Free Enterprise - The FindLaw Small Business Law Blog

June 2009 Archives

'Small' Business Tax Relief Act of 2009?

On Friday, Senator Chuck Grassley introduced the Small Business Tax Relief Act of 2009. It aims to cut taxes for small businesses. If enacted, the bill would spread tax benefits to small, but also to many large businesses. Here is a breakdown of the bill's main features.

The primary benefits the Small Business Tax Relief Act of 2009 would give businesses is decreased tax liability along with increased deductions. It both expands small business tax benefits offered, and increases the size of businesses eligible for many of them.

One element that would please many small businesses is the increased "Section 179" expensing. Section 179 expenses refer to the portion of the tax code that allows deductions for qualifying equipment purchased and put into service in a given tax year. The Obama administration's stimulus package increased the amount that can be expensed from $125,000 to $250,000. Currently, this deduction phases out for businesses that purchase more than $800,000 worth of such equipment.

Grassley's bill would increase the maximum Section 179 deduction to $500,000, and wouldn't phase out any deduction unless a business spent more than $2,000,000 on qualifying equipment in a given year.

Tax on Health Benefits Coming?

A question dominating much of the debate about health care reform is how to pay for it. One idea on the table, which business owners should watch, is to tax at least a portion of employment based health coverage.

President Obama and Congress are currently attempting to sort out details large and small about what type of health care reform we may see, and how we will pay for it. No whehter we  see a robust "public option," fully private insurance, or any variants in between, universal health coverage for all Americans remains a primary goal. All sides agree that this will cost much money, even if reigning in health care costs over the long term proves feasible.

As detailed by the New York Times, several ideas of how to pay are battling it out. They include:

  • Limiting income tax deductions for high income individuals;
  • Taxing a portion of health care benefits received by employees;
  • Spending less on Medicair; and
  • Expanding "sin" taxes on purchases like liquor and cigarettes.

The second option -- taxing health benefits -- has gained ground with some influential Senators, including Max Baucus, Chairman of the Senate Finance Committee. It would affect small businesses that offer (or wish to offer) health benefits to their employees.

The King Of Pop and Commercial Contracts after Death

Michael Jackson's unexpected death left millions nostalgic for his dance-floor igniting early hits. It also left millions of fans with tickets to shows that will never happen, and concert promoters with no more concert to promote. All types of businesses can face this question: what happens when a counter-party to a contract dies?

Many contracts contain provisions specifically setting out what happens when things beyond the control of either party render performance under the contract impossible. These are often called force majeure clauses, and are typically meant to cover so-called "Acts of God." Contract laws vary from state to state, but when including a force majeure clause, it's best to specify examples of what would qualify (natural disasters, wars, etc.).

Death or illness of one of the parties to a contract is not considered a force majeure. However, under general contract principles, if death or illness renders it impossible for that party to perform their side of the bargain, they are excused.

So what happens next?

Yesterday, the Employment Non-Discrimination Act (ENDA) was introduced in the US House of Representatives. It would prohibit employers from discriminating based on sexual orientation or gender identity in a wide variety of employment decisions. Though similar legislation has been repeatedly introduced without success, increased support this year means businesses would be smart to prepare for compliance.

Representative Barney Frank, along with others, has introduced ENDA just about every year since 1994. This year, however, he has 118 original cosponsors from both sides of the aisle. This year's bill (like some, but not all of its predecessors) also includes protections for trans-gender individuals as well as lesbian, gay and bisexual people.

Currently, Title VII of the Civil Rights Act of 1964 puts race, gender, religion and national origin off limits as far as employment decisions including hiring, firing, promotions, demotions, reductions in hours, along with many others. ENDA would provide the same protections for lesbian, gay, bisexual and transgender (LGBT) people.

We also currently have federal protections against some age discrimination, as well as discrimination against those with disabilities, but those are provided outside of Title VII.

Discrimination based on sexual orientation or gender identity, on the other hand, is so far left to state and local rules. As stated in Representative Frank's press release, it is still legal in 30 states to fire someone simply for being gay. 38 states allow it based on gender identity. The bill introduced yesterday would end this. As with the protections Title VII gives other groups, it would ban employment agencies and labor unions from discriminating based on sexual orientation or gender identity.

SBA 504 Loan Program Changes: Refinancing Now Possible

In recent months, the Small Business Administration (SBA) has enacted numerous changes to its lending programs in attempts to get credit moving to small businesses. One change which the agency is publicizing today is a permanent change to the SBA 504 loan program. 504 loans finance the purchase or improvement of large scale fixed assets, such as commercial real estate, buildings or equipment. Now, 504 loans can be used to refinance existing loans already taken out on similar purchases or projects.

Previously, we discussed SBA 504 loan basics and the fact that like 7(a) loans, borrower fees for 504 loans have been temporarily eliminated.

Those who will benefit from the change publicized today have already taken out non-SBA loans to do things that would qualify for 504 loans. That typically means loans for the purchase of land, buildings, or equipment, or for improvement projects. The new change would let such borrowers use the SBA 504 program to refinance their debt to far better terms.

The Dwindling 401k Match and a Pair of 401k Reform Bills

Two recently introduced bills aim to clean up some shady 401(k) practices. Though they could provide some welcome clarity and cut out some less than ethical investment advisor practices, they won't save 401(k) plans from perhaps their biggest short term threat: the disappearing employer contribution match.

Last week, two 401(k) related bills moved forward in the House. Both aim to provide transparency to those who participate in 401(k) plans.

The 401(k) Fair Disclosure for Retirement Security Act would require that fees associate with 401(k) plans be disclosed on quarterly statements, in simple dollar amounts (not percentages), and broken down into investment management fees, transaction fees, administrative fees and other fees.

The Conflicted Investment Advice Prohibition Act perhaps has a little more meat on it that could prevent some problem 401(k) investments (and some 401(k) losses). It would prohibit investment advisors from offering investment advice on 401(k) plans if the advisor has an interest in any of the funds in which plan participants invest. It would also prohibit an investment advisor from advising on a 401(k) if the plan's choice of investments would affect the advisor's income.

As reported by US News & World Report, both bills are now before the full House Education and Labor Committee.

Helping participants understand the fees they pay and cutting out some of the conflicts of interest would both improve 401(k) plans. However, in the short term, the growing number of employers cutting off their matching contributions threatens employee participation and retirement planning.

Age Discrimination Standard Changed by Supreme Court

Yesterday, the Supreme Court made it more difficult for plaintiffs to prevail in workplace age discrimination cases. Despite the increased burden on plaintiffs, employers in the current economic climate of layoffs and cutbacks should be careful to abide by age discrimination laws.

For a breakdown of the decision (Gross vs. FBL Financial Services) and how it sets age discrimination cases apart from other types of federal discrimination cases, see today's post in FindLaw's Law & Daily Life.

The upshot of the case is that now the burden rests solely on the plaintiff to prove that age was the deciding factor in the firing, demotion, or other adverse treatment they received from an employer.

Before this case, a two-step approach had been used (as is still the law in other federal discrimination cases). If the plaintiff could prove that age was a factor in employment decision, then the burden shifted to the employer to prove that it had a legitimate, non-age related reason for the decision.

Not any more for age discrimination cases.

This week, lenders began taking applications for the long anticipated Small Business Administration (SBA) backed ARC (American Recovery Capital) emergency loans. Despite some fears about lender participation, it looks like all the money set aside for the loans will be quickly used. But how many eligible small businesses will be left out in the cold?

We've often discussed the SBA ARC loan program in this space. After last week's release of details about the ARC program and eligibility for the loans, on June 15, applications began being accepted.

Though the participating lenders get 2% plus prime interest from the SBA on these loans, many feared that this would not be enough incentive for lenders to be part of the program. As exemplified in the New York Times new You're the Boss blog, however, some believe the bigger problem will be running out of loans.

Since last weekend, we've had headlines about the IRS coming after taxes owed for personal use of work issued cell phones. Now it looks like that tax may go the way of the dinosaur. Both the IRS and the Treasury Department have asked Congress to repeal it.

Under the current tax code, work issued cell phones are considered taxable fringe benefits to the extent to which employees use them for personal calls. Technically, an employee owes tax on the value of the personal calls made, and for work-related calls the employer can deduct the cost as a business expense.

A key problem that has prevented adequate collection of this tax has been how burdensome it would be for the employer or employee to allocate the exact cost of personal versus work use of a cell phone. The result: many ignore the tax and it goes unpaid. However, this can and has led to large tax liabilities for employers who ignored the rule.

Enter last week's proposals issued by the IRS. The IRS put forth multiple options for how employers could account for the phones, with the most prominent being an across the board assignment of 25% work cell phone cost to personal (taxable) use. It also sought input as to how the split could best be measured.

Well, in response to the options proposed, the IRS did receive comments -- outrage and bad press enough to make the IRS agree that the tax should be repealed.

Tough times have many people trying to pick up extra work where they can find it. Some have a job but take another (or 2) on the side. Some start up small businesses on the side. Others already run small businesses and take an extra job to bolster fallen income. Here are a few legal considerations to keep in mind if thinking about moonlighting.

Today's Wall Street Journal reports on a handful of small business owners and their recent experiences moonlighting. These are folks with established small businesses who have seen their income plummet and take a job on the side.

In the reverse direction, many whose jobs have ceased to exist or whose hours have been cut have started up a small or micro business. And then there are the many people with jobs who add additional jobs to make ends meet. All of these groups should keep a few legal issues in mind before moonlighting.

We will likely soon see legislation to curb IRS enforcement of penalties against small businesses for engaging in 'listed transactions.' Fees for not reporting these transactions aim to curb the use of abusive tax shelters. They target businesses and individuals abusing transactions such as certain benefits plans to avoid taxes. Its unintended victims: small businesses who purchased benefits plans from financial planners without knowing they were participating in any problem transaction, and ended up owing enormous penalties.

The scenario is enough to scare any small business owner. You purchase a retirement or life insurance plan to offer your employees. Four years later you get audited and learn that the IRS finds the plan to be one of its listed transactions. For not reporting the transaction (even if it became listed after the fact), your business owes the IRS $1,200,000. The kicker -- this applies even if you got no tax benefit from the transaction. The second kicker (as if you needed one) -- the fine amount is set and you can't dispute it in court.

As reported by the AP, the chairmen of the House and Senate tax committees intend to change this. They want to pass legislation lowering the fines for not reporting listed transactions. In the meantime, they've asked the IRS to stop enforcing the penalty fees against small businesses where the penalty fee exceeds any tax benefit gained.

Facebook Vanity URLs and Trademarks

Tonight Facebook will open the flood gates and allow users to reserve vanity URLs. Instead of their Facebook page having a cumbersome address filled with numbers, these users (millions of them) will be found at addresses like While such vanity URLs are nothing new, the land rush for Facebook vanity URLs will likely bring some users into conflict with other people's trademarks.

A vanity URL would be a definite benefit for businesses already on Facebook. Their Facebook URL will be much simpler, and potential customers will find them more easily. However, what happens if somebody else grab's a URL containing your trademark?

Most important things first: owners of registered trademarks can go onto Facebook's site and request that their trademarks be made unavailable for others to use in their vanity URL. Trademark owners must do so by 12:00am EDT this Saturday.

Some legal background: can elements of URLs infringe on trademarks? Yes. A URL containing a trademark can infringe if it's used commercially and would likely cause consumer confusion as to source. For example, if Smokin' BBQ was a registered trademark, would likely infringe if it was claimed by another barbeque company.

Health Care Reform: Study Sees Benefits for Small Businesses

A study released today claims that small businesses would benefit from proposed health care reform even if required to help employees pay for coverage. Some claim that forced employer contributions would increase the burden on already stressed small businesses. Others claim this would actually improve small business' bottom line. Of course, the answer will largely depend on the details of whatever reform package becomes law.

As reported by Reuters, the Small Business Majority (a non-profit health care advocacy group) released a study it commissioned, which was conducted by M.I.T. economist Jonathan Gruber. Amongst its key findings, The Economic Impact of Healthcare Reform on Small Business study found that with certain health care reforms (discussed below), the following benefits would follow:

  • Small businesses would pay dramatically reduced costs to provide health insurance to their employees.
  • Small business jobs would be saved. The study cites health care costs as causing the loss of a projected 178,000 small business jobs by 2018. The study predicts that with health care reform, this could be reduced by up to 72%.
  • Small business employees' wages would be preserved. The study cites exploding health care costs as causing cuts in wages at small businesses. With reform bringing these costs down, more money would be left to pay wages.
  • Small business profits and competitiveness would be strengthened. Just like they eat into wages, health care costs cut into profits. Bringing them down, according to the study, would improve profitability.
  • "Job lock" would be reduced. Workers who feel locked to their job because they fear not finding comparable benefits would be freed up to change jobs. Small businesses providing health care would have a greater talent pool from which to choose employees.

So what are the types of reform factored in by the study?

The peer to peer lending (a.k.a. person to person or social lending) success story has expanded its lending operations to U.S. small businesses. If it's pilot program works, Kiva hopes to bring its developing world microlending success to more small businesses in the U.S.

Kiva, based in San Francisco, was inspired by the Nobel Peace Prize winning Grameen Bank of Bangladesh and its founder Muhammad Yunus. Yunus' innovation was simple, elegant, and has proved incredibly useful: small locally geared loans to those deemed uncreditworthy by traditional banks are very often repaid dutifully and give recipients the bit of capital they need to succeed as entrepreneurs.

Kiva has had great success in putting some peer-to-peer into microlending. It works by allowing individuals to simply go online, browse amongst entrepreneurs in the developing world, and lend small amounts (such as $25) via PayPal. The funds are distributed by Kiva's local microfinance partners in specific regions (who also vet the applicant entrepreneurs). Lenders can track their recipient's progress online, and the recipient's pay back the money over time.

Kiva lenders receive no interest. Borrowers do pay some interest, which goes to finance the local microfinance partner. Kiva does not guarantee repayment, but cites a 99.7% repayment rate on loans made so far (a number would make a traditional lender drool).

Today is closing day for almost 800 Chrysler dealers nationwide. In response to a last bid challenge by about 300 of the closing dealers, the bankruptcy court ruled today that Chrysler's sloughing off of these dealers may proceed.

As reported by the Detroit Free Press, U.S. Bankruptcy Judge Arthur Gonzalez approved the rejection of 25% of Chrysler's dealer agreements. Tomorrow, these dealerships will no longer sell new Chyslers or Jeeps. Chrysler will also no longer honor agreements to supply parts or warranty repayment, taking away Chrysler repair work those dealerships may have had on vehicles they sold. Chrysler also will not buy back any unsold inventory, but did agree to arrange for sale of these vehicles to dealers within the "New" Chrysler's network.

Some had wondered whether the Supreme Court's pausing of the Chrysler-Fiat deal yesterday would affect the dealer closings. Yesterday, the Supreme Court put the Chrysler deal on hold in a challenge by two Indiana pension funds owning Chrysler bonds. As for why the Supreme Court paused the deal, we cannot say. The order was issue by Justice Ginsburg without explanation of why or what will happen next.

Unfortunately for the dealers, however, trouble with Chrysler's plan has not prevented the rejection of their contracts.

So, why can pension funds owning a fraction of Chrysler's debt cause a time-out in Chrysler's restructuring plan, but hundreds of affected franchisees can't do anything?

SBA ARC Loans: What Counts as a 'Viable' Small Business?

Despite the federal recovery efforts to increase lending to small businesses, the loans many small businesses have waited on are the Small Business Administration (SBA) emergency ARC loans designed to help struggling businesses temporarily bridge the financial gap. The SBA has released more details about which businesses will be eligible for the loans, set to become available next week.

As discussed previously, the ARC loans, to come from private lenders, will be for up to $35,000. Borrowers will not have to make any payments for a year after disbursement. After that, they'll have 5 years to pay off the loan. Recipients may use the funds to pay down debt (except other SBA loans made before February 17, 2009). The SBA will pay lenders prime plus 2% interest on the loans, but borrowers will need to repay only the principal.

In terms of eligibility, these loans are designed for small "viable" businesses with "immediate economic hardship." The first thing to know is that ARC loans are not for new businesses. Even if a start-up seems "viable," businesses must have been in operation for at least 2 years to qualify.

So, what exactly do "viable" and "immediate financial hardship" mean?

As if there were not already reason enough for employers to avoid bad-mouthing ex-employees, add defamation to the list. As a recent Connecticut case illustrates, making false statements with willful ignorance can be the "actual malice" that defeats any privilege normally given to in-company communications. Concerns about defamation liability (in addition to common sense) counsel employers to keep their mouths shut, particularly if they do not know the facts in question.

The case of Laurie Gambardella in Connecticut serves as an example of what employers should not do. As described by Business Insurance, she was an extended care facility employee fired for "theft" of a deceased patient's furniture, despite having been offered the furniture by the patient's family (which was proven in an internal investigation). Word got out that the plaintiff had been fired for "taking furniture from a dead lady," and she filed a defamation suit.

To be defamatory, a statement must be false, be published (meaning simply communicated to someone besides the plaintiff), and must cause injury to the plaintiff. If the statement was written, it's libel. If spoken, it's slander.

GM Bankruptcy: Stark Options Presented to All Dealers

GM's reorganization appears to pose some tough choices for all of its dealers -- those who will be cut and also those who wish to be part of the "new GM." Though dealers on the chopping block appear to be receiving better treatment than their Chrysler counterparts, the changes any continuing GM dealerships must make may cause some to choose closing up shop.

In the wake of Chrysler's and GM's respective bankruptcies, we've discussed the terrible fate that franchise agreements can meet when the franchisor declares bankruptcy.

Details of GM's reorganization strategy illustrate the incredible bargaining power bankruptcy allows a franchisor. In addition to simply rejecting franchise agreements, Chapter 11 bankruptcy allows a franchisor to dictate new terms to the franchisees it wants to keep around. Franchisees can either accept the new agreement or see their old one rejected by the franchisor in the bankruptcy process.

As reported by CNN, the lucky GM dealers who aren't amongst those already slated to end will have to either accept some heavy handed new terms or hit the road. The new terms include:

  • Heightened sales targets (yet) to be set by GM, which GM may change in the future, and which if not met would allow GM to back out of the agreement;
  • No selling non-GM cars in the same showrooms;
  • No right to protest the movement of other dealerships; and
  • Required upgrades (or even relocation) of dealerships.

Last week the IRS issued guidance regarding the expanded work opportunity tax credits (WOTC). In addition to types of new hires previously qualifying, these credits are now available for employers who hire certain unemployed veterans or "disconnected youth." Businesses with qualifying employees already on their payrolls, and those looking to hire more should know how the credit works.

Work opportunity tax credits reward employers for hiring certain disadvantaged individuals. The American Recovery and Reinvestment Act of 2009 added two groups of new-hires to this list: unemployed veterans and "disconnected youth" hired after 2008 but before 2011.

Groups which were already eligible include:

  • certain disabled veterans;
  • veterans recently qualifying for food stamps;
  • summer youth hires in designated communities;
  • 18-40 year old residents of designated communities;
  • qualifying ex-felons;
  • certain new-hires in the Hurricane Katrina disaster area; and
  • individuals who've recently been eligible or received various benefits (such as SSI, food stamps or Temporary Assistance for Needy Families benefits).

Recently, a bill was introduced that could potentially help ensure that federal small business contracts actually go to small businesses. The Fairness and Transparency in Contracting Act of 2009 would modify the definition of small business in the Small Business Act to exclude publicly traded companies and would create a complaint system for resolution of disputed contract awards.

Reports of government small business contracts going to subsidiaries of large corporations are not new. Since 2003, at least a dozen federal investigations have reportedly found contracts meant for small business going to Fortune 500 and other large companies around the world. This past March, the Government Accountability Office (GAO) released a report finding fraud and abuse in the SBA's Historically Underutilized Business Zone (HUBZone) initiative regarding approximately $30 million in contracts.