Wednesday, June 7, 2017

5 Tips for Developing a Viable Business Plan

A business plan is an important tool that every aspiring entrepreneur should develop. A business plan can help you clarify what needs to be done in order for your company to succeed. It can also help you plan for changes in the market and other attract factors.

Here are five tips for developing a viable business plan:

1. Define the Scope of Business

Defining the business involves outlining its place in the market and its unique selling points.
  1. A marketing position statement outlines what the business would do to fulfill the needs and desires of its customers.
  2. The unique selling proposition shows how the products and services will be different from the rest on the market.
  3. Highlighted items should be strong enough to attract customers and compel them to take action.

2. Be Realistic

A viable business plan should be as realistic as possible.
  1. The sales goals, expense budgets and milestone dates should come from strategies that are possible to implement.
  2. A plan that involves a product that cannot be reasonably manufactured is ineffective and meaningless. The same applies to a plan that requires millions of dollars to implement but does not have a provision for teams that can oversee its implementation.
  3. The rule of thumb for making a realistic business plan is to identify the challenges and opportunities within your industry.
  4. Set realistic goals that help address these challenges and maximize the available opportunities.

3. Develop a Competitive Strategy

A viable plan should outline how the company will obtain and sustain a competitive advantage in the market. This entails the following:
  1. An analysis of the market to determine the strengths and weaknesses of the competitors.
  2. Identification of strategies that will offer your company a distinct advantage over its competitors. Strategies should anticipate potential barriers and solutions to those barriers.
  3. Identification of competitors’ weaknesses and how your company will fill that gap.
  4. Advertising, marketing, and positive media exposure that you will employ to get more customers.

4. Financial Performance Projections

The financial performance of a business is a measure of its success. The business plan must have a projection of how the company will perform based on the market conditions and exposure to fierce competition.
  • It must address the price and profitability of the products and the number of customers the business expects to attract.
  • A good approach when projecting financials is to undervalue the expected revenues and overestimate the company expenses.

5. Identify Forces that Can Impact the Business

There are three main factors that greatly influence the success of a business.
  1. Competitors
  2. Supply and demand
  3. Customers.

The business plan must define these factors comprehensively. For instance, it needs to highlight the role of fluctuating demands and supply of raw materials, manufacturing and labor. These factors play a pivotal role because they can affect the bargaining power of suppliers and customers.

As Charlottesville business law attorneys can attest, creating a viable business plan is an important stepping stone for achieving short and long term success for your company. The tips discussed above should help you develop a viable business plan for your business.

Thanks to our friends and contributors from MartinWren P.C. for their insight into developing a viable business plan.

Monday, May 8, 2017

The Taxation of LLC Member Distributions for Broker Dealers | Bethesda Tax Lawyer

In today’s blog, I’d like to look at another case, Fleischer v. Commissioner (2016), that deals with the reporting of income.  In this case, Ryan Fleischer, a financial advisor with various securities-trading licenses, had left his prior employment with an investment firm to work on his own.  To this end, he secured a contract with Linsco Financial Services, which he signed in his personal capacity. Shortly thereafter, Fleischer incorporated his own business, Fleischer Wealth Plan (FWP), as an S corporation. He then entered into an employment agreement with this entity, entitling him to an annual salary in exchange for various services rendered.  Shortly thereafter, he personally entered into a broker agreement with Mass Mutual, but neglected to include Fleischer Wealth Plan in that agreement.

When he filed his taxes in 2009, Fleischer reported wages of $34,851 and nonpassive income of $11,924 from FWP (which, the company’s returns stated, had $147,617 against expenses of $135,693).  In 2010 and 2011, he reported a similar $34k salary, but the S-corp generated nonpassive income of $147,642 and $115,327, respectively.  The IRS later responded by issuing notices of deficiency for all three of these years, noting that the gross receipts or sales reported by FWP should have been classified as self-employment income by Fleischer.

Fleischer challenged this determination, requiring that the court sort out who earned the income:  the corporate entity or Fleischer himself.  In the case of sole proprietors or employees of companies who are paid salaries or commissions, this is easy enough--the individual earns the income.  But here, the presence of a corporation makes the analysis more challenging.  Fleischer, operating under the assumption that his S-corp had earned these large amounts of nonpassive income, had filed taxes related to FWP asserting that this was so.  

In order to ascertain who earned the income, the court evaluated “who controlled the earning of the income.”  This test, more complicated than a simple examination of “who earned the income,” necessitated that two elements be proven true for Fleischer’s earlier assessment of his S-corporation’s tax status to stand:  first, “the individual providing the services must be an employee of the corporation whom the corporation can direct and control in a meaningful sense”; and second, “there must exist between the corporation and the person or entity using the services a contract or similar indicium recognizing the corporation’s controlling position.”  

In this instance, the fact that Fleischer contracted without mentioning FWP in the documents, including his contract with Mass Mutual after FWP had been formed, indicated that Fleischer, not FWP, controlled the earning of the income (in fact, Fleischer specifically omitted mention of FWP in his contract with Mass Mutual because he hoped to enter another side of the insurance sales business in the future).   Fleischer contended that he had to assign the income to FWP while contracting in his personal capacity because the S-corp did not have the same securities-trading licenses he did, and acquiring them would be financially ruinous, but the court gave no weight to this argument.  

In short, Fleischer was assessed deficiencies because he structured his business contracts improperly and then assigned income to his S-corp that he should have paid taxes on himself.  Had Fleischer actually wished to avoid this situation, he likely could have done so with better advice about tax and contract law.

For a free phone consultation regarding assignment of income to a corporation, the self-employment tax, or other tax matters, please contact the Law Office of Aaron P Richter, a Bethesda-based tax law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

Sunday, April 9, 2017

FBARs are Due April 18th | Bethesda Tax Lawyer

Beginning this year, FBARs are due on tax day, April 15th, most years, and April 18th this year. If you cannot file by the deadline, for this year only, an automatic extension until October 18th will be provided. 

The FBAR is now filed electronically on the BSA website. You can find the form and filing instructions, here.

The penalties failing to file the FBAR are steep.  If you have any foreign accounts and do not think you are required to file; at least contact someone to verify that you are correct.

For a free phone consultation regarding the FBAR, or other tax matters, please contact the Law Office of Aaron P Richter,  a Bethesda-based law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

Sunday, March 12, 2017

The Taxation of LLC Member Distributions | Bethesda Tax Lawyer

With the deadline for filing income taxes approaching, I’d like to discuss a recent decision on whether an individual’s share of income earned through a Limited Liability Company (LLC) is subject to the self-employment tax.  Self-employed individuals generally must pay self-employment tax (SE tax, which consists of 12.4% Social Security tax plus a 2.9% Medicare tax ) as well as income tax, so it is crucially important to know whether money received in a given year counts for self-employment tax purposes.

An important prior case, Renkemeyer et al. LLP v. Commissioner (2011), addressed the question of earnings by partners in a law firm.  In that case, the Tax Court examined the operation of the partnership and determined that all of the earnings that passed through to the partners “arose from legal services they performed on behalf of the law firm” and thus were subject to the self-employment tax as surely as if each partner was doing business for himself. It was clear to the court that “the partners’ distributive shares of the law firm’s income did not arise as a return on the partners’ investment.”  Had some of the partners merely had their names on the masthead of the partnership, and drawn passive revenue from it after a substantial initial investment, the decision might have been different, but the facts as presented did not allow the court to make such a determination.  

However, in last month’s Hardy v. Commissioner (2017) decision, the Tax Court had the opportunity to distinguish Renkemeyer and clarify our understanding of when self-employment tax should apply.  Plastic surgeon Stephen Hardy had bought a $165,000 share, or 12.5%, of a surgery center organized as an LLC.  In exchange, Hardy received annual distributions from the center’s earnings and met quarterly with the other members of the LLC.  Unlike the Renkemeyer partners’ earnings, Hardy’s distributions from the surgical center were not premised on daily attendance at the center or even on the performance of a center number of surgeries on site.  He merely received the distributions, independent of any surgeries or other customer service duties he might undertake.  

After considering those facts, the Tax Court held that “Hardy’s distributive shares [were] not subject to self-employment tax because he received the income in his capacity as an investor.”  His distribution share was, of course, still subject to taxation per the rules governing LLCs, but he was not required to pay self-employment tax that can sometimes prove a significant added cost.  Obviously, some cases of earnings through LLCs will be less clear-cut than either Renkemeyer or Hardy, and the determination of whether the self-employment tax applies will depend on a careful analysis of the many factors that swayed the courts in those two cases, such as the income’s source (return on investment or services performed on behalf of the LLC) and the role of the individual within (daily management and oversight touching on all services that generate earnings, or merely receipt of passive distributions in accordance with their ownership stake in the LLC).  

For a free phone consultation regarding the self-employment tax or other tax matters, please contact the Law Office of Aaron P Richter, a Bethesda-based law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

Friday, January 20, 2017

Bitcoin Update | Bethesda Tax Lawyer

Back in June, I wrote this blog about the tax implications of using Bitcoins and other cryptocurrency.  I was also interviewed by VICE, where I discussed the possibility that the IRS might pursue the untaxed money kept in various cryptocurrency accounts (or “wallets,” as users call them).  Over the course of the past three months, the IRS, which has had success recovering revenue from offshore accounts, launched an investigation into the Coinbase “wallet” service to determine the correct amount of tax that people who use virtual currencies such as bitcoin are obligated to pay.  In November, the agency filed a petition to serve a “John Doe” summons, asking for the identities of any US Coinbase customer who transferred crypto-currency with the service between 2013 and 2015.

When signing up to Coinbase, users are sometimes required to provide identification documents. “There is a reasonable basis for believing these US taxpayers failed to comply with internal revenue laws,” the petition continued. In 2014, the IRS stated that virtual currencies which can be converted into fiat currency are property for tax purposes. As noted in an earlier blog, this means, among other things, that wages paid to employees using bitcoin are taxable to the employee, and are subject to federal income tax.

However, the petition acknowledged that not all Coinbase customers may have broken any internal revenue laws: “The taxpayers being investigated have not been or may not be complying with US internal revenue laws requiring the reporting of taxable income from virtual-currency transactions.”

After the petition was filed in November, several individual users rushed to intervene in the case, hoping to quash the “John Doe” summons on privacy grounds.  The IRS responded by arguing that these users, having revealed their identities in order to intervene, were publicly identified and thus unable to claim that the “John Doe” summons threatened their privacy.  The story took a further turn in mid-January, when Brian Armstrong, the CEO of Coinbase, wrote a blog post announcing that his company would fight the summons in court.

Armstrong made several notable points about tax policy, stating that Coinbase was, unlike other cryptocurrency wallets, “committed to compliance” and prepared to issue 1099-B forms at the end of the year to users.  He argued “asking for detailed transaction information on so many people, simply for using digital currency, is a violation of their privacy” and is not a safe and effective path toward tax compliance. He also criticized the current IRS treatment of cryptocurrency as property, noting that this treatment would occasion the distribution of 1099-B forms for even the smallest transactions, since gains on property do not have a de minimis exception.  This could be resolved, he explained, by treating “virtual currency as actual currency for tax purposes” since there is a de minimis exception for actual currency.

It is difficult, though by no means impossible, to contest actions taken by the IRS.  Nevertheless, individuals who have not reported cryptocurrency transactions would be well advised to take steps to voluntarily disclose this unpaid tax instead of awaiting the results of a decision on the “John Doe” summons.  I will cover voluntary disclosure in greater detail in a forthcoming blog, but the following example given by the IRS is worth noting:  a letter from an attorney which encloses amended returns from a client which are complete and accurate (reporting legal source income omitted from the original returns), which offers to pay the tax, interest, and any penalties determined by the IRS to be applicable in full and which meets the timeliness standard set forth above.  This meets the IRS standards for a voluntary disclosure, which consists of a) a taxpayer showing a willingness to cooperate and b) the taxpayer then making a good faith arrangement to pay the IRS in full, along with applicable interest and penalties.  

The IRS has made known its intentions to collect unpaid tax on income currently kept in cryptocurrency accounts.  With that in mind, taxpayers who have untaxed income in these accounts should take affirmative steps to remedy any delinquencies.  I will continue to monitor this litigation as the situation unfolds.

For a free phone consultation regarding Bitcoin, the FBAR, or other tax matters, please contact the Law Office of Aaron P Richter,  a Bethesda-based law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

Monday, November 21, 2016

Online Gambling and FBAR Reporting | Bethesda Tax Lawyer

If you play online poker and keep your playing funds in accounts associated with the games, you may not have considered whether those accounts are FBAR reportable.  Given that the Ninth Circuit issued a ruling earlier this year attempting to clarify the situation, you should probably familiarize yourself with the current state of the law on this subject.  In United States v. Hom (2016), the court ruled on three types of playing accounts that a California district court had previously held were all subject to the FBAR.

In that case, John Hom--a high-stakes gambler--was assessed a total penalty of $40,000 for failing to report his three accounts in 2006 and his remaining account in 2007 ($10,000 per violation).  The three accounts consisted of two accounts tied directly to poker services, PokerStars and PartyPoker (both are still in operation in 2016), and FirePay (an early competitor to PayPal no longer in existence), which transferred money from an account with that service into either his online poker accounts or his Wells Fargo bank account.  

U.S. citizens who maintain accounts with foreign financial agencies are required to file the FBAR.  For this requirement to apply, the funds must be “in a bank, securities, or other financial account” that is “in a foreign country.”  In Hom’s case, it was undeniable that the funds were located in foreign countries since all three services were based offshore.  The relevant question was whether they were held within a “financial agency,” which the court defined as a “financial institution,” a term comprising commercial and private banks as well as licensed senders of money.

In the opinion of the Ninth Circuit, the FirePay account was FBAR-reportable, and that fine should be allowed to stand.  FirePay, which was based in the United Kingdom, had acted as a money transmitter, allowing Hom to move money between his bank account and online poker accounts.  However--and somewhat surprisingly--the court reversed the fines related to the PartyPoker and PokerStars accounts.  Those accounts, the court reasoned, “were used solely to play poker and there is no evidence they served any other purpose for Hom.”  They were not acting as banks, and since the statute and its related regulations failed to define the term, the court consulted the dictionary and determined that no part of the dictionary definition of bank (“an establishment for the custody, loan, exchange, or issue of money, for the extension of credit, and for facilitating the transmission of funds”) could be applied to either of those accounts.  

Though this was an unusual holding--it would seem logical that all of these accounts should be reportable for FBAR purposes, as the district court had originally held--this decision may influence other circuits.  Nevertheless, individuals with concerns about the tax implications of these and other foreign accounts should seek professional advice before determining what they should report to the IRS.

For a free consultation regarding the FBAR or other tax matters, please contact The Law Offices of Aaron P. Richter,  a Bethesda-based law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

Sunday, October 23, 2016

Intentional Misclassification of Employees | Bethesda Tax Lawyer

My last blog explained the distinction between employees and independent contractors while providing some basic information about the trust fund recovery penalty.  This blog examines the intentional misclassification of employees and its consequences, as well as the operation and assessment of the trust fund tax penalty.  Employee misclassification is an enormous problem nationwide.  A 2012 list of state audits compiled by the National Employment Law Project estimates that the number of misclassified employees in the United States runs into the millions (with nearly 1.2 million such employees working in the two states of Pennsylvania and New York alone!).  

The IRS has issued consumer alerts about fraudulent employment tax practices.  Notable among these are “pyramiding,” or the withholding of employment taxes that are not thereafter submitted to the IRS, and paying employees wholly or impartially in cash without assessing employment taxes.  These and other practices, such as using unreliable or outright criminal third-party payroll services, making frivolous or specious arguments about employee classifications advanced by unscrupulous promoters (a common--and illegal--tax resistance ploy, as noted elsewhere on this blog), or treating employee salaries as corporate distributions, offer strong evidence that an employer is trying to conceal losses or actively stealing money.  Such practices can trigger the application of a civil fraud penalty or a referral to the criminal investigative division.

For a taxpayer--in this case, the employer--to be guilty of fraud, he or she must have willfully attempted to not pay or underreport taxes.  An individual who has willfully attempted to misclassify employees is someone who has acted deliberately, knowingly, and with the specific intent to violate the law.  If the underpayment of tax is due to fraud, a penalty equal to 75% of the portion of the underpayment which is attributable to fraud will be added.  If the taxpayer can establish by a preponderance of the evidence that any portion of this underpayment is not attributable to fraud, that portion will be excepted from the fraud penalty.  IRS examiners will carefully scrutinize the employer’s business practices, looking for “badges of fraud” like the ones I have described here.  Individuals who are genuinely concerned about the classification of their workers--usually because they wish to classify them as independent contractors--can submit Form SS-8 and receive a prospective determination from the IRS, as discussed in my prior blog.  

Criminal investigations for employment tax evasion have remained steady between 2014 and 2016, averaging about 120 cases a year with a 75% incarceration rate (18 months is the average sentence convicted parties are assigned to serve).  The Fiscal Policy Institute released a study in 2007 noting that the most egregious intentional misclassifications of employees occur in the delivery, trucking, building maintenance, janitorial, agricultural, home health care, and janitorial industries.  However, the rise of the “gig economy” and the emergence of alternative means of payment, such as Bitcoin, has surely altered that assessment.  At any rate, employers in these fields, or small business owners in general, would be well advised to consult with the IRS, a CPA, or a tax attorney if they are genuinely concerned about what their best practices should be.

In general, this entire area of taxation represents a minefield for the unwary.  Beyond concerns arising from outright fraud and other criminal activities, employers must understand the crucial distinction between trust fund-related and non-trust fund related taxes.  There are four types of employment taxes, with two classified as trust fund-related taxes and two as non-trust fund related taxes. The first two consist of the employee’s federal income taxes and the 50% share of Federal Insurance Contributions Act (“FICA”) taxes an employer is required to withhold from employee’s wages (these constitute the employee’s contributions to the Social Security and Medicare programs he or she will rely on during retirement). Non-trust fund taxes are those paid by the employer:  unemployment taxes, which the employee can redeem if he or she is laid off through no fault of his or her own, and the employer's 50% contribution to the employee’s FICA taxes.

Given the amounts and types of money at stake, an incompetent or criminal-minded person who is responsible for payroll can wind up in significant trouble. In addition to imposing stiff penalties and interest on delinquent employment taxes, under Internal Revenue Code section 6672 the IRS can assert personal liability (i.e., the 100% trust fund recovery penalty that is triggered by intentional misclassification) for the trust fund portion of the delinquency on any and all of these “responsible persons.” A responsible person could be anyone who has the power to ensure the trust fund taxes are paid on time, and may include middle managers, payroll supervisors, and comptrollers at the employee’s company as well as high-ranking officials at third-party payroll companies.

The IRS can assert and enforce personal liability for the trust fund portion against any number of responsible persons simultaneously and will likely try to hold as many persons as possible liable. Even filing for bankruptcy won’t eliminate or reduce this liability.  Moreover, the federal Department of Labor and many state departments of labor have also begun aggressively campaigning against misclassification of employees, with 27 states as of 2015 having passed “presumptive employee status” statutes that require employers to prove that their workers are truly independent contractors.  

In sum, employers seeking to maintain workforces comprised of low-risk, low-cost independent contractors must tread carefully.  Federal and state governments, along with the IRS, have devoted considerable time and resources to ensuring that employers who are trying to exploit today’s fast-evolving economy must nevertheless comply with relevant labor and revenue laws.  For a free phone consultation regarding the trust fund recovery penalty, payroll taxes, or other tax matters, please contact the Law Office of Aaron P Richter,  a Bethesda-based law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.