Archives for Business Law

2024 Business Law Considerations

Entering the new year, the following highlights are current areas of emphasis in Business Law:

  • The Corporate Transparency Act’s Impact on Small Businesses
  • False Advertising Lawsuits on the Rise
  • SBA Loan Changes: Easier Access to Capital for Small Businesses
  • DOJ’s Announcement of New M & A Safe Harbor Policy
  • Businesses Warned of Employee Retention Credit Scamming

In clicking the link below, you’ll find more in-depth information about each. As always, we are dedicated to “Helping You Keep What’s Yours” and planning for the future by implementing new strategies and keeping ourselves, and you, up to date. Please reach out to us with your questions and business needs. We are here to help.

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New FinCEN Filings Go into Effect on January 1

For existing businesses, the Corporate Transparency Act (CTA) goes into effect on January 1, 2024, and imposes a brand-new federal filing requirement on most corporations, limited liability companies, and limited partnerships and on certain other business entities.

No later than December 31, 2024, all non-exempt business entities must file a beneficial owner information report (BOI report) with the Financial Crimes Enforcement Network (FinCEN)—the Treasury Department’s financial intelligence unit.

The BOI reports must disclose the identities and provide contact information for all of the entity’s “beneficial owners”: the humans who either (1)control 25 percent of the ownership interests in the entity or (2) exercise substantial control over the entity.

Your BOI report must contain all the following information for each beneficial owner:

  • Full legal name
  • Date of birth
  • Complete current residential street address A unique identifying number from either a current U.S. passport, state or local ID document, or driver’s license or, if the individual has none of those, a foreign passport
  • An image of the document from which the unique identifying number was obtained

FinCEN will create a new database called BOSS (Beneficial Ownership Secure System) for the BOI data and will deploy the BOSS to help law enforcement agencies prevent the use of anonymous shell companies for money laundering, tax evasion, terrorism, and other illegal purposes. It will not make the BOI reports publicly available.

The CTA applies only to business entities such as corporations and LLCs that are formed by filing a document with a state secretary of state or similar official. It also applies to foreign business entities that register to do business in the United States.

Some businesses are exempt from the CTA, including

  • larger businesses with 20 or more employees and $5 million in receipts, and
  • businesses already heavily regulated by the government, such as publicly traded corporations, banks, insurance companies, non-profits, and others.

The CTA does not apply to sole proprietors or general partnerships in most states. But it does apply to single-member LLCs, even though the tax code disregards such entities and taxes them on Schedule C, E, or F of Form 1040.

The initial BOI report filing does not expire, and you don’t need to renew it. But you have an ongoing duty to keep the BOI report up to date by reporting any changes to FinCEN within 30 days of occurrence.

Failure to comply can result in hefty monetary penalties and up to two years in prison.

Beat the Net Investment Income Tax

Here is some important information regarding the net investment income tax (NIIT), which may be relevant to your financial situation.

NIIT Overview

The NIIT is a 3.8 percent tax that could apply if your modified adjusted gross income (MAGI) exceeds $200,000 (single filers), $250,000 (married, filing jointly), or $125,000 (married, filing separately). It targets the lesser of your net investment income or the amount by which your MAGI exceeds the thresholds.

What Qualifies as Net Investment Income?

Net investment income includes income from investments (such as interest, dividends, and annuities), net rental income, and income from businesses in which you don’t materially participate. It does not include wages, self-employment income, tax-exempt income, and distributions from qualified retirement plans.

Reducing or Avoiding the NIIT

To mitigate the NIIT, it’s crucial to understand what’s triggering it—your net investment income or your MAGI. Here are some strategies:

  1. Invest in municipal bonds. Pick bonds that are exempt from the NIIT and from federal and state taxes.
  2. Donate appreciated assets. The correct asset donation avoids the NIIT and provides a tax deduction.
  3. Avoid selling appreciated stock. Buy growth stocks that don’t pay dividends, and hold them.
  4. Utilize Section 1031. It avoids MAGI and net investment income, and defers taxes.
  5. Invest in life insurance and annuities. This typically defers tax until withdrawal.
  6. Harvest investment losses. This can offset gains and reduce taxable income.
  7. Invest in rental real estate. Structured correctly, this can minimize taxable income.

Other Strategies

  • Active participation in business. It avoids classifying income as net investment income.
  • Short-term rentals and real estate professional status. These also avoid classifying income as net investment income.
  • Alternative marital status. Though this option may seem extreme, two single taxpayers have a higher MAGI threshold than a married couple.
  • Retirement plan investments. These can reduce MAGI.
  • IRA conversions. Converting traditional IRAs to Roth IRAs may trigger the NIIT but can have long-term tax benefits.
  • Installment sales. They can level out MAGI over time.

The NIIT can be complex, but strategic planning can significantly reduce its impact.

Deducting Start-up Expenses for a Rental Property

Are you interested in becoming a commercial or residential landlord?

If so, you’ll likely have to shell out plenty of money before ever collecting a dime in rent. The tax code treats some of those monies as start-up expenses.

Start-up expenses are some of the costs you incur before you offer a property for rent. There are two broad categories:

  1. Investigatory
  2. Pre-opening costs, such as advertising, office expenses, salaries, insurance, and maintenance costs

Your cost of purchasing a rental property is not a start-up expense. Rental property and other long- term assets, such as furniture, must be depreciated once the rental business begins.

On the day you start your rental business, you can elect to deduct your start-up expenses.

The deduction is equal to

  • the lesser of your start-up expenditures or $5,000, reduced (but not below zero) by the amount by which such start-up expenditures
    exceed $50,000, plus
  • amortization of the remaining start-up expenses over the 180-month period beginning with the month in which the rental property business begins.

When you file your tax return, you automatically elect to deduct your start-up expenses when you label and deduct them on your Schedule E (or other appropriate return).

Costs you pay to form a partnership, limited liability company, or corporation are not part of your start-up expenses. But under a different tax rule, you can deduct up to $5,000 of these costs the first year you’re in business and amortize any remaining costs over the first 180 months you are in business.

Note that the cost of expanding an existing business is a business operating expense, not a start-up expense. As long as business expansion costs are ordinary, necessary, and within the compass of your existing rental business, they are deductible.

The IRS and tax court take the position that your rental business exists only in your property’s geographic area. So, a landlord who buys (or seeks to buy) property in a different area is starting a new rental business, which means the expenses for expanding in the new location are start-up expenses.

You can’t deduct start-up expenses if you’re a mere investor in a rental business. You must be an active rental business owner to deduct them.

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End of Year Real Estate Updates

In our efforts to keep you updated with the latest legal news in Real Estate, this month’s post highlights the following:

  • The White House HUD’s Crackdown on Unnecessary Rental Fees
  • Federal Agencies’ Proposed Rules to Address Bias in Home Appraisal Process
  • Details on The Department of Justice’s Continuing Anti-Redlining Initiative
  • A Rise in Real Estate Transactional Scams & Helpful Federal Guidance

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Business Law Matters

This fall in Business Law matters, we take a deeper dive into:

    1. What businesses need to know about state consumer privacy legislation. A growing number of states are enacting consumer data privacy laws to give consumers more choice over how companies access and manage their personal data.
    2. Companies’ responsibly to understand the U.S. Environmental Protection Agency’s (EPA) decision to ban 9 additional PFAS in products and the reporting requirements. To avoid negligence, companies must work to eliminate legal claims due to environmental contamination or personal injury. An attorney can help you understand your rights and obligations with the government or other parties.
    3. Why and how the legalization of recreational and medical marijuana use’s limited bipartisan support creates a public safety issue. Consumers need to be educated and aware of how the SAFE Banking Act is doing its part.
    4. A costly blunder on the part of the Consumer Financial Protection Bureau (CFPB). Find out how an IT test triggered $2.3 billion in unauthorized payments.
    5. The specifics regarding former Uber executive Joseph Sullivan’s data breach, liability, and sentencing.

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DOL proposes change to independent contractor definition

The U.S. Department of Labor (DOL) has issued a notice of proposed rulemaking related to classifying employees as independent contractors.

The change could result in more workers being classified as employees and therefore entitled to certain federal protections such as minimum wage, workers’ compensation and overtime pay.

The rules would effectively undo a Trump administration-era ruling that took effect in January 2021.

Under the 2021 rule, an “economic reality test” is used that depends largely on two core factors – control over work and the opportunity for profit or loss.

Other factors could be taken into consideration but were given less weight.

Now the DOL has proposed returning to a “totality of the circumstances” evaluation under which applicable standards do not have a predetermined weight.

Additional factors can include:

  • Permanence of the work relationship
  • The worker’s investment in equipment or materials required for the task
  • Whether the work is an integral part of the employer’s business
  • Worker skill and initiative

Analysts have said the proposed rule will have the biggest impact on businesses that rely on gig workers, such as Uber and Lyft.

However, statements from both Uber and Lyft imply that the change is merely a return to the status quo.

In advance of an expected 2023 effective date, businesses should review contract language in which they “reserve the right” to control aspects of a contractor’s work.

Under the proposed rules, such language could constitute an employee relationship, even if you don’t actually exercise that control.

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Business Tax Deduction Strategies

Here are six business tax deduction strategies to implement before the end of 2022.
1. Prepay Expenses Using the IRS Safe Harbor

IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.

Under this safe harbor, your 2022 prepayments cannot go into 2023. This makes sense, because you can prepay only 12 months of qualifying expenses under the safe-harbor rule.

For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance premiums.

Example. You pay $3,000 a month in rent and would like a $36,000 deduction this year. So on Friday, December 30, 2022, you mail a rent check for $36,000 to cover all of your 2023 rent. Your landlord does not receive the payment in the mail until Tuesday, January 3, 2023. Here are the results:

You get what you want—the deduction this year.

The landlord gets what he wants—next year’s entire rent in advance, eliminating any collection problems while keeping the rent taxable in the year he expects it to be taxable.

2. Stop Billing Customers, Clients, and Patients

Here is one straightforward strategy to reduce your taxable income for this year: stop billing your customers, clients, and patients until after December 31, 2022. (We assume here that you or your corporation is on a cash basis and operates on the calendar year.)

Customers, clients, and insurance companies generally don’t pay until billed. Not billing customers and clients is a time-tested tax-planning strategy that business owners have used successfully for years.

Example. Jake, a dentist, usually bills his patients and the insurance companies at the end of each week. This year, however, he sends no bills in December. Instead, he gathers up those bills and mails them the first week of January. He postponed paying taxes on his December 2022 income by moving that income to 2023.

3. Buy Office Equipment

With bonus depreciation now at 100 percent along with increased limits for Section 179 expensing, buy your equipment or machinery and place it in service before December 31, and get a deduction for 100 percent of the cost in 2022.

Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, desks, chairs, and other furniture (and certain qualifying vehicles).

4. Use Your Credit Cards

If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit card for last-minute purchases of office supplies and other business necessities.

If you operate your business as a corporation, and if the corporation has a credit card in the corporate name, the same rule applies: the date of charge is the date of deduction for the corporation.

But suppose you operate your business as a corporation and are the personal owner of the credit card. In that case, the corporation must reimburse you if you want the corporation to realize the tax deduction, which happens on the reimbursement date. Thus, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31.

5. Don’t Assume You Are Taking Too Many Deductions

If your business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL.

If you are starting your business, you could very possibly have an NOL. You could have a loss year even with an ongoing, successful business.

You used to be able to carry back your NOL two years and get immediate tax refunds from prior years, but the Tax Cuts and Jobs Act (TCJA) eliminated this provision. Now, you can only carry your NOL forward, and it can only offset up to 80 percent of your taxable income in any one future year.

What does this all mean? Never stop documenting your deductions, and always claim all your rightful deductions. We have spoken with far too many business owners, especially new owners, who don’t claim all their deductions when those deductions would produce a tax loss.

6. Deal with Your Qualified Improvement Property (QIP)

In the CARES Act, Congress finally fixed the qualified improvement property (QIP) error that it made when enacting the TCJA.

QIP is any improvement made by you to the interior portion of a building you own that is non-residential real property (think office buildings, retail stores, and shopping centers)—if you place the improvement in service after the date you place the building in service.

QIP is not real property that you depreciate over 39 years. QIP is 15-year property, eligible for immediate deduction using either 100 percent bonus depreciation or Section 179 expensing. To get the QIP deduction in 2022, you must place the QIP in service on or before December 31, 2022.

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Protecting Your Company When Using Social Media Influencers

The internet and social media platforms are rich with independent users that have built sizeable audiences ranging from hundreds of thousands to millions of followers.  In many cases these grass-roots campaigns have resulted in viewers that rival or top conventional media outlets.  As a result, many companies have learned that they can get their product or service in front of like-minded individuals at a lower cost than television or radio commercials.  In many cases, these social media endorsements are more powerful and engaging because people have a connection with the influencer they follow.  As with any marketing endeavors, it is important to protect your company and follow the Federal Trade Commission (FTC) rules and regulations.

How Companies Should Protect Themselves

In a recent article by Legal Matters we have read more about his subject, and how some companies have been flagged for non-disclosure violations.  These brands include Lord & Taylor and Warner Bros. Home Entertainment.  Both of which had to make settlements with the FTC for violations.  Specifically, they had failed to release the relationship they had with big-follow social media creators.  In these specific cases, the followers were compensated roughly $4,000 for an endorsement of their product.  Instagram has become feverishly popular over the last couple of years and companies need to ensure they are marketing their products or services within certain guidelines to avoid violation.

What Can Be Done to Avoid Penalties?

The most important take-away is to understand that according to FTC guidelines, consumers have a right to know whether a certain brand is being endorsed by the influencer’s own violation, or if they have a partnership with a company in exchange for free products or future payments.  In this case, the influencer and the companies failed to disclose their relationship, which violates FTC’s disclosure recommendations.  Remember that if your company is investing in advertising it is well worth your time to speak with an attorney to help ensure you are following FTC and online regulations.  The money you pay an online influencer can pale in comparison to the amount certain violations may bring.  In some cases, these disclosures can be adhered to with an online statement, or #hashtag such as #ad #paidadvertisement or #sponsoredpost at the beginning of the post.  Please feel free to contact our office to learn more about how law firms such as BLPG can help protect companies in their online and social media marketing strategies.

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Understanding how to Resolve Contract Disputes in Utah

Business-related contract are becoming more and more complex.  For example, everyday consumers are used to seeing a gargantuan contract to update their mobile phone software or setup internet and cable at their homes.  It is not uncommon for contracts in various industries, such as construction, to have contracts reaching 500 pages or more.  Essentially both sides are trying to protect themselves by using legal maneuvers in an attempt to control risk.  Many business owners, inventors, and entrepreneurs understand that the best way to draft and review these contracts is to work with a trusted business contract attorney in Utah or the state in which their business is headquartered.

What can be done when a dispute arises?

Complex contracts are here to stay and have become commonplace to conduct business.  Along with an increase in length, comes more opportunities to address potential disputes.  A common resolution comes in the form of establishing an ADR or alternative dispute resolution.  This is a contractual and mutually agreed upon the method in which disputes can be resolved without relying on a classic courtroom setting.  As with any solution, there are potential pros and cons depending on a variety of factors.  Below is a quick list of why setting up an ADR can be beneficial, as well as some potential drawbacks.

Benefits of arbitration

Agreements can be made on equal ground:  A traditional legal trail comes with potential unknown and unpredictable outcomes.  At the end of the day, neither side knows with absolute certainty how a judge or a jury will eventually decide.  In the contract, both parties can choose and agree who will be an arbitrator, especially one that has experience in their specific industry or area of legal dispute.

A quicker turnaround time:  Arbitration is typically less formal and more flexible in terms of scheduling.  The discovery process is trimmed down and avoids large portions of gathering and submitting documentation.  Most cases also do not necessitate or include expert witnesses or require as much legal preparation.

Potential drawbacks of arbitration

There are no appeals:  The arbitration decision is final.  This is something that is agreed upon and established during the construction of the contract.  Even if one side feels they received an unfair outcome there is no formal appeals process available.

The limitations on evidence can be worrisome:  Judges in a traditional court setting have specific regulations to follow in regards to accepting or denying the evidence.  Arbitrators do not have as many rules guiding their decisions and can utilize almost any information that is brought to them.  There is also a lack of cross-examination because arbitration generally relies on documents as opposed to witnesses taking away the ability to ask questions or clarify misunderstandings.

Have the right legal team on your side

The largest take-away from this article should be that business contractual legal matters are best left to the professionals.  There are potentially miles of red tape, legal hurdles, and future implications of agreements to take into considerations.  Although this article discusses arbitration, there are other means of resolving disputes that may be more ideal for your business or situation.  If you need contracts updated, drafter or reviewed consider working with Bowen Law Professional Group.  Our team proudly serves businesses of almost any size in Utah, California, New York, Florida, and Tennessee.  Contact us today to speak with a legal professional at (801) 364-0123

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Things to Consider When Forming an LLC

Setting up a limited liability company (LLC) is a popular choice when establishing a business structure for startup and growing businesses.  There are several options that can be selected based on the type of entity that you will be forming.  As with most business decisions, there are perspective advantages and potential disadvantages.  This article is aimed towards addressing key items to consider when deciding if an LLC formation is the right choice for you, your business and your investments.

Items to Consider When Forming an LLC

One of the key items to address when forming an LLC is to ensure that it is formed in accordance with the rules and regulations of a particular state.  In a majority of instances, this will be the state where the business is operated and headquartered.  If your business will be operating in several states you may be required to register in all of these states.

Filing the LLC Articles of Organization

An LLC cannot be officially formed until an “Articles of Organization” is prepared and filed (keep in mind this document can be referred to something else in certain states.)  This document addresses key items such as whom the registered agent for the LLC will be.  This is the person who will receive legal documents related to the business.  Examples include items such as service of process, complaints, subpoenas and so forth.  You will also need to include a statement of the purpose of the LLC.

Keep Current with Required Filings

Most states require some form of annual report filing.  If a business misses this deadline for such filings they may be faced with potential late fees and in some cases a suspension or dissolution of the LLC.  Procedures and filings will differ based on state jurisdictions.  This is why it is important to understand and comply with the standards established in the state in which your limited liability company is established.

Advantages of an LLC

Tax flexibility: This is referred to as flow-through taxation.  The IRS does not tax the LLC directly.  Rather, profits are distributed to the members who are then taxed on profits at their personal tax level.  This avoids double taxation.

Limited Liability:  As the name implies, an LLC provides its members with protection from liability.  This important shield protects members in ways that a sole proprietorship or traditional partnership does not.  Members are not personally liable for debts and often court judgments and creditors.

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