Terminating S-Corporation Status

Have you decided that, following passage of the Tax Cuts and Jobs Act of 2017, you would be better off if your business were a C corporation instead of an S corporation? Are you regretting that you ever made that S election or wishing you had thought this through and acted sooner? Fret not … there is still time to terminate your company’s S-election and be taxed as a C-corporation for the entire 2018 year! As long as it is done by March 15th, the termination will be retroactive to January 1st and effective for the 2018 tax year.

First, you will need to make sure that at least a majority interest of shareholders (i.e. shareholders who collectively own more than 50% of the voting interest in the corporation) are on board because a majority is needed to terminate the S election. You should also check your Bylaws and Shareholders Agreement for whether a super majority or unanimous consent is required to terminate S election. Accordingly, your first step should be drafting a corporate resolution seeking the appropriate consent of the shareholders to terminate S status. Once that has been accomplished, the next step is filing the papers with the IRS, which basically consists of submitting a letter of consent to the IRS that demonstrates consent by the shareholders to terminate S status and includes a slew of required information. Finally, you should check with your state to see if there are any additional state filing or notification requirements. And of course, be sure to keep your accountant in the loop!

One note of caution is that once you terminate S status, you generally cannot re-elect S status for 5 years. So before you make the change, be sure to consult with your legal, tax, and financial advisors to be sure that this is the right move for the company and its shareholders.

 

Electing a Partnership Representative Under the New Law

As of this year, following implementation of the Bipartisan Budget Act of 2015, LLC’s, partnerships, and other pass-through entities must have a designated Partnership Representative. The Partnership Representative replaces the Tax Matters Partner. This is more than just a title change. The Partnership Representative has far more authority and responsibility than the Tax Matters Partner. Under previous law, the Tax Matters Partner was responsible for being the entity’s representative in the event of an IRS audit or any other contact with the IRS, but had limited authority to bind the other partners. As of January 1, 2018, that role has been eliminated and replaced with the Partnership Representative. The Partnership Representative will have significantly more authority to bind the other partners with respect to an IRS audit proceeding. That means that the Partnership Representative can have full and absolute discretion to settle with the IRS, pay the imposed taxes and penalties, proceed to litigation, agree to extend the statute of limitations, etc., all without consulting or even notifying the other partners.

Unlike a tax matters partner, the Partnership Representative need not be a partner/owner of the entity. In other words, the partners can designate a non-owner third party to be the Partnership Representative. Even if the partners have not formally elected a Partnership Representative, when the entity files its tax returns, it will be asked to provide the name of the partnership representative each year. Failure to do so could result in the IRS appointing a Partnership Representative for the partnership.

Accordingly, owners of pass-through entities should take action now, such as appointing a Partnership Representative by resolution and/or amending their partnership/operating agreements to address this and other related changes to pass-through entity law under the Bipartisan Budget Act of 2015 that came into effect this year. For example, beyond merely appointing a Partnership Representative, the partnership/operating agreement can dictate how the representative is appointed and replaced, and can provide for certain parameters, such as requiring the representative to keep the other partners in the loop. Agreeing on these terms now will be far easier than waiting until the company is faced with an IRS audit.

Disability-related lawsuits find new targets

Since at became law in 1990, there’s little doubt that the Americans with Disabilities Act (ADA) has helped make public buildings and businesses more accessible to the disabled. At the same time, however, brick-and-mortar businesses have long complained about the cost of ADA compliance, and claim that many ADA-related lawsuits are more about making money for lawyers than about actually increasing accessibility. Now that most shopping has moved online, lawsuits have begun to extend the ADA to websites and other online services, concepts which really didn’t exist at the time the law was passed.

For example, Home Depot was sued in 2015 by a blind Pennsylvania man alleging that the Home Depot website relied too heavily on images without the alternative text and descriptive links required to allow access by the sight-impaired. The same plaintiff had filed at least 68 similar lawsuits targeting online retailers. Companies from Target to eBay have been sued for ADA issues, and many companies have paid out millions to the government or class action plaintiffs, in addition to the cost of becoming compliant after the fact. Now, plaintiffs’ lawyers have begun targeting platform providers, in what may well result in a new wave of ADA litigation against the internet’s infrastructure providers.

While it’s increasingly clear that internet accessibility is required under the ADA, it’s less clear what constitutes an accessible website. Here are some of the steps you can take to make your website more accessible and less likely to result in a lawsuit or legal liability:

  • Perform a website audit, to determined what aspects of your website might not meet reasonable accessibility standards.
  • Update your website to comply with the Web Consortium’s Web Content Accessibility Guidelines 2.0 (WCAG), currently the closest thing there is to an accessibility standard under the ADA.
  • Make sure your development and design policies include guidelines for continuing WCAG compliance, since it’s all too easy to lose sight of accessibility in the stress of a new site or product rollout.
  • Train customer support and technical personnel to understand and facilitate use of your website by disabled customers, and to be sensitive to the needs and complaints of disabled users.

Although the Department of Justice is expected to issue guidelines some time in 2018, it’s probably not a good idea to wait. In addition to good risk management, it may well be good business, to keep both your disabled and able-bodied customers happy.

Did C Corporations Just Become More Attractive?

Pass-through entities, such as S corporations and LLCs, have been all the rage for small business owners for the past few decades. Pass-through entities offer all of the liability benefits of traditional C corporations but without that pesky corporate level tax. Now that the maximum corporate tax rate just plunged from 35% to 21% under the new tax law, might people start looking at C corporations in a new, more favorable light? Might people start forming C corporations or even converting their S corporations and LLCs to C corporations?

But wait, didn’t the law also provide significant tax relief to pass-through entities in the form of a 20% tax deduction? Well, yes, but with some catches. One catch is that, unlike the corporate tax rate cut, the pass-through tax deduction is set to expire in 2025. Perhaps it will be extended, but there’s no way to know for sure. (Then again, a future Congress could raise the corporate tax rate back to 35%.)

Another catch is that there are significant limitations for certain services providers, such as doctors, lawyers, accountants, and engineers. If you are one of the specifically excluded professions and operate as a pass-through entity (e.g. an engineer providing services through a firm structured as an LLC), the 20% deduction begins to phase out after $157,000 in income for single taxpayers, $314,000 for married taxpayers. This could lead some people to consider splitting their businesses into two entities if, for example, one aspect of their business is offering engineering services (subject to the income exclusions) and another aspect of their business is offering architectural services (not subject to the income exclusions). They could end up with a C corporation for their engineering services and an LLC or S corporation for their architectural services.

However, before forming or converting your pass-through entity to a C corporation or splitting your business into two separate entities, keep in mind that there is still a corporate level tax, albeit a much lower one. Whether it’s 35% or 21%, if you are paying yourself all or most of your company’s profits, you will still probably want to avoid that corporate-level taxation. However, if your entity retains a significant portion of profits in order to grow the business, then a C corporation may make sense, especially if you fall under one of the professions subject to the pass-through exemption income restrictions.

The bottom line is that you should consult with your accountant to crunch the numbers and your lawyer to discuss the process. Which brings up another downside to converting – the fees you will have to pay professionals, along with any filings fees charged by your company’s state. Those costs need to be factored in. If the tax savings will be minimal, it may not be worth the costs of conversion. However, if you will be enjoying significant tax savings, it may be well worth the costs now to enjoy tax savings over the long haul.

Accommodating Your Employee’s Request to Switch to Independent Contractor Status

You run a small or  medium-sized business, you’re busy, and maybe you haven’t given much thought yet to how the recent changes to the tax laws might affect you or your businesses, when one of your best employees approaches you about switching from employee status to independent contractor status so that she can take advantage of the new tax laws. (My last blog post discussed why employees might want to make that switch.) Your first instinct might be to say sure, why not? For one thing, this is a loyal employee and you like the idea of accommodating her and helping her save money. Additionally, you have always known that there are financial advantages to businesses in hiring independent contractors over employees, most notably that you do not have to pay any FICA taxes on behalf of an independent contractor. And this employee in particular has a good salary and participates in your company’s matching 401(k) plan to the fullest extent. She also has her entire family on the company’s generous (and expensive) group healthcare plan. You also suspect she is planning to have another child and take advantage of the company’s paid maternity leave again. If she becomes an independent contractor, she would not be entitled to any of these employee benefits. Seems like a no-brainer to allow her to switch, right?

Not so fast. While it is true that you would no doubt welcome the opportunity to not have to withhold and pay FICA taxes for her, pay for her and her family’s health insurance, and pay for her to go on another paid maternity leave, if the IRS determines that, for tax purposes, she is really an employee, your company could end up getting hit with a hefty bill in back taxes, and even fines. That’s because under IRS regulations, just because you decide to make someone an independent contractor, doesn’t mean the IRS can’t later deem them an employee for payroll withholding purposes. If this is an employee who primarily works on-site for set hours utilizing company equipment and is under your (or another manager’s) supervision, then this is probably not someone who will be able to qualify as an independent contractor. However, if this person sets her own hours, spends much of her time working off-site, uses her own equipment for which she does not receive reimbursement, and generally works independent of any supervision, then independent contractor status might be something to consider.

But even if the risk of an IRS challenge to her independent contractor status is low, there could be other unintended consequences that result from reclassifying an employee as an independent contractor. Does this employee create anything for you? Does she work on the company’s website, write articles to include in the company newsletter, write software programs for the company or its clients, or work on inventions? As an employee, anything she creates within the scope of her employment is (generally speaking under most states’ laws) automatically deemed to be owned by her employer. Not so for independent contractors. Additionally, if she is subject to a non-compete, that non-compete will either terminate along with her employment status (e.g. if she was under an employment contract that included a non-compete provision) or at the very least will be a lot harder to enforce.

Accordingly, employers need to be careful. Any employer approached by an employee about switching should seek the advice of legal counsel to assess the risks and consequences of doing so.

Should You Quit Your Job To Take Advantage of the New Tax Law?

You love your job. You earn a good living. But what if quitting your job could actually save you money? Under the new tax law, there are people who could enjoy significant tax cuts by quitting their jobs and getting re-hired by the same employer as an independent contractor.

The Tax Cuts and Jobs Act of 2017, which was signed into law on December 22, 2017 and takes effect for tax years beginning January 1, 2018, offers some significant tax advantages to individuals who offer services through a pass-through entity, such as an LLC or S corporation. In a typical structure, the individual forms a pass-through entity, and then the entity is engaged as an independent contractor by a company in need of the individual’s services. Utilizing a pass-through entity to offer the owner’s services has been a common practice for a lot of professional service workers, such as computer programmers, architects, and web designers, because an entity offers liability protection, and a pass-through entity means that the individual does not have to pay taxes at the corporate level (avoiding the so-called double taxation). The new tax law just sweetened the deal even more by allowing many owners of pass-through entities to deduct twenty percent of their revenue from their taxable income.  That’s why working for your employer as an independent contractor through a pass-through entity instead of as a traditional employee could save some individuals a lot of money in taxes. (Certain professions, such as doctors, engineers, lawyers, and accountants, are subject to income phaseouts that start at $157,000 for single taxpayers, $314,000 for married taxpayers.)

But wait, there’s more! Not only did the deal get sweetened for people who offer services as independent contractors through pass-through entities, but it also made life a little tougher (or, at least, a little more expensive) for traditional employees. Employees who have been deducting their unreimbursed work-related costs will no longer be able to do so. That’s because the new law eliminates this itemized deduction. Depending on how much in unreimbursed expenses an employee incurs, that could be a significant tax deduction that will no longer be available to them starting this year.

So with the new tax laws being skewed in favor of independent contractors and against employees, should employees be turning themselves into independent contractors? Should, for example, an architect who is employed by an architectural firm consider approaching her firm about switching from being an employee to being an independent contractor? Since she’s not limited by the specified service businesses rules (architects were essentially specifically excluded), she could set up an LLC of which she is the sole member, her firm could pay her LLC for her services, and all the income received by the LLC would pass through to her. She would then be able to deduct 20% of her income. Additionally, she would not have to worry about those unreimbursed expenses not being deductible because she would be able to deduct any work-related expenses as business expenses. Sounds like a pretty good deal, right? Well, from a purely tax standpoint, it is! But there are some potential downsides that need to be considered.

By changing over to an independent contractor she would be giving up her status as an employee. This means that she would be giving up certain protections and benefits. For example, the Title VII anti-discrimination laws protect employees, not independent contractors. So if her firm terminated her employment while she was still an employee, she could file a Title VII violation claim against them if she felt she was fired for being a woman. However, once she is an independent contractor, she loses that protection. Additionally, if she has been enjoying certain employee benefits, such as group healthcare, matching 401(k) contributions, paid vacations, etc., she loses all of those too. She also loses FMLA and workers comp protection (if she gets pregnant or sick or is injured on the job) and unemployment protection and COBRA (if she loses her job). There are many benefits to being an employee over an independent contractor that would be lost to anyone making the switch.

With all that said, because the new tax law so heavily favors independent contractors over employees, employees will want to consider whether they should form a pass-through entity and operate as an independent contractor through their entity. Anyone considering doing so, should first speak with their accountant and seek legal advice to make sure that the pros outweigh the cons for their particular circumstances. Additionally, employees may be able to negotiate the terms of their switch with their employer, since switching could benefit the employer too.

In my next blog post, I will discuss the employer-side pros and cons and what an employer should consider if an employee approaches them about making the switch to independent contractor status. In the meantime, for more details on the tax implications of incorporating, or for other scenarios involving incorporation, see Kelly Erb’s post at Forbes.

Do I really have to worry about the new European privacy rules?

Is it finally time to pay attention to European efforts to regulate privacy? At least according to pwc, the answer is yes.

Let’s face it – many Europeans regarded the former “Safe Harbor” as a loophole big enough to drive a truck through, and many US companies quietly agreed by effectively ignoring it. The GDPR is an attempt to address that more effectively, at least with respect to American companies with assets in Europe, particularly behemoths like Google and Facebook. As of May 25, 2018 most processing of European personal data will have to comply with the GDPR (General Data Protection Regulation), including processing by US-based companies. There are a few reasons for US companies to be more concerned about the GDPR than previous efforts to regulate privacy:

  • The GDPR has the effect of law, without the need for individual (and often inconsistent) country legislation.
  • All businesses which “target” EU nationals are subject to the regulation, no matter where they are based.
  • The fines have been increased significantly and can be tied to worldwide revenue, to ensure that they are meaningful for even the largest of companies.

Of course, it’s easy for EU officials to threaten Google, which has at least four data centers located in the EU, each presumably worth many millions of dollars. It’s a little harder for them to penalize US companies which don’t have assets on the ground in the EU, particularly given that US courts are likely to be skeptical of attempts to enforce the regulation against companies with no offices in Europe. So, how do you know if you should be worried about the GDPR? If you answer yes to any of the following you need to start getting your privacy house in order:

  • Do you have assets in Europe? As already noted, you should be GDPR compliant unless you’re willing to kiss those assets goodbye without compensation.
  • Do you have personnel in Europe? Even with limited assets on the ground, you need to consider the risk to your employees, and the subsequent risk to your company if they are penalized and decided to sue.
  • Is the European market is important to you, or is it expected to be important to you in the future? Obviously, an adverse judgement in the EU could result in loss of any European-based revenue, to say nothing of the loss of customers due to bad publicity.

Notwithstanding the hype, companies with no footprint in Europe and minimal aspirations of success in the European market probably have little to fear from the GDPR. That being said, given increasing concern over privacy on this side of the ocean, even those companies may want to consider implementing some of the GDPR requirements, to minimize any penalties and to make compliance easier if and when it becomes necessary. Besides, better privacy practices may well make business sense for a lot of US companies.

You’re running out of time!

Anderson Sophie Christmas Time Heres The Gobbler PublicDomain

Quick, I have dinner, you handle the rest!

When I say you’re running out of time, you may think I’m referring to time needed to buy presents, drawing the absolutely incorrect conclusion that I have not yet purchased a suitable present for my wife. I have. It’s just that she changed the ground rules on me and … oh, never mind, that’s not what I meant anyway.

What I meant is that you’re running out of time to register your DMCA Designated Agent under the new system we reported on earlier this year. Like it or not, agents designated under the old system are no longer valid starting January 1, 2018, so if you are in any way hosting third-party content you’ll want to register a new agent under the new system.

It’s not terribly difficult, so cruise on over to the US Copyright office’s website and register. You’ll need the following information for both the designated agent and the owner or operator of the website (which may or may not be the same):

  • Name
  • Address
  • Phone number
  • E-mail address

Oh, and you’ll need a credit card. You can’t use mine, I have a little more shopping to do.

Well, then we’ll just sue them!

Vinnie

I guess you could save a little money on counsel, if you really want to.

When working with international (especially German) clients, we sometimes get to the point where the client says “well, then we’ll just sue them.” Unfortunately, while filing a lawsuit is easy, winning anything more than a Pyrrhic victory is often hard.

There are a number of reasons for that, some of which international clients are also familiar with. In most countries, I suspect, litigation takes longer than the parties (particularly the plaintiff) might like, and involves more effort than seems necessary. Similarly, the parties are sinking cash into what already seems to be a lost cost, although in many countries they can get back what they’ve put into the litigation if they win (more on that later). Finally, collecting in any country can be a challenge, and can involve making difficult decisions about when to pursue collection and when not to.

In the United States, however, there are some additional things to consider before bringing a lawsuit. After all, bringing the lawsuit itself is markedly easier than it might be elsewhere, but successfully prosecuting one can be a lot harder. Some of those issues include:

  • As noted above, the loser doesn’t pay the fees of the winner. That means that, in calculating the damages you expect to collect, you have to deduct the expense of filing, carrying out, and collecting on the lawsuit from any award. Sure, you have all read about our seemingly generous regime of “pain and suffering” and other punitive damages, but in the average commercial dispute you can expect to knock off anywhere from thousands to hundreds of thousands of dollars from any actual damages you are awarded, and you’re not likely to get any of those extra damages to make up for it.
  • Adding to both that cost and the impact on your business is the US system of “discovery,” which allows both parties to demand documents, depose witnesses, and otherwise intrude on the daily business life of the other party. Given that flying just one executive to the United States for one day of depositions can costs thousands of dollars and three work days, that’s a cost foreign companies have to think a little more carefully about than their domestic US counterparts. And remember, that money is not coming back even if you win.
  • All of the above means that a party who can afford to win the “war of attrition” can make it difficult to collect on even larger amounts due by driving up litigation costs to the point that a smaller vendor can’t maintain the litigation long enough to collect. I suspect that’s true in most countries, but again, the prospect of never recovering those expenditures makes things more problematic.
  • And then there’s collection – an award in one jurisdiction can be hard to collect on in another, and none of that matters if the party you’ve won against has nothing to collect on. It’s important to do some research up front before filing that lawsuit, since a judgement for $250,0000 which cost you $15,000 to get is really just a loss of $15,000 if you can’t collect in the end.
  • Finally, it’s not all about money. The interruption to your business and stress caused by depositions and document collection and review can be significant, and even more so for non-US employees who aren’t used to that sort of thing. Equally importantly for the foreign employer, in some cases US discovery laws may be inconsistent with your own laws, requiring a difficult choice between compliance with US law or accepting a negative result in the US in order to comply with foreign law.

There are definitely times when a lawsuit is the right way to go, but suing “on principle” in the US rarely makes sense. A lawsuit is like any other business decision, so before filing make sure the return is going to be worth the investment.

German court decides Parents can’t access deceased child’s Facebook account

Facebook

A German appeals court has decided that the Facebook account belonging to a deceased minor cannot be accessed by the deceased minor’s parents, according to German business website Handelsblatt. A couple in Berlin sued for access to the Facebook records of their daughter after she was killed by a subway train in Berlin, hoping to find clues as to the events leading up to her death. They were particularly interested in the chat records, which they thought might provide clues as to whether the daughter’s death might have been a suicide.

The lower court decided for the parents, determining that the Facebook account was part of the deceased minor’s estate. In deciding to appeal, Facebook, the subject of much criticism in Germany for its handling of data privacy, found itself in the unusual position of defending those same rights. The appellate court decided against the parents, and refused access. It appears likely that the parents will appeal the decision.

In the United States, Facebook generally does not allow parents access to a child’s account, deceased or not. Facebook does allow parents to request that the account be terminated, rather than leaving it online in “memorialized” mode, and in rare instances Facebook will honor requests for account data by parents or other authorized individuals.