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Race to the Bottom
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An India-based SaaS startup recently engaged us to advise on tax matters. During our intake, we identified a few “loose ends” in the founders’ approach to “Intellectual Property” (IP). Because it was early on the business’ evolution, we were able to provide a strategy to “tighten” up those loose ends before they approached American venture capitalists and the IP anything blew up.
US Trademark law protects unique marks that you have developed to brand your products and services and patent law protects technical innovations, typically giving you the exclusive use and licensing rights. However, IP ownership is complicated, and wisdom suggests that you consult with experienced counsel. This is particularly true at the early stages of your startup, because counsel helps you make the strategic decisions at strategic times to optimize protection for your company’s (potentially) valuable IP.
If you are handling personal data of EU citizens, you will need to justify why and explain how. The GDPR–an EU privacy law–has specific new language and requirements to the existing definition of consent.
As an early stage company, it’s likely a few people contributed to developing IP. So who owns it? It depends. For patents, if there is more than one inventor, there may be more than one owner. However, ownership can be transferred or reassigned, so there are a few smart strategies to ensure that your company can benefit from IP generated by founders and employees.
If you think we’re the right team to speak with, we have two plans, both fixed-fee, and both tax-deductible.
First, please take a few minutes to complete this intake form (paste into browser if link unavailable): https://form.jotform.com/91835308503153)
Second, you’ll be invited to schedule a call if we can help you. If you’ve already completed the intake step, skip to the scheduler: https://calendly.com/kwame-dougan).
Check out our short slide presentation about our origins and experience ( https://bit.ly/2HhVXL2)
DISCLAIMER. This is not legal or tax advice. Speak to counsel.’
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As a business registered in, operating in, or selling to Americans, you’ve got two pressing considerations: Tax Liability and Legal Liability. Outside of having no sales, these risks are the #1 killers of small business. We’ll walk you through key considerations that you should discuss with legal counsel.
You have the power to decide how you want to be taxed and there are also things that you can do to help reduce, or even eliminate, the tax that you pay.
The Internal Revenue Service (IRS) is responsible for collecting federal income tax revenues and enforcing federal income tax laws. In addition to the federal income tax, each of the 50 states and the District of Columbia impose some or all of the following: individual income tax, corporate income tax, sales tax, real estate transfer tax, gross margin tax, and franchise tax.
You likely established a US business in one of a few states.
Most states have a corporate income tax that works in conjunction with federal income tax law, and those taxes are generally lower than the federal income tax. However, sales and other taxes imposed by states and localities can vary greatly and may play an important role in determining how an investment should be structured.
As a business owner, one of your biggest dangers is a lawsuit. Even if you could win, your priority should be avoiding this at all costs. The next best thing to avoiding lawsuits, is to make sure that if you are sued, you don’t lose absolutely everything that you own.
If your US pass-through entity generates revenue from sales inside and outside the US. You may have income tax and sales tax obligations. Here’s a two-step process to assess your exposure at the federal tax level.
| United States person
|· A citizen or resident of the United States
· A domestic partnership
· A domestic corporation
· Any estate other than a foreign estate
· Any trust if:
· A court within the United States is able to exercise primary supervision over the administration of the trust, and
· One or more United States persons have the authority to control all substantial decisions of the trust
· Any other person that is not a foreign person.
|A foreign/Non-US person
|· Nonresident alien individual
· Foreign corporation
· Foreign partnership
· Foreign trust
· A foreign estate
· Any other person that is not a U.S. person
· Generally, the U.S. branch of a foreign corporation or partnership is treated as a foreign person
Generally, a US business entity will have one of the following default classifications:
Generally, non-US persons and non-residents are taxable only on their US source income. If you have a pass-through entity, such as an LLC, you’ll have to arrive at adjusted gross income by starting with gross income, subtract certain deductions, such as trade or business expenses, and unreimbursed business expenses, for taxable income.
Many states are attempting to tax the popular Fulfillment by Amazon (FBA) and drop shipping business model. Used by remote/online sellers (i.e. retailers that sell over the internet) by enacting sales tax laws that have become known as the “Amazon Laws” or “Click-Through Nexus” provisions.
|Type of Law||Definition|
|Click-Through Nexus:||Require a remote/online seller to collect sales tax from customers located in a state if the seller has an association with any of its in-state marketing affiliates with links or ads through which customers buy from the seller’s online store.
|Affiliated/Related Party Nexus||Creates a nexus in a state if the remote/online seller uses a subsidiary or some other commonly owned members of its group to perform in-state services in connection with the retailer’s sale of tangible personal property; owns or leases a storage or distribution center or warehouse in the state; uses common trademarks or any activities that enhance the remote/online sellers’ sales position in the state.
Remote/online seller collects sales tax
|Reporting/Notification Requirements||Requires the remote/online seller to report their sales transactions to the state’s tax authority and notify their in-state customers about their responsibility to pay use tax.
For smaller businesses, the myriad of differing regulations carries a very high risk of sales tax errors; sales tax errors lead to more aggressive audits and expensive fines and penalties. Moreover, this scenario is expected to get worse before it gets better if a federal proposal to allow states to require out-of-state sellers to collect sales tax becomes law. Under the Marketplace Fairness Act, states that don’t currently require out of state manufacturers, distributors, wholesalers, or drop shippers to collect sales tax would likely begin to.
1) In a drop shipping scenario, when is there a sales or use tax obligation?
2) Do states consider drop-shipping a nexus-creating activity?
3) Do you have a valid resale certificate?
Generally, businesses must have a nexus to the state to be liable for sales and use tax. However, the definition of nexus isn’t clear cut. Let’s take a look at New York for example.
As an attorney that practiced litigation in New York, I was in my element when the question of liability turned on the “substantial nexus” issue. An out-of-state seller must have substantial nexus with New York before it can be required to collect sales tax. Although New York’s standard requires that some amount of physical presence is required to establish substantial nexus, some New York courts have interpreted that standard so liberally that virtually any form of physical presence within New York, combined with sales within New York, can create nexus for an out-of-state seller.
Activities that could give rise to substantial nexus with New York include:
Maintaining a place of business within New York, either directly or through a subsidiary, including:
Distributing catalogues or other advertising material in New York if combined with additional connections, including:
Out-of-state sellers with no physical presence in New York are considered to have substantial nexus with New York if the seller either:
To determine whether your activities might have a nexus, contact counsel at email@example.com
Under New York’s law, out-of-state sellers with no physical presence in New York (for example, internet-based retailers) are presumed to have sales tax nexus with the state if they both:
Both the sales and use taxes are ultimately imposed on the purchaser. However, a vendor who makes sales of tangible personal property or taxable services within New York and has the requisite nexus must collect the sales tax from the purchaser at the time of the sale unless the purchaser presents documentation of a valid exemption.
A vendor must obtain a certificate of registration from New York before commencing sales if it both:
A vendor registers with the New York Department of Taxation and Finance within 20 days of commencing business or making sales. Thanks for Avalara for some of the content.
DISCLAIMER. This is not legal or tax advice. Speak to counsel.’
Learn more @ Scotch & Palm Private Client Law Group
 The laws governing the imposition of the federal income tax are generally found in the Internal Revenue Code of 1986, as amended (1986 IRC), which is located in Title 26 of the US Code. In addition to the 1986 IRC, sources of law include the regulations promulgated by the Department of Treasury interpreting the 1986 IRC, rulings interpreting the 1986 IRC and case law.
 New York provides a special exemption for out-of-state sellers whose presence in New York is limited to the use of an in-state fulfillment service to handle inventory and shipping, even if inventory is stored at that location. These sellers are not required to register as vendors in New York unless the fulfillment service is affiliated by ownership with the out-of-state company (N.Y. Tax Law § 1101(b)(8)(v)
There’s been growing interest in the Series LLC. The Series LLC provides the type of flexibility that real estate investors and angel investors might find particularly attractive.
Although there are some risks and uncertainties relating to the Series LLC, the Series LLC is a powerful tool to create a series of limited liability companies in a single vehicle.
Just like a traditional LLC, e.g.:
IF the series LLC is organized properly you can take advantage of a centralized management structure and have an extra layer of liability protection.
This layer is created when the larger entity is set up (“umbrella”) and comprised of a series of subsidiary membership interest (“cell”), each with distinct names and separate books.
The subsidiary members function as separate and distinct member-managed cells within the larger LLC entity. Done correctly, a “series” structure provides an extra layer of liability protection:
Delaware, Washington, D.C. and roughly fourteen other states have enacted state statutes that enable an LLC to be created via a discrete series of membership interests.
Here’s a visual for good measure.
Beware the Ides of March. Perhaps April deserves a bad reputation. For small business owners and sole proprietors, ’tis Tax Season. At least March has the NCAA tournament.
In response to recent questions posted by clients and my friends at TigerLabs, I’ve summarized a few tips. Below, in order of relevance are the biggest changes to the tax code in decades and why it matters.
It’s a dry name for a deduction (taken from a line in the Internal Revenue Code) but it allows you to deduct the entire cost (subject to certain limitations) of an asset in the year you acquire and start using it for business. Congress approved special depreciation and expensing rules for property acquired in 2018.
Bonus depreciation has been changed for qualified assets acquired and placed in service after September 27, 2017. The old rules of 50% bonus depreciation still apply for qualified assets acquired before September 28, 2017. These assets had to be purchased new, not used.
The new rules allow for 100% bonus “expensing” of assets that are new or used. The percentage of bonus depreciation phases down in 2023 to 80%, 2024 to 60%, 2025 to 40%, and 2026 to 20%.
After 2026 there is no further bonus depreciation. This bonus “expensing” should not be confused with expensing under Code Section 179 which has entirely separate rules, see above. https://turbotax.intuit.com/tax-tips/small-business-taxes/managing-assets/L18WqppFX (basics of depreciation)
Qualified Business Income deduction (also called the QBI deduction, pass-through deduction, or section 199A deduction) was created by the 2017 Tax Cuts and Jobs Act (TCJA) and is in effect for tax years 2018 through 2025.
This new deduction means that most self-employed taxpayers and small business owners can exclude up to 20% of their qualified business income from federal income tax (but not self-employment tax), whether they itemize or not.
With the QBI deduction, most self-employed taxpayers and small business owners can exclude up to 20% of their qualified business income from federal income tax (but not self-employment tax) whether they itemize or not. https://ttlc.intuit.com/questions/4499030-what-is-the-qualified-business-income-qbi-deductionIRS
Starting in 2018, Congress has limited the amount of state and local property, income, and sales taxes that can be deducted to $10,000. In the past, these taxes have generally been fully tax deductible. Deductible property (real estate) taxes include taxes paid at closing when buying or selling a home, as well as taxes paid to your county or town’s tax assessor (either directly or through a mortgage escrow account) on the assessed value of your property.
This question was asked by Scott B. at ExitPromise.com
I am semi-retired from the transportation sector. I have a business friend that owns a transportation company with approximately $100 mm in annual revenue that he would like to sell – retire himself. He would like me to connect him with a private equity group that would be interested in acquiring his company and prefers I be paid a “Finder Fee” by the acquiring PE firm, at closing. I know of a couple PE Firms that may be interested in this business. So my questions: (1) Are PE Firms allowed by law to pay an individual a finder fee on a deal that was referred to the PE firm by the individual and subsequently acquired by the PE firm? (2) Are there any licenses or other requirements the individual (me) must possess/meet to lawfully act and be paid in this “Finders” capacity? Thank you in advanced for your response.
I sold my small business to a buyer and we try to make the landlord agreed with everything. While I was on vacation, the buyer went to the landlord on his own for some negotiating and the landlord made him sign a lease, completely new lease, new rent, new terms.
I was not present and I didn’t sign any paperwork to exit the lease, I just asked the landlord to run the buyer credit and financing to see if he was qualified for his part and asked that the landlord not sign anything before the buyer paid me first.
Well, now the landlord is holding my security deposit and deducted a rent discount and tacked on water bills for the past 2 years.
Sorry about your situation. Sounds like your buyer purchased you a few headaches and you’ll likely need and local advocate on your side to help you resolve this issue.
Here are a couple of tips:
Your case smells like bad faith and could be some solid leverage in settlement negotiations. I suggest you call/email the local bar association for referrals to commercial contract attorneys, ideally with arbitration and litigation experience.
In sum, the Man (Amerika) has this concept called depreciation, which allows businesses to depreciate—or gradually deduct the cost of —assets such as equipment, fixtures, furniture, etc., that will last more than one year. Learn more here, via Turbotax.
Depreciation’s always been a good deal for capital intensive businesses large and small. The old rules provided a 50% bonus depreciation for qualified assets acquired, but these assets had to be purchased new, not used. Still, a pretty good deal, especially when talking real estate and vehicles.
For example, you’d get to lower your taxable income by thousands every year by using your building or car for business. Wage earners/W2s got a few breadcrumbs,, but they were always limited; however, since the Tax Cuts and Jobs Act of 2017, businesses got a huge windfall, and have even MORE reason to “acquire” assets and wage earners get almost NO breaks for doing essentially the same thing. No arguing the morality, just spitting facts. So, here’s what you need to know:
Under the new rules, YOU, you really smart small business dummy, can take 100% bonus “expensing” of qualified assets that are new or used., acquired and placed in service after September 27, 2017. The percentage of bonus depreciation phases down in 2023 to 80%, 2024 to 60%, 2025 to 40%, and 2026 to 20%. After 2026 there is no further bonus depreciation. This bonus “expensing” should not be confused with expensing under Code Section 179 which has entirely separate rules,
***Disclaimer** This response was prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. Attorney advertising. If you have any more questions, reach out to the team at ScotchPalm.com—fearlessly connecting the dots for entrepreneurs.