Thursday, August 29, 2013

Small Business Innovation Research Program

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The Small Business Innovation Research (SBIR) program is a very competitive program sponsored by the Small Business Administration (SBA) to encourage small businesses to explore and profit from their technological potential.   SBIR targets the entrepreneurs because that is where SBA believes most innovation occurs.  However, the costs and risks associated with  serious research and development are often more than many small businesses can bear. By reserving a specific percentage of federal R&D funds for small business, SBIR helps small businesses compete on the same level as larger businesses.  SBIR funds the critical startup and development stages, and encourages commercialization of the technology, products and services developed by the entrepreneur.  Since 1982 when SBIR was enacted as part of the Small Business Innovation Development Act, SBIR has helped thousands of small businesses compete for federal R&D awards.

SBIR Qualifications.  In order to qualify for SBIR, small businesses must meet certain eligibility criteria including:
  • Company must be American-owned and independently operated
  • Company must be operated for-profit
  • A principal researcher must be employed by the Company
  • The Company must have no more than 500 employees
The SBIR Program.   Each year, eleven federal departments and agencies are required by SBIR to reserve a portion of their R&D funds for award to small businesses.  These departments are: Department of Agriculture, Department of Commerce, Department of Defense, Department of Education, Department of Energy, Department of Health and Human Services, Department of Homeland Security, Department of Transportation, Environmental Protection Agency, National Aeronautics and Space Administration and the National Science Foundation.  Each of these departments designate certain R&D topics and accept proposals.

Three Phase Program.  Following submission of proposals, the departments make SBIR awards based on small business qualification, degree of innovation, technical merit, and future market potential. Small businesses that receive awards then begin a three-phase program.  Phase I is the startup phase. Awards of up to $100,000 for approximately 6 months support exploration of the technical merit or feasibility of a proposal.  Phase II awards of up to $750,000, for as many as 2 years.  During this time, the R&D work is performed and the developer evaluates commercial potential.  In Phase III innovation moves from the laboratory into the marketplace.  No SBIR funds are available support Phase III.  Each small business must find funding in the private sector or obtain other non-SBIR funding.

The SBA's Role.  The SBA plays an important role as the coordinating agency for the SBIR program.   The SBA directs the 11 SBIR-funding departments’ implementation of SBIR, reviews their progress, and reports annually to Congress on its operation.  SBA is also the information link to SBIR.  If you would like more information about the SBA or SBIR program, assistance with making an SBIR proposal or obtaining an SBA loan, please contact Jeff Senney, Jon Rosemeyer or one of our other business attorneys at 937-223-1130 or

AND ONE MORE THING.    The University of Dayton’s 2013-2014 Business Plan competition is offering a record $190,000 in total support to help entrepreneurs develop plans to turn an idea into a successful business.  The Business Plan competition is open to all types of businesses.  The Business Plan competition will hold the first information session on September 6 at 5:30pm in the O’Leary Auditorium Hall in Miriam Hall at UD.  For more information on the competition, visit the competition's website at

Tuesday, August 27, 2013

Senney Wins U.S. Tax Court Case

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I recently won a U.S. Tax Court case.  The facts in the case are not that unusual and the issues raised by the IRS in this case could likely be raised with respect to most sole shareholder-owned or closely-held "S" corporations.

In my recent case, the taxpayer operated his business as an "S" corporation.  Like a lot of taxpayers, the client took advances from the "S" corporation during the year.  At the end of the year, the client characterized these advances as either W-2 compensation, "S" corporation distributions or loans.   For 3 years in a row, 2006 to 2008, it made more sense for tax purposes to characterize the advances as loans.  In total, the "S" corporation loaned the shareholder about $400,000.

In the following year, the client and his business had some rough financial times and so the client declared personal bankruptcy.  In the bankruptcy, the amounts loaned to the client by  the "S" corporation were discharged, and the "S" corporation took a bad debt deduction.

On audit, the IRS disallowed the "S" corporation's bad debt deduction and assessed the client personally for taxes, penalty and interest in 2009 based on $400,000 of unreported income.  The IRS raised several arguments to justify their assessment of tax in 2009 including: (1) under IRC 108, cancellation of debt in bankruptcy creates income in 2009; (2) under IRC 1368, distributions in excess of basis are taxable as capital gains in 2009; and (3) under IRC 481, the IRS action to treat the advances as taxable distributions in 2009 amounts to a change in accounting method.

All of these arguments were raised by the IRS attorney in the Tax Court case.  The IRS attorney eventually recognized that cancellation of debt does not create income under IRC 108  if the debtor is insolvent.  The IRS attorney also eventually realized that IRC 1368 cannot not apply to the client in 2009 because the distributions were made to the client in 2006-2008.  Finally, the IRS attorney eventually agreed that changing the characterization of the advances from a loan to a distribution is not a change in accounting method.

The IRS attorney finally agreed with me that if the advances were taxable at all, they were taxable as distributions when paid to the client in 2006-2008.   The IRS attorney then closed the case because it was brought only with respect to year 2009.

The IRS attorney cautioned me that the IRS may try to assess tax in years 2006-2008 under the theory that there has been a substantial understatement of income.  Under the tax law, the normal statute of limitations is 3 years and years 2006-2008 are closed.  Hoever, the normal 3 year statute is extended to 6 years if the reported gross income has been understated by more than 25%.  There was no question that the amount in question was more than 25% of the gross reported income.  However, the IRS failed to realize that the amount in question was reported.  It simply was not reported as gross income on the client's tax return.

The amount in question was reported on the "S" corporation information return as a "loan to shareholder."  The case law is clear that such reporting gives the IRS the notice it needs to do further inquiry.  I forwarded this case law to the IRS attorney with the request it be forwarded to the IRS appeals agents.  Accordingly, I do not suspect the client will face assessments for 2006-2008.

If you have been assessed federal or state income taxes and need help with your appeal to the IRS or U.S. Tax Court, please give me a call or email at 937-223-1130 or

AND ONE MORE THING.  I was listening to WYSO on the way into work this morning.  I heard a news report regarding proper preparation and cooking of chicken.  The story started with a tape of Julia Childs telling her audience that it was very important to thoroughly wash raw chicken in cold water before cooking.  Apparently Julia Childs was wrong.  The USDA has been trying to tell people for years that washing chicken is the wrong thing to do.  The point of washing chicken is to eliminate the salmonella and other germs that are on the chicken skin.  But washing raw chicken splashes the salmonella around in your sink, on your counter and any where else the water gets to.  It is much safer to cook the chicken to at least 165 degrees internal temperature and let the heat kill the salmonella and other germs.  Just thought you might be interested.  You can contact me at 937-223-1130 or

Thursday, August 22, 2013

Estate Planning for Married Couples (Same Sex or Not)

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The U.S. Supreme Court issued a decision in United States v. Windsor that radically changed the estate planning landscape for affluent same-sex married couples. The Court’s decision will have a significant effect on many federal laws and regulations affecting estate planning for spouses.

In Windsor, the Court was reviewing the applicability of the estate tax marital deduction to same-sex couples.  Taking advantage of the federal estate tax marital deduction, an individual can transfer property to his or her spouse during life or at death without having to pay any federal estate or gift tax.  Before the Windsor case, same-sex couples did not get this benefit because the federal Defense of Marriage Act (DOMA) defined “marriage” as a legal union between one man and one woman, and defined “spouse” as a person of the opposite sex who is a husband or a wife.  Consequently, same-sex married couples were forced to pay federal estate tax on their inheritance if it exceeded the tax-free exclusion amount.

Since, the same-sex couple in Windsor was not considered legally married under DOMA, the estate of the deceased had to pay more than $360,000 in federal estate tax.  The executor of the estate then filed suit in District Court requesting a refund, claiming that the definitions of “marriage” and “spouse,” in DOMA was unconstitutional. The District Court agreed.  So did the Court of Appeals.  And in a 5-4 majority decision, the US Supreme Court affirmed the lower courts’ opinions.  By striking down DOMA’s definition of marriage, the Court’s decision made numerous federal laws and regulations (some good, some bad) applicable to same-sex married couples.

The Federal estate planning benefits now available to same-sex couples include:

Portability.  Portability is the right of a surviving spouse to add the unused estate tax exclusion amount (currently at $5.25 million) of the deceased spouse to his or her own unused exclusion amount.  To take advantage of portability, the executor of the deceased spouse transfers the unused exclusion to the surviving spouse, who can then use it to make lifetime gifts or pass assets at death tax-free.  One requirement of portability is that an estate tax return must be filed when the first spouse dies (even if no tax is owed). If the executor does not timely file the return, the surviving spouse loses the right to portability.

Gift-splitting. Currently, any individual can give up to $14,000 each year to as many different people (without limit) as you like without incurring gift tax. Spouses may make a joint gift and combine the annual gift exclusion and jointly give up to $28,000 each year to as many people as they like tax-free. Any gift that is more (individually or in aggregate with all other gifts to the same person) than the annual exclusion amount counts against the lifetime gift tax exclusion amount.  Once an individual has exceeded the lifetime gift exclusion limit (currently $5.25 million), gift tax can apply.  But couples can also gift-split with their applicable exclusion amount, and together can transfer up to $10.5 million through lifetime gifts before gift tax applies.

Retirement Plans. If an individual has a qualified retirement plan or IRA account, ERISA gives the individual’s spouse the right to be the sole primary beneficiary of the account. In order for the individual to name anyone else as a beneficiary, the individual needs his or her spouse’s written consent.

Rollover Rights. For IRAs and qualified plans, the law gives special privileges to spouses who inherit retirement plan or IRA assets. Unlike other inheritors, who must begin making withdrawals by the end of the year following the account owner’s death, a surviving spouse who inherits an IRA or retirement plan account can roll the assets into his or her own IRA and postpone required minimum distributions until the year after the surviving spouse turns 70½.

If you have any questions about estate planning, retirement plans or how the Court’s decision in Windsor affects you and your spouse, please contact one of our tax or estate planning attorneys at 937-223-1130 or

AND ONE MORE THING.    In addition to giving same-sex couples some of the advantages of married status, the Windsor Court’s decision makes available to same-sex couples some of the disadvantages that are inherent in married status including: (1) losing the ability to step up basis in property by selling it to the same-sex spouse; (2) being jointly and severally liable on a joint tax return, subject to possible innocent spouse relief; (3) losing the ability to recognize loss on sale of property to a same-sex spouse; and (4) applicability of the constructive ownership rules to stock owned by the same-sex spouse.   If you want help with any income tax issues involving spouse please contact Jeff Senney at 937-223-1130 or

Thursday, August 15, 2013

Are You or Should You Be a Florida Resident?

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Some of my clients who spend a lot of time in Florida have asked about what is required to become a Florida resident for tax purposes.  While there are many relevant factors that determine where someone resides for tax purposes, the most important factor is where you spend most of your time.  Generally, a person is considered as resident of whichever state he or she spends more than half the year.

But many people travel on business and pleasure and may not spend half the year in any one place. In these situations, the state of residency is determined by looking at where you spend the most time and by examining other factors. To support your Florida residency you and your spouse should do the following:

1.  Complete and file a Florida Residency Declaration.

2.  Apply for a Florida driver’s license.

3.  Register to vote in Florida.

4.  Become a member of a church in Florida.

5.  Join the Rotary club, Lions Club, Elks club or similar organization in Florida.

6.  Join a gym or YMCA or golf club in Florida.

7.  Get a library card from the local Florida library.

8.  Get a land line phone for your Florida house.

9.  Get a new cellphone with a Florida area code number.

10.  Register your cars in Florida and get Florida license plates.

11.  Change the billing address on all your credit cards to your Florida address.

12.  Establish personal bank account in Florida.

13.  If you are operating a Florida management company or other business that will provide services to a non-Florida operating company, set up a Florida bank account for the Florida management company.

14.  Set-up a website for the Florida management company and advertise it as providing sales and management consulting services.

15.  Do a Yellow Pages ad for the Florida management company and its business.

16.  Get some Florida management company business cards and stationary printed up.

17.  Develop a relationship with a Florida doctor and dentist.

18.  Use credit cards to pay for everything so you have a record of all the days you are in Florida.

19.  Consider having someone house sit your non-Florida house while you are in Florida (this is actually a good idea just for protection of the property, but it also makes it more credible that the non-Florida house is your vacation house and the Florida house is your principal residence).

20.  Consider putting the non-Florida house in a trust or family LLC to get it out of your name (this would negate the principal residence gain exclusion on sale of this house so need to think about this one).

Give me a call if you are interested in moving to Florida and becoming a Florida resident. We can help you with any questions you may have about the process. or 937-223-1130.

AND ONE MORE THING.  Sharon and I were co-hosts of the House of Bread Gala that was held Saturday August 10th at the Sinclair Ponitz Center. Dinner and drinks were excellent, visiting with old and new friends was great, and helping House of Bread collect over $30,000 was wonderful. Thank you to everyone that attended, donated  a silent auction prize, made a cash contribution or helped out in any other way.  Hope to see you all at next year's Gala.  For more information about the House of Bread, go to their website at

Thursday, August 8, 2013

Hire Workers Before 2014 to Qualify for WOTC

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 The Work Opportunity Tax Credit (WOTC) allows employers who hire members of certain targeted groups before January 1, 2014 to  get a credit against income tax of 40% of first-year wages up to a maximum amount. The maximum amount of first-year wages  is generally  $6,000 per employee, but the limit is only $3,000 for  qualified summer youth employees and various  amounts for qualified veterans.  The credit percentage is 25% for employees who have completed at least 120 hours, but less than  400 hours of  service for the employer.   Where the employee is a long-term family assistance (LTFA) recipient, the maximum WOTC is $9,000.

The targeted worker groups are: qualified IV-A recipients (qualified recipients of aid to families with dependent children or successor program); qualified veterans; qualified ex-felons; designated community residents;  vocational rehabilitation referrals; qualified summer youth employees; qualified supplemental nutrition assistance program (SNAP) recipients; qualified SSI recipients; and long-term  family assistance recipients, i.e., members of a family that receives or  received assistance under a IV-A program for a minimum period of time.  No WOTC is allowed for employees who are related to the employer or to certain owners of the employer.

The amount of first-year wages taken into account in computing the WOTC for qualified veterans is:

    (a) $6,000 for a veteran who is a member of a family receiving assistance under a food stamp program for at least three months (maximum credit of $2,400);
    (b) $12,000 for a veteran with a service-connected disability (maximum credit of $4,800);
    (c) $24,000 for a veteran with a service-connected disability who has aggregate periods of unemployment of six months or more (maximum credit of $9,600);
    (d) $6,000 for a veteran who has aggregate periods of unemployment which equal or exceed four weeks (maximum credit of $2,400); and
    (e) $14,000 for a veteran who has aggregate periods of unemployment of six months or more(maximum credit of $5,600).

Wages paid (1) for federally funded on-the-job training  and (2) to an individual who performs the same or substantially similar services as those of employees participating  in or affected  by a strike or lockout at the employer's plant don't qualify for the credit.

To be eligible for the WOTC, a new employee must be certified as a member of a targeted group by a State Employment Security Agency (SESA). In general, the employer can either get the certification by the day the prospective employee  begins work  or complete a pre-screening notice (use Form 8850) for the employee by the day he is offered employment, and submit it to the SESA as part of a request for certification within  28 days after the employee begins work.

If you have any questions about the WOTC, please contact one of our tax or business attorneys at 937-223-1130 or
AND ONE MORE THING.  The work opportunity tax credit (WOTC) is a valuable tax break for businesses that hire workers from certain targeted groups. However, under current law, qualifying employee hires must begin work for the employer before January 1, 2014.  Although the United States Congress may extend the WOTC, it's not a certainty.   So if you are planning to add workers, and you are thinking of hiring WOTC-eligible employees, you should make the hire before January 1, 2014 so you can ensure you get the tax credit.  It makes sense not to wait until the last minute, because the process of getting eligible workers certified can be somewhat involved.  Contact me at 937-223-1130 or if you would like to discuss this further.

Wednesday, August 7, 2013

Buying or Selling Assets or Stock of a Corporation

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Potential buyers of a corporate business generally want to buy the assets of the corporation and not the stock.  Sellers generally want to sell the stock and not the assets.

When a seller sells stock of a corporation, the seller pays tax at capital gain rates on the gain recognized on the sale of the stock.  On the other hand, if the seller caused his or her corporation to sell its assets, then the corporation generally would have to pay tax at ordinary income tax rates on the depreciation recapture amount and tax at capital gains rates on the balance of the recognized gain.  And this corporate level tax is in addition to any tax the sellers pay upon distribution of the sales proceeds by the corporation to themselves.  So sellers generally prefer doing a stock sale because they pay less tax when the deal is structured as a stock sale.

On the other hand, a buyer wants to do a deal as an asset sale because the buyer avoids becoming liable for seller’s known and unknown liabilities, and because buyer will get an automatic basis step-up in the corporation’s assets.  As a result, the buyer will  get larger depreciation deductions and will pay less tax in the future.  For these reason, buyers generally insist on doing the deal as an asset sale.

Assuming taxes and existing liabilities are not a major concern, there are some situations where both buyer and seller would prefer to do a deal as a stock sale.  Doing a stock sale can eliminate the need to transfer or obtain new licenses, permits and certifications.  Doing a stock sale is somewhat less cumbersome since only title to the stock gets transferred and not all of the individual assets.

When buyer and seller negotiate the structure of the deal as an asset sale or a stock sale, they need to factor in the tax consequences when setting the agreed purchase price.  A higher purchase price will generally be paid by the buyer in an asset sale.  A lower purchase price will generally be paid by a buyer in a stock sale.

 But if a deal must be structured as a stock sale, is it possible for a buyer to do the stock sale and still get the tax effect of doing an asset deal?    It is.    IRC section 338(h)(10) permits a buyer and seller to jointly make an election to treat the stock sale as an asset sale for tax purposes.  If this election is made, only corporate-level gain on the deemed asset sale is recognized.  No shareholder-level gain is recognized on the actual stock sale.  Second, the deemed asset sale is treated as occurring while the target corporation is still a member of the selling group.  As a result, it is often possible for the seller to shelter the gain on the deemed sale of assets with operating losses or other tax benefits within the selling group.  As a result, an IRC section 338(h)(10) election may be agreeable to both parties when negotiating the structure of a deal if the value of the future tax benefits to the buyer (stepped up basis) exceeds the current tax cost to the seller.  To the extent the buyer gains significant basis step-up as a result of the election, buyer might increase the stock purchase price somewhat to account for the increased taxes paid by the seller.

If you have questions about making a 338(h)(10) election, call one of our business and tax attorneys at 937-223-1130 or

AND ONE MORE THING.  Don’t forget that making a 338(h)(10) election for an “S” corporation could cause the built-in-gains tax to apply.  BIG tax applies when an “S” corporation that was formerly a “C” corporation sells appreciated assets at any time during the recognition period.  If you have any questions about BIG tax please call one our tax and business attorneys at 937-223-1130 or
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