Uncategorized Archives - Shmuel Law Group

Hospitality Clients: Beware Audit Pitfalls Over Industry Classification

Matan Shmuel — Mon, 19 Apr 2021 13:43:22 +0000

The COVID-19 Pandemic has been extraordinarily impactful on hospitality businesses, particularly sit-down dining establishments. To help stimulate this important sector of our economy, one overwhelmingly dominated by small and closely held businesses, Congress authorized a temporary, two-year, 100% business expense deduction for certain business meals at “restaurants.” As with all (tax) law changes, the devil is in the details.

The IRS published on its website Notice 2021-25 which defines a “restaurant” for the purposes of this law change as a “business that prepares and sells food or beverages to retail customers for immediate consumption.” The IRS explicitly excludes businesses that “primarily sell pre-packaged food or beverages not for immediate consumption.” The IRS notes that neither a “specialty foods store” nor a “convenience store” is a restaurant.

In recent audits of non-hospitality clients, we have seen the IRS and state Departments of Revenue scrutinize meal and entertainment deductions, going so far as to investigate the underlying restaurants that issued the receipts. In those cases, the IRS has looked to the NAICS and SIC codes that the restaurants listed on their entity documents. An incorrect NAICS or SIC code by an unwary restaurant owner can lead to the disallowance of business expense deductions for legitimate business meals expensed by the restaurant’s patrons.

In order to prevent this derivative audit risk, we urge our hospitality clients to reach out for a complimentary Industry Classification Review. Our attorneys will review your formation documents and recent tax filings to help determine whether your business is incorrectly classified. We consider this a small effort to help closely held and small businesses get back to normal after the incredibly challenging year we all faced.

We remind our clients that the best time to clean up any paperwork and business formality loose-ends is yesterday. The next best time is today.

The information provided herein should not be relied upon as legal advice. Your receipt of this information does not create an attorney-client relationship between you and Shmuel Law Group, LLC. Any advice provided herein should be discussed between you and your legal and tax advisers and applied to your individual circumstances prior to your acting on it. In certain jurisdictions, this publication may constitute attorney advertising.

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IRS Continues Its Campaign Against Micro-Captive Insurance Companies

arbitrator — Thu, 15 Apr 2021 18:47:18 +0000

Throughout 2020 and 2021, the IRS has repeatedly identified abusive micro-captive insurance arrangements as an audit and criminal enforcement priority. Earlier this month, the IRS issued a press release touting its victory against another micro-captive insurance arrangement in Caylor Land & Development, Inc. v. Commissioner. The IRS continues to pressure taxpayers who are engaged in abusive micro-captive arrangements to exit them and not report deductions associated with the micro-captive arrangements on their returns.

As part of its robust enforcement sweep, the IRS last summer formed 12 micro-captive examination teams to crack down on micro-captive arrangements. The IRS continues to audit existing micro-captive companies and has started to tighten its settlement parameters with continued legal victories in the courts. As a result, it is becoming more and more difficult for businesses involved in micro-captive insurance arrangements to exit these without penalty. The cases continue to pile in favor of the IRS’s position, narrowing the time horizon to exit a captive insurance arrangement without significant tax consequences.

While captive insurance is a potentially smart and savvy strategy for some businesses, micro-captive insurance companies need to pay particularly close attention to compliance issues in light of the IRS’s sweeping enforcement effort. If your business is actively participating in a captive insurance arrangement, now is the time to speak to a Shmuel Law Group attorney to discuss whether the IRS has a basis for targeting your business, and what options are available to you.

It is important to be proactive in this area, as the IRS continues to express an enforcement priority against the micro captive insurance industry. Our attorneys have extensive experience advising businesses in diverse industries that have entered into captive insurance arrangements. Now is the time to consult with us to determine your risk and identify opportunities to unwind from a defective captive insurance arrangement before the IRS initiates an investigation.

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Jonathan D. Grossberg Joins the Firm as Senior Counsel

arbitrator — Mon, 12 Apr 2021 13:41:48 +0000

Shmuel Law Group welcomes Jonathan D. Grossberg, who will serve as Senior Counsel to the firm. Jonathan adds a depth of experience in federal and international tax law to the firm. Jonathan’s practice will focus on advising businesses and individuals on complex business-cycle transactions, with a particular focus on federal and international tax reduction strategies. Jonathan will also broaden the firm’s bench with respect to outsourced general counseling, serving as part of the legal team to the firm’s closely-held business clients in all manner of transactions.

Jonathan’s joining the firm presents an enormous opportunity for Shmuel Law Group’s new and existing clients. Jonathan will be advising new and existing clients in all manner of tax planning techniques including estate and gift planning as well as business-succession planning. Jonathan’s industry experience includes working with technology companies, manufacturing companies, service businesses, and real estate enterprises.

Jonathan will continue to develop thought leadership for the firm and for the profession as a whole, which presents an opportunity for firm clients to have access to cutting edge business and tax advice.

We look forward to integrating Jonathan fully with our current and future clients and to help expand our service offerings complementary to his areas of expertise.

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SBA Relief for Small Businesses

arbitrator — Thu, 19 Nov 2020 11:50:00 +0000

As a response to the economic crisis associated with the COVID-19 stay-at-home order, the federal government (as well as state and local governments in New Jersey and Pennsylvania) have issued directives meant to ease the burdens on small businesses and tax exempt 501(c)(3) organizations. The federal government is providing the following financial resources to eligible entities:

1. Payroll Protection Loan (PPL)

The PPL is available to all small businesses with fewer than 500 employees. It is also available to 501(c)(3) entities with fewer than 500 employees, sole proprietors, independent contractors, self-employed individuals, Indian tribes, and 501(c)(19) veteran’s organizations. In order to qualify for the PPL, the entity or individual must have been in business by February 15, 2020 and had payroll for which taxes were paid.

Under the terms of the PPL, SBA approved lenders will make a loan up to 2.5 times the average monthly payroll of an entity (up to $10 million), calculated by taking the average of 2019’s monthly payroll, or, for businesses formed in 2020, the average monthly payroll for January and February 2020. The loan covers the period between February 25. 2020 and June 30, 2020.

PPL proceeds may be used for payroll costs (including health benefits), interest on mortgages, rent/lease payments, utilities, and interest on debt incurred during the period covered by the bill. Lenders are required to waive SBA fees, and borrowers are not required to provide a personal guarantee for these loans. Loan proceeds used for the expenses discussed above will be forgiven by the federal government, subject to proportional reduction of the forgiveness amount commensurate to a reduction in payroll for the period ending June 30, 2020.

Loan Amounts not forgiven or repaid by December 31, 2020 will convert to a maximum 10-year loan at a maximum interest rate of 4%. Payments on these loans are deferred and interest will not accrue for 6 months to 1 year.

To apply for a loan, borrowers will need to provide lenders: proof of payroll through tax filings, documentation of lease/utility/mortgage obligations. Lender will also need to see proof of the expenses actually being made for forgiveness or else that portion will convert to a normal loan as indicated previously. Borrowers will also need to certify that the loan is necessary because of the uncertainty of current economic conditions; that they will use the funds to retain workers, maintain payroll, or make lease, mortgage, and utility payments; and that they are not receiving duplicate funds for the same uses.

2. Economic Injury Disaster Loan (EIDL)

The EIDL program provides up to $2 million for small businesses and all types of 501(c) nonprofit entities (including 501(c)(4) and 501(c)(6) organizations) affected by COVID-19. Included in this loan is a $10,000 grant which must be made within 3 days of the application date, which does not need to be repaid if a loan is ultimately denied.

EIDLs for amounts below $200,000 will waive credit elsewhere requirements, personal guarantees, and 1-year-in-business requirements, among other leniencies introduced to allow more borrowers to qualify for SBA loans. Borrowers may not receive both an EIDL and a PPL.

Both of these loan programs are made on an as-funding-available basis, so it is important to apply for these funds as soon as possible. If you have an existing banking relationship, it will likely be easiest to work with your current business bank so long as that bank is an SBA eligible lender. Applications can also be made directly to the SBA.

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I Owe Unpaid Taxes….Help!

arbitrator — Thu, 19 Nov 2020 03:28:37 +0000

Clients often call me with concerns that they’ve haven’t paid or filed their federal, state, or local income taxes. As a tax attorney, I am particularly aware of the recurring themes:

“my business grew faster than I could handle it and I fell behind on bookkeeping/administration.”

“I missed a filing deadline years ago, then kept missing them, and now I am

in way over my head!”

“My accountant failed to file a return and I can’t reach him/her!”

In each of these cases, and countless others, I tell my clients that they’ve made progress in addressing their tax delinquency simply by recognizing the have a potential past due-liability. Then I advise them on how to continue their progress and get their tax liability cleared up.

The IRS and state taxing authorities encourage taxpayers to coming forward with voluntary disclosures of delinquent taxes. Often, these agencies are willing to forgive some amount of penalty, or reduce interest on unpaid taxes, to give the delinquent taxpayer a break. In other cases, taxpayers discover that their past due tax liabilities are lower than expected and can pay them off immediately. The IRS also provides an “offer in compromise” process, allowing certain delinquent and insolvent taxpayers an extended time period to pay off tax delinquencies. State and local taxing authorities may offer similar programs, including tax amnesty.

We can work with you to implement a plan to address your unpaid or underpaid taxes and bring your business out of the tax shadows. Contact us for a consultation.

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Philadelphia Set to Halve Tax Abatement

arbitrator — Thu, 19 Nov 2020 03:27:32 +0000

On December 2, 2019, Philadelphia’s City Council voted in favor of Council Bill No. 190944, which effectively cuts Philadelphia’s renown real estate tax abatement for new construction and renovations in half. The bill has been sent to the Mayor’s desk for signature, which is expected by the end of the month.

Under existing law, the real estate tax abatement granted homeowners tax relief for a period of ten years on the entire assessed improvement value of new and renovated home construction. The abatement has been controversial in recent years, with proponents crediting it for increased new home construction and economic development, and opponents deriding increased gentrification and tax breaks being granted to the wealthy.

The new legislation includes two changes designed to reduce the number of properties eligible for the abatement. The first change prohibits new residential construction built on vacant land from receiving an abatement. The second, and more broad reaching change, reduces the value of the tax abatement generally by applying the abatement to a fraction of the assessed improvement value, beginning with 100% of the assessed improvement value in year one and decreasing ten percent per year over the next ten years. This reduced abatement will apply to any abatement obtained after July 1, 2020.

Suppose a developer buys a “shell” house after July 1, 2020 for $50,000 and invests $100,000 in improving the existing property. The assessed value of the improvement is $100,000 for purposes of the real estate tax abatement. In year one of the abatement, 100% of the $100,000 assessed improvement value will be eligible for the tax abatement. In year two, 90% of the $100,000 assessed improvement value, or $90,000, will be eligible for the tax abatement. In year three, 80% will be eligible, and so on until in year ten only 10% of the assessed improvement value, $10,000, will be eligible for the abatement. As a result of this law change, half of the value of the tax abatement will be eliminated.

What does this law change mean for investors, developers, home buyers and home sellers? It may be time to re-evaluate your financial statement and understand all the tax aspects of living and working in Philadelphia. Contact us for a consultation and we can go over your individual circumstances.

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Year-End Charity: Giving Stock Instead of Cash

arbitrator — Thu, 19 Nov 2020 03:04:53 +0000

I spoke with a client over the weekend about a not-so-unusual charitable gift he wanted to make—that of a gift of shares of stock. In this client’s case, the client inherited about $50,000 worth of shares in a mutual fund several years ago. The client has held these shares for several years and has experienced a significant appreciation in the shares over time. However, in the most recent years, the fund’s performance has been mediocre, and the client is interested in reallocating his investments.

The client’s primary concern with owning the shares in the fund is the fund’s annual generation of capital gains taxes, which the client must pay for despite not receiving cash distributions from the fund to pay these taxes. The client is also concerned about triggering a large, personal capital gain event if he sells the shares outright. The client would prefer to generate a tax deduction or credit to offset other gains he experienced this year. In short, the investment is costly from a cash flow perspective, and selling it does not create an optimal tax scenario for the client.

The client and I discussed a unique solution to his specific investment—that of contributing the shares to a charity of his choice. This solution offloads the non-performing shares from the client’s balance sheet, while also preventing the client from realizing a large capital gain event. The charitable contribution also provides the client with a meaningful deduction to reduce his tax liability elsewhere.

It is important to note that several factors need to be considered when making a contribution of appreciated property to a charity. First, how long you’ve held the property determines whether it will be treated as long-term or short-term capital gain property. Second, which type of organization receives the gift could affect the amount of your deduction. Third, you need to consider whether to elect to reduce the deductible amount of long-term capital gain property in order to increase the total amount of your tax deduction. Fourth, you need to consider how to substantiate the value of your contributed property.

My client was able to turn a financial liability into a tax asset by thinking creatively about his overall tax and financial picture. He regularly makes charitable donations, but this is his first time considering a gift of property other than cash. You too might want to consider whether giving an underperforming investment to charity might be a financial benefit to you. It is important to speak with your tax and financial advisors prior to making such a decision. We here at the Shmuel Law Group are on call ready to assist you in making these and similar decisions.

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File Retention and Record Keeping Best Practices

arbitrator — Mon, 09 Nov 2020 00:56:17 +0000

Here’s a question my clients often ask me: “How long do I need to keep copies of tax returns and other business records?”

I understand that in today’s business climate, keeping paper files is cumbersome and even considered a higher security-risk practice for most companies. However, with the relative ease and affordability of encrypted and secured cloud storage, it is also possible for businesses to hold onto old records indefinitely. So, the question remains, how long should you hold onto your files and customer information?

In general, we advise our clients to hold onto tax records for as long as the statute of limitations for auditing those returns remains open. In most cases, this means a term of three years. However, in certain cases, taxing authorities may audit returns going back as far as six years. In other, even more rare instances, the statute of limitations can be open indefinitely.

Another thing to consider is retaining the underlying documents supporting a tax filing for as long as they remain relevant. For instance, if you are depreciating a capital asset over a course of ten, fifteen, or twenty years, retaining records of the original asset purchase for the entirety of the depreciation period is advisable.

Other types of customer and business information may require longer or shorter retention periods. We can work with you to design and review your business’s record retention policy to ensure compliance with federal, state, and local laws. Record retention isn’t just a best practice, its also good business hygiene.

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Tax Relief For New Jersey Business Owners

arbitrator — Mon, 09 Nov 2020 00:50:53 +0000

Updated: Dec 24, 2019

Business owners in New Jersey just received an early Christmas present in the form of NJ S. 3246/A. 4807, a bill approved by both the NJ Assembly and Senate authorizing pass through entities (partnerships, S-corporations, and LLC’s) to elect to pay an entity level tax in New Jersey and providing for an equivalent refundable tax credit for the owners of such pass through entities. The bill is intended to work around the state and local tax deduction cap set forth in 2017’s Tax Cuts and Jobs Act, which limited deductions for state and local taxes paid by individuals to $10,000.

Ordinarily, pass through businesses file informational returns, with the tax attributes (items of income, deduction, and loss) passing through to the owners of these entities, who file and pay the taxes on their personal income tax returns. The bill allows New Jersey residents who own pass through entities to elect to pay their New Jersey business income taxes at the entity level rather than receive the tax attributes of their pass through entities on their personal tax returns, and provides these business owners with a credit against their New Jersey tax liabilities equal to the amount of taxes paid by the pass through entity. This offers business owners an effective workaround to the limitation under federal law for state and local taxes paid, because there is no state and local tax limitation applicable to business tax deductions under federal law.

At the time of the passage of the Tax Cuts and Jobs Act, tax advisers and tax policy experts anticipated that high-tax states would propose workarounds to resolve the state and local tax limitation under federal law. Two years later, it seems that states are finally coming up with workable solutions.

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