When Your Business Hits Hard Times

In order for companies to be successful, business owners must understand the value of staying calm during a crisis situation. When an economic or public relations crisis hits your company, your first reaction may be to panic. But when you have the right kind of support system in place via planning, a great staff, and insurance you can withstand any crisis regardless of how difficult it may seem.

There are five things every business owner or executive should know when it comes to keeping your cool in a crisis. It helps to have a stress ball on your desk to squeeze when things start to go wrong. But for a real solution, nothing beats being prepared.

Business Planning. Small business owners often forget to put together a business plan when they are starting out. A business plan is a the comprehensive blueprint you use to run, grow and finance your company. Just like any good plan, a business plan also has a section that is dedicated to reacting to a crisis.

A business crisis is something that takes up your company resources. You should never use resources unless it fits the business plan. When you create your business plan, put together sections on options during a crisis. When a crisis occurs, you have a head start on getting yourself out of it.

Surround Yourself. The first thing a good business owner should do in times of crisis is surround himself with good people. It is important to avoid surrounding yourself with "yes" men or women that will only tell you want you want to hear. That will do nothing to help you come up with good answers. You need people you can trust that will give you good advice.

You should also surround yourself with the right kind of professional assistance. If your company is having economic problems, then hire an accountant. If it is a public relations issue, then hire a public relations firm. Contract the people who have the know-how to help.

Hit it Head On. The most common response to troubled times is to hide from it and hope it goes away. That is the wrong approach. When a crisis hits your company, then you need to meet it head on and address it immediately. Create a written evaluation of the situation and see where the problem originated. This will help you to solve the problem more quickly, or at least allocate the proper resources to get the issue resolved.

Restrict Access. If your company is having financial problems, then lock down your books and access to all financial tools such as credit cards and your bank account. Some people tend to take advantage of a crisis situation, which can only make it worse. Restrict access to the important elements of a crisis and make sure that only you know what comes in and what goes out.

Business as Usual. It is important that you maintain business as usual during a crisis. Of course, you may run into some situations that would make that difficult. For example, a financial problem may mean that your vendors are not extending you the credit that you need to get materials. In that case, you will need to find alternatives.

Maintaining business as usual gives you something else to think about to help get your mind off the crisis from time to time. It also helps you keep your company afloat and make sure that you are still in business when the crisis is over.

Troubled times require precise responses. When your company hits a rough patch, be sure you are prepared and can handle the problem efficiently.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Charitable Contributions Substantiation and Disclosure Requirements

A recent summary opinion by the United States Tax Court highlights the importance of following the substantiation and record-keeping rules that the federal tax code has put in place for charitable contribution deductions. It is imperative that churches and other religious organizations do their part to comply with these requirements to ensure that their church members are eligible to receive charitable contribution deductions for their gifts and tithes.

In Gomez v. Comm’r, (T.C. Summary Op. 2008-93, 2008) a husband and wife contributed a total of $6,548.27 to their local Texas church. The taxpayers made the donations by writing 20 separate checks. Ten of the checks were each for an amount over $250. The IRS challenged the deductions related to the ten donations over $250 by arguing that the petitioners failed to meet the substantiation requirements imposed by section 170(f)(8) of the Internal Revenue Code (the “Code”).

Specifically, section 170(f)(8)(A) of the Code disallows a charitable contribution deduction of $250 or more unless the church member substantiates the contribution by a “contemporaneous written acknowledgment.” The acknowledgment must come from the church and must include the following information: (i) the amount of cash and a description (but not value) of any property other than cash contributed by the church member to the church; (ii) whether the church provided any goods or services in consideration, in whole or in part, for anything the church member contributed; and (iii) a description and good faith estimate of the value of any goods or services provided by the church, or, if such goods or services consist solely of intangible religious benefits, a statement to that effect. To be “contemporaneous,” a church must provide the written acknowledgment on or before the earlier of: (i) the date on which the church member files a return for the taxable year in which the contribution was made; or (ii) the due date, including extensions, for filing the return.

Because their church did not provide the Gomez family with a contemporaneous acknowledgement, the Tax Court denied them a deduction for any of the contributions that were for $250 or more. The Tax Court determined that a letter from the church written almost three years after the contributions did not meet the federal tax law requirements for a “contemporaneous” acknowledgment. The court was careful to note that even though it was clear that the Gomez family wrote checks for tithes to their church, and the cancelled checks for these tithes were “reliable,” the failure to meet the necessary substantiation requirements required the court to disallow the claimed charitable contribution deductions for checks equal to or greater than $250. (The IRS allowed the Gomez family to deduct eight other checks that were less than $250, and the court acknowledged that this was the appropriate result with respect to those checks.)

The Tax Court again reiterated that a taxpayer cannot deduct a charitable contribution without complying with the § 170(f)(8)(A) substantiation requirements. Durden v. Commissioner, T.C. Memo. 2012-140 (May 17, 2012).

Mr. & Mrs. Durden contributed $22,517 to their church in 2007. Although the church provided them with a timely statement acknoweldging the $22,517 contribution, it did not state whether they had received any goods or services as required by § 170(f)(8)(A) (the “first acknowledgment”). After being notified by the IRS of this deficiency, the Durdens obtained another statement from the church acknowledging the $22,517 contribution and stating that they received no goods or services (the “second acknowedgment”)..

The Tax Court accepted the IRS’s position that both acknowledgments failed § 170(f)(8)(A): (1) the first acknowledgment did not include the required goods or services statement; and (2) the second acknowledgment was not contemporaneous within the meaning of Reg. § 1.170A-13(f)(2) because it was not received by the Durdens before they filed their 2007 return.

The issue considered by the Tax Court in Gomez is inherent in the context of church-plate offerings. Thus, it is important that both donee churches, as well as their tithing members, are aware of the recordkeeping requirements for charitable contribution deductions. In this regard, churches and other religious organizations should consider the following:

• Churches should encourage church members to make donations using checks rather than cash. A cancelled check provides the tithing member with an appropriate “bank record” to substantiate the donation and makes it easier for the church to track and record each donation for purposes of preparing a written contemporaneous acknowledgement.
• For church members making cash contributions, churches should provide an envelope for a donor to fill out his or her name and the date and amount of the contribution. The church can then use this envelope for providing a written communication to the church member that the member can use to meet his or her recordkeeping requirements.
• Churches should keep ongoing records of the amounts received from each church member and update those records each week. See the IRS Publication 1771 Charitable Contributions: Substantiation and Disclosure Requirements.
• As soon as possible after the close of each calendar year, churches should send a letter containing the following information to each tithing church member: (i) the amount of each contribution of cash (whether made in currency or by check); (ii) a statement explaining whether the church provided any goods or services in consideration, in whole or in part, for anything the church member contributed; and (iii) a description and good faith estimate of the value of any goods or services provided by the church, or, if such goods or services consist solely of intangible religious benefits, a statement to that effect. Delay in sending out this letter could result in a tithing member being unable to deduct his or her tithes on his or her federal income tax return.

If your church or religious organization has additional questions concerning these or other substantiation and recordkeeping requirements for charitable contribution deductions, please contact us at 954-591-8290 or use our Contact form.

Crowd Funding Tax Questions

If you've been looking for funding for your business, you've probably heard of it. The concept is simple. Go to a web site that facilitates a matchup between you and potential investors. Investors may contribute small amounts (e.g., $50) or make a more substantial contributions (e.g., $2,000).

A bill defining the legal limits for investors was recently signed by President Obama, The Jobs Act & Investment CrowdFunding Act But the IRS has yet to weigh in on the craze.

Will the contributions be a "gift" and not income to the business? If the business provides a service or product in return will the contribution be "income"? If the contribution is significant, it couldn't be classified as a gift and probably not income, but then is it a loan or equity capital? If it's equity, does that mean the investor is now a partner or shareholder?

If you're doing business as a partnership, LLC, or S corporation and the contribution is equity capital, you may have to send the individual a K-1 each year. You may consider the tax issues a minor problem if you're getting several large (e.g., $10,000) contributions, but not if you receive 100 small contributions and have to treat them as equity interests. Talk to your tax adviser before making a commitment.

Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

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Thou Shalt Not Sin?

It's no secret that Washington uses the tax code to do more than just raise revenue. Lawmakers also use it to influence some of our biggest financial decisions, with tax deductions for mortgage interest to encourage homeownership, tax credits for fuel-efficient cars to encourage conservation, and "bonus depreciation" to stimulate business spending. Washington seems to believe those incentives really work. And cynics argue that the real reason we'll never see a true flat tax is because lawmakers are loath to give up the power to regulate that comes with their power to tax.

Government also uses the tax code to sway some of our smaller decisions, too. This is especially true with so-called "sin taxes" -- essentially, fees we pay to consume unhealthy products or engage in unhealthy behaviors. As Adam Smith wrote in The Wealth of Nations, "sugar, rum and tobacco are commodities which are nowhere necessaries of life, which are become objects of universal consumption, and which are therefore extremely proper subjects of taxation."

230 years later, sugar, rum, and tobacco are still taxed. (In New York City, a pack of smokes comes with a hefty $6.86 in federal, state, and local taxes -- the tobacco is extra!) The 2010 health care reform slapped a 10% tax on tanning beds. Public health advocates have proposed taxes on fatty foods and sugary sodas to fight obesity. And many Americans, discouraged by what they see as a decades-long failure in the War on Drugs, call for legalizing drugs, taxing them to shift profits from private cartels, and using the revenue to fund anti-addiction efforts.

So, how effective are sin taxes at balancing their dual goals of raising revenue and discouraging unhealthy behavior? Well, federal and state tobacco taxes alone raise nearly $30 billion per year. They seem to do that job just fine. But some economists find that sin taxes send the wrong message by legitimizing the behavior they try to discourage. Here's what Harvard Professor Michael J. Sandel says in his new book, What Money Can't Buy: The Moral Limits of Markets:

"A study of some child-care centers in Israel shows how this can happen. The centers faced a familiar problem: parents came late to pick up their children. A teacher had to stay with the children until the tardy parents arrived. To solve this problem, the centers imposed a fine for late pickups. What do you suppose happened? Late pickups actually increased."

Clearly, telling parents "don't be late or we'll fine you" sends a very different message than telling them simply "don't be late." And so it goes with sin taxes, too. Telling smokers and drinkers "don't indulge or we'll tax you" offers them implicit forgiveness -- that it's actually OK to light up and enjoy two-for-one Happy Hour so long as they pay the fee. (If you're reading these words with a cigarette in one hand and a Red Bull in the other, you can breathe a sigh of relief!) It may sound hypocritical for Uncle Sam to wag his finger at you with one hand while he reaches into your pocket with the other. But sin taxes have been around a lot longer than income taxes, and they aren't going away.

 There's really no "planning" we can help you do to avoid sin taxes. (We would just give you the same advice as your mother.) But it may be worth it, next time you pay any tax, to ask yourself "what's the government trying to accomplish with this tax? What's the government trying to get me to do?" Understanding why you pay a tax can make you a better-informed consumer. And that, in turn, helps all your dollars go farther.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Tax Choices for Startups

Choosing which entity to operate your business involves two fundamental choices: 1) will you remain personally liable for business debts; 2) how will you and your business pay tax? There’s no “pat” answer, and in many cases you’ll want more than one entity. Consider these options as starting points:

• Proprietorship: This is a business you operate yourself, in your own name or trade name, with no partners or formal entity. You remain personally liable for business debts. You report income and expenses on your personal return and pay income and self-employment tax on your profits. These are best for startups and small businesses with no employees in industries with little legal liability.
• Partnership: This is an association of two or more partners. General partners (“GPs”) run the business and remain liable for partnership debts. Limited partners (“LPs”) invest capital, but don’t actively manage the business and aren’t liable for debts. The partnership files an informational return and passes income and expenses to partners. GP distributions are taxed as ordinary income and subject to self-employment tax; LP distributions are taxed as passive income.
• “C” Corporation: This is a separate legal person organized under state law. Your liability for business debts is generally limited to your investment in the corporation. The corporation files its own return, pays tax on profits, and chooses whether or not to pay dividends. Your salary is subject to income and employment tax; dividends are taxed at preferential rates. These are best for owners who need limited liability and want the broadest range of benefits.
• “S” Corporation: This is a corporation that elects not to pay tax itself. Instead, it files an informational return and passes income and losses through to shareholders according to their ownership. Your salary is subject to income and employment tax; pass-through profits are subject to ordinary income but not employment tax. These are best for businesses whose owners are active in the business and don’t need to accumulate capital for day-to-day operations.
• Limited Liability Company (“LLC”): This is an association of one or more “members” organized under state law. Your liability for business debts is limited to your investment in the company, and LLCs may offer the strongest asset protection of any entity. Single-member LLCs are taxed as proprietors, unless you elect to be taxed as a corporation. Multi-member LLCs choose to be taxed as partnerships or corporations. This flexibility and asset-protection strength makes LLCs the entity of choice for many new businesses.

If you expect your business to lose money at first, consider a proprietorship, LLC, or “S” corporation. Losses from these entities (up to your basis in the business) offset outside income from salaries, investments, and other businesses. If losses exceed that income, they generate net operating losses (“NOLs”) that you can carry back two years or forward 20.

Filing Guide

Proprietors and single-member LLCs file Schedule C then carry profits or losses to Form 1040. Partnerships and LLCs taxed as partnerships file Form 1065, then report partners’ income and expenses on Form K1 “C” corporations file Form 1120 or 1120-A. “S” corporations file Form 1120S, then report shareholder income and expenses on Form K1.

IRS Publication 334:
Tax Guide for Small Business
 
IRS Publication 535:
Business Expenses
 
IRS Publication 536:
Net Operating Losses
 
IRS Publication 583:
Starting a Business and Keeping Records

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Document Those Receipts

If your only income is through salary, dividends, interest, etc. you probably will have few worries about the IRS asserting you have unreported income. But if you or your spouse have a business, you've got to be able to document amounts received that are not business income.

For example, your spouse has a consulting business. You're taking a trip to a Germany and agree to purchase six cuckoo clocks for a friend for a total of $4,000. You use your credit card and upon returning your friend reimburses you the $4,000. You're later audited and the IRS claims the $4,000 you deposited in your personal bank account was unreported income from your business.

The first question is will you even remember what the $4,000 was for? If you pass that test, can you prove it? There are many income sources that may be difficult to prove; some are easy. A loan from relatives for your business. The repayment of a loan you made to your neighbor to start a business. The proceeds of a yard sale. The sale of an inherited art work.

At a bare minimum make some sort of diary entry to describe the source of the income. Copy the check before depositing the money. Retain any documentation such as a note that substantiates a loan, a bill of sale for an item, etc.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Is That 1099-C Correct?

In McCormack v. IRS, T.C.  Memo 2009-239, the Tax Court ruled that the IRS cannot rely on merely the fact that a Form  1099-C has been issued by a creditor, when the taxpayer has  made a good faith dispute of the amount due and owing, and there is then  a settlement reached between the parties to that dispute. 

The IRS must  do more than rely on the amounts set forth in the Form 1099-C.  Under  IRC Section 6201(d), in any court proceeding, if a taxpayer asserts a  reasonable dispute with respect to any item of income reported on an  information return and has fully cooperated with the IRS, the burden is  then on the IRS to produce reasonable and probative information  concerning a deficiency, in addition to the amount identified on the  information return. 

In the case, the taxpayers asserted reasonable  disputes as to the amounts reflected on Forms 1099-C, and the IRS failed  to produce reasonable and probative information independent of the  third party information returns.

While not at issue in the McCormack case, taxpayers need to know that there is a provision in the tax law  providing taxpayers with the right to be protected against the  fraudulent issuance of information returns.  Under Internal Revenue Code Section 7434 of the  Internal Revenue Code, civil damages can be assessed if any person  "willfully files a fraudulent information return with respect to  payments purported to be made to any other person."  Damages recoverable  are equal to the greater of $5,000 or the sum of any actual damages  sustained by the taxpayer as the proximate result of the fraudulent  information return, including any costs attributable to resolving the  deficiencies asserted as a result of such filing, plus the costs of the  action, and in the court's discretion, reasonable attorney's fees

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. Counseling Entrepreneurs, Professionals and Select Individuals who are struggling with ever changing tax laws and who are paying too much in taxes. All the while he is protecting his clients from the IRS and other taxing authorities using proactive tax planning strategies, ensuring compliance with minimal tax liability.

Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a commit and  please share it on twitter, facebook or your favorite social media site and  with your friends, family and colleagues. Thank you. 

Green Apple

For 20 years now, Apple has blazed a reputation for stylish design and innovative products, creating a near-cult following among fans. Apple's computers appeal to the artists and designers who set so many of today's trends. Their iPod has helped change how the world listens to music. Their iPad has made online content available nearly anywhere. And their iPhone is helping change the way we communicate with friends, family, and colleagues. (Just a few years ago, your mother-in-law didn't have a cell phone. Now she sends text messages and "checks in" on Facebook.)

Apple may be the most successful company on earth. At one point last year, they had more cash on hand ($76.2 billion) than the United States government ($73.8 billion). And Apple is currently the most valuable company on the planet, with a "market cap" (total value of tradeable shares) that topped $590 billion dollars on April 10. (That's right . . . those iTunes you casually download for a buck each have created a company worth over half a trillion dollars.) In fact, Apple's current market cap is more than the gross domestic products of Iraq, North Korea, Vietnam, Puerto Rico, and New Zealand -- combined.

But Apple's most recent annual report reveals the company's genius for creating successful marketing strategies also extends to successful tax strategies. How else would you describe a strategy that lets Apple earn billions and pays less than 10% of their taxable income in tax?

How do they do it? Largely by keeping the money they earn outside the United States, outside the United States. Apple owns subsidiaries in tax havens like Ireland, the Netherlands, Luxembourg, and the British Virgin islands. They helped pioneer the "Double Irish with a Dutch Sandwich" strategy that hundreds of other multinational companies have imitated. Apple even maintains a subsidiary in tax-free Nevada -- the blandly-named "Braeburn Capital" -- to manage that enormous cash haul without paying tax in its home state of California. For 2011, the company paid a worldwide tax of $3.3 billion on $34.2 billion of profit. But one study concludes that Apple would have paid $2.4 billion more without these rules.

Now Apple has become part of the political debate. At the risk of grossly oversimplifying a pretty complicated discussion, Democrats in Washington scoff that taking an extra $2.4 billion in tax last year would have squelched Apple's creativity. Republicans reply that using the cash to grow the business or distribute more dividends to shareholders will grow the economy faster than if it goes to the IRS. Both President Obama and presumed Republican nominee Mitt Romney have called for eliminating corporate tax loopholes in order to pay for lower rates (28% in President Obama's plan, 25% in Governor Romney's). Either way, Apple is likely to become one of the stories -- like Warren Buffett paying a higher tax rate than his secretary -- that come to define this year's campaign.

Taxes always play a part in Presidential races. But this time, with the economy still struggling and the Bush tax cuts scheduled to expire in a few short months, taxes will be even more important than usual. Our job, as November approaches, includes helping you understand just what the candidates' proposals mean for your bottom line. So keep up with these emails -- and if you're curious how any of the proposals you hear about would affect your plan, call us!

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

To Pay Or Not To Pay

One scam that's effective is to send phony bills to businesses. Small businesses can be vulnerable because no one has the time to check with the boss or research the invoice. If there's any doubt as to the amount or validity of the bill, it should be checked. But it shouldn't hold up processing other invoices.

While the bills can be true scams from companies that provide no services and/or ones you never dealt with, they can also come from vendors who just continue to bill you for services that you may no longer need. For example, you decided to cancel the service contract on the forklift you now rarely use, or the copy machine that's been relegated to a corner of the warehouse. And make sure you have a system for not paying the same invoice twice.

Automatically paying invoices can be costly. Having a policy of reviewing them can also allow you to reconsider expenditures that you may no longer need. And individuals are not immune. Scammers have used the same approach on individuals for extended warranties, etc.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Business Recordkeeping

In David A. Olagunju et ux. (T.C. Memo. 2012-119) the taxpayer was denied deductions for a number of items because he could not substantiate the deductions.

The Court disallowed travel expenses for one of the taxpayer's businesses between New Jersey and Washington because the taxpayer owned houses in both locations and he did not show the business reason for the travel to Washington. The Court disallowed a deduction for checks written to organizations where there was no clear business purpose. The Court disallowed rent expense where the taxpayer could not produce a lease on the premises.

The Court also questioned the credibility and authenticity of the taxpayers' cash receipts where the handwriting on them matches the handwriting on some other receipts issued by different vendors. The Court also disallowed certain other handwritten invoices.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.