The Supreme Court’s decision on DOMA and Prop 8 is not only a civil rights win for same sex couples- it’s a financial win for many.
In an unprecedented event last week, the Supreme Court ruled that the 1996 Defense of Marriage Act (“DOMA”) singled out same-sex marriage and treated same-sex couples "as living in marriages less respected than others." This week’s ruling will now give same-sex couples many of the same benefits (and in some cases, drawbacks) as any other married couple in the eyes of the law. Married same-sex couples in a dozen states and the District of Columbia will now be eligible for more than “1,000 spousal benefits previously off limits under DOMA.” And the court's other decision on Wednesday, striking down California's Prop 8, paves the way for same-sex marriages to resume in that state.
Key Aspects of the DOMA Ruling Include:
Income tax: Same-sex couples will now be able to file their federal income taxes jointly. For many couples -- especially those where one person earns significantly more than the other -- merging incomes for tax purposes will result in big savings. In addition, many education benefits, such as the American Opportunity Tax Credit and Lifetime Learning Credit, are now available to the spouse in a same-sex marriage where one spouse pays for qualified expenses of the other.
Health insurance: Some same-sex couples pay income tax on imputed income for the medical benefits one partner receives through the other's health insurance plan; this will now likely change. Meanwhile, many federal employees will likely be granted spousal benefits like partner health insurance.
Estate and Gift tax: Same-sex couples will also be exempt from gift tax when transferring assets to each other. Under DOMA, any gift between same-sex spouses of more than $14,000 (the 2013 annual gift tax exclusion) began utilizing the lifetime exclusion limit of $5.25 million-- after which tax was assessed on gifts exceeding the exclusion. Opposite-sex couples have never been subject to that tax. Same-sex couples will also be eligible to “split” gifts to take advantage of a doubled annual gift tax exclusion ($14,000 above x 2 married individuals or $28,000 for 2013) In addition, the unused lifetime exclusion of the decedent spouse is now portable and will allow the estate of the surviving spouse to utilize it.
Social Security benefits: Same-sex couples will now be eligible for the same federal tax treatment and Social Security benefits as opposite-sex couples in the event that one spouse passes away. This means a surviving spouse will be eligible for Social Security survivor’s benefits and will be exempt from the federal estate tax on assets exceeding $5.25 million. Note: In states where same-sex marriage is banned, this issue still has to be sorted out as the Social Security Administration has based these benefits on the state of residence.
While many will receive the benefits of this ruling; they will also receive its downside. For example, same-sex couples who divorce may be subject to the federal gift tax when dividing assets, or be partially responsible for the back taxes of the divorcing partner. Also, same-sex married couples will now have to file as either married filing joint, surviving spouse or married filing separate. Thus, the “marriage penalty” will impact some same-sex couples.
What the decision doesn't do: While many specifics of the Supreme Court's ruling are still blurry, it appears that couples must be married at a state level for all of these federal benefits to apply -- meaning domestic partnerships and civil unions don't qualify. It's also unclear whether federal benefits will apply to same-sex couples who marry in a state where same-sex marriage is legal but move to a state where it's not recognized.
To learn more check out this special report detailing Post DOMA Tax Implications
We may be based in New York State, however Freed Maxick CPAs provides tax services to business all over the U.S., no matter your location: Alabama, AL; Alaska, AK; Arizona, AZ; Arkansas, AR; California, CA; Colorado, CO; Connecticut, CT; Delaware, DE; Florida, FL; Georgia, GA; Hawaii, HI; Idaho, ID; Illinois; IL; Indiana, IN; Iowa, IA; Kansas, KS; Kentucky, KY; Louisiana, LA; Maine, ME; Maryland, MD; Massachusetts, MA; Michigan, MI; Minnesota, MN; Mississippi, MS; Missouri, MO; Montana, MT; Nebraska, NE; Nevada, NV; New Hampshire, NH; New Jersey, NJ; New Mexico, NM; New York; NY, North Carolina, NC; North Dakota, ND; Ohio, OH; Oklahoma, OK; Oregon, OR; Pennsylvania, PA; Rhode Island, RI; South Carolina, SC; South Dakota, SD; Tennessee, TN; Texas, TX; Utah, UT; Vermont, VT; Virginia, VA; Washington, WA; West Virginia, WV; Wisconsin, WI; Wyoming, WY. We Serve all 50 States.
Contact us to learn more about our tax services
Ever hear the saying “there’s an app for that”; well now there’s a currency for online users-Bitcoin. With no actual existence in the physical world, Bitcoin has been breaking barriers for online and consumer bartering.
How does it work?
By visiting an online exchange site, you can simply exchange traditional curriences (dollars, pounds, etc) for the virtual currency. Trading started at $7.00 in 2010, in exchange for one Bitcoin. What separates the Bitcoins from other tradable scripts (i.e. the Disney dollar), is that the coins trade on a floating exchange rather than having a fixed exchange rate set to a national currency. Prices have fluctuated wildly over the last couple of years, and with no government oversight or regulation, there is also no way to protect the online exchange. This led to a brief shutdown after Bitcoin sites were hacked. It is back in circulation, but finding places that will take the coin is difficult. There are some restaurants, book stores and online retailers that will take the coin as currency. It requires logging into your IPhone and sending the coins to the retailer you are dealing with, virtually. Once the exchange is complete, you have your merchandise. According to Bitcoin Magazine, the currency has gained over 1 million users.
It can’t be that easy?
It’s not! When Bitcoin first started trading in 2009 it sold for less than a dollar. The virtual currency started garnering more attention when, in the start of January of this year, it rose from $10.00 to roughly $260.00 by April 10th. But that bubble burst when it fell to $77.00; since then it is slowly rising again. Not only is the currency volatile, but investors have had to deal with highly unstable trading platforms- the unfortunate symptom of decentralized currency. Currently there are 11 million Bitcoins in circulation, but this new way of bartering is unpredictable. Traditional currencies are safely held in a range of investment funds and banks. While both have their security problems, only one is considered “hard currency”.
Are there tax implications?
Due to widespread curiosity and the growing interest in Bitcoins, the Treasury Department issued a series of guidelines for Bitcoin brokers. The guidelines serve more as a direction against money laundering than tax implications. The IRS hasn’t specified yet whether Bitcoins should be considered an in-kind payment, bartering system, or foreign currency payment. Trying to decipher between these distinctions is no easy task, as each has its own implications under the U.S. tax code. As the continued education is necessary, to be aware of future tax issues that may arise from internet currencies; as the IRS and government entities move toward concrete answers to questions surrounding the treatment of digital currencies.
Freed Maxick tax auditors stay current and update with currency guidelines, to help keep you aware of issues or implications that could affect your taxes. If you would like to learn more Contact us to connect with our experts.
We have also worked with hundreds of high tech companies and startups. Please call us to talk with one of our CPAs or business advisors about getting your high tech company to growth mode. Call us at 716.847.2651, or contact us here.
Navigating the Bewildering Maze of Options, Laws and Requirements
One of the key ways that high tech companies recruit and retain loyal employees is through the use of stock based compensation plans. In addition to giving staff the opportunity to participate and share in the company’s growth, stock compensation plans serve as a way to align their interest with those of shareholders and investors. And, it’s a way to save cash.
However, there’s a bewildering maze of options, laws and requirements. These considerations include:
- Securities law considerations (such as registration issues)
- Tax considerations (tax treatment and deductibility)
- Accounting considerations (expense charges, dilution, etc.)
- Corporate law considerations (fiduciary duty, conflict-of-interest)
- Investor relations (dilution, excessive compensation, option re-pricing).
The first step in creating a stock based compensation plan is to consult with your team of accountants and attorneys. They’ll help you understand what options are available, and the pros and cons of each. For starters, here’s a brief overview of the major type of stock based compensation plans:
Stock options give employees the right to buy a number of shares at a price fixed at grant for a defined number of years into the future. They are generally subject to satisfaction of vesting conditions (i.e. continued employment) or achievement of performance goals. There are two types of stock options:
Incentive stock options: These are a creation of the tax code that can only be granted to employees. If and when certain requirements are met, the holder of the option can receive a favorable tax treatment when the option is exercised.
Nonqualified stock options: Non-qualified options do not provide special tax treatment to the recipient, but the corporation will get a deduction equal to the employee’s income upon exercise.
Restricted stock gives employees the right to buy a number of shares at a price fixed at grant for a defined number of years into the future. However, acquired shares aren’t fully owned by the employee until specified conditions occur like vesting if the employee continues to work for the company for a certain number of years.
An employer corporation can give shares outright to the employee, subject to no restrictions. The employee can pay full fair market value for the shares, pay a discounted amount, or pay nothing at all, but will get an immediate equity stake in the company.
Phantom Stock and Stock Appreciation Rights (SARs)
These are bonus plans that grant the right to receive an award based on the value of the company's stock, hence the terms "appreciation rights" and "phantom."
If the employer corporation wishes to reward an employee based upon the performance of the company’s stock value but without giving up any actual ownership of the company, then stock appreciation rights (SARs) or phantom stock may be used. Phantom stock provides a cash or stock bonus based on the value of a stated number of shares, to be paid out at the end of a specified period of time.
Employee Stock Purchase Plans (ESPPs)
Employee stock purchase plans (ESPPs) provide employees the right to purchase company shares, usually at a discount. These plans allow employees to set aside money over a period of time (called an offering period), usually out of taxable payroll deductions, to purchase stock at the end of the offering period. Plans can be qualified under Section 423 of the Internal Revenue Code or non-qualified.
Freed Maxick has worked with hundreds of high tech companies and startups. Please call us to talk with one of our CPAs or business advisors on selecting the stock based compensation plan for your high tech company. Call us at 716.847.2651, or contact us here.
Your Decision Today Can be of Great Value – or a Hindrance - Tomorrow
A critical decision for your high tech company that must come at a very early stage of life is the selection of the most beneficial legal entity. This requires a bit of crystal ball gazing, but the decisions you make early in the company’s history can be invaluable in helping the company achieve its goals, or a significant obstacle to growth down the road.
When choosing a business entity, owners need to consider issues like flexibility to raise capital for future growth, tax consequences – both on the company and its individual owners, and limitation of liability on owners, which is the starting point for making a decision.
The question is, do you as an owner want to incorporate so as to avoid being held responsible for debts of the business, or do you not incorporate and find yourself personally liable for the debts and obligations of the business?
Key Questions to Discuss With Your Trusted Advisors
Your trusted advisors will be asking you a number of questions in order to help you make the right decision on business entity type. We recommend that you come prepared with some insight about these questions to facilitate the discussion:
- How will the business be funded now and in the future?
- How many owners are there and would you ever bring on co-owners in the future?
- Do you plan on having employees?
- How much control over the business are you willing to give up?
- Are you going to issue stock or membership interests?
- What type of investors/owners are you willing to accept (trusts, foreign individuals, etc.)?
- What will your exit plan be when you retire or leave your business?
- Where will you do business?
A Guide to Types of Entities
This guide provides should only serve as a preliminary reference tool for helping you in your decision process.
Type of Entity
Tax and Liability Consequences
Two types of unincorporated entities:
Sole Proprietorship - is owned by one individual who retains complete managerial control over the business
Partnerships exist when two or more people operate a business, and may be either general partnerships or limited partnerships.
Owners are personally responsible for the debt of the business
Profits and losses are reported on the owner's personal federal and state tax returns
In a general partnership, the partners are jointly liable for the debts of the business and share managerial control
Limited partnerships are comprised of both general and limited partners, but only general partners maintain managerial control and are personally liable for the debts of the business end.
Incorporated entities have rights, privileges, and liabilities distinct from those of its members, and the obligations of an incorporated business remain those of the business
C Corporations can issue multiple classes of stock and are may be an appropriate choice for businesses anticipating the need to raise a significant amount of capital
S Corporation may only issue only one class of stock and must have under one-hundred shareholders. An S Corp provides liability protection to owners, but is treated differently from a C corp regarding taxation.
C Corporations are double taxed, first when the corporation, as an entity, is taxed on its profits, and second, when the corporation makes distributions to its shareholders, who must also pay tax on the money they receive.
An S Corporation is not a separate taxable entity for federal, and most state, income tax purposes. Profits and losses are divided pro rata among the shareholders and "passed through" to their personal returns.
LIMITED LIABILITY COMPANY
An LLC is a hybrid entity that combines the best aspects of a partnership with those of an incorporated business.
Note that if venture capital is required for growth or operational funding, many LLCs are formed with the understanding that to ease the way, it will convert to an S or C Corporation.
LLCs protects the owners from personal liability while allowing business profits and losses to be "passed through" to their personal returns.
Can You Switch Entities?
It is possible to switch types of entities, but this must be done with great care and consideration, and for valid reasons. Again, we urge you to consult with your team of trusted advisors on the merits of making a switch, and the liability, taxation and funding consequences of making a switch. Converting an LLC into a C Corp is a relatively easy transition (with proper legal and accounting guidance) as there may be minimal tax consequence and with the proper assistance, the economic rights of the owners and employees of the LLC may be readily transferred to the corporate format. This transition will make the company more attractive to venture funding sources.
Switching from an incorporated status to an LLC is more difficult and problematic from a tax perspective, and should only be considered for good reasons and with the counsel of your trusted advisors.
FreedMaxick has worked with hundreds of high tech companies and startups. Please call us to talk with one of our CPAs or business advisors on selecting the right entity type for your high tech company. Call us at 716.847.2651, or contact us here.
Budgets are a Tool for Evaluating and Communicating Performance
There may be no better – or more important a time – to do formal annual budgeting than when your high tech company is looking to make the leap from early stage to growth company.
Budgets are like an action plan for your high tech firm that allow you to plan and control expenses and match them to sales revenue. While they cannot always stay static, budgets create guidelines and prescribe limits. Last but not least, budgets are a tool for evaluating the performance of a company at the end of the time period that the budget covers – on both the expense and revenue side.
Of particular importance for the early to growth stage company, budgets show how money from funding sources has and will be used to make the leap.
What Should the Budgeting Process Accomplish?
- Sharpening the understanding of the company’s goals
- Delivering a “real picture” that shows what the company is actually able to do in a given year and where the gaps in funding are
- Encouraging critical and creative thinking on effective ways of dealing with financing, revenue generation and expenditure issues
- Fulfill the need for required information requested by funding sources , vendors and employees and other stakeholders
- Facilitate an open and honest dialogue about the financial realities of the company
- Avoiding surprises and maintaining fiscal control
Freed Maxick has worked with hundreds of high tech companies and startups. Please call us to talk with one of our CPAs or business advisors on creating an annual budget for your high tech company. Call us at 716.847.2651, or contact us here.
Making the Leap from Early Stage to Growth Requires Planning and Documentation
High tech companies that are looking to make the leap from start up to growth stage must have a business plan. Business plans are not only important for raising funding, they’re a way to describe and promote your business, critical for getting shareholders and employees on the same page, and represent a reality check against both market and competitive situations.
There is an abundance of information about how to write a business plan and our CPAs and consultants have helped hundreds of companies though the strategic and business planning process. Based upon our experiences, we offer the following checklist that can help you assess your business plan efforts:
A 10 Point Checklist for Your Business Plan.
A short, concise, and clear executive summary
A business rationale based upon your vision of the unsolved problems or needs that the business will address – i.e. – a convincing business case or “reason for being.”
A concise description of your differentiating product or service
A clearly defined target market
A competitive analysis and a SWOT analysis
A statement of goals and objectives for the business over time
A comprehensive marketing plan, including both traditional and digital marketing strategies
Bios of key team members, with particular attention to their responsibilities and key skills and capabilities they bring to the business
A roadmap or implementation plan for reaching goals or objectives
A credible financial plan, including projections
What Else Do You Need?
In addition to a full written business plan, we recommend that you also have available:
- An elevator pitch that delivers your value proposition in 2-3 sentences;
- A handout/executive summary of 1-2 pages that clearly outlines key aspects of your business;
- A PowerPoint presentation of 8-20 sides.
Writing a business plan is a fundamental and necessary step for making the leap – your current and potential investors will require one. But its value goes far beyond financial projections – it’s a roadmap to the future.
Freed Maxick has worked with hundreds of high tech companies and startups. Please call us to talk with one of our business advisors on structuring a business plan that will help you with strategic, financing and operational strategies and tactics. Call us at 716.847.2651, or contact us here.
Tap Your Trusted Advisor for Help in Building a Finance Acquisition Plan
If there’s one common denominator for all high tech companies, it’s that they are always on the search for money to fund their growth. The transition from start up to growth is particularly tough because of the need for the company to balance growth with the need to build infrastructure, but in many cases, that just isn’t possible without financing assistance.
Having a well-conceived and structured business plan is fundamental to securing financing, but it has been our experience that successful firms find, and fight tooth and nail for every available dollar, without sacrificing too much in the way of equity or loss of control.
It’s a good idea to work with your trusted advisors to develop a financing plan that weaves’ several sources of financing together, along with a way to retain as much equity and control over the business as possible. Here are a number of ideas for sources of financing that you might consider:
- Advance payments from customers
- Angel equity
- Bank loans
- Debt: factoring, asset based lending, mortgages
- Federal or state government grants, loans or credit guarantees
- Friends and family members
- Funding out of cash flow
- Local and state economic development organizations
- Maximizing tax deductions
- Small Business Innovation Research Grants
- Smart leases
- Refundable tax credits
- Venture capital
Of course, not all of these are going to be appropriate for helping to finance your company’s leap from start up to growth stage, but likely that some combination of these will be required.
Freed Maxick has worked with hundreds of high tech companies and startups. Please call us to talk with one of our business advisors on structuring a plan that will help you secure financing for your business. Call us at 716.847.2651, or contact us here.
Find Advisors That Marry Integrity with Capability
As your company makes the transition for early stage to growth, it only gets more confusing, complex and fraught with possibilities of missteps that could bring it to a crashing halt. That’s why it’s important for your management team to surround itself with trusted advisors that can help you make the leap.
The type of markets you serve, your business goals, and the skill set of your management team will all help determine what types of advisors are necessary. It’s likely, however, that you’ll need a strong relationship with an accountant, a lawyer, a banker, a marketing consultant, and an insurance broker at a minimum. As your business grows, your cadre of trusted advisors will also grow and include technical experts and other specialized professionals.
The Characteristics of a Trusted Advisor
Trusted advisors need to be able to earn the trust of company management and build relationships. They need to be credible, reliable and always have the interests of your company at heart. But they also have to be honest and challenging when necessary, especially when it comes to separating emotion from business realities.
According to Searl Street Consulting (www.searlstreet.com.au) an effective Trusted Advisor will have the following 10 characteristics:
1. Have a predilection to focus on the client, rather than themselves. They have:
- enough self-confidence to listen without pre-judging
- enough curiosity to inquire without supposing an answer
- willingness to see the clients co-equal in a joint journey
- enough ego strength to subordinate their own ego
2. Focus on the client as an individual, not as a person fulfilling a role
3. Believe that a continued focus on problem definition and resolution is more important than technical or content mastery
4. Show a strong “competitive” drive aimed not at competitors, but with constantly finding new ways to be of greater service to the client
5. Consistently focus on doing the next right thing, rather than on aiming for specific outcomes
6. Are motivated more by an internalized drive to do the right thing than by their own organization’s rewards or dynamics
7. View methodologies, models, techniques and business processes as means to an end. They are useful if they work, and are to be discarded if they don’t, the test as effectiveness for this client
8. Believe that success in client relationships is tied to the accumulation of quality experiences. As a result, they seek out (rather than avoid) client-contact experiences, and take personal risks with clients rather than avoid them
9. Believe that both selling and serving are aspects of professionalism. Both are about providing to clients that you are dedicated to helping them with their issues
10. Believe that there is a distinction between a business life and a private life, but that both lives are very personal. They recognize that refined skills in dealing with people are critical in business and personal life; the two worlds are often work alike that they are different, and for some, they overlap to an extraordinary event
From our experience in working with hundreds of early stage companies looking to make the leap to the growth stage, having the right team of advisors is a critical and fundamental element. Freed Maxick CPAs would welcome the opportunity to discuss how we might be a trusted advisor to your high tech company.
Please call us to talk with one of our CPAs or consultants about our accounting, tax and advisory services. Call us at 716.847.2651, or contact us here.