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Wisconsin Business Law Blog

Providing in-depth discussions, thought, creative, and innovative insights on Business Law innovative insights

Easier Tax-Exempt Status: New IRS Form 1023-EZ

Posted in Business Formation, Operating a Business, Other Legal Issues, Tax

Good news for those of you starting new exempt organizations: the IRS just released a new form, called the 1023-EZ, which will make applying for tax-exempt status for some smaller organizations much easier.  The new form is only three pages long, compared to the lengthy 26 page standard 1023 form.  The simplified form will substantially reduce the legal expense of starting a 501(c)(3) and hopefully speed up the IRS approval process.

The IRS hopes that simplifying the approval process for smaller organizations will also reduce delays for larger organizations by freeing up more resources to review the lengthier applications.  Currently, the IRS has more than 60,000 501(c)(3) applications in its backlog, with many of them pending for nine months or longer.

The IRS estimates that as many as 70 percent of all applicants will qualify to use the new 1023-EZ.  Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.

However, the new application processes is still not without complications.  For example, you will still have to decide whether your organization will be a public charity or private foundation.  Further, certain types of organizations, such as churches, are categorically excluded from using the new form, even if they are small in size.

Therefore, it is still important that you confer with an attorney who can help determine if you qualify to use the 1023-EZ and to help you make other important decisions related to your non-profit organization.  If you need assistance in this area, one of our business attorneys would be happy to assist you.

Thanks to our law clerk, Kelsey O’Gorman, who assisted in the post.

The Innocent Owner Defense: Wait! That’s My Car!

Posted in Buying, Owning and Selling a Business, Operating a Business, Other Legal Issues

One of my partners, Eric Raskopf, who practices criminal and traffic defense work, recently posted to his blog, On Legal Ground, an article about someone losing their car as a result of being stopped while involved in criminal activity. Before you say, “Wait, that’s never going to happen to me,” read about what your kids, or maybe your employees, friends or neighbors may unintentionally do to your property, when you are not adequately supervising. Enjoy the read!

Proposed Federal Legislation is Likely to Raise Legal Fees

Posted in Operating a Business, Tax

How is Washington going to raise legal fees? Quite simple: just raise the costs for lawyers to do business by raising taxes substantially on many law firms.

The Federal Government has two bills pending, each of which would require law firms with gross receipts in excess of $1 Million to report for tax purposes using the accrual method of accounting. Most such law firms currently report on a cash basis. Consequently, if passed, all such law firms would have to report as taxable income monies which were billed, but not yet received. That would have the effect of causing a large amount of taxes to be paid by all such firms, which essentially means that in order to continue to meet all their other expenses, including payroll, such firms would be left with one option: raise fees.

If you may be opposed to such action, please consider writing your Senators and Representatives, mentioning the Tax Reform Act of 2014 and Section 51 of a similar Senate draft bill.

What do Clients Feel about the NSA Evesdropping on Attorney-Client Phone Conversations?

Posted in Other Legal Issues

The American Bar Association’s annual technology conference was held in Chicago last week, and one session was entitled, “Tools for lawyers worried that NSA is eavesdropping on their confidential conversations.” While I think most of the conversations I hold with my clients would be pretty boring stuff for the NSA, there are a few occasions where a client consults with me as to whether certain behavior or actions may be construed as criminal in nature. When that happens, I believe both my client and I presume such conversations are protected as “attorney-client privilege.” But is that really true anymore?

The ABA session and article linked above point out that the law is so vague and changes from day to day, such that lawyers really are not certain what the law is.

I’d love to hear the thoughts of others on this topic, whether lawyers or clients. How do you feel about your government snooping? If you or your attorney took measures to stop such snooping, do you think it would make you even a larger target, giving the government the idea that you have “something to hide?”

I have to admit that the whole thing gives me the creeps. The past few years have seen an increased erosion of private citizen rights in this country. Is this just another one? When the President can broadcast to the nation that he doesn’t need to follow the law and in fact will make laws himself, does that thinking then extend to others in government who then want to control others, maybe those being you and me?

My biggest question is this: If government can snoop, then can they also plant incriminating evidence? I’m sure the answer is “yes.” If that’s the case, then no one is safe. What then makes this the land of the free? What makes this country any different than those other countries which deny human rights?

This is just too important to ignore. I think it is time to enter the conversation. Your comments would be greatly appreciated!

Obamacare’s New 3.8% Sales Tax on Real Estate

Posted in Buying, Owning and Selling a Business, Other Legal Issues, Real Estate, Tax

Starting in 2013, a new 3.8% federal tax, known as the “Medicare Tax,” may apply to some gains on the sale of real estate, including even sales of personal residences. However, this is not a general tax and there are some exceptions. It is best to know the rules and seek competent tax advice.

The tax is calculated upon the lesser of:

1.  Net investment income; or

2.  The amount modified adjusted gross income exceeds: $250,000 for married couples filing a joint return or surviving spouses, or $125,000 for a married individuals filing a separate returns. The excluded amount is $200,000 for all other taxpayers.

Married couples filing jointly may still exclude up to $500,000 and singles up to $250,000 of the gain on the sale of a personal residence, thereby avoiding the tax. Consequently, persons selling homes may be subject to the new tax if their gain: 1. exceeds the exempt amount ($250,000 for individuals, $500,000 for married couples) and 2. causes taxable income to increase above the $125,000/$250,000/$200,000 limit.

While I’m focusing on the sale of real estate in this short article, I want to point out that this tax applies to all investment income, including dividends and interest, as well as gains on the sales of many other things, including the sale of a business.

If you find yourself in such a situation, be sure to confer with your tax advisor.

When the Contract says, “It is all in the contract,” is it?

Posted in Operating a Business

The Wisconsin Bar Association has a number of different sections for its various members. One such section is the Business Law Section. This section puts out periodic newsletters. In the December, 2013, edition of the Business Law News, Attorneys James M. Ledvina and Brick N Murphy, both of the Law Firm of Conway, Olejniczak & Jerry, S.C., of Green Bay, tackled an interesting topic raised by an unpublished, but none-the-less important, Wisconsin Court of Appeals decision. This deals with what is commonly known as an “integration clause.”

In the case of C&M Hardware, LLC v. Ture Value Co., 2013 WI App 84, 348 Wis. 2nd 761, 833 N.W.2d 872 review denied, 2013 WI 87, 350 Wis.2d 727, 838 N.W.2d 635, the Court of Appeals looked at the issue of whether a contract clause which purports to say that the contract includes all matters between the parties, really does, thereby stopping a party from bringing in evidence outside the contract?

In this case, C&M alleged that provisions in the contract that said it was “the entire agreement” were not conspicuous nor did they specify the specific tort claims that C&M would be releasing if it signed such a contract. The Court of Appeals agreed with C&M.  As a result, Ledvina and Murphy suggest adding the following language to all such clauses:

THE PARTIES ACKNOWLEDGE AND AGREE THAT BY AGREEING TO THIS SECTION THE PARTIES ARE WAIVING RIGHTS THAT THEY MAY OTHERWISE HAVE TO ASSERT CLAIMS FOR CONTRACTUAL BREACH OF REPRESENTATIONS OR WARRANTIES, MISREPRESENTATION AS A TORT, NEGLIGENCE, NEGLIGENT MISREPRESENTATION, FRAUD, AND OTHER TORT CLAIMS.

While this is an unpublished opinion, and is only useable for argument sake, it still doesn’t make a lot of sense. Parties that sign contracts should read them. If they sign them, we should be able to rely on the fact that they did read them. If we even put in a paragraph that says, “this is the whole agreement,” we should all be able to rely on it. This decision basically says, you now have to provide a very visible paragraph that sets forth what someone is giving up if they sign a contact that says, “this is it.” Extend this further: maybe we need such a paragraph for each and every term of a contract. Maybe we should just get opinion letters from the other side indicating their clients have read and understand the contract. Isn’t that what they hired their lawyers for to begin with?

Thoughts on Final IRS Regs Re: Capitalization vs. Write-off

Posted in Operating a Business, Tax

One of my favorite legal publishers, Thomson-Reuters, to whom I subscribe to their newsletter, “Checkpoint,” recently released an extensive report entitled, “NAVIGATING THE FINAL REGS ON DEDUCTION VS. CAPITALIZATION OF TANGIBLE PROPERTY COSTS.” In it, they say:

The IRS recently issued long-awaited final regs providing guidance on the application of Code Sec. 162(a) and Code Sec. 263(a) to amounts paid to acquire, produce, or improve tangible property. There is much for businesses to be pleased with in the final regs. For example, a substantially revised and expanded de minimis safe harbor election—effectively a book-tax conformity election—will allow many businesses to currently deduct their outlays for lower-cost assets, materials, and supplies. Building owners will be able to use a new safe harbor election allowing a current deduction for routine maintenance. This Special report provides an overview of the most widely applicable rules in the new regs and how they are to be applied in practice.

As I see it, the important points in this report for all business and property owners to now consider are these:

1. I feel the current scheme about what gets included in a capitalized asset hasn’t changed much. What it takes to put it in service is what gets capitalized. The new regs do let us write off compensation and overhead incurred to do so. Per the report, “unless the expense qualifies as a material or supply, or the de minimis safe harbor election applies, a taxpayer must capitalize amounts paid to acquire or produce a unit of property (UOP), whether real or personal property, including leasehold improvement property.”

2. Repairs made to get something into service are to remain capitalized.

3. Costs that are “inherently facilitative” in getting something into service are also capitalized. They may fall into 11 categories: shipping, moving or appraising property, application fees, sales and transfer taxes, finder’s fees, architectural, engineering, environmental or inspection services related to specific properties, brokers’ or appraisers’ fees, and services provided by a qualified intermediary in a Code § 1031 exchange.

4. These rules general apply to tax years beginning on and after January 1, 2014.

5. The de minimus safe harbor election rules allow taxpayers to write off certain lower cost business assets that they expense for book purposes under a written policy. This is called a “book tax conformity election.” To be elgible, the UOP can’t cost more than $5,000 if a business has an Applicable Financial Statement (AFS) and $500, if not. Acceptable financial statements for purposes of the de minimis safe harbor election are:

(1) A financial statement required to be filed with the Securities and Exchange Commission (SEC) (10-K or the Annual Statement to Shareholders).

(2) A certified audited financial statement accompanied by the report of an independent certified public accountant (or in the case of a foreign entity, by the report of a similarly qualified independent professional) that is used for:

(A) Credit purposes

(B) Reporting to shareholders, partners, or similar persons; or

(C) Any other substantial non-tax purpose

(3) A financial statement (other than a tax return) required to be provided to the federal or a state government or any federal or state agency (other than the SEC or IRS). (Reg § 1.263(a)-1(f)(4))

Code Section 179 Rules still apply, though they are currently up in the air. Per the Thomson report:

Under Code Sec. 179, eligible taxpayers may deduct (in lieu of depreciation) the cost of most tangible personal property, and certain other property, used in the active conduct of a trade or business. For tax years beginning in 2013: (1) the dollar limitation on the expensing deduction is $500,000; and (2) the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $2,000,000 (the investment ceiling). For tax years beginning after 2013, the maximum expensing limit is scheduled to drop to $25,000, and the investment ceiling is scheduled to drop to $200,000 (although Congress may not allow the expensing limit and investment ceiling limit to drop this drastically).

Making the election, while not complex, is daunting, considering all possible risks. Thomson continues:

The Reg § 1.263(a)-1(f) election, which is irrevocable, is made by attaching a statement to the taxpayer’s timely filed original Federal tax return (including extensions) for the tax year in which amounts eligible for the election are paid. The statement must be titled “Section 1.263(a)-1(f) de minimis safe harbor election” and include the taxpayer’s name, address, taxpayer identification number (TIN), and a statement that the taxpayer is making the de minimis safe harbor election under Reg § 1.263(a)-1(f).

Routine maintenance for building owners is also affected. Routine maintenance keeps the building in its “ordinarily efficient operating condition.” Activities are routine if they can, at the time the UOP is being placed into service, be expected to need to be done more than once in the 10 ensuing years. Routine maintenance for non-building UOP’s is designed to keep them in their “ordinarily efficient operating condition,” and examples include, inspection, cleaning, and testing; and the replacement of parts of the UOP with comparable and commercially available and reasonable replacement parts.

Expenses that are ineligible for the routine maintenance safe harbor include:

(1)    For a betterment

(2)    To replace a component

(3)    To restore damage to a UOP for which the taxpayer has taken a basis adjustment

(4)    To return a UOP to its former ordinarily efficient operating condition, if the property has deteriorated to a state of disrepair and is no longer functional for its intended use;

(5)    To adapt a UOP to a new or different use

(6)    For repairs, maintenance, or improvement of network assets; or

(7)    For repairs, maintenance, or improvement of rotable and temporary spare parts to which the

taxpayer applies the optional method of accounting for rotable and temporary spare parts.

Finally, there is a per-building safe harbor election for qualifying small taxpayers, those with $10 Million or less average annual gross receipts in the past 3 years. Such taxpayers may elect not to treat as capitalized expenses, improvements made to an eligible building property, which is one with an unadjusted basis of $1 Million or less, if the total paid during the tax year for repairs, maintenance, improvements, and similar activities does not exceed the lesser of $10,000 or 2% of the building’s unadjusted basis.

I have highlighted just the main considerations of this new and promising set of regulations. See the Thomson Report for more details and be sure to get the advice of your qualified tax expert when attempting to deal with these new rules.

 

Has the NSA Gone Too Far?

Posted in Operating a Business, Other Legal Issues, Tax, Technology Related Topics

Maybe its time for Americans to start taking sides on the issue of what their government ought to be spying on. While I have been no fan of Edward Snowden, I have also become no fan of the NSA. The longer this matter drags out, the more the NSA looks like it has become even more of a “big brother” than George Orwell imagined in his book,1984.

I have an iPhone, as I’m sure many of our readers have. If I misuse my iPhone to break laws, I would expect my government to have some right to get at what is on my iPhone to prove a case, presuming they have probable cause that a crime has been committed and that I was probably the criminal. But what if I’m not doing anything illegal? Should the government still have the right to follow me around, read my emails and voicemails, turn on my camera and microphone and record things? Such sci-fi activities certainly could not have been contemplated by our forefathers, but the concepts protecting an individual from such scrutiny were.

According to an article by Stephen Lawson for PCWorld’s “Best of PCWorld,” “the U.S. National Security Agency was developing in 2008 a software implant for Apple iPhones that allowed the agency to take almost total control of the device, including retrieving text messages and voicemail and remotely turning on its microphone and camera, according to a report by the German magazine Der Spiegel.

The article goes on to say: “The implant, code-named DROPOUTJEEP, was “in development” and initially intended for ‘close access’ installation on a phone, with remote installation being planned for a future release, according to an alleged NSA document with the date October 1, 2008, that Der Spiegel included in a graphic with its recent NSA report. DROPOUTJEEP’s other capabilities included remotely pushing and pulling files from an iPhone, retrieving the phone’s contact list and identifying the device’s location and the location of the nearest cell tower, the document said. The implant could do all this without the phone user’s knowledge, over SMS (Short Message Service) or a GPRS (General Packet Radio Service) data connection. All the software implant’s communications would be “covert and encrypted,” the document said.” See some interesting things Der Speigel says come directly from NSA’s own materials.

If iPhone hacking isn’t enough, the article then goes on to say, “The alleged NSA document describing DROPOUTJEEP was included in an interactive graphic published alongside a December 30 Der Spiegel report on a special hacking unit of the agency, which reportedly intercepts deliveries of computer equipment and installs spyware on it before it’s delivered to the recipients. The report cited internal NSA documents that Der Spiegel said it had viewed. The graphic included links to numerous documents about technologies that the hacking unit developed for infiltrating servers, firewalls, routers, wireless LANs, PCs, peripherals and cellphone networks.”

OK. So where does this all lead us? Should our government be able to put bugs into our computing devices before we start using them? Should they be able to enter into our networks to see what we’re doing? If they can plant files on someone’s computing device (and a smart phone is a computer!), then can incriminating evidence be planted? Will the government monitor the advice lawyers give their clients, such as tax advice?

I’d love to get a discussion going on this. I’d love to hear your thoughts. I personally don’t know exactly where the line should be drawn, but I certainly have some fears about people in positions of power being able to get rid of people they don’t like. Isn’t that what Kim Jong Un just did to his uncle in North Korea?

Crowdfunding in WI: a Good or Bad Idea?

Posted in Business Formation, Buying, Owning and Selling a Business, Technology Related Topics

“Crowdfunding” is a relatively new word. You may have heard of the concept, but may not yet know the word. Crowdfunding is a method by which money is raised to put capital into a business. Usually, this is done through an internet site, such as Indiegogo, Razoo, Upstart or a host of others. I am not linking to any of these, because I personally don’t know the operators of any such sites and cannot vouch for them. What happens is this:  an entrepreneur sets up an arrangement with such a website to raise small amounts of money from a very large number of prospective investors. If the offering is successful, the entrepreneur gets the capital he or she needs for the business, and the investors get a small stake in the venture.

I am concerned about such funding. When America suffered the Great Crash of the markets in 1929, it was determined that we needed significant regulation to be sure investors were protected. The result was the Security Acts of 1933 and 1934, both of which put into place many of the basic regulations we still live with today. What has happened in the past 80 years? America has become the largest, most successful economy in the world. Why change something that is working?

Crowdfunding didn’t start in Wisconsin. It started on the internet. The federal government responded in 2012 with the JOBS Act, which allowed certain websites to sell certain securities to certain investors, if they met certain requirements. Those requirements seem to fit into 3 categories: 1. how the investor is categorized; 2. what information is disclosed; and 3. whether the website may have to be registered. Wisconsin passed its Crowdfunding law as 2013 Wisconsin Act 52.

These are all very complicated issues in a new law that itself is very complicated. This comment is not intended, nor could it within the confines of such a short piece, address all the issues and complexities of the new law. Anyone intending to get involved with crowdfunding should certainly hire an attorney with securities experience that may show them the way.

Federal law governs offerings that cross state lines. Wisconsin law only covers offerings that take place entirely within the State of Wisconsin. The federal law already had a term, “accredited investor” or “AI.” An accredited investor is someone of wealth and sophistication that is expected to know the risks involved with certain financial investments and be more able to sustain losses on such investments without being destroyed. That person generally has to have an annual income of at least $200,000 for two years in a row ($300,000 including spouses), or a combined net worth of at least $1,000,000.  Wisconsin has created a new classification of “certified investor” or “CI,”  who only has to have $100,000 annual income($150,000 including spouse) or $750,000 net worth.

There are also limits on how much can be raised. The feds limit the amount to $1 Million, with certified financial statements ($500,000, if not) and Wisconsin doubles those amounts. Likewise, there are limits as to how much an investor may invest. The feds limit Non-AI investors to $2,000 or 5% of income or net worth, if under $100,000 of  income or net worth, and 10%, if above $100,000. Wisconsin just sets the limit at $10,000. Neither limits AI’s or CI’s (for Wisconsin). That means a much less wealthy person can invest a lot of money in Wisconsin.

The following table may help:

 

Federal AI

Federal non-AI

 Wisconsin CI

Wisconsin – non CI

Accredited Investor (AI) 2 year annual income at least $200,000 ($300,000 with spouse) or $1,000,000 net worth N/A Same as Federal N/A
Certified Investor (CI) N/A N/A 2 year annual income at least $100,000 ($150,000 with spouse) or $750,000 net worth N/A
Limit on Investment by an Investor with income or net worth <$100,000 None $2,000 or 5% of net worth or net income None $10,000
Limit on Investment by an Investor with income or net worth >$100,000 None 10%, up to $100,000 investment None $10,000
Maximum Amount Entrepreneur may Raise with Certified Financials $1,000,000 $1,000,000 $2,000,000 $2,000,000
Maximum Amount Entrepreneur may Raise without Certified Financials $500,000 $500,000 $1,000,000 $1,000,000

 

Now, my thoughts: I think this new system takes away all the protections we have in place for small investors. I think many shady people will hide behind these legitimate offerings and gather money and it will be gone before the investors can know what happened. And since the amount they have put at risk is relatively small, no prosecutor will be interested in going after the wrongdoers. This scheme makes no sense under any circumstances, because even if investors only put in $10 each, if the crook getting all the money gets a million or two, it won’t make any difference, it will just hurt a lot of people a little bit, instead of a few people a lot. This is just a very bad idea!

Obamacare: What To Do if You Are About to Lose Your State Assisted Insurance In Wisconsin (HIRSP, Badgercare, Medicaid)

Posted in News and Recent Decisions, Other Legal Issues

The Wisconsin legislature had originally reacted to Obamacare by deciding to shift the burden of providing health coverage for government dependent people to those plans that would become available on the exchanges, with many of these people qualifying for subsidies. Unfortunately, with the poor roll out of Obamacare, many people do not know what is going to happen to their coverage, when it may end, and what alternatives they have. They are totally unaware that they may contact a private insurance agent, who may help them find their way through this maze.

I recently received a communication from Patrick Courtney, V.P. at Health Insurance Associates, Inc., an expert in providing health insurance. Patrick pointed out that even though these government sponsored plans were scheduled to expire December 31, some have now been extended, along with the period for open enrollment period to enroll on the new exchanges. While the open enrollment period has been extended until March 15, 2014, for coverage effective April 1, 2014, anyone expecting to lose coverage earlier than April 1 should apply sooner, to be sure they are covered before their current plan ends. That means for some, they must apply by December 23, 2013 for January 1, 2014 coverage. A consortium of the major insurers have now agreed to extend the time for people to pay their initial premiums until January 10, 2014, but the December 23 deadline for application still remains.

While this is all pretty messy, there are those experts, like Patrick who can help people sort this out and get them into an applicable program. They can also assist in determining whether there will be a subsidy, and how much it will likely be. Patrick, who works with his father, James, are located in Brookfield, and can be reached at 262-786-6666.