Beth Rizkal, Author at The CJ Group

Update on the New Business Interest Expense Limitation

Posted on August 5, 2019July 22, 2024 by Beth Rizkal

The Tax Cuts and Jobs Act (TCJA) imposes a new limitation on deductions for business interest expense. The IRS recently issued guidance in the form of proposed regulations. The business interest expense limitation is a permanent change for tax years that began in 2018. Thankfully, many businesses are unaffected. Here’s what you need to know.

Prior Law

Before the TCJA, some corporations were subject to the so-called “earnings stripping” rules. Those rules attempted to limit deductions by U.S. corporations for interest paid to related foreign entities that weren’t subject to U.S. income tax. Other taxpayers could generally fully deduct business interest expense (subject to restrictions, such as the passive loss rules and the at-risk rules).

TCJA Change

The TCJA shifts the business interest deduction playing field. For tax years beginning in 2018, a taxpayer’s deduction for business interest expense for the year is limited to the sum of: 1) business interest income, plus 2) 30% of adjusted taxable income (as defined later), plus 3) floor plan financing interest paid by certain vehicle dealers. This new interest expense deduction limitation can potentially affect all types of businesses — corporate and noncorporate.

Business interest expense is defined as interest on debt that’s properly allocable to a trade or business. However, the term trade or business doesn’t include the following excepted activities:

Performing services as an employee,
Electing real property businesses,
Electing farming businesses, and
Businesses that sell electrical energy, water, sewage disposal services, gas or steam through a local distribution system, or transportation of gas or steam by pipeline, if the rates are established by a specified governing body.

Interest expense that’s disallowed under the limitation rules is carried forward to future tax years indefinitely and treated as business interest expense incurred in the carry-forward year.

Proposed Regulations

The IRS has issued proposed regulations on how to apply the business interest expense limitation. The proposed regulations are organized into these sections:

1. Definitions used throughout the proposed regulations.

2. General rules on how to calculate the business interest expense limitation.

3. Ordering rules and rules coordinating the limitation with other tax code provisions, such as the passive activity loss rules.

4. Rules for C corporations and tax-exempt corporations.

5. Rules on the treatment of C corporation disallowed business interest expense carry-forwards.

6. Special rules for applying the limitation to partnerships and S corporations and their owners.

7. Rules for foreign corporations and their shareholders.

8. Rules for foreign persons with effectively connected income.

9. Rules for elections by eligible real property businesses and farming businesses to be exempted from the business interest expense limitation.

10. Rules for allocating income and expenses between nonexcepted and excepted trades and businesses. Excepted trades and businesses are electing real property businesses, electing farming businesses and regulated utilities.

11. Transition rules for the limitation.

Unless otherwise stated, the proposed regs would be effective for tax years ending after the date they’re published in the form of final regulations. However, taxpayers can choose to follow the proposed rules for tax years beginning in 2018 — if they apply the proposed rules consistently.

Small Business Exception

The good news is that many businesses are exempt from the interest expense limitation rules under what we’ll call the small business exception. With this exception, a taxpayer (other than a tax shelter) is exempt from the limitation if the taxpayer’s average annual gross receipts are $25 million or less for the three-tax-year period ending with the preceding tax year.

Businesses that have fluctuating annual gross receipts may qualify for the small business exception for some years but not for others — depending on the average annual receipts amount for the preceding three-tax-year period. For example, if your business has three good years, it may be subject to the interest expense limitation rules for the following year. But if it’s been a bad year, it may qualify for the small business exception for the following year. If average annual receipts are typically over the $25 million threshold, but not by much, judicious planning may allow you to qualify for the small business exception for at least some years. Your tax advisor can help with that.

Interaction with Other Limitations

The rules in the proposed regs generally apply only to interest expense that could otherwise be deducted without regard to the business interest expense limitation. So interest expense that has been disallowed, deferred or capitalized in the current tax year, or that hasn’t been accrued yet, shouldn’t be taken into account when considering the limitation. However, the limitation should be applied before applying the passive activity loss rules, the at-risk rules and the new excess business loss disallowance rule.

Calculating the Deduction Limitation

Assuming your business doesn’t qualify for an exception, the business interest expense deduction for the tax year can’t exceed the sum of: 1) business interest income, plus 2) 30% of adjusted taxable income, plus 3) any floor plan financing interest expense.

Adjusted taxable income means taxable income calculated by making adjustments to factor out the following:

1. Items of income, gain, deduction or loss that aren’t allocable to a business,

2. Any business interest income or business interest expense,

3. Any net operating loss deduction,

4. The deduction for up to 20% of qualified business income from a pass-through business entity,

5. Any allowable depreciation, amortization or depletion deductions for tax years beginning before 2022, and

6. Other adjustments listed in the proposed regulations.

Deductions for depreciation, amortization, and depletion are added back when calculating adjusted taxable income for tax years beginning before 2022. For tax years beginning in 2022 and beyond, these deductions won’t be added back, which may greatly increase the taxpayer’s adjusted taxable income amount and result in a lower interest expense limitation amount.

Example

For 2019, BB Co. has $20,000 of business interest income, $250,000 of business interest expense and $1 million of adjusted taxable income. Assume the small business exception doesn’t apply. The company can deduct all $250,000 of its business interest expense because that amount is less than the deductible limit of $320,000 [$20,000 of business interest income + $300,000 (30% of the $1 million of adjusted taxable income)].

For 2020, BB Co. has $20,000 of business interest income, $120,000 of business interest expense and only $100,000 of adjusted taxable income. The company can only deduct $50,000 of its business interest expense in 2020 [$20,000 of business interest income + $30,000 (30% of the $100,000 of adjusted taxable income)]. The $70,000 of disallowed interest expense ($120,000 – $50,000) is carried forward to future years.

This example illustrates that the business interest expense limitation is more likely to affect a business when it’s having a subpar year. The only good news is that the disallowed interest is carried forward to future years, so it can potentially be deducted when things get better.

Important: For tax years beginning before 2022, taking advantage of generous depreciation tax breaks (such as 100% first-year bonus depreciation and Section 179 deductions) will not reduce adjusted taxable income. For later years, taking advantage of such breaks will reduce adjusted taxable income, which will make the interest expense limitation more likely to come into play.

The interest expense deduction limitation rules get more complicated for businesses operating as partnerships, limited liability companies (LLCs) treated as partnerships for tax purposes and S corporations.

Electing Out of the Limitation

Eligible real property and farming businesses can elect out of the new business interest expense limitation. However, electing to be exempt has a tax cost.

Real Property Businesses

Real property businesses can elect out of the rules if they use the Alternative Depreciation System (ADS) to depreciate their nonresidential real property, residential rental property and qualified improvement property. Using the ADS results in lower annual depreciation deductions because its depreciation periods are longer than the depreciation periods under the regular MACRS (Modified Accelerated Cost Recovery System) rules that usually apply. Real property businesses include developing, redeveloping, constructing, reconstructing, acquiring, converting, renting, operating, managing, leasing and brokering real property.

Affected real estate businesses should evaluate the tax benefit of gaining bigger interest expense deductions by electing out of the interest expense limitation rules vs. the tax detriment of lower depreciation deductions under the ADS. If the election out is made, first-year bonus depreciation that would otherwise be allowed for real property assets won’t be allowed under the ADS.

Farming Businesses

Eligible farming businesses can also elect out of the interest expense limitation rules. Farming businesses include nurseries; sod farms; raising or harvesting of tree crops, other crops, or ornamental trees; and certain agricultural and horticultural cooperatives. These businesses can elect out of the rules if they use the ADS to depreciate assets used in the farming business that have MACRS depreciation periods of 10 years or more.

Special Partnership and S Corporation Rules

Basically, the limitation is calculated at both the entity level and at the owner level. Special rules prevent double counting of income when calculating an owner’s adjusted taxable income for purposes of applying the limitation at the owner level.

The proposed regs set forth the special rules for applying the business interest expense limitation to partnerships and S corporations and their owners. The provisions are complex and present significant compliance challenges for affected taxpayers.

Minimize the Effects

As you can see, the business interest expense limitation rules are complicated. Fortunately, many businesses are exempt from the limitation. According to one estimate, about 98% of U.S. businesses are covered by the small business exception.

If your business is among the 98%, it’s important to properly document that fact in case the IRS comes calling. Your tax advisor can help.

On the other hand, if your business is affected by the limitation, your tax advisor may be able to suggest planning moves to minimize the ill effects.

Construction Company Owners: Watch Out for the TFRP

Posted on August 4, 2019 by Beth Rizkal

The Trust Fund Recovery Penalty (TFRP) is one of the harshest tax provisions on the books. Under the TFRP, a company owner, officer or other employee may be held liable for 100% of the company’s unpaid payroll taxes — which is why the assessment is sometimes called the “100% penalty.” Contractors beware: The TFRP can severely damage, if not destroy, your construction business and threaten your personal financial security.

Broad Interpretations

The TFRP may be applied to any person who’s: 1) responsible for collecting or paying withheld income and employment taxes or for paying collected excise taxes, and 2) willfully fails to collect or pay those taxes. Be aware that the IRS has broad interpretations of these two requirements.

For example, a “responsible person” is any person — or group of people — who has the duty to perform and the power to direct the collection, accounting and paying of trust fund taxes. This person might be:

An officer or employee of a corporation,
A member or employee of a partnership,
A corporate director or shareholder,
A member of a board of trustees of a not-for-profit organization,
Another person with authority and control over funds to direct their disbursement, or
Another corporation or third-party payer.

Similarly, the IRS broadly interprets the requirements for a “willful failure.” The failure doesn’t have to be intentional. For instance, the TFRP may be applied in situations where the responsible person knew, or should have known, about the taxes that should have been paid but, in fact, weren’t.

If the IRS determines that you’re a responsible person, it will mail you a letter stating that it plans to assess the TFRP against you. You have 60 days (75 days if this letter is addressed outside the United States) from the date of the letter to appeal. The letter will explain your appeal rights. If you don’t respond to this communication, the IRS will assess the penalty against you and send a Notice and Demand for Payment.

Once the TFRP is assessed, the IRS can take collection actions against your personal assets. It may, for example, file a federal tax lien or take levy or seizure action.

U.S. v. Samango

A recent Pennsylvania court case illustrates how easily a construction company owner can be found negligent. The defendant in U.S. v. Samango was the sole shareholder and president of a concrete construction company. As president, he supervised all aspects of the business, including reviewing and signing all federal and state tax returns. In addition, he was a minority shareholder and president of a framing company. In this capacity, he approved, signed and submitted various tax forms and documents to federal and state tax authorities.

Both companies had the same business address and phone number. They also shared top-level management and employees. In 2008, the concrete business subcontracted with the framing company to help on a construction project.

While the owner was president of both businesses, he signed checks from the concrete construction company’s account to pay the framing company’s liability for state unemployment compensation insurance. He also approved, signed and submitted to the IRS the Federal Unemployment Tax Act (FUTA) form for the framing company.

Subsequently, the IRS assessed the TFRP against the owner, claiming he was a responsible person who failed to pay trust fund taxes for the four quarters during which the framing company worked with the concrete construction company as a subcontractor. But the owner objected. He argued that he was only a minority shareholder; had no knowledge of the company’s finances, operations or general decision-making; and held no power or authority to pay its taxes.

Court’s Ruling

However, when the case came before a Pennsylvania district court, it found that the owner was a responsible person who willfully failed to pay taxes. The court rejected the owner’s claim that he wasn’t responsible because he had no oversight or control of the framing company’s finances. After all, the court reasoned, he signed and certified government forms on the company’s behalf. He also paid taxes owed by the framing company with funds from the concrete company’s account for which he had signatory authority.

The owner admitted at trial that he didn’t take any steps to ensure that the framing company’s taxes were being paid. This hurt his case. As president, he should have known that there was a grave risk that the taxes weren’t being paid. And he could have easily found out whether they were being paid. In the end, the owner was ordered by the court to pay $900,000 in unpaid employment tax.

High Stakes

With the TFRP, the stakes for tax compliance are high. To protect your construction business and personal assets, ensure that payroll tax deposits are made to Uncle Sam in a timely manner.

Your HR Department Should Be as Well-Oiled as Your Machinery

Posted on August 1, 2019 by Beth Rizkal

Manufacturing company owners and managers generally focus their attention on what’s happening — or isn’t happening — on the plant floor. Activities in overhead departments, such as human resources (HR), can become a secondary consideration. If this sounds like your company, consider this: Manufacturing is a labor-intensive industry, and you can’t afford to ignore HR.

A well-oiled HR department enables your business to run on all cylinders and overcome many challenges. Conversely, HR problems can slow down your company’s growth. If, for example, HR doesn’t proactively search for new machine operators, you may not be able to fill a big order that comes in unexpectedly.

7 Critical Functions

Here are seven ways HR departments can support a manufacturing company’s operational and performance objectives:

1. Recruitment.

This may be HR’s most important function. Finding the best talent to keep the plant humming without breaking the bank is always an issue, but it’s even more so in the current tight labor market. Today’s unemployment rate has reached record lows in some markets, and many applicants lack the skills and training to operate complex machines and computers that are used by advanced manufacturers.

One challenges for HR is that Millennials have shown less interest in manufacturing than previous generations. This may be due to a widely held misconception that manufacturing isn’t “cutting-edge.” Some younger workers may also believe that manufacturing jobs aren’t secure due to a reliance on temps to handle seasonal or periodic work.

The numbers bear this out. According the National Association of Manufacturers (NAM), in the first quarter of 2019 more than 25% of manufacturers had to turn down new business opportunities for lack of skilled employees. By 2025, millions of manufacturing jobs are expected to go unfilled. Your HR department must constantly strategize and think creatively to ensure that this doesn’t happen to your company.

2. Compensation.

For many manufacturers, compensation is the second largest business expense next to raw materials. Of course, wages alone aren’t enough to attract the top talent. Today, jobseekers look for a complete package that includes a good salary, benefits and perks, such as bonuses, paid time off and retirement plans.

Your HR team needs to know enough about the labor market to offer the best combination of these elements. At the same time, HR must align salary and incentive programs with your company’s performance markers — all while working within a tight budget. It’s a tough balancing act.

3. Health care benefits.

No question, the biggest-ticket under the benefits umbrella is health insurance. As health care costs rise, premiums will also continue to soar.

HR managers must balance the needs of employees against the cost to your company. Increasingly, this means asking workers to pay a larger percentage of premiums and accept high deductibles. But your company can’t put too much of the burden on employees or it risks losing them. HR must understand the health insurance marketplace and know how to find the best “deals” without sacrificing quality or violating laws governing employer-sponsored health insurance. This may require them to outsource some work to benefits experts.

4. Training.

Manufacturers hoping to rely on “interchangeable” workers probably won’t last long in the global marketplace. You need workers with specialized skills — and that means devoting resources to training.

Extra training isn’t only about the right hands operating critical machines. When workers are well-trained, they tend to care more about the quality of work, leading to higher productivity. Accordingly, HR should use every tool at its disposal, including mentoring, coaching, internships, career development plans, tuition reimbursements and motivational speakers.

5. Performance management.

Skilled performance management promotes employee success and, if HR is successful, results in better financial performance. Many HR managers design and implement internal employee appraisal programs. But input from performance management consultants can be valuable as new “best practices” emerge.

6. Labor relations.

In most U.S. states, manufacturers can’t ignore unions. Managing union relations may fall to your HR department. It’s important that this team maintains a positive and productive relationship with unions and union members. Of course, if conflict arises, upper management must step in.

7. Compliance.

Whether they want to be or not, HR managers must be labor law experts. Your HR manager may be responsible for drawing up policies that protect workers and keeping corporate officers abreast of changing regulations. There’s little room for error because failure to comply with labor laws can lead to litigation and financial penalties.

Protect Your Assets

Your company’s HR department to integral to its success. Make sure that this team receives the budgetary and other support it needs to excel at recruiting, training, reviewing, compensating and protecting your most valuable asset — your workforce.

Employer Responsibility for Gig Workers Evolves with Safety Concerns

Posted on July 9, 2019 by Beth Rizkal

If you pay for services from independent contractors, your legal obligations to those individuals are far more limited than those involving statutory employees. But the growing importance of so-called “gig” workers in today’s labor force is changing the legal landscape for some businesses.

Evolving Marketplace

The term “gig workers” refers to people who an employer would contract with directly, through agencies, or using a professional employer organization. The growth of the gig economy is fueled by variable demand for manpower and new enabling technology for some categories of work. But employment attorneys warn that aggressive plaintiffs’ lawyers are chipping away barriers to employer liability for gig workers in the areas of accidents and injuries.

Meanwhile, the Occupational Health and Safety Administration (OSHA) is also paying more attention to contract workers. On its website, OSHA has outlined employer duties to protect temporary workers. It states, “OSHA has concerns that some employers may use temporary workers as a way to avoid meeting all of their compliance obligations.” Employers “should consider the hazards it is in a position to prevent and correct.”

OSHA’s website also asserts that “Host employers must treat temporary workers like any other workers in terms of training and safety and health protections.”

Warning Shot

OSHA’s policy statement is focused on employers’ use of temp agencies in “joint employment” arrangements, rather than the standard gig worker/independent contractor relationship. But it appears that a warning shot has been shot across employers’ collective bow.

A study recently published by the Journal of Occupational and Environmental Medicine notes “increased rates of fatal and non-fatal injuries” among “traditional contingent workers,” and explores potential causes. Differences in training was a potential culprit.

As a result, one employment law firm warns that “safety, training, culture, practices, supervision and enforcement must be adapted to meet the new economy.” Even without the threat of litigation, only the rare employer would be indifferent to potential hazards facing anybody performing work for them. Besides, accidents caused by independent contractors at your worksite can also hurt regular employees and your customers.

Naturally, hazards faced by gig workers vary according to the nature of the work they perform. “On-demand jobs are among the most dangerous in the country,” asserts the worker legal advocacy group National Employment Law Project. This organization wants states to mandate workers compensation coverage for all “on-demand workers.” It lists the three most common job categories — transportation, delivery and home services — as “among the most hazardous in the country.”

Vulnerability to Injury

Outside of the transportation, delivery and home services sectors, attention generally focuses on gig workers who spend a lot of time on your company’s premises, where they might be vulnerable to accidents or injuries. Worksite injuries don’t always involve hazardous equipment or materials.

Experts calling attention to the safety issue point to the demographics of gig workers, particularly the fact that they tend to be young. “Younger age is a well-known independent risk factor for occupational injury,” according to a recent study by the Journal of Occupational and Environmental Medicine.

In addition to their relative youth, gig workers often work for a relatively short time periods for one company or in one industry sector. That inexperience also can put them at greater risk for accidents.

Protecting Workers

Meanwhile, OSHA has recently focused on worksite risks for younger workers. It’s identified the following steps to employers should take to protect full-time and temporary workers under age 30:

Ensure that young workers receive training to recognize hazards and are competent in safe work practices.
Implement a mentoring or buddy system.
Encourage young workers to ask questions about tasks or procedures that are unclear.
Explain to young workers what they need to do if they’re hurt on the job.

In addition, OSHA has informed employers of their duties to try to protect workers from workplace violence. The agency highlighted a case in which a social services contractor was held responsible for ignoring safety concerns expressed by a worker who traveled outside the workplace to visit clients and, while conducting a visit, was killed by a client.

The worker was an employee of the contractor. However, the case highlights employers’ obligations to provide for the safety of individuals who provide services in a gig-like environment.

Toeing a Fine Line

In attending to the safety needs of independent contractors, employers should avoid tipping the scales toward establishing an employer-employee relationship with individuals who it classifies as independent contractors.

The law in this evolving area of employment law involves subjective assessments, and the nature of gig work arrangements varies widely. So, the advice of an employment attorney could prove invaluable as you weigh your workplace safety maintenance obligations.

How Much Can Businesses Deduct for Vehicles Placed in Service in 2019?

Posted on July 8, 2019July 22, 2024 by Beth Rizkal

Does your business need to add one or more vehicles? If so, the purchases may qualify for tax breaks under current tax law. Here are the details.

First-Year Depreciation Breaks

The Tax Cuts and Jobs Act (TCJA) allows unlimited 100% first-year bonus depreciation for qualifying new and used assets (including eligible vehicles) that are acquired and placed in service between September 28, 2017, and December 31, 2022. However, for a used asset to be eligible for 100% first-year bonus depreciation, it must be new to the taxpayer (you or your business entity).

Spotlight on Leased Vehicles

Business use of a leased vehicle may be tax deductible. If a leased vehicle is used 100% for business purposes, the full cost of the lease is deductible as an ordinary business expense. However, lessees of more expensive vehicles must include a certain amount in income for each year of the lease to partially offset the lease deduction.

The income inclusion amount varies based on the leased vehicle’s initial fair market value and the year of the lease. The IRS recently published a table to help taxpayers determine the inflation-adjusted lease inclusion amounts for vehicles with lease terms starting in 2019.

For example, suppose your business leases a light truck with a fair market value of $66,500 on January 1, 2019, for three years. It’s used for business purposes only. According to the IRS table, your income inclusion amounts for each year of the lease would be as follows:

$72 in 2019,
$160 in 2020, and
$236 in 2021.

The lease inclusion table is designed to help balance out the tax benefits of leasing a luxury car compared to purchasing it and taking the expanded first-year depreciation tax breaks.

Contact your tax advisor to discuss the pros and cons of leasing vs. buying a business vehicle. Taxes are just one consideration in this critical decision. The TCJA also permanently increased the Section 179 expensing limit for qualifying asset purchases from $500,000 in 2017 to $1 million for tax years beginning in 2018 and beyond. However, this break is phased out for qualifying purchases over $2.5 million in 2018 (up from $2 million in 2017).

For tax years after 2018, these amounts will be adjusted annually for inflation. The inflation-adjusted figures for 2019 are $1.02 million and $2.55 million, respectively.

Sec. 179 expensing for qualifying asset purchases is phased out on a dollar-for-dollar basis for purchases that exceed the threshold amount. So, no Sec. 179 deduction is available if your total investment in qualifying property is above $3.57 million for 2019.

Heavy Vehicles

Heavy SUVs, pickups and vans are treated for tax purposes as transportation equipment. So, they qualify for 100% first-year bonus depreciation and Sec. 179 expensing if used over 50% for business. This can provide a huge tax break for buying new and used heavy vehicles.

However, if a heavy vehicle is used 50% or less for business purposes, you must depreciate the business-use percentage of the vehicle’s cost over a six-year period.

To illustrate the potential savings from these first-year tax breaks, suppose you buy a new $65,000 heavy SUV and use it 100% in your business in 2019. You can deduct the entire $65,000 in 2019 thanks to the 100% first-year bonus depreciation privilege. If you use the vehicle only 60% for business, your first-year deduction would be $39,000 (60% x $65,000).

To qualify as a “heavy” vehicle, an SUV, pickup or van must have a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. You can verify the GVWR of a vehicle by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door where the door hinges meet the frame. Examples of suitably heavy vehicles include the Audi Q7, Buick Enclave, Chevy Tahoe, Ford Explorer, Jeep Grand Cherokee, Toyota Sequoia and lots of full-size pickups.

Garden-Variety Passenger Vehicles

The tax breaks for passenger automobiles (defined to include light SUVs, pickups, and vans) are less generous than for heavy vehicles. The inflation-adjusted depreciation limits for passenger vehicles that were acquired before September 28, 2017, and placed in service during 2019 are:

$10,100 for the first year ($14,900 with bonus depreciation),
$16,100 for the second year,
$9,700 for the third year, and
$5,760 for each succeeding year.

The depreciation limits for passenger autos acquired after September 27, 2017, and placed in service during 2019 are:

$10,100 for the first year ($18,100 with bonus depreciation),
$16,100 for the second year,
$9,700 for the third year, and
$5,760 for each succeeding year.

If the vehicle is used less than 100% for business, these allowances are cut back proportionately.

Important: For a vehicle to be eligible for these tax breaks, it must be used more than 50% for business purposes, and the taxpayer can’t elect out of the deductions for the class of property that includes passenger automobiles (five-year property).

Limited-Time Offer

The Sec. 179 limits were permanently expanded by the TCJA. But the first-year bonus depreciation program will gradually start phasing out 20% per year, beginning with tax years starting in 2023. And the bonus depreciation program will expire after 2026, unless Congress extends it. If you have questions about depreciation deductions on vehicles, contact your tax advisor.

Should You Offer Employees Paternity Leave?

Posted on July 3, 2019 by Beth Rizkal

Although maternity leave for new mothers has become more common in U.S. workplaces than it used to be, fathers don’t always receive the same benefits. Most new fathers aren’t granted any time off — let alone paid time off on the birth or adoption of a child. However, as the labor market tightens, employers are starting to recognize that paternity benefits can help attract and retain employees.

According to Mercer’s Survey on Absence and Disability Management, about 40% of employers now offer paid parental leave for both parents, compared to 25% in 2015.

Here’s what you need to know if your organization is thinking about adding paternity leave to its employee benefit package.

Know Their Rights

Under the Family and Medical Leave Act (FMLA), the controlling federal law in this area, there is no nationwide right to receive paternity leave. However, six states and all 20 of the largest U.S. companies mandate some form of paid parental or family leave. Although fathers have no federal right to be paid during paternity leave, the FMLA requires that the employee’s job be protected for up to 12 weeks after the birth or adoption of a child. In other words, the employee is entitled to return to his job without penalty in pay or position. To qualify, the employee must have worked at a company with more than 50 employees and have logged at least 1,250 hours on the job the previous year. Other requirements may apply.

In addition to federal law, workers may have rights under state law. As of this writing, 25 states supplement FMLA protection by either providing longer leave time (for example, 16 weeks), lowering the minimum employer size or even requiring private employers to pay for a leave, up to a dollar cap. Six states — California, Massachusetts, New Hampshire, New Jersey, New York and Washington — plus the District of Columbia, have passed family leave legislation that extends paternity leave rights to fathers.

Typically, employers providing leave to a birth father offer the same or similar benefits to fathers adopting a child. The FMLA states that employees may take 12 weeks of unpaid leave for an adoption and some individual states offer time off to adoptees under the umbrella of family leave (which can also include leave to care for sick children or elderly relatives).

Decide on the Details

If you’re thinking about making paternity leave benefits available to employees, discuss your intentions with legal and financial advisors. Although some companies offer unofficial benefits on a per-employee basis, you’re generally better off putting everything — including whether paternity leave is paid or unpaid — in writing. This includes updating employee handbooks and new employee orientation materials.

Most employers that offer paid paternity leave continue to cover full-time employee benefits such as health and life insurance during the leave period. However, you may want to reserve the right to be reimbursed for insurance premiums if the employee doesn’t return to work when the paternity leave period ends.

Employers typically suspend the employee’s right to other benefits temporarily — including their ability to:

Accrue seniority benefits,
Earn vacation and sick time, and
Receive 401(k) matching contributions or advance the vesting schedule.

And, of course, employees on parental leave can’t contribute to their 401(k) on a pre-tax basis because they aren’t receiving a paycheck.

Handle Leave Requests

Under the FMLA, employees working for employers that offer paternity leave must make a leave request at least 30 days in advance. The employee can take the leave any time during the spouse’s pregnancy or within one year of the child’s birth. It’s important to stress that this decision is made by the employee — not the employer — and usually is influenced by such personal factors as the employee’s finances and the mother’s health during pregnancy.

An employer can require the employee to use up vacation, personal or sick days before being taking official FMLA leave. However, in many organizations, the employer and employee discuss and negotiate these issues to arrive at a mutually agreeable decision.

Pressure Is Growing

Smaller employers aren’t covered by the FMLA, and even large employers aren’t required to offer family leave benefits to part-time employees. But you may want to consider offering paid paternity leave anyway — particularly if you already offer maternity leave. Pressure is growing on lawmakers to address the issue and legislation could require more from employers in the future. In the meantime, offering paternity leave can give your organization an edge in the search for new talent.

Are Pop-Ups a Fresh Marketing Concept or Merely a Fad?

Posted on July 1, 2019July 23, 2024 by Beth Rizkal

Pop-up retail stores, restaurants and events promise numerous benefits. They can be less expensive and more flexible to operate than traditional brick-and-mortar operations. And they may appeal to consumers who crave fun, memorable events. They’re also great for seasonal retailers and online boutiques that want to expand or unload inventory.

But will the here-today, gone-tomorrow trend last? Here’s what you should know before opening or investing in a pop-up shop.

Reinventing Pop-Ups

The concept of pop-ups has been around for decades. Think of ice cream trucks that cruise down suburban streets during the summer. And don’t forget costume retailers that drop anchor in vacant strip malls in the fall, and flower kiosks that appear in train stations for forgetful spouses on Valentine’s Day.

In the 21st century, however, the pop-up concept has transitioned. It’s evolved from a seasonal sales model into a marketing tool to:

Test innovative consumer products and services,
Build awareness for established brands, and
Create buzz about trendy consumer “experiences.”

Modern pop-ups — like nightclubs in vacant warehouses, food trucks at local breweries and vintage jewelry displays at boutique hotels — offer fun, lifestyle events that are typically spread via word-of-mouth and social media (rather than radio or print ads). They give people the opportunity to touch, taste or try products and services before making a purchase.

Building Popularity

The pop-up market is currently valued at roughly $50 billion. (See “Pop-Up Stores” below.) And it’s expected to continue to grow as Millennials and Generation Z gain even more purchasing power. Younger generations have a different approach to shopping than previous generations. They tend to be more brand loyal, budget-conscious and linked by social media. And these characteristics lend themselves to today’s pop-up model.

What makes a pop-up successful? Value drivers for pop-up shops include:

Costs. Countless brick-and-mortar stores have shuttered in recent years, often due to burdensome overhead costs and emerging competition from online stores. Temporary pop-up locations don’t require long-term leases, costly build-outs or substantial inventory investments.

Pricing strategy. Often, a pop-up storefront allows customers to physically interact with the merchant or service provider, and then make purchases online. This distribution model requires minimal investment in inventory, which, in turn, helps pop-up merchants charge a lower price than traditional brick-and-mortar stores.

Conversely, the novelty of a pop-up concept may enable a merchant to charge a premiumprice. With a limited supply of inventory on hand, consumers may be willing to pay extra for impulse purchases at a pop-up location — or to be seen as trendsetters.

Location. It’s important for pop-ups to identify their target market and understand its habits and needs. When and where will customers shop? In most cases, pop-ups need a visible space with significant foot traffic. But sometimes, a hidden location can create brand magic. For example, foodies might track a well-known food truck to its latest spot across town using Twitter or Instagram.

To maximize headcount, coordinate your pop-up’s appearance based on favorable weather conditions and local events that will be attended by your target market. You also might consider joint venturing with another vendor who offers a complementary product or service. For example, an activewear clothier might share space with a smoothie vendor to help lower lease costs and leverage off each other’s customer base.

Downsides of Pop-Ups

There are limits to the value of the pop-up concept — and, like anything trendy, the novelty may eventually wear off. Because it’s hard to maintain a creative edge, many pop-up shops are used to test, grow or supplement an existing online or brick-and-mortar business.

Pop-ups also face capacity issues. That is, they’re small and can serve a finite number of customers. To fully serve your target market’s needs, you may need to open additional pop-up locations or settle down in a permanent location.

Ready to Join the Bandwagon?

If you’re interested in opening or starting a pop-up shop, contact your financial advisors to evaluate your business plan, estimate costs and develop pricing strategies. An experienced professional can help you work through the logistics and maximize your venture’s potential long-term value.

When to Update Your Estate Plan

Posted on June 18, 2019July 22, 2024 by Beth Rizkal

Estate planning isn’t just for the rich and famous. Many people mistakenly think that they don’t need an estate plan anymore because of the latest tax law changes. While it’s true that the Tax Cuts and Jobs Act (TCJA) provides generous estate tax relief, even for well-to-do families, the need for estate planning has not been eliminated. There are still numerous reasons to develop a comprehensive estate plan and regularly update it.

How the Estate Tax Has Evolved

Several recent tax law changes, including certain provisions of the TCJA, may help you shelter all or a large portion of your estate from estate and gift tax.

At the turn of the century, the unified estate and gift tax exemption was a mere $675,000. It was increased to $1 million in 2002, while the top estate tax rate was 55%. Then legislation gradually increased the estate tax exemption to $5 million for 2011, indexed annually for inflation, and lowered the top estate tax rate to 35%. (There was a one-year moratorium on federal estate tax for people who died in 2010.)

Along the way, the unified estate and gift tax exemptions were severed and then reunified, as they remain under current law. Therefore, any amounts used to cover lifetime gifts erode the remaining estate tax shelter.

Notably, subsequent legislation also created and then preserved a “portability” provision. This allows the estate of a surviving spouse to use the unused portion of the deceased spouse’s exemption. So, it effectively “doubled” the $5 million exemption for married couples to $10 million.

Starting in 2018, the TCJA officially doubled the estate exemption per individual from $5 million to $10 million, with annual indexing for inflation. For 2019, the exemption is $11.4 million for an individual or $22.8 million for a married couple. However, these provisions are scheduled to expire after 2025. For 2026 and thereafter, the law will revert to pre-2018 levels, unless Congress takes further action.

Why Estate Planning Still Matters

Given the dramatic increase in the unified estate and gift tax exemption over the last 20 years, there’s a common misconception that federal estate planning is a concern of only the wealthiest individuals. But here are four valid reasons for people with estates below the unified exemption threshold to devise a plan — or revise an existing plan to take advantage of current tax law.

1. Family changes.

Most mature adults have created a will. Some also have set up trusts to maximize each spouse’s exemption and protect assets from creditors and spendthrift family members.

However, circumstances change over time. Is your old list of beneficiaries still complete and accurate? You may need to update your will and estate plan to reflect births and (unfortunately) deaths and divorces in the family.

Who’s listed as the executor of your estate? The executor is the quarterback of your estate planning team. Maybe your children were minors when you originally drafted your plan, and now your grown children may be better suited to serve as executors than your aging parents.

Carefully select your executor and successor (to serve as a backup executor in case the appointed executor predeceases you or is otherwise unable to fulfill the duties). To prevent problems after you die, consider meeting with the successor to iron out any potential problems and discuss the challenges that must be met. Even if your first choice is still on board, you may periodically want to “check in” and review matters.

Your estate plan also may need an overhaul if you’ve divorced, especially if you’ve remarried and your new spouse has children of his or her own. Along the same lines, one or more of your children may have divorced, requiring adjustments to your estate plan. The need to update your plan could even extend to pets that need care if you should unexpectedly pass away.

2. Changes to assets and liabilities.

It’s a good idea to review your estate plan any time there’s a significant change in the value of your estate, including the value of any business interests, real estate or securities you own. A major increase or decrease in the value of one asset could cause you to rethink how your holdings will be allocated among your beneficiaries. Similarly, the sale or purchase of an asset may require adjustments to your plan.

3. Change in residence.

State law generally controls estate matters. Therefore, the state where you legally reside can make a big difference. The differences may range from the number of witnesses required to attest to a will to the minimum amount a spouse must inherit from an estate. Furthermore, the legal state of residence may affect other estate planning documents besides your will, such as a power of attorney, living will or advance medical directive.

If you’re moving to another state, or you’ve already moved, meet with a local estate planning advisor to review your current plan and determine whether changes are needed. This is especially important when you have a substantial estate for tax purposes. Sometimes, an old home state may assert that a person didn’t change his or her legal residence and continue to pursue state death tax obligations.

4. Estate tax changes.

If you haven’t updated your estate plan since the TCJA passed, it’s worth checking in with your estate planning advisor to ensure your plan reflects current tax law. The wealthiest individuals may still set up complex estate planning strategies to shield their estates from federal estate tax. But simple trusts may still be used to protect assets from creditors and guard against spendthrift family members.

Also, beware that the estate tax provisions of the TCJA are in effect only through 2025 — and there are no guarantees the current estate tax levels will remain in effect until then. Congress could change the law again before 2026 — or make it permanent.

Moreover, the federal tax law changes don’t provide protection on the state level. So, it’s important for your estate plan to take any applicable state death taxes into account.

Time to Update

Too often, well-intentioned taxpayers create an estate plan, including a will, and then stick it in a drawer or safe deposit box where it gathers dust. This can potentially leave a legacy of estate tax complications and frustrations for your family members when they can least afford it, financially and emotionally. To ensure your final wishes are kept and your assets are preserved, work with an estate planning professional to devise a flexible, comprehensive plan and then review it on a regular basis.

How to Benefit from the Rising Average Age of American Workers

Posted on June 14, 2019July 22, 2024 by Beth Rizkal

By 2026, nearly one in four workers will be 55 and older. That’s compared to about one in five today, according to the U.S. Bureau of Labor Statistics.

So, the proportion of younger workers in the overall labor pool will shrink. Does that mean your business will have to settle for workers that are less capable in some ways?

Research suggests that this isn’t the case. As workers age, their levels of agility and skills is unlikely to diminish, according to the Gerontological Society of America (GSA). In fact, the GSA estimates that 85% of the U.S. population in the 65 to 69 age bracket has no health-related impediments to work. That proportion only drops to 81% for the 70 to74 age bracket. And the majority (56%) of Americans aged 85 and over have no such limitations — although that percentage might be smaller for heavy manual labor.

“Longevity Economics”

The GSA recently published a report entitled, “Longevity Economics: Leveraging the Advantages of an Aging Society.” It offers some insight about the working world through the eyes of older employees. The report states, “While previous generations may have viewed their 50s and early 60s as their most productive and financially rewarding years, older Americans view their 70s or 80s as ages for making some of their greatest contributions.”

The report highlights a series of “myths” (with some underlying elements of truth) concerning older workers, while also offering tips on making the most out of this growing workforce sector. Here are some examples:

Myth: Older workers expect to earn more.

Reality: Many older workers have already paid for their homes and other major life expenses, such as children’s education. So, they’re often content to take jobs with less responsibility and, accordingly, lower pay.

Myth: The cost of health benefits for older workers is higher than for younger ones.

Reality: While older workers may individually incur more health claims, they typically don’t use family coverage. And they also may qualify for Medicare coverage. So, they may be less expensive to cover than younger employees.

Myth: Older workers are harder to motivate because they aren’t as financially ambitious or as interested in getting a promotion as younger workers are.

Reality: Compared to their younger counterparts, older workers might be less motivated by financial rewards. But they might find nonfinancial benefits, such as flexible work hours or extra vacation time, more rewarding — and employers can satisfy these needs at little or no cost.

Different Motivations

According to GSA research, “Older workers are more motivated to exceed expectations than younger workers” and are more deeply engaged in their work than their younger colleagues. In addition, the report highlights older workers for their “willingness to contribute to company success through discretionary activities such as working longer hours, being dedicated to the company, and putting more energy into their jobs correlated with lower staff turnover and better company performance.”

So, what inspires older employees to become engaged? A survey of job seekers over age 50 performed by RetirementJobs.com shows that older workers aren’t indifferent to what they are paid in salary and benefits. But they are particularly interested in flexibility, security and stability, independence, autonomy and pure challenge. Even the term “retirement jobs” suggests that, while some people call themselves retired, they may view working as more of a retirement activity than a job.

Just as employers have had to learn how to maximize the productivity of new generations of workers, with policies such as “casual Fridays,” they must do the same for older workers. “Employers just need to recognize the differences in motivators at various points across the years of employment,” the report states. “HR innovations can be very effective in supporting longer working lives.”

The Long View

One “innovation” is simply taking a long-term view of your company’s workforce needs. Don’t try to precisely forecast specific jobs from year to year. Instead, focus on your long-term goals over the next five or ten years. It’s nearly impossible to predict specific job skills that will be required in the future. Also, think in terms of how you’ll fill and retain workers in broad “job families” and where older workers will fit into the big picture.

The GSA report suggests these tactical approaches to consider:

Invest in older workers today to maintain their productivity through training, workplace adaptations and internal transfers. Recognize the shift of careers from upward to horizontal, such as into an advisory capacity, or downward as people want to contribute in less demanding positions. Create performance-based compensation structures that are independent of age. The GSA concludes, “By leveraging an aging population in the ‘longevity era,’ economic growth can be enhanced now and continued into the future.” Contact your HR and payroll advisors to help your business capitalize on today’s older (and possibly wiser) workforce.

DOL Updates Guidance on Independent Contractor Status

Posted on June 11, 2019 by Beth Rizkal

The so-called “gig economy” challenges conventional practices between companies and the people who perform the work. A key question is: Are these workers independent contractors or employees?

The U.S. Department of Labor (DOL) recently published a new wage and hour opinion letter, spelling out its position with respect to a specific virtual marketplace company (VMC). Though the letter is directly applicable only to the specific employer that sought the opinion, it still offers insight on how the DOL might rule in similar cases.

Just the Facts

The DOL letter indicates that VMC workers can legitimately be classified as independent contractors, and thus aren’t subject to the Fair Labor Standards Act (FLSA). The DOL defines a VMC as “an online and/or smartphone-based referral service that connects service providers to end-market consumers to provide a wide variety of services.” Examples of services include:

Transportation (for example, Uber and Lyft),
Delivery,
Personal shopping,
Moving,
Plumbing,
Painting,
Home repair, and
Cleaning.

To determine the appropriate classification for workers, the DOL letter identified the following relevant facts about workers at the company in question:

They were paid per task performed.
They could request pay rates that deviated from the VMC’s “default” local rate, based on their level of experience.
They could accept or reject work requests they received through the company’s platform.
They used their own supplies and equipment.
They could hire assistants to help them perform agreed-upon services.
They could use competing platforms to get tasks to perform. (This is similar to some Uber drivers who concurrently use the Lyft platform to solicit work and vice versa.)
They could turn down service requests without immediately being booted off the platform, and, if they were suspended due to inactivity, workers could reactivate their status.
They weren’t directly supervised by the company; rather, performance was judged by customer feedback.

The DOL letter distinguishes an employee from a person who’s engaged in business for himself or herself. An employee, “as a matter of economic reality, follows the usual path of an employee and is dependent upon the business to which he or she renders service.”

Economic Reality

The “economic reality” standard must be applied to the workers’ activities as a whole, based on the following six factors:

Nature and degree of the potential employer’s control,
Permanency of the worker’s relationship with the potential employer,
Amount of the worker’s investment in facilities, equipment or helpers,
Amount of skill, initiative, judgment or foresight required for the worker’s services,
The worker’s opportunities for profit and loss, and
Extent of integration of the worker’s services into the potential employer’s business.

Applying those assessment criteria to the VMC in question, the DOL noted the “significant flexibility” the company’s workers have to pursue external economic opportunities. The DOL found no hint of “permanency” in the VMC’s relationship to the people who obtain work on its platform. Examining the third factor, the DOL observed that workers are required to use their own equipment.

Regarding skills, the DOL focused on the fact that the company assumes workers already have the requisite skills when they join the platform because it provides no training. And their initiative, the DOL inferred, is evident from the fact that workers chose for themselves which work opportunities to take. That power also touches on the fifth criterion, opportunities for profit and loss.

Finally, the VMC’s workers aren’t operationally integrated into its platform in the sense of developing, operating or maintaining it. Rather, they’re “consumers” of the service and, as independent people, “negotiate over the terms and conditions of using that service.”

Market Dynamics

Not everyone agrees with the DOL’s assessment, however. Maya Pinto, a senior researcher at the National Employment Law Project (a labor policy research not-for-profit organization) disagrees with the ruling. She recently advocated on behalf of gig workers, saying, “We believe in most cases, if not all cases, the workers are under control of the company and are in fact employees.”

Likewise, Uber drivers made a vocal pitch for employee status. Many drivers participated in a strike the day before the ride-hailing company’s recent IPO. Seeking to settle the nerves of potential investors, Uber agreed to increase pay rates, but it didn’t cave on the drivers’ independent contractor classification.

The lesson seems to be that the cost of labor, whether it comes from employees or independent contractors, is governed by market forces. The fact that striking Uber drivers extracted some concessions from the company on the eve of its IPO shows market forces at work.

How Does the DOL Letter Affect Your Situation?

An opinion letter is an official, written opinion by the DOL’s Wage and Hour Division on how a particular law applies in specific circumstances presented by the individual person or entity that requested the letter. However, the letter does provide insight into how the DOL regards the VMC business model.

So, regardless of whether your company operates as a VMC or uses a more traditional business model, the same basic principles of independent contractor vs. employee status apply under the FLSA. It’s also important for companies to consider state law, which may, in some cases, be more restrictive than the FLSA when analyzing independent contractor status.

Even when workers’ classification status seems straightforward, based on the standards laid out in the DOL ruling, that doesn’t guarantee protection. And the price of misclassifying workers can include paying back wages and payroll taxes, as well as fines and additional penalties if the IRS believes your misclassification was based on fraudulent intent. An employer also may be liable for employee benefits that should have been provided but weren’t.

It’s important to get worker classification questions right. Contact a human resources professional, tax advisor or labor attorney for additional guidance on this issue.

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