By John A. Moscati, Jr.
Lose weight, exercise more, spend more time with my family . . . making and breaking New Year’s resolutions is all the rage this time of year. When it comes down to it, most resolutions revolve around trying to establish good habits, or break bad habits. Why not use the New Year as an opportunity to establish some good and break some bad business habits as well!
Here are five “New Year’s Resolutions” that we suggest you consider adopting for your business as you head into 2015:
- We Will Keep Our Minute Book Up to Date. All corporations, and most LLCs should have regular meetings of their governing board. Minutes of these meetings (or written consents, where meetings are not held) should be recorded in the business’ minute book. At a minimum, one meeting a year is recommended for most businesses, with additional meetings (or action by written consents) when significant issues arise. January is a perfect time to update your minute book to catch up on decisions that were made during the prior year that might qualify as being “outside the ordinary course of business.” This can include things like bonuses, executive compensation, entering into new leases, equipment purchases, etc. Having these items formally approved by your governing board shows that your business is “respecting the corporate formalities” which can be a key issue in protecting officers and directors from potential personal liability.
- We Will Schedule and Hold an Annual Meeting of Shareholders or Members. Most corporations and LLCs are required to hold an annual meeting of their shareholders or members. Many fail to do so. This can result in shareholder dissatisfaction and a lack of confidence in management. Ultimately, if shareholder meetings go unheld for too long, it can expose the business or individual managers to liability. Holding an annual meeting does not need to be a confrontational exercise. Generally, it is an opportunity for management to tell shareholders or members how the business performed in the prior year, keep them informed about plans for the coming year and have the shareholders vote to re-elect the Board of Directors or managers. The election of the board is generally the only real business item on the agenda at the annual meeting.
- We Will Update Our Buy-Sell Valuation. Many businesses have Buy-Sell Agreements among the owners which call for the value of the business to be agreed upon annually, or uses a formula to determine the value of the company. As tax returns and financial statements are being completed, it is a good time to look at your Buy-Sell Agreement and verify that any agreed upon value or valuation formula in the Agreement still works for the business.
- We Will Put Commission and Bonus Agreements in Writing. Many states, including New York, require that employers enter into a written agreement with any employee who is paid on commission. Failing to have a written agreement can result in a presumption that the employees’ recollection of the commission structure is the correct one. This can result in significant expense when a dispute arises. Commission agreements do not need to be complicated, they just need to get done!
- We Will Update Our Employment File, Notices and Posters. Both state and federal employment laws require the posting of certain notices in the workplace. Similarly, there are rules requiring that written notice of compensation be provided to employees on an annual basis. Finally, all employers are required to maintain up-to-date employment documentation for their employers. The start of a new year is a good time to make sure you are in compliance with these rules. Many payroll services will assist you in maintaining compliance if you ask.
Happy New Year and good luck keeping your 2015 New Year’s business resolutions!
By Matthew K. Pelkey
Over the coming months we will explore the various legal issues facing distilleries, brewers and wineries in New York State. This first part of the series will explore what goes into a startup distillery in New York.
Recent changes in New York State regulations have made starting a distillery a viable consideration for those in—or desiring to be in— the craft beverage industry. Indeed, since loosening these regulations, New York has seen unprecedented growth of producers of craft spirits.
This inevitably leads to a thought amongst so many of us: how do I go about starting a distillery?
Well let’s get one thing unequivocally clear from the beginning: starting a distillery in New York is not as simple as starting a brewery or a winery. And rightfully so—distillation after all produces high grade ethanol, which for those of us who did not pay attention in chemistry class, is highly flammable. Distillation is a craft, and a craft that while enjoyable, needs to be given some fairly serious consideration and respect.
Unlike breweries and wineries, home-distilling (or moonshining as it is more commonly known) happens to be a felony in New York. In fact, owning, operating, possessing, or controlling a still for production of ethanol without a proper license is also a felony regardless of whether a still is even used. Oh yeah, and if that weren’t enough, even selling a still to someone lacking a proper license is a felony in New York.
There simply is no such thing as a legal “home-distiller” of ethanol for use as spirits in New York. The distilling industry is a highly regulated one at both the state and federal level. To successfully open a legal distillery, one will have to navigate a myriad of regulations from the New York State Liquor Authority (“SLA”), the Alcohol and Tobacco Tax and Trade Bureau (TTB), New York State Department of Taxation and Finance, and the New York State Department of State.
Zoning: Depending on where your distillery is located, you will likely also need to obtain zoning approval to legally operate. In the City of Buffalo, you will need to be zoned for manufacturing which requires, amongst other things, a valid lease or cooperation from the existing landlord or owner of the intended property. Properly structuring and negotiating a lease can mean the difference of tens of thousands while permitting is being completed.
TTB Approval: The “basic” federal distilled spirits permit is the first permit on your way to becoming a distillery. It will require submission and review of the principals’ tax history, criminal records, architectural drawings of the building, a lease, a bond/surety to cover estimated excise tax liability, the equipment intended for use and a thorough review of the company’s corporate structure and ownership.
SLA Approval: The New York State Liquor Authority will likewise conduct an extensive review of the proposed distillery including but not limited to a background check, financial review of the owners and principals, review of the finances for the distillery, and finger printing. Depending on what class of license you are apply for will determine your production requirements and capacity. A NYS class D farm distillery license (which carries with it certain marketing and cost advantages) will require finished products comprised of “predominately” (at least 75%) NYS agricultural products, and will cap production at 75,000 gallons a year. New York will also require further permitting for sales tax and distribution.
TTB COLA: If you’ve successfully made it through the above steps, congratulations! You should now be legally able to produce spirits in New York. Unfortunately you are not yet able to legally sell spirits. In order to sell the spirits that you can now produce, you will need to go through formula approval and/or label approval (COLA) through the TTB. Depending on the spirit you are producing COLA may require compliance with a specific definition set out in the TTB regulations or creation of a fictitious name for your spirit, submission of your recipe, and/or submission of a sample for lab analysis. After formula approval, or if your particular product is exempt, you will need to submit your proposed label to the TTB for approval. Once you have cleared these final two hurdles you will be at a point where you can legally sell your spirits in New York State.
Of course, you may still have local laws and ordinances to comply with. Going forward you will also have no shortage of operational compliance at both the federal and state level covering everything from regularly scheduled calibration of equipment, OSHA and employee safety, production, marketing, distribution, compliance with environmental regulations, both federal and state excise tax—and everything in between. The reporting and compliance requirements for your distillery will occupy a considerable amount of time each month. In case that weren’t enough to worry about, failure to comply with operational regulations can result in fines of $1,000 or up to one year in prison for each offense.
While the above may seem an onerous amount of regulations to navigate, it is not in any way intended to be an exhaustive list, nor is it intended to substitute legal advice regarding the particular circumstances surrounding a distillery. This article is intended for information and discussion purposes only. If you are considering starting a distillery (or are in the process) it is highly recommended that you seek professional assistance from attorneys and accountants.
TAX PITFALLS FOR THE ENTREPRENEUR
FIRST IN A SERIES
By Frederick J. Gawronski
Small business owners have many responsibilities. In addition to running their respective businesses, they have to be a part-time accountant, part-time bookkeeper, part-time negotiator, part-time boss and part-time employee. The last thing on their minds is that they may have personal responsibility and liability for debts incurred by the business. Nonetheless, both the Internal Revenue Service and New York State Department of Taxation and Finance rely on statutory and judicial authority to hold third parties such as shareholders, officers and commercial lenders responsible for the tax obligations of the business.
Over the next several weeks we will be examining these pitfalls for the unwary and presenting strategies to avoid them.
Trust Fund Recovery Penalty
Small businesses will commonly experience ups and downs associated with growth and success. Failing to turn over payroll taxes to the IRS is an easy mistake to make when money is tight and bills need to be paid. That mistake can quickly turn into an expensive problem for the company and could turn into a nasty surprise for those responsible to pay the taxes.
In brief, Internal Revenue Code §6672 allows the IRS to collect from the person(s) responsible to collect, account for and pay over trust funds that should have been collected, accounted for and turned over to the IRS from an employee’s pay but were willfully not collected, accounted for and turned over to the IRS. The liability is considered joint and several among all those persons deemed responsible. Before we go any further, we need to define a couple of key phrases.
Trust Funds. Typical trust funds are the portion of the Social Security and Medicare tax withheld from employees pay (7.65%) and income tax withheld from the employee’s pay. They may also include railroad retirement taxes and excise taxes.
Responsible Person. Responsible person can really be anyone. Typical examples include corporate officers, sole proprietors, partners, employees, bookkeepers and accounting firms. For this provision, responsible person is not just derived from a title in the business but from other indicators as well such as hiring and firing authority, check signing authority and the authority to sign and file payroll tax returns.
Willfulness. The willfulness test determines if a person knew the taxes were not paid and willfully and intentionally did not remit the funds to the IRS after knowing that such funds were due. Responsible persons act willfully if they know taxes are due and use funds to pay other debts, such as other business liabilities. Responsible persons do not act willfully if they do not know of a tax liability but, upon learning of the liability, use funds to pay current taxes.
Joint and Several. Each person or entity determined to be responsible is liable for the entire tax. The IRS is under no obligation to collect from each party equally.
The determination and assessment of a trust fund penalty on a responsible person is a two step process. First, a company must be assessed a liability for unpaid payroll taxes. The assessment can include the unpaid trust funds as well as federal unemployment taxes, the employers matching 7.65% for Social Security and Medicare taxes or the interest and penalties assessed to the employer for failing to remit these trust funds. The interest and penalties alone can more than double the liability for the employer.
Once the assessment on the employer has taken place, the IRS can move to assess the responsible person(s) when it believes the government’s ability to collect the assessed taxes is in jeopardy. Typically, this happens if the company hasn’t filed appropriate tax returns or the IRS determines it will be difficult to collect from the company. The assessment against the responsible person(s) is not for the same amount as the assessment against the company. It is only for the trust fund portion of the assessment.
The best way for an employer to address this potential issue is to take steps to make sure your payroll taxes are timely paid. This can be done by hiring a payroll company to handle all your payroll filings. In the event a payroll company is not a possibility and payroll will be handled in-house, then the employer needs to make payment of payroll taxes a priority above all other debts of the company.
In the event a company is assessed for unpaid payroll taxes, it is best to seek professional help. Tax issues of this kind are often symptoms of other problems with the business and an accomplished professional will be necessary to help navigate these troubled waters.
By Matthew K. Pelkey
The Acer Access and Development Program, otherwise known as the Maple TAP Act, is a part of the federal 2014 Farm Bill enacted earlier this year which will provide USDA grants of up to $20 million per year over five years to maple producing states to encourage production and development of the maple industry. This is a competitive grant process between maple producing states.
The public policy justification behind this funding is that the United States is missing out on a large opportunity given the number of maple trees we have and the relatively low number of trees we are tapping. Canada, and more specifically Quebec, is capitalizing on 75% of worldwide production. The U.S. does not even break 20% of worldwide production.
The problem, and corresponding opportunity, is that Quebec utilizes 35% of available maple trees whereas the U.S., with 2 billion potential taps, only has a utilization rate of .38%. Given that we are currently importing 4 times as much maple syrup as we produce—there is a tremendous market opportunity presenting itself.
New York is particularly well suited to benefit from the Maple TAP Act given that we currently utilize about only 0.50% of maple trees and have the highest total potential taps of any maple producing state at approximately 300 million.
Source of data and graph: Cornell University paper, Background Information and Justification for Reintroducing the Maple Tapping Access Program Act as part of the new Federal Stimulus Package.
With an available 300 million taps, there is a tremendous market opportunity in New York State alone. Indeed, if New York even utilizes a third of its available maple taps, the resulting economic impact would be tens of millions of dollars to farmers and the upstate economy.
According to U.S. Senator Charles Schumer’s office, the sponsor of the Maple TAP Act, the potential economic impact to upstate New York breaks down as follows:
- In the North Country, the epicenter of New York’s maple industry, there are 70 million potential new taps, and the TAP Act could help bring in an additional $19 million in revenue per year.
- In the Capital Region, there are 34.8 million potential new taps, and the TAP Act could help bring in an additional $10 million in revenue per year.
- In the Western New York, there are 21.1 million potential new taps, and the TAP Act could help bring in an additional $6 million in revenue per year.
- In the Rochester-Finger Lakes Region, there are 11.6 million potential new taps, and the TAP Act could help bring in an additional $3 million in revenue per year.
- In the Southern Tier, there are 70.8 million potential new taps, and the TAP Act could help bring in an additional $22 million in revenue per year.
- In Central New York, there are 45.5 million potential new taps, and the TAP Act could help bring in an additional $13 million in revenue per year.
- In the Hudson Valley, there are 26.8 million potential new taps, and the TAP Act could help bring in an additional $8.7 million in revenue per year.
So where can this funding be used most effectively? Anecdotally, if you talk to current producers the biggest barrier to further production is access to land. Landowners, many of which are concerned that tapping their trees will compromise the quality of timber intended be subsequently harvested and sold, are hesitant to lease their properties to maple producers. New York State could, and quite frankly should, propose funding through the Maple TAP Act to encourage landowners to lease property to maple producers and increase access to these trees. Furthermore, focus should likewise be given to encouraging research, development and commercialization of new products from maple sap and syrup.
Inherited IRAs are available to bankruptcy creditors.
By Frederick J. Gawronski
The United States Supreme Court unanimously ruled on June 12, 2014 in Clark v Rameker, that non-spousal inherited IRAs are not exempt from a debtor’s estate in bankruptcy.
This case involved an IRA that petitioner Heidi-Heffron Clark inherited from her mother in 2001. Heidi received distributions from the IRA for 9 years. In 2010, Heidi and her husband filed for Chapter 7 bankruptcy. In the Wisconsin couple’s schedules, they listed Heidi’s inherited IRA as retirement funds and hence exempt from the reaches of creditors.
The Bankruptcy Trustee, Rameker and the couple’s creditors disagreed, claiming the funds from the inherited IRA were merely Heidi’s inheritance, thus becoming an asset of the bankruptcy estate and available to creditors.
Writing for the Court, Justice Sotomayor noted that the phrase “retirement funds” is not defined in the Bankruptcy Code, so a normal meaning must be applied to the term. The Court concluded that its ordinary meaning as ‘sums of money set aside for the day an individual stops working”. In the Court’s view, there are three characteristics differentiating inherited IRAs from retirement funds:
- The holder of an inherited IRA is prohibited from contributing additional money to the account;
- The holder of an inherited IRA is required to take mandatory withdrawals from the account without regard to the holder’s retirement; and
- The holder of an inherited IRA may withdraw the entire balance of the account at any time, use it for any purpose, all without penalty.
As indicated by the Court, the result is consistent with general debtor-creditor law and the Bankruptcy Code. Exempting a traditional, non-inherited IRA is to provide for the retirement needs of the debtors, even to the detriment of creditors. A non-spousal inherited IRA serves no such purpose.
PLANNING NOTE: The ruling only applies to the federal bankruptcy exemptions. There are several states which do protect these types of IRAs, including Florida and Texas. New York does not have such an exemption. And the exemption applies to the debtor’s location, not the person leaving the inheritance. Accordingly, those individuals with IRAs who want the balance of the money to be protected from their heirs’ creditors should designate a spendthrift trust as the beneficiary of the balance, not the heirs directly.