply an increased basis on the disposition of the Company stock.
The net effect of all the changes was a reduction in the tax being assessed by the Commonwealth of Pennsylvania by $20,000 (a change of over $600,000 of taxable income), netting the taxpayer a refund of a portion of the taxes originally paid prior to the assessment. In order to utilize the Tax Benefit Rule, copies of Pennsylvania Income Tax Returns for the taxpayer for each year that the Company was in existence were located.
(Planning Note: Current Department of Revenue guidelines require the taxpayer to provide copies of Pennsylvania tax returns for all years in which ownership was held in the pass-through entity to prove basis. Individuals incurring unused loses in pass-through entities should retain copies of Pennsylvania tax returns for all years of the duration of ownership in the pass-through entity, even beyond the statute of limitations period in order to meet Department guidelines for use of the Tax Benefit Rule.)
While we are not always able to effect such dramatic benefit to all our clients, very often a fresh review of taxes being appealed can result in an application of changes or other interpretations of tax provisions to a situation. For more information on Pennsylvania’s Tax Benefit Rule or to find out how we can assist you with a Federal, State or Local tax matter, contact our firm.
Small businesses (Gross receipts less that $15 million) with deductions exceeding their income in 2008 can use a new net operating loss tax provision to get a refund of taxes paid in prior years.
To accommodate the change in tax law, the IRS today updated the instructions for two key forms – Forms 1045 and 1139 — that small businesses can use to make use of the special carryback provision for tax year 2008. These forms are used to accelerate the payment of refunds.
The new provision, enacted as part of the American Recovery and Reinvestment Act of 2009, enables small businesses with a net operating loss (NOL) in 2008 to elect to offset this loss against income earned in up to five prior years. Typically, an NOL can be carried back for only two years. The IRS released legal guidance today in Revenue Procedure 2009-19 outlining specific details. Some taxpayers must make the election to use this special carryback by April 17, 2009.
The IRS announced that expects record numbers of small businesses to be eligible for the refunds. It further stated that it is putting in special steps to ensure timely processing of these refunds to help small businesses during this difficult period.
Small businesses with large losses in 2008 may be able to benefit fully from those losses now, rather than waiting until claiming them on future tax returns.
The normal two-year carryback remains available if the small business does not elect the special carryback provision. If the loss exceeds the income for the carryback period, the taxpayer can continue to carry forward the remaining balance of the NOL for up to 20 years.
For small businesses that use a fiscal year, this special carryback may be used for an NOL in either a tax year that ends in 2008 or a tax year that begins in 2008. Once a taxpayer makes this election, it may not be changed.
To qualify for the new five-year carryback provision, a small business must have no greater than an average of $15 million in gross receipts over a three-year period ending with the tax year of the NOL. Businesses with more than $15 million in gross receipts still qualify to carry back their 2008 NOL for two years.
The methods that a small business may use to elect the new provision as detailed in the Revenue Procedure 2009-19.
If a small business previously elected to waive the carryback of 2008 NOL but now wants to elect this special carryback, the small business may revoke its previous election to waive the carryback. The election revocation must be made on or before April 17, 2009.
Generally small businesses that are not corporations (including sole proprietorships filing schedule C with their Form 1040) may accelerate a refund by using Form 1045, Application for Tentative Refund.
Corporations with NOLs may also accelerate a refund by using Form 1139, Corporation Application for Tentative Refund.
If you have questions about the special carryback provisions or other changes made by the recent “Economic Stimulus Bill” contact Us for more information about the changes in tax laws and how it may impact your business.
Businesses have been dependent on computerized information for some time now, but it has been only relatively recently that insurance companies have devised and offered insurance policies specifically tailored to the potential losses from a variety of problems that can affect a computer system.
An early impetus for cyber insurance was anticipation in the late 1990s of losses associated with the coming of “Y2K.” That concern turned out to be overblown, but the threats that have spurred cyber insurance offerings since then are real enough, including viruses, hackers, and legal injuries to others from information on a company’s website. One study has found that the average annual technology‑ related financial loss for United States companies more than doubled just from 2006 to 2007.
Another development that prompted more cyber insurance policies was the realization, which sometimes came as a surprise to insured businesses, that general liability policies did not cover computer problems. Cyber insurance is a good idea for all of the usual reasons associated with insuring against business losses. But it also makes sense because of the particular costs associated with responding to a computer data breach, especially now that many states have adopted data breach notification laws.
This kind of postmortem after a breach could include such measures as notifying affected customers, paying for credit monitoring for those customers, replacing compromised credit or debit cards, and undertaking forensic analyses of affected databases. All in all, there are some expensive scenarios to insure against.
Categories of Losses
The losses covered by cyber insurance generally fall into two categories: first‑party losses, meaning those affecting the business itself; and third‑party losses, meaning incidents mainly affecting outside parties, including the customers of a business. Of course, the same underlying problem can cause both kinds of losses, such as when unauthorized access to a computer system shuts down the computer system of a company whose customers or clients rely on that system through an extranet.
A comprehensive cyber insurance policy should encompass both kinds of risks. These are the typical categories of coverage:
- First‑party business interruption, covering lost revenue experienced during downtime due to accidents or security breaches (but typically not losses due to catastrophic regional power outages);
- First‑party electronic data damage, such as the compromise of data from a virus infection;
- First‑party extortion, including the demands made by hackers;
- Third‑party network security liability, arising from compromise and misuse of data stemming from identity theft and credit‑card fraud;
- Third‑party network liability in the form of court judgments obtained by persons harmed by problems originating with a business’s computer system; and
- Third‑party media liability, aimed at the full range of potential liability from matter published in interactive online communications.
When an Internet executive held a meeting with the chairman of a telecommunications company, the agenda was a new business idea that the Internet executive had. The discussion was transformed into a recruitment when the telecommunications executive suggested that the idea should be pursued within the company he headed. For two men in the upper echelons of high‑tech businesses, they then chose a decidedly low‑tech way to memorialize their agreement. The end result, however, shows how substance can sometimes triumph over form in the law of contracts formation.
At the end of their meeting, the telecommunications executive simply wrote out the agreement by hand on two notebook pages, and both men signed it. The writing included specifics as to how the newly hired executive would be compensated, the terms on which he could quit if he became unhappy, and what would happen if intellectual property involved in the deal could not be transferred to the telecommunications firm. It also included the statement that “[t]he parties will complete formal contracts as soon as possible but this is binding.” This would turn out to be pivotal language in the litigation that followed.
Unfortunately, the new arrangement quickly went downhill, and after about six months the new employee was fired. The relationship ended with the “formal contracts” never having been drafted and executed. When the former employee sued for breach of contract and other wrongs, more than six years of litigation ensued, with two trials and two appeals.
Much of the case focused on whether the handwritten agreement that started everything was a valid, binding contract. The telecommunications company argued that it was merely an “agreement to agree.” However, a jury eventually ruled that the agreement was valid, and that the telecommunications firm had breached the terms of the contract represented by the two notebook pages.
Four factors are usually considered in determining whether a “preliminary agreement” is binding. In this case, the first two clearly favored the fired executive: There was no explicit reservation of a right not to be bound (in fact, the handwritten agreement said the opposite) and the executive had partially performed the contract. The third factor is whether all of the terms of the alleged contract were agreed upon. On that point, the agreement, although it may have lacked some details, addressed all of the essentials for a binding contract.
The final factor is whether the agreement was a type of contract that is usually committed to writing in a formal manner. When millions are at stake, as was the case here, it may be unusual to seal the deal with a handwritten document, in outline form, and drafted on the spot by one of the principals without benefit of legal counsel. The agreement was not much to look at, barely surpassing in formality the proverbial agreement scribbled on a cocktail napkin. Still, that it was unorthodox did not mean that the method was unprecedented. In the end, this factor, balanced against the other three, was not enough to discard the agreement and deprive the departed executive of the benefits of his bargain.
This case demonstrates need to formalize agreements and how “preliminary” or “intent” documents can be sufficient to constitute an enforceable contract. Contact Us for more information if you are uncertain if a formal agreement is needed in your situation.
The federal Computer Fraud and Abuse Act (CFAA) is most closely associated with criminal prosecutions brought by the Department of Justice. But the CFAA also provides for a civil cause of action for anyone who suffers damage or loss because of a violation of the statute. In light of the expansive reading that some courts have given to the law, victimized companies should give consideration to taking the civil route. A civil lawsuit gives the wronged party more control and may provide a quicker fix. By means of such a lawsuit, the victim can retrieve stolen data, enjoin illegal access to data, and even get compensatory damages for the theft and destruction of data.
The CFAA applies to all companies and all computers that are connected to the Internet. Potentially, there are multiple, distinct types of violations of the statute that could support a civil action. On a recurring issue in such cases—whether the defendant had authorization for his actions—the courts look at several factors:
- whether the defendant was an agent of the plaintiff’s, with particular powers;
- whether an employment contract, such as may have been embodied in company rules and policies, was breached; and
- whether the defendant’s use of the computer exceeded normal use that was expected by the plaintiff.
Recent Court Decisions
A real estate business was allowed to proceed with a civil action against a former employee for violations of the CFAA. In violation of his employment contract, the employee decided to quit and start a competing business. Before he returned the company’s laptop, he deleted all of the data in it, including data that would have revealed his misconduct. Knowing that “deleted” files can be retrieved, he erased the incriminating data by loading into the laptop a secure‑erasure program.
All of this, if proven in court, violated the CFAA as “transmission” of a program that damaged the computer (defined to include files in the computer), and as intentionally accessing the computer without authorization. Although the employee had not yet left his job when he installed the program, by law any authorization he might have had evaporated as soon as he violated the duty of loyalty to his employer.
In another case brought under the CFAA, a tour company secured an injunction against a competing company run by one of its former employees. The ex‑employee improperly used confidential information from his former employer to enable his new company to glean pricing data from his former employer’s website, so that his new enterprise could effectively undercut those prices.
Although the website was open to anyone, the unauthorized use of the confidential information, combined with the use of a “scraper” software program, violated the CFAA. On top of the injunction, the plaintiff could recover, as a compensable “loss” under the CFAA, the thousands of dollars it had paid in computer consultant fees for diagnostic work after the defendant’s conduct was discovered.
Properly drafted Confidentiality Agreements and Covenants Not to Compete can aid employers in protecting legitimate business data and help make it clear to employees what type of actions may result in actions by the employer. Contact Us to discuss your rights about Confidential Information, Trade Secrets and Covenants Not to Compete.
The much-anticipated and much-delayed rules from the IRS on the income tax treatment of deferred compensation are now available. At almost 400 pages, the rules are not exactly light reading for the average taxpayer. Taxpayers have until the end of 2007 to make any necessary changes to their deferred compensation plans.
The Internal Revenue Code has special tax rules for “nonqualified” deferred compensation plans. These are not to be confused with “qualified” employer retirement plans, like a 401(k) plan, or with bona fide vacation leave, sick leave, compensatory time, or disability pay or death benefit plans. The new regulations expand the already broad definition of what constitutes deferred compensation. Essentially, a plan provides for deferred compensation if an employee has a legally binding right during a taxable year to compensation that has not been actually or constructively received and included in gross income, and that is, or may be, payable under the plan in a later year.
The impetus for the new rules was a growing concern that some individuals were deferring money over which they still had control, and which they could receive basically whenever they wanted it. The memories are still fresh of top Enron executives cashing out their deferred compensation early and leaving the company financially floundering. In a nutshell, the new rules accomplish the following:
limit the flexibility for the timing of elections to defer compensation;
- restrict distributions during employment to fixed dates, certain changes in control, or extreme hardship;
- prohibit acceleration of distributions of deferred compensation;
- prevent key employees of public companies from receiving deferred compensation due to severance from service until six months after severance; and
- require that deferrals of distribution dates or changes in the form of payment be made at least one year in advance of the scheduled distribution date.
If the rules are not followed, the tax consequences are significant. The participant is immediately taxed on the value of the deferred compensation once it is no longer subject to a substantial risk of forfeiture. On top of that, there is a 20% excise tax on the amount that is included as income. For good measure, there is also an interest penalty. To avoid such a scenario, employers and employees with deferred compensation plans should promptly come up to speed on the new rules and get appropriate professional help with making sense of, and responding appropriately to, the new IRS rules for deferred compensation.
Contact Us to discuss how the new rules may impact your Company’s plans.
Every day, more and more business transactions are conducted over the Internet. Many of these transactions begin with a “clickwrap agreement.” Clickwrap agreements are variations on “shrink-wrap” agreements, those printed terms and conditions usually found in the packaging for software. Clickwraps basically work the same way, but the user agrees to the terms by clicking a button on his computer, instead of by opening the package and using the product. While clickwrap agreements are still widely associated with software licensing, their use has spread to a wide range of business settings, such as advertising services, telecommunications, and banking, to name only a few.
Given that clickwraps have become ubiquitous, it is prudent for businesses to consider their advantages and to be informed as to the desirable characteristics that any clickwrap agreement should have. As compared with their paper predecessors, clickwraps are easier and quicker for a customer to accept, and more difficult for the customer to attempt to change. They provide a measure of control that is to the business’s advantage. Depending on the size of the business and its market, clickwraps can be the means by which countless relationships are formed and deals are struck, so it is vital for any business using them to get all of the details correct. To ensure enforceability and to head off later legal problems to the greatest extent possible, companies should seek and use the advice of legal counsel as they create clickwraps tailored to particular businesses.
Once a business decides to use a clickwrap agreement, there are certain traits that should be considered:
- Put the steps in the right order. Before a customer is expected to pay for the product or service, or is allowed to receive it, he should be given the chance to review the entire clickwrap agreement and the option to accept or reject all of its terms and conditions.
- Identify the user. If the party who comes to a company’s clickwrap represents another company, it is especially important to get identifying information that will show that the user is authorized to bind his company to the agreement. To this end, the clickwrap should have places for the user’s name, the company’s name, the user’s title, and both e‑mail and physical addresses. Of course, aside from its value for such verification purposes, the identifying information can be useful in other ways.
- Do not make the user hunt. The clickwrap should be readily apparent to a user, and the “install” or “download” button should appear only after the clickwrap is set out in its entirety. In the same vein, a checkbox indicating that the user has agreed to the terms of the clickwrap makes good sense. The idea is to prevent anyone from claiming in a later dispute that there were parts of the agreement that he could not have easily seen, and to which he did not give his assent. As for any terms that are weighted in favor of the business, making them hard to find is an especially bad idea. On the contrary, these terms should stand out, maybe even with their own “I agree” checkbox.
- Drop the legalese. As is true for any contract, a clickwrap should use clear, plain English. It is well settled in law that a court will construe ambiguous terms against whoever wrote them, that is, the business whose clickwrap is being deciphered.
- Make the clickwrap control. If there are any other dealings with the user, whether oral or written, that conceivably could be said to constitute a separate agreement, they all should explicitly defer to the clickwrap agreement. Likewise, the clickwrap itself should have language indicating that its terms override any conflicting terms in other agreements relating to the transaction.
- Keep the final word for your business. What if a user navigates successfully and accepts the clickwrap agreement, but your business determines for some reason that it wants no business relationship with that user? The business should provide itself with an escape hatch, with language in the agreement to the effect that the business must confirm the agreement before it becomes enforceable, or that the business can cancel the agreement at will.
Clickwrap agreements have gained acceptance as valid, enforceable contracts, albeit in an unconventional format. This point is illustrated by a recent federal court decision. In a breach‑of‑contract dispute between two software companies concerning the use of licensed software, the court hardly paused at the question of whether a clickwrap agreement constituted a valid contract. In answering “yes,” the court also relied on an extensive list of prior court decisions that had reached the same conclusion. The clickwrap agreement has become a permanent part of the legal landscape for businesses and individuals alike.
By some accounts, a large majority of employees access the Internet on company computers for personal reasons while at work. The obvious adverse effects of this on productivity are only the tip of the iceberg with regard to the potential headaches that such activities can cause for employers. Personal Internet activity by employees can pose security risks to the company’s computer network itself, such as by exposing a network to a computer virus.
Less immediate but just as serious is the threat of legal liability of the employer to injured third parties. Some scenarios are not difficult to imagine. An employee uses his computer as a tool for sexually harassing fellow workers by visiting pornographic websites. Or, an employee embroiled in a bitter domestic dispute uses his office computer to communicate threats to his spouse, and the employer fails to take action.
In a recent case, one such nightmare scenario was all too real for an employer that had to defend itself against the alleged victims of an employee who used a workplace computer for conduct that was criminal, not just indicative of poor judgment. This case may be the first reported decision on the matter of an employer’s liability to a third party for having failed to take action to stop an employee from using a company computer in a manner that harmed the third party. It most certainly will not be the last such case.
The case involved an employee who used his company’s computer at work to visit pornographic sites, including some relating to child pornography. Over a period of time, a supervisor and some co-employees became aware of this activity and complained to management. Eventually, the offending employee was confronted and was told to stop such use of the computer, but, a few months later, he was again discovered to have accessed pornographic sites.
Eventually, the employee was arrested on child pornography charges, including allegations that he had transmitted nude pictures of his 10‑year‑old stepdaughter over his office computer to a child pornography site. The employee’s wife, who divorced him, sued the employer for failing to investigate and for failing to report the employee’s viewing of child pornography. The case was settled, but not until a precedent was set when the lawsuit survived attempts to have it dismissed before trial.
There are limits to what companies can or should do to prevent improper use of company computers, but it is only prudent to take at least some basic measures. It makes sense to have a written e‑mail and Internet use policy that clearly informs employees of what, perhaps, they should already know that the employer has and reserves the right to monitor employees’ use of the company’s computers and to discipline violators. In addition, there needs to be even‑handed enforcement of the policy. Even the best written policy will do little to convince a jury, if it comes to that, that a company has done all it reasonably could have done, if the evidence is that the policy was toothless or rarely enforced.
The federal income tax deduction for the business use of a home has a good dollars‑and‑cents upside for those who qualify. Some detailed questions have to be answered correctly to get to that point, however. Not surprisingly, the IRS publication on the subject makes use of a complex flowchart filled with yes or no questions to guide taxpayers to a determination of eligibility for the deduction.
Qualifying for the Deduction
To pass the threshold for use of the home business deduction, a taxpayer must satisfy the following two basic sets of requirements. The first set concerns the nature of the business activities, while the second set relates more to the place itself.
First, the use of the business part of the home must be exclusive (with exceptions to be discussed below), regular, and for the business. Second, the business part of the home must be one of the following: the principal place of business, the place where the taxpayer meets or deals with patients, clients, or customers in the normal course of business, or a separate, detached structure used for business.
The exclusive use factor means that the area is used only for business, not for a mixture of business and personal uses. However, the exclusive use requirement need not be met when a part of the home is used for storage of inventory or product samples, or for a day‑care facility. When the IRS says that the use of the home must be for a trade or business, it does not mean any activity that makes money for the taxpayer. If you use a computer in your den for day‑trading of stocks or online gambling, do not count on taking the deduction. As for what constitutes a [email protected] use for business, that essentially means business conducted on a continuing basis, not occasionally. Even if a taxpayer has a place in the home used exclusively for business, the deduction is not available if the business activity is only sporadic.
As for the requirements relating to the place itself, the area in the home used for business is a “principal place of business” if it is used exclusively and regularly for the administrative or management activities of the business, and there is no other fixed location where substantial activities of that kind are carried out. If some business is transacted at more than one location, determining whether the home location is the principal place of business requires consideration of the relative importance of the activities at each location. If that does not provide an answer, the time spent at each site should be considered. Remember that the deduction is available if either the home is the place for meeting with patients, clients, or customers, or a separate structure on the premises is dedicated for business.
If the taxpayer is an employee using part of a home for business, the deduction is available if all of the requirements described above are met, plus two additional tests. The business use must be for the convenience of the employer (not just appropriate or helpful), and the employee may not rent all or part of the home to the employer while using the rented portion to perform services as an employee.
What Is Deductible?
Deductible expenses for a business use of the home include items such as the business portion of real estate taxes, deductible mortgage interest, rent, casualty losses, utilities, insurance, depreciation, painting, and repairs. This is not likely to be an all‑or‑nothing proposition, though. Generally, an expense is fully deductible if it is direct, that is, incurred only for the business part of the home. An indirect expense, incurred for running the home as a whole, is deductible based on the percentage of the home used for business. Any reasonable method for determining that percentage is acceptable, such as dividing the square feet used for business by the total square feet, or dividing the number of rooms devoted to business by the total number of rooms. If an expense is unrelated to the business part of the home, it is not deductible at all. If the taxpayer’s gross income from the business use of the home is lower than the total business expenses, the deduction for certain expenses will be limited. But those expenses that cannot be deducted because of such a limitation can be carried forward for the next year’s home business expenses.
For more information see IRS publication 587, Business Use of your Home available
at or contact our office.
But Can Cause Legal Headaches
An automated external defibrillator (AED) is used to treat people suffering sudden cardiac arrest whose hearts have an irregular heartbeat. Since September of 2004, when the Federal Food and Drug Administration approved over‑the‑counter sales of AEDs, it has been possible for individuals and businesses to have AEDs on hand, instead of waiting for them to be brought by medical personnel.
The greater availability of AEDs has been a mixed blessing from a legal standpoint. Businesses most likely to put an AED to use (and what business cannot foresee that a customer might have a heart attack on its premises?) are now in the position of having to decide whether they should have an AED at their facilities. If they do not, there is a risk that a customer who needed an AED could cite the failure as negligence in a lawsuit. That is the “damned if you don’t” part, but the rest of the saying may apply as well.
If a business – for example, a fitness center – decides that it would be prudent to have its own AED, it may be commended for preparing for an emergency, but it also may have created a legal headache. Under the right set of facts, the business could be liable for a range of acts or omissions, such as not training its personnel to properly use the AED, or even something as simple as not keeping fresh batteries in the AED. There are already lawsuits in which such allegations have been made, and court cases from the period before over‑the‑counter sales began suggest that businesses can be held liable if the AED is not kept in good working order or if the use (or non‑use) of the AED is especially negligent.
Businesses with AEDs on premises should think in terms of having a comprehensive AED program, not just the piece of equipment. With a view toward quick and effective use of the AED, the program should include:
- good means of communication about emergencies requiring an AED;
- training of workers in the use of the AED;
- procedures for regular checking and maintenance of the AED, and;
- storage of the AED in an accessible location, identified by clear signs.
Now 15 years old, the Americans with Disabilities Act (ADA) protects disabled persons from discrimination in employment settings. When you first think of individuals with disabilities, the millions of Americans who have some history of cancer may not immediately come to mind. But, as the Equal Employment Opportunity Commission (EEOC) discusses in a recently published guide, a cancer victim may well be entitled to the protections afforded by the ADA.
Cancer as a Disability
Cancer is a “disability” within the meaning of the ADA when the cancer itself or its effects substantially limit one or more of a person’s major life activities. The limiting condition needs to be more than just temporary in nature. Just what constitutes a major life activity is difficult to succinctly describe, but an exhaustive list would be a long one. Interacting with others, sleeping, eating, and walking are but a few examples. As with other types of conditions, cancer will be treated as a disability if it does not, in fact, significantly affect a major life activity but an employer treats the individual as if it does. This reflects the ADA’s goal of attacking discriminatory stereotypes and assumptions when they motivate an employer’s decision making.
During the time period before any offer of employment has been made, an employer may not ask an applicant if he or she has (or has had) cancer, or about cancer‑related treatments. The employer is permitted to ask if an applicant can perform particular job requirements. If an applicant has volunteered the information that he or she has (or has had) cancer, the employer still may not question the applicant about the cancer or the applicant’s prognosis, but the employer may ask questions about whether the applicant will need an accommodation and, if so, what kind.
Once a job offer has been made, the employer may ask health‑related questions and require a medical exam, as long as the employer treats all applicants for the same type of position in the same manner. The discovery that an applicant has (or has had) cancer cannot be used to withdraw a job offer if the applicant can perform safely all of a job’s fundamental duties, with or without reasonable accommodation. When an offer has been accepted, the employer can ask questions about the employee’s health or require a medical exam only when it has a legitimate reason to believe that the cancer may be affecting the employee’s ability to do the job, and to do it safely. With a few exceptions, an employer must keep confidential any medical information learned about an applicant or employee.
Within reason, the ADA requires employers to make adjustments or accommodations to enable people with disabilities to enjoy equal employment opportunities. An employer is not required to subject itself to undue hardship (that is, significant expense or difficulty) in order to accommodate someone. Nor must an employer remove an essential function from a job, although it may choose to do so. As for cancer‑related disabilities, some individuals may need, and are entitled to, reasonable accommodations because of the cancer itself, the effects of cancer medication and treatment, or both. A request is necessary to trigger the duty to make a reasonable accommodation, but no “magic words” are required and, in fact, the request may come from someone acting on behalf of the disabled person. The guidance is available on the EEOC’s website at www.eeoc.gov/facts/cancer.html .
The legal distinction between an employee and an independent contractor may seem like a subject suitable only for a law school exam, but it has real‑life significance for both employers and employees.
Considering just federal taxes, for example, if a worker is an employee, the employer must withhold income tax and the employee’s part of Social Security and Medicare taxes. The employer also is responsible for paying Social Security, Medicare, and unemployment taxes on wages. An employee can deduct unreimbursed business expenses if the employee itemizes deductions and the expenses are more than 2% of the adjusted gross income.
If the worker has independent contractor status, however, there is no withholding, and the contractor is responsible for paying the income tax and self‑employment tax. In that situation, it also may be necessary to make estimated tax payments during the year. An independent contractor can deduct business expenses, but on a different schedule of the tax return than is used by an employee.
So how do you tell the difference between an employee and an independent contractor? There is no single, quick answer. The particular facts of each case must be examined. However, relevant facts can be grouped into three general categories: behavioral control; financial control; and relationship of the parties.
The focus here is on who has the right to control how a worker does the work, rather than simply on the end result of the work. If a business has that right, the worker is an employee; if the worker retains that right, he is an independent contractor. The more that a worker gets instructions or training on how the work is to be done, such as determining what equipment to use, hiring assistants, or deciding where to get supplies, the more likely it is that the worker is an employee.
Apart from the actual performance of work, there is the question of a right to control the dollars‑and‑cents part of the work. Rather than having a direct financial stake in the business, an employee essentially works for a paycheck and maybe some reimbursed expenses. Some factors pointing more toward an independent contractor status include a worker’s significant investment in the work, his or her lack of a right to reimbursement of even high business expenses, and his or her potential to realize a profit or suffer a loss.
Relationship of the Parties
This factor considers how the parties themselves perceive their relationship. While an independent contractor, as the term suggests, is on his own concerning benefits, a worker who is provided insurance, retirement benefits, or paid leave is probably an employee. Sometimes the clearest picture of a worker’s status is to be found in a written contract. The parties’ intent, as shown in a contract, can be decisive, especially if the other factors do not lead to a conclusive answer.
Launching a business is a little like walking a tightrope, with any long‑term rewards coming only after overcoming some risk. Being well‑informed and realistic from the outset is essential. One of the first considerations is the legal form that the business should take. An option that has the potential for achieving a good balance between risk and reward is the franchise.
A franchise is a relationship between the owner of a trademark or trade name (franchisor) and an individual or entity (franchisee) who contracts to use that legally protected identification in a business. The details of the relationship are controlled by a franchise agreement, but most franchises share some common characteristics. Typically, the franchisee sells goods or services that are either supplied by the franchisor or at least must meet standards set by the franchisor. In simple terms, the franchisor provides the ingredients that come from the proven experience of an established line of businesses, while the franchisee provides the elbow grease and all of the other intangibles that are needed if a fledgling business is to get off the ground and prosper.
There are two types of franchises. The simpler version, known as a “product/trade name franchise,” is the sale of the right to use a business name or trademark. In the more complex form, called a “business format franchise,” the fates of the parties are tied together more closely and for a longer period of time. In this format, the franchisee trades some of its independence in exchange for various forms of assistance from the franchisor.
One benefit of a franchise is that the prospects for a healthy bottom line are enhanced, since the risks of the investment are reduced by being associated with an established company and its good name. But that boost is not without cost. A would‑be franchisee should always be aware of the financial commitment involved, but not be too quickly scared away by the reality that here, as in most business matters, “you have to spend money to make money.”
It is only prudent to consider carefully a number of likely expenses. There is the initial franchise fee, sometimes nonrefundable and usually at least a few thousand dollars. Costs to rent or build an outlet and to purchase the initial inventory will be significant. The full range of expenses depends on the type of business, but some of the other typical expenses include fees for licenses and insurance, ongoing royalty payments to the franchisor based on income and for the right to use the franchisor’s name, and payments into the franchisor’s advertising fund.
Who’s in Charge Here?
It is the nature of a franchise that, in exchange for getting to hitch its wagon to the franchisor, the franchisee agrees to give up some of the control over how the business will operate. There still should be room for putting a personal stamp on the business, but the franchise business model is not for someone who would have difficulty giving up the decision‑making power that comes with starting a business. Owners of a “Mom and Pop” do not need permission for their store’s color schemes, but the franchisee probably will.
As set out in the franchise agreement, the franchisor will usually have the final say about the specific goods and services that may be sold, site approval for the business location, design or appearance standards, as well as authority over an array of operational matters such as hours of operation, signs, employee uniforms, and even bookkeeping procedures. On the larger scale, the franchisor also may limit the franchisee’s business to a specific territory.
A franchisee’s breach of the franchise agreement, such as by failure to make payments or to comply with performance standards, could result in termination of the franchise and loss of the franchisee’s investment. Even without a breach, a franchisee must foresee that franchise agreements generally run for a finite period, such as 15 or 20 years. Of course, if both sides so desire, the agreement can be renewed under the same terms or perhaps even terms more favorable to the now‑proven franchise. But the franchisor could decide not to renew, and it usually reserves the right to do so for its own reasons. If there is a renewal, the parties must agree again to all of the terms and conditions. The franchisor may take that opportunity to make changes in the deal to its benefit. In that event, the franchisee would be wise to give a fresh look at whether owning a franchise still makes business sense.
Anyone seriously considering buying and running a franchise needs to do the homework first, and the Federal Government has made that process more organized. The Federal Trade Commission (www.ftc.gov) requires franchisors to prepare a disclosure document, sometimes called a Franchise Offering Circular, that puts in one place a wealth of information about the franchisor, current and former franchisees, and what the franchisee is agreeing to when the franchise agreement is signed. Reading and understanding the disclosure document, not to mention the franchise agreement itself, is essential.
Contact us to get legal advice before making a commitment to a franchise arrangement.
Four years after Edward opened a credit card account with one of the major credit card companies, he married Linda. Linda became an authorized user of the card, but she was not, as the credit card company would later claim, a co‑applicant for the card. Some years later, without telling Linda, Edward filed for bankruptcy. The credit card company took Edward’s name off of the account and notified Linda that she was responsible for the balance on the account, which amounted to many thousands of dollars. After she learned about Edward’s secretive bankruptcy, Linda left Edward. But when she tried to buy a condominium on her own, she could not qualify for a mortgage because of the big credit card debt that showed up on her credit record.
Linda’s efforts to free herself from the effects of Edward’s overspending began by getting copies of her credit reports from all three major credit reporting agencies. These reports confirmed her worst fears, showing her as being legally responsible for the credit card balance. Linda notified the reporting agencies that she disputed the fact that she was obligated on the account, and the agencies informed the credit card company of Linda’s position.
In response to learning that Linda was challenging her responsibility for the debt, the credit card company was required by the federal Fair Credit Reporting Act to conduct an “investigation” regarding the disputed information. The nature and extent of that investigative duty became the focus of Linda’s lawsuit under the Act. She filed suit when the company continued to maintain that Linda was responsible for the debt, thereby leaving in place the black cloud over her credit picture.
Linda won her case, with an award of damages for good measure. The credit card company had not satisfied its duty to investigate. After hearing from the credit reporting agencies, the company simply confirmed that the disputed information provided by the agencies matched the account information in its computer system. This cursory review was no “investigation.” Federal law required the creditor to look beyond the bare information in its customer information system, such as by consulting underlying documents. In this case, the most important document would have been the credit card application submitted by Edward. As it happened, the company had lost the application, but that did not get it off the hook. Had the company done enough to discover that the key document was missing, it at least could have informed the credit reporting agencies that there was no conclusive proof that Linda was responsible for the credit card debt.
Whether we like it or not, identity thieves are resourceful. Their methods are as varied as the ways in which consumers need to use some form of identification to initiate and complete transactions. It can all be confusing and intimidating, but consumers need not feel helpless against the expanding threat of identity theft. For most of the tactics used by the bad guys, there are countermeasures for consumers. These measures cannot completely insure that a consumer’s identity is safe, but the odds of becoming a victim decline with each protective step taken. What follows is a nonexhaustive collection of safeguards you can put in place to lower the chances that a stranger will do you harm, even as he adds the insult of pretending to be you.
In the Short Term
- Obtain, review, and insure the accuracy of your credit report from each of the three major credit bureaus. These reports have information on where you work and live, your credit accounts, how you pay your bills, and whether you have been sued or arrested or have filed for bankruptcy.
- Use random passwords on your credit card, bank, and telephone accounts rather than birthdays, initials, or other obvious passwords.
- Make sure that the personal information in your home is secure, especially when you have roommates, employ outside workers, or have service and repair work done in your home.
- Look into security procedures for personal information at work. You should be able to find out who can access your information, how your records are kept secure, and what the employer’s procedures are for the disposal of records.
Good Habits to Acquire
- Unless you initiated the contact or you know to a certainty whom you are communicating with, do not give out personal information over the telephone, through the mail, or over the Internet. Before sharing information with an organization, use a website or telephone directory to check on its legitimacy.
- Remove your regular mail as promptly as possible from your mailbox before a would‑be identity thief beats you to it. For outgoing mail, put it into a collection box rather than leaving it to be picked up from your mailbox. Let the Postal Service hold your mail if you are going to be away.
- Yes, it may sound like overkill at home, but it still makes sense to shred or tear up all those discarded charge receipts and similar papers with personal information. There are people out there more than willing to go through your garbage if it means they get to use your credit cards.
- Travel light, financially speaking. Carry only such identifying information, or credit and debit cards, as you will actually need.
- Stay on top of the timing of your credit card bills. A late or missing bill may be a sign that a thief already has taken over your account.
- Approach promotional contacts with a healthy skepticism. Phony offers are too often successful in getting personal information straight from the victim himself.
- Secure your Social Security number. Keep the card itself in a safe place, not on your person. Ask questions and be satisfied by the answers if any person or business asks for your number. There are some legitimate reasons for giving out your number, but it is not a good enough reason when a business simply wants your number as part of its standard recordkeeping.
Computers have their own unique set of threats to the security of your identity, but there is good advice for the wary here, too. Update virus protection software regularly. Do not download files or click on hyperlinks coming from strangers. Use a secure browser and a firewall program, especially if you use a high‑speed Internet connection. Avoid storing financial information on a laptop but, if you must, use a strong, random password, do not use an automatic log‑in feature, and always log off when you are finished.