Senate Approves Internet Sales Tax: Measure Headed to House
The U.S. Senate has overwhelmingly, and with strong bipartisan support, passed the Marketplace Fairness Act of 2013 (the Act) by a vote of 69-27. The bill would allow a state to require certain remote sellers to collect sales and use tax on sales made to customers in the state. States that are members of the Streamlined Sales and Use Tax Agreement (SST) would automatically be granted this authority. States that are not SST members would be required to implement simplification requirements. The bill provides an exception for businesses with annual remote sales of $1 million or less.
Highlights of the report available below include:
Authorization of Tax
Collection on Remote Sales
Small Seller Exception
Relief from Liability
To check out a detailed summary on the Marketplace Fairness Act, click HERE for the full report.
When it comes to taxes, Freed Maxick CPAs is different than most accounting firms in Western New York. To us, tax time is all the time. We’re sticklers about deadlines and compliance, but our larger goal is tax management. So we keep a year-round eye on federal, state and local tax laws, including those pending. We alert you to any changes that may affect you and help you respond in a timely way.
We have the experience and resources necessary to resolve all your tax issues no matter what the complexity, including:
Capitalization vs. Repair
Cost Segregation Services
Foreign Bank Account Report Compliance
International Tax Services
New York (NY) State Excelsior Jobs Program
Personal Tax Services
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State and Local Tax Services
State Tax Analysis & Resolution
Tax Planning and Consulting
Transfer Pricing Analysis – Study
Tax Planning and Consulting
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By Joe Burwick, CPA
Crowdfunding is not a new concept, as grassroots fundraising dates back to 1997. But with new platforms, like that of IndieGoGo and Kickstarter, crowdfunding has gained traction in raising revenues for donations, charities, and businesses.
What types are there?
Crowdfunding relies on the concept of asking large groups of organizations and individuals, to contribute to a project. There are three primary types of crowdfunding:
Donation or Reward. When people give money towards a project and receive a gift or promise of one of the finished products in return.
Debt. Receiving funding from people with the expectation they will be paid back with interest in the future.
Equity. This involves getting a large number of people to buy into an idea in return for equity in the project or business.
Depending on the structure of the transaction (Equity, Debt, or Donation/Reward) there are differing tax implications and reporting requirements. For instance, donations/rewards where the investor receives something in return is a taxable event and must be included in gross receipts. However, if deductible business expenses exceed your crowdfunding revenue and other operating revenue, then you won’t owe income tax (but may owe franchise or minimum taxes).
Depending on how the payments are received, the crowdfunding recipient may get Form 1099-K. If payments are made by credit card or if payment in settlement of third party network transactions (i.e. PayPal) where gross payments exceed $20,000 and there are more than 200 transactions, you may receive one of these forms. The IRS will look to match (and analyze) the income on your return to Form 1099-K you receive.
In response to the growing popularity of Crowdfunding, the JOBS act set the Crowdfunding exemption for equity interest offered to the public at a ceiling of $1,000,000 for the aggregate amount sold to all investors in a twelve month period. Prior to this act you had to either register with the SEC or meet another exception before offering securities to the public.
The act further limits the amount sold to any individual investor based upon their annual income or net worth as follows:
If annual income or net worth is less than $100,000; the aggregate amount sold to such investor cannot exceed $2,000 or 5 percent of net worth / annual income.
If annual income or net worth is greater than $100,000 the aggregate amount sold to such investor cannot exceed ten percent of the annual income or net worth of the investor (not to exceed a maximum aggregate amount of $100,000).
You should consult a tax advisor to determine if the amounts received can be excluded from income (i.e. under Internal Revenue Code Section 118 for a Corporation).
What are the Financial Reporting Requirements?
Not only are there potential tax implications to these equity investments, but you must meet various financial reporting requirements as well. Here is what you have to know to meet the financial condition requirements clause of the JOBS act:
Different offering amounts have different SEC financial reporting standards. Congress has set forth the standards as follows:
If the target offering is $100,000 or less, the most recently completed income tax return and financial statements certified by the principal executive officer of the issuer must be provided.
If the target offering is more than $100,000, but not more than $500,000, financial statements reviewed by a public accountant independent of the issuer must be provided.
If the target offering is $500,000 or more, audited financial statements reviewed by a public accountant independent of the issuer must be provided.
As new provisions of the JOBS Act are rolled out, it seems to have raised more questions than answers for entrepreneurs and online start ups. While the bill was designed to help companies tap investors for the early cash they need to get established and hire workers, easing federal requirements for completing private share offerings; a young company would then be bound by SEC rules protecting the rights of their new stockholders, as well as certain state laws.
Don’t expect state security regulators to ease up anytime soon. As crowdfunding gains traction (and the dollars associated with it grow), so too will the scrutinizing of start-ups that issue shares through crowdfunding. Due to the complexities of parts of the JOBS Act and SEC rules toward crowdfunding, entrepreneurs should talk to a tax consultant; to be aware of all the state and federal regulations and the impact it may have at tax time.
Freed Maxick CPAs
Freed Maxick tax auditors will keep you up to date on the most pressing tax issues. If you would like to know how crowdfunding may affect your business at tax time Contact us and connect with our experts.
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.
Earlier we published a blog post about about that discussed not losing your business to occupational fraud. Check it out here.
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 fraud detection and prevention for your high tech company. Call us at 716.847.2651, or contact us here.
Use This 17 Point Checklist to Get Started on Selecting a New ERP System
There’s going to be an inevitable point in your high tech firm’s evolution from start up to growth stage where you will outgrow your IT and Enterprise Resource Planning (ERP) platform and software. In fact, without an ERP system that meets your needs and is scalable, your ability to make the leap onto the growth stage may be severely hampered.
Selecting, installing, managing and using an ERP system is expensive and fraught with risks. Considering that most systems have a shelf life of between 10 and 15 years, you don’t want to make a mistake at the beginning of the process that will haunt you for years to come.
So, our first piece of advice is to hire an ERP system consulting specialist who can work with your management and ERP implementation team throughout the process. This consultant should be independent (i.e. not a software vendor representative), have at least a basic understanding of your industry, and a well-defined process. This is a huge investment requiring an exhaustive change management process, undertaken with the promise of huge returns over time.
At the 10,000 foot level, selecting the right ERP system involves defining what you need, pinpointing expectations for results or benefits from the system, becoming familiar with the ERP market, and then searching for the right solution. Along the way you’ll get into a discussion of cloud based ERP systems, vendor recommendations and references, and get exposed to lots of horror stories about ERP projects that have gone horribly wrong.
17 Point Checklist
Here is a 17-point checklist from www.erpsoftwareblog.com that can help you navigate the daunting process of selecting the right ERP system for your company. This is, of course, a very preliminary list and we offer it as a starting point for your journey:
1. What business challenges do you plan to solve with ERP?
2. What key issues and concerns do you have with your current system? What functionality do you think your system is missing but needs?
3. What functionality will you actually use? This way, you don’t pay for features your company doesn’t need now or don’t foresee using in the future.
4. Is the solution scalable and flexible to meet today’s needs – and provide a framework for future growth?
5. What will define success for your new system? How will you quantify this success – in terms of increased productivity, reduced costs, or other factors?
6. What’s unique to your industry and business that new software would need to address?
7. Does the ERP solution strategically align with its purchase justifications (business case, return on investment, etc.)?
8. How much customization will be involved – and what is the impact of that customization upon the solution?
9. How intuitive is the user-interface for employees? In other words, does the ERP system offer an interface similar to software that most employees already use – which reduces training time and improves employee buy-in? Or is this something totally new that employees need to learn from scratch?
10. How much employee training will actually be required to optimize the value of the new system once deployed?
11. What deployment options do the software and vendor offer – on-premise or hosted or combination of the two; one-time license fee or monthly subscription?
12. What is the deployment process and expected timeframe?
13. What will be required of your in-house staff during deployment?
Vendor support requirements
14. What on-going services should you expect from your ERP vendor?
15. What are the different levels of support plans offered by the vendor?
16. What is the availability of after-hours support?
17. What response times can the vendor commit to achieve?
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 ERP system selection for your high tech company. Call us at 716.847.2651, or contact us here.
8 Core Elements of Business Process Management
High tech companies that are successfully making the leap from start up to growth stage continuously seek ways to improve productivity and operational efficiencies. With growth comes more exposure to competition, and demands from customers for more value and higher quality at lower prices. Customer loyalty and satisfaction becomes increasingly more important, as does requirements for cost and time savings and greater levels of employee productivity.
High tech firms moving to a growth stage need to consider increasing productivity though Business Process Management approaches and technologies. According to SearchCIO, Business Process management (BPM) is “a systematic approach to making an organization's workflow more effective, more efficient and more capable of adapting to an ever-changing environment. A business process is an activity or set of activities that will accomplish a specific organizational goal.”
BPM pinpoints opportunities to improve key business processes through analysis, measurement, and use of benchmarks to identify ways to streamline these processes for effectiveness and efficiency. Employing BPM for your firm should result in increased productivity levels, improvements in staff morale, and positive impacts on customer loyalty and relations.
- Identifying Key Business Processes - Select only key business processes that have a direct impact on the organization and its customers, and develop the benchmark against which success will be measured.
- Identifying the Voice of the Customer - Collect data through your internal and external feedback mechanisms to get their perspective on the good the bad and the ugly of your key business processes.
- Develop a Current Value Stream Map - Use subject matter experts to identify everything that is included in completing each portion of the key business process, and then create a detailed flowchart of this information to identify what is being done and why.
- Measure the Process - Identify the direct costs, people costs, overhead costs and opportunity costs associated with the business process.
- Completing a Root Cause Analysis of the key business process - Identify all of the blockages and barriers preventing the business process from immediately reaching its defined "improvement" requirements.
- Developing the Ideal Value Stream - Identify the blockages and barriers to reaching your defined success measures. Create the "ideal" process map that will address the root causes of all identified issues, concerns, problems and challenges in the current process.
- Developing Solutions - Generate a list of possible options and solutions that can be implemented, and then select the best possible options and solutions, ensuring that these will overcome the root causes. Some firms employ business strategies such as Six Sigma to improve quality and productivity.
- Developing the Implementation Plan -Develop a detailed implementation strategy to ensure that the solutions are successfully realized. Include who needs to do what, when and with what resources.
BPM has the potential to reduce costs, enhance efficiency and productive, and minimize risk and errors. It also serves as a means for helping company management direct, monitor and measure company resources.
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 business process management for your high tech company. Call us at 716.847.2651, or contact us here.
Cash Flow Management Can Spell the Difference Between a Successful High Tech Firm and a Failed One
At the point where your high tech firm is looking to make the leap from early to growth stage, it’s likely that cash flow and management of cash is becoming an increasingly more difficult challenge. Cash flow management can spell the difference between a successful business and a failed one, because in any business venture cash is always the king.
While your firm may be profitable, that doesn’t necessarily translate to a cash rich business. Cash management and having enough cash on hand is generally a function of timing – between selling an item and collecting a payment; or between times you purchased items for your business and paid for them. So cash management really deals with knowing where cash is coming from, when you will get it, where it needs to go, and when it needs to get there.
Having the right accounting systems in place is fundamental to understanding and budgeting for cash flow. These are functions where your accountant can be of enormous assistance. With your management team, they can also recommend strategies for improving cash flow, for example:
- Set and stick to a cash management budget
- Managing and tighten your customers' credit
- Weed out unprofitable customers, those that cost more to maintain than they add to the bottom line
- Invoice promptly and take measures to encourage prompt payment
- See if payments to suppliers can be extended
- Renegotiate contracts
- Attract new customers or sell additional goods or services to your existing customers
- Keep a close eye on budgets and expenses for new product development
- Kill pet projects that are unproductive and a drain on cash
Another critical area of cash management for high tech companies moving to the growth stage is effective inventory management, and for companies looking to protect their cash it’s smart to minimize inventory. According to Chris Gordon of WIPRO Consulting Service, “high-tech businesses often cannot satisfy demand for their most popular products due to availability issues, and also experience inventory overhangs when a slump in demand catches them off guard.”
Your inventory management best practices may include the following strategies:
- Make your vendors keep your inventory
- Have vendors ship the inventory to customers
- Outsource components of the manufacturing process
- Order inventory just-in-time
- Pay only as you use the inventory
- Order in real time
- Educate employees about your goal to reduce inventory and give them an incentive for making it happen
- Make products to order instead of to sell
- Allow only limited access to inventory to minimize theft
- Use the same inventory items to create multiple products
- Stock only items that have a quick turnaround
- Get rid of obsolete inventory
There are, of course, other more sophisticated inventory control strategies and technologies that require greater involvement with your team of accounting and operations management advisors.
It’s unfortunate that so many high tech companies fail to make the leap to a growth stage because of cash management issues. While this blog post provides a brief overview of why cash flow management is important, and a number of strategies for improving cash flow, our recommendation is that you make this issue a priority in your planning efforts.
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 cash management and inventory control strategies for your high tech company. 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.