This newsletter provides insight on recent developments in the law facing businesses today.
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May February |
Health Reform Starts Now – Tax Breaks for the Year 2010
Most of the healthcare reforms that President Obama signed into law in March will not take effect for another four years. However, small business can look forward to some relief for the 2010 tax year. A tax credit to offset health insurance premiums took effect immediately. To get the credit, a business must have fewer than 25 full-time workers, or the equivalent, and pay an average annual wage of less than $50,000 and cover at least half of the health insurance premiums for their workers. Businesses with fewer than 10 employees and average wages of less than $25,000 can max the credit out while larger firms, and those with higher payrolls, collect a reduced credit. For 2010-2013, the tax credit covers up to 35% of the money a qualifying business spends on its health insurance premiums. In 2014, the top tax credit increases up to 50%. This credit is available for a maximum of six years: 2010-2013 and for any two years after that.
The IRS broke down the numbers to help business owners understand the kind of cash they can get back. For example, an auto repair shop with 10 employees that has a total payroll of $250,000, where each worker averages $25,000 and spends $70,000 annually on health insurance premiums would max out the benefit and collect a credit of $24,500 on its 2010 taxes.
Tool Designed to Help Companies Hire the Jobless
Employers in New York have a tool now to help them assess the benefits of hiring an unemployed worker. New York State unveiled a calculator that will tell companies the federal tax credits they will receive in the tax year 2010-2011 by hiring people who have been jobless for at least sixty days. Employers can qualify for up to a 6.2% payroll tax incentive, which, in effect, exempts them from paying Social Security tax on that person's wages if they hire people who have been jobless for at least sixty days. Companies will also receive a $1,000 tax credit for each of these workers that stays on the job for at least one year. These tax incentives are designed to encourage companies to hire full-time workers and not temporary workers while they may remain unsure about the economy.
Six Ways Health Reform Will Help Small Businesses
Small businesses want to provide health coverage for their workers, but they face extraordinary challenges in doing so. These challenges include premiums that are 18% higher, on average, than large businesses pay for the same coverage. Health reform legislation signed by President Obama includes a number of important benefits to help make the coverage more affordable:
- Establishes a small business healthcare tax credit to help small businesses afford the cost of covering their workers;
- Creates health insurance exchanges to increase bargaining power and reduce administrative costs;
- Ends price discrimination against small businesses with sick workers;
- Increases healthcare security to unlock entrepreneurship;
- Reduces the hidden tax on small business employees with health insurance; and
- Reduces premiums in the small group market.
How to Manage an Intern
Internships are increasingly more popular for young people. Often high school, undergraduate and graduate students looking for practical experience in a wide-range of fields promote internship programs. Internship programs can also be a great resource for a company, particularly start-ups that might not have the same talent draw as their larger counterparts. Here are some tips on how to structure a program and manage the interns to everyone's advantage:
- Know what you want – When you decide to bring an intern on board for your company, you need to have a clear vision of why you are creating the internship program. This will allow you to gauge its success and keep you from inadvertently exploiting your interns.
- What to Provide for your Interns – The main thing interns should take away from an internship at your company is practical work experience that, in some way, matches their interests. Internships should be viewed as a supplementation to the education system, filling in the knowledge gaps by teaching tangible skills.
- Providing Mentorship and Advice – Even if you have a hands-off management style, when you bring on interns, you have to insure that they have at least one point person, if not more, who they can go to with their questions.
- Making the Time Commitment – It is important to make sure you understand how much time you will need to spend training and advising the intern, and that they understand how much time they will need to commit to your company.
Avoiding A Legal Snafu - According to the Department of Labor, under the Fair Labor Standards Act, unpaid internships must meet all of the following six criteria:
- The training interns must be similar to what would be given in an educational or vocational academic setting;
- The internship should be focused on the benefits to the trainee; Interns cannot be replacing workers who are usually paid;
- The employer receives no immediate advantage from the trainee's activities and the employer's operations may be impeded on occasion;
- At the end of the training, the trainees do not necessary get hired;
- Both the company and the intern must understand that work is being done without pay.
Prepared by Katy M. Hedges
SBA ANNOUNCES NEW LOAN PROGRAMS
The United States Small Business Administration (“U.S. SBA”) has introduced three loan program initiatives to stimulate the establishment and expansion of small businesses.
PATRIOT EXPRESS PILOT LOAN INITIATIVE
The Patriot Express Pilot Loan Initiative (“PEPLI”) is available to able-bodied and service-disabled veterans or their spouses, military who are actively serving in the Transition Assistance Program or their spouses, members of the United States Reserves and the Army National Guard or their spouses, or widows of veterans or servicemen who died while serving the United States or from a service-related disability.
Under PEPLI, individuals who qualify for this initiative may receive up to $500,000 in loans. Loans may be used for a variety of business-related expenses, which include: costs for starting and expanding the business, capital, equipment purchases, inventory and certain types of real estate purchases.
According to the U.S. SBA, PEPLI’s loans provide the lowest interest rate for business loans, from 2.25% to 4.75% over prime. Individuals may contact the local SBA district office to learn more about PEPLI and area lenders.
LOAN PROGRAMS AND THE AMERICAN RECOVERY AND REINVESTMENT ACT
SBA ARC LOAN PROGRAM
The America’s Recovery Capital (“ARC”) loan program is a temporary program established by the American Recovery and Reinvestment Act (“the Recovery Act”) to provide existing, “viable” small businesses which are facing immediate financial hardship, such as a decline in sales or difficulty meeting operating expenses, temporary financial relief so that they may regain their financial footing.
Under the ARC loan program, a financial hardship that qualifies a business for this loan may include a reduction in the businesses’ customer base, an increased cost of doing business, reduced capital, reduced short-term credit, credit restrictions which prevent the business from meaningfully restructuring its debt, a reduction in the businesses’ workforce, and a reduction of its major suppliers.
Businesses eligible for a loan under the ARC program must meet the following criteria: they must be established, they must produce financial statements which show profits made in the past year or two, and they must project cash flow to meet current loan payments and payments two-years from the date of the loan’s approval. Start-up businesses are not eligible for ARC loans.
Businesses that obtain ARC loans may pay the principal and the interest on one or more qualifying small business loans with ARC loan funds for a six month period. The purpose of permitting this use is to allow businesses to invest funds they would otherwise spend on paying these small business loans on essential operating costs, such as buying inventory and paying employees.
Under the ARC loan program, borrowers are not charged interest, and ARC loans are 100 percent guaranteed to lenders. Additionally, principal repayment is deferred 12 months from the date of the last loan disbursement.
SBA lenders will only offer ARC loans until funding runs out or September 30, 2010, whichever is first.
MICROLOAN PROGRAM
Under the Recovery Act, the federal government is providing $74 million dollars in additional funding to the U.S. SBA microloan program, which provides loans under $500 and up to $35,000, as well as technical assistance, to start-up small businesses. Of the $74 million dollars, $50 million is allocated for the loans, while $24 million will go toward technical assistance training.
This program targets borrowers with little or no credit history, low income borrowers, and women and minority borrowers who do not qualify for conventional loans. Loans are made for capital, machinery, equipment, inventory and improvements. The infusion of funding to the microloan program allows lenders to provide additional technical assistance and loans to area small businesses.
For more information on the SBA’s microloan program, go to http://www.sba.gov/idc/groups/public/documents/sba_homepage/recovery_act_microloans.pdf.
REASONS TO APPLY FOR A DUNS NUMBER FOR YOUR BUSINESS
Businesses that apply for federal grants require a D-U-N-S, or “data universal numbering system” number.
A D-U-N-S number is a nine-digit number that provides identifying information about the business entity to which it is assigned. The Federal Government’s Office of Management and Budget (“OMB”) began requiring D-U-N-S numbers from businesses applying for federal grants on or after October 1, 2003, as a way to monitor how federal grant monies were being spent.
Businesses may register for a D-U-N-S number by calling 1-866-705-5711, or on the web at http://fedgov.dnb.com/webform. Applicants may be asked to provide the legal name of the business, the business’s physical and internet addresses, its telephone number, the name of the its authorizing agent, its business purpose, and the number of people that it employs.
NEW HEALTH INSURANCE EXCHANGES IMPACT SMALL BUSINESSES
Congress is considering a health insurance exchange program as part of its health care reform initiative. By creating a pool of as many as 30 million American insurance consumers, the participants in the exchange would have an opportunity to choose from a variety of insurance plans. In turn, the insurance premiums offered through the exchange would likely be lower than rates these individuals or small businesses would otherwise secure.
A number of logistical issues must be addressed if the plan is to work effectively. Under the House of Representatives’ health care plan, small business employees could choose to be covered by any of the plans participating in the exchange. However, this may require employers to issue checks to each plan for each employee. Arguably, it would be more efficient to pay the exchange for the business’s share of the coverage, and have the exchange further disburse the funds.
Reconciling the House bill with the Senate bill may result in unforeseen changes. Under the current Senate bill, the CBO estimates that individuals will pay 10-13% more than if no legislation was enacted.
In light of Massachusetts’ Senator Scott Brown’s recent election to Congress, the future of health care reform seems uncertain. Nevertheless, if Congress proceeds to adopt a health care reform bill which provides for health insurance exchanges, the success of the exchange will, in no small part, depend on how the exchange is implemented – a method which, as yet, is undetermined.
Prepared by Kimberly S. Conidi
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November August June March |
Selling a Small Business
Approximately 40 percent of small business owners expect to sell their business in the next decade, but only about one-third have a known successor.
When selling your small business, you may wish to remain involved in the operations of the business. Two major options exist: 1) Selling only a portion of your business; this allows you to reduce your risk and see a return on your investment. 2) Sell the business entirely on the condition that you remain employed. This option allows for you to maintain a stream of income, while eliminating your risk.
Timing the sale of your business can help in realizing the highest return. High management turnover can decrease the value of your business. Also, bad economic times will usually equal a lower return. Begin preparing to sell your business well in advance of putting it on the market. The additional time should be sufficient for you to correct any management issues and survey market conditions.
Price the business right. Owners tend to over-value their business. Speak to a professional in determining the true value.
What is an SBA Loan?
SBA loans are loans funded by various lending institutions that carry a federal guarantee from the Small Business Administration.
These loans are a good source of funding considering the current credit crunch and unwillingness to lend by many institutions. The loans allow borrowers to fall outside normal credit terms. This can include such things as a longer repayment period and a higher loan-to-equity ratio.
The SBA will back up to 85 percent of the loan value, up to $150,000. However, it must be remembered that the decision to enter into a relationship with the SBA is one that rests with the lending institution and not the borrower.
All borrowers must develop a good business plan. The borrower must first "sell" the business plan to the lending institution before the SBA will be considered.
Always shop around with different lending institutions; they all have different lending standards.
Federal Tax Incentives for Small Businesses
Five-year Carryback of Net Operating Loss – businesses can pick to which of the past five years they would like to apply the current year's losses, and therefore create a tax refund for the selected year. However, the company's gross-receipts can not exceed $15 million.
Extension of Expensing Allowance – was originally set to expire in 2008, but has been extended for another year. IRS allows businesses to expense up to $250,000 for certain business expenses such as office furniture, fixtures, and certain machinery.
Extension of Bonus Depreciation – was also set to expire in 2008. Allows companies to take 50 percent depreciation on certain purchases. For example, a piece of equipment with a 20-year operating life can be depreciated 50 percent in year one.
Health Care Reform – What does it mean for my small business?
Health care reform is projected to impact one-third of all small businesses (operating as sole proprietorships, S-corps, or other entities where the income from the business flows through the individual owner for tax purposes) that employ 20 to 250 workers.
The surcharge will range from 1 percent to 5.4 percent for households with income in excess of $350,000.
Although the impact on small businesses is disputed, there is a consensus among most that there will be some type of surcharge on small businesses.
The final health care reform bill is still in negotiations and therefore the true impact will be unknown until it is enacted.
Prepared by: Manik J. Saini
WHAT LICENSES DO I NEED TO START AN ONLINE BUSINESS IN NEW YORK STATE?
When it comes to licenses and permits in New York State, an online business is not any different from any other business in the state. Depending on the type of business you conduct, either online or offline, you will need to obtain certain permits and licenses from local authorities, the state government and the federal government. In New York State, you can find out what kinds of licenses and permits are required by going to New York's Online Permits Assistance and Licensing website, OPAL.
For example, to start an online retail business, you will need to obtain a Certificate of Authority to collect sales tax.
Federal government permits and licenses are not normally necessary, except in certain types of cases, such as drug manufacturing and selling of alcohol and firearms.
OPAL advises that the sale of certain goods may require additional licenses and suggest that when you are starting up an online business, you contact GORR (New York State Governor's Office of Regulatory Reform).
BENEFITS OF SETTING UP A LIMITED LIABILITY COMPANY
A limited liability company (LLC) is a business entity that enjoys many of the advantages of being a corporation, including limited liability, but also maintains characteristics of unincorporated entities such as sole proprietorships and partnerships. Members of a limited liability company enjoy protection from individual liability similar to that afforded to corporate shareholders. When starting an LLC, you must prepare Articles of Organization, to be filed with the Secretary of State, along with the filing fee. Also, when starting an LLC, the members should create and approve an Operating Agreement for the LLC. The Operating Agreement governs the operation and management systems for the LLC and will direct the manner in which profits are to be divided.
Unlike corporations, LLCs are not required to hold their own meetings or prepare reports. An LLC may have income. The income of an LLC passes through to its members, who report the income on their personal tax returns. For tax purposes, a single member LLC is treated as a sole proprietorship and a multiple member LLC is treated as a partnership. An LLC will usually be required to file an annual informational tax return with the IRS.
AN LLC NEEDS ATTORNEY REPRESENTATION IN COURT IN NEW YORK STATE
A New York court has determined that a New York LLC needs to be represented by an attorney in court. Michael Reilly Design, Inc. v. Houraney, 2007 N.Y. Slip. Op. 03890 (2nd Dept. 2007).
In Michael Reilly Design, Inc. v. Houraney, an appeal was pending before the Second Department in which an LLC and one of its members were appellants. The member appeared pro se purportedly on behalf of the LLC. However, this member was not an attorney admitted to practice in the State of New York. On a motion by the member to raise certification of the Record on Appeal (22 NYCRR 670.102), the Appellate Division, Second Department, ordered the LLC to retain an attorney to represent it on the appeal within a certain time, or otherwise it would dismiss the appeal.
Pursuant to CPLR §321(a), "a party, other than one specified in §1201 of this chapter, may prosecute or defend a civil action in person or by attorney, except that a corporation or voluntary association shall appear by attorney…"
Until recently, no one knew this provision applied to limited liability companies. Now the Second Department has indicated that it does.
BENEFITS OF SETTING UP A SOLE PROPRIETORSHIP
A sole proprietorship is the simplest form of business to start. In New York State, all you need to do to start operating a sole proprietorship is to open up a business under your own name (or a fictitious name – a d/b/a) and social security number, obtain any required licenses or permits and start your business. Disadvantages to opening a sole proprietorship include the fact that a sole proprietorship has only one owner. If you have a business partner, you may need to choose a different business form, as you cannot operate as a sole proprietorship. Furthermore, the biggest downside of operating a sole proprietorship is the lack of protection from personal liability. A sole proprietorship is not legally distinct from its owner. If you operate as a sole proprietorship, your personal assets may be subject to claims. Furthermore, for taxation purposes, income to the business is treated as income to the business owner, and all income is reported on your individual tax return and is taxed in the year it is received. With other business entities, it may be possible for the business to have its own income and to file its own tax return and sometimes it is possible to defer income to a different tax year, but this is not the case with a sole proprietorship.
Prepared by: Kristen B. Degnan
COBRA Extension Intended to Protect Individuals
The $24.7 billion American Recovery and Reinvestment Act (ARRA) is intended to assist recently unemployed individuals in maintaining their health insurance benefits. Individuals who earn less than $150,000 a year may qualify for a 65 percent government subsidy on a COBRA policy. COBRA allows workers who are between jobs to continue to receive health care coverage provided by their former employers. Eligible individuals pay only 35 percent of their COBRA premiums and the remaining 65 percent is reimbursed to the coverage provider (former employer) through a payroll tax credit. The premium reduction applies to periods of health coverage beginning on or after February 17, 2009 and lasts for up to nine months for those eligible for COBRA during the period beginning September 1, 2008 and ending December 31, 2009 due to an involuntary termination of employment that occurred during that period.
Now, affected employers receive quarterly tax credits for paying 65 percent of the former employees' premiums and collecting an additional 35 percent from the recipients.
ARRA Increases Section 179 Expensing and Extends First-year 50% Bonus Depreciation
The above referenced ARRA increased the amount
a small business can elect to expense from $133,000 to $250,000 of the cost of
qualifying property under IRS Code Sec. 179. It should be noted that the
existing $25,000 expensing limit still applies to sport utility vehicles. The
$250,000 maximum expensing amount is reduced if the cost of all Sec. 179 placed
in service exceeds $800,000 for the tax year.
Under IRS Code Sec. 168(k)(2), the ARRA also extended the 50% bonus first-year
depreciation allowance that was available in 2008 for acquisitions of qualifying
property.
A corporate taxpayer must make the election by the due date (including extensions) of the federal income tax return for the taxpayer's first taxable year ending after March 31, 2008. Even if the taxpayer does not place in service any eligible qualified property during its first taxable year ending after March 31, 2008, the taxpayer must make the election for that taxable year if the taxpayer wishes to apply the election to eligible qualified property placed in service in subsequent taxable years.
Health-Care Reform and its Potential Effect on Small Business and Individuals
Government-run insurance plans may soon be offered as an option in health-care reform. Legislation is expected to be presented within the U.S. Senate in the upcoming months regarding the establishment of a national health insurance exchange enabling small businesses and individuals to procure the best deal available. Issues are abounding with regards to this matter, including how to market a national insurance plan. While helpful to small business and individuals, there is an underlying fear that a government run insurance program will be able to undercut private insurers, leading to less competition in the insurance marketplace.
Emergency SBA Loans to Become Available in June
The Small Business Administration plans to begin guaranteeing emergency bridge loans for small firms in mid-June. Small businesses not able to make payments on existing non-SBA loans may be eligible for loans up to $35,000, interest-free. These loans can be used to make up to six months of payments of principal and interest on small business debt.
Terms of repayment allow for a one year grace period after the final disbursement, and then the business will have five years to repay the loans. These loans will be made through the SBA's network of private- sector lenders.
All lenders will be given the opportunity to participate in the SBA's government-guaranteed loan programs, enabling them to help borrowers who are behind on their loan payments, and turn past-due loans into loans that are current.
Small Business Tips for "Going Green"
Small choices in "going green" for small businesses have the potential to make a big difference being environmentally and financially friendly. Here is a the cost of one easy "green" initiative: conversion to high- efficiency lighting fixtures allows up to a 50 percent reduction in annual energy usage. The up-front cost is typically between $75 and $100 per fixture installed. However, small businesses are eligible for a government rebate of $35 per fixture. As an example, for a typical 2,000 square foot office space (or 32 standard fixtures), an initial investment of between $2,400 and $3,200 would be required, but with an immediate government rebate of $1,120.
Prepared by: Patrick D. Slade
STIMULUS PACKAGE INCLUDES HELP FOR SMALL BUSINESS OWNERS
The 787 billion dollar economic stimulus package, while being criticized by some for not doing enough to aid small businesses, does contain some benefits. The stimulus bill includes 730 million dollars in appropriations to improve Small Business Administration programs and create new initiatives to address the current economic crisis.
Additionally, the bill contains 375 million dollars which is earmarked to allow for temporary waivers or reductions in the fees that the Small Business Administration currently charges to lenders and borrowers in its Flagship 7(A) and 504 Loan programs. A spokesman noted that the bill requires the SBA to give borrowers and smaller banks priority in receiving fee relief.
Other incentives in the bill include a provision that would increase loan guarantees for Small Business Administration lenders, one that offers a tax credit for businesses that hire disadvantaged workers like veterans and disconnected youth, and a provision which allows some businesses to deduct up to $250,000 for capital investments.
Another provision gives companies a 50% bonus deduction on capital investments made in 2009 that, otherwise, would have had to be deducted over many years.
Companies will also be able to use losses from 2008 to offset profits in earlier years.
WHITE HOUSE SAYS STIMULUS WILL BRING 20,000 JOBS TO WESTERN NEW YORK
Numbers released by the White House, estimate that the impact of the American Recovery and Reinvestment Act will create 20,000 jobs in Western New York over the next two years, while creating or saving 3,500,000 jobs nationwide. Ninety percent of these jobs, says the White House, will be in the private sector.
The Council of Economic Advisors estimates that Western New York will add more than 7,200 jobs in the 26th District (Rep. Chris Lee, Republican), 6,800 jobs in the 27th District (Rep. Brian Higgins, Democrat), and 6,700 jobs in the 28th District (Rep. Louise Slaughter, Democrat).
A recent poll completed by CNR Research Institute claims that three-quarters of New Yorkers say they support the nearly 800 billion dollar stimulus package.
STIMULUS ACT STIMULATES OUR ENVIRONMENT
A provision of President Barack Obama's stimulus package offers grants for the installation of new solar panels. It is hoped that the Economic Stimulus Act will lead to more widespread use of the technology by businesses.
It is expected that the United States solar energy industry will expand because of the Stimulus Act. President Obama stated, at his State of the Nation Address given on February 24, 2009, "we invented solar technology, but we have fallen behind countries like Japan and Germany in producing it."
The federal government has offered a 30% tax credit for property owners who install solar power. Grant money from the stimulus package is meant to replace the tax credit.
It is hoped that the package will motivate plumbers, roofers and general contractors to add solar installations to their businesses.
STIMULUS PACKAGE INCLUDES TAX CREDITS FOR FAMILIES AND INDIVIDUALS
The economic stimulus package, signed into law on Tuesday, February 17, 2009 by President Obama includes tax credits for families and individuals. Some families and individuals can look forward to the following:
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A $400.00 tax credit for working individuals and $800.00 tax credit for working families in 2009 and 2010.
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A 10% tax credit of up to $8,000.00 for first time primary home buyers who purchase a home in 2009.
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Up to a 30% tax credit on qualified energy efficient home and building improvements through 2010. This covers purchases such as energy efficient windows and doors, new furnaces and insulation.
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A tax credit of up to $2,500.00 for higher education tuition costs and related expenses.
Prepared by: Tara S. Evans
2008
| November August May February |
STATE REGULATORS MAKE INSURERS KEEP THEIR RATES DOWN.
State regulators required auto insurers to reduce or withdraw their proposed 8% rate hike requests that would have cost consumers several hundred million dollars in increased premiums. State officials stated that auto insurance rates for New Yorkers will rise by an average of less than 1% for 2009.
State insurance regulators demanded that the companies justify their proposed increases in light of evidence that Americans were driving less, and therefore, posing less risk. "Because of higher gas prices, New Yorkers are driving less and having fewer accidents as a result," said New York Governor David Paterson in a press release. "It's simply counterintuitive to increase rates by 8% when people are driving less."
In June and July alone, New Yorkers drove 907 million fewer miles than in the same two months in 2007.
SOCIAL SECURITY BENEFITS TO RISE IN 2009.
Social Security benefits for 50,000,000 people will be going up 5.8% next year, the largest increase in more than a quarter of a century. This increase will begin in January and it will mean an additional $63 per month for the average retiree. The typical retiree's monthly check will go from $1,090 to $1,153.
The 5% rise in the cost of living adjustment is a sharp departure from recent years. The COLA increases have been below 3% for all but three of the past 15 years.
SIX SIGMA GAINS WIDER APPEAL.
Motorola Inc. may have pioneered Six Sigma, the business discipline that aims to solve problems and improve performance, but it is not just for manufacturers any more. Six Sigma is a system that allows employers to tackle issues they determine are costing too much money or hurting customer service or results. Data is the driving force, helping Six Sigma practitioners pinpoint the source of their problem as well as measure how well a solution is working. The goal is to formulate a cure that will generate consistent results and wipe out "defects."
John Lupienski, a Six Sigma consultant, said the system can work for a variety of employers, regardless of whether they make printed circuit boards, treat patients or serve customers in retail stores.
Leadership backing for Six Sigma is vital, but so is insuring employees understand what the goals are so that they will support it, Lupienski said. "You've got to make people realize that you won't have to worry about losing your job. The bottom line of Six Sigma is dollars and cents and customer satisfaction," he said.
2009 INFLATION ADJUSTMENTS WIDEN TAX BRACKETS.
For 2009, personal exemptions and standard deductions will rise and tax brackets will widen because of inflation adjustments announced by the IRS.
By law, the dollar amounts for a variety of tax provisions must be revised each year to keep pace with inflation. Key changes affecting 2009 returns, filed by most taxpayers in early 2010, include the following:
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The value of each personal and dependency exemption, available to most taxpayers, is up $150 to $3,650.
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The new standard deduction is $11,400 for married couples filing a joint return, which is up $500, and $5,700 for singles and married individuals filing separately, which is up $250. In addition, the standard deduction for heads of households is up $350 to $8,350.
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The annual gift exclusion rises to $13,000 up from $12,000 in 2008.
QUALIFYING FOR THE ALTERNATIVE MOTOR VEHICLE TAX CREDIT.
In the past, only Hybrid vehicles, fuel cell vehicles and alternative fuel vehicles had been certified as having qualified for the alternative motor vehicle tax credit. Now certain low fuel consumption vehicles that generally run on diesel fuel have been certified.
The qualifying vehicles and their credit amounts are:
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2009 Volkswagen Jetta 2.OL TDI Sedan manual or automatic - $1,300
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2009 Volkswagen Jetta 2.OL TDI Sport Wagon manual or automatic - $1,300
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Mercedes GL 320 BLU TEC - $1,800
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Mercedes R 320 BLU TEC - $1,550
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Mercedes ML 320 BLU TEC - $900
Prepared by Katy M. Hedges
NEW YORK STATE INSURANCE DEPARTMENT DELAYS SETTING MEDICAL MALPRACTICE INSURANCE RATES.
The New York State Insurance Department has postponed setting its new medical malpractice insurance rates in order to pursue reform of the medical malpractice system. This reform is sought in an effort to reduce the burden on physicians. Malpractice insurance rates were originally scheduled to be adjusted on July 1st and it was widely believed that the Department would impose a significant rate hike. Last year, the rates were increased 14%, which is in keeping with the double-digit increases experienced over the past five years.
This postponement follows on the heels of statements by Dr. Michael Rosenberg, President of the Medical Society of the State of New York, who believed a rate hike, in addition to scheduled Medicare fee cuts, would be extremely detrimental to health care providers. Dr. Rosenberg requested that, in order to put "pressure on the wound so it does not hemorrhage," any increase in medical premiums be delayed until the legislature has a chance to reform the medical malpractice system.
HEALTH INSURANCE COSTS RATED NUMBER ONE ISSUE FACED BY SMALL BUSINESS OWNERS.
Two recent surveys, performed by the National Federation of Independent Business and Wells Fargo, found that the cost of health insurance is the number one issue facing small business owners, continuing a trend that has lasted for 20 years. Health insurance costs again topped even the cost of gasoline and fuel oil as the greatest concern for small business owners.
Other cost issues in the top ten include fuels and electricity, supplies, inventories and Workers' Compensation insurance. Appearing on the list for the first time is "tax complexity" which ranks fifth on the survey and was cited as a "critical" problem for 23% of business owners.
IRS INCREASES STANDARD MILEAGE RATES TO 58.5¢ PER MILE THROUGH DECEMBER 31, 2008.
On June 23, 2008, the Internal Revenue Service announced that it would increase the optional standard mileage rates from $0.505 per mile to $0.585 per mile for all business miles driven from July 1, 2008 to December 31, 2008. The IRS made this special adjustment in recognition of recent drastic increases in the price of gasoline. The IRS sets the optional mileage rate for the next calendar year in the preceding fall and normally does not change its mileage rates during the year. The optional business standard mileage rate is used to determine the deductible costs of operating an automobile for business use and is also used by many businesses as the rate for which they reimburse their employees for mileage.
NEW YORK STATE ATTEMPTS OVERHAUL OF ITS
PENSION SYSTEM.
In a bill recently passed by the Senate, New York State will attempt to overhaul its pension law. Among the proposed changes are the elevation of pension fraud from a misdemeanor to a felony and a provision which adds a new criminal penalty for attorneys who improperly receive state pension benefits. The bill would also allow the Attorney General the power to seek penalties equivalent to three times a guilty party's salary.
A portion of the bill is in response to recent investigations by the Attorney General into attorneys who were erroneously listed as employees of school districts and local governments in order to allow them to receive state pension credit. The new bill would not allow attorneys to be listed simultaneously as both independent contractors and employees of school districts or local governments.
The bill was recently approved by the Senate and awaits action in the State Assembly. The bill has been endorsed by Governor David Paterson.
IRS MAY BE ALLOWED ACCESS TO
CREDIT CARD INFORMATION.
Proposed legislation may grant the IRS access to information from credit card companies which details the amount of revenue received by merchants. This legislation is designed to help close the tax gap by encouraging small businesses to report their income more accurately.
Proponents of the bill estimate that the legislature could raise nearly $10 billion in the next ten years and would not result in any new taxes; it would instead operate to deter small business owners from paying the Federal government less than what is owed. Opponents of the bill criticized the plan because they believe it would be costly to implement and may lead to unnecessary and unfair audits of small businesses who already abide by the tax laws.
Prepared by Patrick D. Slade
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This installment of the Business Newsletter focuses on using bankruptcy courts as a positive tool to improve business and rectify uncertainties. The central theme of this bulletin explores when a business should consider some sort of bankruptcy protection if it is nearing a distressed situation. The sale of a company through bankruptcy offers many benefits which are explored herein.
For more information on how a businesses can use bankruptcy courts to protect themselves and rectify uncertainties, please do not hesitate to contact the undersigned.
BENEFITS OF BANKRUPTCY FOR BUSINESSES IN DISTRESSED SITUATIONS
Many people view bankruptcies as situations where people are down on their luck, have lost everything, and are looking for a way to be forgiven their debts. Similarly, many people are misinformed about corporate bankruptcies and believe that such companies are going out of business and leaving no assets for their creditors. While this may be true in some situations, businesses can also use bankruptcy as a positive tool.
The Bankruptcy Code is located in Chapter 11 of the United States Code. The Bankruptcy Code is separated by chapters. The most popular chapters include Chapter 7, providing liquidation for businesses and individuals, Chapter 11, governing business reorganizations, and Chapter 13, providing for reorganization of individual debts. When a business enters a distressed situation, it should consider bankruptcy protection as a way to preserve assets for the benefit of the company’s shareholders and creditors. Chapter 11 bankruptcy allows a business to continue in a different form. The sale of a business through the bankruptcy process can offer many benefits. A Chapter 11 bankruptcy may be required by a successor purchaser because there are benefits associated with successor liability under this type of bankruptcy. Under Chapter 11, a buyer can take assets free and clear of all liens and encumbrances, with all such claims funneling back and attaching to the proceeds of the sale by the debtor/seller. Other benefits of Chapter 11 include: rejection of underperforming contracts, time and leverage to deal with creditors, actions to bring back money for distribution to creditors, and orderly liquidation and distribution mechanisms.
Bankruptcy courts can help failing businesses close their doors, but they can also help businesses liquidate or reorganize in an efficient manner. Therefore, if your business is falling on hard times, Chapter 11 bankruptcy may be a worthwhile consideration which will help achieve benefits for all parties involved.
INTERNAL REVENUE SERVICE AND ECONOMIC STIMULUS PAYMENTS
Starting in May of 2008, the Treasury will begin sending economic stimulus payments to households. To receive a payment, taxpayers must have a valid social security number, have at least $3,000 of income, and file a 2007 federal tax return. Eligible individuals will receive up to $600. Married couples will receive up to $1,200 and parents will receive an additional $300 for each eligible child younger than 17 years old. To receive the economic stimulus payment, you must file your 2007 federal tax returns. The actual amount of the payment received will depend on the income claimed on your tax return.
INTERNAL REVENUE SERVICE AND POLITICAL ACTIVITY COMPLIANCE
Federal law requires that organizations exempt from tax under the Internal Revenue Code Section 501(c)(3) (such as charities and churches) shall not intervene in or participate in any political campaign on behalf of or in opposition to any candidate for political office. The Political Activity Compliance Initiative educates such tax exempt organizations about the federal law concerning political campaigning and donations and enforces the law in this area. The Political Activity Compliance Initiative is in effect for the 2008 election season.
THE LIBEL TERRORISM PROTECTION ACT
The Libel Terrorism Protection Act was recently passed by the Senate in Albany, New York. The bill was introduced after the New York Court of Appeals ruled in December that New York’s laws did not protect an American author from a possible bid by a Saudi Arabian businesswoman to enforce a summary judgment issued by the High Court in London, England. The bill passed by the Senate is intended to amend New York’s long arm jurisdiction in order to give the state’s courts jurisdiction over foreign libel claimants who win judgments against authors with substantial ties to the state. Many legislators argue that this act will give New York’s journalists and authors the protection they need to expose truths in our society and to maintain free speech.
Prepared Kristen B. Degnan
FEBRUARY 2008
national labor relations board allows employers to restrict employees' use of e-mail.
In December, 2007, the National Labor Relations Board (NLRB) addressed an issue relating to employee use of an employer supported e-mail system. The NLRB decided that employees have no statutory right to use an employer's e-mail system for activity protected under §7 of the National Labor Relations Act, legislation which protects an employee's right to support a union or to refrain from doing so. Register-Guard 351 NLRB 70.
The NLRB ruled that an employer's policy of prohibiting use of its e-mail system for non-job-related solicitations did not violate the National Labor Relations Act.
Private employers should take note of this decision, even if not involved with union matters, because the decision supports an employer's right to restrict use of its e-mail system. The decision allows employers to permit personal and charitable communications and solicitations in the workplace while still specifically barring union-related activities.
NEW YORK INSURANCE DEPARTMENT TO INTRODUCE RULES REQUIRING INSURANCE BROKERS TO DISCLOSE COMMISSION.
The New York State Insurance Department will be introducing rules in the upcoming year requiring insurance brokers and agents disclose to their clients the commissions earned on policies they place. The timeframe for such actions have not yet been determined. Rules governing this matter would be a complete departure from the current practice whereby insurance brokers and agents are not required to disclose commissions to their clients.
HOW ETHICAL IS YOUR BUSINESS?
A recent survey by the Ethics Resource Center regarding ethical misconduct and American businesses found that 56% of employees witnessed ethical misconduct in their workplaces in 2006. This percentage was up from 52% in 2005 and 46% in 2003. The most common types of ethical misconduct were conflicts of interest, lying to employees, and abusive behavior.
More than 40% of employees who witnessed ethical misconduct did not report it to their supervisors or top management, mainly out of fear of retaliation or a feeling that no action would be taken by the corporation with regard to the misconduct.
This issue is brought to your attention because a new federal regulation took effect on December 24, 2007, requiring federal contractors to have a written code for business ethics and conduct. Additional information is available at www.ethics.org.
MEDICARE BENEFITS TO BE ACCOUNTED FOR BY EMPLOYERS TO REDUCE THEIR HEALTH INSURANCE EXPENSES.
The Equal Employment Opportunity Commission affirmed a rule published December 26, 2007, formally authorizing employers to take Medicare into account when structuring health benefit packages provided to retired workers. Employers can reduce their health insurance expenses once the retired workers turn 65 and qualify for Medicare. This affirmation shifts a costly burden from private employers to Medicare in picking up the ever increasing health insurance costs. In effect, the Equal Employment Opportunity Commission is seeking to preserve and protect employer provided retiree health benefits, which may be more generous than Medicare, while shifting a financial burden away from the employer.
THE EFFECT OF PROPOSED FEDERAL TAX REBATES ON SMALL BUSINESSES
As recent headlines in the news have indicated, the federal government has proposed a one-time tax rebate of $150 billion to America’s families and small businesses. Businesses are expected to receive $50 billion in incentives to invest in plants and equipment. The stimulus measure would give businesses immediate tax write-offs for 50% of the purchase price of plants and other capital equipment and also permit small businesses to write-off additional purchases of equipment.
Prepared by Christopher R. Poole
| November August May February |
="cbodyhdr3" align="center" style="text-align:center">Governor Spitzer Calls For “Partnership for Coverage” Health Policy.
What Does That Mean for Employers and the
Health Insurance Industry? ="profilecommtexthdr" align="center" style="text-align: left; margin-bottom: 12pt"> Governor Spitzer has the daunting task of formulating a health care policy that meets the demands of the public and the interests of the private sector. The lofty goal set by Governor Spitzer is universal coverage for all. How to achieve this end will be left up to one of the two different means: a tax-supported single-payer system or restructuring the private health insurance market. Governor Spitzer’s three part “Partnership for Coverage” calls for enrolling 1.3 million uninsured residents who are eligible but unregistered for the state insurance programs, expanding the state’s Child Health Plus Program to 70,000 middle income children and providing coverage for 1.3 million uninsured residents who are not currently eligible for the public programs. The universal health care for New York would be funded through taxes or by employers and individuals picking up part of the cost. Either way, the taxpaying citizens of New York will have to pick up the tab for this program. ="cbodyhdr3" align="center" style="text-align:center">Governor Spitzer Calls for Licenses to be Issued to Illegal Immigrants in New York: Does That Leave New York Vulnerable?
Governor Spitzer issued a new policy (effective in December) permitting illegal immigrants to obtain drivers’ licenses. Governor Spitzer accomplished this by reversing an executive order issued by former Governor George Pataki in 2002 that required all applicants for a New York drivers’ license to have a valid Social Security number. Many critics feel that the drastic move by Governor Spitzer was absurd given 9/11 and that his policy will render New York essentially a gateway and hiding place for terrorists. What was the motivation behind this shift in policy? Governor Spitzer cites road safety and an increased number of insured drivers which will result in a drop in insurance premiums. Officials are concerned with border safety, conflict with federal policies and the lack of research on the impact of Governor Spitzer’s decision. Legislators and officials around the state are opposing the Governor's new policy.
="cbodyhdr3" align="center" style="text-align: center; margin-bottom: 12pt"> Western New York Area Home Construction Holding Steady Means Good News For Home InsurersNationwide, the number of single family home building permits has declined by 28% during this past year. In New York State, the number of permits issued has declined by 14%. In Buffalo Niagara, the decline was only 3% and, bucking the trend, Erie County registered an increase in the issuance of permits. As such, the market in Western New York remains relatively stable and that means good news for home insurers and mortgage lenders.
State Wants Property Insurers to Build Rainy Day Funds
State regulators unveiled proposed rules that would require insurance companies operating in New York to create catastrophe reserve funds to cover losses related to hurricanes, wind, hail, earthquakes, snow, ice, freezing rain or tsunamis. The logic behind creating such funds is to ensure that the companies have enough money set aside to cover heavy losses, without being forced to raise premiums to offset the hit to their earnings. Currently, tax laws discourage insurers from establishing such a fund. The new regulations would require insurance companies to dedicate the amount they currently charge customers for catastrophe protection, less taxes paid, as such a reserve. The amount of each company's reserve would be publicly disclosed.
Home Office Tax Deductions Hinge On Good Record Keeping
The number of U.S. taxpayers claiming home office deductions has grown from more than 1.5 million in 1991 to nearly 3.2 million in 2005. The dollar amount claimed by Americans for home office deductions approaches 9 billion. The IRS has a three pronged test for determining if a taxpayer is eligible for home office deductions. Firstly, the home office must be used regularly. Secondly, the home office must be used only for work. Thirdly, a commuter can only claim a home office if the space is used for the convenience of the employer, not the employee.
NEW IRS FILING REQUIREMENT FOR SMALL TAX-EXEMPT ORGANIZATIONS
On July 12, 2007, the Internal Revenue Service announced that it began mailing educational letters to more than 650,000 small tax-exempt organizations that will be required to submit a new annual notice. This annual notice has been mandated by the Pension Protection Act of 2006 (PPA). Pursuant to this act, the small tax-exempt organizations will be required to submit the new Form 990-N "Electronic Notice for Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ." Pursuant to the PPA, the majority of small tax-exempt organizations are now required to submit this new filing. Prior to the enactment of this act, tax-exempt organizations with gross receipts of $25,000 or less were not required to submit information returns. Beginning in calendar year 2008, these organizations will be required to file this new electronic notice.
U.S. SUPREME COURT LIMITS SCOPE FOR PAY DISCRIMINATION CLAIMS
On May 29, 2007, the United States Supreme Court held that an employee seeking to recover for pay discrimination under Title VII of the Civil Rights Act of 1964 must be able to prove a discriminatory act within the 180-day limitations period. Ledbetter v. Goodyear Tire & Rubber Co., Inc., 127 S. Ct. 2162. The decision in Ledbetter rejects prior holdings that had allowed recovery for allegedly discriminatory pay decisions that occurred outside the statute of limitations. In these prior holdings, the discriminatory pay decisions were allowed based on the premise that the past pay decisions affected pay during the limitations period.
IRS MANDATES USE OF NEW AGENT APPOINTMENT FORM
On June 20, 2007, the Internal Revenue Service declared that employers, payors and their agents must utilize a new and improved version of Form 2678, "Employer/Payor Appointment of Agent." This form authorizes an agent to file tax returns and deposit and pay employment or other withholding taxes on an employer's behalf. The IRS receives about 15,000 of these forms annually, encompassing approximately 3,000 agents and 20,000 employers. The IRS has mandated the use of a new Form 2678 which makes it clearer and more user friendly for the employer. However, the employer must remember it retains responsibility for filing Form 940, "Employer's Annual Federal Unemployment [FUTA] Tax Return," and depositing and paying FUTA tax.
POTENTIAL CHANGES IN THE AMERICANS WITH DISABILITIES ACT
Senator Tom Harkin (D – Iowa) is expected to introduce to the Senate the "Americans With Disabilities Act Restoration Act." This act would effectively shift the focus of Americans With Disabilities Act litigation from whether the individual is disabled, to whether the individual was subject to discrimination "on the basis of a disability." Under current Supreme Court case law, the determination as to whether an individual is disabled under the ADA is a complex inquiry that a court must undergo prior to reaching the question of whether there was any discrimination. The contemplated legislation seeks to reverse several Supreme Court decisions that have restricted the circumstances under which employees can establish ADA claims. This act seeks to include language that presumes the individual bringing suit is a member of the protected class of persons with disabilities. Should this act pass, ADA litigation would focus more on the alleged discriminatory treatment and less on determining whether an individual is "disabled".
Prepared by Michael M. Chelus
New York State Passes Worker's Compensation Reform
As part of the first budget under new Governor Spitzer, New York State accomplished what has been heralded as significant worker's compensation reform. The result has been characterized as a "win-win" result with benefits increasing for workers for the first time in a decade, while costs will decrease. Key components of the agreement include increases to the maximum amount of money received by workers, strong anti-fraud measures and setting a maximum number of years certain workers can receive benefits resulting in savings estimated to be in the hundreds of millions.
New York Government Continues to Employ More Workers than Any Other State
According to an analysis done by the Public Policy Institute, New York State and local governments pay public employees 21 percent more than the national average and the number of public employees compared to the general population is the highest in the country. The average yearly salary over $54,000 was fourth highest in the country and 21% higher then any other state. Lastly, New York and local government employed 62 workers per every 1,000 residents, 14% above the national average.
Governor Spitzer's Budget Creates Tax Cuts for Manufacturers and Other Businesses
Under the recently passed budget the Article 9-A corporate tax rate levied on more then 50,000 businesses dropped from 7.5% to 7.1%. The primary tax rate levied on banks and insurance companies was decreased by the same percentage. Further, the general tax rate affecting approximately 3,400 manufacturing companies drops from 7.5% to 6.5%.
A Dissolved Corporation Can Still Bring a Lawsuit for Indemnification
In Tedesco v. A.P. Green Industries, 8 N.Y. 3d 243 (2007), Insulation Distributor was a distributor of asbestos products resulting in their involvement in a number of lawsuits. They were eventually sued by a former employee of Dupont. Insulation Distributors went out of business and was dissolved in 1999. Subsequent to being sued IDI brought a third party action against Dupont. The Court of Appeals held that a third party action from a dissolved corporation could proceed since the activity was part of "winding up its affairs."
An Employee Does Not Need to Give Notice of an Injury Where the Employer Is Aware of the Injury
In Coffey v. Shop-Rite Supermarkets North, -- N.Y.S.2d --, 2007 WL 1075084 (3rd Dept. 2007 ), the claimant was injured on December 20, 2004 but did not file a written report until April 9, 2005. The employer appealed the decision of a Worker's Compensation Judge establishing the injury arguing lack of timely notice. The Appellate Court held that the record established that the employer was aware of the witnessed accident and therefore the employee was excused from the timely notice requirement.
SPECIFIC PROCEDURES MANDATED FOR
DISPOSING OF PERSONAL EMPLOYEE INFORMATION
As of December, 2006, New York State requires employers to properly dispose of records containing personal employee information through one of the following means: shredding, destruction, modification, or other reasonable action to insure that no unauthorized person will gain access to the personal information.
Affirmative obligations are now imposed on private sector employers to protect individuals from identity theft. Employment applications, disciplinary notices, and payroll records containing personal information are subject to the new disposal requirement. With regard to electronic documents, advice from information technology professionals is necessary to insure that such records are destroyed completely.
The law imposes a civil penalty of up to $10,000.00 for non-compliance and provides the New York State Attorney General with broad enforcement powers. Due diligence may serve as an affirmative defense to any such complaint.
EXTENDED DEPLOYMENTS MAY HURT BOTH
EMPLOYERS AND THEIR EMPLOYEES
On January 11, 2007, the Chairman of the Joint Chiefs of Staff announced that limits were being extended on the length of time that military reservists and members of the National Guard can spend on active duty.
The new policy could require citizen soldiers to serve on active duty in Iraq or Afghanistan for as long as 48 months, with an initial tour lasting up to 24 months followed by a return to civilian life and a potential second deployment of an additional 24 months.
U.S. SUPREME COURT EXPANDS PROTECTION
TO EMPLOYEES WHO ALLEGE EMPLOYER RETALIATION
Employees who bring retaliation claims under Title VII of the Civil Rights Act of 1964 are no longer required to prove that they suffered an "ultimate employment decision" or "materially adverse change in the terms and conditions of employment". The older standard required that the employee prove retaliation in such forms as a discharge, demotion, loss of pay, etc. In Burlington North and Santa Fe Railway Company vs. White, No. 05-259 (2006), the Court expanded its definition of acceptable forms of retaliation to include more subtle treatment such as a change in schedule or even the failure to invite an employee to lunch.
As articulated by the U.S. Supreme Court, the new standard is whether "a reasonable employee would have found the challenged action materially adverse, and whether such action might have dissuaded a reasonable worker from making or supporting a charge of discrimination."
To guard against retaliation claims, employers should instruct their supervisors with respect to the newly established, broader standards. Employers should also review their stated policies to insure that they prohibit not only discrimination and harassment, but also retaliatory action.
EMPLOYMENT SCREENING DEVICES AND
THE AMERICANS WITH DISABILITIES ACT
Pursuant to the ADA, employers may not discriminate against potential employees on the basis of a disability, if reasonable accommodations could be made such that an employee could perform the essential functions of his or her job. Employers may not ask specific disability related questions or request a medical examination prior to conditionally offering an applicant a job. Because certain psychological or personality tests could be considered medical examinations that detect underlying psychological disorders, the ADA is sometimes implicated by the mere administration of a test.
Tests designed to measure an applicant's honesty or habits are permissible, but EEOC regulations forbid most other forms of psychological testing.
TITLE VII DISCRIMINATION CLAIMS
Title VII of the Civil Rights Act of 1964 forbids discrimination in the hiring process on the basis of race, sex, religion, color or national origin. Although Title VII specifically allows employers to administer "ability" tests to applicants, personality tests or psychological tests that are not carefully designed may cause an employer to run afoul of Title VII.
The protection afforded by Title VII may be violated if certain questions in a personality test have an adverse, or disparate, impact on a protected class of persons. For example, if certain questions tend to screen out more women than men, the adversely affected female applicant may have a legitimate claim of Title VII discrimination, so long as the question is not necessary to screen for a bona fide occupational qualification.
| November August May February |
FAILURE TO PROVIDE A BLIND-ACCESSIBLE WEBSITE MAY CONSTITUTE DISCRIMINATION UNDER THE AMERICANS WITH DISABILITIES ACT
In the case of National Federation of the Blind, et al. v. Target Corporation, 2006 U.S. Dist. Lexis 63591 (N.D. Cal. 2006), a class action lawsuit has been brought against Target arguing that the retailing giant’s website, Target.com, is not accessible to the blind and, hence, is in violation of Title 3 of the Americans with Disabilities Act.
The district court has denied Target’s motion to dismiss on the grounds that the complaint alleges a sufficient nexus between Target.com and Target’s “brick and mortar” stores. The district court’s decision means that Target will have to go through a full round of discovery and, potentially, motions and trial as to whether its website is indeed accessible to the blind.
Regardless of how the district court case ends, we can expect that this decision will go up on appeal, especially with regard to “public accommodation” translation supplied by the district court. Any business that utilizes a website, in whole or in part, to sell its goods and services should continue to observe the progress of this case, as it could have far-reaching consequences.
NEW YORK LAW NOW REQUIRES PROOF OF AGE FOR ALL EMPLOYEES BETWEEN THE AGES OF 18 AND 25
Under New York Labor Law, all employees under the age of 18 have traditionally been required to produce a set of so-called “working papers”, which the employer is required to keep on file and produce to the New York Department of Labor on demand.
As of December 15, 2005, New York Labor Law requires that all employers keep on file proof of age of all employees claiming to be between the ages of 18 and 25. Proof of age must be in the form of either a) a driver’s license or other documentation issued by any state or federal government, or b) a certificate of age issued by an employment certificating official. This proof, kept on file, constitutes evidence that the employee has reached the stated age. Failure to do so could result in a Child Labor Law violation.
NEW YORK COURT OF APPEALS REJECTS “PRODUCT LINE” EXCEPTION TO SUCCESSOR LIABILITY LAW
In an unanimous opinion, the Court of Appeals has rejected the “product line” exception to successor liability law. Resolving a spilt between the First and Third Departments of the Appellate Division, the Court of Appeals has ruled that a corporation purchasing another corporation’s assets is not liable for the seller’s torts simply because the purchaser has continued the output of the seller’s line of products.
With this decision, New York joins the majority of states that have rejected the “product line” exception. (One major exception to the general rule exists in California, which has followed the “product line” exception since 1977.) Here, the Court of Appeals has taken a business-friendly viewpoint in deciding that any such change in the law should come from the legislature.
IRS INCREASES PENSION PLAN LIMITATIONS FOR 2007
The Internal Revenue Service has recently announced cost of living adjustments applicable to dollar limitations for pension plans and other items for Tax Year 2007.
For example, the limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) is increased from $15,000 to $15,500. This limitation affects elective deferrals to Section 401(k) plans and to the Federal Government’s Thrift Savings Plan, among other plans. The limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $175,000 to $180,000. The limitation for defined contribution plans under Section 415(c)(1)(A) is increased from $44,000 to $45,000.
Several other limitations have also been raised. Each are detailed on the Internal Revenue Service's website : www. irs.gov.
"DISPOSAL OF PERSONAL RECORDS LAW" SET TO TAKE EFFECT
On December 4th, 2006, the "Disposal of Personal Records Law" will take effect in New York. In an effort to curb the growth of identity theft, this law requires all employers to take extra steps when disposing of documents and records containing personal identifying information of their employees, such as Social Security numbers and driver's license numbers.
Under the new law, such records, when marked for disposal, will have to be destroyed or altered pursuant to the standards. The best way to conform to these standards will be to shred all documents and records that may contain sensitive information
NEW YORK LAW RESTRICTING VIDEO SURVEILLANCE
OF
EMPLOYEES GOES INTO EFFECT
Earlier this year, New York passed a law restricting the ability of employers to videotape employees in restrooms, locker rooms, or any other area where they may be changing their clothes.
Any such surveillance in the future will require a court order. Violation of the new law provides an employee with the right to sue for damages and attorney's fees. Employers should also understand that, in that such surveillance is now illegal, the footage gained will no longer be admissible in cases involving the employee, such with discrimination or wrongful termination matters.
U.S. SUPREME COURT
June marked the end of the Supreme Court's 2005-2006 term, and unfortunately, rulings in the area of labor and employment law may result in future increases in litigation costs for employers.
E-mail Etiquette: Employers may want to think twice before picking up the phone to call an employee or shooting an e-mail his way. In IBP, Inc. v. Alvarez, the Supreme Court ruled that time spent by workers either putting on or taking off protective gear and walking to and from a job site was compensable under the Fair Labor Standards Act. In other words, in instances when an employee engages in a principal work activity, or an act that is indispensable to a principal work activity, an employer must compensate an employee for his actions. Therefore, if an employee is answering phone calls by a manager or reading company e-mail messages prior to or after completing a normal work day, the employer may be on the hook for paying his employee extra wages.
Discrimination Downfall: According to Title VII, the American Disability Act and the Age Discrimination Employment Act, only those employers that employ at least 15 employees for a 20 or more week period in the present or preceding calendar year may be subject to a federal cause of action under Title VII for discrimination. Such a computation becomes difficult when independent contractors, part-time employees, and seasonal workers are among the employees. Unfortunately for the small business owner, the Supreme Court ruled unanimously that the 15-employee threshold for determining whether an employer is covered by Title VII is an element of a plaintiff's claim to be decided by a jury; not a judge. Ultimately, this means that juries will get to decide on a case-by-case basis who qualifies as an employee, providing less certainty and higher litigation costs in discrimination cases.
Harass and Get Hit: The Supreme Court's recent decision in Burlington Northern and Santa Fe Railway Co. v. White, just made the ticket price for defending a sexual harassment claim an expensive trip to court. Instead of adopting a clear standard for what constitutes a retaliatory action, such as hiring, granting leave, discharging, and promoting, each potentially actionable act will need to be litigated in court to determine whether it passes or fails the "materially adverse to a reasonable person" standard. The implications of this individual basis evaluation will become extremely burdensome to small employers, as the costs associated with potential litigation will begin to skyrocket.
TALLYING TAXES
What's Taxable and How Much? The New York State Department of Taxation & Finance has recently published two reference guides to help businesses meet their New York sales and use tax obligations. The first guide, Publication 850, simplifies a business' ability to determine if a particular good or service is taxable and under what conditions, as well as how to avoid common errors when filing a sales tax return. The second guide is a Sales and Use Tax Jurisdiction and Rate Work-Up Service, which will help businesses determine which local sales tax jurisdictions should receive revenue from certain sales tax transactions and the correct sales tax rate to apply to those transactions. This guide is meant to resolve the problems encountered when a customer's mailing address is not indicative of the local taxing jurisdiction where the individual resides, thus simplifying the process for charging and reporting the proper amount of local sales tax.
USE IT OR LOSE IT
If an employer is serious about wanting to enforce an arbitration clause found within an employment contract, the employer had better speak up. In a recent decision, 11 months had elapsed between the time the employer was served with an employment discrimination action and its filing the motion to compel arbitration. During that time frame, the plaintiff/employee retained counsel who took on the expense and effort of being admitted in New York and beginning fact discovery. The court concluded that the employer waived his right to enforce arbitration due to the time and effort advanced by the plaintiff in the interim.
The fact that an employee stays on the job just long enough to earn a bonus does not permit the employer to withhold payment. Simpson v. Lakeside Engineering, -- N.Y.S.2d --, 2006 WL 260048 (4th Dept. 2006). In Simpson, the employer offered a $10,000 bonus if the employee completed a year's service. The employee quit just after she completed the year and the employer refused to pay the bonus. The court said that an employer cannot argue that a bonus is discretionary after an employee has completed all the requirements. The employer’s arguments of fraud and lack of good faith on the part of the employee were not enough to change the Court’s decision.
The devil is in the details. In a recent case, a purchaser was bound by language disclaiming a warranty despite the fact that the language was on the reverse side of a form. Roger’s Fence v. Abele Tractor and Equipment Co., --N.Y.S.2d--, 2006 WL 259600 (4th Dept. 2006). Unfortunately for the purchaser, its vice-president signed an agreement that stated warranty terms were on the reverse side and also signed a delivery report indicating that he reviewed and understood the warranty coverage. As a result of those signatures, the purchaser was bound by the disclaimer.
The question of what is a day's pay is more complex than it may seem. In New York, a contractor working on public projects must pay workers the local prevailing rate for a day’s work in the same trade. The Commissioner of Labor has the authority to classify workers by type (i.e. ironworker or glazier) and determine wage rates. In a recent decision, the Court of Appeals said that when the Commissioner is classifying the work performed by an employee to a particular trade he does not need to consider the actual contractor practices within the locality. Lantry v. State of New York, -- N.E.2d. --, 6 N.Y.3d 49 (2006) Rather, the Commissioner can disregard local practice and rely upon job classifications as defined in collective bargaining agreements.
If a self-insured employer, or an insurance carrier, wants to reserve their rights in a worker’s compensation case they need to say so loud and clear. In New York, a self-insured employer or a carrier has the right to offset an injured worker’s future benefits with the proceeds of any recovery resulting from a lawsuit against a third-party. However, there is a clear burden on the employer and the carrier to overtly state the intent to seek an offset. See Brisson v. County of Onondaga, -- N.E.2d --, 2006 WL 345880 (2006). Simply disagreeing with a worker’s belief that the employer or carrier has no right to seek an offset is not enough. The employer must expressly and unambiguously reserve its rights or they will be considered waived.
It appears that New York is beginning to enter the debate on mandated health insurance. On January 17, 2006 New York Assemblyman Daniel O’Donnell introduced the “Fair Share” bill. (A.9534) This bill is similar to the Maryland bill targeting Wal-Mart and seeking to force an increase in health benefits for Wal-Mart employees. O’Donnell’s bill would force companies with 10,000 or more employees to pay a tax of 8% of their total payroll. This bill has passed the Assembly Labor Committee but must pass the Assembly Codes, and Ways and Means Committees before being presented to the Assembly. Notably, Assemblyman Nick Spano is advocating a bill that would levy a $3 per hour/per employee tax on businesses with 100 or more employees.
APPROPRIATE USE OF VIDEO
SURVEILLANCE IN THE WORKPLACE
As an employer, you may suspect that an employee has stolen money or inventory from your company, or is otherwise slacking off on the job. You may have entertained the notion of installing video surveillance in order to better protect your interests, but aren't sure about the legal ramifications. A few simple precautionary steps may insulate an employer from an employee's right to privacy action. It is advisable to install hidden cameras only after informing employees that they may be subject to such monitoring; installing cameras in plain view in open public spaces does not invade an employee's reasonable expectation of privacy. Indeed, posting a sign that reads: "THIS AREA IS SUBJECT TO VIDEO MONITORING. YOU DO NOT HAVE A REASONABLE EXPECTATION OF PRIVACY," in the areas that are subject to video surveillance will minimize or even eliminate any risk of liability for invasion of privacy.
SEXUAL STEREOTYPING MAY BE
EVIDENCE OF DISCRIMINATION
In a recent federal case, the plaintiff claimed she was denied tenure because of a perceived lack of commitment to her job. In support of her claim, the plaintiff alleged that the employer repeatedly questioned whether she could perform her job duties and maintain her required work hours with "little ones" at home and also questioned whether her commitment to her job would change once she received tenure. The Second Circuit of the U.S. Court of Appeals ruled that comments made about a woman's apparent inability to combine work and motherhood constituted direct evidence of a gender-based discrimination. This case should remind employers that sex-based stereotyping is not limited to assumptions based upon a woman's physical appearance.
TERMINATIONS FOR TRASH
TALK DEEMED NOT RETALIATION
When circumstances provide a problem employee with protection, for example, if an employee has made a request for leave under the Family and Medical Leave Act (FMLA), employers are sometimes reluctant to terminate that employee, even for legitimate reasons, for fear of being accused of retaliation. However, there is recent case law suggesting that a protected employee may properly be terminated for outrageous behavior, such as pervasive "trash talk", without the employer being liable for retaliation. When an employee has engaged in a protected activity, an employer must approach any termination or other disciplinary decision with great care. The employee can easily claim that any adverse action taken by the employer was retaliation for the protected activity and that the stated legitimate reason was merely a pretext. Employers must be careful to ensure that employees who engaged in similar conduct in the past were disciplined in the like manner. While good judgment dictates that caution must always be exercised, recent case law does provide employers with encouragement that courts will recognize that the legitimate need to run a business includes allowing employers, without recrimination, to remove protected employees who engage in offense and outrageous behavior.
| November August May February |
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NOVEMBER 2005
THE IRS ANNOUNCES 2006 INFLATION ADJUSTMENTS SPARKING A WIDENING OF TAX BRACKETS AND CHANGES IN VARIOUS TAX BENEFITS
On October 28, 2005 the Internal Revenue Service announced a wide variety of inflation adjustments to be implemented for the 2006 tax year. Through Revenue Procedure 2005-70, standard deductions and personal exemptions will increase and tax brackets will widen. In addition, taxpayers will be permitted to make larger tax-free monetary gifts during the 2006 tax year.
Each year, the Internal Revenue Service revises various provisions of the Internal Revenue Code to account for inflation. For the 2006 tax year, the IRS has revised more than three dozen tax provisions. As a result, nearly every taxpayer will find themselves affected by these various modifications. What follows is a brief discussion of a few provisions of Revenue Procedure 2005-70 which will likely affect a great many taxpayers filing their 2006 tax returns in early 2007.
One tax benefit utilized by many married couples in the United States is the standard deduction which may be taken when such couples file a joint return with the IRS. Pursuant to Revenue Procedure 2005-70, in the tax year 2006, the new standard deduction for married couples filing a joint income tax return will rise to $10,300. As a result of this increased deduction, the IRS has predicted that approximately two out of every three taxpayers will opt to take advantage of this new standard deduction instead of itemizing individual deductions like state and local taxes, mortgage interest and charitable contributions.
In addition to increasing the standard deduction which may be taken by married couples filing a joint return in the 2006 tax year, the IRS has also announced its decision to increase the tax-bracket thresholds for each filing status. By way of example, for married couples filing a joint return, the taxable-income threshold separating the 15% bracket from the 25% bracket will be $61,300. This is a nearly $2,000 increase from the $59,400 income threshold which separated those tax brackets in the 2005 tax year.
Those individuals intending to utilize the annual gift tax exemption in the 2006 tax year will also realize a benefit through the recently announced 2006 inflation adjustments. In the 2006 tax year, the annual gift tax exemption (on gifts to any person, other than gifts of future interests in property) will rise to $12,000 from the presently allowable $11,000 exemption. Such gifts are not included in the total amount of taxable gifts under §2503 of the Internal Revenue Code made during that year.
Finally, the personal and dependency exemption, a tax benefit available to most taxpayers, will also be increased for the 2006 tax year. In this regard, the IRS has announced that that exemption will increase by $100 from the 2005 allowable exemption of $3,300.
A complete listing and explanation of all 2006 inflation adjustments will be provided by the Internal Revenue Service in Bulletin 2005-47 which is expected to be released on November 21, 2005. In the interim, a complete photocopy of Revenue Procedure 2005-70 is available for public viewing in the IRS on-line newsroom at www.irs.gov.
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AUGUST 2005
IRS AMENDS THE "USE IT OR LOSE IT" RULE
FOR CAFETERIA PLANS
In May, 2005, the IRS amended the "Use It or Lose It" rule to permit an employer that operates a §125 Cafeteria Plan to give employees a two and one-half month grace period after the end of each year's plan. During this grace period, any unused benefits or contributions remaining at the end of the immediately preceding plan year may be paid or reimbursed to plan participants for qualified benefit expenses incurred during the grace period.
Prior to May, 2005, Federal Law prohibited an employer that operated a §125 Cafeteria Plan to defer compensation to the next plan year. Consequently, employees who participated in the cafeteria plan had to use all of the benefits or contributions they had set aside within a plan year or else "forfeit" the unused amount of benefits or contributions. This is known as the "use it or lose it" rule. With the amendment to this rule, employees who participate in the plan will now have extra time, after the plan year has ended, to utilize any benefits or contributions which were not used during the plan year.
Other areas of tax law provide that for a short, limited period, compensation for services paid in the year following the year in which the services that are being compensated were performed is not treated as "deferred compensation", thereby establishing a grace period. The "use it or lose it" rule pertaining to cafeteria plans clearly contradicts these other areas of tax law. In order to be consistent with these other areas of tax law, the U.S. Department of the Treasury and the Internal Revenue Service believed it was appropriate to modify the "use it or lose it" rule to afford participants in the plan additional time within which unused benefits or contributions may be used.
Now, under proposed Treasury Regulations §§1.125-1 and 1.125-2, a cafeteria plan may, at the employer's option, be amended to provide for a grace period immediately following the end of each plan year. This grace period must apply to all participants in the cafeteria plan and it must not extend beyond the 15th day of the third calendar month after the end of the immediately preceding plan year to which it relates. The effect of the grace period is that participants may now have as long as 14 months and 15 days to use the benefits or contributions for a plan year before those amounts are forfeited under the "use it or lose it" rule.
Unused benefits or contributions relating to a particular qualified benefit may only be used to pay or reimburse expenses incurred during the grace period with respect to that particular qualified benefit. For example, unused amounts elected to pay or reimburse medical expenses in a health flexible spending arrangement (FSA) may not be used to pay or reimburse dependent care or other expenses incurred during the grace period.
An employer may adopt a grace period for its cafeteria plan for the current cafeteria plan year (and subsequent cafeteria plan years) by amending the cafeteria plan document before the end of the current plan year.
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MAY 2005
An employer will not be afforded the protections of Workers’ Compensation Law §11 against third party liability without first securing Workers’ Compensation whether or not the employee sustained a “grave injury”.
The New York Court of Appeals has recently ruled that without obtaining workers’ compensation for its employees, an employer cannot benefit from the protections of Workers’ Compensation Law §11 whether or not the employee sustained a grave injury. Boles v. Dormer Giant, Inc., 2005 WL 405355 (February 22, 2005).
In Boles v. Dormer, the plaintiff (Boles) alleged injuries resulting from an accident that occurred while in the course of employment with Personal Touch Home Improvements, Inc. (Personal Touch). At the time of the accident, Personal Touch was subcontracted by the defendant, Dormer Giant, Inc. (Dormer), to assist with a remodeling project.
Boles subsequently commenced suit only against Dormer for the alleged injuries. As such, Dormer commenced a third-party action against Personal Touch for common law indemnification and contribution. It should be noted however, that Boles could have also sued his employer directly as Personal Touch did not secure workers’ compensation for its employees, but failed to do so.
Boles moved for summary judgment under Labor Law §240(1) on the issue of liability against Dormer. Personal Touch in turn cross-moved for summary judgment against Dormer to dismiss the third-party complaint. In support of its position, Personal Touch argued in relevant part that §11 bars liability because Boles did not sustain a grave injury. Dormer argued in opposition that §11 does not apply because Personal Touch did not secure workers’ compensation.
Workers’ Compensation Law §11 protects an employer from contribution and indemnification claims arising out of accidents that occur while in the course of employment. An exception to the rule arises if the employee sustained a grave injury as defined by the section.
The Supreme Court and the Appellate Division, Second Department ruled that Boles did not sustain a grave injury and the third-party complaint against Personal Touch was dismissed in accordance with §11. Dormer appealed to the New York Court of Appeals.
The issue before the Court of Appeals was whether §11 shields an employer from tort liability where the employer failed to secure workers’ compensation. The Court answered “no,” thereby reversing the lower Court’s ruling. In doing so, the Court looked to the legislative intent and public policy behind §11. The Court noted that Workers’ Compensation was constructed as a bargain between labor and management. Labor obtains necessary medical care benefits and compensation for workplace injuries regardless of fault while employers obtain a degree of protection from tort liability with the exception of grave injuries. The Court held that Personal Touch did not adhere to its part of the bargain and, as such, cannot be afforded the protection of §11. In terms of public policy, the Court noted that if an employer was provided with the protections of §11 without securing workers’ compensation, it would be unfair to the law-abiding employers. Furthermore, there would be no incentive to obtain workers’ compensation which would discourage employers from upholding their end of the bargain.
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FEBRUARY 2005
AVOIDING EMPLOYEE LAWSUITS BY COMPLYING WITH NEW OVERTIME AND MINIMUM WAGE LEGISLATION
Despite a veto from Governor Pataki, the Empire State Wage Act of 2004 was ratified by the New York State Senate on December 6, 2004. Thankfully, the Act is rather simple and does not change New York=s wage payment rules aside from an increase in the minimum wage.
Pursuant to the legislation, on January 1, 2005, New York=s minimum wage, currently set at $5.15 per hour, will be increased to $6.00 per hour. Additionally, on January 1, 2006, the minimum wage in New York will rise to $6.75 per hour, and will reach $7.15 per hour effective January 1, 2007.
The Empire State Wage Act of 2004 also affects the minimum wage for food service workers who routinely collect tips. The wage for these workers is currently $3.30 per hour. As of January 1, 2005, the minimum wage will rise to $3.85 per hour. The rate will rise again effective January 1, 2006 to $4.35 per hour and then to $4.60 per hour as of January 1, 2007.
The federal government also amended a relevant piece of legislation dealing with wages this year, the Fair Labor Standards Act. Unless specifically exempted, employees covered by the Act must receive overtime pay not less than time and a half of their regular pay rate for hours worked in excess of forty in a given work week. The employees work week need not coincide with the calendar week; it may begin on any day and at any hour of the day. Further, different work weeks may be established for different employees or groups of employees in an effort to minimize overtime pay. However, averaging hours of two or more weeks is not permitted. Further, an employee=s work week must be fixed and regularly reoccurring.
There are two ways an employee can fall under the overtime requirement of the Fair Labor Standards Act. The first is known as Enterprise Coverage. Any business or organization which either: a) does $500,000.00 or more in business annually; or b) is involved in medical, educational or governmental work must pay its employees under the Fair Labor Standards Act.
Even when there is no Enterprise Coverage, most employees will qualify under individual coverage for Fair Labor Standards Act protection. This applies to employees engaged in AInterstate Commerce.@ Obviously, this would include a truck driver transporting goods across state lines. However, AInterstate Commerce@ has been interpreted to include a wide range of employees such as a secretary typing letters that will be sent out of state, an employee keeping records of interstate transactions, an employee making phone calls out of state, even an employee doing janitorial work in a building where goods are produced for shipment outside the state.
The danger for employers who are not fully compliant with the Fair Labor Standards Act and/or New York State Labor Law requirements is a suit by an employee or employees for back overtime pay. It is not uncommon for plaintiffs= attorneys to commence class action lawsuits seeking back overtime pay for many employees over many years.
In order to avoid such problems, a wise employer will be certain that employees not receiving overtime pay are exempt under both the Fair Labor Standards Act and New York State Labor Law. Further, adherence to the Fair Labor Standards Act and New York Labor Law in the area of record keeping is essential to demonstrate compliance in the unfortunate event of a lawsuit.
2004
I. THE IRS TAKES A STEP TOWARD RESOLVING
FREQUENTLY DISPUTED EMPLOYMENT TAX ISSUES
In August of 2004 the IRS announced the development and future release of a new schedule to assist those tax payers who find themselves facing an employment tax discrepancy as a result of a consolidation, acquisition or statutory merger. The new Schedule D (Form 941) is a product of the IRS Industry Issue Resolution Program (IIR). The IIR was created in 2001 to tackle various tax issues which are commonly contested and often times cumbersome to resolve. Schedule D (Form 941) will allow the IRS to resolve these types of employment tax discrepancies without having to involve the employer directly, thereby reducing tax payer burden. Reducing tax payer burden is one of the primary goals of the Industry Issue Resolution Program.
The new Schedule D (Form 941) was created to allow qualifying employers to explain a discrepancy between wages reported to the Social Security Administration on Form W-2 and what was reported to the IRS on Form 941 because of an acquisition, statutory merger or consolidation. Schedule D is to be utilized to explain such discrepancies which occur on or after January 1, 2005. It may be used by employers even if they have e-filed their employment tax returns. It is anticipated that, in the future, employers will be able to e-file Schedule D (Form 941) directly.
Not all employers who find themselves faced with this type of tax discrepancy will be able to rely upon Schedule D (Form 941) to resolve it. Only those employers faced with a tax discrepancy caused by a statutory merger or consolidation, or any acquisition which satisfies the requirements for predecessor-successor status will be permitted to file the new Schedule D to explain the discrepancy. Employers with tax discrepancies generated as a result of other acquisitions which are not statutory and which do not fulfill the requirements for predecessor-successor status should not file Schedule D (Form 941).
The IRS released a draft of the new Schedule D (Form 941) on July 20, 2004. To obtain a copy, simply visit the Draft Tax Forms page on the Internal Revenue Service=s web site (IRS.gov). More information about the new schedule can be obtained from Revenue Procedure 2004-53.
II . PENSION PLAN LIMITATIONS FOR TAX YEAR 2005
ANNOUNCED BY THE IRS
On October 20, 2004, the Internal Revenue Service announced the various cost of living adjustments which will apply to pension plan limitations for 2005 tax year.
The dollar limitations on benefits and contributions for qualified retirement plans are delineated in Section 415 of the Internal Revenue Code. The majority of these limitations have statutory thresholds which, when met, allow for an increase in the applicable dollar limitation. Various cost of living adjustments announced by the IRS on October 20th have triggered many of these statutory thresholds. Therefore, many of the Section 415 pension plan limitations will be increasing for the 2005 tax year.
For a breakdown of the pension plan limitation changes for the 2005 tax year you may visit the IRS Newsroom at IRS.gov.
IRS OFFERS SMALL BUSINESSES NEW TOOLS TO HELP MANAGE RETIREMENT PLANS.
The Internal Revenue Service has recently introduced two new tools to help small businesses in their perpetual battle to keep retirement plans compliant with Federal tax law. The new tools are designed to help employers better understand the retirement plans which they implement and to stay up to date with current developments in Federal tax law. To aid small businesses in this pursuit, the Internal Revenue Service has introduced a suite of retirement plan Acheck-ups@ and an employer news letter.
The IRS encourages small business owners to review one of the three Acheck-ups@ to ensure that their IRA based retirement plans are compliant with Federal tax law. There are three check-ups which the IRS encourages small business owners to utilize: one for Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA; one for Simplified Employee Pension (SEP) IRA plans; and one for Salary Reduction Simplified Employee Pension (SARSEP) IRA plans. Each of the new check-ups created by the IRS is geared to one of the aforementioned retire plans, which are the most commonly operated plans by small businesses.
Each of the check-ups can be found on the retirement plans page on the IRS website (http://www.IRS.gov). The check-ups are designed to target the most frequently encountered problems by IRS examiners. Each check list has ten questions with plain language expressions of federal tax laws, advice on fixing problems, and links to further information
After a small business owner reviews the plan and completes the appropriate check list contained in the check-up, the small business owner may find an error in the operation of their plan. Any error that is discovered can most likely be corrected by using the Employee Plans Compliant Resolutions System (AEPCRS@). The EPCRS can also be found on the IRS=s website. The EPCRS allows business owners to correct retirement plan errors, many times without having to contact the IRS directly. This allows small business owners to continue providing employees with retirement benefits on a tax-favored basis.
In addition to the aforementioned tools, the IRS has also recently introduced three new components of EPCRS. The first new component is Self Correction Program (SCP), in which employers or plan administrators identify and correct problems with their plans without the requirement of notifying the IRS. The next component is the Voluntary Correction Program (VCP), in which corrections proposed by small business owners are submitted to the IRS for approval. Once the small business owners receive this approval, the employers then have written and reliable assurance that the IRS has approved their corrections. The final new component of EPCRS is the Audit Closing Agreement Program. This allows retirement plans to be corrected with IRS approval while the plan is under audit.
The second new tool offered by the IRS to aid small business owners with their IRA based retirement plans is a periodic newsletter entitled ARetirement News for Employers.@ Each newsletter strives to address the special concerns of small businesses with respect to the retirement plans that they maintain for their employees. The inaugural issue of the newsletter contains articles relating to re-employed military veterans and companies that they work for, new retirement plan products and upcoming events and expositions involving small businesses. Subscribing to the retirement newsletter for employers is free and can be downloaded from the retirement plans page on the IRS website.
In addition to the check-ups and newsletter now offered by the IRS, small business owners are encouraged to take advantage of all the other information and tools available on the IRS=s retirement plans web page. On that web page, small business employers will find a plethora of useful tax information for retirement plans, including information on 401k plans for small businesses, frequently asked questions about retirement plans, and a list of employment plan abusive tax transactions.
GRID COMPUTING HAS ARRIVED IN THE BUSINESS COMMUNITY AND BUSINESSES MUST BE AWARE OF LEGAL ISSUES TO PROTECT AGAINST LIABILITY
Implementation of grid computing is growing increasingly popular within the business community based upon its ability to achieve the necessary means of advanced computer capabilities at the desired end of cost efficiency. Grid computing is the term coined where one business (the provider) possesses excess computer capabilities and sells its surplus to a business (the customer) with fluctuating demand or insufficient monetary resources. The standard grid computing arrangement involves the customer transmitting raw data over a network to the provider and the provider in turn delivers processed data to the customer. The transmitting of business data over the internet raises legal issues for both the firm selling its data processing capabilities and the firm outsourcing the data processing capabilities.
The first legal implication of grid computing pertains to the personal information of third parties. For example, a medical provider may transmit medical records via the network to a provider for processing. Privacy laws such as HIPAA and confidentiality agreements may potentially expose a customer to liability for merely transmitting data. Customers should therefore secure permission from third parties before engaging in grid computing. Additionally, customers should insist contractually that the provider only utilize the data for processing and not retain the information for a different endeavor. The customer=s proprietary information is also an area of concern. Forwarding data over the internet to a provider affords third parties the opportunity to intercept the transmission. The security of a customer=s proprietary information should be safeguarded with contractual protections.
A customer should furthermore insist upon contractual protections such as asserting ownership of the unprocessed and processed data, prohibition from tampering with data or intermingling data with that of other customers.
The provider should equally insist upon contractual protections to legally safeguard its personal and proprietary information. A provider=s own information and that of a third party is likewise exposed to tampering by allowing customers access to its computer capabilities. The provider should contractually prohibit any activity beyond the scope of authorization, Moreover, the provider should insist upon privacy rules that impose restrictions on the collection of data as well as the use of data. For example, without such protections, a customer could easily monitor the provider=s computer network or install unauthorized software which has the ability to copy the provider=s data.
The provider should also be aware of the legal implications surrounding specific software that is provided by the customer to process the data. The provider should ensure that the customer possesses a valid software license and that use of the software is not outside the scope of the license. The provider risks intellectual property infringement for violating a software license or installing the software outside the scope of the licensing agreement. Likewise, the provider should ensure that processing customer data does not violate the existing software license agreements it currently possesses
Lastly, another potential legal liability involving grid computing is that certain data may fall within the domain of national security. This is especially critical in today=s global society and the war on terrorism. If a broker purchases data processing capabilities and leases it to a customer, the provider may not know the content of the data which is processed. The provider should take necessary measures to ensure conformity with domestic and international law.
There is very little statutory or case law pertaining to grid computing; however, the law continues to evolve as legal issues emerge. Without an expansive body of law, businesses must draft a conservative grid computing contract addressing the above addressed liability issues.
Michele L. Laski
February 2004
THE FEDERAL ANTI-SPAM LEGISLATION HAS GONE INTO EFFECT AND WILL PLACE NEW REQUIREMENTS AND RESPONSIBILITIES UPON BUSINESSES THAT UTILIZE E-MAIL FOR COMMERCIAL PURPOSES
On December 16, 2003, President George W. Bush signed into law the CAN-SPAM Act (s. 877), which went into effect on January 1, 2004. This anti-spam act is the federal government=s first foray into regulating the ever-growing problem of “spam”, or the practice of sending unsolicited commercial e-mails. This law was primarily in response to the nearly forty states that have already enacted their own anti-spam legislation. For the most part, the new federal law preempts and supercedes existing state laws and regulations.
It is important to understand that this new law contains language that is broad enough to theoretically apply to practically any business that utilizes e-mails for commercial purposes. The act defines “commercial e-mail message” as “any electronic message the primary purpose of which is the commercial advertisement or promotion of a commercial product or service.” As a result, it is strongly advisable that all businesses that utilize e-mail review the new law=s requirements. This will apply even to businesses that are not in the practice of bulk or mass mailing - which we more commonly associate with the term “spamming.” The law applies to e-mails regardless of whether they are sent from business-to-consumer or even business-to-business.
- The Anti-Spam law requires all such commercial e-mails to contain the following:
- Truthful header information.
- A specific method for opting out. In other words, there must be some sort of internet or e-mail tool available with which the recipient of the e-mail can effectively communicate to the sender in order to stop any further e-mailing.
- The business= physical postal address.
- Truthful and accurate subject lines.
- Clear and conspicuous notice that the messages are advertisements. (This is not required, however, to be in the e-mail=s subject line.)
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There are various types of e-mails that are specifically excluded. These include:- E-mails intended to facilitate a commercial transaction that the recipient previously agreed to.
- E-mails that provide warranty, product recall, safety, or security information with respect to a product used by the recipient.
- E-mails that notify the recipient of changes to a subscription, membership, account, loan, or comparable commercial relationship.
- E-mails that provide information related to an employment relationship or related benefit plan.
- E-mails that deliver goods or services, or product updates, that the recipient is entitled to receive under a previously agreed upon transaction.
The penalties for violating the new law can range from imprisonment of up to five years (for the most serious and fraudulent “spammers” to fines and damages. It is also vital to understand that businesses can even be held liable for the violations of a third party under certain circumstances. As a result, if your business has outsourced the task of marketing via the internet to another business, you are still responsible for the e-mails that tout your goods and services.
2003
November, 2003
- NON-PRESCRIPTION OVER-THE-COUNTER MEDICATIONS CAN NOW BE PAID WITH PRE-TAX DOLLARS THROUGH HEALTH CARE FLEXIBLE SPENDING ACCOUNTS.
On September 3, 2003, the Treasury Department and the Internal Revenue Service announced Revenue Ruling 2003-102 which allows reimbursement for non-prescription drugs by an employer sponsored health plan to be excluded from income. Health Care Flexible Spending Accounts allow individuals to reduce their taxable income by the amount of money set aside to cover medical expenses which they have incurred but which are not reimbursed by health insurance. The pre-tax money is used to reimburse the insurer for medical expenses that are not covered under an employee health insurance plan.
Prior to September 2003, over-the-counter drugs available without a prescription were not eligible expenses. As more drugs have become available without prescriptions, many health care providers have not covered the costs of such non-prescription drugs. As a result, the consumer incurs a greater expense when the cost of non-prescription drugs is greater than the co-pays for prescription drugs.
As a result of the Revenue Ruling, so long as non-prescription, over-the-counter drugs such as antacids, allergy medicines, pain relievers and cold medicines are used to "alleviate or treat personal injuries or sickness," they can be reimbursed in current Health Care FSA plans. Importantly, the cost of dietary supplements (e.g. vitamins and herbs that are merely beneficial to the employee's general health), cannot be excluded from income.
- BEGINNING IN JANUARY OF 2004, MORE BUSINESSES CAN TAKE ADVANTAGE OF THE STANDARD MILEAGE RATE.
In October, the Internal Revenue Service released the optional standard mileage rates to use for 2004 in computing the deductible costs of operating an automobile for business, charitable, medical or moving expense purposes.
The Internal Revenue Service also announced that, starting in 2004, taxpayers who use no more than four vehicles at the same time for business purposes may use the standard mileage rate. The law currently states that those using more than one vehicle at a time cannot use the standard rate at all, leaving them to track the actual expenses for each vehicle.
A taxpayer may not use the standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS), claiming a Section 179 deduction for that vehicle, or for any vehicle used for hire.
Beginning January 1, 2004, the standard mileage rates for the use of a car (which includes vans, pickups, or panel trucks) will be 37.5 cents a mile for all business miles driven (up from 36 cents a mile in 2003); 14 cents a mile when computing deductible medical or moving expenses (up from 12 cents a mile in 2003); and 14 cents a mile when donating services to charitable organizations.
Jennifer A. Hemming
August, 2003
For years now, a massive lobbying effort has been in place throughout New York State to change certain corporate tax laws, specifically, the so-called “Toys”R”Us” loophole. This loophole, named after the toy store giant, essentially allows major corporations which operate in New York State to avoid paying taxes by setting up subsidiaries in other states. This practice started in the mid-1980s and then exploded in the 1990s. Here is a brief description of how the loophole works: a large operating company, such as Toys”R”Us, would create subsidiaries, usually referred to as a passive investment company (PIC), in a favorable tax state such as Delaware. Once the subsidiary is established, the operating company would then transfer certain intellectual property such as patents or trademarks to that company. The subsidiary would then license these back to the parent company in New York State for a fee allowing these large corporations to reduce their New York State taxable income by deducting these transactions.
To demonstrate how big a problem this was, Nausau County did a study on some of the larger corporations that utilized this corporate loophole to their benefit. The study cited corporations such as Toys”R”Us, Home Depot, The Gap, The Limited, Radio Shack, Sherwin Williams and Tyson Foods. It was reported that together these companies produced $94.5 billion dollars in revenue over the years 1999 through 2001 but only paid a combined $1.15 billion in income taxes throughout the states they operated in.
On June 5, 2003, the supporters of a change in the law received a major boost in their campaign. The New York State Tax Appeals Tribunal, in a landmark decision which is certain to receive national attention, reversed an administrative law judge’s opinion in the case of In the Matter of the Petition of the Sherwin-Williams Company, DTA No. 816712. The Division of Taxation, in its decision, required Sherwin-Williams and two of its Delaware subsidiaries to file a “combined return” instead of separate company returns. This was the first time that New York forcibly combined an intangible holding company for tax purposes. In its 118 page decision, the Tribunal held that contrary to what the lower administrative judge held, there was no business purpose for the creation of these subsidiaries in Delaware other than mere tax avoidance. The decision stated that the reasons Sherwin- Williams set forth regarding the creation of these subsidiaries such as “improve quality control oversight” and “prevent hostile takeovers” were illogical and impractical. By forcing Sherwin Williams to file a combined return, New York State was allowed to essentially assess a tax on the nationwide operations of that company.
Supporters of closing this loophole estimate that anywhere from $200,000,000 to $400,000,000 can be saved by New York State per year. Corporations that had engaged in “inter-corporate transactions,” which distorted their reportable income, will no longer be able to avoid paying taxes. This Sherwin Williams decision sets the standard that unless a corporation can demonstrate a clear “business purpose” for creating these out-of-state passive investment companies, they will be forced to file a combined return. In these times of belt-tightening in New York State, a decision like this can relieve the burden that has fallen on the smaller business owner.
US HOUSE OF REPRESENTATIVES PASSES
SMALL BUSINESS HEALTH FAIRNESS ACT
On June 19, 2003, the United States House of Representatives passed HR-660 entitled “The Small Business Health Fairness Act of 2003.” This bill amends the Employee Retirement Income Security Act of 1974 (ERISA). This bill permits the establishment of “association health plans” which permits small businesses to purchase health insurance coverage for their employees through associations of several employers. Under this bill, associations that represent retailers, wholesalers, printers, agricultural employees and other groups could form large national or regional groups that could provide health insurance to their workers. Supporters of this bill pointed to the fact that under these AHPs, smaller businesses could increase their bargaining power with the larger health care providers giving them freedom from costly state mandated benefit packages. Critics of the bill countered with the argument that this bill exempts AHPs from state regulation essentially substituting federal oversight of health insurance instead of state oversight. The bill has recently been referred to the Senate Committee on small business and entrepreneurship.
May 2003
CONVERSION OF START-UP CORPORATIONS TO LLCS COULD PROVIDE TAX BENEFITS TO INVESTORS.
Due to the significant declines in values of C corporations compared to the cash and other property contributed to them, start-up technology C corporations may want to consider converting to an LCC. The investors may want the business to continue in hopes that it will prosper in the future and conversion to an LLC may be a viable entity for tax purposes. Because start-up corporations often need to attract additional capital, the benefits of the LLC may be the lure that these start-up companies need.
It may be an attractive option for tax planning purposes to convert corporations to an LLC, thereby providing significant tax benefits to investors. This may attract corporate investors who desire capital losses to offset capital gains. For individual investors, all or part of the loss could qualify to offset ordinary income. Additionally, subsequent operating losses of the LLC can be passed through to pre-existing investors and investors that make new or additional contributions. This pass through of operating losses is not available to stockholders in C corporations.
TIMING IN WHICH CORPORATION IS TERMINATED MAY BE HELPFUL IN ACHIEVING A MORE DESIRABLE TAX TREATMENT.
Upon terminating a corporation, there are several important factors to consider with regard to tax treatment. When considering termination of a corporate entity, the corporation should keep the following factors in mind: (1) the date of termination as it relates to the impact on return filing requirements; (2) evaluating the deductibility of accrued liabilities; (3) avoiding post-termination payments by shareholders; and (4) evaluating the impact of termination on the use of net operating losses.
If the corporation does not plan accordingly, a corporation may encounter some unexpected and undesirable tax consequences. Not only may a corporation lose ordinary income tax deductions, the corporation may have to file additional returns, and the timing of the income and expenses may not provide the best tax benefits. Additionally, an inactive corporation with losses should make sure that it is not considered dissolved so that it may consider alternative ways to use the losses in the corporation.
PRE-PAID FORWARD CONTRACT NOT TREATED AS CONSTRUCTIVE SALE.
IRS has ruled that a shareholder's pre-paid forward sale of appreciated stock of a public company is not a current sale under general principles and does not result in current income to the shareholder under Code Sec. 1259 ("constructive sales"). (Rev Rul 2003-5 IRB 363) Thus a shareholder can effectively "cash out" such a stock position without current tax, while retaining a certain amount of upside in the stock, as long as traditional indicia of continued ownership exist.
The important facts in the ruling were:
- Shareholder owned 100 shares worth $2,000 and agreed to deliver 100 or fewer shares to the "buyer" three years later (the Exchange Date); the buyer "paid" shareholder z dollars (let's assume, the present value of $2,000) when the parties entered the contract.
- The number of shares to be delivered on the Exchange Date will range from 80 to 100, with the number decreasing as the market price increases, so that the shareholder keeps the first 25% of appreciation, and any additional appreciation is split 1/5 to the shareholder and 4/5 to the buyer.
- To secure the obligation to deliver the shares, the shareholder deposits all 100 shares with an unrelated trustee, but retains the voting rights and dividends on the shares.
- On the Exchange Date the shareholder can substitute cash or other shares of the same corporation and reclaim the deposited shares.
- Although shareholder intends to deliver the pledged shares on the Exchange Date, he is not "economically compelled" to do so.
February 2003
SMALL BUSINESS OWNERS CAN MAXIMIZE RETIREMENT PLAN CONTRIBUTIONS BY UTILIZING A MINI 401(K)
Prior to the enactment of the Tax Reconciliation Act (EGTRRA) in 2001, small businesses did not establish 401(k) plans. It was more cost effective and profitable to establish a SIMPLE IRA or a SEP. If the company is comprised only of one employee, then it was more beneficial to fashion a company pay-all profit sharing plan. The enactment of the EGTRRA has small business owners rethinking how they construct retirement plans.
More small business owners are now erecting mini 401(k) plans for retirement. A mini 401(k) basically treats the employees as members of the owner's family. The mini 401(k) plan: (1) increases the elective deferral limit under Code Sec. 402(g) from $7,000 to $11,000 for 2002, $12,000 for 2003, $13,000 for 2004, $14,000 in 2005 and $15,000 in 2006 or thereafter; (2) increases the maximum amount of contribution from both the employer and the employee that can be made under an employer's defined plan on behalf of a participant for a limitation year from the lesser of 25% of compensation or $30,000 to the lesser of 100% or $40,000 and; (3) increases the deductible contribution that a company can make to a profit sharing plan under Code Sec. 415(c) from 15% to 25% of total eligible compensation.
The above changes result in the ability of small business employees to maximize contributions to a retirement plan. To illustrate, consider a sole employee making $20,000 who is looking to establish a retirement plan and is comparing a company pay-all profit sharing plan and profit sharing plan with a section 401(k) feature. If a plan without a 401(k) feature is established, the maximum deductible contribution that can be made to the plan is $5,000 (25% of income). With the 401(k), in addition to the $5,000 from the company, the employee could contribute up to $12,000 on a before tax basis for 2003. The employee's before tax contribution does not count towards the 25% deduction limit. The total contribution of $17,000 does not exceed the employee's Code Sec. 415 limit of $20,000, which is 100% of the employee's income determined before the reduction for before tax contributions.
HAS COURT OF PUBLIC OPINION CONVICTED CORPORATE AMERICA?
A recent survey of people eligible for jury service has corporate America rethinking its procedures. The Minority Corporate Counsel Association surveyed 1000 people eligible for jury service regarding their attitudes toward the corporate realm and then followed up with focus groups in five states. The survey revealed the following:
- Overall, 75 percent distrust corporations;
- 75 percent of white males distrust corporate America where historically this segment of the population were supporters;
- Potential jurors in the South and Northeast, regions rich in corporate allure, were more skeptical then jurors in the Midwest and West where corporate presence is less prominent;
- 85 percent feel that corporations hide product defects;
- 71 percent are more distrustful of upper level management then lower level employers;
- 87 percent of nonwhites still believe racial discrimination exists, while 71 percent of whites agreed.
The numbers are relatively high due to a feeling that corporate executives are greedy and lack accountability while at the same time they deem accountants as "crooked." Due to this overall feeling of distrust, those surveyed have issues with product safety, environmental awareness and job discrimination.
What does this mean for corporate America? The researchers argue that this survey does not mean that a corporation has to reach deep into its pockets and pay the amount demanded in the complaint. "To do otherwise would be the litigation tail wagging the business dog." The anger with corporate America has many corporations turning to alternative dispute resolution and implementing new protective standards above that required by the Securities and Exchange Commission (SEC).
To assure the credibility of its corporation, General Electric (GE) requires that two-thirds of its board members be independent where the SEC only mandates a majority. Moreover, GE requires a more stringent standard for independence. In the wake of Enron, GE also requires that a portion of the senior management's salary be in the form of stock and stock options must be held for at least a year. The SEC does not require such a measure or even address it for that matter.
2002
AGE DISCRIMINATION SUITS CAN BE WAIVED.
EEOC regulations which implement the Older Worker’s Benefit Protection Act allow employees to waive age discrimination claims in exchange for a severance package. The EEOC regulations contemplate both voluntary early retirement programs as well as involuntary layoffs.
The key provisions of the statutes and regulations mandate that, prior to signing a waiver, an employee must be provided with a listing of the ages and job titles of all other workers who are being laid off or who are eligible for early retirement, as well as list of all other workers in the same “class of employees” who are not being laid off or who are not eligible for early retirement.
However, an employer is not entitled to revoke an employee benefit, only to offer to replace it if the worker executes a waiver. Additionally, an employee cannot waive his or her right to sue for age discrimination that accrues after signing a waiver. Such would be the case where an employee is told that his or her job was eliminated but then later learns that a younger worker was hired in his or her place.
All employees must be given 45 days to consider whether to sign the waiver and are also afforded a 7 day recission period.
The proper drafting and language of the waiver are essential given that the entire waiver will be found invalid if one provision of the waiver is deemed to be invalid. The waiver agreement must be in writing, must advise the employee to consult a lawyer before signing, and must also specifically reference the Age Discrimination In Employment Act.
THE IRS HAS ISSUED SIMPLIFIED PER DIEM RATES FOR EMPLOYEE TRAVEL.
Reimbursement of an employee’s business travel costs at a per diem rate, which may include lodging, meals and incidental expenses, are payroll and income tax free, to the extent that they are properly substantiated and the daily rate does not exceed the federal per diem rate for the locality of travel.
Although the rates are identical to those in effect for the previous twelve months, the meals and incidentals portion of the per diem rates has changed slightly. The IRS has also changed the definition of incidental expenses, creating a new “incidental-expense-only” per diem for self-employed taxpayers and unreimbursed employees.
The revised incidental expenses, effective after September 30, 2002, have been interpreted to include:
1. Fees and tips given to porters, baggage carriers, bellhops, hotel maids, stewards or stewardesses and others on ships, and hotel servants in foreign countries;
2. Transportation between places of lodging or business and places where meals are taken, if suitable meals cannot be obtained at the temporary duty site;
3. Mailing costs associated with filing travel vouchers and payment of Government sponsored charge card billings.
Essentially, the definition of incidental expenses has been expanded to include taxi cab fairs.
STANDARD MILEAGE RATES FOR BUSINESS AUTO USE CUT TO THIRTY-SIX CENTS PER MILE FOR 2003.
The IRS has announced that the optional mileage allowance for owned or leased autos will be $.36 per mile for business travel as of January 1, 2003.
This represents a half-cent drop in the allowance previously permitted by the IRS. The primary reason given by the IRS for this change is the decrease in gas prices during the twelve month period ending on June 30, 2002.
This decreased rate may make it worth while for business owners to deduct actual expenses plus depreciation instead of using of the standard mileage rate.
August 2002
LESS PAPERWORK FOR SMALL CORPORATIONS
Starting with the 2002 tax year, the IRS will no longer require small
corporations to reveal balance sheet information or complete related reconciliations on their corporate income tax returns. The relief applies to corporations with less than $250,000.00 of gross receipts and less than $250,000.00 in assets. For example, on the regular corporate income tax return (Form 1120), these small corporations will no longer have to complete Schedule L (Balance Sheets per Books), Schedule M-1 (Reconciliation of Income Loss) (per Books with Income per Return), or Schedule M-2 (Analysis of Unappropriated Retained Earnings per Books).
IRS EXPLAINS HOW TO CLAIM OR ELECT OUT OF BONUS FIRST YEAR DEPRECIATION
The IRS has explained in detail how taxpayers claim or elect not to use the additional 30% first year depreciation deduction that applies for most types of depreciable tangible personal property (as well as some types of software and leasehold improvements) placed in service after September 10, 2001 and generally before September 11, 2004 (later, for certain classes of property). The new IRS guidance makes it clear that the additional first year depreciation deduction automatically applies to qualifying assets, unless the taxpayer elects not to use it. An election not to use the bonus depreciation allowance may be a good idea if a business has about-to-expire net operating losses, or anticipates being in a higher tax bracket in future years. The IRS also reiterated that the additional first year depreciation allowance applies for both regular taxing and alternative minimum tax (AMT) purposes, and generally is determined without any proration based on the length of the tax year in which the qualifying property is placed in service.
INDEFINITE MORATORIUM ON PAYROLL TAXES ON STATUTORY STOCK OPTIONS
The IRS has announced that it is extending a moratorium on payroll taxes on statutory options-incentive stock options-or options granted under an employee stock purchase plan indefinitely until it completes the review of comments on recent proposed regs and issues future guidance, which would apply only on a prospective basis. The IRS had earlier announced that statutory options would not trigger FICA or FUTA tax, or income tax withholding before 2003.
FINALIZED RULES ALLOW MORE BUSINESSES TO USE THE CASH METHOD OF ACCOUNTING
The IRS has finalized proposed rules issued in 2001 permitting businesses with average annual gross receipts of up to $10,000,000.00 to use the cash method of accounting (instead of the accrual method) if their principal business activity is providing services, or the fabrication or modification of non-realty property in accordance with customer designs or specifications. The business cannot, however, engage in mining, manufacturing, wholesale or retail trade, or information industries as its principal business activity. Additionally, the relief does not apply to businesses that are C corporations (or partnerships with C corporation partners) having average annual gross receipts over $5,000,000.00, unless they are personal service corporations or farming businesses.
WEIGHT LOSS PROGRAMS MAY BE DEDUCTIBLE
The IRS has ruled that the un-reimbursed cost of participating in a weight loss program as treatment for a specific disease or diseases (including obesity) diagnosed by a physician qualifies as a medical care expense. The cost of diet foods, however, is not deductible. Individuals who might otherwise join a weight loss program to improve their general health or appearance should first be examined by a physician to see if there is a medical reason for participating, such as to aid in alleviating hypertension, reducing high cholesterol, or combating diabetes. If a medical reason exists, and is documented in a written report from the physician, the cost of the program may be deductible. Note that medical expenses, including qualifying weight loss expenses, are deductible only to the extent that they cumulatively exceed 7.5% of adjusted gross income (AGI). Individuals who participate in a company sponsored medical flexible spending account may obtain a reimbursement from the account for qualifying weight loss expenses.
COUNTRY CLUB CORPORATION DISCOUNT TO SHAREHOLDERS TREATED AS DIVIDEND
It is common for suburban, leisure home, or retirement area country clubs organized as corporations to give their shareholders a discount on dues, fees, and restaurant purchases. Now the IRS has ruled privately that the excess of the fair market value of the goods and services purchased by the country club shareholders, less the amount paid for them, is a taxable distribution to participating shareholders to the extent it constitutes a dividend. A dividend is a distribution of property by a corporation to its shareholders with respect to its stock, out of accumulated or current earnings and profits.
May 2002
THE FORMATION OF LIMITED LIABILITY
COMPANIES MADE SIMPLER AND LESS EXPENSIVE.
Over the last decade, the limited liability company has grown increasingly popular as an alternative to the S corporation. Limited liability companies combine the advantages of a corporation, i.e. limited liability, with the tax advantages of a partnership. Although a separate corporate entity, profits and losses from a limited liability company pass through to its members individual tax returns, rather than incurring any tax at the corporate level.
While seemingly interchangeable with minor differences, the limited liability company has always been more expensive to establish. While having similar filing fees to a corporation, Limited Liability Law § 206 requires publication of notice of the formation of the limited liability company for six successive weeks in two newspapers in the county in which the office of the limited liability company is located. The published notice must include essentially all of the information which is filed with the Secretary of State on the limited liability companys articles of organization. Publication of such a lengthy legal advertisement for six weeks in two newspapers can be quite costly. In Western New York, the costs range from $500 to $800. Downstate, the cost could be as high as $1,500 to $2,000. While a limited liability company failing to publish the necessary notice does not cease to exist as a corporate entity, the limited liability company can not commence a lawsuit in New Yorks courts until it has complied with the publication requirement.
The owner of a real estate company in the greater New York area challenged the publication requirement, stating that the publication requirement serves no useful purpose and violates the state and federal constitutions. The Supreme Court in New York County agreed in Barklee Realty Company, LLC v. State of New York, index number 120546/99 (2001). Stating it is doubtful that any potential defendant in a lawsuit commenced by a limited liability company would be perusing classified ads on a regular basis to ensure he or she was informed as to the organizing information of a newly formed limited liability company, the publication requirement was found to be unconstitutional. With the Barklee decision, limited liability companies are now as easy and inexpensive to form as S chapter corporations.
The State of New York has appealed the Barklee decision so stay tuned for further developments
THE PROPERTY CONDITION DISCLOSURE ACT BECAME EFFECTIVE MARCH 1, 2002, ALTERING THE LIABILITY OF SELLERS OF RESIDENTIAL REAL ESTATE.
The rule in New York has long been that a seller of residential real estate can only be held responsible by the buyer of that real estate for defects in the property learned after closing if it is established that those defects were known by the seller and affirmatively concealed by the seller. That rule has now been changed with the enactment of the Property Condition Disclosure Act which became effective March 1, 2002. Sellers of residential real estate are now required to complete a lengthy questionnaire disclosing items in the sellers knowledge regarding the condition of the physical structure on the property, environmental information including the presence of asbestos, lead and fuel storage tanks, and legal information including easements and title issues.
The buyer is entitled to rely upon the information disclosed on the questionnaire completed by the seller. If the seller provides inaccurate information, the purchaser will then have a cause of action against the seller for breach of contract. If the seller fails to provide the required disclosure statement, the purchaser is entitled to a $500 reduction in the purchase price at the time of closing. Thus, sellers of real property must determine whether the added risk of a breach of contract action is worth the $500 penalty at the time of closing. As a new requirement, there is no case law interpreting the requirements of the Disclosure Act, or breach of contract actions based upon an inaccurate disclosure.
Matthew A. Lenhard
February 2002
A REFRESHER ON EMPLOYER OBLIGATIONS TO
EMPLOYEES CALLED FOR MILITARY DUTY
As a result of recent world events, many employers face the situation of employees being called for military service. These employees are most likely covered by the Uniformed Services Employment and Re-employment Rights Act (USERRA). A quick refresher might be helpful for employers to understand their rights and responsibilities toward these employees. The USERRA is very broad in scope. If an employer pays employees for work or has control over the employment status of an individual, that employer generally falls under the scope of the USERRA. Employees covered by the USERRA include any individual on active or inactive duty, including training and fitness examinations. These individuals must be called to duty by the US Armed Forces, Army National Guard, Air National Guard, commissioned corps of the Public Health Service, or anyone else designated by the president during war or emergency. As you can see, almost any employee called for service for almost any reason is protected.
Upon return from service, an employee is entitled to re-employment if the employee gave advance written or verbal notice of the call to duty to the employer, if it was reasonable to do so; the cumulative length of absence from the particular employer does not exceed 5 years, although exceptions do apply; and the employee promptly returns to work upon completion of service or submits an application for re-employment within 14 or 90 days after the completion of service, depending on the individuals length of service away from the employer.
Of course, an employer is not without rights and protections. For example, an employer is not required to re-employ a returning service person if the employers circumstances have so changed to make re-employment unreasonable or if re-employment would impose undo hardship on the employer. Further, an employer is not required to re-employee an employee if the position which the employee leaves is for a brief, non-recurrent period and there is no expectation that the position would continue indefinitely or for a significant period of time. Finally, an employer is not required to offer re-employment to an employee if the employer had a legally sufficient cause to terminate the employee at the time the employee left for service.
If the employee was called to service for less than 91 days, the employee must be reinstated to the position that would have been attained had employment not been interrupted, if the employee is qualified for that position or becomes so after reasonable efforts by the employer to qualify the employee. If the employee does not become qualified, the employee shall be put into any other position for which he or she is qualified to perform which is most like the position for which he or she was unable to qualify. For example, if an employee was on a track for a promotion, but was called to active service before achieving the promotion, upon return from service that employee would be entitled to resume at the promoted position. If the employee was not qualified for that position, the employer must make reasonable attempts to qualify the individual for that position. If unable to do so, the employer must offer that employee a position for which he or she is qualified, which is most like the promoted position.
An employee is also entitled to certain rights and benefits during the period for which he or she is called to active service. An employer is required to pay a service member while on leave if the employer pays employees for non-military leaves. Even if the employer does not pay employees for leaves, an employee called to service is entitled to use any accrued leave benefits. An employer is required to offer continuation of health insurance coverage for up to 18 months. The employer cannot require an employee to pay more than his or her normal share for that coverage if the employees service does not exceed 31 days. However, if the service does exceed 31 days, the employee may be required to pay up to 102% of the full premiums, similar to COBRA. Further, an employee is entitled to benefits and rights that he or she would have obtained if employment had not been interrupted, such as seniority rights.
States are free to offer employees further coverage beyond the USERRA. In fact, New York State does offer protection for employees beyond that offered by the USERRA. For example, there is no maximum period of leave and employees have a full 90 days after completion of service to re-apply for employment, regardless of service length. Also, New York State imposes a one year prohibition against discharge, except for cause, for employees returning to work.
The recent increase of individuals called to active service makes it necessary for employers to be aware of their rights and obligations towards employees called for service. The preceding generally outlines some of these rights and obligations, although the list is not exhaustive. As an employer, you may have additional rights or be subjected to further obligations.
AGREEMENT WITH GOVERNMENTAL AGENCY
MAY CREATE UNINTENDED RIGHTS FOR EMPLOYEES
A clothing manufacturer signed an agreement with the United State Department of Labor. The agreement stated that it would contract work out only to factories that met certain legally minimum standards for wages and work conditions. The clothing manufacturer then contracted with various factories to produce its clothing line. Unfortunately, these factories did not pay their employees legally sufficient wages. The employees from these factories sought to collect back wages and other damages from the clothing manufacturer.
Typically, in order to have a right to sue, the employees would either have to have signed an agreement with the clothing manufacturer or be specifically named as a beneficiary in the contract that the clothing manufacturer signed with another. Neither of these scenarios existed in the present matter. However, the judge in Chen v. Street Beat Sportswear, Inc., 01-CV-9792, found that the agreement between the clothing manufacturer and the United States Department of Labor was made contemplating the protection of the employees who might make clothing for the clothing manufacturer. As such, the judge found the factory employees to have third-party beneficiary status and allowed them to proceed with their suit against the clothing manufacturer.
It appears that businesses must be careful in any and all agreements they sign, not just because of what the agreements contain, but also because of rights that the agreement may grant to others. If an agreement appears to be created for the benefit of a certain party or parties, a court may find that those parties may have certain rights owed by a business, even though the business and the parties never directly contracted with each other.
Scott W. Kroll
2001
NOVEMBER 2001
STANDARD MILEAGE RATE FOR BUSINESS AUTO USE
RISES TO 36.5 CENTS PER MILE FOR 2002.
The IRS has announced that the optional mileage allowance for owned or leased vehicles will be raised to 36.5 cents per mile for business travel as of January 1, 2002. This marks a two cent increase. This rate change was made necessary by the rise in gasoline prices during 2001.
This also marks the second time that the standard mileage rate for business travel has increased by two cents per mile.
The mileage allowance deduction replaces separate deductions for lease payments (depreciation), maintenance, repairs, tires, gas, oil, insurance and license/registration fees. Deductions for parking fees and tolls may still be claimed separately.
THE IRS HAS ANNOUNCED TERRORIST ATTACK TAX RELIEF
AND HAS ISSUED A LONG LIST OF ACTS WHICH MAY BE POSTPONED.
Following the September 11, 2001 terrorist attacks, the IRS announced a variety of tax relief measures for taxpayers affected by or living in the declared disaster areas, including victims of the crash, relief workers and those employed within a disaster area.
The IRS has issued Rev Proc 2001-53, which provides a list of time sensitive acts which may be postponed. This list also applies to members of the armed services serving in a combat zone. The acts and elections which may be postponed by a taxpayer are organized under the following headings:
- Accounting methods and periods;
- Business and individual tax issues;
- Corporate issues;
- Employee benefit issues;
- Estate, gift and trust issues;
- Exempt organization issues;
- Excise tax issues;
- International issues;
- Partnership and S corporation issues;
- Procedure and administration issues;
- Bankruptcy and collection issues;
- Information returns;
- Miscellaneous;
- Tax credit issues;
- Tax exempt bond issues.
Accordingly, the IRS has also given itself additional time to perform certain acts which correspond to the postponements given to a taxpayer under the provisions referenced above.
THE IRS PERMITS A DEDUCTION FOR A CHARITABLE
DONATION OF A REBATE RECEIVED THROUGH A WEBSITE PURCHASE.
Recently, an IRS ruling dealt with a retailing website which allowed its customers to either receive a rebate in cash or to donate it to a charity. The IRS has determined that a taxpayer, who chooses to have his rebate paid to a charity, is eligible to claim a charitable contribution in the year that the rebate was turned over to the charity. The rebate will not have to be included as income.
A charitable rebate program enables a for-profit company to allow its customers to enter its website, and upon purchase of an item, receive a rebate which they may either donate to a charity or receive in cash.
The rebate qualifies as a charitable contribution under Internal Revenue Code §170. Under the tax code, the key element in determining whether the rebate may be considered a charitable donation, and therefore deductible, is if the taxpayer has been given the choice of either donating the rebate or having it paid to himself.
The taxpayer can only claim a charitable contribution deduction for the tax year within which the retailer transfers the taxpayers rebate to a charity, as opposed to the year in which the taxpayer purchases the item from the retailer.
August 2001
NEW YORK ADOPTS ELECTRONIC SIGNATURES
AND RECORDS ACT.
New York State has adopted a law which authorizes electronic signatures on all but a few forms of legal documents. Chapter 57(a) of the State Technology Law was signed into law by Governor Pataki. This law took effect as of March 26, 2000.
This law permits binding contracts to be made using a unique electronic identifier in place of a traditional signature on paper. This identifier must be unique, under the sole control of the signer, capable of verification, associated with data in such a way as to authenticate its attachment, and be intended as a signature. The key provision is §105(3) which states: An electronic record shall have the same force and effect as those records not produced by electronic means. Section 103 designates the States Office of Technology as the electronic facilitator, and it is given the authority to promulgate rules and regulations for the use of electronic signatures. Four kinds of documents are excluded by §107. These documents are (1) wills, trusts, powers of attorneys and healthcare proxies; (2) negotiable instruments or other documents whose possession confers title, unless the instrument can be created in a unique electronic version which is identifiable and unalterable; (3) conveyances or other instruments to be recorded under Real Property Law Article 9; and (4) any other document the electronic facilitator has expressly excepted by rule and regulation. Section 106 of this law further provides that any electronic record or electronic signature is admissible in evidence under New York CPLR Article 45.
BANKRUPTCY REFORM ACT NEARS COMPLETION.
The long standing attempt at reforming the nations bankruptcy laws is expected to be signed into law by President Bush as early as Labor Day of this year. While there are different versions of this bill between the House and Senate, it is believed that such differences are slight and will not provide an impediment in the bill being passed into law. One of the main differences relates to the homestead exemption which involves how much home equity a debtor can shield from creditors. The Senate voted to allow debtors to shield only $125,000.00 of their home equity while the House bill leaves homestead exemptions up to the respective states. In the case of the State of Florida, the entire value of a debtors home is exempt from creditors claims. The State of New York currently allows a homestead exemption of up to $10,000.00. Both the House and Senate versions establish a means test for consumer bankruptcies that would force individuals who have the capacity to pay back some of their debts to do so through Chapter 13 instead of wiping their slates clean through Chapter 7. It is widely agreed that, if the bill becomes law, bankruptcy filings are expected to soar in the months before it goes into effect.
John R. Condren
May 2001
For those of you who owed tax on last year's return, or who received a substantial refund, and how to avoid giving the IRS a "loan" this year, here is how you would benefit from a mid-year meeting with your tax professional.
It's not a major disaster if you owed Uncle Sam some money when you filed your return after all, you'd rather have use of the funds for as long as possible. But what you want to avoid is having to pay the IRS a penalty for underpaying your taxes during the year. If you owe the estimated tax underpayment penalty, which is nondeductible, you're in effect paying the IRS interest for part of the money you should have prepaid during the year for taxes, but didn't. On the other hand, if you got a big refund on last year's return, you made an interest-free loan to the government, something you may want to avoid this year. If that happened, you should consider reducing the amount of withholding taken from your salary and/or the amount of estimated tax payments your make.
Here are some pointers to keep you on even keel when it comes to estimated taxes.
Basic Rules. There is no estimated tax underpayment penalty if the total tax on your return reduced by withholding (but not by estimated tax payments) is less than $1,000.00. If the amount owed on an individual income tax return comes to $1,000 or more after subtracting withheld tax, the estimated tax underpayment penalty generally won't apply if your "required annual payment" the amount that must be prepaid during the year in the form of withheld tax and estimated tax payments equals at least the smaller of two amounts: (1) 90% of your tax bill for 2001, or (2) 100% of your tax bill for 2000 For example, let's suppose your tax bill (after taking a credit for withholding) for 2000 was $12,000, and your tax bill for 2001 will come to $15,000 (90% of that is $13,500). In this case, you must prepay at $12,000 of your tax bill during 2001 to avoid the underpayment penalty. On the other hand, if the tax you will owe for 2001 after withholding will only be $10,000, you will have to make timely estimated tax payments of only $9,000 for 2001 to avoid the penalty.
A tougher rule applies if your adjusted gross income for 2000 exceeded $150,000 ($75,000 for married persons filing a separate return). During 2001, you must prepay the smaller of (1) 90% of the tax for 2001, or (2) 110% of the tax for 2000. This is different from the rule that applied for 2000. Last year, the required annual payment for higher-income earners was the smaller of (1) 90% of the tax bill for 2000, or (2) 108.6% of the tax for 1999. Thus, if you are in the higher-income category and "prepay" the same minimum amount as you did last year, you could wind up owing a penalty.
It's a pay-as-you-go-system. In general, one-quarter of your required annual payment must be paid by April 16, 2001, June 15, 2001, September 15, 2001, and January 15, 2002. Keep in mind that tax withheld from your salary is treated as an estimated tax payment, and that an equal part of withheld tax generally is treated as paid on each installment date.
You should also review whether changes in your personal or financial situation require a change in estimated tax payments or withholding. For example: ...If one of your children graduated college in January and is working and supporting himself, you will have one less dependency exemption deduction for the year and may need to file a new W-4 to increase withholding.
...If you anticipate having large capital losses due to the recent stock market decline, you should keep in mind that those losses can offset capital gains plus up to $3,000 of ordinary income. That could mean smaller estimated tax payments than you made in the past.
...If you've shifted significant portions of your non-IRA stock market portfolio into money-market accounts, you may have significantly higher amounts of interest income than last year, possibly requiring higher estimated tax installments to be made.
HOUSE PASSED STATE TAX REPEAL BILL
The House of Representatives on April 4, 2001 adopted H.R.8, "the Death Tax Elimination Act of 2001" by vote of 274 to 154. This bill provides for $185.6 billion in tax relief over ten years and would reduce the estate, gift, and generation-skipping transfer rate beginning in 2002, and fully repeal the estate tax beginning in 2011.
February 2001
IRS CONSIDERING NEW REGULATIONS ON ELECTING SMALL BUSINESS TRUSTS AS S CORPORATION SHAREHOLDERS
The IRS is currently working towards finalizing new regulations pertaining to the taxation of Electing Small Business Trusts (ESBT). If finalized, the new regulations would be effective for tax years of ESBTs that end after December 27, 2000.
The Small Business Job Protection Act of 1996 created the ESBT, a new type of trust that may be a shareholder of an S corporation. An Electing Small Business Trust is a type of trust that does not have a beneficiary other than an individual, an estate, or certain charitable organizations. Electing Small Business Trusts cannot have stakeholders which acquired their interest by purchase. Also, an election must be made for a trust to qualify as an Electing Small Business Trust. In Electing Small Business Trusts, each potential current beneficiary is treated as a shareholder for purposes of determining whether a corporation qualifies for S status. During periods when there is no potential current beneficiary, the trust is treated as the shareholder.
The proposed regulations on the ESBTs are intended to define any unclear regulations which currently apply to ESBTs, and to provide further guidance in other areas concerning the Electing Small Business Trusts. The proposed regulations would provide guidance as to who is an ESBT beneficiary, replacing the former, ambiguous regulations in this area. The IRS also looks to further explain the bar against acquiring an interest in an ESBT by purchase, and the new regulations will permit a grantor trust to be an ESBT. Other goals the new Electing Small Business Trust regulations will accomplish include defining the potential current beneficiary as any person who at any time during the period is entitled to, or at the discretion of any person may receive, a distribution from the principal or income of the trust. The IRS also looks to establish a unified procedure for making an ESBT election. Under these new regulations, the trustee would make a single ESBT election by filing a single statement with the same IRS office where the ESBT currently files its 1041 form. This single filing will obviate the need under the current regulations to make a separate ESBT election with respect to each S corporation the trust holds stock in.
The new Electing Small Business Trust regulations proposed by the IRS would also establish a new, simpler procedure for converting a qualified sub-chapter S trust to an Electing Small Business Trust. The new ESBT regulations would also clearly explain how ESBTs are taxed in situations where the ESBT consists of an S portion, a non-S portion, and in some instances a grantor portion. Finally, the proposed Electing Small Business Trust regulations would provide that a trustee would have to seek IRS approval before revoking an ESBT election by obtaining a private letter ruling, and would define circumstances under which an Electing Small Business Trust would be considered terminated.
UNDER PRESIDENT GEORGE W. BUSH, A BROAD BASED TAX CUT IS PROPOSED
President George W. Bush has expressed his concerns about a possible recession, and has vowed to combat an economic slow down with his tax cut plan. In reference to the state of our nations economy and the possibility of a recession, the President stated, "I am concerned that there are some warning signs on the horizon. I am worried about an economic slow-down and I believe it is important for us to insure against any economic slowdown by a responsible tax relief package." President Bush has told the press that he believes the evidence is growing more and more clear that the economy is not as strong as government officials had thought. The president stated that he hopes that this evidence of a slowing economy will strengthen his case for a tax cut. Bushs proposal calls for a tax cut ranging from $1.3 to $1.6 trillion over the fiscal 2002-2011 period. The Presidents tax cut proposal has met some resistance from Democrats who argue the tax cut would disproportionately benefit the wealthy when it should be focused upon relief for the middle class.
The President believes that approximately 25% of the nations surplus should, and could be returned to the people through his proposed broad based tax cuts. President Bush believes his plan will promote economic growth nationwide. A tax cut may be just what the economy needs during a period when federal taxes are the highest they have ever been during peace time. Currently, the average American family pays nearly 40% of their income in taxes after accounting for all federal, state and local taxes, more than twice the rate paid by the average family in 1955.
Among other changes, President Bushs tax plan would seek to encourage entrepreneurship and business growth by lowering the maximum tax rate from its current 39.6% to 33%, by eliminating the death tax, and by making the research and development tax credit permanent.
Thomas A. Nyitrai
2000
November, 2000
IRS PERMITS EMPLOYER REIMBURSEMENT OF PARKING EXPENSES AS A FRINGE BENEFIT NOT INCLUDED IN THE INCOME OF THE EMPLOYEE
The IRS has recently amended its code to permit employers to reimburse their employees for parking expenses associated with commuting to work without the employee incurring a tax liability, even if the reimbursement is offset against the employees salary. In other words, employees may now pay for their parking expense out of pre-tax dollars which would reduce their parking expense by perhaps upwards of 30% depending on the employees tax bracket. Such a perk provided to employees is most properly called a qualified transportation fringe benefit.
Internal Revenue Code §132(f)(4) was amended in 1998 to permit an employee to receive a cash reimbursement for parking expenses, in lieu of a portion of their salary, without that amount being considered part of the employees gross income for determining that employees tax liability. Previously, that section had held that employers could provide as a fringe benefit reimbursement of transportation and parking expenses, but the employer could not consider that part of the employees compensation. Thus, the transportation or parking expense reimbursed by the employer would be at the sole expense of the employer and not effect the earnings of the employee. Obviously, there was little incentive for employers to institute such a program as it was solely at their expense.
Under the new code, an employer may reimburse an employee out of the employees salary up to $65.00 per month for the expense of using a commuter highway vehicle, meaning a vehicle with a seating capacity of at least seven adults, $100.00 per month for the employee to purchase a transit pass, or $170.00 per month for qualified parking expense. Qualified parking simply means any such parking expense incurred in parking on or near the business premises of the employer, so long as that parking is not also used by the employee for residential purposes.
Therefore, employers may now offer to their employees the option of paying for their transportation or parking expenses out of pre-tax dollars. There should be little added administrative expense for the employer inasmuch as the employee still controls the parking lot to be used, pays that entity directly, and simply seeks reimbursement from the employer which can then be used to offset the employees salary.
THE TAX ADVANTAGES OF A LIFE INSURANCE TRUST
Closely held business owners have long used life insurance to provide liquidity at the time of their death to enable their beneficiaries, often children or other family members, to continue operation of the business, or buy time until a suitable purchaser of the business can be located, to prevent a fire sale. While life insurance proceeds are generally income tax free to the beneficiary, often times, they can be subject to estate tax, which could have the effect of reducing their value of up to 50 percent. Estate taxation of life insurance can be completely avoided by transferring ownership of the policy to a trust.
Internal Revenue Code §2042 states that if a life insurance policy is owned by the insured at death, or is payable to the insureds estate, the policy proceeds are to be included in the insureds estate for estate tax purposes. If, however, the life insurance is owned by a third party at the time of the insureds death, and the insureds estate is not named the sole beneficiary of the policy, the life insurance proceeds will not be included in the insureds estate. The insured must not retain any incidents of ownership (generally meaning the ability to change the beneficiary, take a loan against the policy, etc.) and ownership of the policy must be transferred to the third party at least three years prior to the insureds death. The life insurance proceeds will then escape estate taxation.
Rather than transferring ownership of a life insurance policy to a minor child or a spouse, the life insurance trust is an attractive option. Ownership in the insurance policy can be transferred to a trust permitting the trustees to name beneficiaries, borrow against the policy to pay policy premiums, borrow against the policy to purchase other life insurance policies on the life of the insured, or otherwise manage the benefits of the policy itself. To escape estate taxation, the transfer to the trust must be irrevocable.
The insured may name his or her spouse as a beneficiary of the trust without the life insurance proceeds ever being included in that spouses estate for tax purposes either. The dispositive terms of the trust can be identical to those in the insureds will. In other words, the insured can still control at the time of the transfer to whom the life insurance proceeds will benefit.
One caveat: if the person establishing the trust also transfers to the trust income producing property, and that income, or dividends or loans against the life insurance policies themselves, are used to pay the premiums of the insurance policies transferred to the trust, any income tax liability would remain with the grantor establishing the trust. Therefore, the grantor, while giving up the right to control the assets contained within the trust, may still have some tax liability. Generally, however, life insurance policies do not generate income that would be taxable.
Matthew A. Lenhard
August, 2000
I
BUSINESS OWNERS SHOULD CONSIDER THE USE OF WRITTEN CONTRACTS MANDATING PERSONAL LIABILITY WITH RESPECT TO BUSINESS TRANSACTIONS.
Numerous businesses have taken to a widespread use of credit agreements in situations where a number of transactions between the business and one specific client are expected in the future. An example of such a scenario is a car parts store that sells its goods to repeat customers, whether they be individuals or small businesses, by utilizing a credit agreement. The customer receives the car parts without paying cash on delivery. Instead, a credit account is charged and usually paid off by the customer on a periodic basis.
Unfortunately, a number of the customers fail to pay for the services rendered and default on the credit agreement. In this scenario, the business owner is forced to sue its customer to recover for the unpaid services. In cases where the customer is a small business or corporation, the chances of recovering against the owner of that defaulting business are minimal unless the credit agreement provides for personal exposure of the business owner if a collection action is necessary. It is therefore imperative to include within the credit agreement a provision mandating personal exposure in case of nonpayment. Provisions for interest (up to 24% per year) and attorneys fees should be included thereby insuring that they may be recovered in case a collection suit is commenced. These simple steps maximize the chances of recovery for the business owner.
II
THE ISSUE OF NOTICE OF A DEFECT IS CRUCIAL WITH RESPECT TO LIABILITY OF BUSINESS OWNERS FOR ACCIDENTS OCCURRING ON THEIR PROPERTIES.
Generally, before business owners and land owners are liable for injuries sustained on their properties, the plaintiffs must show that the property owner had actual or constructive notice of the defect. While a property owner may be liable for injuries resulting from a dangerous condition where the land owner has notice of the condition, the land owner cannot be held liable if it had no notice that a dangerous condition may be present on their properties.
A recent case of Smith v. May Department Store, 705 N.Y.S.2d 153 (4th Dept. 2000) is illustrative of this concept. In that case, the plaintiff slipped and fell on a wet floor just inside the entrance of the defendants store. After the action was commenced, the defendant asked the judge to dismiss the plaintiffs case arguing that it had no notice of the wet floor prior to the accident. The defendant submitted proof that the store manager inspected the entrance where the accident occurred prior to the accident and did not notice any moisture on the floor.
The court agreed with the defendant holding that the plaintiffs claims should be dismissed since the defendant had no actual constructive notice of the moisture prior to the accident. The court held that a constructive notice is proven where the defect is visible and apparent for a sufficient length of time prior to the accident to permit the defendants employees to discover and remedy it. Although the store manager was aware that it had been raining, a general awareness that a dangerous condition may be present is insufficient to constitute notice of the particular condition that caused the plaintiffs fall.
This case illustrates the important concept that land owners and business owners may be liable for accidents that occur on their properties only if they have notice of the defect that caused the accident. It is therefore imperative for business owners and their staffs to frequently monitor the condition of the premises to insure that no defects exist. If such defects are found, they constitute notice to the business owner, and should be therefore remedied in an expeditious manner in order to limit potential liability to the business or the land owner.
III
LIABILITY OF LANDLORDS FOR INJURIES RESULTING ON THEIR LEASED PREMISES.
The law mandates that an out-of-possession landlord is generally not liable for injuries resulting from a defect on the leased premises unless the landlord retains control of the premises. The basic concept is that the out-of-possession landlord will not be liable for accidents that occurred on their property unless the landlord takes an active role in maintaining or controlling the property which has been leased to another party.
The recent case of Mikolajchyk v. M.C. Morgan Contractors, Inc., 709 N.Y.S.2d 283 (4th Dept. 2000) is illustrative of this concept. In that case, the owner of the premises leased the entire property consisting of three buildings and a number of walkways to another business. The plaintiff then slipped and fell on the snow covered ice on a walkway located on the leased property. The plaintiff thereafter sued the owner of the property as well as the party to whom the property was leased.
The business owner requested that the court dismiss the plaintiffs claims against him arguing that a landlord should not be liable for injuries resulting from a defect on leased premises. The Appellate Court disagreed holding that there was evidence that the land owner was often present on the premises and would occasionally use salt and remove snow from the walkways located on the premises. There was also evidence that within years prior to the plaintiffs accident, the owner would clear the walkways and the parking areas during the winter months. This evidence sufficed to allow the court to conclude that the out-of-possession landlord may be liable for the plaintiffs injuries as he retained control of the premises through the periodic snow removal.
The moral of this case is that out-of-possession landlords may drastically increase their legal exposure by taking an active role with respect to the maintenance and control of the leased premises. Although it seems counterintuitive, an out-of-possession landlord may in fact lower potential liability by taking a hands-off approach and allowing the party that leases the property to maintain and control the premises.
May 2000
CYBERSQUATTING: THE LATEST FORM OF TRADEMARK INFRINGEMENT
What is Cybersquatting? Cybersquatting is committed when an individual registers an Internet domain name to which he or she has no connection. For example, an individual would be Cybersquatting if he or she registered the domain name ESPN.com, where it is evident that the individual has no connection to ESPN. Apparently, Cybersquatting has been a problem on the Internet ever since its inception.
The Anti-Cybersquatting Law was enacted as part of the 2000 federal budget. Prior to this laws enactment, individuals who have registered domain names that were the same as or close to trademarks could, under certain circumstances, keep the domain name. Prior to this laws enactment a trademark owner could only stop a domain name registrant from using a domain name only if the Cybersquatter used the domain name to promote goods or services.
Trademarks exist to facilitate commerce by prohibiting anyone other than the owner of the trademark from using a similar mark or similar product. Domain name speculators would buy the rights to a domain name so that no one else could use it. In December, 1998, Mobile and Exxon announced their merger. Shortly thereafter, an individual registered several variations on the company name including mobile-exxon.com, exxon-mobile.com, etc. The goal of these domain name speculators would be to ask the rightful trademark owner to pay a hefty sum for the rights to the domain names already registered to the individual.
Prior to the Anti-Cybersquatting Laws enactment, it was difficult for a trademark owner to prove trademark infringement in order to get the domain name. As long as the domain name registrant did not put up a web page under someone elses trademark, the name was not interpreted as being used in connection with goods or services. In this circumstance, the trademark owner would be forced to pay the domain name registrant a fee for the right to engage in electronic commerce under its own brand name or opt for a different domain name.
If the Cybersquatter does not offer anything for sale, his or her use of the domain name would not constitute a trademark infringement. Basically, if no one would perceive that the Cybersquatter was the same entity as the trademark owner or was an entity approved by the trademark owner, then no trademark infringement would exist.
This new legislation has leveled the playing field. The purpose of the Anti-Cybersquatting Consumer Protection Act is "to protect consumers in American businesses, to promote the growth of on-line commerce, and to provide clarity in the law for trademark owners by prohibiting the bad faith and abusive registration of distinctive marks as Internet domain names with the intent to profit from the good will associated with such marks" in order to prevent "the erosion of consumer confidence in brand name identifiers and in electronic commerce generally." This law applies without regard to whether goods or services are offered on the offending web site. Under this law, a trademark owner can legally challenge someone who is only holding the domain name in the hopes of selling it to the rightful trademark owner, offering goods and services unrelated to the trademark owner.
In order to establish rights to a domain name, a trademark owner must establish two specific elements. The first element is that there was bad faith on the part of the domain name registrant and second that the domain name is distinctive or famous.
The statute itself is very detailed and sets out nine factors to determine whether the name owner had a bad faith intent to profit from the domain name. However, the statute invites the court to look at additional factors. This new law also makes it illegal to register or require multiple domain names that the registrant knows are identical to, similar to, or dilutive of other peoples famous trademarks. This is targeted at people who hoard domain names.
Currently, the law does not require a trademark owner who raises a challenge against a cybersquatter to have filed federal trademark registration for his name. However, such registration can serve as prima facie evidence helping the trademark owner to prove both the distinctiveness of the name and bad faith on the part of the cybersquatter.
In conclusion, this legislation will do much to bolster Internet commerce.
FEBRUARY, 2000
TAX CHANGES FOR BUSINESS
Higher Expensing Limit - The maximum amount of equipment purchases that can be expensed is $20,000.00 (up from $19,000.00 in 1999).
Higher Business Mileage Rate - As of January 1, 2000, the simplified deduction for business auto use rises to 32.5 cents from 31 cents per business mile traveled.
Eased Electronic Deposit Filing Requirements - The dollar threshold that determines whether your business must use the Electronic Federal Tax Payment System (EFTPS) increases from $50,000.00 of federal tax deposits to $200,000.00. All federal tax deposits are now combined to determine if the threshold is exceeded. Extended Due Date For Certain Information Returns - Beginning in 2000, if you file Forms 1098, 1099, or W-2 electronically, the due date for filing them with the IRS or the SSA is extended to March 31. The due date for providing the recipient with these forms remains January 31.
RETIREMENT PLAN CHANGES
Combined Plan Limit Repealed - The prior overall limitation on retirement plan benefits available to an individual who is a participant in both a defined benefit plan and defined contribution plan maintained by the same employer is repealed.
Maximum 401K Elective Deferral Increased - An employee may elect to defer up to $10,500.00 tax free under a 401K plan (up from $10,000.00 in 1999).
More People Can Make Deductible IRA Contributions - The up to $2,000.00 deduction for contributions to traditional IRAs made by active participants in an employer sponsored plan begins to phase out when AGI exceeds $52,000.00 (joint return filers) or $32,000.00 (single or head of household).
PERSONAL INCOME TAXES
Increased Deduction for Education Loan Interest - You may now deduct up to $2,000.00 of interest paid on an education loan (up from $1,500.00 in 1999), but the deduction phases out over $40,000.00 to $55,000.00 of adjusted gross income.
Higher Threshold for "Nanny Tax" Reporting - Pay for a nannys services in your home is not subject to Social Security Tax (FICA) if the amount you pay the nanny during the calendar year is below $1,200.00 (up from $1,100.00 in 1999).
ESTATE AND GIFT TAX CHANGES
Increased Unified Credit - The first $675,000.00 (up from $650,000.00 in 1999) of transfers are exempt from estate and gift taxes through a larger "unified credit". Under New York State law, there will be no separate New York estate tax for decedents dying on or after February 1, 2000.
Executor Elections - Under certain conditions, an executor may elect to value real property used for farming or in a trade or business at its actual use, rather than its highest and best use. The total decrease in value by the election cannot exceed $770,000.00.
1999
November, 1999
USE OF WEBSITES POSE UNIQUE LEGAL ISSUES FOR THE 21ST CENTURY
The advent of the World Wide Web (WWW) and E-mail provide businesses with a unique opportunity to reach an ever-increasing population of potential customers. However, with such technology comes a host of legal issues that courts will continue to struggle with for years to come.
Perhaps one of the biggest issues involves the application of the doctrine of jurisdiction over a particular defendant and over an issue in controversy. Jurisdiction is defined as "the power of a Court to decide a matter in controversy." For instance, when the Blue Note Café in Saint Louis, Missouri promotes itself through a Website, it may be seen as infringing on the intellectual property of the Blue Note Café in New York City, New York. The question of jurisdiction deals with whether a New York Court may compel the Missouri defendant to remove or modify its Website even though the Missouri defendant may not be "physically present" in New York.
Given the irrelevancy of state borders in digital commerce, an increasing number of courts in the United States are addressing the issue of when to assert jurisdiction over a particular defendant based on its use of a Website.
One such case is People By Vacco v. Lipsitz, 174 Misc.2d 571, 663 N.Y.S.2d 468 (N.Y. Supreme Ct. 1997). In Lipsitz, the New York Attorney General brought a special proceeding seeking enforcement of consumer fraud and false advertising laws against a business physically located in New York that engaged in deceptive and false practices in selling magazines through e-mail and over the WWW. The Attorney General sought enforcement of New York consumer fraud and false advertising laws against the defendant who is physically located within New York, but was alleged to have engaged in fraudulent consumer sales practices targeting the WWW. In a well-reasoned opinion, Supreme Court Justice Lebedeff discussed the issue of jurisdiction over the defendant and found jurisdiction in the New York Court to be proper because the acts complained of physically occurred in New York even though the impact may have been in other locations. The Court held that the Attorney General had clear authority to seek to restrain illegal business practices by a local business in relation to both in-state and out-of-state residents, notwithstanding that these practices occurred over the WWW.
Accordingly, at least one New York Court has determined that jurisdiction may be properly asserted over a New York defendant who engages in business practices over the WWW. While Lipsitz involved a defendant who had a business location in New York, it is quite possible that New York Courts may begin to adjudicate disputes involving non-New York defendants merely as a result of the Websites presence in New York.
John R. Condren