Posted on Oct 8, 2019

The U.S. Department of Labor (DOL) has issued the long-anticipated final version of its overtime eligibility rules. The changes will take effect on January 1, 2020. As a result, the DOL estimates that 1.3 million workers will be newly eligible for overtime pay. Are any of them on your payroll? Read on to find out.

What’s Changing?

The basic change that takes effect next year is that employees, even if their jobs can be properly classified as executive, administrative or professional, are still eligible for overtime pay unless they earn at least $684 per week. That’s the equivalent of a $35,568 annual salary. The previous “white-collar” employee threshold, set in 2004, was $455 per week or $23,660 per year.

According to the DOL, the updated amount will “set an appropriate dividing line between nonexempt and potentially exempt employees by screening out from exemption only those employees who, based on their compensation, are unlikely to be bona fide executive, administrative or professional employees.”

In addition, the annual income threshold for overtime pay eligibility for “highly compensated employees” (HCEs) has increased from $100,000 to $107,432. Employees whose jobs don’t come under the executive, administrative or professional classifications must earn at least that amount to lose eligibility for overtime pay.

The new HCE threshold was set at the 80th percentile of weekly earnings of salaried workers nationwide. That’s down from the 90th percentile in the earlier proposed version of the new rule.

How Will Bonuses Factor into the Overtime Equation?

Some earnings that aren’t part of the employee’s regular pay can be added to their base pay when calculating where they are in relationship to the exempt threshold. Specifically, a formula-based extra pay component that’s not discretionary — such as a bonus based on productivity, corporate profits or sales commission — can be added to base pay for overtime pay eligibility calculation purposes.

However, the variable pay component can’t represent more than 10% of that employee’s total pay. Also, it must be given no less often than annually to qualify.

On a positive note, the new rule gives employers the opportunity to make last-minute payments to push an employee into nonexempt status. According to the DOL, “If an employee does not earn enough in nondiscretionary bonuses and incentive payments (including commissions) in a  given 52-week period to retain his or her exempt status, the Department permits a ‘catch-up’ payment at the end of the 52-week period.” The rules give an employer one pay period to make up for a shortfall of up to 10% of the standard salary level for the preceding 52-week period.

Does the “Duties Test” Still Apply?

The new rule doesn’t change the “duties test” that is the basis for determining exempt status. As a reminder, it’s not enough to give an employee an administrative, executive or professional job title and deem the employee exempt. If an employee sues, asserting entitlement to overtime pay, the focus will continue to be his or her actual job function.

This means, beginning next year, any employee that you’ve classified as exempt based on having an administrative, executive or professional job, who earns from $35,568 to $107,432, could challenge that status if the job doesn’t meet the applicable duties test.

For example, the DOL considers a job eligible for exempt status under the “administrative” classification if the employee’s primary duty is “the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers, and the employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.”

How Should Employers Prepare for the Changes?

To prepare for the 2020 effective date of the new regulations, employers should review their payroll records for workers in the following pay ranges:

Employees earning from $23,660 to $35,567. For workers in this pay range who are treated as exempt and are properly classified based on the duties test, you have two options: 1) Treat them as eligible for overtime pay and set up your hours-worked tracking and payroll systems accordingly, or 2) increase their annual salary to at least $35,568.

Employees earning from $35,568 to $107,432. Workers in this pay range who are treated as exempt based on one of the administrative, executive or professional job categories could be eligible for overtime pay if they fail the duties test. You have two choices for these workers: 1) Reclassify them as nonexempt, or 2) adjust their job duties to make them legitimately exempt.

Important: Just because a formerly exempt employee gains nonexempt status doesn’t make overtime pay inevitable. You can minimize overtime pay by carefully tracking workhours and requiring manager authorization for employees to work beyond 40 hours in a given week.

Need Help?

When the DOL issued its final overtime rules, the agency acknowledged that 15 years is a long time to wait to adjust the overtime pay thresholds. The DOL “intends to update the standard salary and HCEs total annual compensation levels more regularly in the future through notice-and-comment rulemaking.” Contact your tax and payroll professional for more information on the new rules and assistance on implementing the changes.

Posted on Sep 9, 2019

For most small businesses, having a website is a necessity. But what’s the proper tax treatment of the costs to develop a website?

Unfortunately, the IRS hasn’t yet released any official guidance on these costs. Therefore, you must extend the existing guidance on other subjects to the issue of website development costs.

Depreciable Fixed Assets

The cost of hardware needed to operate a website falls under the standard rules for depreciable equipment. Similar rules apply to purchased off-the-shelf software.

Specifically, once these assets are up and running, you can deduct 100% of the cost in the first year they’re placed in service, as long as that year is before 2023. This favorable treatment is allowed under the 100% first-year bonus depreciation break established by the Tax Cuts and Jobs Act (TCJA).

In later years, you can probably deduct 100% of these costs in the year the assets are placed in service under the Section 179 first-year depreciation deduction privilege. However, Sec. 179 deductions are subject to several limitations.

For tax years beginning in 2019, the maximum Sec. 179 deduction is $1.02 million, subject to a phaseout rule. Under the rule, the deduction is phased out if more than a specified amount of qualifying property is placed in service during the tax year. The threshold amount is $2.55 million for tax years beginning in 2019.

There’s also a taxable income limit. Under that limit, your Sec. 179 deduction cannot exceed your business taxable income. In other words, Sec. 179 deductions can’t create or increase an overall tax loss. However, any Sec. 179 deduction amount that you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable dollar limit, the phaseout rule and the taxable income limit).

Important: Software license fees are treated differently from purchased software costs for tax purposes. Payments for leased or licensed software used for your website are currently deductible as ordinary and necessary business expenses under Sec. 162.

Internally Developed Software

If you take the position that your website is primarily for advertising, you can currently deduct internal website software development costs as an ordinary and necessary business expense.

An alternative position is that your software development costs represent currently deductible research and development costs under Sec. 174. To qualify for this treatment, the costs must be paid or incurred by December 31, 2022.

A more conservative approach would be to capitalize the costs of internally developed software. Then you would depreciate them over 36 months under Sec. 167(f).

Payments to Third Parties

Some companies take the easy way out. They hire third parties to set up and run their websites. Payments to such third parties should be currently deductible as ordinary and necessary business expenses.

Expenses Incurred before Business Commences

Up to $5,000 of otherwise deductible expenses that are incurred before your business commences can generally be deducted in the year business commences. These so-called “start-up expenses” are covered by Sec. 195.

However, if your start-up expenses exceed $50,000, the $5,000 currently deductible limit starts to be chipped away. Above this amount, you must capitalize some or all of your start-up expenses and amortize them over 60 months, starting with the month that business commences.

Important: Start-up expenses can include website development costs. But they don’t include costs that you treat as deductible research and development costs under Sec. 174. You can deduct those costs when they are paid or incurred, even if your business hasn’t yet commenced.

Need Help?

Until the IRS issues specific guidance on deducting vs. capitalizing website development costs, you can apply existing guidance for other subjects. Your tax advisor will determine the appropriate treatment for these costs for federal income tax purposes. Contact your advisor if you have questions or want more information.

Posted on Jul 1, 2019

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.

Posted on Apr 9, 2019

Hiring young people can be beneficial for all parties. But before you make any job offers, be fully aware of how youth employment is regulated under the Fair Labor Standards Act (FLSA). When employers fail to comply with these obligations, they can be prosecuted by the Department of Labor (DOL). And if the prosecution is successful, the DOL will likely publicize the results as a sobering reminder to all employers of the FLSA requirements.

Recent Examples

For instance, a fast food franchisee in the Midwest was recently charged with multiple labor law violations. They permitted several dozen employees under the age of 16 to work shifts longer than three hours on school days. The underage workers were allowed to operate certain dangerous equipment. And, the company failed to maintain proper employee work records. The result? The employer was fined nearly $50,000.

In another case, the local government of a small town was penalized for employing minors to perform hazardous jobs, which included riding in the back of trucks and operating chainsaws. The case reminds employers of “the importance of preventing employees under the age of 18 from participating in prohibited work,” the DOL’s Wage and Hour Division stated.

Under-Age Categories

There are two age brackets for youth workers: 

  •  14- and 15-year-olds, and
  •  16- and 17-year-olds.

Different rules apply to each bracket. Minors who work for a family business (assuming the work is considered nonhazardous) are exempt from these rules. Otherwise, children generally must be at least 14 to work, according to the FLSA.

The maximum hours of work for 14- and 15-year-old employees in various non-manufacturing, non-mining, nonhazardous jobs are as follows:

  • 40 hours per week when school isn’t in session,
  • 8 hours per day when school isn’t in session,
  • 3 hours per day when school is in session, and
  • 18 hours per week when school is in session.

Also, after Labor Day and before June 1, 14- and 15-year-olds aren’t permitted to work before 7:00 a.m. or after 7:00 p.m. During the summer months, they can work until 9:00 p.m. Exceptions are made for certain work study and career exploration programs.

Workers ages 16 to17 don’t have restricted work hours. However, like 14- and 15-year-olds, they aren’t permitted to work in hazardous jobs, such as:

  • Manufacturing,
  • Construction,
  • Assisting with or operating power-driven machinery,
  • Lifeguarding in a lake, river, ocean beach or other natural environment.

Other examples of hazardous jobs are: work involving the use of ladders and scaffolding, cooking, baking, loading goods off or onto trucks, building maintenance, and warehouse work (unless clerical).

The DOL’s website provides a full list of jobs that 14- and 15-year-old workers are permitted to do. It’s important to reference this list before hiring a teenager in that age bracket, because it isn’t permissible to hire these workers for any job that doesn’t appear on the approved job list.

Exploration

If young employees are participating in a special work experience program, they might not be subject to all the usual FLSA restrictions, including the number of hours they can work during a school week.

An example is the “work experience and career exploration” program for 14- and 15-year-olds. State education departments can apply to the DOL’s Wage and Hour Administrator to set up such programs. Their purpose is to “provide a carefully planned work experience and career exploration program for students who can benefit from a career-oriented experience.”

Employers also have more flexibility with 14- and15-year-olds who are in a DOL-approved work study program, which is geared to academically oriented students. Individual schools can apply to the DOL for approval of those programs.

6 Practical Tips

Here are six practical tips offered by seasoned employers of workers who are under age 18, compiled by the DOL’s “Youth Rules” website resource center.

1. Color coding. Different colored vests are issued to employees under the age of 18 by one chain of convenience stores. That way, supervisors know, for example, who isn’t allowed to operate or clean the electric meat slicer.

2. Tracking. An employer in the quick service industry, with over 8,000 young workers, developed a computerized tracking system to ensure that workers under 16 years of age aren’t scheduled for too many hours during school weeks.

3. Policy cards. One supermarket issues teens a laminated, pocket-sized “Minor Policy Card” on the first day of work. The card explains the store’s policy and requirements for complying with the youth employment rules.

4. Training. Many employers have taken the simple, but critical, step of training all their supervisors in the requirements of the FLSA. Refresher training at periodic intervals is equally important.

5. Warning stickers. Some employers place special warning stickers on equipment that young workers may not legally operate or clean.

6. Self-check for compliance. Some companies conduct their own compliance checks of their businesses to ensure they adhere to all federal, state and local youth employment rules.

Last Words

If you’re prepared, there could be a wealth of mutual benefit in hiring young teens for certain jobs. Employers benefit from their youthful exuberance and vigor. And, while a young worker’s focus might be earning some spending money, everyone needs to make a successful entry into the working world. As with any labor policy, check your state and possibly even local government’s laws and regulations pertaining to hiring minors before taking the plunge.

 

Posted on Mar 22, 2019

Today (and since 2004) salaried employees who earn at least $455 per week aren’t eligible  for overtime pay under the Fair Labor Standards Act, if their job duties are executive, administrative or professional (EAP) in nature. That’s true no matter how many hours these employees work in a week.

Under proposed regulations, the limit would rise to $679 in 2020. So, salaried employees earning up to around $35,308 annually would be overtime-eligible even if they fall into those EAP job roles as defined by the Department of Labor (DOL).

Although the jump in the threshold is substantial, it’s not nearly as high as the $913 weekly pay threshold set in an earlier version of the proposed regulations. If that version — which was blocked by a federal judge — had passed, it would’ve been much more costly to employers.

Highly Compensated Employees

The other significant change in the newly re-proposed regulations would raise the threshold for “highly compensated employee” (HCE) status from a $100,000 annual salary to $147,414. HCEs aren’t eligible for overtime, even if they don’t fall under the EAP job categories. In other words, if that new higher HCE threshold takes effect next year, a non-management employee earning, for example, $146,000, could still be eligible for overtime pay after logging more than 40 hours of work in a week.

Chances are, you don’t have many (or any) employees earning that kind of money who don’t meet the EAP test. Even so, you may need to take a close look at your higher paid employees’ job duties to be sure you don’t inadvertently neglect to meet the regulations’ requirements next year.

An employer who wishes to avoid paying overtime needs to pay at least the $35,308 threshold. However, a wrinkle in existing regulations that was preserved in the new proposal allows you to pay only 90% of the salary threshold ($31,778) to employees who are also eligible for a “non-discretionary” bonus. Assuming the bonus is earned, it must be sufficient to carry them over the $35,308 annual income level. A non-discretionary bonus (or commission) is one awarded based on an employee’s objective performance against concrete goals, such as profitability or productivity levels.

That works out to eligibility for a bonus of at least $3,531. If it turns out that, by the end of the year, the employee doesn’t earn the full bonus and misses the $35,308 threshold, the employer can make up the difference in the following pay period.

No Automatic Raises

Under the 2016 version of the proposed regulations, the compensation thresholds would have risen regularly based on a cost of living index. That provision isn’t included in the latest version, which indicates only that the DOL would periodically update thresholds using an amendment process (including public input).

Also unchanged in the current version: Overtime protections for police officers, fire fighters, paramedics, nurses and laborers. The “laborers” category includes:

  • Non-management production-line employees, and
  • Non-management employees in maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers and longshoremen.

What This Means for You

So, what’s the bottom line for employers, assuming the regulations are finalized as proposed? The DOL estimates that “average annualized [additional] employer costs” over the next decade will be $120.5 million. Your share of that estimated cost will depend on what steps, if any, you take to mitigate the impact.

For example, if you have employees who are now earning close to $35,308 annually and who would become newly eligible for overtime pay, you might come out by raising their compensation above the $35,308 threshold. Doing so would eliminate eligibility for overtime pay (assuming their jobs qualify for overtime based on the EAP test). Alternatively, you can take steps to minimize overtime work by previously exempt employees who suddenly become eligible for overtime pay.

Something to Think About

Be aware, this topic is one where it’s easy to be “penny wise and pound foolish.” Unemployment is low and the labor market is tight. If employees believe you’re changing your policies to do an end-run around the intent of the updated regulations, you may save a little money but the result could be a spike in your employee turnover rate.

Nearly 15 years have elapsed since the last change in the minimum pay overtime eligibility threshold level, so change is most likely coming. Even so, the DOL will probably receive some complaints from employers who don’t believe the threshold should be raised as much as proposed. The agency will accept comments on the revised proposal until early May.

 

Posted on Mar 1, 2019

Barriers for women in leadership positions are slowly being broken down in the United States. Women currently hold 102 seats in the House of Representatives (23.7% of the voting members) and 25 seats in the Senate (25% of the total). Four women also serve as non-voting delegates from American Samoa, Puerto Rico, the Virgin Islands and Washington, D.C.

Two decades ago, women held only 13% of the seats in the House and 9% of the seats in the Senate. However, the “glass ceiling” has yet to be shattered in some business boardrooms. When it comes to business leadership, women in the U.S. have come a long way, but there’s still a long way to go at many organizations.

California Mandates More Female Directors

Under a new law, California has become the first state to require public companies to have at least one woman on its board of directors. This mandate was signed into law on September 30, 2018.

It requires public companies whose principal executive offices are located in California to comply by the end of 2019. By the end of 2021, the minimum is two females on the board if the company has  five directors, and three females if it has at least seven directors.

Venus or Mars: Does It Matter

Approximately 70% of women and 50% of men think too few females hold leadership positions in U.S. business and politics. This finding was reported in Women and Leadership 2018, a recent survey and report published by Pew Research.

Women are also far more likely than men to see females facing organizational impediments. Mentoring, which sounds like a positive thing, may sometimes become an obstacle in a business setting. That’s because  men may be more likely to mentor other men than women, and women are more likely to mentor other women than men. Thus, it’s hard to break the cycle of male dominance. As inroads are made, women leaders may want to focus on mentoring the next generation of women leaders.

Despite such obstacles, most Americans generally see men and women as being equally capable when it comes to leadership, according to the Pew survey.

In addition, the majority acknowledges that the different genders tend to exhibit different leadership styles. Female business leaders are often perceived to have certain advantages. For instance, 43% of the people polled by Pew Research responded that women are better at creating a safe and respectful workplace while only 5% say men are better at this. The majority (52%) was neutral on this issue.

In addition, women often excel at compromising, which, in turn, helps promote collaboration and avoid stalemates. It’s widely believed that a woman’s give-and-take approach can help close deals and result in more effective brainstorming sessions.

Other perceived advantages cited in favor of women include:

  • Valuing people from different backgrounds,
  • Considering the societal impact of business decisions,
  • Mentoring young employees, and
  • Offering reasonable pay and fringe benefits.

However, men are perceived to be better than women at negotiating profitable deals, according to those surveyed. Overall, the public recognizes the value of female leadership in both political and business arenas. More than two-thirds say having more women in leadership positions would improve the quality of life for everyone.

Opportunity Knocks

Despite decades of progress, the disparity in pay based on gender has persisted. Currently, a woman earns about 78 cents for every dollar that a man makes, according to The State of the Gender Pay Gap in 2018 published by Pay Scale (a provider of payroll software)..

But it’s not just a “pay gap” that’s holding women back; there is also an “opportunity gap.” According to PayScale, women and men start their careers making roughly the same amount of money for the same sort of work. However, men are offered more opportunities to advance into higher-paying positions.

At middle age, men are 70% more likely to be in executive positions than women. By retirement, this disparity almost doubles.

How Women Add Value

Another study, sponsored by the Peterson Institute for International Economics, focused on diversity in the workplace. The not-for-profit organization’s study found a positive relationship between female corporate leadership and financial performance. It concludes that fair and unbiased representation throughout an organization improves operations.

According to the study, minority women owned fewer than a million U.S. businesses (approximately 17% of all U.S. businesses) in 1997. By 2014, that figure had nearly doubled to 33% of all businesses. African-Americans represented the largest women’s business ownership group at 14%, followed closely by Hispanic women at 11% and Asian-American women at 7%.

During this time of growth in female and minority leadership, there were no legal mandates for gender inclusion and diversity in the C-Suite. Thus far, the progress has evolved with minimal government intervention. However, that could change in certain parts of the country. (See “California Mandates More Female Directors” at right.)

To help bridge the gender gap, industry leaders — both male and female — must become agents of change. This may include mentoring qualified women candidates and helping them develop career strategies. In addition, mentors can help future women leaders set and attain specific goals within a definitive time frame.

How Does Your Business Measure Up?

Businesses without women in leadership positions may be missing the boat. A diverse management team is more likely to see problems (and solutions) from a variety of perspectives — allowing it to identify potential threats and opportunities that might otherwise be missed. We can help you evaluate your current policies and procedures to identify and correct possible gender disparity in your workplace.

Posted on Dec 5, 2018

On January 1, 2019, many states and localities are increasing their minimum wage amounts. In some areas, the amounts paid to tipped employees is also increasing and garnishment limits may also be changing.

This chart briefly details the changes that will kick in on New Year’s Day. For more information about your situation, consult with your payroll advisor.

State Change on January 1, 2019
Alaska    The minimum wage will increase from $9.84 to $9.89 per hour. Tipped employees must be paid this same rate.
Arizona    The minimum wage will increase from $10.50 to $11 per hour. The cash minimum wage for tipped employees will increase from $7.50 per hour to $8 per hour. In Flagstaff, the minimum wage will increase in from $11 to $12 per hour.
Arkansas    The minimum wage will increase from $8.50 to $9.25 per hour. For tipped employees, the cash minimum wage will remain at $2.63 per hour.
California    The minimum wage will rise from $11 to $12 per hour for employers with more than 25 employees. It will increase from $10.50 to $11 per hour for employers with fewer than 26 employees. Tipped employees must also be paid this rate. The minimum wage will also increase in Belmont, Cupertino, El Cerrito, Los Altos, Mountain View, Palo Alto, Redwood City, Richmond, San Diego, San Jose, San Mateo, Santa Clara and Sunnyvale.
Garnishment limits may also change. In CA, the maximum amount subject to garnishment can’t exceed the lesser of 25% of weekly disposable income, or 50% of the amount by which the individual’s disposable earnings for the week exceed 40 times the greater of either the state or local minimum wage rate in effect where the debtor works when the earnings are payable.
Colorado    The minimum wage will increase from $10.20 to $11.10 per hour. The cash minimum wage for tipped employees will increase from $7.18 per hour to $8.08 per hour. The garnishment limit is also changing.
Delaware    The minimum wage will rise from $8.25 to $8.75 per hour. For tipped employees, the cash minimum wage rate will remain at $2.23 per hour.
Florida    The minimum wage will increase from $8.25 to $8.46 per hour. The cash minimum wage for tipped employees will increase from $5.23 per hour to $5.44 per hour.
Maine    The minimum wage will increase from $10 to $11 per hour. The cash minimum wage for tipped employees will increase from $5 per hour to $5.50 per hour. The garnishment limit is also changing.
Massachusetts    The minimum wage will rise from $11 to $12 per hour. The cash minimum wage rate for tipped employees will increase from $3.75 per hour to $4.35 per hour.
Minnesota    The minimum wage will increase from $9.65 to $9.86 per hour for large employers (those with annual gross sales of $500,000 or more, exclusive of retail excise taxes). The minimum wage for small employers will increase from $7.87 per hour to $8.04 per hour. Tipped employees must also be paid these rates.
Missouri    The minimum wage will increase from $7.85 to $8.60 per hour. For tipped employees, the cash minimum wage will increase from $3.925 per hour to $4.30 per hour.
Montana    The minimum wage will increase from $8.30 to $8.50 per hour. Tipped employees must also be paid this rate.
New Jersey    The minimum wage will increase from $8.60 to $8.85 per hour. The cash minimum wage for tipped employees will remain at $2.13 per hour.
New Mexico The state minimum wage will remain at $7.50 per hour, but the minimum wage rate will increase in Albuquerque, Bernalillo County and Las Cruces.
New York    On December 31, 2018, the minimum wage will rise from: 1) $13 to $15 per hour for NY city employers with 11 or more employees; 2) $12 to $13.50 per hour for NY city employers with 10 or fewer employees; 3) $11 to $12 per hour for Nassau, Suffolk and Westchester county employers, and 4) $10.40 to $11.10 per hour for employers in areas not noted above. The cash minimum wage for tipped employees varies by industry. The garnishment limits will also change on January 1.
Ohio    The minimum wage will increase from $8.30 to $8.55 per hour. The cash minimum wage rate for tipped employees will increase from $4.15 per hour to $4.30 per hour.
Rhode Island    The minimum wage will increase from $10.10 to $10.50 per hour. However, the minimum cash wage for tipped employees will remain at $3.89 per hour.
South Dakota    The minimum wage will increase from $8.85 to $9.10 per hour. The cash minimum wage for tipped employees will increase from $4.425 per hour to $4.55 per hour. The garnishment limit will also change.
Vermont    The minimum wage will increase from $10.50 per hour to $10.78 per hour. The cash minimum wage for tipped employees will increase from $5.25 to $5.39 per hour.
Washington    The minimum wage will increase from $11.50 to $12 per hour. Tipped employees must also be paid this rate. The minimum wage will also increase in Seattle, SeaTac and Tacoma.

Looking Ahead in 2019

On July 1, 2019, the minimum wage will go up in the District of Columbia from $13.25 to $14 per hour.

In Oregonthe minimum wage will increase in July of next year to various amounts, depending on where an employer is located. For employers located within the Portland metro urban growth boundary, the minimum wage will go from $12 per hour to $12.50. In smaller cities, it will go from $10.75 to $11.25 per hour. And in non-urban counties, the minimum wage will rise from $10.50 to $11 per hour. All of the changes in Oregon are effective on July 1, 2019.

In addition, both houses of the Michigan legislature have approved legislation that would increase the state’s minimum wage rate from $9.25 per hour to $10 per hour, effective March 1, 2019, with annual increases until it reaches $12 per hour, effective January 1, 2022. The legislation had the effect of keeping an approved ballot measure off the November 6 election ballot that would have allowed voters to decide whether to increase the minimum wage rate. However, several published reports say that the Republican-controlled legislature passed the bill not only to keep voters from determining the issue, but with the intention of later killing the measure. They are reportedly working to scale back the minimum wage legislation and paid sick legislation before they leave office in December.

Posted on Nov 15, 2018

Today, approximately 38 million private-sector employees in the United States lack access to a retirement savings plan through their employers. However, momentum is building in Washington, D.C., to remedy this situation by helping small employers take advantage of multiple employer defined contribution plans (MEPs).

Could a MEP work for you and your workers? If the federal government expands these retirement savings programs, small employers will need to carefully consider the pros and cons before jumping at the MEP opportunity.

Wheels of Change

In September, President Trump issued an executive order, asking the U.S. Department of Labor (DOL) to investigate ways to help employers expand access to MEPs and other retirement plan options for their workers. The order also aims to improve the effectiveness and reduce the cost of employee benefit plan notices and disclosures.

The DOL followed up by publishing proposed regulations that would expand eligibility for MEP participation. Those regulations are expected to be finalized in early 2019.

A MEP essentially acts as the sponsor of a defined contribution (DC) plan, on behalf of a group of employers under its administrative umbrella. “The employers would not be viewed as sponsoring their own plans under ERISA. Rather, the [MEP] would be treated as a single employee benefit plan for purposes of ERISA,” says the Society for Human Resource Management. The MEP’s sponsor “would generally be responsible, as plan administrator, for complying with ERISA’s reporting, disclosure and fiduciary obligations.”

In principle, the administrative efficiencies of participating in a MEP would lower the costs of providing employees with retirement savings plans. But there are additional factors to take into consideration in evaluating MEPs.

Current rules only provide for “closed” MEPs that are sponsored by an association whose principal purpose is something other than sponsoring the MEP, and whose members must also have a “commonality of interest.”

Under the DOL’s more relaxed proposal, membership in a MEP would open up to companies in the same geographic area or in the same trade, profession or industry. Also, sponsoring the MEP could be the association’s primary purpose, so long as it had at least one secondary “substantial business purpose.”

Several additional requirements for associations that sponsor MEPs were listed in the proposed regulations. Among them, the association must:

  • Have a formal organizational structure with a governing body and bylaws,
  • Be controlled by its employer members,
  • Limit participation in the MEP to employees or former employees of MEP members, and
  • Not be a financial institution, insurance company, broker-dealer, third party administrator or recordkeeper.

The regulations would allow PEOs (professional employer organizations) to sponsor MEPs, if the PEOs meet certain requirements, including to perform “substantial employment functions” on behalf of their employer clients. Also, self-employed individuals and sole proprietors would be eligible to participate in a MEP.

Legislative Improvements

Even though the proposed DOL regs would ease current restrictions on MEPs, enough constraints would remain that could limit their expansion. A major issue that the proposed regulations fail to resolve is the so-called “bad apple” rule. That is, if one employer in a MEP fails to fulfill its administrative requirements, that failure, depending on its severity, could cause the entire MEP to be disqualified under the DOL proposal.

Fortunately, the House of Representatives has already passed a bill (the Family Savings Act) that addresses the bad apple issue. A similar measure (the Retirement Enhancement and Savings Act) is now pending in the Senate. The proposed legislation would clarify that the plans would separate noncompliant employers from other employers — or in essence “quarantine” the bad apples.

The bill also clarifies that employers’ fiduciary liability for the operation of the MEP is limited. But employers can’t avoid fiduciary liability altogether. That’s because they remain responsible for:

  1. Selecting a MEP and its investment lineup, and
  2. Ensuring that the MEP and the association that sponsors it adhere to the quality criteria the employer used when deciding to join the MEP.

The Senate version of the legislation would create a type of MEP known as a “pooled employer plan” (or PEP). PEP participants would interact with the plan electronically to help keep the plan’s administrative costs as low as possible.

Boom or Bust?

It’s unclear whether the new-and-improved MEPs will have a significant cost advantage — or whether that’s even a primary objective of employers that decide to join a MEP. Inexpensive Web-based 401(k) plan sponsorship platforms have emerged in recent years that help to address the cost issue.

Plus, there’s concern that some MEPs will lower costs by transferring fiduciary responsibilities to employers. But many employers may look beyond cost when deciding on a retirement plan. They may also value the simplicity of outsourcing plan administration and sharing fiduciary responsibilities with the plan sponsor.

Need more information about your situation? Your benefits advisor can help you select the retirement savings plan options that make the most sense for you and your employees.

Posted on Jun 1, 2018

Would you like to invest in a business that allows you to subsequently sell your stock tax-free? That may be possible with qualified small business corporation (QSBC) stock that’s acquired on or after September 28, 2010. Sales of QSBC stock are potentially eligible for a 100% federal income tax exclusion. That translates into a 0% federal income tax rate on your profits from selling stock in a QSBC.

Here’s what you need to know about the 100% stock sale gain exclusion rules, including important restrictions and how this deal may be even sweeter under the Tax Cuts and Jobs Act (TCJA).

Tax-Free Gain Rollovers for QSBC Stock Sales

Sales of qualified small business corporation (QSBC) stock may potentially be eligible for a gain exclusion. (See main article.) But that’s not all. There’s also a tax-free stock sale gain rollover privilege — similar to what happens with like-kind exchanges of real property.

Under the rollover provision, the amount of QSBC stock sale gain that you must recognize for federal income tax purposes is limited to the excess of the stock sales proceeds over the amount that you reinvest to acquire other QSBC shares during a 60-day period beginning on the date of the original sale. The rolled-over gain reduces the basis of the new shares. You must hold the original shares for over six months to qualify for the gain rollover privilege.

Essentially, the gain rollover deal allows you to sell your original QSBC shares without owing any federal income tax and without losing eligibility for the gain exclusion break when you eventually sell the replacement QSBC shares.

The Basics

Whether you’re considering starting up your own business or investing in someone else’s start-up, it’s important to learn about QSBCs. In general, they’re the same as garden-variety C corporations for legal and tax purposes — except shareholders are potentially eligible to exclude 100% of QSBC stock sale gains from federal income tax. There’s also a tax-free gain rollover privilege for QSBC shares. (See “Tax-Free Gain Rollovers for QSBC Stock Sales” at right.)

To be classified as tax-favored QSBC stock, the shares must meet a complex list of requirements set forth in Internal Revenue Code Section 1202. Major hurdles to clear include the following:

  • You must acquire the shares after August 10, 1993.
  • The stock generally must be acquired upon original issuance by the corporation or by gift or inheritance.
  • The corporation must be a QSBC on the date the stock is issued and during substantially all the time you own the shares.
  • The corporation must actively conduct a qualified business. Qualified businesses don’t include 1) services rendered in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services or other businesses where the principal asset is the reputation or skill of employees, 2) banking, insurance, leasing, financing, investing or similar activities, 3) farming, 4) production or extraction of oil, natural gas or other minerals for which percentage depletion deductions are allowed, or 5) the operation of a hotel, motel, restaurant or similar business.
  • The corporation’s gross assets can’t exceed $50 million immediately after your shares are issued. However, if the corporation grows and exceeds the $50 million threshold after the stock is issued, it won’t cause the corporation to lose its QSBC status with respect to your shares.

This is only a partial list. Consult your tax advisor to determine whether your venture can meet all the requirements of a QSBC.

Gain Exclusion Rules and Restrictions

To take advantage of the gain exclusion break, the stock acquisition date is critical. The 100% gain exclusion is available only for sales of QSBC shares acquired on or after September 28, 2010. However, a partial exclusion may be available in the following situations:

  • For QSBC shares acquired between February 18, 2009, and September 27, 2010, you can potentially exclude up to 75% of a QSBC stock sale gain.
  • For QSBC shares acquired after August 10, 1993, and before February 18, 2009, you can potentially exclude up to 50% of a QSBC stock sale gain.

The tax code further restricts QSBC gain exclusions for:

C corporation owners. Gain exclusions aren’t available for QSBC shares owned by another C corporation. However, QSBC shares held by individuals, S corporations and partnerships are potentially eligible.

Shares held for less than five years. To take advantage of the gain exclusion privilege, you must hold the QSBC shares for a minimum of five years. So, for shares that you haven’t yet acquired, the 100% gain exclusion break will be available for sales that occur sometime in 2023 at the earliest.

TCJA Impact

The new tax law makes QSBCs even more attractive. Why? Starting in 2018, the law permanently lowers the corporate federal income tax rate to a flat 21%.

So, if you own shares in a profitable QSBC and eventually sell those shares when you’re eligible for the 100% gain exclusion, the flat 21% corporate rate will be the only federal income tax that the corporation or you will owe.

Right for Your Venture?

Conventional wisdom says it’s best to operate private businesses as pass-through entities, meaning S corporations, partnerships or limited liability companies (LLCs). But that logic may not be valid if your venture meets the definition of a QSBC.

The QSBC alternative offers three major upsides: 1) the potential for the 100% gain exclusion break when you sell your shares, 2) a tax-free stock sale gain rollover privilege, and 3) a flat 21% federal corporate income tax rate. Your tax advisor can help you assess whether QSBC status is right for your next business venture.

Posted on May 6, 2018

The Tax Cuts and Jobs Act (TCJA) expands the first-year depreciation deductions for vehicles used more than 50% for business purposes. Here’s what small business owners need to know to take advantage.

Depreciation Allowances for Passenger Vehicles

For new and used passenger vehicles (including trucks, vans and electric automobiles) that are acquired and placed in service in 2018 and used more than 50% for business purposes, the TCJA dramatically and permanently increases the so-called “luxury auto” depreciation allowances.

The maximum allowances for passenger vehicles placed in service in 2018 are:

  • $10,000 for the first year (or $18,000 if first-year bonus deprecation is claimed),
  • $16,000 for the second year,
  • $9,600 for the third year, and
  • $5,760 for the fourth year and beyond until the vehicle is fully depreciated.

If the vehicle is used less than 100% for business, these allowances are cut back proportionately. For 2019 and beyond, the allowances will be indexed for inflation.

Bad News for Employees with Unreimbursed Vehicle Expenses

The new tax law isn’t all good news. Under prior law, employees who used their personal vehicles for business-related travel could claim an itemized deduction for unreimbursed business-usage vehicle expenses. This deduction was subject to a 2%-of-adjusted-gross-income (AGI) threshold.

Unfortunately, for 2018 through 2025, the new tax law temporarily suspends write-offs for miscellaneous itemized expenses. So, an employee can no longer claim deductions for unreimbursed business-usage vehicle expenses incurred from 2018 through 2025.

There’s a possible work-around, however: Employers can provide tax-free reimbursements for the business percentage of employees’ vehicle expenses under a so-called “accountable plan” expense reimbursement arrangement. Contact your tax advisor to find out if an accountable plan could work for you.

First-Year Bonus Depreciation for Passenger Vehicles

If first-year bonus depreciation is claimed for a new or used passenger vehicle that’s acquired and placed in service between September 28, 2017, and December 31, 2026, the TCJA increases the maximum first-year luxury auto depreciation allowance by $8,000. So, for 2018, you can claim a total deduction of up to $18,000 for each qualifying vehicle that’s placed in service. Allowances for later years are unaffected by claiming first-year bonus depreciation.

There’s an important caveat, however: For a used vehicle to be eligible for first-year bonus deprecation, it must be new to the taxpayer (you or your business entity).

The $8,000 bump for first-year bonus depreciation is scheduled to disappear after 2026, unless Congress takes further action.

Prior-Law Allowances for Passenger Vehicles

These expanded deductions represent a major improvement over the prior-law deductions. Under prior law, used vehicles were ineligible for first-year bonus depreciation. In addition, the depreciation allowances for passenger vehicles were much skimpier in the past.

For 2017, the prior-law allowances for passenger vehicles were:

  • $3,160 for the first year (or $11,160 for a new car with additional first-year bonus depreciation),
  • $5,100 for the second year,
  • $3,050 for the third year, and
  • $1,875 for the fourth year and beyond until the vehicle is fully depreciated.

Under prior law, slightly higher limits applied to light trucks and light vans for 2017.

Good News for Heavy SUVs, Pickups and Vans

Here’s where it gets interesting: The TCJA allows unlimited 100% first-year bonus depreciation for qualifying new and used assets that are acquired and placed in service between September 28, 2017, and December 31, 2022. However, as explained earlier, for a used asset to be eligible for 100% first-year bonus deprecation, it must be new to the taxpayer (you or your business entity).

Under prior law, the first-year bonus depreciation rate for 2017 was only 50%, and bonus depreciation wasn’t allowed for used assets.

Heavy SUVs, pickups and vans are treated for tax purposes as transportation equipment — so they qualify for 100% first-year bonus depreciation. This can provide a huge tax break for buying new and used heavy vehicles that will be used over 50% in your business.

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

Definition of a “Heavy Vehicle”

100% first-year bonus depreciation is only available when an SUV, pickup or van has a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. 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.

You can usually 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.

Case in Point

To illustrate the potential savings from the new 100% first-year bonus depreciation break, suppose you buy a new $65,000 heavy SUV and use it 100% in your business in 2018. You can deduct the entire $65,000 in 2018.

What if you use the vehicle only 60% for business? Then your first-year deduction would be $39,000 (60% x $65,000).

Now, let’s assume you purchase a used heavy van for $45,000 in 2018. You can still deduct the entire cost in 2018, thanks to the 100% first-year bonus depreciation break. If you use the vehicle 75% for business, your first-year deduction is reduced to $33,750 (75% x $45,000).

Buy, Use, Save

The TCJA provides sweeping changes to the tax law. Many changes are complex and may take months for practitioners and the IRS to interpret. But the provisions that expand the first-year depreciation deductions for business vehicles are as easy as 1-2-3: 1) buy a vehicle, 2) use it for business, and 3) save on taxes.

If you have questions about depreciation deductions on vehicles or want more information about other issues related to the new law, contact your tax advisor.