The Tax Implications of Crowdfunding

Throughout the COVID-19 Pandemic, individuals and businesses have turned to crowdfunding to support their financial needs. Crowdfunding sites like GoFundMe and Kickstarter have made it accessible for companies to acquire much-needed financial support. Although crowdfunding has grown in popularity, the implications of this funding can be tricky to navigate. To properly understand the implications it can have on your business, it’s important to start at the beginning. 

What is it? 

Crowdfunding is the process of raising capital through various backers by way of the internet. 

Common Crowdfunding Sites

• Kickstarter
• GoFundMe
• Indiegogo
• Fundable 

Types of Crowdfunding

• Donor-Based: The most popular type of crowdfunding that involves the donation or receipt of donations without any resources or services exchanged. 
• Reward-Based: Involves the exchange of funds in return for goods or services.
• Equity-Based: The exchange of funds in return for an ownership interest in a company.

Tax Implications

• Donor-Based: For the most part, funds received from donors, with no expectation of getting something in return, are not considered income. Under the “something for nothing” rule, the donation is considered a personal gift from the backer. For this reason, the gift would be nontaxable to the receiver, but the gift is restricted to the $15,000 annual gift tax exemption for the donor. Since the donations are usually made to a non-qualified charity, the donation does not qualify for the charitable deduction. 
• Reward-Based: Keeping in line with the “something for nothing” rule, any funds received using the reward-based crowdfunding source would be considered taxable income. This is because the contributor is receiving something in return for the funds provided. For example, if a clothing company needs additional funds for a new clothing line, it may offer a “free” T-Shirt in return for any funds received. Since an exchange is taking place, this would be deemed a business transaction and reported as a source of income. 
• Equity-Based: Under the Jumpstart Our Business Startups (JOBS) Act of 2012, an exemption was created that allowed non-accredited investors the opportunity to participate in funding campaigns. It is debatable how exchanges using this source of crowdfunding should be taxed based on the specifics of the situation. Hence, it’s critical to reach out to your local CPA for help on how to account for the matter. 

In Summary

It’s important to keep in mind that the details provided above are the general rule, and that not all transactions should be treated the same way. Additionally, all records should be preserved to demonstrate when income can be properly excluded from your tax return. If you have any questions about crowdfunding, and their tax implications for your business, please reach out via email, give us a call at (401)-921-2000, or fill out our online contact us form. 

Important company documents often overlooked are Buy-Sell and Shareholder Agreements (referenced as the “Agreements”). These are legally binding documents that provide for the orderly transition of a company or company interest(s). Often these Agreements are used interchangeably; however, a Shareholder Agreement[1] explicitly defines the roles of each shareholder and their responsibilities to each other and the company. It protects the rights of existing shareholders/owners and outlines their decisions on what outside parties may become future shareholders/owners. By having such an Agreement in place, shareholders/owners will be able to ensure that they are all aware of the direction of the company. With everyone in agreement, the company is more likely to maintain a stable ownership interest and operate effectively. When a company lacks a plan for succession, significant expense, delay, and a disruption of company operations and profits may result.

[1] A Shareholder Agreement may contain provisions of a buy-sell agreement.

Shareholder vs. Buy-Sell Agreement

Unlike the Shareholder Agreement, a Buy-Sell Agreement strictly deals with the transfer of ownership interests of the company; it includes provisions relative to the agreed upon handling of the transfer of ownership upon the occurrence of certain “triggering events” such as death, divorce, disability, or departure. This document allows shareholders/owners to plan for one of these triggering events before it inevitably occurs. Not only is it essential to have such a document in place, but it is of equal importance to review this document every few years to adjust for changes in the practice such as growth, changes in value, etc. If an Agreement is in place, the terms of said agreement will be executed even if it is old and outdated. If no Agreement is in place, then there is no plan to preserve the rights of the surviving owners or the continuation of the company. Although it is best to have these agreements formed at the inception of the company, a Buy-Sell or Shareholder Agreement may be put into effect at any time to protect the interests of those that have dedicated themselves to the success of the company.

What Goes Into an Effective Agreement?

An effective Buy-Sell Agreement should include provisions addressing the valuation of the ownership interests or the circumstances in which a company may dispose of an ownership interest(s), though it is ultimately at the owners’/shareholders’ discretion to tailor the agreement to their expectations. Another consideration is whether owners/shareholders will have the option to buy an exiting owners’/shareholders’ interest prior to it being sold to an outside party. With this provision, ownership interests in the company can be better managed by existing owners/shareholders. This protects the company from a break in management or voting control, which can potentially lead to needless expenses or even the collapse of the company.

Shareholders of a company founded on years of hard work, dedicated time, and invested capital will greatly benefit from implementing or reviewing either of these agreements. The expense of planning ahead and establishing these documents are minimal compared to the potential costs – both monetarily and structurally – associated with litigation resulting from ownership disputes. A well thought out Buy-Sell or a Shareholder Agreement will help mitigate problems before they occur and save countless hours of time and capital.

In Summary

If you would like a review of your current Buy-Sell Agreement and/or Shareholder Agreement or would like to discuss putting one in place, please contact us at 401-921-2000 or complete our online contact form.

Are physical audits becoming a thing of the past and e-audits becoming the norm? Due to COVID travel restrictions, auditors have been conducting inventory observations remotely with the help of technology. This is gaining popularity as a safe and flexible alternative that can produce the same results as the conventional method. E-auditing follows auditing standards throughout the engagement process, while keeping both parties safe. To prepare for a potential remote audit visit, it is important to stay informed on necessary applications to make it successful. Some assistance is required from the company to streamline the process and prevent issues on the day of the visit. 

Technological Alternatives

The most common method, live streaming, allows for two-way communication and video. Clients can film themselves as they perform the walk-through, allowing the audit team to watch it live. Audio capability from the live feed allows for questions asked as needed and to host open conversations. 

Another technology option is video recordings and photographs. The recordings performed by the client can simulate an auditor first hand, or can be performed by an independent third-party. High-definition security cameras can also serve as an effective tool to stream inventory to auditors.

Technology Drawbacks

With video recordings and lack of authenticity, there is a possibility that the recording is not a current representation of the inventory. Material information could be omitted or manipulated from this, creating a scope limitation. Also, it is possible that the technology does not produce a clear enough image for the auditor to base their opinion.

Tips for Remote Auditing

Clients should begin to prepare for potential remote audit visits as they become a more viable option. Communication between the client and auditor is key to receive the most effective and reliable results. 

Prevent technology fails by testing the procedures beforehand. To start, download a live streaming app onto the intended portable device and test for a strong connection, without lagging and delays. Testing the clarity of the camera when live streaming ensures the auditors can collect sufficient evidence.

Companies can also practice recording and streaming themselves counting the inventory, or find a third-party to do so. If security cameras are the selected method, find out if it has the necessary features to allow auditors to use them for the inspection.

In Summary

As the world changes in response to COVID, the auditing industry is following along, and it is important to be ready for the inevitable shift. Virtual audits are quickly becoming reality. If you have any questions about the audit process, please call us at 401-921-2000, or reach us through email or complete our online contact form.

If there is a silver lining at all to COVID-19’s effect on industry, it’s that its forced managers to re-evaluate their profit margins. Striving to optimize profitability has never been more of a factor in financial endurance as it is right now. Handled correctly, the changes implemented to survive financially during COVID-19 will reap its greatest benefits once the worst of the pandemic is behind us. The good starting point in a reassessment is to disaggregate the components feeding into company margins and identify those reaping the greatest rewards. There are several ways to dissect and capitalize on profitability streams.

• By customer: As a rule of thumb, analysts estimate that the top 20% of customers generate approximately 120% of company profits; and the bottom 20% account for 100% of losses. While it feels counter intuitive to many business owners whose mantra is to grow a customer base, culling your revenue pool is probably one of the quickest ways to improve profitability. Start by identifying which customers belong in the top, middle, and bottom buckets. Which of the poor performers can be renegotiated, and which need to be let go?
• By product: Unless a manufacturer produces a single homogenous item, there will be variability in margins by product. Managers that do not have visibility at this level do themselves a disservice. Identifying fixed and variable costs by product reveal which perform at or above expectations, and which hurt the bottom line.
• By distribution channel: How business owners get their products to their customers can have vastly different cost structures. How much does it cost to use traditional wholesalers, regional distributors, direct-customer avenues? Will there be repercussions to the business in upsetting the apple cart? Are there new opportunities in web-based sales?
• By supply chain: Time is money. Logistical challenges to get inventory in the door and through processing plays an inherent role in product costs. Examine the interface between engineering and production. Which products can be produced to QC standards, within budget, and put out to market quickly?

This self-examination may be borne of the need to stay afloat during these unprecedented times, however, it does create an opportunity. Understanding what truly drives company profit puts management in a position to devise and execute a margin optimization strategy. A focused plan based on relevant data will mitigate the financial strain of the pandemic and, even more importantly, fortify the business model in a post COVID-19 economy.

If you have any questions on how your business would benefit from a profit margin evaluation, please call us at 401-921-2000, or reach us through email or complete our online contact form.

Health care providers have dedicated their resources to providing patients with the care they need throughout a rapidly evolving pandemic. During these unprecedented times, medical providers have been faced with additional costs related to treating coronavirus patients as well as lost revenues due to government shutdowns and the suspension of elective procedures. To help mitigate the financial impact on providers, the U.S. Department of Health and Human Services (HHS) issued Provider Relief Fund (PRF) payments to be used towards eligible coronavirus related expenses and to help cover lost revenues.

Recipients of these funds agreed to certain terms and conditions, including reporting requirements pertaining to the use of these funds. If in any Payment Received Period you received one or more payments totaling $10,000 or more in the aggregate, you are subject to the reporting requirements.  Failure to meet these requirements could result in HHS seeking recoupment of the funds. The following table provided by HHS summarizes each Payment Received Period, along with the Deadline to Use the Funds and the respective Reporting Time Period:

Summary of Reporting Requirements

*On September 10, 2021, HHS offered a 60-day grace period for Period 1. Although the reporting time period and deadline to use the funds has remained the same, HHS will not initiate collection procedures during this grace period.

Providers will be required to report on eligible coronavirus related expenses, such as personal protective equipment, tele-health costs, touch-free technology, hazard pay to employees, physical barriers meant to reduce the spread of COVID-19, and costs related to COVID testing to name a few. The expenses need to be for the preparation for, prevention of or response to coronavirus.  Additionally, if you received any other funds, either from federal, state, or local governments or from business insurance, those monies need to be reported and applied against the eligible expenses first. If you have not used all the PRF payments for eligible expenses, you will need to provide information on lost revenues attributable to coronavirus.  HHS is allowing several different methods to report on lost revenues.

Additional reporting requirements will include interest earned on the funds if they were held in an interest-bearing account, metrics related to personnel, patients and facilities and you will need to answer various questions about the impact of the payments during the period of availability. Providers that expend $750,000 or more in federal funds, including the PRF payments, are subject to a Single Audit requirement.

The reporting requirements outlined above are a general overview of the complex calculations and reporting required to comply with HHS guidelines. For additional information and guidance related to the Provider Relief Fund payments and the related reporting requirements, click here. If you would like assistance or advice regarding your reporting obligations, please call us at 401-921-2000, or complete our online contact form.

Under the American Rescue Plan Act of 2021 (ARP), new tax credits are being provided for paid leave to employees who take time off related to COVID-19. The ARP allows small and medium-sized employers, and certain governmental employers, to claim refundable payroll tax credits equal to 100% of the qualified sick leave. Eligible employers that are entitled to claim the refundable tax credits include businesses and tax-exempt organizations with fewer than 500 employees and pay qualified sick leave wages. Self-employed individuals are eligible for similar tax credits.

Qualified sick leave includes wages for an employee who is directly affected, experiencing symptoms, and seeking a medical diagnosis for COVID-19 as well as employees in the process of obtaining or recovering from the effects of any COVID-19 vaccination. The credit is allowed for up to 80 hours of paid sick leave in an amount equal to the employee’s regular wage, capped at $511 per day for a total of 10 workdays, for a total cap of up to $5,110.

Businesses and nonprofits will be eligible to claim the tax credits available to eligible employers that pay sick and family leave from April 1, 2021 through September 30, 2021. The Emergency Paid Sick Leave Act allows employers to reclaim the original credit as written under the Families First Coronavirus Response Act from its enactment up to March 31st, 2021. Employers can claim the credit again from April 1st, 2021 to September 30, 2021 for another 10 days on the same employee if needed.

Eligible employers claiming the credits for qualified leave wages must retain records and documentation related to and supporting each employee’s leave. Credits can be claimed on Form 941, Employer’s Quarterly Federal Tax Return. Eligible employers can keep the federal employment taxes that they otherwise would have deposited, including federal income tax withheld from employees, the employees’ share of social security and Medicare taxes, and the eligible employer’s share of social security and Medicare taxes with respect to all employees up to the amount of credit for which they are eligible. If the eligible employer does not have enough federal employment taxes on deposit to cover the amount of the anticipated credits, the eligible employer may request an advance by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Self-employed individuals may claim comparable credits on the Form 1040, U.S. Individual Income Tax Return. The credit will be based on the net earnings during the year divided by 260 days to determine the credit limitations. The ARP increased the day limitation to 60 days ($12,000 overall; $200 per day).

More Information

• IRS: Under the American Rescue Plan, employers are entitled to tax credits for providing paid leave to employees who take time off related to COVID-19 vaccinations
• IRS: American Rescue Plan tax credits available to small employers to provide paid leave to employees receiving COVID-19 vaccines; new fact sheet outlines details

If you have any questions on the above and how it applies to you, please call us at 401-921-2000, or reach us through email or complete our online contact form.

Treasury Secretary Janet Yellen called for a global minimum tax for US multinationals in a speech to the Chicago Council of Global Advisors on April 5, 2021. Under the proposal, US Multinational Enterprises (MNEs) would pay at least a 21% tax rate on profits earned in every country with foreign operations. The proposal increases the current GILTI rate of 10.5% and would apply more broadly by eliminating the exclusion for the 10% return on tangible fixed assets.

The initiative follows President Joe Biden’s campaign platform that called for raising the US corporate income tax (CIT) rate to 28% and replacing the current global intangible low-tax income (GILTI) tax with a much stronger minimum tax on foreign earnings.

The current GILTI tax on foreign subsidiary earnings has the following main elements:

• 5% effective tax rate (21% CIT rate with a 50% earnings deduction)
• Exclusion of a 10% return on foreign tangible assets
• Global pooling of foreign profits and foreign tax credits (FTCs)
• Elective High Tax Exclusion (HTE) for Controlled Foreign Corporations (CFCs) with effective tax rate above 18.9% (90% of standard CIT rate)

By contrast, Biden’s foreign minimum tax proposal has the following main elements:

• 21% effective tax rate
• Full income tax base (no exclusion of basic returns on foreign investments in tangible assets)
• Would eliminate pooling of profits and FTCs (by imposing country-by-country limitation)

It is noted that alternative versions of the US GILTI rules changes are being worked on and will likely be considered in the House and Senate. In addition, it will also be important to see how any eventual US changes align with the OECD’s Base Erosion and Profit Shifting (BEPS) Pillar 2 proposal for worldwide minimum corporate income taxation.

It is noted that while the OECD BEPS Pillar 2 initiative is still under discussion, it appears likely to set a minimum tax rate of about 12.5% and would exclude a normal rate of return on foreign investment. As a result, Biden’s proposal could put US MNEs at a competitive disadvantage and reignite corporate inversions (transactions where US MNEs become foreign MNEs).

More Information

If you have any questions regarding these tax updates, please call us at 401-921-2000, or reach us through email or complete our online contact form.

Many of us have been spending more time than ever at home lately, and with all that at-home time, may have noticed a few shortcomings throughout the entire house. Things that we overlooked before are now glaringly obvious, especially when it comes to functionality. Some households now have two parents working from home, as well as schooling being done remotely. Finding areas to accommodate everyone can be a challenge. To address these concerns, many people are building home offices in their basements, designating specific locations in their living areas or bedrooms, and upgrading lighting, internet services, and more.

The Home Improvement Boom

Adding office space, building a deck, upgrading landscaping and kitchen renovations are all popular projects, and the pandemic has not slowed down the pace of home renovations. According to a recent U.S. Census Bureau report, sales at home and garden centers, hardware stores, and building supply stores have seen a year-over-year increase of 22.6%.  Only the category of online sales showed a bigger year-over-year increase. According to Houzz, there was a 58% increase in request for home professionals in June 2020, compared to June 2019.

 All of this is not surprising, given that many employers shut down, and non-essential employees were required to work remotely. Working from home has saved many employees on commuting time, and that has opened up a few extra hours for home projects. Plus, our surroundings impact our mental health. The pandemic has invoked increased stress in most individuals, and having a pleasant, functional environment can boost people’s mood. This effect increases when combined with the sense of accomplishment from a project well-done. Even a simple coat of paint and some organization and decluttering can make a huge difference. 

Paying for Home Improvements 

It may be difficult to find the funds to pay for improvements, especially if you have been out of work due to COVID-19. Some projects, such as painting and adding new cabinet hardware, are inexpensive. Others, obviously, can be quite costly. A popular way to pay for home improvements has always been a home equity loan or home equity line of credit (often referred to as a HELOC). Because interest rates have been low, a cash-out refinance or a HELOC are even more attractive options. While taking on additional debt is always something to be considered carefully, if your projects will increase your home’s value, then it may make sense. Another benefit of a HELOC in these uncertain times is the access to cash it provides, particularly for those who do not have a liquid emergency fund. If you are considering one of these options, do not wait. Some lenders are overwhelmed with applications to process right now, so get the ball rolling as soon as possible.

Tax Implications of Home Improvements 

There may be tax implications if you borrow against your home. If you itemize, on your personal income tax return, a portion of the interest and real estate taxes may be limited. Fewer people itemized these last few years because of the $10,000 limit imposed on the deductibility of taxes and the higher standard deduction provided by the Tax Cuts and Jobs Act of 2017.

Under current tax law, home mortgage interest on debt up to $750,000 (or $1 million if the debt originated prior to December 16, 2017) used to purchase or improve your home (that includes your primary residence and a second home) is tax deductible. Home mortgage interest on debt that is not used for home purchase or improvements can no longer be deducted. Therefore, it is important to calculate your deductible vs. non-deductible interest if you itemize and have home mortgage debt that was used for anything other than home purchase or improvement. Keep in mind, these limits are cut in half if you are married filing separately. There are also other restrictions that may apply to your situation. 

In addition, major improvements can add to the basis of your home and ultimately reduce the gain on the sale. If you are selling your primary residence, there is a gain exclusion of $250,000 for single and $500,000 for married filing jointly. There are different rules for gain on sale of rentals and vacation homes. 

More Information

If you have any questions regarding the above tax issues and limitations, please call us at 401-921-2000, or reach us through email or complete our online contact form.

In the ongoing pandemic, we have seen many businesses at best struggle, and at worst, succumb to unavoidable increased costs of compliance with new mandates. Pairing this with a significant loss of revenue due to restrictions in operations could directly result in a decreased customer base. While many businesses have been seeking aid through the downturn via utilization of the various government provided incentives, those businesses that are considered essential continue to struggle to provide their goods and services to both private owners and government agencies. The construction industry is one such sector deemed essential, and as such, has been faced with the ongoing challenge to adjust to the unintended consequence  of employing a workforce that must operate under new mandates.

Contract Prices and the Pandemic

Most construction companies work on fixed price contracts, so the added costs and inefficiencies of adapting and adhering to continuously updated changing recommendations from health, state, and federal government officials are taken directly from corporate profits.  

As an industry that thrives on team work, as well as the precision required of people working together in tight spaces, the industry is faced with special challenges in complying with social distancing and health/safety mandates. In time, contract prices will have to be adjusted to compensate for the additional cost of compliance but, by then, the industry may very well see a number of companies succumb to the increased financial burden.

Action for Construction Companies 

Construction companies should take various steps and actions to mitigate risk of surrendering to the additional cost of compliance as the coronavirus pandemic continues, and beyond:

1. Issue notice of cost and schedule impacts for all projects.
2. Document loss/damage due to work slowdowns, shutdowns, weather damage, etc. for insurance purposes, as well as to communicate with owners, general contractors, and subcontractors.
3. Update contracts to include pandemic language.
4. Establish new cost codes where appropriate to track cost of compliance.
5. Evaluate business interruption insurance for applicable coverage, if any.  
6. Determine exposure to the business in the event any employees fall ill and/or spread the virus at the job site.
7. Establish on-site protocols for anyone showing virus symptoms or indicating exposure.
8. Address cash flow concerns and take all available measures to align overhead to volume.
9. Monitor key metrics and realign acceptable high/low thresholds so you can quickly identify impending issues.
10. Revise cash flow projections on existing contracts.
11. Utilize change orders on existing and not yet started projects to help cover increased cost of compliance with safety/health ordinances.
12. Assess cost of compliance on bid rates and revise as required to cover items such as additional equipment/materials cost due to increased lead times.
13. Assess utilization of incentives such as the Families First Coronavirus Response Act (FFCRA) paid sick leave, Paycheck Protection Program (PPP ) loan forgiveness, and any other applicable assistance as they become available.

During these uncertain times, it becomes even more imperative to plan. One certain aspect of that plan should be to reevaluate existing operational protocols to assess the impact of increased cost of compliance with health/safety mandates. By addressing the steps above, construction companies will help to mitigate their risk of surrendering to that unavoidable cost.

More Information

For more information on the above, and its tax implications for you and your business, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.

The Employee Retention Credit (ERC) was first enacted as part of the CARES Act, then further enhanced and extended by the Taxpayer Certainty and Disaster Relief Act. Through this program, eligible employers can generate maximum tax credits of $5,000 per employee in 2020 and $14,000 ($7,000 per quarter) per employee in 2021. Currently, the ERC is only available through June 30, 2021, which is why maximum funding equates to $14,000 for 2021. Credits will offset payroll taxes reported on quarterly payroll filings (i.e. Federal income tax deposits withheld on behalf of employees’ Social Security, and Medicare taxes).  

Below is a brief summary of who can qualify for this credit in 2020 and/or 2021:

Qualifications for the 2020 Credit:

• Employer of any size, with the exception of government entities
• Must be engaged in a trade or business
• Must have qualified wages in a calendar quarter in which either of the situations described below occurred:
  • Business operations were fully or partially shut down due to COVID-19 restrictions issued by government order
  • The business must prove they have a significant decline in gross receipts (does not need to be COVID-19 related)
    • The business is eligible for the credit starting with the first calendar quarter they had a >50% decline in gross receipts compared to the same calendar quarter in 2019 
    • The business continues to be eligible for the credit until the end of the calendar quarter where gross receipts rebound to >80% of 2019 receipts for the same calendar quarter or until December 31, 2020 if gross receipts fail to rebound 
• Related employers need to aggregate their gross receipts to prove eligibility for this credit
• Wages used to calculate the credit must have been paid between March 13, 2020 and December 31, 2020 
• The credit rate is 50% of qualified wages up to $10,000 per employee during the year
  • Wages used for Paycheck Protection Program loan forgiveness calculations or family and sick leave credits under the Families First Coronavirus Response Act cannot be reused in this credit calculation
• For employers with 100 or fewer full-time employees, all qualifying wages are eligible for the credit. For employers with over 100 full-time employees, only wages paid to individuals not rendering services qualify for the credit.           

Qualifications for the 2021 Credit:

• Employer of any size, including certain government employers  
• Must be engaged in a trade or business
• Must have qualified wages in a calendar quarter in which either of the situations described below occurred:
  • Business operations were fully or partially shut down due to COVID-19 restrictions issued by government order
  • Decline in gross receipts of at least 20% when comparing a 2021 calendar quarter to the same 2019 calendar quarter
    • if you were not in business in 2019 you may still qualify for the credit 
• Related employers need to aggregate their gross receipts to prove eligibility for this credit
• The credit rate is 70% of qualified wages up to $10,000 per employee, per quarter
  • Wages used for Paycheck Protection Program loan forgiveness calculations or sick leave credits under the Families First Coronavirus Response Act cannot be reused in this credit calculation
• For employers with 500 or fewer full-time employees, all qualifying wages are eligible for the credit. For employers with over 500 full-time employees, only wages paid to individuals not rendering services qualify for the credit.           

More Information

If you have any questions regarding the ERC, or guidance on your specific situation, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.