Category Archives: Business

Moving your business to a low-tax state

As explained in the April 2018, the Tax Cuts and Jobs Act of 2017 has put a cap on state and local tax (SALT) deductions. Beginning with your 2018 tax return, if you itemize deductions, you can count no more than $10,000 a year of SALT deductions for income and property tax on a single or joint tax return (you can choose to include sales tax instead of income tax). SALT deductions (other than those for state and local income taxes) are not limited if they relate to income from a trade or business or for property held for the production of income.

Therefore, paying large amounts of SALT will become more painful because there will be scant relief from a federal income tax deduction. The more you pay in SALT each year, the more the $10,000 ceiling will hurt. In addition, if you plan to make a profitable sale of your company within the foreseeable future, the state income tax on your sale could be substantial, yet not deductible.

Moreover, the new tax law’s SALT cap could have a ripple effect on your company. If you have key employees, chances are they pay relatively high state and local income and property tax because of ample compensation and living in valuable homes. These employees might be thinking of their own tax-related relocation if you’re in a high-tax area now.

Plan yourself first

The idea of moving to a lower tax state could be more appealing now. Such a decision should be based on careful research.

To start, determine whether you want to personally relocate. Moving your business to another state while continuing to live in your current state may cause problems. Say you have decided to move your business from New York to Florida. It may be difficult to convince New York that you have moved your company to Florida if your own residence is still in Manhattan or Brooklyn.

If you do decide to personally relocate, your claimed change in residence will be more convincing if you sell your home in New York and cut all ties. That could include getting a new driver’s license, voter registration, local bank account, and so on. You might have to put young children into school within the new state. If you choose to keep other New York real estate after moving, it may be costly. New York will seek to tax rents on property within its borders, and the property, if still owned at death, will be subject to New York state estate tax.

Besides comparing tax burdens, look at other major costs, as well. Will home and auto insurance be higher or lower after a move? How will health insurance be affected?

If your spouse works outside your company, will there be job opportunities in the new area? Determine if the total savings will justify the disruption that a move will create.

Getting down to business

Once you’ve decided that a personal move would be cost effective, analyze what a business move would entail. If your business is very small, perhaps just yourself and an assistant, relocating may be fairly straightforward. As long as it will pay off for your family, moving to save money paid for state and local tax could make sense.

With larger companies, though, more factors must be considered. You might have to deal with relinquishing office space and finding suitable new business premises. Other decisions could involve dealing with business property, offering employees help to relocate, providing severance pay to those who will be left behind, obtaining various licenses and registrations in the new jurisdiction, and so on. The sooner you move and the longer you operate in the low-tax state, the greater your chance of avoiding tax from your old state on a sale of the company.

The bottom line is that moving a business may be challenging, but it is doable. Such relocation is implemented all the time by many types of companies. The new tax law, with its limit on SALT deductions, may be the proverbial final straw that gets you going. Our firm can calculate the overall cost savings from such a move and help you deal with the regulatory requirements that might arise.

Coping with summer vacations at your small business

During the summer, it may be true that “the living is easy,” as the old song goes. The midyear season, though, is often not so easy at small businesses because many employees are taking vacations. Total work hours often shrink and so may company productivity.

Spreading vacation time over the rest of the year might not be practical, especially if many of your workers have school-age children and desire family vacations during summer break. You may prefer to squeeze most vacations into the summer so the disruption is minimal the remainder of the year. Nevertheless, you probably won’t welcome a warm weather slowdown, so it’s best to take steps to keep things running at an acceptable pace.

Scheduling strategies 

It’s vital to create and maintain a visual schedule of who is taking time off and when. This might be created with a simple wall board or online. In a relatively small company, you could have your assistant keep up this schedule and show it to you every week or so. A larger firm could leave the schedule supervision to department or division heads, each of whom would track their workers.

However you decide to do it, you should have an easy way to see who will be away next week, the week after, and so on. If several people are scheduled for vacations during, say, the third week of July, you (or the manager who will be affected) might push forward some projects or delay them until you have a full crew in the office. Also, you probably should be cautious about approving additional vacation requests for weeks when multiple employees are already planning time off.

Reaching out

Summer vacations can be extra troubling because your business won’t be the only one shorthanded from now until Labor Day. Chances are that your customers, suppliers, and other companies with which you work also will have employees who won’t be available. Their absence can put a crimp in your own operations. If you have strong relationships with such business associates, you might ask about their vacation schedules and who to contact if your company runs into a snag.

In some situations, you might decide to revise some of your company’s efforts to make the timing mesh with that of key outsiders.

Filling the gaps

There is not much you can do about vacationing employees elsewhere, but there are things you can do this summer to help your company manage with a reduced workforce. If there are deadlines, require employees to finish all projects before they leave. For ongoing efforts, have your workers write up a summary of work-to-date with helpful materials attached. Get mobile numbers and email addresses where they can be reached, in case a need for contact should arise.

Make sure employees place vacation responses on their work phones and email, with dates of departures and returns. You might consider assigning someone to create templates for these employees to use for their vacation responses; this can assure that vacation responses will contain the required information and without any comments that could offend or reveal confidential matters.

In addition, arrange for some employees to cover for those on vacation, if necessary. You’re probably better off if you can avoid one-on-one coverage because the worker staying at the office will be doing two jobs. Work sharing among multiple co-workers might be a better solution. If you have summer interns, ask if they might be able to handle some of the tasks usually assigned to the vacationers.

Clarity begins at home

With all this planning, don’t forget to schedule your own vacation. Obviously, you also work hard throughout the year, so some downtime will be beneficial, whether you travel or wind down at home.

In addition, you should keep track of what unexpected flaws arise this vacation season and how you might remedy them in 2019. Should you require all summer vacation requests two weeks, or even a month, ahead of time? Demand that all requests be turned in by Memorial Day before you grant any approvals? Treat conflicts in favor of seniority? Offer those who lose out by conflict a chance to jump the line next year? The more clarity in a vacation plan you disseminate to all employees, the greater the chance your company will keep operating at its peak this summer and next.

No tax deductions for business entertaining

The good news is that the TCJA of 2017 lowered corporate tax rates from a graduated schedule that reached 35% to a 21% flat rate. The bad news? Many business expenses are no longer tax deductible. That list includes all outlays that might be considered entertainment or recreation.

As of 2018, tickets to sports events can’t be deducted, even if you walk away from the game with a new client or a lucrative contract. The same is true if you treat a prospect to seats at a Broadway play or take a valued vendor out for a round of golf. Those outlays will be true costs for business owners without any tax relief.

Drilling down

Does that mean that you should drop all your season tickets supporting local teams? Cancel club memberships? Pack away your putter and your tennis racquet? Before taking any actions in this area, take a breath and crunch some numbers.

Example: In recent years, Luke Watson spent about $20,000 a year on various forms of entertainment, which his company claimed as a business expense. Indeed, these were valid expenses and helped his LW Corp. grow rapidly.

Assume that LW Corp. paid income tax at a 34% rate. In 2017 and prior years, business entertaining was only 50% deductible. Thus, LW Corp. deducted $10,000 (half of Luke’s expenses) and saved $3,400 (34% of $10,000). With $3,400 of tax savings and $20,000 of out-of-pocket costs, Luke’s net cost for entertaining was $16,600 under the law in effect during 2017.

Now suppose that Luke has the same $20,000 of entertainment costs in 2018 and that those costs would have still been 50% tax deductible at the new 21% tax rate. His tax savings would have been only $2,100, so the net entertainment cost would have been $17,900. As it is, under the new law his actual entertainment cost would be the full $20,000 with no tax benefit.

This example assumes that LW Corp. pays the corporate income tax on its profits. If Luke operates his business as an LLC or an S corporation, with business income passed through to his personal tax return, the calculation would be different, but the principle would be the same.

Business entertainment has been done mainly with after-tax dollars. Under the new TCJA, you’ll entertain clients and prospects solely with after-tax dollars. You should be careful about how this money is spent and judge the expected benefit. Nevertheless, if business entertaining has paid off for your company in the past, it may still prove to be valuable even without tax breaks.

Fine points

Meal expenses associated with operating a trade or business, including employee travel meals, generally continue to be 50% tax deductible. However, keep in mind that the rules have changed for meals provided for the employer’s convenience. Previously, these were 100% deductible if they were excludible from employees’ gross income as de minimis fringe benefits. That might have been the cost of providing free drinks and snacks to employees at the workplace. Now outlays for such meals are only 50% deductible and they’re scheduled to become nondeductible after 2025.

On the bright side, the new law doesn’t affect expenses for recreation, social, or similar activities primarily for the benefit of a company’s employees, other than highly compensated employees. So, your business likely can still pay for holiday office parties with pre-tax dollars.

New tax deduction for pass-through entities

Many small businesses are pass-through entities, including S corporations, partnerships, sole proprietorships, LLCs, and LLPs. The label indicates that all business earnings are passed through to the owners’ personal income tax returns. Thus, they avoid the corporate income tax.

The TCJA contains a new tax benefit for pass-throughs. This provision is complex, but it is relatively straightforward for taxpayers with taxable income below $157,500 in 2018, or $315,000 on a joint return. Such business owners may qualify for a tax deduction that equals 20% of their qualified business income (QBI).

Example: Melanie Foster runs her business as an LLC. In 2018, her QBI (the net of her company’s domestic business taxable income, gain, deduction, and loss) is $140,000. On the joint tax return that Melanie files with her husband, the taxable income is $235,000. This taxable income is before the QBI deduction.

Here, Melanie can deduct $28,000 (20% of $140,000) from their taxable income. Note that this deduction doesn’t reduce the Fosters’ adjusted gross income, which can impact many areas on their tax return.

Over the limits

For taxpayers over $157,500 or $315,000 in taxable income, other factors come into play, which can reduce the QBI deduction. Moreover, some service businesses, such as medical practices and law firms, don’t merit the Q (for qualified) in QBI if their income is over certain limits. Our office can illustrate the value of the deduction for your pass-through business income.

How Small Companies Can Address Harassment Issues

Politicians, journalists, and other celebrities are not the only ones vulnerable to charges of sexual harassment. As a business owner, you could be in the spotlight if allegations of improper behavior arise, especially if they are brought by one or more employees. Even if your own conduct has been beyond reproach, harassment among staff members might damage your company’s workplace morale, public image, and profitability.

This issue is not going away. Here are some ideas on how to minimize problems and deal with any that might surface.

Get serious

A plan for addressing sexual harassment at your firm is not something you should assign to just anyone. Get involved personally or delegate the task to a reliable person with proven ability to accomplish vital matters. The higher in your company the responsibility lies, the greater the importance of preventing problems will appear to all of your people.

Get a lawyer

 You shouldn’t believe that your knowledge of the company and good old common sense will enable you to deal with any incidents. The legalities and public perceptions can be complex. One way to start facing potential perils from sexual harassment is to get in touch with an attorney who is knowledgeable about the local law in your state and perhaps your city.

It’s likely that such an attorney will advise you to create and disseminate a formal policy, expressing your company’s abhorrence of sexual harassment. The policy can spell out what actions will not be tolerated by employees at any level of the firm. Make it clear that any problems can be brought to you or to someone in a senior position without fear of retaliation. At the same time, the policy should assert that anyone accused of stepping out of line won’t be prejudged until all the facts are revealed.

Get ready to follow through

Accept the fact that some harassment claims will arise at some point. Therefore, you should have a plan in place to investigate the dispute, perhaps a procedure suggested by your attorney.

You’ll probably begin by hearing both sides. This might be done separately so the parties won’t fear intimidation. Get statements from third parties if they have witnessed the activities in question.

Keep records that thoroughly document what has been said and what has been done about it. The complaint might be dismissed, the person accused might be told to undergo counseling, or the guilty party could be fired. Again, it’s a good idea to touch base with your lawyer before announcing any resolution of the complaint.

Set an example

Perhaps the best way to indicate that sexual harassment won’t be condoned at your company is to walk the walk as well as talk the talk. Refrain from saying or doing anything that might be misconstrued, no matter how innocent it might seem to you. If you’re married, and if you have children, think about how any questionable actions might be perceived by your spouse or your kids.

Demonstrate to all your employees that your place of business is somewhere that they can do their jobs without feeling uncomfortable.