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What’s Next for the Cannabis Industry?

The cannabis industry is off to a fast and quite intriguing start in the Bay State, and two new categories of license have particular potential to move this sector in new directions: one for home delivery of cannabis products, and another for social-consumption establishments, or cannabis cafés.

By Isaac C. Fleisher, Esq.

We are nearly three years into the Commonwealth’s experiment with recreational cannabis, and the industry is finally moving beyond an amusing novelty.

The Cannabis Control Commission (CCC) reports that retail sales in 2019 alone have already exceeded $190 million, and this is just the tip of the iceberg. To date, the CCC has issued only 72 final licenses for marijuana establishments, but there are currently another 400 license applications that are pending or have received provisional approval.

Isaac C. Fleisher

This all means that, over the next few years, the Massachusetts cannabis industry is set to grow at an unprecedented rate. What we don’t know is how this growth will change and shape the industry.

Much of the excitement and rhetoric around legalization has focused on the potential to create new business and employment opportunities for communities that have been disproportionately harmed by prohibition and for local entrepreneurs. Lawmakers attempted to pursue these goals (with mixed success) through the design of the original regulations, with provisions for local control by cities and towns, special categories for equity applicants, and caps on the number of licenses that a single business could control.

The CCC has recently been grappling with these issues once again as it revises its regulations.

On July 2, after months of policy discussions and hearings, the CCC released new draft regulations for both medical and recreational marijuana, which will be open for public comment until Aug. 16. While most casual observers will not find the draft regulations to be scintillating reading material, there are a number of interesting new provisions that can tell us a lot about what the future of Massachusetts’ cannabis industry could look like.

Two new categories of license have particular potential to move the cannabis industry in new directions; one for home delivery of cannabis products, and another for social-consumption establishments (i.e., cannabis cafés).

Social Consumption

A social-consumption license would authorize businesses to sell cannabis products to customers for on-site consumption. Just think of your neighborhood bar, but it serves cannabis instead of alcohol. Under the proposed regulations, cannabis could be consumed at a social-consumption establishment in almost any form, except for combustible (i.e. smoking it the old-fashioned way), but even that possibility is left open by a provision for an outdoor smoking waiver.

Cannabis edibles would have to be prepackaged and shelf-stable, but there is no prohibition on serving prepared food on site, so long as the food isn’t directly infused with marijuana. That means we could soon be seeing cannabis restaurants that offer gourmet food alongside gourmet pot.

“There is no prohibition on serving prepared food on site, so long as the food isn’t directly infused with marijuana. That means we could soon be seeing cannabis restaurants that offer gourmet food alongside gourmet pot.”

The CCC is taking an incremental approach to this new class of license by including provisions for a social-consumption pilot program that would be limited to only 12 municipalities. Towns that participated in a working group on social consumption — including North Adams, Amherst, Springfield, Provincetown, and Somerville — would be among those able to opt into the pilot program. Licenses would initially be available only to applicants that were already licensed as a ‘microbusiness’ or a ‘craft marijuana cooperative,’ or applicants certified by the CCC as an ‘economic empowerment’ applicant or ‘social equity’ applicant. The pilot program is an interesting attempt to address the demand for new cannabis markets, while still preserving access for small, local, and minority-owned businesses.

Home Delivery

A licensed ‘delivery-only retailer’ could deliver marijuana products directly to a customer’s residence. Advocates for home delivery have long touted its potential to level the playing field between large, well-funded businesses and the small, local entrepreneurs the CCC seeks to attract.

In theory, a delivery-only licensee wouldn’t need much more than a vehicle in order to begin operating. However, the draft regulations include a number of provisions that could create substantial barriers to entry for small-time operators. Home-delivery orders would still need to go through a traditional brick-and-mortar retailer, who would presumably not be particularly interested in providing their product to competitors at wholesale prices.

Additionally, the draft regulations prohibit deliveries to any residence in a town that has banned brick-and-mortar retailers.

Numerous security provisions included in the draft regulations create further costly (and controversial) requirements for delivery-only retailers. Each delivery vehicle would need multiple surveillance cameras, and delivery agents would need to wear body cameras to record the entire delivery, including the customer. This has predictably resulted in a number of concerns about privacy and regulatory overreach.

At a recent CCC meeting, Commissioner Shaleen Title pointed out that, “to the extent that home delivery to [medical-marijuana] patients has been ongoing, there may already be security in place that goes above and beyond our regulations, and to my knowledge there haven’t been incidents … That seems to be an argument that you should not be putting in additional burdens and regulations.”

While body cameras got the most attention at the CCC’s meetings, one provision in the proposed home delivery regulations with the potential to be far more consequential is the option to use a “third-party technology platform provider” to facilitate the ordering process. In simpler terms, we could soon be saying “there’s an app for that.”

While there is still a thorny tangle of federal and state laws preventing a true e-commerce for cannabis, it’s not hard to imagine startups racing to be the first ‘Uber for weed.’ This would certainly make the consumer experience even more convenient, but it would mean yet another blow to the delivery only retailer’s profit margin, and does not seem consistent with the goal of lowering the barrier to entry for small businesses.

Of course, excitement about new markets comes with the important caveat that the rules still need to be finalized and, in some cases, there would need to be a corresponding change in state law. Nevertheless, it is encouraging to see that regulators are willing to consider new ideas for Massachusetts’ cannabis industry. The lines around the block at the first retailers have everybody seeing dollar signs, but with no statutory limits on the number of licenses that the CCC can issue, it is only a matter of time before supply exceeds demand.

In states that are further along in this process there is already evidence of a boom-bust cycle, as oversupply causes wholesale prices to plummet and smaller operators are forced out of the market. In Massachusetts, where the cannabis industry is still relatively nascent, there is still opportunity for regulators, consumers, activists, and entrepreneurs to play important roles in shaping the future of the industry.

Attorney Isaac C. Fleisher is an associate with Bacon Wilson, P.C., where his practice is focused on business and corporate law, with particular emphasis on the rapidly expanding cannabis industry. An accomplished transactional attorney, he has broad experience in all aspects of business representation, for legal matters ranging from mergers and acquisitions to business formation and financing; (413) 781-0560; [email protected].

Accounting and Tax Planning

Section 199A

Section 199A of the Tax Cuts and Jobs Act was created to level the playing field when it comes to lowering the corporate tax rate for those businesses not acting as C corporations. For most profit-seeking ventures, qualifying for the deduction is not difficult, but for rental real estate, it becomes more difficult.

By Lisa White, CPA

On Dec. 22, 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law, bringing with it a plethora of changes, affecting, albeit in varying degrees, every taxable and non-taxable entity and individual.

One of the primary focuses of the act was to lower the corporate tax rate to a flat rate of 21%. In order to keep the taxable-entity landscape equitable, however, a provision was necessary for those businesses not operating as C corporations.

Thus, Section 199A was created, providing for a deduction of up to 20% of qualified business income from a domestic business operating as a sole proprietorship, partnership, S corporation, trust, or estate.

The first step in assessing the benefit of the Section 199A deduction is to determine if there is a qualified activity. The statute uses Section 162 of the Internal Revenue Code to designate qualification — which is difficult since Section 162 does not actually provide a clear definition of what constitutes a trade or business.

“What might be the easiest way to approach making the determination is the ‘walks like a duck, quacks like a duck’ scenario. If the activity is a profit-seeking venture that requires regular and continuous involvement, there should not be an issue with rising to the level of a qualified trade or business under Section 162 — and thus being eligible for the Section 199A deduction.”

Instead, case law must be used to support the position taken. What might be the easiest way to approach making the determination is the ‘walks like a duck, quacks like a duck’ scenario. If the activity is a profit-seeking venture that requires regular and continuous involvement, there should not be an issue with rising to the level of a qualified trade or business under Section 162 — and thus being eligible for the Section 199A deduction.

For rental real estate, the determination becomes a bit more complicated. If the rental activity consists of property being rented to or among a group of commonly controlled businesses, where the same owner — or group of owners — owns directly or indirectly at least 50% of both the rental property and the operating business, and the operating business is not a C corporation, then the qualifying designation is automatic. Otherwise, to make the determination, we must once again turn to case law.

Here, this becomes problematic, as there is limited history supporting the position that rental activities rise to the level of a Section 162 trade or business, as the designation heretofore was unnecessary.

In response to concerns about the lack of guidance, the Internal Revenue Service issued Revenue Procedure 2019-7, which provides for a safe harbor under which a rental-real-estate activity will be treated as qualifying for the Section 199A deduction. In addition to holding the rental property either directly or through a disregarded entity, other qualifying factors include the following:

• Separate books and records are maintained for each rental activity (or rental activity group);

• At least 250 hours of rental services are performed each year on each rental activity; and

• For tax years ending after 2018, contemporaneous records are maintained detailing hours of services performed, description of services performed, dates on which services were performed, and, who performed the services.

When making the determination of whether an activity rises to the level of a trade or business under the general rules, each activity must be assessed separately, and no grouping is permitted.

Alternatively, the safe-harbor provision provides an opportunity to elect to group rental activities together in order to meet the other qualifications. The caveat here is that commercial properties must be grouped only with other commercial properties, and likewise for residential properties. Once made, the grouping election can be changed only if there is a significant change in the facts and circumstances. The rental services performed that qualify for the 250-hour requirement include tasks such as advertising, negotiating leases, collecting rent, and managing the property, among others. Financial-management activities, such as arranging financing or reviewing financial statements, do not qualify as ‘rental services,’ nor does the time spent traveling to and from the property. The rental services can be performed by the owners of the property or by others, such as a property-management company.

The safe-harbor election is available to both individuals and pass-through entities and is made by attaching a signed affidavit to the filed return stating that the requirements under the safe-harbor provision have been met.

It’s important to note here that, although meeting the safe-harbor requirements will qualify the activity for Section 199A, it does not provide automatic qualification under Section 162. Similarly, failure to satisfy the safe-harbor requirements does not mean the activity automatically does not qualify for the deduction. Instead, support for the position will just need to be derived from considering other relevant factors and/or case law that can be used as precedent.

Additionally, the safe-harbor election cannot be made for residences used personally for more than 14 days during the year, nor for properties rented on a triple-net-lease basis, a scenario where the tenant is responsible for the taxes, insurance, and general maintenance related to a rental property.

If pursuing the Section 199A deduction for rental property without using the safe-harbor provision, some factors to consider documenting would be the type of property rented, the day-to-day involvement of the owner (or the owner’s agent), and the types and significance of any ancillary services provided.

It seems the courts have applied a relatively low threshold in finding rental activities to rise to the level of a Section 162 trade or business, but it’s also important to note that implications of that designation have changed significantly. One thing is for certain: if the position is taken that the rental activity is a trade or business for the Section 199A deduction, then it needs to be treated as a trade or business in all other aspects, as well, which could mean additional filings (i.e. Forms 1099) and becoming subject to different tax regulations (i.e. interest-limitation rules).

Ultimately, although the Section 199A deduction was implemented as a means of leveling the playing field for the tax impact of entity choice and could potentially offer significant tax savings, in order to take advantage of the deduction, the related activity must first qualify for the deduction.

Reaching this designation is relatively easy for most business operations, but might require more analysis when considering rental activities. There are some options available, such as the safe-harbor and grouping elections, but the related tax impact should be carefully considered prior to making any election.

Be sure to consult with your tax advisor if you have any questions.

Lisa White, CPA is a tax manager with the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 322-3542; [email protected]

Law

Date with Destiny

By Timothy M. Netkovick, Esq. and Daniel C. Carr, Esq.

Timothy M. Netkovick

Timothy M. Netkovick

Daniel C. Carr

Daniel C. Carr

As everyone knows, paid family medical leave (PFML) is coming to Massachusetts on Jan. 1, 2021. To that end, the Department of Family and Medical Leave recently released its final regulations that will govern PFML.

The final regulations provide much-needed clarity on some aspects of PFML, while other aspects remain vague.

Prior to the final regulations being rolled out, one of the most common questions was whether PFML would apply to employers who have places of business in locations other than Massachusetts. The final regulations make clear that the definition of an employee in the Commonwealth of Massachusetts will be very broad. The regulations state that an employee will be eligible for PFML leave if the service provided by the employee is entirely within the Commonwealth or the service is performed both within and outside the Commonwealth, but the service performed outside the Commonwealth is incidental to the individual’s service within the Commonwealth.

An employee is also eligible for PFML if the service is not localized in any state, but some part of the employee’s service is performed in the Commonwealth and (1) the individual’s base of operations is in the Commonwealth, or (2) if there is no base of operations, then the place from which such service is directed or controlled is within the Commonwealth, or (3) the individual’s base of operations or place from which such service is directed or controlled is not in any state in which some part of the service is performed, but the individual’s residence is in the Commonwealth.

Therefore, even employers who do not have a physical place of business in Massachusetts, but who may have salespeople in Massachusetts, will want to review the PFML regulations with their employment counsel to determine any potential impacts to their business.

“Even employers who do not have a physical place of business in Massachusetts, but who may have salespeople in Massachusetts, will want to review the PFML regulations with their employment counsel.”

Once an employee begins PFML leave, an employer cannot require an employee to use other forms of paid time off (PTO) prior to PFML leave. However, an employee can choose to use accrued PTO provided by their employer instead of PFML. If an employee chooses to use accrued PTO, the employee is required to follow the employer’s notice and certification processes related to the use of PTO.

If an employee is going to use accrued PTO, employers are required to inform employees that the use of accrued PTO will run concurrently with the leave period provided by PFML. It will be important for employers to track the use of accrued PTO, as they will also be required to report the use of accrued PTO by employees or covered individuals upon request by the Department of Family Medical Leave.

Employers have the ability to establish their own private PFML plan instead of participating in the state administration process. If an employer is going to utilize a private PFML plan, the plan must confer all the same or better benefits, including rights and protections, as those provided to employees under PFML, and may not cost employees more than they would be charged under the state plan administered by the department. A private plan will also need to be approved by the Department of Family Medical Leave before it is implemented.

While the clear intent of the PFML regulations is to line up with the Family and Medical Leave Act (FMLA) as much as possible, there are also several key areas of difference.

The first noticeable difference is that PFML applies to every employer, regardless of size. Furthermore, as covered employers are aware, under the FMLA, an individual is entitled to leave if they work for 1,250 hours within the previous 12-month period. That 12-month period can be a calendar year or rolling period. PFML contains no such service requirement or minimum hours worked.

Furthermore, an employee is eligible for 20 weeks of leave for their own serious health condition under PFML as opposed to 12 weeks under the FMLA.

It is clear that questions still remain regarding the implementation of PFML. It is also clear that PFML and FMLA will not perfectly align. Employers will therefore want to consult with their employment counsel as they continue to prepare for PFML.

Timothy M. Netkovick and Daniel C. Carr are attorneys with Royal, P.C.; [email protected], [email protected]; (413) 586-2288

Law

A Disturbing Trend

By Amelia J. Holstrom, Esq.

Amelia J. Holstrom, Esq.

Amelia J. Holstrom, Esq.

The #MeToo movement exploded back in 2017. With #MeToo in the news almost a daily, women everywhere became more comfortable coming forward and reporting harassment and telling their stories.

As a result, women felt empowered, but has sharing their stories hurt them in other ways? According to a recent survey conducted by LeanIn.org, the answer to that question might be yes.

Over the past two years, LeanIn.org — an organization dedicated to helping women come together and achieve their goals — conducted surveys to gain an understanding of what individuals are experiencing at work. One of the surveys revealed that, in the post-#MeToo world, women may be receiving less support at work from male managers and may be hindered in their ability to seek career advancement.

The survey, titled “Working Relationships in the #MeToo Era,” suggested that 60% of male managers reported they were not comfortable participating in common work activities — mentoring, working alone, or socializing — with women.

To put that into perspective, according to LeanIn.org, that percentage was only 32% just a year ago. The survey also noted that senior-level men were 12 times “more likely to hesitate to have one-on-one meetings” with junior female employees, nine times “more likely to hesitate to travel [with junior female employees] for work,” and six times “more likely to hesitate to have work dinners” with junior female employees. According to the survey results, 36% of men said they avoided mentoring or socializing with women because they were concerned about how it might look.

Worrisome Results for Employers

The results suggest that #MeToo may actually lead to more gender discrimination in the workplace. If male members of management distance themselves from mentoring, working alone with, and socializing with women, they might be creating legal liability for their employer because they are giving women less opportunity to advance and succeed with the organization.

For example, while work performance is always a factor in decisions regarding promotions, skills learned through mentoring and workplace connections and relationships also play an important role. If a female employee is denied a promotion due her lack of mentorship and/or workplace connections and relationships, and she did not have access to those things like her male colleagues did simply because of her gender, the employer could be subject to a gender-discrimination lawsuit.

The survey did contain some good news for employers: 70% of employees, compared to 46% in 2018, reported that their company was doing more to address sexual harassment. The increase in this statistic is likely because more employers are conducting annual sexual-harassment training in the post-#MeToo world. Unfortunately, the remainder of the survey results suggest that training alone is not enough.

Proactive Steps

Employers should continue to address harassment in the workplace through their anti-harassment policies and by conducting annual anti-harassment training, but they also need to do more to educate employees regarding other forms of discrimination.

First, employers should have an equal-employment-opportunity policy that clearly outlines that discrimination based on gender or any other characteristic protected by law is expressly prohibited. The policy should also outline how an employee may file an internal complaint of discrimination at the workplace.

Second, employers should add annual anti-discrimination training to their training agenda. Implementing effective training will demonstrate that you care about the issue and are taking it seriously, which could help you defend against a lawsuit if an employee decides to bring one.

Finally, employers should remember that gender discrimination doesn’t just arise in this context. Businesses should take a close look at compensation practices to be sure there are no pay-inequity issues. Studies show that women in America earn about 80 cents for every dollar paid to men. Not only is this wage gap a fundamental problem, but it can also lead to serious legal trouble for an employer. Case in point: the World Cup-champion U.S. women’s soccer team’s lawsuit alleging pay inequity and “institutionalized gender discrimination.”

Bottom Line

It is clear that #MeToo has led to important changes in the workplace, but LeanIn.org’s recent study suggests that employers need to continue to be proactive and take steps to create a culture free from harassment, but also address other forms of discrimination.

The full survey results can be found at leanin.org/sexual-harassment-backlash-survey-results.

Amelia J. Holstrom is an attorney with Skoler, Abbott & Presser, P.C., one of the largest law firms in New England exclusively practicing labor and employment law. Holstrom specializes in employment litigation, including defending employers against claims of discrimination, retaliation, harassment, and wrongful termination, as well as wage-and-hour lawsuits. She also frequently provides counsel to management on taking proactive steps to reduce the risk of legal liability; (413) 737-4753; [email protected]

Law

The Neutral Patent Evaluation

By Mary Bonzagni

Business owners often ask themselves, ‘why embark on a path of securing a U.S. patent when enforcing your patent rights in court will inevitably be a very costly and time-consuming endeavor?’ Amazon may have helped to remove the presumption embedded in that question by offering an attractive alternative to the costly and time-consuming litigation route.

As we all know, Amazon dominates the e-commerce marketplace worldwide. For many consumers (like me), Amazon has become the first and primary source for virtually anything we may need (or want). Dominance, however, has come with a price. Mounting pressure from intellectual-property owners for Amazon to take responsibility for conduct in its marketplace has apparently pushed Amazon into choosing to relinquish its former ‘hands-off’ approach to infringement concerns.

Neutral Patent Evaluation

For U.S. utility patent owners (not U.S. design or foreign patent owners) who have identified infringing products on the Amazon retail or Marketplace platform, Amazon now offers its neutral-patent-evaluation procedure.

The benefits of this procedure include its low cost ($4,000) relative to litigation and its streamlined approach to resolving patent disputes (two weeks to four months). Plus, the parties do not waive any rights to pursue their respective claims in court.

By way of this procedure, a patent owner files a request for an evaluation of their infringement allegation against an Amazon retailer. The Amazon retailer is given the option of either responding to the allegation or removing the accused product listing. If the Amazon retailer choses to respond, then Amazon assigns a neutral evaluator who is a qualified patent attorney, and each party then pays a deposit in the amount of $4,000 to the evaluator. The deposits are held in escrow during the evaluation procedure. The prevailing party will have its deposit reimbursed, while the non-prevailing party will forfeit its deposit, with the forfeited deposit paying the fees/costs of the evaluator.

“While the benefits of this process are apparent, there are limitations.”

While it is not same-day Shipping, this procedure takes only a few weeks (if the Amazon retailer does not participate in the procedure) or up to a maximum of four months (if the Amazon retailer does participate in the procedure). To assure that this procedure concludes within this relatively short term, Amazon limits the evaluation procedure to one patent claim, does not allow any challenges to the validity of the asserted claim, allows only written arguments of a specified length (no discovery or oral arguments), and imposes strict response deadlines.

If the evaluator decides the accused product is covered by the asserted patent claim, then Amazon will remove the listing of the product from its online marketplace. Irrespective of the evaluator’s finding, however, should either party obtain a judgment or order from a court of competent jurisdiction that the accused product does or does not infringe the asserted patent claim, or that the asserted patent claim is invalid, then that party may submit the judgment or order to Amazon, which will honor it by either removing or relisting the product.

During the neutral patent evaluation, the parties may not talk directly to the evaluator but may talk to each other regarding the possibility of reaching an amicable resolution to the dispute. If this happens, then the evaluator may keep a portion of the deposits received from each party as compensation for work completed.

While the benefits of this process are apparent, there are limitations. For example, the outcome of this process determines only whether a product may continue to be sold on Amazon; it does not limit other avenues of commerce for allegedly infringing products. Plus, the procedure only applies to third-party merchants. In other words, products sold by Amazon itself, cannot be challenged using Amazon’s neutral-patent-evaluation procedure. It is also problematic that Amazon does not inform the parties how neutral evaluators are selected. Nonetheless, in my opinion, this procedure is attractive for what it does offer.

Amazon’s Other Programs

Amazon has other programs as well that are designed to protect IP rights. Amazon’s brand-registry program provides owners of registered trademarks with tools for searching and identifying potential infringers of their registered trademarks on the Amazon platform. Amazon also allows IP owners to report patent, trademark, and/or copyright infringement directly to Amazon by way of its report-infringement form. If Amazon accepts the infringement claim, then it will remove the reported content and will take appropriate (but unfortunately confidential) action against the retailer. If Amazon rejects the infringement claim, then they will not take any further action. Amazon will, however, provide the claimant with the reason for its rejection of the claim.

Conclusion

As more and more consumers flock to e-commerce sites, the hope is that Amazon’s neutral-patent-evaluation initiative will be picked up and further developed by other online marketplaces, or perhaps developed into an all-inclusive system that serves to address not only patent, but also trademark and copyright, infringement in a way that all online marketplaces can collaborate on.

Mary Bonzagni is a partner at the law firm of Bulkley Richardson, where she focuses on intellectual-property matters; (413) 781-2820.

Accounting and Tax Planning

Employee or Contractor?

By Danielle Fitzpatrick

Taxpayers often ask about the difference between being an independent contractor and an employee. Although it may seem like they both perform similar work, there are some significant differences when it comes to their responsibilities and when filing annual income-tax returns.

Perhaps you are currently working for an employer and are considering becoming a contractor, or maybe you have just graduated college with a degree and are trying to decide which option is best for you. Whichever route you decide to take, it is important to know the differences so that you can plan accordingly.

Differences in Responsibilities

You are considered an employee when the business you work for has the right to direct and control the work you perform. You are given specific instructions on when and where to work, and are often provided training and the necessary equipment needed to perform specific duties. As an employee, you receive regular wages and may be eligible for benefits such as insurance, retirement, vacation, and sick pay.

You are considered a contractor when services are provided for a specific period of time. Rather than being paid a regular wage, you are paid a flat fee for contractual services. As an independent contractor, you are not eligible for benefits or training through the businesses you are performing services for. You are in charge of your own schedule and typically have several clients for which you are providing services.

Differences at Tax Time

One of the biggest differences between being an employee and a contractor is how your income is taxed on your income-tax return. Unfortunately, the difference is often not realized until an individual files their return and is faced with a significant tax burden.

As an employee, your employer pays 50% of your Medicare and Social Security (FICA) taxes. The other 50% is withdrawn from your regular paycheck along with federal and state (if applicable) tax withholdings. If any expenses are incurred and unreimbursed by your employer, the expenses are not deductible for the employee. On an annual basis, you receive a Form W-2, which shows your taxable income along with all taxes that you had withheld throughout the year.

“One of the advantages of being a contractor is that you can deduct expenses you incur in relation to the income you receive. Record keeping is extremely important when becoming self-employed in order to ensure that you are tracking all applicable income and expenses.”

As a contractor, you are considered self-employed (a sole proprietor). You are now responsible for 100% of the FICA taxes, also known as self-employment taxes. No federal or state tax withholdings are withdrawn from the income you receive, and you may be required to make quarterly estimated tax payments. On an annual basis, you receive a Form 1099-MISC showing the gross income you received in excess of $600 for each business you performed services for. All of the income you receive as a contractor is reportable on Schedule C, which is filed with your individual income-tax return, or on a business tax return if you choose to become incorporated.

One of the advantages of being a contractor is that you can deduct expenses you incur in relation to the income you receive. Record keeping is extremely important when becoming self-employed in order to ensure that you are tracking all applicable income and expenses. Expenses that may help offset your income include, but are not limited to, vehicle expenses, travel expenses, supplies, fees paid for continuing education, and the renewal of professional licenses.

Some Examples

Say you are an employee making $25 an hour and working 40 hours a week. For this example, note that nothing is being withheld for benefits. Your paycheck would look like the following:

Weekly Pay ($25 x 40 hrs.) $1,000
Less:
Federal Taxes Withheld       $200
State Taxes Withheld             $50
FICA Taxes Withheld             $77
Total Weekly Pay              $673

Now, say you are a contractor and charge $25 an hour to provide services to three businesses totaling 40 hours for the week. You receive a total of $1,000 for the week. In addition, you purchased $30 in office supplies and drove 250 miles for the week. Your net income for the week would be:

Gross Income             $1,000
Less:
Office Supplies                $30
Mileage Expense           $145
Taxable Net Income    $825

Now you’re thinking, why am I not a contractor? I bring home over $300 more a week! Yes, you bring home more for the week, but you cannot forget that taxes are not being withheld from your income. You will be responsible for paying these taxes on a quarterly basis and/or when you file your tax return.

As an employee, you report $1,000 as taxable wages on your income-tax return, from which federal and state taxes have already been withheld and will hopefully cover your tax liability. As a contractor, you have taxable net income of $825, but you are now responsible for self-employment tax, in addition to regular income tax that you have not yet paid.

Conclusion

So, should you become an independent contractor or an employee? There is no right or wrong answer; each individual needs to make their own decision and determine what will work best for them and their situation. However, whichever route you decide to take, be sure to consult your tax professional for advice to eliminate any potential surprises and ensure that you are prepared when it comes to filing your annual income-tax returns.

Danielle Fitzpatrick, CPA, is a tax manager at Melanson Heath. She is part of the Commercial Services department and is based out of the Greenfield office. Her areas of expertise include individual income taxes and planning, as well as nonprofit taxes. She also works with many businesses, helping with corporate and partnership taxes and planning.

Accounting and Tax Planning

Recording Revenue

By Rebecca Connolly

Recording revenue is, in anyone’s mind, seen as a job well done when you complete selling your product or service or receiving a donation for your organization.

But a new revenue-recognition standard for non-public companies is effective for years ending Dec. 31, 2019 and annual periods then after, and business owners and managers must be aware of what this new standard means.

The new revenue-recognition standard, Accounting Standards Codification 605, Revenue Recognition, created a five-step process to determine when you should recognize revenue.

• Step 1: Identify a contract with a customer. This contract can include an invoice, a formal signed contract, and other various forms agreed to upon the purchase of goods or services. Once a contract has been identified, you proceed to step 2.

“Know what you are signing and know, if you are entering into a long-term contract, how to structure it in accordance with generally accepted accounting principles.”

• Step 2: Identify the performance obligations (promises) in the contract. Contracts can have one or more performance obligations. An example of one performance obligation is to deliver the 10 office chairs that were ordered by a customer. An example of multiple performance obligations within a contract is a construction contract that requires a house to be built and suitable for living, a driveway to be installed, and a garage to be constructed. The key item here is to know what you are signing and know, if you are entering into a long-term contract, how to structure it in accordance with generally accepted accounting principles. Then you proceed to step 3.

• Step 3: Determine the transaction price. Transaction price is the amount of consideration the entity expects to be entitled to, in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. This item concerns how much money the entity expects to receive. As one example, if you sell office chairs for $59 a chair, but there is a sale and the chairs are now $45 a chair, then the revenue the entity can expect to receive for the chair at this time is $45 a chair. Elements from step 2 and step 3 are then used in step 4.

• Step 4: Allocate the transaction price to the performance obligation in the contract. If there is only one performance obligation of the office- chair delivery, then no allocation is needed. It gets complicated when you have more than one performance obligation in a contract. The best method is to allocate the price per performance obligation in the contract itself. Continuing the example of the construction of a house, the price could be allocated at $200,000 and the garage and driveway obligation could potentially be allocated at $100,000. An important element here is to be consistent in your application of the price allocations and document your process with the allocation among performance obligations. Once prices are allocated, you can proceed to step 5.

• Step 5: Recognize revenue when (or as) the reporting organization satisfies a performance obligation. Recognizing the revenue in the amount determined in step 4 has become more of a checklist item, as, yes, we have completed the performance obligation, and now the revenue can be recorded. This step is ‘I have delivered the office chairs and have completed the performance obligation with this contract.’

Conclusion

The moral of the new revenue-recognition standard is that the rules are changing, and it is best to look at your contracts and how you record revenue now before your accountant comes in and notes your revenue is overstated by $300,000.

Rebecca Connelly, CPA is a manager for West Springfield-based Burkhart, Pizzanelli, P.C. She is involved in the accounting and consulting aspects of the practice and manages engagements of various size and complexity, including nonprofit and construction companies, manufacturing, and distributors; (413) 734-9040.

Senior Planning

The Four Key Documents of an Estate Plan

By Gina Barry

Consider this — tomorrow, you take a terrible fall.

You are injured to the point that you cannot communicate, or worse yet, you pass away. No one expected this to happen. Your loved ones are reeling. They are in shock and not thinking clearly.

Gina Barry

By Gina M. Barry, Esq.

They are now immediately called upon to act on your behalf. Do you know who will handle your affairs? Have you given that person the legal authority they would need to do so without added cost, time, and administrative difficulties? If your estate plan is in place and up to date, your affairs can be handled efficiently and effectively, leaving your loved ones to grieve the tragedy without all the added stress of navigating your affairs blindly and without authority.

Thus, every adult should have an estate plan in place. Fortunately, a basic estate plan is quite simple to establish. It requires four documents:

Last Will and Testament

The will is the document most people think of when contemplating an estate plan. Your will directs how your probate assets will be distributed after you pass away.

When you die, your probate assets are those assets held in your name alone that do not have a designated beneficiary. If you pass away without a will, your estate will be distributed in accordance with the Commonwealth’s intestacy laws, which may not be as you would have wanted.

A common misconception is that a will is not needed unless you have a lot of assets; however, a will can do much more than simply distribute assets. A will is necessary for you to name a personal representative (formerly known as executor), who will carry out your estate. Your personal representative will gather your probate assets, pay valid debts, and distribute the balance as set forth in your will.

Further, if you leave behind minor or disabled children, a guardian can be named in your will to take custody of these children. Likewise, a trust can be established in a will to provide ongoing protection for minor or disabled children as well as for other beneficiaries who should not receive their inheritance outright, usually due to spendthrift concerns. When there is no will in place, your power to make these designations and to direct the distribution of your property is forfeited.

Many also believe that, if every asset is jointly owned or has a designated beneficiary, a will is not necessary. For such a plan to be successful, the joint owner or beneficiary must survive you. If they do not survive you, your estate will need to be probated, which is when your will would direct the distribution of those assets.

Further, there are some instances where joint ownership cannot carry out your wishes, such as when you have more than one child, but cannot add all of their names on the same account due to the financial institution’s practices or because one or more of your children cannot be trusted to have access to your account as a joint owner during your lifetime.

Healthcare Proxy

A healthcare proxy is a document that designates a healthcare agent, who would make healthcare decisions for you if you were unable to make them for yourself.

Your healthcare agent would step into your shoes and make your decisions as you would if you were able. For example, your agent may decide whether a certain medication should be taken, a certain medical procedure should be done, or an admission or discharge from a medical facility should occur. Should you lose capacity and not have a healthcare proxy in place, your loved ones would need to petition the Probate Court to become your guardian, which is a lengthy, expensive, and public process that most would rather avoid.

‘Living-will’ language is normally included within the healthcare proxy, as it addresses your end-of-life decisions and generally sets forth that you do not want extraordinary medical procedures used to keep you alive when there is no likelihood of recovery. This can be a difficult decision to carry out; therefore, care should be taken to name someone who would be able to honor that decision.

If you have a terminal illness or are of advanced age, you also should consider establishing Medical Orders for Life-Sustaining Treatment (MOLST) in addition to your healthcare proxy. A MOLST is a form completed by you and your physician that relays instructions about your care. A MOLST would eliminate the need for living-will language in a proxy, but the best practice would be to reference the MOLST in your proxy.

Durable Power of Attorney

A durable power of attorney is a document that designates someone to make financial decisions for you. This document is usually in full force and effect when it is signed, but it is expected it will not be used unless you want help with or are unable to handle your own financial affairs.

It is also possible to grant a springing power that does not take effect until incapacity arises. Should you lose capacity and not have a durable power of attorney in place, your loved ones will have to petition the Probate Court to become your conservator, which, just like the guardianship process, is also lengthy, expensive, and public.

The durable power of attorney is a very powerful document with authority that is as broad as the powers granted within it. It gives power to the person you name to handle all your financial decisions, not just pay your bills. In most cases, the person named will be authorized to handle your real estate, life insurance, retirement accounts, other investment accounts, bank accounts, and any other matters involving money, such as tax returns and applications for public benefits.

As such, the person chosen to serve in this capacity should be someone with financial savvy who can be absolutely trusted to use your assets for only your benefit.

Homestead Declaration

For Massachusetts homeowners, a homestead declaration, once properly recorded in the Registry of Deeds, will declare your principal residence to be your homestead. The homestead declaration protects the equity in your primary residence up to $500,000 from attachment, seizure, execution on judgment, levy, or sale for the payment of debts.

In some cases, such as advanced age or disability, the equity protection can be up to $1 million. If a homestead declaration is not recorded, there is an automatic $125,000 of equity protection. It should be noted that, in addition to some other specific exceptions, a homestead declaration will not protect your real estate from nursing-home costs or tax liens.

Conclusion

While incapacity and death are not the most joyous of topics, when faced with them, most people would prefer to have a plan in place to ensure their needs and goals will be met.

You can help your loved ones avoid expensive legal hassles related to your ongoing care and your estate. Individuals with more complicated estates may require different or additional documents to fully protect their interests, but for most, an estate plan is only four documents away.

Gina Barry is a partner with the law firm Bacon Wilson, P.C. She is a member of the National Assoc. of Elder Law Attorneys, the Estate Planning Council, and the Western Massachusetts Elder Care Professionals Assoc. She concentrates her practice in the areas of estate and asset-protection planning, probate administration and litigation, guardianships, conservatorships, and residential real estate; (413) 781-0560; [email protected].

Local Business Advice

The Wealth Technology Group

By: Gary F. Thomas, JD, LLM, CLU, ChFC, AIF, CDFA

Earlier this year I received a call from “Jen”, a concerned client. She had just learned from her older brother that her widowed, elderly mother, who lives in Rhode Island, had fallen a couple of days before and had been admitted to the hospital with broken ribs and several fractures. Even though Jen was in the regular habit of calling her mother once or twice a week, the fall occurred shortly after their last conversation and was a shock.

Jen immediately dropped what she was doing and drove to the hospital. While visiting she perceived that her mother was suffering from more than the fractures, but was also somewhat disoriented, which Jen assumed was because of medications that were administered to alleviate pain.

When asked why she was not notified of the fall immediately she was told that mother and her brother who lived nearby just “didn’t want to worry her”. Of course Jen was worried, not only about her mother’s health but also about her mother’s finances, and whether any plan was in place to prepare for the unexpected. All along she had assumed that her brother, who was a retired comptroller, had everything under control.

When Jen questioned her brother, he said that even though he had dealt with finances for his entire life, he was uncomfortable talking to Mom about money, because it was too close to home. He wasn’t sure what planning their mother had done, whether or not she had even the most basic legal documents, and if so where they were located.

“They learned that their mother, who had lost her husband more than twenty years earlier, had never updated the documents after their father’s death.”

Unfortunately, they were forced to have the difficult conversation about money with their mother while she was still in the hospital, admittedly, not an ideal time. They learned that their mother, who had lost her husband more than twenty years earlier, had never updated the documents after their father’s death. Mom said that the lawyer who had prepared them had retired long ago, and she wasn’t sure where the originals were. More than that, she was not quite certain of her banking and financial accounts because the names of the institutions had changed so many times over the years, and she found it difficult to keep track of what she owned. Mom said she had just been assuming that, because of her son’s financial background “he would take care of things” should any health or financial issues arise.

Fortunately since her accident, Mom has returned home and appointments were made for the whole family to meet with a local attorney to complete some basic estate and elder law planning. Now, both Jen and her brother have located Mom’s insurance policies, financial accounts, and credit cards, and keep track of accounts monthly. They have updated the beneficiaries on life insurance and retirement accounts, which are now set up to avoid probate. For the first time, they have a clear picture of their mother’s assets, income and expenses.

Unfortunately, many incidents like this don’t quite turn out as well. Lack of planning and lack of time can cause a financial disaster. Often costly financial decisions are made in the heat of the moment and without full knowledge of the resources available, tax consequences, or the affect of the parent’s ongoing needs.

Our advice: Broach the conversation about money after you have completed your own estate and financial plan, then share with your parents what you have done, which may make it easier to begin the conversation.

 


Gary F. Thomas

JD, LLM, CLU, ChFC, AIF, CDFA

“Because it’s not what you make … it’s what you keep!”

Gary is the President of The Wealth Technology Group, with offices in Pittsfield and Westfield. His company serves over a thousand individuals and businesses in Massachusetts, Connecticut, and across the country, helping them reduce taxes, diversify their portfolios, and keep more of what they have.

Gary is a native of Pittsfield and is a graduate of the Massachusetts College of Liberal Arts and Western New England University Law School. He is a member of the Massachusetts Bar and holds the prestigious Master of Laws in Taxation degree from Boston University Law School. Gary is a Chartered Life Underwriter and a Chartered Financial Consultant. He is also certified as an Accredited Investment Fiduciary, having met the ethical and education standards of a prestigious network of forward-looking investment professionals dedicated to advancing fiduciary responsibility.

Gary has conducted courses on retirement planning, financial management, and estate planning at General Dynamics Corporation, Tubed Products, the Massachusetts Nurse’s Association, Plumbers and Pipefitters Locals 4 and 104, Westfield State University, Berkshire Community College and the Massachusetts College of Liberal Arts, and has lectured financial planning and insurance professionals throughout the U.S. and internationally on best practices and customer service. He specializes in education about safe money management and the maximization of pension and Social Security benefits, so that his clients enjoy a stress-free retirement.

Gary is a member of the Massachusetts Bar Association, the Financial Planning Association, the National Association of Insurance and Financial Advisors, and the International Association of Financial Planners; he sits on the Board of Directors of the MCLA Foundation. Last year, Gary was honored to be appointed a member of the Board of Trustees for Western New England University. He also underwrites programming for WHMP, Channel 57, and is a member of the Westfield Chamber of Commerce and the Better Business Bureau. He was chosen Outstanding Philanthropist of the Year for 2013 by the Western Mass Association of Fundraising Professionals.

Gary is a presence on local media and is sometimes called upon to comment on financial news. Every few weeks Gary also has some fun talking about financial topics with Bax & O’Brien on Rock102. His programs are available on the station websites, and are podcast on iTunes and at www.wealthtechnology.com. He has appeared nationally on Fox Business News, and has been quoted on the Forbes and CNN Money websites.

(800) 266-6793

[email protected]

www.wealthtechnology.com

Modern Office

The Value of Internships

By Brittany Bird

People are often aware of the numerous benefits for students who participate in an internship while pursuing an undergraduate or graduate degree, but the benefits to you as an employer of offering an internship program are not to be overlooked.

Interns are similar to entry-level employees who are likely students and are hired for a specific period of time. Interns may be paid or unpaid, though paid internships typically produce better candidates. Students are generally eager to get their hands dirty and get real, hands-on experience so that they can put into practice what they’ve been learning in their classes.

Brittany Bird

What’s more, students putting in the effort to seek internship opportunities tend to be motivated, aspiring professionals who are willing to work hard to show their value to a business in the field of their major and desired career. These young go-getters can offer fresh perspectives, new ideas, and valuable feedback. As interns are most often still in school while working with your business, they are able to provide insight into new technology and trends to participate in the continuous improvement of your company.

The feedback they provide from their experience with you can also help to better the work environment and position your business to attract other young graduates like themselves.

Providing internship opportunities to local students showcases that your business supports the community and is interested in the potential of the younger generations. Internships support students as part of the growing workforce by giving them work experience and a better understanding of their field of choice and their own skill set.

This is a great way for local businesses and firms to secure young talent in Western Mass. as well. Indeed, your company has the chance to try out new talent before hiring them as a full-time employee. Internships allow you as an employer to gauge the work ethic of the student and see how he or she fits with your company and vision.

Recruiting for these positions also increases brand awareness among students, across local university campuses, and beyond. People become more familiar with your company name and what you represent as a result of your recruiting presence. Additionally, interns themselves act as quasi-recruiters as they tell friends, family, and classmates about their internship experience and inform them of other positions available with your company.

Internships allow young professionals to become familiar with your company and its culture and mission. Scouting out interns is like proactively recruiting for future full-time positions. Internships are a time to evaluate the intern in a lower-risk setting than bringing someone on full-time allows. Also, interns can typically do the same work as a new hire, but for a lower pay rate.

Retention Rate as of 1 year of Employment:

Internship with your company: 70.6%
External internship experience: 65.8%
No internship experience: 46.3%
(NACE 2016)

Internships also provide the chance for more seasoned staff to improve their management, mentoring, and leadership skills by training the new students on board. Having internships during your busiest times of year puts them through the ringer and tries their abilities to keep up and help out even in the craziest of circumstances while providing relief to other associates from the less important or less involved projects.

Internships not only allow a smoother transition into a career for the student, but also for your business. Instead of hiring someone you have to train from scratch, you now have an entry-level employee who has spent time with your organization and will require significantly less, if any, training. You will already to know their strengths and how they work with the team.

When they come on full-time, you have a much better understanding of their abilities and qualifications and can bring them on and keep your business operating smoothly. And getting employees who are a better fit through internships means better retention. Studies conducted by the NACE have shown that, at one year (see table on page 30) and at five years, retention rates are higher for those employees who started with a business through an internship program. Even if there are no full-time positions currently available, the line of communication is there and can be kept open for when future opportunities arise or when the student graduates and is looking for a career.

Internship programs that are well-designed and well-run will attract bright, young talent that can be a great addition to your team and part of your strategy for achieving the goals of growing your business by increasing productivity, efficiency, and profitability. Recruiters can look to university career centers to contact personnel who can lead them in the direction of clubs relevant to your business’ field or inform them of dates of meet-and-greet events or career fairs. Often, businesses can also put postings on universities’ websites or flyers and applications in the universities’ career-counseling offices.

In short, the time, money, and effort put into an internship program usually provide a big payoff in the long run as well as providing direct benefits to your company’s short-term goals in the present.

Brittany Bird is an audit associate with the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C. She began her career at MBK as an intern and recently celebrated her first anniversary as a full-time audit associate; (413) 322-3502; [email protected]