Category: Uncategorized

Preface: Each payroll provider should be able to articulate how their company has developed a niche in the payroll industry, and this can help you understand how well each company will be able to serve you.

How to Choose the Right Payroll Provider

Credit: Matthew P. Glick

Payroll processing is one of those crucial back-office operations that every business needs, but few people fully understand. HR laws are complex, and are continually evolving. Processing payroll can easily feel like a process that is just beyond your control, where you press buttons, and employees get paid. In this article, we will be breaking down what it is that you should look for in a payroll provider by classifying three phases (Evaluating what you need, Searching the market for available solutions, and RE-searching the list of available solutions by comparing each contender with the competition).

1. Evaluating

In this phase, you will mainly be concerned with evaluating your current needs. A good starting point would be understanding why you are looking into switching providers. By identifying the “pain points” with your current provider, you should be able to more easily identify a solution that will satisfy your needs much better. For instance, if customer service regularly fails to deliver on expectations, consider locating a provider that has a dedicated team or account manager to handle customer service, instead of a call center.

Some other points to consider would be the complexity of your payroll situation. What kind of benefits do you offer employees? Always be sure they are prepared to handle anything unique you bring to the table. The more complex your situation, the less willing you sould be to compromise on having a knowledgeable onboarding team that will be able to configure your solution just the way you need it. Some companies with a higher employee turnover may find it beneficial to invest in an integrated HCM module, which would allow them to process onboarding paperwork online, eliminating the need for paper forms.

Remember to look into what kind of integrations you will need. Making sure that your payroll provider integrates with your accounting software can save valuable time. Another integration that may save time depending on the size of your company would be timesheets automatically importing into your payroll system.

Don’t forget to evaluate you company’s future growth plans as well. Identifying a solution that has room to grow with your company will save you much time and hassle, and will allow you to focus on those growth plans rather than medicating the growing pains in HR.

Note: If your company has relatively few needs with minimal complexity, an option to consider would be Quickbooks Payroll (especially if you already use them for accounting). Their pricing structures are pretty transparent, and their online version even offers an automatic payroll option for salaried employees, or hourly employees who regularly work the same number of hours.

2. Searching

In this phase of the journey to finding the perfect payroll provider you will want to focus on searching the market for what is available. Use the list of needs that you came up with in the previous phase to quickly “weed out” any obvious misfits. Use that list to keep focused as you browse each company’s carefully curated public image. It’s easy to get taken in by all the bells and whistles that a solution offers, but keep in mind that a great solution that may not have all the bells and whistles is far better than one that looks shiny but repeatedly fails to deliver. Staying objective is the key here.

Tip: Avoid filling out forms that ask for contact information at this stage. You’re just trying to get a high-level overview of each company, and once you get on their marketing lists, it can be very difficult to get off. In order to get pricing data, you will most likely need to contact the company, but avoid doing so until you have identified a few clear front-runners.

3. RE-searching

By the time you get to the end of this phase, you should have a clear idea of which direction you are headed. This is the part where you will want to meticulously compare each company with the competition. Remember, this company will be handling sensitive payroll information, and will be the conduit through which your largest expense sources flow. No pressure, but don’t mess this one up!

Develop a list of questions to ask each company. A few examples would be: “What sets your company apart from the competition?” or “How has your company fared during the COVID-19 pandemic?” Each company should be able to articulate how their company has developed a niche in the payroll industry, and this can help you understand how well each company will be able to serve you. As of the date of this publication, the pandemic is nearly two years old, but the second question should serve you well in identifying a company that is able to adapt to change quickly, which is crucial for any payroll company.

You will also want to scour reviews. Websites like G2 and Capterra are great for this. They will even find the most helpful critical reviews for you, so you can get a balanced perspective on the best and worst parts about a company.

In the end, the company that is perfect for you may not be perfect for the next person, which can make this search a little more complex than we would like, but keeping your company’s goals in mind can go a long way in finding the right solution for you.

This article is general in nature, and it does not contain legal advice.  Contact your advisors to discuss your specific situation.

Preface: When inventory costs catapult, a business owner may find himself in the strange position of making higher profits but having less cash.

Catapulting Costs

Credit: Jacob M. Dietz, CPA

Catapult on the Job Site

Imagine Abner’s hammer crash into another nail as he fastens another 2X4 to connect another truss on another building.  Abner is simply doing his honest work. He has done this for years.  His father started the business, and he has been building even longer than Abner.  The gentle breeze blows across his sweated face and tugs at his hat.

Now, imagine someone installing a small catapult in the middle of the building that is being constructed.   Abner and his dad stare in disbelief at the catapult.  Neither of them has ever seen a catapult come to a job site before.  The catapult flings a stone up through the trusses.  The stone sails mere inches away from Abner’s hat on the way up, and it almost hits Abner’s dad as it descends. The stone could hurt Abner on the way up as the catapult propels it away from the earth, and it could hurt Abner or his dad on the way down as gravity hurls it towards the ground.

Business owners might stress if catapults started flinging stones at their builders, but fortunately I have not heard of any construction companies coming under catapult attack.  Some companies, however, have been threatened by catapulting costs.  Some fluctuations in costs may be a normal part of business, but unfortunately some costs have fluctuated in recent times in ways that current business owners, and perhaps their fathers too, have never experienced.  Although the business owners might desire to be able to simply work a normal day without catapulting costs, unfortunately the catapult has come to the industry.  How do catapulting costs threaten businesses?

Increasing Costs

First, catapulting costs could hammer a company’s bottom line if the company cannot raise prices enough to compensate for their increased costs.  Imagine Abner’s building company normally pays $35 in lumber for every $100 of sales.  That left them with $65 for every $100 in sales to pay labor, subcontractors, and other expenditures and still have some left over for a profit.  Net profits vary from business to business and industry to industry, although for this example we will assume that the company normally kept $15 of profit for every $100 of sales.  If the cost of lumber suddenly doubles on the company, and they failed to raise their prices or make any other adjustments, then lumber would cost them $70 for every $100 in sales.  Instead of making $15 on every $100 of sales, they would lose $20 on every $100 of sales.  The catapulting prices hit this hypothetical company on the way up.

Now suppose the company realized that lumber was shooting up, and they adjusted their prices to make the same profit.  Now they should not lose money for each $100 of sales.  There could still be other challenges, however.

Increasing Prices

One challenge is figuring out how much to raise prices.  First, let’s assume that lumber doubled, so Abner reacted by doubling his prices.  If Abner still sold the same number of jobs, his profits likely will more than double, since his sales price doubled, and his lumber doubled, but his other costs did not double.  Depending on the market, doubling prices when one cost doubles might price yourself out of the market.

Imagine Abner realized that his market would not allow him to double his prices, so he only increased his sales price by the same amount that this lumber increased.  Abner might find that he is less profitable.  One reason is if Abner gives discounts off the total sales price to some customers.  For example, if Abner gives a 2% discount for timely payment, and if he increases his sales price, then 2% of the new sales price is more dollars and cents than 2% of the old sales price.  What if Abner gives discounts to certain other businesses that are even more than 2%?  Those discounts could be even more dollars and cents after Abner increased his prices.  Also, even if Abner were able to maintain the same profit in dollars after increasing prices only enough to offset the increase in lumber, his net profit percentage would decrease, because as a percentage his profits would be lower.  It would be the same profits (numerator), but a higher sales number (denominator).

Increasing Inventory

Another way the cost catapult could hurt Abner’s business is by increasing inventory costs.  Assume that Abner has X quantity of inventory in stock.  Now, assume that the cost of that inventory doubles.  If Abner counts the quantity of inventory, it is the same as it always was.  The money that Abner has tied up in inventory, however, may have doubled along with the cost.  Abner therefore needs more capital to simply sustain his normal inventory.

When inventory costs catapult, a business owner may find himself in the strange position of making higher profits but having less cash.  How is this possible?  If the business owner increases prices enough, there might be more profits.  The profits might need to go to fund the higher cost of inventory.

Increasing Lead Times

Abner may need more capital to sustain his inventory with normal lead times if costs rise. It is even possible that Abner might increase his inventory quantity if he is having trouble getting product in time.  Increasing the quantity of inventory that has already increased in price can be quite capital intensive.  Abner may want to consider these capital needs when he considers how much to charge his customers.  He might also want to consider negotiating with vendors for payment terms, and he might consider talking with his banker.

Gravity

Catapulting a stone causes danger on the way up.  Gravity also poses a risk as the stone hurls earthwards.  What would happen to Abner’s company if suddenly the cost of his inventory fell drastically, after he stocked up on inventory at a high price?  Would the market force him to sell some of the inventory at a loss?  Abner may want to ask himself if he has enough financial margin to sustain the business if his costs of materials drop significantly, potentially forcing him to cut his prices.

Pay Attention

If a real catapult suddenly showed up at work and started flinging stones, it would get the attention of the business.  Action might be taken to mitigate the risk.

Fortunately, real catapults don’t normally show up at jobsites.  However, catapulting prices have affected the economic landscape recently.  Are you paying attention to your costs and your prices?  Are they healthy?

Proverbs 27:23 Be thou diligent to know the state of thy flocks, and look well to thy herds.

This article is general in nature, and it does not contain legal advice.  Contact your advisors to discuss your specific situation.

Preface: Millions and millions of people don’t pay an income tax, because they don’t earn enough to pay on one, but you pay a land tax whether it ever did or ever will earn you a penny. You should pay on things that you buy outside of bare necessities. I think this sales tax is the best tax we have had in years. –Will Rogers

Navigating the Labyrinth of Sales Tax Compliance

Credit: Matthew P. Glick

So, you’re a small business owner, or you’re thinking of becoming one in the near future. You’ve taken the plunge, and you’re starting to see the return on your investment. But now, you just started researching sales tax (Or just started reading this article), and all of the sudden, your head is spinning a million details, and you’re just trying to figure out where you’re supposed to start. Sales tax is intimidating, and it can be difficult to know where to start. First of all, there are fifty states in the US (not to mention five additional territories), each with the power to levy a tax on the sale of items in that state/territory. Compounding the issue, is that each county and city can also impose an additional tax on sales that happen within the county/city. In all, that brings the total number of sales tax jurisdictions in the US to well over 10,000. To further complicate matters, each jurisdiction can have its own rules on what is considered taxable, and can also set its own tax rate. Is your head spinning yet?

While sales tax compliance is a very tedious process, I hope this article will help you understand where your business stands in this area, and give you a good starting point to do some additional research. If in doubt, you will want to pull in the advice of a qualified CPA or tax attorney to help you through the process.

Some of you may be thinking “Yeah, that’s a lot of stuff to keep track of if you’re managing a large enterprise like Walmart, but how does this apply to me?” Excellent question, the reasoning is simple: I don’t have a presence in any of these other jurisdictions, so why do I need to worry about their laws?

This reasoning was true once upon a time, until 2018, when the United States Supreme Court ruled in South Dakota v. Wayfair, Inc. that a physical presence was not necessary in a state to give that state the power to tax sales into that state. This overturned the decision also made by the Supreme Court in Quill Corp. v. North Dakota, which ruled that a physical presence was necessary in order for the state to levy a tax on the sale.

So what happened that caused the Supreme Court to overturn its prior decision? The most obvious factor is changes due to technological advances. To put this in perspective, the Quill decision was based on the presence of floppy discs being shipped into the state.

The Supreme Court ruled that a shipment of floppy discs did not constitute a physical presence in the state. Since then, with the advent of the internet, ecommerce is a booming industry, and thanks to solutions such as Shopify and Americommerce, it is now available to small and large businesses alike. Previously, states had to levy a tax on the use (Use tax) of items within their state to recoup lost sales tax dollars due to online sales, which would be the buyer’s responsibility to pay to the state, rather than the seller’s. As buyer’s compliance with use tax reporting is astronomically low, South Dakota sought to pass a law that would overturn the physical presence rule for collecting sales tax, and did so successfully.

So, we just established that if you are a small business, and your sell items or services out of state, you may need to comply with over 10,000 individual laws. Now what? The answer will vary depending on the way your business is structured, and how you market your products or services. The first thing to consider is the volume of out-of-state sales that you deal with. If your gross receipts for sales within a certain state are under $100,000 and less than 100 transactions, chances are low that additional research is required.

Keep in mind that each state measures sales differently. Some use gross receipts, others use net sales; some measure it over the calendar year, and others measure it on a continuous basis over the past twelve months, but a quick look at gross receipts should be good indicator if more research is required.

Then of course you need to research the products and services you offer, and find out if those items or services are taxable. Again, each jurisdiction has different rules regarding what is taxable. As a general rule of thumb, tangible personal property is taxed, and necessary items such as food and medication are exempt.

Again be sure to verify, as each state has different nuances to their exemptions, but this rule of thumb can help you understand what to expect. Services are much more tricky, as some states tend to tax services, while others do not.

The good news is that most online ecommerce platforms are equipped to handle these challenges by integrating with services that will automate sales tax compliance for a fee. These services may calculate sales tax, and allow you to file it on your own, or may even file the appropriate returns for you, depending on the level of service you subscribe to. Searching “Sales tax compliance software” into a search engine should help you locate a provider.

If you only offer your products from a brick-and-mortar location, and only do local deliveries if any, your job is even easier. Simply research to verify your state’s sales tax rate, and confirm to make sure your county and city don’t also levy a sales tax. You can take advantage of this free tool by Avalara to look up sales tax rates by typing in the address.

If this seems like a lot, it’s because it is. The good news is that there is software out there to help you stay compliant, and these solutions tend to scale with your company, making the investment palatable even in the beginning stages of your company. While it’s not a perfect solution, it is better than no solution, and noncompliance can be costly, as back taxes, along with penalties and interest can stack up quickly.

Our team at Sauder & Stoltzfus is willing to help. Get in touch with us to see how we may be able to assist you in becoming or staying compliant with sales tax regulations.

Preface: We will ensure that associates continue to possess unsurpassed product knowledge and maintain their dedication to customer service and respect for their colleagues and for the communities in which they work and live. — Arthur Blank

Home Depot: Two Good Guys Success

“Bernie Marcus and Arthur Blank dreamed up The Home Depot from a coffee shop in Los Angeles in 1978. Avid DIYers, they envisioned a superstore that would offer a huge variety of merchandise at great prices and with a highly-trained staff. Employees would not only be able to sell, but they would also be able to walk customers at every skill level through most any home repair or improvement.

With help from investment banker Ken Langone and merchandising guru Pat Farrah, Marcus and Blank opened the first two Home Depot stores in Atlanta the following year. The 60,000-square-foot warehouses dwarfed the competition with more items than any other hardware store. But the heart of Home Depot was the expertly trained floor associates who could teach customers how to handle a power tool, change a fill valve or lay tile. It wasn’t enough to sell or even tell — associates also had to be able to show. Soon, The Home Depot began offering DIY clinics, customer workshops and one-on-one sessions with customers.

Marcus and Blank implemented a customer “bill of rights,” which stated that customers should always expect the best assortment, quantity and price, as well as the help of a trained sales associate, when they visit a Home Depot store. These commitments were an extension of the company’s “whatever it takes” philosophy.” [i]

Bernie Marcus was the son of a poor Russian Orthodox Jewish immigrants. With ambitions to be a psychiatrist during his high school years, but unable to afford college or medical school, he faced his career realities and obtained a job in discount retail. His map to the entrepreneurial launch point began at United Shirt Shops eventually leading him to Two Guys discount Store in New Jersey. With a sharp-eye towards making the journey count, he was soon in charge of more than $1.0B in business at Two Guys. That position gave him the visibility for an opportunity to obtain an executive position with Handy Dan Home Improvements Centers where he was chairman and CEO.

Arthur Blank was raised in Queens New York. He learned the accounting trade and obtained a job at Arthur Young & Company following his formal education. Blank then joined his family’s pharmaceutical business that was purchased by Daylin Corporation. Daylin was an investor in Handy Dan Home Improvements Centers.

Bernie offered Arthur a job at Handy Dan and the two enterprising future business partners soon became best friends. Soon the Daylin Corporation CEO set the two free to pursue their dreams from that coffee shop conversation in 1978, by firing them both. As Bernie and Arthur made their way out the door, the CEO Mr. Langone told them to “open up that store you talked about!”

They initially considered such names as MB Warehouse and Bad Bernie’s Buildall, and then an investor suggested the name Home Depot.  Working business connections with Ken Langone a New York investment banker who organized the initial group of investors, and merchandising consultant Farrah helped that coffee shop dream to bud into a very successful enterprise.

When they opened the first store, Home Depot had so few customers that if Bernie or Arthur saw someone leaving their store empty-handed, they took it personally. The legacy of Home Depot is build on the tenet that they are in the training business, and that they are the college for learning flooring installation, kitchen and bath remodeling, millwork and even computerized registers.

Bernie and Arthur summarize the impressive ascension from humble beginnings to entrepreneurial  success as learning how important the folks are with whom they surrounded themselves, and that is their secret — they surrounded themselves with people at the Depot who were better, smarter, and more talented than they were, and invited them along on the Home Depot train.

[i] https://corporate.homedepot.com/about/history

Preface: Taxes are not good things, but if you want services, somebody’s got to pay them so they’re a necessary evil. –Michael Bloomberg.

Historical Individual Income Tax Trends

Credit: Benuel B. Glick, EA

Overview

It has been said that death and taxes are two unavoidable facts of life. While it may not be quite that simple, there may be some truth to it. And, as the humorist Will Rogers said a century ago, “The difference between death and taxes is death doesn’t get worse every time Congress meets.” In fact, death is a much-anticipated liberation for the follower of Jesus.

In this article, we’ll briefly explore the history of America’s individual federal income tax rates. We will not look at all the shades or governmental motives for taxation. Nor will we get into excise, tariff, sales and use, corporate, investment, real estate, payroll, social security, estate and inheritance, gift, capital gains, tangible personal property, or state and local taxes. “Taxes” and “tax rates” will be referring to “individual income taxes” and “individual income tax rates” respectively.

Trying to cover all the nuances of calculating the tax rates would quickly turn this article into a book, and the graph shown above only highlights overall trends since 1913. It does not reflect exemptions, phase-outs, credits, blended rates, etc. However, excluding many additional factors, it does reflect the highest and lowest marginal individual tax brackets for given time periods.

Background

With some exceptions, the American government collected the majority of its revenues from duties, tariffs and excise taxes prior to 1913. In 1913 the 16^th Amendment to the U.S. Constitution was ratified by the states – albeit with much resistance – and a new era of taxation was born. In strong opposition of the 16^th amendment, speaker of the Virginia House of Delegates Richard E. Byrd warned: “A hand from Washington will be stretched out and placed upon every man’s business; the eye of the Federal inspector will be in every man’s counting house.…” Sound prophetically accurate?

Included in the 16^th Amendment is the following: “The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” In short, the United States Congress was finally allowed to directly assess income taxes on individuals without permission from the states, or anyone else for that matter. It’s not difficult to guess what Congress did next.

Modest Beginnings

Initially, the tax rates appeared modest enough with taxable income under $20,000 taxed at 1%, and the highest bracket of over $500,000 taxed at 7%. That didn’t last long. In October of 1917, shortly after declaring war on Germany (WWI), Congress passed the War Revenue Act which drastically increased the tax rates. In 1918 the top bracket for income over $1M was taxed at a whopping 77%! As the saying goes, strike while the iron is hot.

The 1920’s are often referred to as the ‘roaring 20s’. World War 1 ended in 1918, and Congress nimbly lowered the top tax rates in subsequent years. The 1920’s saw a significant top rate reduction; however, it was accompanied by much lower thresholds. By 1925 the top rate was at 25%, but that included all taxable income over $100,000.

New Era of Taxation

Black Tuesday crashed onto the financial stage on October 29, 1929, and decades of high taxation followed suit. By 1940, the top tax rate was at 81.1% on income over $5M. Not satisfied with the current state of affairs, president Roosevelt actually pushed for a top tax rate of 100% and is quoted as saying to Congress in April 1942, “…I therefore believe that in time of this grave national danger, when all excess income should go to win the war, no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year.” In addition to his New Deal, he was calling for more funds to alleviate the WWII financial burdens. You might say he reached 94% of his goal by 1944 when tax rates had reached 94% on taxable income over $200,000!

Taxes remained high During the rest of the ‘40s and all through the ‘50s with a marginal top rate of 91% on income over $400,000 from 1954 through 1963. It’s important to maintain perspective though, an estimated fewer than 10,000 households would have reached the top bracket in 1950 per a Wall Street Journal article.

In 1964, president Lyndon B. Johnson signed the largest pre-Reagan-era tax cuts into law. A top marginal rate of 77% on income over $400,000 might sound ridiculous to the current generation, but it was a welcome relief for wealthy earners in 1964. The top rate dropped to 70% in 1965, accompanied by a threshold drop from $400,000 to $200,000. The top marginal rates bounced around within the 70-77% range during the remainder of the ‘60s and for all of the ‘70s, and were generally triggered by the top tier income over $200,000.

Modern Era of Taxation

When America’s 40^th president, Ronald Reagan, was inaugurated on January 20, 1981, the economic climate was ripe for a legislative revolution of sorts. During Reagan’s tenure in office – from 1981 to 1989 – he incrementally slashed the top marginal tax rate for individuals from 70% down to 28%. It is important to note that this top rate of 28% was triggered by taxable income of approximately $30,000.

In 1993, newly elected president Bill Clinton proposed an ambitious budget to cut the national deficit in half by 1997, and signed the Omnibus Budget Reconciliation Act into law. Among many other things, this bill increased the top marginal rate to 39.6%, accompanied by a $250,000 threshold.

From 1991 through 2018 we see a consistent top rate in the 35 – 40 percent range. The top marginal rate remained at 35% with a threshold of $311,950 from 2003 to 2012. In 2013 it increased to 39.6% accompanied with a $450,000 threshold. In 2018 the top marginal rate decreased to 37% with a $600,000 threshold.

In this article we glimpsed into the historical tax trends for American individuals over a 105 year span. I’ll refrain from making a prediction for the next 105, but I am reminded of a wise saying from millennia ago: “The thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun” (Ecclesiastes 1:9 KJV).

 

Preface: In the long run we shall have to pay our debts at a time that may be very inconvenient for our survival. — Norbert W.

Business and Nonbusiness Bad Debts

It is virtually inevitable that at one time or another some taxpayers will incur financial investment losses either in business or personal lives. One frequently occurring type of loss is a bad debt. Whether made in the course of business, or to a friend or relative, sometimes a loan simply cannot be repaid despite the best intentions of the debtor, and if there is little or no prospect that repayment can be made in the future.  In those cases, a “bad debt” may exist for tax purposes. The issue then becomes whether you can salvage some tax benefit from not being repaid.  Although this subject is fraught with complexities, we have outlined the basic tax principles below so you may consider your options.

The first step is ascertaining that a real debt exists. There must be a valid and legally enforceable obligation to pay you a fixed or “determinable” sum of money. Loans between family members, or other related parties such as corporations and their shareholders, are particularly scrutinized to make sure that they are really debts rather than disguised gifts, dividends, or contributions to the corporation’s capital. Therefore, if you are contemplating a loan to a related party, you must ensure that you treat the transaction as a true loan by taking the steps that an arm’s-length lender would take, such as putting it in writing and charging a reasonable rate of interest.

Secondly, it then must be determined if, and when, the debt has become totally or partially worthless. If so, that is a bad debt. One problem, however, is that the IRS often requires taxpayers to play a guessing game. A taxpayer might claim a bad debt loss when nonpayment is only probable, rather than a virtual certainty, and then the IRS may disallow the loss as premature because there is some possibility of repayment in a later year. On the other hand, if the taxpayer waits until repayment is clearly hopeless, the IRS may maintain that the debt was really worthless in a prior tax year and determine that the loss should have been taken then. Because of potential statute of limitations problems, we generally recommend that the loss be claimed in the earliest possible year that it can reasonably be argued to be worthless. There are a number of facts which might indicate worthlessness, including the debtor’s bankruptcy, but no one of them is decisive; it is the totality of circumstances that is determinative.

Once you have established that a bad debt exists, you must also determine whether that debt had a business or nonbusiness nature. The specific tax deduction to which you may be entitled often hinges upon this characterization. As you might expect, a business bad debt must be created or acquired, or become worthless, in the course of your trade or business. If you conduct a business in the form of a corporation, generally any debt held by the corporation is a business debt. Any debt not falling into the business category is a nonbusiness debt. A nonbusiness debt must be completely worthless before a loss can be taken, whereas a loss on a business bad debt can be taken when partial worthlessness can be established. Furthermore, nonbusiness bad debts are subject to the limitations on capital losses. Business bad debts, on the other hand, are deductible as ordinary losses in full against your other income.

As we said above, this is a complex topic and the preceding discussion can give only a rudimentary overview of all of the tax rules involved. If you are, or may be in a situation where these rules could affect you, please do not hesitate to contact us.

Preface: For which of you, intending to build a tower, sitteth not down first, and counteth the cost, whether he have sufficient to finish it?  Lest haply, after he hath laid the foundation, and is not able to finish it, all that behold it begin to mock him,  Saying, This man began to build, and was not able to finish –Luke 14:28-30

SWOT Analysis for the Aspiring Entrepreneur

Credit: Jacob M. Dietz, CPA

Should I start a business?  If you are considering becoming an entrepreneur, first spend significant amounts of time researching and thinking about your options.  This article does not delve into all the considerations, but it recommends that the aspiring entrepreneur conduct a SWOT analysis to examine Strengths, Weaknesses, Opportunities, and Threats.

Strengths

First, strengths are your characteristics and traits that can help.  Some strengths that you might possess include a good work ethic, discipline, integrity, experience, and good hand-eye coordination.  If you start and run your own business, expect to work hard.  You might work harder than you have ever worked before.  If you already possess a good work ethic, that is a strength to you.  Your life experience can be a strength.  If you worked in a similar business for your father for years, then that experience will be a strength to you as you start your own business.

Write down the strengths that you possess that could help you.  Be honest.  Do not overrate your strengths, but also do not underrate those strengths.  They are blessings given to you.  Appropriately considering your strengths may influence your decision about starting a business.

Why write out your strengths?  Seeing your strengths may bring clarity to you as to what your strengths are.  You might be able to think of some strengths off-hand, but as you look at them written down you may grasp a fuller picture.  Furthermore, if you seek counsel as you consider your business opportunity, and I recommend that you do seek counsel, then having written strengths allows your advisors to picture your strengths.

What would give you a competitive advantage? What internal strengths would help you run this business successfully?  Consider this question, ask your advisors for input, and write down the answers.

Weaknesses

Along with your strengths, remember your weaknesses.  Weaknesses include your characteristics that may harm you.  It may be painful to recognize your own weaknesses, but it also can be extremely beneficial. If you know your weaknesses, then you may be able to avoid long-term harm by avoiding certain situations, or by minimizing your weaknesses in certain situations.

For example, assume that you are terrified of heights and cannot work long hours in the heat without suffering from heat exhaustion.  Perhaps you should not start a roofing business.  On the other hand, sometimes a weakness can be mitigated.  Maybe you are weak at analyzing financial data.  If that is the case, then you may want to team up with a talented CPA who can assist you with the financial analytics.

Knowing your own weaknesses can be hard since there can be a tendency to overlook our own weaknesses.  Consider asking family members and work associates about your weaknesses.  Ask someone who has managed you what your weaknesses are.  Ask someone whom you have managed what your weaknesses are.

Again, write down your weaknesses.  If you do not write them down, it might be easy to forget them.  Also, your business counsellors may have better insights if the weaknesses are written.

The purpose of writing your weaknesses is not to make yourself feel bad.  Considering your weaknesses may help you avoid bad situations or take steps to minimize the danger of those situations.  Do not neglect this step.

Opportunities

In addition to analyzing your internal strengths and weakness, also consider external opportunities and threats.  What are the opportunities in the industry?  For example, suppose you want to become a residential homebuilder.  An opportunity could be that your township revised its zoning laws to allow more houses to be built.  Another opportunity could be a growing population of a certain demographic group that wants your product or service.  For example, if you want to start a home healthcare business, then a growing population of senior citizens could be an opportunity.

Opportunities are external to you, so they may require some outside research.  Reading can be a great way to gather some of this information.  Business publications, trade publications, and even your local newspaper might provide helpful information.  Consider talking with your librarian.  Your library may have access to business databases, publications, and references that will help you research.  You also may want to talk with experienced people in the industry in which you are considering starting out as an entrepreneur.  Do they know of any good opportunities to seize?

Some people who know the opportunities the best may not wish to share them with you as a competitor.  Nevertheless, you might find some entrepreneurs who may be willing to share their knowledge, even if they know that you might compete with them.  If you are having trouble finding someone, consider trying to find someone who might be less concerned about competition.  For example, if you aspire to start a roofing company, perhaps a building supplies entrepreneur might have some information on your industry.  In that situation, you would not be seen as a competitor but as a potential customer.  You might also be able to talk to someone who lives geographically far enough away to avoid some of the competition to share with you.  Just remember that there could be geographic differences in opportunity.  Consider reaching out to an older man who knows the industry, but who loves to pass on knowledge to those getting started.   Consider seeking out advisors and professionals who have knowledge in your industry.

Threats

A threat is an external item that could harm your potential venture. Threats may include legal, economic, and other hazards.  For example, if you wanted to start a residential construction company right after a housing bubble popped then you may face a major threat.

Some of the same research that you do to learn about opportunities may help you learn about threats as well.  Consider researching publications, talking with your librarian, and seeking out those with experience in the industry.

When researching threats and writing them down, try to portray them accurately.  If you and your business counsellors accurately understand the threats, then you might be able to chart a good course.

Just because you find grave threats does not automatically mean that you should abandon the idea for a business, although in certain situations that could be prudent.  Firefighters understand that fire poses a grave threat to their health and lives.   When the fire alarm goes off, however, the firefighters do not stay in the safety of their living rooms sipping cold water to avoid the grave danger.  Firefighters rush toward the action and the danger.  Firefighters, however, invest much time and action into safety to protect them from the danger.  They train for safety.  They don personal protective equipment to guard them from the danger.

If firefighters did not understand the danger of fires, then fires could hurt more of them.  Likewise, entrepreneurs increase the likelihood of problems if they do not understand the threats to their enterprise.

The factors going into a decision about entrepreneurship are many.  Remember to include a SWOT analysis in the decision process.  It might steer you away from a disastrous decision.  Alternatively, you may still make the decision to enter that field but be better prepared to use your strengths to seize certain opportunities and to take measures to minimize the risks from weaknesses and threats.  Feel free to contact your accountant if you would like to talk about becoming an entrepreneur.

This article is general in nature, and it does not contain legal advice.  Contact your advisors to discuss your specific situation.

Preface: Whatever you tax, you get less of. – Alan Greenspan

Cryptocurrency and Virtual Currency Taxation Guidance

Virtual currency transactions are taxable per IRS legislation just like transactions in any other taxable sales of property, e.g. real estate or stocks. The IRS is also increasingly aware that some taxpayers with virtual currency transactions may have incorrectly reported or completely failed to report income and pay the related tax on virtual currency gains. Therefore, it is actively addressing potential non-compliance in this area. So, millions of taxpayers may find themselves the target of a new IRS initiative called Operation Hidden Treasure.

Virtual Currency

Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency i.e. “real currency”, that functions as a unit of account, a store of value, and a medium of exchange within in jurisdication. Some virtual currencies are convertible, which means that they have an equivalent value in real currency or act as a substitute for real currency.  The IRS uses the term “virtual currency” to describe the various types of convertible virtual currency that are used as a medium of exchange, such as digital currency and cryptocurrency.

Cryptocurrency. Cryptocurrency is a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. Distributed ledger technology uses independent digital systems to record, share, and synchronize transactions, the details of which are recorded in multiple places at the same time with no central data store or administration functionality. A transaction involving cryptocurrency that is recorded on a distributed ledger is referred to as an “on-chain” transaction; a transaction that is not recorded on the distributed ledger is referred to as an “off-chain” transaction.

Regardless of the label applied, if a particular asset has the characteristics of virtual currency, it is virtual currency for IRS tax purposes. In general, virtual currency is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency.

Sale or Exchange of Virtual Currency

When a person sells virtual currency, they must recognize any gain or loss on the sale, subject to any limitations on the deductibility of losses. The gain or loss is the difference between adjusted basis in the virtual currency and the amount received in exchange for the virtual currency, which should be reported on the Federal income tax return in U.S. dollars. The basis is the amount spent to acquire the virtual currency, including fees, commissions, and other acquisition costs in U.S. dollars. The adjusted basis is basis increased by certain expenditures and decreased by certain deductions or credits in U.S. dollars.

Transfer of property. If virtual currency is exchanged for property, the gain or loss is the difference between the fair market value of the property received and adjusted basis in the virtual currency exchanged. If a taxpayer transfers property held as a capital asset in exchange for virtual currency, they will recognize a capital gain or loss.  If they transfer property that is not a capital asset in exchange for virtual currency, they will recognize an ordinary gain or loss.

Transfer of services. Generally, self-employment income includes all gross income derived by an individual from any trade or business carried on by the individual as other than an employee.  Consequently, the fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self-employment income and is subject to the self-employment tax.

In addition, the medium of remuneration for services is immaterial to the determination of whether the remuneration constitutes wages for employment tax purposes.  Consequently, the fair market value of virtual currency paid as wages, measured in U.S. dollars at the date of receipt, is subject to Federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement.

The amount of income a taxpayer must recognize is the fair market value of the virtual currency, in U.S. dollars, when received.  In an on-chain transaction, the taxpayer receives the virtual currency on the date and at the time the transaction is recorded on the distributed ledger.

If a taxpayer pays for a service using virtual currency that they hold as a capital asset, then they have exchanged a capital asset for that service and will have a capital gain or loss. The gain or loss is the difference between the fair market value of the services received and the adjusted basis in the virtual currency exchanged.

Cryptocurrency Transactions and Hard Forks

A hard fork occurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger. This may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger. If the cryptocurrency went through a hard fork, but the taxpayer did not receive any new cryptocurrency, whether through an airdrop (a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses) or some other kind of transfer, the taxpayer doesn’t have taxable income. If a hard fork is followed by an airdrop and the taxpayer receives new cryptocurrency, they have taxable income in the tax year they receive that cryptocurrency.

Summary

This blog highlights some of the complex tax rules for virtual currency transactions and promotes compliance with Operation Hidden Treasure. We encourage you to maintain records that document receipt, purchase date, cost basis, fair value at the time of sale, exchange or other dispositions of all your virtual currency ownership. Please contact our office if you would like additional guidance on when and how to report and treat your transactions related to virtual currency and cryptocurrency.

 

Preface: We all want a simpler code, but tax reform is about much more. It is about ensuring that everyone pays their fair share. The tax code is also used to promote behavior that we as a nation support, such as home ownership or charitable contributions. –Charles B. Rangel

Tax Planning: Charitable Giving

The majority of taxpayers are probably already aware that they can get an income tax deduction for a monetary gift to a charity when itemizing tax filing deductions on Schedule A. But there is a lot more to charitable giving.

Firstly, under the current tax legislation, for example, you are permitted to give appreciated property to a charity without being taxed on the appreciated gains. In addition, fort these reasons, and more, charitable giving may be an important part of your overall estate planning. These benefits can be achieved, though, only if you meet various requirements including substantiation requirements, percentage limitations and other restrictions. This blog is to introduce you to some of these charitable giving requirements and tax saving techniques.

To begin, let’s look at the basics –  Your charitable contribution giving can help minimize your tax bills only if you itemize your deductions. Once you do, the amount of your savings varies depending on your tax bracket and will be greater for contributions that are also deductible for state and local income tax purposes.

An individual may deduct any qualified charitable contribution as long as the contribution does not exceed the individual’s adjusted gross income.

Non-Itemizing Tax-Payers

The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows an above-the-line deduction for non-itemizers in tax year 2020, However, unlike the provision under the CARES Act, the deduction for 2021 is claimed as deduction in calculating taxable income and not as an above-the-line deduction in calculating adjusted gross income. Individuals can take a $300 deduction against taxable income even if they do not itemize. The contribution must be made in cash. The cash must be contributed to churches, nonprofit educational institutions, nonprofit medical institutions, public charities, or any other qualifying 501c3 organization.

Itemizing Tax-Payers

Under the 2017 Tax Cuts and Jobs Act, the percentage limitation on the charitable deduction contribution base is increased from 50 percent to 60 percent of an individual’s adjusted gross income for cash donations to public charities in 2018 through 2025. There is an even greater benefit, because in addition, for 2021 you can elect to deduct up to 100 percent of your AGI with charitable contributions (formerly 60 percent prior to the CARES Act).

The income-based percentage limit is temporarily eliminated for an individual taxpayer’s cash charitable contributions to public charities, private foundations other than a supporting private foundation, and certain governmental units for 2020 and 2021. An individual may deduct any qualified charitable contribution as long as the contribution does not exceed the individual’s adjusted gross income.

Generally, a bank record or written communication from the charity indicating its name, the date of the contribution and the amount of the contribution is adequate.

An individual may carry forward for five years any qualifying cash contributions that exceeds his or her adjusted gross income. Partners in a partnership and shareholders in an S corporation may also deduct qualified charitable contributions that do not exceed their adjusted gross income.

Contributions to certain private foundations, veterans’ organizations, fraternal societies, and cemetery organizations are limited to 30 percent of adjusted gross income. A special limitation also applies to certain gifts of long-term capital gain property.

Contributions must be paid in cash or other property before the close of your tax year to be deductible, whether you use the cash or accrual method.

Taxpayers over 70 ½ years of age are allowed an exclusion from gross income for distributions from their IRA made directly to a charitable organization of up to $100,000 ($100,000 for each spouse on a joint return). A qualified charitable distribution counts toward satisfying a taxpayer’s required minimum distributions from a traditional IRA.

Contributions must be paid in cash or other property before the close of your tax year to be deductible, whether you use the cash or accrual method. Your donations must be substantiated. Generally, a bank record or written communication from the charity indicating its name, the date of the contribution and the amount of the contribution is adequate. If these records are not kept for each donation made, no deduction is allowed. Remember, these rules apply no matter how small the donation.

However, there are stricter requirements for donations of $250 or more and for donations of cars, trucks, boats, and aircraft. Additionally, appraisals are required for large gifts of property other than cash. Finally, donations of clothing and household gifts must be in good used condition or better to be deductible.

There are other special charitable giving techniques beyond the usual gifts of cash. These include, among others, a bargain sale to a charity, a gift of a remainder interest in your residence and a transfer to a charity in exchange for an annuity.

If you enjoy charitable giving as part of your tax planning, please do not hesitate to contact us with your tax questions about any of the tax giving benefits raised in this blog.

 

 

Preface: Education is what remains after one has forgotten what one has learned in school. — Albert Einstein

Educational Improvement Tax Credits with Special Purpose Entity (SPE)  

Pennsylvania’s Educational Improvement Tax Credit (a.k.a. EITC Program) is a tax credit-based program that provides charitably inclined individuals and businesses to give educational support to qualifying Pennsylvania private schools in the form of a tax credit.

These Pennsylvania tax credits are obtained from donations to a qualifying educational organization through an approved EITC vehicle. For example, with an EITC contribution, qualifying individuals and businesses can receive PA tax credits up to 90% for their qualifying and approved organization charitable contributions, so a $3,000 donation can give you a $2,700 credit towards your Pennsylvania income taxes.

Often, too many qualifying businesses do not capitalize on the opportunity to encourage funding the future of local schools and aspiring students with this special Pennsylvania tax credit. While the EITC Program has been available in Pennsylvania for more than a decade, recent revision provides these qualified credits with a simplified Special Purpose Entity investment.

A Special Purpose Entity is a pass-through partnership established solely to make contributions to schools through Pennsylvania’s Educational Improvement Tax Credit (EITC) program and distribute the tax credits received to its members.

There exist several Special Purpose Entity (SPE) participation opportunities that comprise a partnership K-1 investment that confers members the chance to obtain a credit that begins with an investment threshold of around $3,000. Therefore, SPE investments are ideal for taxpayers with $100,000 or more of taxable Pennsylvania income.

Additionally, there is a minimal barrier to entry for approval to participate in an SPE for an EITC credit. The process includes a one or perhaps two-page application where you designate the school(s) you wish to fund and the donation amount applicable to each. Once your application is approved, the SPE will communicate expectations of when they request the contribution check.

Following the end of the calendar year, SPE members obtain Federal and State K-1 forms, as with any partnership interest. The Federal Form K-1 shows your investment and Federal charitable contribution amount of the 10% of non-qualifying credit payment. In addition, the PA K- 1 allocates members a 90% PA tax credit, filed on a members PA-40 as other credits.

Who can join SPEs?

• • • • Legal entities and individuals who are owners or employees of an LLC, partnership, or corporation (but not sole proprietorship)
      • Individuals who own stock in any public company registered to pay tax in Pennsylvania2

What are the benefits of joining the SPE?

• • • • Receiving 90% of your contribution as a Pennsylvania tax credit;
      • Being able to direct your contribution to a private Pennsylvania school;
      • Being able to contribute the amount desired as an individual rather than through business ownership percentage;
      • Participate in the tax credit program in a Pennsylvania business partnership with out-of-state business owners who can’t benefit from the program.

If you think an SPE investment is of interest to you, or would like more information on SPE participation or paying your Pennsylvania income taxes while funding private education, please contact our office.