At Strothman and Company we help entrepreneurial businesses grow. At every stage.  Every day. That's why we keep you up to date on relevant issues.
 
In This Issue:
TaxPlanning
2018 - The Year of Tax Planning for Everyone!
 
All of us here at Strothman and Company are still digesting all of the provisions of the new Tax Cut and Jobs Act.  A recent summary contained 74 pages, and that was just a brief summary. To further complicate matters, the Treasury Department and the IRS are going to need to provide guidance and interpretation on many of the provisions. What that means is that every individual and business needs to reevaluate their income tax situation during 2018 and it will be an ongoing process.
 
It is going to take some thoughtful consideration in many instances.  For example, several of our clients who operate as S Corporations or Limited Liability Companies ("LLC") have asked if they should switch to C Corporation status.  On the surface, the 21% C Corporation tax rate looks very appealing.  And, if you have a high growth business in which most of the cash needs to be left in the company, it might be.  However, if you are like most people who own a company, you would like to take cash out and use it for personal purposes.  In that case, it appears that the S Corporation or LLC might still be more beneficial.  Even though C Corporations now have the great 21% U.S. rate, there is an additional 20% capital gains tax on dividends when the money is taken out of the corporation (plus, there could also be additional Obamacare taxes of 3.8%.  When also considering Kentucky income taxes, this drives the effective tax rate to well over 50%.
 
For more details regarding the Tax Cuts and Jobs Act please make plans to attend our seminar on Thursday, February 1 at the University of Louisville Shelby Campus. We don't have all the answers yet.  However, all of us at Strothman and Company are working hard to determine the best tax structure going forward for each of our clients.

Everyonesanowner
Everyone's an Owner?

Some experts are predicting that the recent tax legislation will create a ton of new business creation and activity - just not the kind that lawmakers originally intended. These people are predicting a surge in efforts for reclassification and the organization of cover companies by employees so they can have their salaries recognized as business income, significantly lowering their tax burden as a result.

A central tenant of the Republican bill is that it reduces both corporate and pass-through business tax rates. Corporate profits are now taxed at only 21 percent, and owners of pass-through companies will get to take a 20 percent deduction. While these same experts predict it will take some time to adapt, they believe that as lawyers and accountants delve into the new rules, they will find ways to minimize taxes for their clients using the new tax structure.

A group of tax law professors and lawyers wrote a paper on various ways imaginative and wealthy individuals can use the preferential business tax treatment to reduce their taxes. This academic paper is entitled " The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the New Legislation" (available for download via SSRN), and it chronicles how they believe individuals in various fields and scenarios will create or turn themselves into small businesses to take advantage of the new tax structure.

Below is a brief synopsis of the different strategies. As always, remember that each situation is unique and you should consult your tax professional before implementing any of these strategies - this is definitely not a DIY type of situation.

Partnership Game Changers

Some of the paper's authors believe that people will transform themselves into self-employed contractors or partnerships, thus turning their wages into pass-through profits and entitling them to the 20 percent deduction.

The IRS lays out pretty strict guidelines on who can be classified as an independent contractor, with a bias toward workers being treated as W-2 employees - so this isn't a simple path. The most likely candidates are individuals in certain professions, such as law firms. One example given is that associates (partners would already receive the pass-through treatment) could create an LLC and then be hired by the firm. There are provisions that prevent guaranteed payments from qualifying for the deduction; however, many feel these regulations are weakly written and might only apply to S corporations.

Split the Difference

Another strategy professional service pass-through can use is to split their companies into parts. One part would perform the services portion of the business, while the other would own the real estate and/or any productized revenue streams. Separating the service portion of the business would allow the other segments to qualify for profit deductions where they would not otherwise if they were comingled.

Self-Incorporation

Initially, many believed the easiest way to arbitrage the new tax rate structure would be to organize a corporation.

Currently, however, most entrepreneurs avoid forming corporations due to double taxation (profits are taxed at both the corporate level and then again as dividend distributions). The reduced corporate rate of 21 percent combined with the top dividend rate of 20 percent means that even taxpayers in the top brackets will do better not incorporating; however, opportunities for interest earning investments are still available.

Conclusion

Change often means opportunity when it comes to tax law. The new tax law substantially shakes up business taxation, and as professionals sort through the finer details, new strategies will emerge for some taxpayers.

Technology
Technology: Net Neutrality - What's All the Fuss About?

According to the pundits, the Dec. 14 move by the U.S. Federal Communications Commission to repeal existing net neutrality rules is either a major blow to free communication or a storm in a teacup. Perhaps the truth lies somewhere between these polarizing viewpoints.

It appears that those who supported dismantling the rules put in place to ensure equal access to the Internet (a concept usually known as "net neutrality") and those who wished them to remain want the same things. Both sides say they are opposed to Internet Service Providers putting discriminatory practices in place to slow down or block certain content, and neither wants ISPs to charge users more to see certain websites. The disagreement appears to center on how fair play on the Internet should be enforced and who exactly does the enforcing. Not surprisingly, President Trump's appointee to the FCC, Chairman Ajit Pai, believes less government regulation will be more beneficial, and that broadband should not be regulated as if it were a utility.

Most software companies disliked the FCC's recent repeal of the Obama era regulations. Many small business owners and entrepreneurs also voiced their opposition to the repeal, fearing that the big ISPs will take advantage of their "gatekeeper" role. On the other hand, telecommunications companies were glad to see them repealed. The naysayers believe there are clear dangers in allowing market players to also be guardians of net neutrality. They argue that big telecom companies are already dabbling in preferential Internet usage practices to steer consumers to their sister companies and that Pai's repeal opens the door for more ploys of this nature.

Here's some of the history behind the headlines and some of the key issues to ponder:
  • Before 2015, Internet Service Providers were governed by general laws regarding anti-competitive policies and consumer protection. In 2015, under President Obama, ISPs were classified as utilities and so-called net neutrality rules were put in place to stop ISPs from slowing down service, blocking access or requiring payment to favor certain content providers.
  • When Ajit Pai, who had voted against the 2015 reclassification in his role as an FCC Commissioner, was nominated by President Trump to take over the top job, industry observers knew a reversal was on the horizon. Pai contends that heavy-handed government regulation inhibits innovation and investment.
  • Net neutrality existed prior to launch of the 2015 regulations. It might be argued that now, in 2017, we are back to pre-2015 conditions and that there is no call for the alarmist clamor.
  • On the other hand, Pai's critics note that a neutral Internet is not guaranteed to last. Major companies already are deploying preferential usage patterns to boost sales - for example, AT&T customers who access DIRECTV Now (which AT&T owns) are able to do so without that access counting as part of their data package. AT&T competitors like T-Mobile and Verizon also have similar setups. This practice - zero rating - was scrutinized by the FCC under the Obama era regulations but, following Pai's repeal, it isn't any longer. Vertical integration by major ISPs is on the increase, and there could be a strong incentive for these industry leaders to favor their own content over all-comers.
 
Lawmakers have the power to overturn this recent decision, and to propose their own laws to provide some stability to the regulatory environment. Small business owners who want to see a fair and level playing field will want to continue to monitor this situation. 

Tip
Tip: The Only New Year's Resolutions You Need

In the wake of the New Year, many of us burden ourselves with a laundry list of resolutions to do things differently and to improve upon our personal and professional goals.  For many entrepreneurs, a new year offers a clean slate and a tantalizing chance to achieve greater business success. Individual goals may vary, but here are five central principles that are integral to business success in today's competitive world. Focus on them and you'll see some big improvements.

1)      Clarify your business goals. Whether it means updating an existing strategic plan or starting from scratch, having a focused business plan that states specific, realistic, measureable goals, as well as a timeline and a budget is crucial. This is not a purely academic exercise. You can - and should - share this with all your employees. A strategic plan is a key tool (edited as needed for outside audiences) when you need to apply for business funding or when you seek business partners. With that said, a business plan needn't be written in stone. If circumstances or opportunities change, update the written plan to reflect these changes.

2)      Proactively manage cash flow. Alongside your business plan, prepare  a month-by-month rolling cash-flow projection. To avoid unwelcome surprises, review and update the cash flow-plan at the end of each month. That way you can adjust your elective spending and readjust your pricing systems to keep your company financially healthy.

3)      Evaluate payment options . Don't limit your financial planning to revenue forecasts. Make sure you offer customers the easiest and most convenient means to pay for goods or services. Pay attention to the latest technology for mobile payments and electronic payment methods. Offer your customers secure options with maximum convenience.

4)      Know your market. Apply the resources and/or staff time needed to research your specific market and competitors. Stay ahead of the game by anticipating market trends and understanding your key competitors' sales and marketing strategies. For many small business owners, it often makes sense to hire a freelance marketing professional who has the know-how and experience to do this quickly and cost-effectively.

5)      Manage your time mindfully. Think not so much about managing your time as knowing your priorities each and every day. Spend your time on the things that move you closer to your goals. If boosting business revenue is your aim, first do those tasks that contribute most to generating more income. Every day, determine what needs to be accomplished in the next 24 hours to bring you closer to that goal. Control interruptions when you can. You might have to stop whatever you're doing to take a client call, but limit email, texts or phone call distractions by blocking off time on your daily calendar to return routine calls and answer non-urgent email.

OnlineTrust
How to Build Trust with Customers Online

When it comes to selling online, gaining users' trust is a serious matter for businesses. Based on a July 2015 poll from the U.S. Census Bureau and the National Telecommunications and Information Administration, security and privacy concerns are a big reason consumers are not doing more online. The survey found that 45 percent of respondents have stopped at least one online transaction due to these concerns, such as purchasing items online, commenting via social media, or making Internet-based banking or investment arrangements. With these statistics, what can businesses do to gain the trust of their visitors and shoppers?

Tell Customers What You'll Do with Their Information

One way to gain trust with online customers is to explain how their information is collected and handled when they visit a businesses' website. This is accomplished by creating a Privacy Policy that website visitors can review. A privacy policy explains what information is collected from visitors, and how that information is stored, used and disclosed internally and with third parties. Examples of such sharing include giving consumer details to third-party companies that work with the original website owner to help with order fulfillment or customer surveys.

Another way to gain the trust of website users is to explain how personal information is handled when it is entered on a company's website and when it is transmitted to data centers. Whether entered via an online contact form or when placing an order, names, emails, shipping and billing addresses and telephone numbers are common pieces of information that consumers expect to be safeguarded.  When transmitting consumer information, businesses can provide another layer of security by ensuring the green lock appears next to the web address.

Businesses can do this by using Secure Socket Layers (SSL) Certificates or Transport Layer Security (TLS) Certificates to ensure that each user's session is encrypted. A privacy policy also may describe how the business's physical security is setup for its data center to reassure consumers their data is at minimal risk of being intercepted by hackers regardless of the stage of transmission.

Let Customers Contact You at Their Convenience

A business can help establish credibility by creating "About" and "Contact Us" pages on its website. Given the fact that anyone has the opportunity to setup a business presence, providing identifiable and verifiable information can help build trust with visitors and customers.

The "About Us" section may include information about who founded the company and how the company started, along with traditional contact information, such as phone numbers for sales, ordering, ongoing support and social media contacts. Using verified Twitter accounts of the business itself or select departments, such as a dedicated support department, can give visitors additional reassurance that they are dealing with the intended company. To gain consumers' trust, a business's information can be validated through third-party certification.

Obtain Independent Verification

Becoming accredited with a third-party agency that's well known by visitors can help increase trust. Using the Better Business Bureau as an example, consumers will know many details of the company's past and present business operations. Along with requiring a company to follow a privacy policy and ensuring "secure financial transactions," businesses must have been in existence for at least six months. Requirements also mandate holding necessary licenses and bonding requirements, along with creating trustworthy advertisements. If online users have any doubt about the legitimacy of a website and its contact details, a business could encourage visitors to follow up with the third-party verifying agency to show the business is committed to honesty and transparency with reputable, independent business agencies.
 
Sources for the study, statistics and the Better Business Bureau:


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