Thirty years ago, when I was a real accountant (haha), January was one of the most hectic months of the year. The preparation of annual payroll tax returns marks the quiet beginning of tax season. You should now start to receive W-2’s, 1099’s, and other tax forms to be set aside for the preparation of your 2020 individual income tax return. Many of our regular readers are now working from home on either an intermittent or permanent basis. For those of you in this category, you may be able to take advantage of the employee home office deduction. In the past, the standards for deducting home office use have proven notoriously prohibitive. Pursuant to the 2018 Tax Cuts and Jobs Act, requirements for W-2 wage earners clearly stipulate that for its costs to qualify, a given home office must: Be used at the convenience of the employer Constitute a specifically allocated area used expressly for work-related purposes and Have space for storing work-related materials. There are of course numerous other requirements, but historically these have proven sufficient barriers for many remote employees. But since the advent of COVID-19, two novel legislative pathways have opened up: Section 139 (Disaster Relief Payments) and Section 165 (Losses) The primary purpose of this blog post is to briefly discuss both of these two sections of the Internal Revenue Code. Section 139 (Disaster Relief Payments) Section 139 provides that any funds an individual may receive as Qualified Disaster Relief Payments cannot be included in […]
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Home Office Deduction Considerations During COVID-19
Posted in Economic Damages, on Jan 2021, By: Mark S. GottliebShare
What To Consider In Determining Owner’s Compensation
Posted in Business Valuation, on Jan 2021, By: Mark S. GottliebShare
Whether a company is being valued for a shareholder or an equitable distribution dispute, one of the most common normalization adjustments to a subject company’s income stream is owner compensation. Both the Court and the IRS tend to closely scrutinize this issue, with the IRS in frequent disagreement as to the reasonableness of shareholder-employee compensation. For income tax purposes, business owners typically prefer to classify payments as tax-deductible wages. This allocation reduces both their corporate taxes and their federal taxable income. As one might imagine, the IRS is correspondingly meticulous in its examination of these classifications. If it believes that owner compensation is excessive, it may claim that non-deductible dividends have been disguised as compensation. As they pertain to business valuation, the determination and application of reasonable shareholder-employee compensation are similarly contentious. The correlative relationship between owner compensation and cash flow means that when compensation is inflated, the available cash flow is reduced. Correspondingly, the indicated value under the income approach will be likewise reduced. But whether challenges to owner compensation emanate from taxing authorities or a rival valuation expert, the case law in this area strongly indicates that there is no global rule of thumb – reasonable officer compensation is determined according to the particular circumstances of an individual case. It is for this reason that Trial and Appellate Courts often struggle to resolve questions regarding reasonable officer compensation. For non-valuation professionals, this confusion is perhaps attributable to the number and diversity of sources used to ascertain reasonableness. […]
The Biden-Harris Ticket Promises To Make Major Tax Changes. Your Clients May Want To Act Now.
Posted in Business Valuation, on Nov 2020, By: Mark S. GottliebShare
This has certainly been an eventful week. My beloved New York Mets were sold. Although I believe Steve Cohen will be up to the task, I am somewhat resentful that my bid to purchase the Amazins was rejected. On the other side of the plate, Joe Biden can claim victory in the turbulent presidential election. Despite the possible legal battle, it appears that the Biden-Harris battery is now warming up for a January 2021 inauguration. President-elect Biden has made no secret of his intent to raise $3.5 trillion in taxes over the next ten years. The intended contributors will be corporations and individuals earning over $400,000 per year. Conversely, lower-income taxpayers may benefit from tax-cutting incentives from items such as refundable credits, etc. Biden’s ability to effectuate any tax change heavily depends upon the Democrats’ ability to win both the House and Senate. The Democrats currently hold a majority in the House of Representatives but are taking swings at the two remaining Senate seats up for grabs. If the Democrats sweep both available seats and get a 50/50 split in the Senate, then the Biden tax reform vision could theoretically be passed without a single Republican defector. Pending a home-field advantage, the Biden tax reform could pass via a Budget Reconciliation which will not require 60 votes for passage. Alternatively, they will only need a majority of 51 votes. Assuming everyone votes along the party line, Vice President-elect Kamala Harris will cast the deciding vote. Without the benefit of […]
What Has COVID-19 Taught Us About Neutral Experts?
Posted in Business Valuation, on Oct 2020, By: Mark S. GottliebShare
The news cycle is currently inundated by the testimony of medical professionals of various backgrounds and experience, and as we have seen, their opinions and advice can starkly differ. While many have advocated for social distancing and the use of masks, others have sought to cast doubt on the productivity of these measures, claiming either that they are unnecessary or that they have no impact on the virus’s transmissibility. Recently, lawyers for the CT Freedom Alliance offered two medical expert witnesses that were subsequently rejected on the basis that neither was sufficiently qualified to serve as an expert. In response to one individual’s previous attestations that viruses are nonexistent and vaccines poisonous, Judge Thomas G. Moukawsher expressed his clear inclination that established scientific evidence should not be disputed. This is an extreme example but one that bears mentioning. Judges are frequently confronted with radically opposing partisan expert opinions. Irrespective of their familiarity with the subject at hand, they must decide as to which opinion is most correct. With regards to COVID-19 and the preventative measures thereof, there are a sufficient number of credible and widely circulated opinions as to make the credibility (or lack thereof) of witnesses such as those described above relatively obvious. But what of matters that concern subjects that aren’t so broadly known? Let us take for example the industry accepted principles and standards in business valuation. In a matrimonial, shareholder, or estate dispute, it is often that both parties hire a business valuation expert. Occasionally, […]
For those of you familiar with our valuation and forensic reports, you know first-hand that we use various tools to analyze and illustrate the financial capacity of a subject company. To examine financial characteristics, we often compare the subjects’ financial ratios to their peer group. For example, the subject company may report travel and entertainment expenses as 5.0% of annual sales. If the subject company reports T&E at 15.0% of sales, further investigation may indicate that this category contains excess owners’ perquisites. To illustrate these and other financial trends, we use charts and other demonstratives. One of my favorite analytical tools is a SWOT analysis. SWOT is an acronym that stands for strengths, weaknesses, opportunities, and threats. Strengths and weaknesses generally refer to: • Financial resources (funding, sources of income, and investment opportunities) • Physical resources (location, facilities, and equipment) • Human resources (employees, volunteers, and target audiences) • Access to natural resources, trademarks, patents, and copyrights, and • Current processes (employee programs, department hierarchies, and software systems) While opportunities and threats consider: • Market trends (new products, technology advancements, and shifts in audience needs) • Economic trends (local, national, and international financial trends) • Funding (donations, legislature, and other sources) • Demographics • Relationships with suppliers and partners • Political, environmental, and economic regulation We commonly illustrate the SWOT analysis in chart form, which draws the reader’s attention to those areas of greatest significance. Another tool we frequently use is Michael Porter’s Five Forces theory. For those of […]
Do You Remember When Alimony Was Deductible?
Posted in Divorce & Matrimony, on Sep 2020, By: Mark S. GottliebShare
As the summer nears its conclusion, those individuals that previously applied for an extension to file their 2019 individual income tax returns are becoming increasingly aware of the impending October 15th deadline. Couples that divorced after the Tax Cuts and Jobs Act (TCJA) of 2017 are already cognizant of the changes affecting alimony. Before the TCJA, alimony received was taxable to the recipient, and deducted, dollar for dollar, by the payer in the determination of their adjusted gross income. Thus, deductibility of alimony historically provided specific incentives in negotiating a divorce settlement. For couples divorcing after the TCJA, the payment and receipt of alimony is neither deductible nor taxable. In many instances, this change has created a significant tax burden for those paying alimony. While this change has been effective now for several years, our firm still get requests from attorneys to quantify the lost tax benefit resulting from the change in the tax law. Today, we revisit how this change affects those paying alimony. Let us take for example a taxpayer (filing single and utilizing the standard deduction) who earns a salary of $75,000 per year and pays annual alimony of $21,000. As the following table illustrates, the taxpayer’s income tax liability will increase by $6,700 or 71.3% resulting from of the tax law change. OLD LAW NEW LAW Wages $ 75,000 $ 75,000 Alimony 21,000 0 Adjusted Gross Income 54,000 75,000 Standard Deduction Filing Single Taxable Income $ 41,800 $ 62,800 Federal Taxes 5,100 9,700 NY State […]
Valuing Promissory Notes In Difficult Economic Times
Posted in Business Valuation, on Jun 2020, By: Mark S. GottliebShare
Despite the recent partial rebound of the stock market, the economic realities developed in the second quarter of 2020 is having a devastating effect on the economy. Unemployment is at an alarming rate, several prominent businesses have declared bankruptcy, and many businesses, small and large, are debating their future. That being said, this new reality may provide estate planning opportunities to reduce gift and estate taxes. In this blog, I’d like to discuss the valuation of promissory notes and how their valuation may be affected during times of economic hardship. Promissory notes are commonly used to transfer assets between family members. Sometimes these notes are part of a gifting program; other times, it may be an asset of an estate. In either instance, the note needs to be valued. Standard of Value The standard of value in gift and estate matters is fair market value. Fair market value is defined in Revenue Ruling 59-60 [2.2 Section 20.20231-1(b) of the Estate Tax Regulations (Section 81.10 of the Estate Tax Regulations 105) and Section 25.2512-1 of the Gift Tax Regulations (Section 86.19 of Gift Tax Regulations 108)] as “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” The fair market value standard assumes that the price is transacted in cash or cash equivalents. Court decisions […]
Did Shake Shack Commit Fraud When They Applied For PPP?
Posted in Financial Advisory, on Apr 2020, By: Mark S. GottliebShare
Many law firms and their clients have applied for the available federal and local loan and grant programs. Despite the promise for quick financial assistance, many businesses (including law firms) still face financial difficulties due to the Coronavirus Pandemic. The Payroll Protection Program (“PPP”) was established to provide immediate financial assistance to businesses that employ five hundred employees or less. The money set aside for the PPP was entirely distributed within days after the application process began. We are now hoping that the government replenishes the program. As it turned out, a significant amount of this money was disbursed to businesses that technically meet the SBA’s criteria, but are actually much larger companies, which are not intended to benefit from this stimulus package. Companies, such as Shake Shack, are returning the $10 million it received in the hopes that the money will be redistributed. Shake Shack is not the only large company to have benefited from having the infrastructure to quickly get ahead of the line for this money earmarked for small businesses. The realization that our economy’s financial weaknesses are now being exposed. Despite the prior peaks in the stock market, it is now clear that the adage: “What’s good for General Motors is good for America,” is just not true. Despite the current financial assistance being offered, tens of millions of workers are now unemployed, and many businesses are not expected to withstand the financial pressures caused by the current business interruption. Individuals and business owners are […]
Lost Profits v. Loss of Business during the Coronavirus Pandemic
Posted in Uncategorized, on Mar 2020, By: Mark S. GottliebShare
Last week’s blog inspired a lot of conversation regarding the economic impact of the coronavirus virus. I have received numerous phone calls and emails from attorneys and business owners inquiring about our damage calculation services. Yesterday, my wife and I took a short walk near our New York City apartment. As we witnessed many store owners covering their windows with plywood in anticipation of their planned “temporary closure,” I wondered how many of these businesses would be able to weather the storm of this pandemic. Our firm just reached our 30th anniversary. During this time, we have worked with businesses of various sizes and sophistication. One of the differences between the two, other than size, is that these businesses often differ by their access to capital. Small and medium-sized companies have always been considered riskier by lenders and investors. Many of those small business owners whose shops line Main Street, USA are covering their windows with plywood panes, and many may never open again. Only time will tell as to which ones survive. With that being said, your business clients may now be considering filing a damage report. This analysis may look to calculate either lost profits or lost business. In either case, the objective is to restore the plaintiff to the position it would have been – “but-for” the event that caused the damages. Lost Profits When calculating lost profits, damages are typically measured for a specific or limited period of time. In general, the loss is the […]
Filing a Business Interruption Claim Following the Coronavirus
Posted in Economic Damages, on Mar 2020, By: Mark S. GottliebShare
Like you, I woke up today to numerous news programs discussing the coronavirus. Aside from the health concerns, it has become apparent that businesses, large and small, national and local, are being affected. Some have stated that this week’s events have the potential to be the most catastrophic economic challenge in generations. With no immediate correction anticipated, business owners may be considering filing a business interruption claim. Business interruption insurance can provide much-needed assistance when disaster strikes. But filing a claim requires detailed analysis and documentation to allow the business owner to focus on recovery efforts. What’s covered? Most business interruption policies require the insured to file a detailed “proof of loss” within a short period (30 days, for example) after a loss occurs. But before estimating losses, it’s critical to review the scope of coverage. Policies typically reimburse the insured for lost business income (profits) during the loss period. Some also offer more extensive coverage. Here are just a few examples. Extraordinary expenses. Some policies will reimburse the insured for repairing damaged inventory and equipment, as well as the cost of operating the business at a temporary location until the original location is restored. “Denial of access” losses. This can occur when a natural disaster or other incident causes governmental authorities to block access to a company’s property for security reasons, even if the property isn’t damaged. Rebuilding costs. Depending on the policy language, some courts have found that the insured should be reimbursed for the extra cost […]