Barbara’s Blog

With passage of the Jumpstart Our Small Businesses (JOBS) Act on April 5, small businesses will now have the opportunity to raise equity through crowdfunding. Crowdfunder.com shares these factoids:

• Small businesses currently receive only 17% of business financing (bank loans, venture capital, angel investors).
• If 1% of the $30 trillion held by Americans in long-term investments were to be shifted to small businesses, it would amount to more than 10 times the venture capital invested in 2011.
• Access to equity crowdfunding won’t begin until the SEC issues rules, which are required within 270 days of enactment (i.e., by early January 2013).

How much can you raise?

You will be able to use crowdfunding to raise up to $1 million. Businesses that need more funding will have to comply with the general SEC public offering requirements. Once you raise money totaling $1 million, you’ll have to wait at least 12 months before another crowdfunding offering. Also, once the number of investors exceeds 2,000, you’ll have to register with the SEC.

Until now, raising equity was limited to approaching “accredited investors,” which means individuals with a net worth exceeding $1 million (exclusive of their primary residence) or $200,000 in annual income. Crowdfunding has been extended to nonaccredited investors. Investments by these nonaccredited investors are restricted to:

• $2,000 or 5% of income if annual income is less than $100,000.
• 10% of income (up to $100,000 investment) if income is more than $100,000.

Sharing financial information

To participate in crowdfunding, your company must provide certain financial information. If you want to raise:

• $100,000 or less: Tax returns and a financial statement certified by a company principal.

• $100,000 to $500,000: Tax return and a financial statement must be reviewed by independent accountants.

• More than $500,000: Audited financial statements

Once you have investors, be prepared to communicate regularly with them. Rules on frequency and disclosure that have yet to be issued by the SEC likely will address this concern.

More information
Listen to my radio interview about equity crowdfunding with Matt Imhoff of EquityNet.com – click here to listen.

Taxes may already be a fond memory for you if you’ve filed your 2011 tax returns, but unfortunately there’s no time to rest. The clock keeps ticking as tax obligations continue unabated for this year and beyond. According to a recent NFIB survey, tax uncertainty continues to plague small business.

Here are some of the survey’s findings:

• 20% of small business cited taxes as the single most important problem facing them today.
• 22% said it is the single most important external impediment to growth.
• Small businesses spend on average $74 per hour to comply with the federal tax code, which is the most expensive paperwork burden imposed on small businesses by the federal government.
• 88% of small business owners use paid preparers to complete their tax returns.

What does this uncertainty do to small business and the economy? The NFIB fact sheet says that it

“hinders long term planning and create[s] uncertainty which prevents small businesses from making investments.”

It drains small businesses of valuable resources that could otherwise be spent on hiring, research, and other activities that would benefit the nation.

What’s up for 2012?

If Congress fails to take action now, the more than four dozen tax breaks that expired at the end of 2011 will not apply for 2012. This means:

• Many small business owners will owe the alternative minimum tax (AMT), especially those living in high-income tax states; higher taxes on owners means less money for hiring, etc.
• Businesses won’t be able to claim the research credit or many employment-related tax credits; the incentives won’t be there to incentivize.

What’s up for 2013?

If Congress does not make changes for 2013, it will be “taxmaggedon.” What to expect in the absence of any Congressional action:

• The Bush-era tax cuts will expire. This pushes the top tax rate up to 39.6%, the capital gains rate to 20%, and many other unfavorable tax rules.
• The Medicare surtaxes on earned and unearned income (as created by the Patient Protection and Affordable Care Act of 2010) will take effect for the first time.

What to do!

Become political. Whether you fall on the left or the right, you must urge your representatives to act. Just like a parent’s torment when a child goes missing, the uncertainty (not knowing what the tax rules will be) is killing us.

The first installment of 2012 estimated taxes is due on April 17, 2012. (The second will be due on June 15, 2012, the third on September 15, 2012, and the fourth on January 15, 2013.) Figuring the right amount of estimated tax is more challenging than ever. The reason: We don’t yet know many of the tax rules for 2012.

Expired tax rules
More than 50 tax rules affecting individuals and businesses expired at the end 2011. Most of the rules are noncontroversial; both sides of the aisle in Congress favor an extension. But when will an extension be enacted?

House Speaker Boehner (R-OH) said an extender bill likely would be enacted before the election. If Congress waited until this time to act, it would mean that three of the four estimated tax payments for 2012 will have already been made before we even know what the tax rules for this year will be.

A Ways and Means Committee hearing will be held in late April to consider tax reform that would make some extenders permanent. Ways and Means Committee Chairman Dave Camp (R-MI) said in a joint-statement with Rep. Patrick Tiberi (R-OH), “Far too many provisions in the tax code are temporary, making it hard for employers to plan, invest and create new jobs for American families.” Yah think?

Estimated tax safe harbors
So what are taxpayers supposed to do about their 2012 estimated taxes? They can rely on a safe harbor to avoid any estimated tax penalties for underpayments. This safe harbor requires taxpayers to base 2012 estimated tax on 2011 tax liability. If their 2012 estimated taxes total 100% of the tax 2011 tax bill (or 110% if adjusted gross income in 2011 was more than $150,000), then they are penalty free.

The problem with this safe harbor is that it overtaxes the very people who can least afford it. Suppose you already see that 2012 is not shaping up to be a great year. If you use the 100% safe harbor, you may overpay your estimated taxes and be out-of-pocket for the money that could better be spent reinvesting in your business.

You might consider closely monitoring estimated taxes so you can adjust payments going forward. If you wind up paying at least 90% of the taxes you’ll ultimately owe on your 2012 return through estimated taxes, there will not be any underpayment penalty. You could, for example, make a modest payment now on the theory that your revenues will be down and your taxes will be lower than last year. If, by June, things turn around, you can adjust your second estimated tax payment.

Even if you underpay estimated taxes, the cost is not that great at this time. The underpayment penalty is figured using the IRS interest rate. The rate for the second quarter of 2012 is only 3%!

You can learn more about making estimated tax payments through my book, J.K. Lasser’s Small Business Taxes 2012 and IRS Publication 505.

Bottom line
Monitor the fate of extenders as they move through Congress. Also keep a close eye on your estimated taxes for 2012. Hopefully, it won’t be too long until you’re better able to figure your tax payments for this year. Work with a knowledgeable tax advisor to help you avoid both penalties (however small) for underpayments as well as making interest-free loans to the government via overpayments.

Small business owners know that not much has happened in Congress to help them access capital, hire new workers, or take any other steps to improve their bottom lines. Who are the key players in Congress that are in positions to help small businesses and what key actions are pending now?

Here’s a rundown so that you can contact key players to encourage action, as well as keep track of legislation:

Key players
The House’s Small Business Committee is headed by Rep. Sam Graves (R-Mo). The ranking member on the committee is Nydia Velazquez (D-NY). Other committee members include:

• Lou Barletta (R-PA)
• Roscoe Bartlett (R-MD)
• Jaime Herrera Beutler (R-WA)
• Steve Chabot (R-OH)
• Judy Chu (D-CA)
• David Cicilline (D-RI)
• Yvette Clarke (D-NY)
• Mike Coffman (R-CO)
• Mark Critz (D-PA)
• Renee Ellmers (R-NC)
• Janice Hahn (D-CA)
• Richard Hanna (R-NY)
• William Keating (D-MA)
• Steve King (R-IA)
• Jeff Landry (R-LA)
• Mike Mulvaney (R-SC)
• Bill Owens (D-NY)
• Gary Peters (D-MI)
• Cedric Richmond (D-LA)
• Bobby Schilling (R-IL)
• Kurt Schrader (D-OR)
• Scott Tipton (R-CO)
• Joe Walsh (R-IL)
• Alan West (R-FL)

In the Senate, the Small Business and Entrepreneurship Committee is headed by Sen. Mary Landrieu (D-LA); the ranking member on the committee is Sen. Olympia Snowe (R-ME). Other committee members include:

• Kelly Ayotte (R-NH)
• Scott Brown (R-MA)
• Maria Cantwell (D-WA)
• Ben Cardin (D-MD)
• Mike Enzi (R-WY)
• Kay Hagan (D-NC)
• Tom Harkin (D-IA)
• John Kerry (D-MA)
• Carl Levin (D-MI)
• Joseph Lieberman (I-CT)
• Jerry Moran (R-KS)
• Rand Paul (R-KY)
• Mark Pryor (D-AR)
• James Risch (R-ID)
• Marco Rubio (R-FL)
• Jeanne Shaheen (D-NH)
• David Vitter (R-LA)

Key bills
There have been a number of proposals in this Congress to aid small businesses. Key measures to keep an eye on are:

The Small Business Tax Cut Bill (H.R. 9) is a bill that would provide small businesses (up to 500 employees) with a 20% tax cut in order to bolster job creation. The bill would allow eligible businesses a tax reduction of 20% of their active business income. Unfortunately, the Senate is not expected to even consider the measure.

Extension of expired and expiring tax rules—to date, there has been no bill that would extend the tax breaks that expired at the end of 2011 and those set to expire at the end of 2012.

Final thoughts
While large corporations often engage lobbyists to push their agenda; small business owners can’t afford lobbying costs and need to do things on their own. Become more proactive and voice your opinion. Contact your representatives. Support small business advocacy groups, like NFIB and the Small Business & Entrepreneurship Council. If you do nothing, you have nothing to complain about!