Should Small Business Saturday Be a Tax Holiday?

March 5th, 2015


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Small Business Saturday® (SBS), which is the first Saturday after Thanksgiving, was established by American Express OPEN in 2010 as a way to help small businesses get customers, which stimulates sales on Main Street.

The NFIB has included in its legislative agenda for 2015 the goal of making Small Business Saturday a sales tax holiday (here’s the agenda for my state of Florida).

About sales tax holidays

A sales tax holiday is a temporary suspension of the requirement to charge sales taxes that would otherwise be due on specific goods and services. The idea of a sales tax holiday is relatively new, with the first holiday created in New York for the first week in January 1997.

Today, only a little more than a dozen states offer some form of tax holiday. The holiday usually runs for a weekend or so.  Some states run their holidays each year (e.g., early August for back-to-school clothing and school supplies); others do so from time to time (Florida had a pre-hurricane season sales tax holiday last year and waived sales tax on items such as flashlights, first aid kits, and portable generators).

Find a list of sales tax holidays for 2015 from the Federation of Tax Administrators and the Sales Tax Institute. The latter list includes annual sales, so even if 2015 days aren’t published yet, you can plan your marketing efforts nonetheless.

Wisdom of a tax holiday for SBS

Last year, the Tax Foundation concluded that tax holidays are politically expedient but poor tax policy. The Tax Foundation found:

  • Sales tax holidays do not promote economic growth or significantly increase consumer purchases; the evidence shows that they simply shift the timing of purchases. Some retailers raise prices during the holiday, reducing consumer savings.
  • Sales tax holidays create complexities for tax code compliance, efficient labor allocation, and inventory management. However, free advertising for what is effectively a paltry 4 to 7 percent sale leads many larger businesses to lobby for the holidays.

Nonetheless, many small retailers like the notion of a sales tax holiday because of the free advertising. Will this boost overall sales or simply change the time at which revenue is received (see the Tax Foundation’s conclusion noted above).

Final thought

With or without any sales tax holiday, Small Business Saturday has been very helpful to some local retailers and restauranteurs; it should continue to grow each year. Mark your calendar: November 28 for SBS 2015!


Legal Protections for Independent Contractors?

February 26th, 2015


Independent Contractors protectionEmployees enjoy various legal and financial protections: minimum wage and overtime rules, employee benefits (health coverage; retirement savings), unemployment insurance and workers’ compensation, and various anti-discrimination laws. Independent contractors have virtually no legal or financial protections (in some states they can opt in for workers’ compensation).

Should there be legal and financial protections for independent contractors, given a prediction that within the next five years or so about half of the entire workforce will be independent contractors?

Government protection versus oppression

I’m loathe to invite new government regulation. All too often government regulation results in overkill, costing businesses untold expense and time without the meaningful benefits that had been intended (think Obamacare).

But there can be some protections extended to independent contractors without the need for additional burdens on businesses. These may include:

  • Universal access to workers’ compensation. States can allow independent contractors to buy this coverage (only a limited number of states currently allow this).
  • Voluntary withholding. While mandatory withholding of income taxes from payment to independent contractors would be burdensome to businesses (in fact a mandatory withholding rule that had been created for federal contractors was repealed before it could take effect), a voluntary system similar to that used for Social Security benefits and certain retirement payments could be adopted. Payors would not be required to offer withholding but could agree to do so if the contractor requested it (for payors that use payroll providers, the cost for the addition of an independent contractor would be nominal, but even this could be shifted to the contractor). Withholding would help independent contractors pay their income and self-employment taxes without having to file estimated taxes.

Dependent contractors

A recent Wall Street Journal article discusses a new category of worker (in addition to employee and independent contractor): dependent contractors (those who work entirely or primarily for a single company). Referencing a 2005 ruling from the National Labor Relations Board, the article notes that countries such as Canada and Germany provide specific protections for workers who are economically dependent on a single company.

If there were a way to create a legal definition of dependent contractor (perhaps working a minimum number of hours for a single company), then many benefits enjoyed by employees could be extended to dependent workers without a lot of new laws or costs to companies. These added benefits could include the ability of a dependent contractor to opt for coverage under the company’s health care plan (by paying for it) or joining the company’s 401(k) plan (by paying for it and without requiring any company contributions).

Conclusion

To date, discussions by companies and the focus of government on independent contractors has related solely to distinguishing them from employees. Given the changing landscape of the workplace, there needs to be a new discussion about the legal and financial protections for independent contractors.


Office Pools — Good or Bad Idea?

February 19th, 2015

Betting on football at the officeOffices across the U.S. were abuzz with the Super Bowl on Sunday, February 1. March Madness begins on March 17.  Throughout the year there are fantasy teams as well as events and occasions (e.g., the birth of an employee’s child) that trigger a betting pool among employees. Office pools may be present in two-thirds of all companies.

Should you allow or ban pools at your company?

Positive effects

It’s believed that office pools foster morale and bonding among staff members. There’s no actual outlay for the company, even though it can have positive effects for the company.

Negative effects

Many experts say that office pools can have a serious impact on productivity, costing businesses billions annually. (The projected loss for March Madness 2014 was $1.2 billion.)

There’s time out for chatter and betting. What’s more, some employees actually watch or listen to games at work or take time off before or after a big game.

Of course, you can find experts that argue office pools increase productivity in the long run by creating a happier workforce.

Employers should be aware that betting, even with nominal amounts, may be illegal under state law (even though enforcement of the law may be nil). Thus, even if office pools are overlooked, employers should be careful not to give them any actual support.

Conclusion

It’s your call. But trying to ban any pools may be futile; employees likely will find a way to make them happen if they want them and the company will be perceived as a meanie.

Just make sure that employees aren’t pressured by co-workers to participate if they don’t want to and that the company doesn’t agree to any illegal activities.

Valentine’s Day at Your Business

February 12th, 2015


Amber Heart

For some small businesses, such as jewelry stores, restaurants, flower shops, candy shops, and card stores, Valentine’s Day (a Saturday this year) means serious business.

For example, this day is the third biggest holiday for jewelers (after Christmas and Mother’s Day); consumers are expected to spend a total of $4.8 billion on jewelry this year.

But the holiday on February 14 raises a couple issues for all small businesses. Here’s what comes to mind:

Using the holiday for marketing. The day can be used to show appreciation to customers. This can be reflected in special messages sent via email or social media, or special offers (e.g., discounts on products or services; special drawings).

Using the holiday to do good. Operation Valentine is a way to remember the troops far from home. One small business owner, a Vietnam veteran, began participating a couple of years ago; this year he sent more than 100 letters. You can send valentines through Operation Gratitude.

Reviewing company dating policies. Some large companies believe that employees who date each other may cause workplace problems, such as distractions and favoritism. I don’t know of any small businesses that ban dating among employees. But even these companies have to be careful to avoid any sexual harassment claims or other negative results.

Find a helpful sample dating policy here.

Final thought

Wishing you xoxo this Valentine’s Day!

The President’s Tax Proposals

February 5th, 2015


TaxesIn the President’s State of the Union Address on January 20, 2015, he laid out some tax proposals designed to raise revenues to fund a number of new federal programs (e.g., free tuition for everyone at community colleges). I don’t want to appear political, but I’m compelled to comment on two provisions that gave me a strong “been there done that” feeling.

Carryover basis for inherited property

The President suggests that we eliminate the stepped-up basis rule that applies for inherited property. This rule effectively wipes out any untaxed capital gain that the decedent had been sitting on. In its place the President would use a carryover basis (heirs would take over the tax basis of the decedent) so that the untaxed capital gains will be taxed when heirs sell the property.

In theory this sounds fine because it merely taxes what would have been taxed had the decedent sold the assets during his/her life. In practice, it’s a TERRIBLE idea as proven by two attempts to implement carryover basis in the past.

Here is a brief description of my experience with prior carryover basis attempts (warning: this is complicated stuff):

  • The concept of carryover basis for inherited property was created by the Tax Reform Act of 1976 and was set to take effect for property inherited from decedents dying in 1977 and later. Heirs and tax practitioners soon realized that it was unworkable (it was impossible in many/most cases to know what a decedent had paid for property or whether that property had originally been acquired by gift or inheritance, and whether any improvements (that would increase basis) had been made. A moratorium was in place until 1978; it was repealed in 1979.
  • The concept was brought back in a modified form by the Economic Growth and Tax Relief Act of 2001 for property inherited from someone dying in 2010, the year in which it was slated that there would be no federal estate tax. Ultimately, a modified carryover basis rule could be used at the option of executors of people who died in 2010. If they used the modified carryover basis rule, there would be no estate tax, but if they chose a stepped-up basis, there was a $5 million federal estate tax exemption and a 35% federal estate tax would apply. I have no idea how many estates opted for carryover basis, but I’m sure the number was limited.

While theories about fairness may support the concept of a carryover basis, my experience through both of these prior legislative attempts shows me that it is just unworkable.

My suggestion: Leave the stepped-up basis rule alone.

Increased capital gains rates

Currently, the top rate on capital gains is 20%; most people pay at the rate of 15% and those in the lowest two brackets pay no capital gains tax. The President proposes to raise the top rate to 28%. Again, I think this is a TERRIBLE idea (although not as terrible as carryover basis).

The rate on capital gains (which means gain on assets held more than one year) has gyrated considerably over the years. The last time we had a 28% rate was in 1997, and Congress at that time decided to bring the top rate down to 20%.

Look what other countries do:

  • Canada only taxes half of the gain, so you only pay half of your marginal tax rate.
  • Great Britain has a top rate of 28%, but exempts gains up to an annual limit (for 2015 this is about $16,500 in U.S. dollars).
  • Japan has a 20% rate.
  • These countries that have no capital gains tax: Belgium, Belize, Hong Kong, Malaysia, and New Zealand.

A good argument can be made on both sides of this issue:

     In favor of a tax rate increase: Why should gains from investments be taxed differently than gains from labor?

     Against an increase: Why should gains from investments be taxed when the capital to make them has already been taxed?

My suggestions: Leave the current rates where they are, or reduce/eliminate them as part of comprehensive tax reform. Make the 100% exclusion for gain on the sale of qualified stock permanent and extend it to all startups. Currently, it is restricted to C corporations in manufacturing, technology, retail, and wholesale.

Conclusion

A few weeks ago Senate Finance Committee Chairman Orrin Hatch said, “My top priority for the new Congress will be to reform our nation’s broken tax code. Tax reform is long overdue,” and repeated his seven principles for tax reform. Let’s see if anything can be done in this session of Congress and whether the President’s proposals will play any role.

The Entrepreneur Track

January 29th, 2015


The Entrepreneur TrackWhen I was in high school in the mid-60s, the New York City school system had three tracks: academic (for those planning to go to college), commercial (for those planning to become secretaries and bookkeepers), and general (for everyone else; those planning to go into the trades or automotive, or join the military).

I think there are three tracks for startups as well: lifestyle businesses, scalable businesses, and businesses that change the world. Let me explain what these are and why it’s important to know this at the outset:

Lifestyle businesses

Lifestyle businesses comprise the vast majority of businesses in the U.S. (The term was coined in 1987 by William Wetzel, a director emeritus of the Center for Venture Research at the University of New Hampshire.) Lifestyle businesses are set up and run to essentially provide a paycheck for owners and enable them to support their families. They are the mom-and-pop dry cleaners, pizzerias, landscapers, and boutiques; consultants, freelancers, and independent contractors; and most other closely-held businesses. Sure, these businesses hope to grow from year to year, but their goal is primarily the owners’ own support; they don’t have large expectations.

Many owners of lifestyle businesses ‘DIY’ for most or all of their business tasks, including marketing, HR, and government compliance. They want to know what they need to know so they can run their business well and stay out of trouble.

Books I like:

  • Become Your Own Boss in 12 Months, 2nd Ed., by Melinda Emerson
  • E-Myth Revisited by Michael Gerber

My book, J.K. Lasser’s Small Business Taxes 2015, is also suitable for business owners who want to know how to factor tax results into their business planning.

Scalable businesses

These are companies that can grow, often duplicating themselves for multiple locations or becoming franchises. They’re also referred to as growth businesses. Can you say Subway? For these businesses, the sky’s the limit; some may even go public and provide tremendous wealth for owners. They don’t necessarily have a core idea that’s radical; they simply do something better than their competitors.

Owners of scalable businesses want to know how to grow dramatically. Owners must learn to delegate responsibilities in order to achieve their goals.

Books I like:

  • Let Go to Grow by Doug and Polly White
  • Grow to Greatness: How to Build a World Class Franchise System Faster by Steve Olson

Change-the-world businesses

These are companies that are game changers, such as Apple, Facebook, and Uber. Ultimately, if they succeed, they become big businesses (even though all obviously start out as small businesses).

Owners of these businesses need to understand venture capital, which is essential for their growth.

Books I like:

  • The Creator’s Code by Amy Wilkinson (pub. date is February 17, 2015)
  • Venture Deals, 2nd Ed., by Brad Feld

Conclusion

Like students in my high school, those on one track could pursue another life course than the one dictated by their track (e.g., many college graduates in the 60s went to Katherine Gibbs for job skills; many of those who went into the military ultimately finished college).

A lifestyle business could expand and become scalable (my cousins transformed their parents’ local art supply store into a national retail and online art supply company). But an owner who knows his or her track can pursue the tools and information to help with success.

What to Do About Sec. 179 Uncertainty

January 22nd, 2015


Here’s the catch-22 for businesses: in order to increase their capital good, equipment is necessary, but to get the equipment, businesses may lack the capital and need tax incentives to help pay for it … and those incentives are currently up in the air.

The extension of the favorable dollar limit on first-year expensing (the so-called Sec. 179 deduction), which was enacted on December 19, 2014, has already expired!

The $500,000 limit that was extended for 2014 no longer applies; instead the dollar limit is set at $25,000, unless Congress takes action. Businesses that depend on the tax savings from this upfront deduction for their capital purchases face tough choices.

http://www.dreamstime.com/royalty-free-stock-image-end-uncertainty-image23769116Here are some options to consider:

Wait and see

Businesses that need the write-off to help pay for equipment and machinery costing more than $25,000 may want to wait and see what Congress does about extending the favorable dollar limit for the Section 179 deduction. With the new makeup of Congress, serious tax reform in the coming year is possible (but not certain). This could include a permanent, or at least long-term, extension of the $500,000 limit.

Lease instead of buy

The Sec. 179 deduction applies only for businesses that purchase equipment. Those that lease instead of buy can write off all of their lease costs. This fixes the monthly cost for the equipment, which may turn out to be less than the cost of buying it.

This option doesn’t make sense in all cases:

  • Leasing may not be an option for certain equipment.
  • Businesses are essentially locked in for the term of the lease, which is a detriment if the equipment becomes obsolete before the lease ends.

Buy and finance

If a business needs the equipment now but lacks some or all of the cash to buy it, financing options should be explored:

  • Seller-financing. The company selling the equipment may offer financing to swing the deal.
  • Working capital loans. For example, Kabbage offers lines for small businesses from $2,000 to $100,000, with a prompt approval based on real-life data, such as your bank account or QuickBooks data (not necessarily a credit report).

For any type of financing, check terms and conditions carefully.

Conclusion

It’s become the norm for businesses to operate without the ability to plan because Congress has failed to fix tax laws for the future. Let’s see what happens now.

Are You Prepared for … ?

January 15th, 2015

http://www.dreamstime.com/stock-image-prepared-text-unprepared-black-uppercase-letters-white-background-letters-un-crossed-out-red-pen-held-image36001131Donald Rumsfeld, Secretary of Defense under Bush 2, said:

“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. These are things we don’t know we don’t know.”

In business things are constantly changing, because of technology, legal developments, and Mother Nature, creating a never-ending pool of unknown unknowns. Here’s what we know so far and should prepare for (i.e., how to deal with the known unknowns).

Virtual currency
According to a survey by SMB accounting technology research firm Software Advice, 25% of consumers would use virtual currency, such as bitcoin, if it becomes available. Yet half of small and mid-sized businesses aren’t prepared to accept digital currency.

Decide whether accepting bitcoin as payment makes sense for your business after doing your homework and understanding the risk, namely fluctuation in bitcoin value. If you want to go forward, recognize that preparedness means having a mechanism in place to process virtual currency payments and knowing how to spend the bitcoin you receive. You’ll need a bitcoin merchant solution for this purpose. Find a list of options here.

Even more challenging, however, is having a system in place to comply with IRS reporting requirements. Work with your accountant and check out IRS rules for bitcoin.

Natural disasters
Institute for Business and Home Safety estimates that 25% of businesses do not reopen following a major disaster. Yet only about 64% of small businesses have any disaster preparedness plans.

Review or institute plans for action in case you experience a natural disaster. These plans should also include action in case of riots (think about the small businesses in Ferguson, MO) or other man-made disaster. Check out the SBA’s Emergency Preparedness Guide and the Toolkit from the Institute for Business and Home Safety.

Hack attacks
Verizon’s 2012 Data Breach Investigations Report found that 71% of data breaches occurred at companies with fewer than 100 employees. The incidents include web app attacks (attackers use stolen credentials or exploit vulnerabilities in web applications such as content management systems, cyber espionage to obtain intellectual property (e.g., patent information), point of sale instructions to capture customers’ credit card information, and physical theft and loss of laptops and other equipment with sensitive data.

The 2014 report lists actions you can take to better protect your data.

Conclusion
Stay alert to continual changes in the business environment. Hopefully, the unknowns can become knowns and you can prepare for them.

Ideas for Protecting Sensitive Employee and Contractor Data Before E-File Season

January 8th, 2015

http://www.dreamstime.com/stock-image-yellow-folder-chain-lock-data-security-concept-d-ren-rendering-image42652501Privacy laws and common sense dictate that you take action to protect information about your employees and independent contractors. As the deadline approaches for providing W-2s or 1099s to workers, it’s important to safeguard keep security of their Social Security numbers and other sensitive information.

eFile4Biz, an IRS-authorized e-file provider for online processing of 1099s and W-2s, shares these guidelines:

  • Keep only the information you need. Eliminate or archive older data.
  • Set routine procedures for tasks, such as when/how to dispose of tools that contain house sensitive info.
  • Protect paper documents from a security breach or identity theft. Lock cabinets in which papers are kept.
  • Keep an inventory of your information sources. Make sure as a small business owner you know where your important data is at all times.
  • Review your network setup. Protect your business with a strong firewall and strong security programs.
  • Provide access to information only on a “need to know” basis. Protected information includes not only employee/contractor data, but also your passcodes.

It’s also a good idea to use encryption when you transfer data via email. If so, give the password to the recipient by phone or a separate email.

Resources to help with security for your sensitive information:

Five New Year’s Resolutions

January 1st, 2015


http://www.dreamstime.com/royalty-free-stock-photography-new-year-resolutions-personal-life-goals-to-do-list-overambition-bunch-post-notes-written-them-years-just-image47600027While few keep them, it doesn’t stop us from making them every year.

Here are my five favorites. (This is adapted from an article published in Big Ideas for Small Business® in 2011.)

1. Listen better

There are a variety of reasons why people fail to listen when other people talk: they’d rather talk, they get distracted, they are preoccupied with their own thoughts and conclusions, or they find the other person boring. Still, other people, especially your staff and customers, may have something valuable to say and you need to listen carefully.

Become an “active listener” by paying attention and keeping your mind on what’s being said. Use online tools, such as MindTools, to help.

2. Think more

We all fall victim to Michael Gerber’s criticism that most small business owners spend more time working in the business than on it. To avoid this flaw, schedule time for strategic planning to focus your attention on ideas and not on routine or even pressing business matters.

Here are some activities you might do in the coming year that make you think more:

  • Write or revise your business and marketing plans.
  • Set up an advisory board to discuss strategic planning for your business; fix a regular time for the board to meet.
  • Take time off to concentrate on business planning without company distractions.

3. Learn new things

While technology is bombarding us with new developments every day, it’s important not to become shell-shocked. Make a resolution to learn how you can better use technology, such as integrating social media into your marketing plans.
New things are not restricted to technology. Consider spending time to learn a new language, take a writing or sales course, or hone some other skills.

4. Pay attention to details

Little things matter. Spending just a few minutes a day, each day, can add up to big results over the course of a year.

  • Keeping good books and records throughout the year can entitle you to greater tax savings when you complete your tax return.
  • Maintaining control over clutter by filing and tossing may require a few minutes each day but you’ll gain more time in easy access to your stored information.

5. Maintain perspective

For many entrepreneurs, their company is their baby and they take losses, criticism, and other bad news too seriously. Remembering that the worst that can happen to a business is that it goes under — the owner isn’t put in debtor’s prison or burned at the stake — may help you keep perspective.

Don’t forget to laugh, and to celebrate your achievements.

Here’s wishing you a prosperous New Year, and I hope all your dreams are realized.