Just because you intend to do business primarily in one particular state does not mean that you necessarily have to set up your company in that state.  On the contrary, you can organize your company in any state (or even foreign jurisdiction) and then register that company to do business in the state where you do most of your business.

You have probably heard that large corporations tend to select Delaware as their state of incorporation.  Usually, these companies are not headquartered in Delaware.  In fact, they probably do not have an office in Delaware at all.  So, why have a Delaware corporation if your business has nothing to do with Delaware?  And, does it have to be Delaware, or are there other advantageous «jurisdictions» to consider?

Corporations start up by “incorporating.”  All other forms, such as LLCs and partnerships, start up by “organizing.”  It means the same thing.

That is why the governing document for a corporation is called “Articles of Incorporation,” while the equivalent document for other companies is called “Articles of Organization.” 

Tax Implications

Let’s start by dispelling a common misconception.  It is true that some US states charge income tax, while others do not.  However, you should not be under the impression that you can avoid state taxes merely by setting up your company in a state that has no income tax.  That would be a fatal mistake.

Corporate taxation is determined by where the money is generated, not by state of incorporation. 

So, for example, if your company’s office is in California, and you sell widgets to Californians, you cannot escape state taxes merely by organizing your company in Nevada.  If only it were that easy, right?  You can be sure that many, many people have tried to do just that.  And, when the Department of Revenue catches on . . . well, it’s not pretty.

Therefore, when determining the jurisdiction for domiciling your company, tax implications should not be a primary consideration.  If you are going to try to escape state taxes by setting up in a different state, you do so at your own risk.

Confidentiality

This is one of the big differences among the different jurisdictions.  Just how easy is it for the public to see your business and personal information?

Transparent States

Some states, such as Florida, are extremely transparent.  A good deal of business information, including owners’ names and addresses, are easily accessible online.

For lawyers, this is very useful.  When we need to sue a company, we just go online to the Department of State’s website (www.sunbiz.org), and we can get most, if not all, the information needed for the lawsuit right there.  It’s great.

On the flip-side, however, this transparency may not always be the best from an owner/officer perspective.  Besides making it easy for lawyers to prepare lawsuits, Florida companies also open themselves up to «trolls.»

If someone wants to find out whether you have enough assets to be worth suing, they can do a quick search online and see all the ventures you have going in Florida.  Similarly, if you have neighbors or family members that might be prone to jealousy, they can also easily find out what you have going on financially.

This «concern» is very situational, of course.  For many small business owners, having your information in the public record may be of absolutely no consequence. 

In that case, just go ahead and organize in the state where you are doing business.  That is the simplest and most convenient thing to do.  It will simplify setting up company bank accounts, minimize the need for a professional registered agent, etc.  It’s just easier.

Privacy-Conscious States

There are a number of states that are much more protective of a company’s confidential information.  If you go to the State Department’s website in one of these states, you will be able to see that a company exists.  In some cases, you may even be able to see whether the company is currently active.  But, that is about it.  No other corporate information will be available to the public on those websites.

Most of the states in New England tend to guard corporate information, as do the common «asset-protection» states, such as Wyoming, Nevada and Alaska. 

Again, what is best for individual business owners is situational, but an argument could be made that it is really a better business practice to set up in a state that will protect your company’s confidential information.

There is a bit of a trade-off, however.

Registered Agents

If you are going to set up your company in one state, but then do business in another state(s), you will need to hire a registered agent in the state of incorporation/organization.

Example:  You live in Florida and plan to do business in Florida, but you want to incorporate in Delaware.  At the time of incorporation, you will be required to provide a «registered agent» that has a physical location in Delaware.   So, unless you have a buddy in Delaware that is willing to act as registered agent for your company (not a great idea, by the way), then you will have to hire a professional registered agent in Delaware.

The purpose of a registered agent is to receive official documents on behalf of the company, such as lawsuits, governmental correspondences, etc.  Registered agent services are not particularly expensive (less than $100/year is common), but it is an extra step.

Double Registration

Continuing the example above, hiring a Delaware registered agent is not the end of the initial set up.  Since you are planning to do business in Florida, you will still need to register your Delaware company as a «foreign company doing business in Florida.»

If you live in Florida, you have the option of acting as your own registered agent (also not a great idea), so you do not necessarily have to hire a professional company for those services.  Still, you will need to maintain two registrations in two different states.  So, that too is an extra measure.

Thankfully, in the US, all states make it relatively easy and inexpensive to register a business.  The biggest thing is remembering to file annual renewals in both states and keeping the registered agent paid.  If you miss a renewal deadline, your company will be «inactive» or, even, «dissolved.»  And, to reinstate, there is usually a fairly nasty penalty ($400-600).

Asset Protection States

The main reason big corporations have traditionally incorporated in Delaware has to do with the governing statutes.  First of all, Delaware is the state with the most extensive case precedent when it comes to business matters.  That is advantageous because it prevents surprise.

Since almost every corporate situation you can possibly imagine has been litigated at some point in Delaware, you know ahead of time where the Delaware courts stand on all essential issues.

The predictability of Delaware courts is valuable to companies, especially those doing business on a large scale.

Second, the Delaware laws have traditionally been owner/officer/director friendly.  At some point in history, Delaware made conscious decision to be protective of owners/officers/directors in order to encourage companies to incorporate in Delaware.  It worked.

Simply put, Delaware law makes it more difficult to impose personal liability on owners, officers and/or directors for the bad luck, negligence or, even, misconduct of their companies. 

Owners, officers and directors are the decision-makers for their companies, and they like the protection.  So, everyone flocked to Delaware.

Now, because Delaware has been so successful at attracting businesses, certain other states have basically adopted the same laws.  They don’t even try to be subtle about it.  If you look at the case law, you will find judges openly stating «we follow Delaware law.»

As a result, these days, it is no longer necessary to set up in Delaware in order to get the benefits traditionally associated with Delaware.  I refer to the group of states that actively vie for your company’s business through these kinds of incentives as «asset protection states.»

Best Jurisdictions

Delaware

Naturally, you cannot go wrong with Delaware.  The only drawback is that it is a little more expensive than the competition.  At this point, Delaware sees itself as the «gold standard,» so you have to pay a little more to be there.

Nevada

The first state to aggressively compete for corporate filings was Nevada.  I think Nevada wanted to establish itself as the «Delaware of the West.»  And, it was largely successful in this regard.

Progressive states like California and Washington tend to offer more protections to consumers and employees, and less to owners/officers.  So, that created a great opportunity for Nevada to set itself up as the closer-to-home alternative to Delaware.

Unfortunately, Nevada, your recent overhaul of your Corporate Divisions website, and accompanying fee hike, is a disaster.  Your system has become terribly frustrating to deal with.  Even your own employees hate it.  On top of that, you decided to start charging more???  No, I’m out.

Wyoming

These days — at the moment, at least — my favorite asset-protection state is Wyoming. 

Wyoming has a simple, user-friendly online system for registering companies, and the fees are cheaper than the other jurisdictions I have looked at.  Also, you can get a human being on the phone when you need one, and the human will be nice to you.

As for asset-protection, Wyoming staunchly adheres to Delaware law, so you get the same liability limitation features in Wyoming as you would in Delaware.

Other Options

I know from my research that there are some other good options out there as well, most notably Alaska and South Dakota.  I am sure they are lovely.  I just have not had a lot of personal experience with these other jurisdictions.

~ Jeff Harrington, Esq.

The Opportunity Zone program has been around since 2017 but, since the Pandemic, it has received some beneficial tweaks you should know about.

Benefits

Some of the deadlines under the program have already passed, but the benefits still available are impressive.

The first thing you need to understand is that we’re really talking about TWO separate tax-saving opportunities.   We’ll call them GAIN #1  and GAIN #2.

GAIN #1 – Previous Capital Gains

Here, we’re talking about the capital gains you made in 2021 (or the first quarter of 2022).

You’re just sitting on this money at the moment, getting ready to pay taxes on it.  But, hold on.  There is an alternative.

If you act quickly, you can take those gains from 2021 and reinvest them in a Qualified Opportunity Zone Fund.  That will exempt those gains from your 2022 tax return.

Then, you can defer the tax on those 2021 gains until 2027.  So, you have six (6) years in which you can make money on Uncle Sam’s money.  Let me give you an illustration.

Example:  Let’s say you sold real property last year and made a profit of $500,000.  Depending on your tax bracket, you probably owe 20% in capital gains tax on that money, which would be $100,000.  Under this program, Uncle Sam basically says:

You can hold onto my $100,000 as long as you reinvest it in an Opportunity Zone.  And, whatever you earn on that money in the next six years, you get to keep. 

That is not a bad deal AT ALL.  But, brace yourself.  Here comes the crazy part.

GAIN #2 – Capital Gains from QF

Continuing with our example, if you leave that $100,000 investment in the Qualified Fund (QF) for at least 10 years, you are going to get all the capital gains derived from that investment TAX FREE.  Let that sink in.

Example:  Let’s say you find a good QF for your $100,000.  You can probably expect your Fund Manager to grow the fund at a rate of 10% to 15% per year.  That will essentially double your investment in five (5) years.  So, by year five, give or take, your $100,000 investment will have grown to $200,000.  And, by year ten (10), it will be worth $300,000.  That leaves you with a capital gain of $200,000 by the end of the 10-year cycle.

Guess what.  You will pay exactly zero taxes on that $200,000 gain. 

That, my friends, is rather amazing.

Now that we have your attention, look for follow up articles with details on _

• Who can invest in a QF?
• What kind of money qualifies for a QF?
• What kind of projects are in an Opportunity Zone?
• What is the risk analysis for a QF?
• How does a QF compare with a 1031 Exchange?
• Where do I find a QF to invest in?

~ Jeff Harrington, Esq.

The good news is that, for purposes of a QF, what is considered «capital gains» is not just proceeds from the sale of real estate.  In fact, all of the following are qualified capital gains:In order to get the tax advantages available under the Opportunity Zone program, you have to invest «qualified capital gains.»  So, it is not just any kind of money that can be invested in a Qualified Fund (QF).  For example, if you have put away some cash from your regular salary or other compensation, that money will not qualify for the tax benefits because it is not «capital gains.»

• Sale of Real Estate
• Sale of stocks and bonds
• Sale of shares in a corporation
• Sale of a partnership interest
• Sale of cryptocurrency 
• Sale of REIT
• Sale of land
• Sale of machinery
• Sale of timber and other natural resources
• Sale of unharvested crops and livestock
• Gains from leaseholds (at least 1 year old)

So, as long as the funds you intend to invest can be defined as «capital gains,» you can invest in a QF and receive the very advantageous tax benefits of the Qualified Opportunity Zone program.  That is one significant advantage of a QF over the traditional 1031 exchange.

See our related articles for more on how to take advantage of the Qualified Opportunity Zone program:

• What are the benefits of a QF?
• Who can invest in a QF?
• What kind of projects are in an Opportunity Zone?
• What is the risk analysis for a QF?
• How does a QF compare with a 1031 Exchange?
• Where do I find a QF to invest in?

~ Jeff Harrington, Esq.

These QOZs were created to spur economic growth by extending generous tax incentives to investors who invest their qualified capital gains into Qualified Opportunity Funds (QOFs).  Ultimately, the federal program open to ALL investors.

First, be aware that the investor can be either an individual or an entity.  Many people wisely hold their investments in an LLC or trust (even REITs).  That is not a problem.  Also,  the investor, whether an individual or entity, does not have to be a US citizen or US resident.

Foreign nationals can also invest in a Qualified Fund (QF).

If you do your investing through an entity, you will likely want to use that same entity as the «investor» in the QF.  However, if you may not be required to do so.

The analysis turns on the question of «Who is the taxpayor?»

If the investment vehicle you use is a «pass-through» entity, such that you report the gains/losses on your personal return, then you personally are the «taxpayor.»  In that case, you have the option.  You can either make the investment in the QF with the same investment vehicle — usually an LLC or trust–or you can make the investment in your individual name.

By contrast, if your investment vehicle is taxed as a C-corp, then that entity is itself the «taxpayor.»  So, you should use that entity as the investor in the QF.

Caveat:  In order to get into the Opportunity Zone program, you have to invest in a qualified fund (QF).  These QFs are privately owned and managed, so some of them may impose certain restrictions.  One common restriction is that you be an «accredited investor,» as defined in the tax code.  To be clear, this is not a requirement imposed by the federal program itself.  But, you may find it is a criteria imposed by managers of certain QFs

This article addresses just one specific aspect of the Qualified Opportunity Zone program.  Be sure to follow these links in order to get additinal information:

• What are the benefits of a QF?
• What kind of money qualifies for a QF?
• What kind of projects are in an Opportunity Zone?
• What is the risk analysis for a QF?
• How does a QF compare with a 1031 Exchange?
• Where do I find a QF to invest in?

~ Jeff Harrington, Esq.

According to the IRS:

Opportunity Zones are an economic development tool that allows people to invest in distressed areas in the United States. Their purpose is to spur economic growth and job creation in low-income communities while providing tax benefits to investors.

The legislation passed with bipartisan support.  The Republicans liked the tax savings, while the Democrats liked the investment in under-developed neighborhoods.

Where are the Opportunity Zones?

Congress left it to individual states to determine what areas would be designated as an Opportunity Zone.  (See List of Designated Tracts)  There are some nice interactive mapping tools available online as well.

With some notable exceptions, you can expect opportunity zones to be neighborhoods traditionally considered «under-developed» or «disadvantaged.»

Projects Permitted by a Qualified Fund

Keep the purpose of the legislation in mind, you will understand why Qualified Funds (QFs) are not permitted to invest in just any kind of project.  Here are some of the guidelines.

New Construction

QFs are not allowed to buy a property and simply throw some paint on it.  The project must be brand new construction or a «substantial rehabilitation,» which means the QF put more money into the improving the property than it did to purchase the property.

 Examples of Qualifying Projects

Generally, QFs are expected to invest in projects that bring a benefit to the community by creating jobs or otherwise.  Some examples include the following:

• Affordable Housing
• Community Revitalization
• Economic Development
• Infrastructure Investment
• Mixed-use Development
• Multifamily Residential
• Renewable Energy Investment
• Single Family Residential
• Small Business Development
• Workforce Housing

Profitability

Naturally, an important aspect of the projects is profitability.  You can expect good QF managers to make strategic decisions when determining what projects to undertake in the Opportunity Zone.  After all, investors not only receive the capital gains from the projects, but they also participate in the yearly cash flow.

See our related articles for more on how to take advantage of the Qualified Opportunity Zone program:

• What are the benefits of a QF?
• Who can invest in a QF?
• What kind of money qualifies for a QF?
• What is the risk analysis for a QF?
• How does a QF compare with a 1031 Exchange?
• Where do I find a QF to invest in?

~ Jeff Harrington, Esq.

Commonalities

Both 1031 Exchanges and Opportunity Zone Funds, called «Qualified Funds» (QF), give investors incentives to reinvest their capital gains.  Specifically, both programs permit investors to defer paying tax on their capital gains.  That essentially lets an investor make money on Uncle Sam’s money for free.  Legislators use this effective technique to encourage real estate investment and development.  There are, however, important differences between 1031 Exchanges and QFs.

Tax Savings

1031 Exchange – Indefinite Deferral

As many people know, when an investor sells a piece of real estate, the investor has an opportunity to take the initial investment money plus the profit and reinvest both in another property of equal or greater value.  The investor can continue this practice indefinitely, until death, and continue to defer the taxes.  This feature lends itself to investors rolling their money into increasingly expensive pieces of property, thereby growing their asset.  That is very nice, but the investor will eventually have to «pay the piper.»

QF – Deferral plus Forgiveness

Like 1031 Exchanges, QFs also provide tax deferral on capital gains.  One important difference, however, is that the investor will not continue rolling the money over into new projects indefinitely in order to escape paying the capital gains tax.

Under the OZ program, the tax due on the money invested in the QF (Gain #1) will have to be paid in 2027.  So, the ride does come to an end with respect to Gain #1.

However, as for the capital gains made through investment in the QF (Gain #2), that will be tax free as long as you keep the money in the QF for at least 10 years.  So, for Gain #2, you can take your money out without triggering any tax liability at all.

Liquidity; Original Principal

Here is another potential advantage to the OZ program.

1031 Exchange – All or nothing

When you roll your money into a 1031 Exchange, you have to invest all the money you got back from the sale of the property–i.e. both the initial investment and the capital gains.   That is why you will generally buy increasingly expensive replacement properties.  Otherwise, you have to pay taxes on any money not reinvested.

QF – Free up original principal

With a QF, you are not required to roll over the original capital investment.  If you so choose, you could take that money out and just reinvest the capital gains.

1031 Example:  Investor purchased a home for $300,000 and, two years later, sold it for $500,000.  If Investor does a 1031 Exchange, with full tax deferral, he must purchase a replacement property worth $500,000 or more.

QF Example:  Investor purchased a home for $300,000 and, two years later, sold it for $500,000.  If Investor invests in a QF, he can hold onto the $300,000 without any tax reprecussions.  He only needs to put the $200,000 capital gain into the QF.  After 10 years, Investor’s $200,000 investment in the QF generates a gain of $400,000.  At this point, Investor can take all his money out of the QF — i.e. $600,000 — tax free.

Deadlines

1031 Exchange – 45 days & 180 days

With a 1031 Exchange, the rule is that the sale of Property A and the purchase of Property B must be parts of a single integrated transaction.  That is why it is called an «exchange.»

• You have 45 days from the date you sell Property A to identify a potential Property B.
• The exchange must be completed no later than 180 days after the sale of Property A or within 180 of the due date to file your taxes (with extensions), whichever comes first.

The second deadline is not too hard to meet, but the first one can cause some stress.

QF – 180 days

The basic rule is the capital gains must be placed in a QF within 180 days of the sale of the asset.

There are some exceptions, all of which provide additional time for the reinvestment.  For example, if the investor is a partnership, the individual partners have 180 days from the end of the tax year (December 31st) to place the capital gains in a QF.

Note:  There are special rules on the timing for reinvestment of 1231 gains.

Often, an investor that misses the 45-day deadline for a 1031 Exchange can salvage the tax planning by placing the money in a QF instead.   

Control of Funds

1031 Exchange – Qualified Intermediary

As you may have learned from our previous article here, one of the major pitfalls with a 1031 Exchange is that the funds from sale of Property A can never be in the possession of control of the investor prior to purchase of Property B.  That is why it is crucial to use a Qualified Intermediary.  Failing to do so can easily disqualify the entire transaction and lead to penalties.

QF – Relaxed Rule

By contrast, investors in a QF are not subject to any «control» restrictions.  As long as the capital gains from sale of Property A are placed in a QF within the relevant timeframe — which, at a minimum, is 180 days, the tax benefits will be preserved.  That gives investors the ability to use the money in the interim, if they so choose.

Miscellaneous Differences

In some ways, the programs are simply different.  For example, there is no «like-kind» requirement when investing in a QF since the transaction is not strictly an «exchange.»

Similarly, when investing in a QF, the funds can be any kind of capital gains or 1231 gains.  (Click here for a list of qualifying funds)    With a 1031 Exchange, of course, the only money that can be reinvested is the original principal and capital gains from Property A.  So, the Opportunity Zone program is much broader in this sense.

Lastly, a QF is likely to bring some measure of diversification to the investment.  Most QFs are large enough to hold multiple projects of differing types.  (Click here for examples of qualifying projects).  That aspect potentially reduces risk, as compared to a 1031 Exchange, where all the money from Property A must go into Property B.

Conclusion

Objectively speaking, the Opportunity Zone program does seem to have certain advantages over the traditional 1031 Exchange program.  But, that is not to say investment in a QF is for everyone.

For example, I have investor clients who enjoy the «hands on» aspect of developing one project, selling, and reinvesting in another.  1031 Exchanges are perfect for them because they remain in control of all their projects, and they enjoy the work.

For most other investors, though, the Opportunity Zone program is an absolute jewel.  And, unless Congress decides to extend the program, it will not be available for too much longer.  So, get in while you can.

Now that we have your attention, look for follow up articles with details on _

• What are the benefits of the Opportunity Zone program?
• Who can invest in a QF?
• What kind of money qualifies for a QF?
• What kind of projects are in an Opportunity Zone?
• What is the risk analysis for a QF?
• Where do I find a QF to invest in?

~ Jeff Harrington, Esq.

Unemployment Benefits under CARES Act

First, understand that unemployment benefits are handled at the State level.  So, that means there will be some delay and inefficiency in getting from Point A (federal legislation) to Point B (actual checks in the mail), and there will be some differences from State-to-State.  Our firm is headquartered in Florida, so we will provide some additional detail for Florida businesses.  That said, here is basically what everyone can expect.  Request Consultation

Pandemic Unemployment Assistance

The CARES Act includes a Pandemic Unemployment Assistance program (“PUA”), which expands the definition of a “covered individual.”

Eligible Workers

• full and part time employees (W-2)
• self-employed
• independent contractors (including gig workers)
• religious workers (workers laid off from churches)
• workers who do not have sufficient work history to normally qualify under State law

Qualifying Criteria

Workers who cannot work due to any one of the following circumstances:

• diagnosed with COVID–19 or experiencing symptoms and is seeking diagnosis
• a member of a household where someone has been diagnosed with COVID-19
• provides care for a family member or a member of the household who has been diagnosed with COVID-19
• takes care of a child or other person in the household who is unable to attend school or daycare as a result of COVID-19
• cannot reach the workplace because of a quarantine or isolation order
• has been advised to self-quarantine due to COVID-19 concerns
• was scheduled to commence employment (i.e. does not currently have a job) but now cannot go in due to COVID-19
• has become the breadwinner or major supporter for a household because the former head of the household died as a result of COVID-19
• had to quit his or her job as a direct result of COVID-19
• cannot work because the place of employment is closed as a result of COVID-19 (telework not an option)

Available Benefits

Covered individuals get the amount they would normally receive under State unemployment law (maximum of $275/week in Florida), plus an additional $600 per week.

So, a Florida employee could potentially get $875/week or $3,500/month.

How long do benefits last?

As long as the unemployment is due to the Coronavirus, regular benefits can extend up to 39 weeks in most states. However, the extra $600 per week is only available through July 31, 2020.  Note: Florida only provides 12 weeks of unemployment benefits. So, in Florida, once the 12 weeks runs out, the worker will continue to get just the $600/week under PUA.  Request Consultation

What is “furlough”?

Furlough is an unpaid leave of absence.  So, technically, the workers still retain their positions, but they cease working and do not earn a salary.  The idea, of course, is that furloughed workers will one day return to their jobs.  Also, workers usually continue to receive their company benefits during the furlough.

By contrast, being terminated or laid-off is permanent.  If the worker comes back to the company after being terminated or laid-off, then that “return” is actually new employment.  All previous arrangements are open for renegotiation.  That may be beneficial for the company, or maybe not . . .

Usually, furlough is temporary and short-term.  Otherwise it would make more sense to both the company and the worker to just terminate the employment and move on.  However, there is no defined limitation on how long a furlough can last. So, under the current circumstances, where workers probably cannot get another job for as long as the Coronavirus crisis continues, it seems likely we will see unusually long furloughs.

Advantages to furlough?

Yes, probably.  For most business owners, telling workers they are «furloughed» is a lot easier than saying «terminated.»

Most importantly, furloughed workers are entitled to unemployment benefits, including the extra PUA money.  So, as a business owner or manager, you do not have to terminate workers in order for them to receive benefits.

Let me hasten to qualify this statement by saying that, normally, whether a furloughed worker can collect unemployment or not is determined at the State level. Under PUA, though, the federal government has extended benefits to all furloughed employees as long as the meet the criteria above.

As a business owner, you would probably prefer to bring back your staff out of a sense of loyalty, as well as the fact that they are already trained.  So, the furlough option may be one to carefully consider.  Request Consultation

Potential Drawbacks

Taxable Income

As it stands now, these PUA payments will be counted as income for tax purposes as well as for determining eligibility for some welfare programs, though not for Medicaid or Children’s Health Insurance.  This may be only a minimal concern, though, since nobody is going to get rich off of unemployment payments, even with the extra PUA money.

Unemployment Tax Liability

If you are wondering if your business is going to have to pay higher unemployment rates in order to compensate for the additional payments to employees, the answer is «maybe.»  The CARES Act does not address this issue, probably because unemployment is administered at the State level.  So, the answer could be different on a state-by-state basis.  It is still too early to provide much guidance in this regard.  And, as a practical matter, it probably will not affect your decision-making, especially given the CARE Act tax breaks for businesses.

Other Considerations

Immediate Availability.  The normal one-week waiting period is waived under the PUA. So, unemployed or furloughed workers can apply immediately for unemployment benefits.

This is important because we are still waiting for the Families First business loans to become available.  However, the paid leave requirements went into effect April 1, 2020.  So, for companies that are in real danger of running out of money, terminating or furloughing can be a stop-gap measure.

Short Term/Work Share Programs.  This might make sense to a lot of employers. The concept of Work-Sharing or Short-Term compensation is where the company does not have enough work to give someone a full-time position but does have some work to offer. The conundrum for some workers is that they face losing their unemployment benefits if they take on work. That creates a sort of all or nothing scenario for them. It can be a disincentive to taking on partial or temporary work.

This kind of perverse disincentive is resolved by States that allow such short-term/work-share without penalty. Florida does have a short-term/work-share program, which could be very useful for businesses that have not completely shut down but are significantly affected by the Covid-19 crisis.

Our firm plans to discuss this option on a client-by-client basis.  Request Consultation

Conclusion

So, now you have all the pieces of the puzzle and can put together a plan of action for your business: business loans, tax breaks, paid leave, and unemployment. We all want what is best for our employees and, presumably, helping the company survive the Coronavirus crisis is in the employees interest. They will understand that. Now, it is a numbers game.

Understanding the interplay between the available business loans, tax breaks, paid leave obligations and unemployment benefits is the whole game at this point.  You have to weigh your options and make the best choices you can for your business. 

April 1, 2020 is here, so it is time to make decisions.  Our firm is here to help.  Request Consultation

~ Jeff Harrington, Esq.

The paid leave requirements come under the Families First Coronavirus Response Act (FFCRA).  There are two separate Acts that apply to all businesses (and non-profits) with fewer than 500 employees: the Emergency Paid Sick leave Act (EPSLA) and the Emergency Family and Medical Leave Expansion Act (EFMLEA).  Request Consultation

Beware: Both the EPSLA and the EFMLEA are in effect from April 1, 2020 to December 31, 2020.  And there are penalties for non-compliance.

Emergency Paid Sick leave Act (EPSLA)

What workers are eligible?

All W-2 employees, both full and part time, that have one of these six (6) situations:

Personally affected:

1. Is subject to a federal, state, or local quarantine or isolation order
2. Has been advised by a healthcare provider to self-quarantine
3. Is experiencing COVID-19 symptoms and is seeking medical diagnosis

Caretaker of affected person:

1. Is caring for an individual subject to a quarantine/isolation order or medical advice to self-quarantine
2. Is experiencing any other substantially-similar condition specified by the Secretary of Health & Human Services
3. Is caring for a child whose school or care provider is closed or unavailable

How much time and pay?

Full-time employees get up to 80 hours, and part-time employees get up to two weeks. As for calculating the amount of pay the employee can get, it actually depends on the reason for the leave.

If the employee falls into the «Personally Affected» category above, then

• Pay at regular rate under the FSLLA (capped at $511/day and $5,110 in the aggregate over a 2-week period)

For those employees that fall into the «Caretaker» category above, then you have to break it down a little further:

• If the employee is caring for someone else who is subject to a quarantine or isolation order (or who has been advised to self-quarantine) OR who is subject to another substantially similar condition specified by the regulatory agencies, then

Pay at 2/3 their regular rate under the FLSA (capped at $200/day and $2,000 in aggregate over a 2-week period, up to 80 hours).

• If an employee is caring for a child because school or care is unavailable, then

Pay at 2/3 of regular rate or 2/3 the applicable minimum wage, whichever is higher, up to $200 per day and $12,000 in the aggregate (over a 12-week period – two weeks of paid sick leave followed by up to 10 weeks of paid expanded family and medical leave).

And, as Employer, you cannot _

• offset this emergency sick leave with other sick leave already provided by employee contract or state law
• require your employee search for a replacement worker to cover the hours for which he/she is receiving paid sick leave
• require your employee use other paid sick leave prior to using this emergency paid sick leave.

The only carve-back is that employees cannot carry over the emergency paid sick leave to subsequent years.

An employee may choose to substitute accrued vacation leave, personal leave or medical/sick leave for the first two weeks of the leave.  That is up to the employee, though. You, the employer, do not get to decide.

How can your company afford this?

There are two forms of aid coming your way. The first, and probably the most important, is the business loans  under the Paycheck Protection Program and Economic Injury Disaster Loans.  Read more here.  Florida, and other states, will offer business loans as well, though with terms less favorable than the federal programs.

The other help is tax breaks.  For details on the Employee Retention Tax Credit and Payroll Tax Delay, go here. There is even a way to get some of the credits paid to your business in advance.

For some companies, though, these aids may not be enough. In that is your situation, then you will have to make your case for exemption.

Are there any Exemptions?

Yes.  You will have to apply to the Department of Labor (DOL) and show your business has fewer than 50 employees and that compliance with the new provisions would jeopardize the viability of the business.  Additionally, the Act does not apply to employees who are healthcare providers or first responders.

For many, the magic words are “jeopardize the viability of the business.” We will find out more about what exactly that means as the DOL starts making decisions.

If your business cannot afford to comply with the paid leave requirements, consider hiring counsel to help obtain the exemption.  Request Consultation

Emergency Family and Medical Leave Expansion Act (EFMLEA)

Here the situation is a little different because we already have the Family and Medical Leave Act.  The EFMLEA is just an amendment to the existing law. So, all the provisions of the Family and Medical Leave Act that do not conflict with the following continue to be in full effect.

Who is eligible?

Employees that

1. have been with the company for at least 30 days prior to the leave
2. are unable to work (or telework) because they need to care for a minor child due to (i) closure of school or daycare center or (ii) care provider’s unavailability.

How much time and pay?

• Unpaid leave for the first 10 days, although employees can elect to use any other accrued paid leave, including personal, vacation or sick leave (including emergency paid sick leave).
• After 10 days the emergency leave becomes paid leave. The total leave can extend up to 12 weeks.
• Employees are required to be paid at a rate equal to at least 2/3 their regular rate of pay multiplied by the number of hours in their average work week, not to exceed $200 per day or $ 12,000 total (over a 12-week period).
• Employees who take emergency leave are entitled to job restoration rights unless the employer has fewer than 25 employees.
  • Fewer than 25 employees – the employer meets its obligations if the previous position no longer exists due to the emergency and the employer makes reasonable efforts to return the employee to an equivalent position — including benefits, pay and other terms of employment — at some point during the one-year period beginning from when the employee’s leave ends or 12 weeks after the leave begins, whichever comes first.

WHAT ELSE SHOULD YOU KNOW?

This part applies to both Acts:

Posted Notice

Employers must post a notice of FFCRA requirements in a conspicuous place at the job site.

Penalties and Enforcement

Employers in violation of the first two weeks’ paid sick time or unlawful termination provisions of the FFCRA will be subject to the penalties and enforcement described in Sections 16 and 17 of the Fair Labor Standards Act 29 USC 216; 217.

• Employers in violation of the provisions providing for up to an additional 10 weeks of paid leave to care for a child whose school or place of care is closed (or child care provider is unavailable) are subject to the enforcement provisions of the Family and Medical Leave Act.
• The Department will observe a temporary period of non-enforcement for the first 30 days after the Acts takes effect, so long as the employer has acted reasonably and in good faith.
• For purposes of non-enforcement, “good faith” means the violations are remedied and the employee is made whole as soon as practicable by the employer, the violations were not willful, and the Department receives a written commitment from the employer to comply with the Act in the future.

Prohibitions

Employers may not discharge, discipline, or otherwise discriminate against any employee who takes paid sick leave under the FFCRA and files a complaint or institutes a proceeding under or related to the FFCRA.

Understanding the interplay between the available business loans, tax breaks, paid leave obligations and unemployment benefits is the whole game at this point.  You have to weigh your options and make the best choices you can for your business. 

April 1, 2020 is here, so it is time to make decisions.  Our firm is here to help.  Request Consultation

~ Jeff Harrington, Esq.

Payroll Taxes

For most companies, the most notable tax relief under the CARES Act relates to payroll taxes coming due from April 1, 2020 – December 31, 2020. There are two categories, each with slightly different benefits and criteria.

Employee Retention Tax Credit

There is a «refundable tax credit» equal to 50% of employee compensation available to all businesses, both big and small, that _

(i) continue to pay their employees
(ii) do not receive Paycheck Protection loans
(iii) have been fully or partially suspended as a result of government order OR suffered a 50% reduction in quarterly receipts due to the Coronavirus crisis

Amount of Credit

Businesses with fewer than 100 employees – May claim a credit for wages paid to employees, with a cap of $10,000 per employee.

Businesses with more than 100 employees – Get a credit for employees who are furloughed or whose hours are reduced as a result of business closure or economic hardship.

Applying for the Tax Credit

So, what is a “refundable tax credit”? How does this actually work?

When you file your company’s quarterly payroll tax, you can take a credit equal to 50% of what you pay employees.  If the credit you claim is greater than the tax liability, you will receive a refund for the difference.

What are the limitations?

There are no restrictions on business size.  You do have to meet the three criteria above, though.

Payroll Tax Delay

You know the employer portion of the payroll taxes you normally have to pony up every pay cycle?  Under the CARE Act, your business can defer those payments through the end of 2020. In effect, the delay is like an interest-free loan.

Requirements

(i) continue to pay employees
(ii) do not take a Paycheck Protection loan

Payback

The deferred payroll taxes can be paid back in two installments. The first half (50%) is due by December 31, 2021, and the second half (50%) by December 31, 2022.

Defer-able Portion of Payroll Taxes

Your company can defer all of the following:

– employer portion of FICA taxes
– employer and employee representative portion of Railroad Retirement taxes
– half of SECA tax liability

Other portions of your company’s payroll taxes, such as amounts charged by your State, are not affected by the CARE Act.

Advance Payment of Tax Credits for Paid Leave

If your business is required to provide paid leave to employees due to the Families First Act, then you may be wondering how you can afford that. This may help.

The CARE Act allows the US Treasury to send advance payments of tax credits. The details are still sketchy, but it appears the calculation will be based on a projection as follows:

Company liability for payroll taxes minus Payroll Tax Credits available under CARE Act =

(A) remaining amount due to be paid to the IRS

OR

(B) excess credit due to the company

If, in your case, the result is (B), then you can apply to have the refund sent to you in advance. Having those funds in-hand may help your company meet its obligations to pay for employee leave during the crisis.

The emergency paid leave provisions go into effect April 1, 2020. For more details on your company’s obligations under Families First Coronavirus Response Act, click here.

Net Operating Losses

The Tax Cuts and Jobs Act of 2017 put restrictions in place regarding Net Operating Losses (NOLs), such as (i) limiting NOLs to 80% of taxable income, and (ii) eliminating NOL carrybacks to prior years. The CARE Act modifies these restrictions . . . in your favor.

CARRYBACKS

Your business can now carryback NOLs for the last five (5) years, meaning 2015 to 2020. This effectively delays the 80% taxable income limitation until 2021, while at the same time providing retroactive relief for the past five (5) years.

CARRYFORWARDS

First, your business can now deduct its NOLs up to 100% of taxable income, as opposed to be limited to 80%. Second, for taxable years after 2021, the business can write off all its NOLs for tax years prior to 2018. Finally, your business can take a deduction up to 80% of modified taxable income for NOLs arising in tax years after 2017.

Other Limitations on Losses (less common)

The CARES Act retroactively suspends the current rule that limits deductible business losses. The limitations were previously effective as of 2018 but have now been pushed back to 2021. The same is true for active farming loss rules.

Corporate Alternative Minimum Tax
The CARES Act allows corporations to claim 100% of AMT credits in 2019 as fully refundable and also provides an election to accelerate claims to 2018. Previously, there were limits to how much AMT credit a corporation could take.

Business Interest Deduction
The CARE Act permits businesses to elect to increase the interest limitation from 30 percent to 50 percent of ATI for 2019 and 2020. Further, businesses may elect to use 2019 ATI in calculating their 2020 limitation. There is a special rule for partnerships, which allows 50 percent of any excess business interest allocated to a partner in 2019 to be deductible in 2020, rather than being subject to the ATI limitation. The remaining 50 percent of excess business interest from 2019, however, is subject to the ATI limitation.

Property Improvement
This one may interest our clients who own restaurants or commercial building, as well as those in real estate investment (i.e. fix and flip). The CARE Act will permit you to immediately deduct the expenses of property improvements or depreciate over 20 years. Previously, you had to depreciate over 39 years.

Alcohol Taxes on Hand Sanitizer
The CARES Act exempts undenatured spirits from excise taxes for those distillers that are producing hand sanitizer on an emergency basis.

So, what is our take-away from all of this?  For one thing, you are going to be spending some quality time with your accountant and/or tax attorney.  Beyond that, my feeling is that these tax benefits will be of great interest to businesses that have done well in past years and do not really need or want business loans.  For a lot of businesses that are «at risk,» these tax breaks may not be enough.

Understanding the interplay between the available business loans, tax breaks, paid leave obligations and unemployment benefits is the whole game at this point.  You have to weigh your options and make the best choices you can for your business. 

April 1, 2020 is here, so it is time to make decisions.  Our firm is here to help.  Request Consultation

~ Jeff Harrington, Esq.