Nolo's Small Business Legal Blog

Moratorium on IRS Tax Shelter Penalties for Small Business Retirement Plans

2010-03-09T21:57:52Z

The IRS recently extended--for the second time--a moratorium on collecting penalties for failing to report certain transactions considered tax shelters by the IRS. Caught in the IRS tax shelter snare are small business owners who paid into certain retirement accounts (namely 412(i) and 419(e) plans), even though the provision was intended to go after big corporation and wealthy individuals. As reported by Margaret Collins in a recent Business Week article, the IRS moratorium will suspend penalties on individuals who received less than $100,000 in savings from the unreported transactions and under $200,000 for other taxpayers. "Some of these businesses were assessed tax penalties as high as $300,000 per year but received a tax benefit for as little as $15,000 from the transaction," according to Senator Charles Grassley, an Iowa Republican. There is proposed legislation that would make the penalty proportional to the tax benefit received.

SBA Stimulus Funds Are Running Out

2010-03-06T18:53:21Z

Back in October we posted about the availability of new lending for small businesses. Now it appears the stimulus money is running out (a second time), because so many small businesses have taken advantage of the new loan money. The programs at stake, the 7(a) and 504 lending programs, have been popular with banks because they increased SBA guarantees up to 90% for lenders, and they've been popular with small businesses because they decreased loan fees for borrowers. According to the Wall Street Journal's article on the dwindling SBA stimulus funds, "The 90% guarantee and reduced fees have catalyzed SBA loan activity, even as conventional loans have continued to decline. According to the SBA, average weekly loan volume has increased by nearly 90% since the stimulus measures kicked in one year ago."

You can still sign up for the SBA loan queue and possibly get a loan if a borrower fails to qualify for their loan. Go to www.sba.gov/recoveryq/ to find out more.

Online Social Media - The New Marketing Platform

2010-03-01T23:13:01Z

Small businesses can no longer afford to ignore the importance of online reviews, blogs, local search sites, and other social media. Word of mouth, the Yellow Pages, and other traditional marketing tools are no longer what people rely on when making decisions about where to shop, eat, or visit. As reported in an article by Kermit Pattison in the New York Times, "84 percent of Americans say online reviews influence their purchasing decisions." Don't get left behind--or worse, find out too late that you haven't properly managed your online reputation.

What to do? First, find out what is out there already, advises Pattison in "Managing an Online Reputation." Do a Google search of your business name and see what comes up. What impression would the search make on a customer? Are you easy to find? If there's not much there, list your business on local search sites like Yelp, Citysearch, and others. Then, get active and engaged in the online community. Stay on top of the online buzz with Google alerts and do your own online browsing to see what's out there and what people are saying about you and your competitors. What do people think about your product or services? Are there changes you should make to better serve your customers? Respond to reviews to show you care and listen to what people have to say.

Figure out what sites are popular in your area and learn to use others like Twitter and Facebook. Try to develop your own following and stay up to date. Finally, never, ever post fake reviews or do anything false or misleading solely to make your business look better or to harm a competitor. You could face fines from the attorney general's office or worse, ruin your hard-earned reputation.

Banks Urged to Look Beyond Numbers When Lending to Small Businesses

2010-02-24T23:16:15Z

The Board of Governors of the Federal Reserve System issued a press release this month urging banks to make small business loans based on a broader-based analysis of the viability of a business rather than simply a credit score. In essence, the Board of Governors is asking all banks to act more like community banks which are often more willing to lend to small businesses. Community banks often have a better understanding of the local market and the borrower as opposed to commercial lenders who simply rely on numbers and credit scores in their analysis.

The statement assures banks that "financial institutions that engage in prudent small business lending after performing a comprehensive review of a borrower's financial condition will not be subject to supervisory criticism for small business loans made on that basis. Financial institutions should understand the long-term viability of the borrower's business and focus on the strength of a borrowers' business plan to manage risk rather than using portfolio management models that rely primarily on general inputs, such as a borrower's geographic location or industry."

As reported in a Business Week article by John Tozzi, "Banks have been pulled in two directions over commercial lending. The Obama Administration and members of Congress have urged them to expand lending to small businesses, but regulators want them to reduce their risk. In this statement, the regulators say they won't penalize banks for making loans to businesses in troubled industries or locations, as long as the bank has soundly assessed the borrower's ability to repay."

Proposed Tax Credit for New Hires in 2010

2010-02-18T19:55:42Z

In an effort to stimulate hiring and increase employment, the Obama administration has proposed a one-year tax credit for businesses that hire new employees in 2010. Under the proposal, any firm that hires a new employee in 2010 would get up to a $5,000 tax credit for each hire. The credit is capped at $500,000 per company. In addition, firms that hire new employees or increase salaries of current employees would be reimbursed for Social Security taxes related to their increased payroll. The Social Security reimbursement would not apply to wages above the $106,800 Social Security maximum to make sure the benefit is tied to -- and encourages the hiring of -- less highly paid workers.

The administration estimates 1 million small businesses will take advantage of the credit, which is expected to cost the government $33 billion. The money would come from savings from the Troubled Asset Relief Program, which officials now think will cost $200 billion less than expected.

New Credit Card Rules Don't Help Small Businesses

2010-02-17T04:00:05Z

New credit card rules designed to protect consumers from overreaching practices by credit card companies take effect on February 22^nd. These new rules, however, apply only to consumers--they do not cover credit cards issued to small business owners. So small businesses that carry credit card debt won't benefit from the new credit card rules unless they start charging business expenses on their personal credit cards. But, as noted by Emily Maltby in "Entrepreneurs Weigh Credit-Card Options,"while this may sound tempting, it's probably not a good idea. First, the new rules are intended to protect consumers, not businesses--they may not cover a personal credit card that is used too much for business purposes. Also, one of the first things most business owners do when they get started is to separate personal and business spending and expenses for tax and other reasons. Going back on this basic good business practice is not a good idea.

Obama Proposes New $30 Billion Fund to Promote Small Business Lending

2010-02-13T21:57:46Z

President Obama has announced a new lending plan which would provide smaller community banks with new capital to lend to small businesses. Under the proposal, which will require Congressional approval, the government would use $30 million it receives back from Wall Street banks repaying bailout loans under the Troubled Asset Relief Program (TARP) and set up a new Small Business Lending Fund. This fund would be available to banks with assets under $10 billion--primarily smaller community banks. These banks account for 50% of all small business loans.

"These are the small, local banks that work most closely with small business -- they're usually the ones that provide them their first loan, and they watch them grow through good times and bad," Mr. Obama said. . . "The more loans these banks provide to creditworthy small businesses, the better deal we'll give them on capital from this fund that we've set up."

President Obama has also proposed continuing other small business lending incentives such as waiving fees and increasing guarantees for loans backed by the Small Business Administration. In his State of the Union address, President Obama also said he will be proposing new tax breaks for small businesses that create new jobs or increase hours and wages on existing jobs.

The L3C LLC: Low-Profit Limited Liability Company

2010-02-12T00:30:46Z

In our last two posts, we talked about the series LLC and the nonprofit LLC. Here's one more: the L3C, or LLLC.

L3C is a nickname for a "low-profit limited liability company." Why would anyone go into business to make little profit? Similar to a nonprofit, an L3C is organized to perform services or engage in activities that benefit the public. But a L3C is run like a regular profit-making business and is allowed to make a profit as a secondary goal.

A small but growing number of states, including Illinois, Michigan, Utah, Vermont, and Wyoming, allow L3Cs. These states' LLC statutes set out the purposes for which an L3C company can be formed; the statutes are modeled on the IRS requirements for program-related investments (PRIs). However, the IRS has not yet ruled on whether investments in L3Cs will qualify as PRIs. The idea behind an L3C is to allow public-spirited LLCs to receive seed money from large nonprofit foundations. But because the IRS has not yet ruled on this issue, because L3Cs are not automatically qualified as tax-exempt nonprofit organizations under federal and state tax laws, and because they may not be eligible to receive foundation funds without the addition of restrictions to their articles of organization or operating agreement, they face challenges finding credibility in the real world of nonprofit-foundation funding.

Update: I just read a February 9 article on L3C companies written by Malika Zouhali-Worrall of CNN Small Business, focusing on a farmer-owned milk processing company in Maine. An interesting example of how the L3C structure can be used.

A Nonprofit LLC?

2010-02-07T00:24:04Z

In our last post we introduced a new type of LLC, the series LLC. Here we'll talk about another interesting way to use the limited liability company, the nonprofit LLC.

Nonprofit LLCs are usually formed by larger nonprofit corporations to house some of their activities. Some larger tax-exempt nonprofit organizations like to segregate nonprofit funds or assets in a nonprofit LLC. The assets of the nonprofit LLC must be irrevocably dedicated to nonprofit purposes, and the LLC cannot pay out profits to its members.

As another strategy, some larger nonprofits form a regular profit-making LLC to place a limited liability shield around some of the nonprofit's unrelated business activities (activites that bring in a profit and are only tangentially related to the nonprofit's mission). As long as the LLC's income and activities are insignificant, relative to the overall income and activities of the parent nonprofit, this arrangement may pass muster with the IRS. The parent nonprofit has to pay income taxes on profits it receives from its LLC subsidiary. Next, up a hybrid LLC called the L3C, which has a mix of profit and nonprofit motives.

New Types of LLCs on the Horizon

2010-02-01T23:42:05Z

There are three new types of LLCs (limited liability companies) that have come along in the past year or so: the series LLC, the LC3, and the nonprofit LLC. Each is unique and limited in scope and purpose.

The series LLC allows LLC members (the owners) to own interests in different series of assets and to collect ifferent revenue streams from the LLC. So far, only fourteen states currently allow for the formation of a series LLC: Delaware, Florida, Indiana, Illinois, Iowa, Minnesota, Mississippi, Nevada, North Dakota, Oklahoma, Tennessee, Utah, Virginia, and Wisconsin.

The main characteristic and advantage of the series LLC is that it allows the LLC to set up one or more series of assets within the LLC. Each series is administered separately from the other series, which means that separate businesses and properties can be subsumed into one LLC entity, but the business and assets of each series can be managed and operated separately from the business and assets of the other businesses. For example, each series can have separate owners and managers, a separate LLC operating agreement that specifies a separate division of profits and losses associated with the series, and other separate formation and operation characteristics.

An important aspect of some states' statutes regarding series LLCs is that each business is insulated from the liabilities of the other businesses within the LLC. A series LLC can work well to insulate multiple real property parcels owned by a real property developer. It may also work for an LLC engaged in separate lines of business that have unique legal liabilities attached to each business. Generally, however, for locally owned and operated small businesses, it is unnecessarily costly and complex to form a series LLC.

We'll talk about the nonprofit LLC and the series LLC in our next posts.

IRS Lowers Standard Mileage Rates for 2010

2009-12-14T20:25:04Z

The IRS announced the 2010 standard mileage rates for the use of a car (including a van, pickup, or panel truck). Effective January 1, 2010, the standard mileage rates are:
50 cents per mile for business miles driven
16.5 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations

The 2010 rate for business miles is lower than the rate that was in effect for 2009, which was 55 cents per mile. According to the IRS, the lower rate for business use of a vehicle for 2010 reflects "generally lower transportation costs compared to a year ago," such as the cost of gasoline.
Self-employed people can choose either the standard mileage rate with the rate set annually by the IRS or they can calculate their actual costs of operating a business vehicle. There are certain restrictions on using the standard mileage rate however. You must use that method the first year you use the vehicle in your business, and you can't have claimed accelerated depreciation deductions or have taken any Section 179 deductions for the vehicle.

Section 179--A Small Business Owner's Best Friend (at Taxtime)

2009-11-19T23:22:01Z

If you learn only one number in the tax code, it should be Section 179. This humble piece of the tax code is one of the greatest tax boons ever for small business owners. Section 179 doesn't increase the total amount you can deduct, but it allows you to get your entire depreciation deduction in one year, rather than taking it a little at a time over the term of an asset's useful life--which can be up to 39 years. To qualify, the property must be long-term, tangible personal property that you purchase and then use in your business over 50% of the time.
In an effort to jumpstart the economy, the Section 179 limit was increased to a whopping $250,000 for 2009 (from $128,000 in 2007). It is scheduled to go back down to $133,000 in 2010 and then $25,000 in 2011. So if you're planning on purchasing more than $25,000 of eligible property for your business and want to deduct the cost in one year, you should make your purchase before 2011.

See Deduct It! by Stephen Fishman (Nolo) for more information on small business tax deductions.

Facebook -- The New Essential Marketing Tool

2009-11-17T20:16:58Z

More and more businesses are using Facebook to market and promote their business. As reported in a recent New York Times article "How to Market Your Business With Facebook," there are 300 million people on Facebook--a vast audience of potential consumers. By creating a Facebook Page, small businesses can build their own online communities of fans and customers through targeted marketing that reaches those most likely to be interested in their product or services.

Clara Shih, author of "The Facebook Era" (Pearson Education, 2009) recommends that businesses start small and have a clear objective in mind--for example, getting more customers in the door. Then create a strategy to accomplish that goal. The owner of a cupcake bakery called Sprinkles increased its fan base and store traffic by posting a password on its Facebook page every day that could be used to redeem a free cupcake at the store. A simple, focused, and effective strategy.

Some other basic rules from the experts: Don't use Facebook just to market and push your product or services. Create a site that is inviting to users, reflects personality, and is interactive. Liven it up with news, useful information, and promotions--and keep it current. Also, be sure to listen to your users so you can see how you are doing and what changes you may want to consider based on the feedback you get from your online fans.

Top IRS Audit Concerns

2009-11-09T22:15:08Z

Most small businesses have at least some concern about the possibility of facing an IRS audit. You may be wondering how the IRS decides to audit, how likely it is that you'll be audited, and what you can do to avoid being one of the unlucky ones. Let's take a look at some of the things that are most likely to draw the attention of the IRS. That way you can take steps to avoid that unwanted attention--or come out of an audit unscathed if you find yourself in the government's crosshairs.
When auditing small business owners, the IRS is most concerned about whether you have done one of the following:
• Underreported your income. Unlike employees who have their taxes withheld, business owners who are not employees have no withholding--and many opportunities to underreport how much they earned, particularly if they run a cash business.
• Claimed tax deductions to which you were not entitled. For example, you claimed that nondeductible personal expenses, such as a personal vacation, were deductible business expenses.
• Properly documented the amount of your deductions. If you don't have the proper records to back up the amount of a deduction, the IRS may reduce it, either entirely or in part. Lack of documentation is the main reason small business owners lose deductions when they get audited.
• Taken business deductions for a hobby. If you continually lose money, or you are involved in a fun activity such as art, photo¬graphy, crafts, or writing and don't earn profits every year, the auditor may question whether you are really in business. If the IRS claims you are engaged in a hobby, you could lose every single deduction for the activity.

For more information on this and other small business tax deductions issues, see Deduct It, by Stephen Fishman.

Top Tax Deductions For Your Small Business

2009-11-05T18:08:44Z

When you're totaling up your business's expenses at the end of the year, don't overlook these valuable business deductions. Remember, the more tax deductions your business can legitimately take, the lower its taxable profit will be. It's that simple. But you need to know what is -- and isn't -- deductible, and pay careful attention to IRS rules. Here are some of the more common deductible business expenses that you won't want to miss.
1. Expenses of Going Into Business. The costs of getting a business started are capital expenses, $5,000 of which you may deduct the first year you're in business; any remainder must be deducted in equal amounts over the next 15 years.
2. Equipment Purchases. Under Section 179 of the Internal Revenue Code, you can fully deduct up to $250,000 of certain business equipment you purchase in 2009 (subject to a phase-out if you spend more than $800,000). There is also a first-year bonus depreciation deduction in effect for 2009 which allows you to depreciate 50% of the adjusted basis of qualified property purchased during the year. Take advantage of these tremendous tax savings if you can--the Section 179 deduction is scheduled to go down to $133,000 in 2010 and bonus deduction expires at the end of the year.
3. Auto Expenses. If you use your car for business, or your business owns its own vehicle, you can deduct some of the costs of keeping it on the road. Mastering the rules of car expense deductions can be tricky, but well worth your while.
4. Business Entertaining. If you pick up the tab for entertaining present or prospective customers, you may deduct 50% of the cost.
5. Travel. When you travel for business, you can deduct many expenses, including the cost of plane fare, taxis, lodging, meals, telephone calls, faxes, and tips.
6. Legal and Professional Fees. Fees that you pay to lawyers, tax professionals, or consultants generally can be deducted in the year incurred. However, if the work clearly relates to future years, they must be deducted over the life of the benefit you receive.
7. Bad Debts. If someone stiffs your business, the bad debt may or may not be deductible -- it depends on the kind of product your business sells. If your business sells goods, you can deduct the cost of goods that you sell but aren't paid for. If your business provides services, no deduction is allowed for time you devoted to a client or customer who doesn't pay.
8. Interest. If you use credit to finance business purchases, the interest and carrying charges are fully tax deductible. The same is true if you take out a personal loan and use the proceeds for your business. Be sure to keep good records demonstrating that the money was used for your business.
9. Taxes. Taxes incurred in operating your business are generally deductible. How and when they are deducted depends on the type of tax.
10. Advertising and Promotion. The cost of ordinary advertising of your goods or services -- business cards, yellow page ads, and so on -- is deductible as a current expense. Promotional costs that create business goodwill -- for example, sponsoring a peewee football team -- are also deductible as long as there is a clear connection between the sponsorship and your business.
See Deduct It! by Stephen Fishman (Nolo) for more information on tax deductions for your small business.