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The CEO and Reputation

By John Garvey

John Garvey

John Garvey

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

Warren Buffett’s advice on protecting the most valuable commodity an individual or organization possesses is spot on. In business, however, it helps to know what ‘do things differently’ means, in advance of the next crisis.

As a business leader, what not to do is well-known. If you are unsure, just Google ‘Travis Kalanick’ or ‘Oscar Munoz’ and the word ‘crisis.’ Don’t be those guys. Essentially, they and most business leaders get in trouble or impact negatively on their organization’s reputation by not thinking enough about reputation — their company’s and even their own.

Reputation is not only worth worrying about, it should be regarded as a market advantage.

Reputation is your sustainable differentiator. It’s why a lot of customers come to your door, why influencers send you referrals, and perhaps why parents tell their children to do business with you. Most businesses invest quite heavily in enhancing their reputation, an effort that conveys to their audience, “we are here to help you with our products and services.”

Anything that threatens or damages that message is a reputational threat. It’s that simple.

The complicated part of reputation management is that threats have changed and responses have not. Today’s threats are fueled by algorithms. You’d recognize those computer programs as the Internet, primarily search engines like Google, and social media. Algorithms add fire to smoke, and that fire spreads quick across audiences and sometimes into traditional media. Then your phone rings.

The typical response is to answer it, and here is where the CEO is most often thrown under the bus, or better put, steps out in front of it. The CEO answers the call, makes the statement quickly to put out the fire, and days later is apologizing for that quick response. Don’t be that CEO.

Recently, when Facebook faced a crisis because of a data breach, Mark Zuckerberg did not pick up the phone. Instead, the organization met behind closed doors and went to work on the problem. The fire grew hot in the interim, but when he finally did talk, he apologized and suggested that the organization would do better. The crisis is not over of course, but Facebook took proactive steps to manage it — rather than be managed by it.

Knowing what causes threats is a good place to start the process of protecting your organization’s reputation. Threats sometimes come from national issues that have nothing to do with your individual company but are, instead, targeting your industry. Similarly, local issues that you may have a loose tie to, e.g., one of your customers did something wrong, also can be a source of threat.

Social media, where haters go to hate, often is where micro-threats eat away at your reputation like termites. Customers, former employees, or anyone with a grudge can become the troll that chips away on the reputation that you have worked so hard to enhance. Just about anything you do in a community can have negative consequences, e.g., that new office that you opened or a merger that you recently completed.

So, now that you are thinking about threats to your reputation, let’s move on to the doing. First, don’t jump out in front of the bus. Just don’t. Think baseball: the CEO is the closer, maybe the reliever at times — not the starting pitcher. CEOs get in trouble when they push aside professional staff or are encouraged by the same to jump into the fray early. Build crisis resilience every day. That is your job.

Have you set your north star, meaning the values that your organization stands for? Does everyone, including your executive staff, board of directors, and customer-facing associates, know what those values are and how they are turned into action? They all should, because they are your first line of reputational defense.

You should develop a crisis-management plan. It doesn’t have to be a big plan, but it should define potential threats and determine who is responsible for managing them (including the starting pitcher). You also always want to buy time to prepare, know any interview questions in advance, and contemplate the mediums where your message will be carried.

If it is a TV interview, you will want to contemplate the setting for that interview. If it is a print interview, you will want to provide photo images (of yourself, perhaps) and helpful images like infographics. You also want to outline your options: respond, avoid, or divert.

Back to a few more do’s and don’ts: If and when you do get called in front of the microphone, stick to the script. If your thought is from your heart, leave it there. This is about your organizational values — the ones you have worked so hard to instill (your north star). That should be reflected in the message and should be in your head, not your heart.

Here is something to think about: don’t immediately consider posting your message on social media. The trolls will eat you alive. Conversely, traditional media will do a better job of getting your message right.

Finally, harking back to the famous line from Hill Street Blues, “be safe out there” — it’s a dangerous world, and CEOs need to treat it as such. Unfortunately, it is a fact of life — your life — that some crisis or even everyday business could provoke someone to confront you or even do you harm.

John Garvey is founder of GCAI Digital Marketing and PR. He has more than three decades of public-relations experience. He holds a certificate in reputation management from the Public Relations Society of America. He was also a keynote presenter on “Managing the Media and Your Reputation in a Crisis” at the Massachusetts Bankers Assoc. 2017 Executive Officers Conference.

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Finance: A Primer on the TCJA

By David Kalicka

David Kalicka

David Kalicka

It is important to note that, although many business changes are permanent, the individual changes are temporary. The changes in tax rates, standard deductions, and personal exemptions will expire in 2025, unless extended at some future date.

Individual Tax Changes

Tax rates: Lower individual income-tax rates of 10%, 12%, 22%, 24%, 32%, 35%, and a top rate of 37%. (The current rates would be restored in 2026, i.e. 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%).

Standard deduction: Single $12,000, increased from $6,350 (2017). Married filing joint $24,000, increased from $12,700 (2017).

Personal exemptions: Eliminated. Under prior law, exemptions would have been $4,150 each for 2018.

Child tax credit: Temporarily increased to $2,000 per child under 17 (was $1,000) and new $500 credit for dependents other than child.  These credits phase out for higher-income taxpayers.

Itemized Deductions: Deduction for taxes (income taxes and real-estate taxes) limited to $10,000 per year.

Mortgage interest: For mortgage debt incurred after Dec. 15, 2017, interest deduction limited to acquisition debt of $750,000. Acquisition debt incurred prior to that date is still subject to the $1 million limit.

Home equity loan/line of credit interest deduction eliminated beginning in 2018, regardless of when the home-equity loan originated.

The deduction for contributions of cash to public charities will be limited to 60% of AGI beginning in 2018 (prior limit was 50% of AGI).

Miscellaneous itemized deductions have been eliminated. This category included unreimbursed employee business expenses and investment expenses. Under prior law, these were deductible to the extent they exceeded 2% of AGI.

• In view of the elimination or limitation of certain deductions and the increase in the standard deduction, fewer taxpayers will be itemizing. To maximize the benefit of deductions, you should consider bunching allowable deductions in alternating years. For example, a married couple with no mortgage and state and local income taxes and real-estate taxes of at least $10,000 will need an additional $14,000 to exceed the standard deduction. Combining multiple years’ charitable contributions in one year may be a way to benefit from itemizing in a particular year. One technique for doing this is a donor-advised fund.

Elimination of other deductions: The moving-expense deduction has been eliminated.

Alimony: For divorce agreements executed after Dec. 31, 2018, alimony will no longer be deductible by the payer or taxable to the recipient. If anticipated, any such agreement should be reviewed in light of the new law to determine the effects of timing.

Alternative minimum tax: The individual AMT has been retained, but the exemption has been increased. With the limitation on taxes and the elimination of miscellaneous itemized deductions, fewer people will be subject to AMT.

Section 529 plans: These plans can now be used to pay up to $10,000 per year for private elementary or secondary school tuition.

Casualty and theft losses: The itemized deduction for casualty and theft losses has been suspended except for losses incurred in a federally declared disaster.

Estate and Gift Taxes

For decedents dying and gifts made after Dec. 31, 2017 and before Jan. 1, 2026, the federal exclusion has been doubled to roughly $11 million per person. Keep in mind that this expires in 2025 and then reverts to about $5.5 million per person.

Taxpayers with large estates should consider the benefit of making large gifts now to take advantage of this temporary increase in exemption.

Business Tax Provisions

These provisions have been made permanent in the new tax law unless otherwise indicated.

C-corporation: Flat corporate tax rate of 21% (old law 15%-35%). This low tax rate is attractive; however, keep in mind that there is a second level of tax when the corporation pays dividends or is liquidated. Also, C-corporations have additional potential penalty taxes (personal holding company tax and accumulated earnings tax).

Pass-through entities: Many S-corporation shareholders, LLC members, partners, and sole proprietors will be able to deduct 20% of their pass-through income. This seems like a simple concept. Unfortunately, there are some very complex rules depending upon the individual’s taxable income and whether the business is a professional service business or real-estate business. It is not practical to try to explain these rules in this communication. Therefore, you should consult with your tax adviser to discuss the optimal entity choice for your business and how you can plan to take additional advantage of some of these rules.

DPAD repealed: The new law repeals the domestic production activities deduction for tax years beginning after 2017.

Entertainment expenses: No longer deductible (50% deductible under prior law). Business meals remain deductible subject to the same substantiation rules and limitations. The 50% disallowance is expanded to cover meals provided via an in-house cafeteria or otherwise on the employer’s premises

Section 179 expensing: Annual limit increased to $1,000,000 (previous limit was $500,000). Also, the expanded definition of assets eligible for section 179 includes certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging. The definition of qualified real property eligible for expensing is also expanded to include the following improvements to non-residential real property after the date such property was first placed in service: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.

Bonus depreciation: increased to 100% (from 50% under prior law) for property placed in service after Sept. 27, 2017 and before Jan. 1, 2023, and expanded to include used tangible personal property. After 2022, it phases down by 20% each year until Jan. 1, 2027.

Luxury auto depreciation limits: Under the new law, for a passenger automobile for which bonus depreciation is not claimed, the maximum depreciation allowance is increased to $10,000 for the year it’s placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years in the recovery period. These amounts are indexed for inflation after 2018. For passenger autos eligible for bonus first-year depreciation, the maximum additional first-year depreciation allowance remains at $8,000 as under pre-act law.

Business interest deduction limitation: For businesses with gross receipts in excess of $25 million, interest-expense deductions will be limited to 30% of adjusted taxable income. For years beginning before 2022, adjusted taxable income is computed without regard to depreciation and amortization. Any excess interest expense is carried over to future years. Real-estate businesses may elect out of this limitation. However, the election requires use of ADS depreciation, which results in longer depreciable lives and loss of bonus depreciation.

Net operating losses: There is no longer a carryback provision; however, the carry-forward period is now unlimited (previous law provided that NOLs could be carried back two years and forward 20 years). In addition, any losses incurred after Dec. 31, 2017 can offset only 80% of taxable income.

Excess business limit: The new tax law limits the ability of a non-corporate taxpayer to deduct excess business losses. After application of passive loss rules, the deduction of business losses is limited to $500,000 per year for taxpayers filing jointly and $250,000 for others. The excess loss is carried forward as part of the taxpayer’s net operating loss. This provision applies to tax years beginning after Dec. 31, 2017 and prior to Jan. 1, 2026.

As you can see from this brief summary, the new law is extremely complex. You should consult with your tax adviser to fully explore how to take advantage of the opportunities and to minimize the impact of the negative changes.

David Kalicka, CPA serves as partner emeritus for the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 536-8510; [email protected]

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Law Column

By Marylou Fabbo

Marylou Fabbo

Marylou Fabbo

During the holiday season, employers may have been faced with a variety of religion-related requests such as whether they may display certain religious icons in their work areas. Throughout the year, employees may want time off to observe certain holy days rather than conforming to the employer’s holiday schedule, request breaks to pray, or seek an exemption from an employer’s dress or grooming standards so that they may express themselves consistent with their religious beliefs.

While employers do not question most requests, what should an employer do if it suspects that the requested accommodation is being made to upset a co-worker or that an employee is requesting certain days off to go shopping or take a long weekend?

What Constitutes a Religious Belief?

Both state and federal law prohibit discrimination against employees and applicants based on religion, and employers are required to reasonably accommodate bona fide religious beliefs.

A ‘bona fide religious belief’ means that the individual has a religious and sincerely held belief or practice. Title VII defines ‘religion’ very broadly. It includes traditional, organized religions as well as those that are new, uncommon, not part of a formal church or sect, or held only by a small number of people. Religious beliefs don’t need to be part of organized religion, and moral or ethical beliefs as to what is right or wrong could constitute religious beliefs. According to the U.S. Equal Employment Opportunity Commission (EEOC), however, “social, political, or economic philosophies, or personal preferences” are not religious beliefs.

What Religious Accommodations Must an Employer Provide?

Employers may not refuse to accommodate an employee or applicant’s sincerely held religious beliefs or practices unless accommodating them would impose an undue hardship.

Some examples of accommodations that an employer would have to provide, absent undue hardship, include excusing a Catholic pharmacist from filling birth-control prescriptions or permitting a Muslim employee to take a break schedule that will permit daily prayers at prescribed times. With the holidays approaching, an employee may request other accommodations, such as the ability to take certain days off (other than Christmas) or to display religious symbols in their work areas. What should an employer do in response? Read on.

When May an Employer Deny a Request for a Religious Accommodation?

Employers must grant a request for a religious accommodation unless doing so would pose an undue hardship on the employer. The ‘undue hardship’ burden is lighter when it comes to religious accommodation than it is when talking about disability-accommodation requests. For religious-accommodation purposes, an undue hardship exists if it would cause more than de minimis cost in terms of money or burden on the operation of the employer’s business. Generic co-worker complaints usually are not valid reasons to deny a request for religious accommodation.

What If an Employer Suspects the Employee Wants an Accommodation for Non-religious Reasons?

Certain behaviors may make an employer question an employee’s assertion that the employee sincerely holds a religious belief that forms the basis of a requested accommodation. The EEOC has suggested that these behaviors may include whether the employee has behaved in a manner markedly inconsistent with the professed belief, whether the accommodation sought is a particularly desirable benefit that is likely to be sought for secular reasons, whether the timing of the request renders it suspect, and whether the employer otherwise has reason to believe the accommodation is not sought for religious reasons.

The courts, too, have recognized that an employee might use ‘religious beliefs’ to obtain an accommodation for a personal preference rather than a religion. In a recent case, a hospital employee refused to receive a mandatory flu vaccination based on her religious beliefs, which included the notion that her body is a temple. The hospital excused the employee from the mandatory vaccine and instead required her to wear a mask. She claimed that the mask was not an acceptable alternative because it interfered with others’ ability to understand her. During the litigation, the employer sought a detailed description of the ways in which the employee adhered to her belief that her body is a temple, and, despite the employee’s protest, the court required her to answer the question.

It’s probably the best practice to ask the same questions to everyone who makes a religious-accommodation request, or question whether an employee has a sincerely held religious belief, when there is objective evidence that the request may have been made for ulterior reasons.

How Should Employers Handle Requests for Religious Accommodations?

When an employer receives a request for a religious accommodation, the employer should let the requesting employee know it will make reasonable efforts to accommodate their religious practices.  Employers should assess each request on a case-by-case basis.

Remember, while an employer should consider the employee’s requested accommodation, employers are not required to provide an employee’s preferred religious accommodation if there’s another effective alternative. However, be wary of affording employees who practice certain religions different treatment than afforded to those who practice other religions. Employers should train supervisory personnel to make sure they are aware that a reasonable accommodation may require making exceptions to regular policies or procedures.

Marylou Fabbo is a partner and head of the litigation team at Skoler, Abbott & Presser, P.C. She provides counsel to management on taking proactive steps to reduce the risk of legal liability that may be imposed as the result of illegal employment practices, and defends employers who are faced with lawsuits and administrative charges filed by current and former employees; (413) 737-4753; [email protected]

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Seven Keys to a Successful Nonprofit

By Christopher D. Marini, MSA, MOS

Christopher Marini

Christopher Marini

With an increased regulatory environment and constant pressures to maximize revenues, operating a fiscally successful nonprofit organization can be more challenging now than ever before. There are many actions, both big and small, that can be taken to ensure an organization is operating as effectively as possible.

I’ve selected seven keys to discuss that can help your organization in the years to come.

An Investment in People

In an industry that’s so intently focused on varied sources and levels of funding, it’s good to remember that an important asset of any organization is its staff. Here are some points to consider:

• Having a solid management team is particularly important because their attitudes permeate through all levels of the organization. To aid them, look for trainings or webinars that can help management develop their leadership abilities. With motivated, inspiring, and knowledgeable leaders at the helm, staff are more likely to be inspired to work with passion.

• Any time is a good time to perform an analysis on your hiring process. Is your new-hire training standardized, and does it help introduce staff to the culture of the organization in addition to position-specific training?

• Keep an eye out for that shining star of an employee that shows aptitude for future growth and leadership. If you can provide him or her with an opportunity to develop their skills, you will develop a pipeline for strong leadership. This form of succession planning can help the future continuity of the organization.

• Keeping employees and staff engaged and motivated is always a challenge. Are your organization’s raises and promotions based on measurable merit, whereby those employees who best meet the desired criteria of success are rewarded for their efforts? Doing so will keep your best and brightest engaged and set an example for other employees.  A consistent method of evaluating the success and performance of your employees is a great foundation.

Having an Involved Board

Having a diverse and knowledgeable board of directors is a tremendous advantage. Be sure to tap into their unique skill sets and contact networks to maximize their value. Be open-minded about ideas they have, and assist them in organizing periodic meetings to discuss big-picture items such as programs, investments, budgets, legal issues, and other high-level or important items that may require attention.

Public Image

Public image and recognition are crucial to obtaining donations, funding, and support from your local community. Consider evaluating your current marketing efforts critically to determine whether your approach is earning you the recognition needed to support your program. You likely have a wide range of tactics available to you — press releases, networking, speaking opportunities, social media, and a website.

However, simply having these things in place does not breed efficacy in and of itself, and, unfortunately, marketing is often the last thing on the minds of busy and inundated nonprofit leaders.

First, it’s important to clearly define your intended audience. All too often, organizations take a very broad approach without first considering the profile of their audience. It’s imperative to know who your audience is before engaging in public relations.

Next, consider whether your outreach initiatives are using resources effectively. Here’s an example: your organization is engaging in speaking events to garner support and find new volunteers for summer-camp programs your organization runs for area youths. However, your current speaking engagements at local Rotary clubs and chambers of commerce aren’t yielding the number of volunteers you’d hoped for. In this case, you might consider alternative audiences like church community-service groups, student organizations on college campuses, or other community-based groups whose mission better matches the profile of your ideal volunteer. The idea here is to think critically on every mode by which you communicate to determine if alternate approaches might be more efficient or effective.

Utilizing Volunteers

An excellent method of keeping costs down, while still getting work done, is utilizing volunteers. In order to attract and retain volunteers, it is important that the community is aware of the existence of your organization and cares about its mission, as noted above. If either of these criteria is not met, obtaining volunteers will prove to be a challenge.

Once volunteers are on board, it is imperative to use their time well.  When they arrive, ensure clear expectations are set, while at the same time making the process fun and convenient. If a volunteer has a good first experience, they are more likely to come back and even bring a friend.

Always show appreciation for their time and energy. Some organizations will even buy small gifts or hold an annual reception for volunteers.

Diversify Funding Sources

Most people have heard the adage “don’t put all your eggs in one basket.” When nonprofits rely too heavily on one type of grant or donor, they create a concentration that could potentially be detrimental if they lost this key revenue source. Most nonprofits already have a good handle on garnering cash donations from individuals and businesses, but here are some other sources that may not have been considered yet:

• One way of giving that is becoming more popular is making a charitable donation from a retirement account. Amounts attributable as qualified charitable distributions will not be included as taxable income to the individual.

• Non-cash gifts or trade can also be helpful for certain organizations.

• Charitable gift annuities are a good way to gain immediate revenue while offering tax advantages to the donor.

• Encourage people to name your nonprofit as a beneficiary in their wills or through tax-beneficial methods such as charitable remainder trusts. A good public image and mission will make this easier.

• Special events are a great way to generate additional revenue in a fun setting.  It is also an excellent way to have direct face time with donors.  Examples of popular special events include golf tournaments and annual galas.

Know the Rules

Nonprofits are highly regulated, and the rules are constantly changing. There are many annual filing requirements, and audits are a requirement for organizations with certain amounts or types of government funding. Regular communication with your accountants and attorneys is always a good place to start.

Additionally, consider sending certain staff to external trainings or seminars to help them stay on top of what they need to know to successfully perform their job.  Further nonprofit information can be obtained at www.mbkcpa.com/category/non-profit.

Mergers

While it is a word that some organizations dread, mergers can sometimes be a useful tool. Oftentimes, a region may have too much direct competition for resources, or a key executive director will retire or accept a position elsewhere. In instances where continuity seems troublesome, mergers can be an effective way for organizations of similar missions to come together for a common good.

Mergers can help centralize and combine resources, leading to a better financial position and the ability to spread the organization’s mission to a larger population.

In Conclusion

Running a fiscally successful nonprofit organization ultimately comes down to the quality of the people involved and the programs it operates. With knowledgeable employees, involved board members, and motivated volunteers, your nonprofit will be able to keep a positive public image and be in a good position to maintain the proper funding and regulatory compliance necessary to ensure future continuity and fiscal success. u

Chris Marini is a senior associate with the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 322-3549; [email protected]

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Entrepreneurship

By Melyssa Brown

Melyssa Brown

Melyssa Brown

More than 627,000 new businesses open each year, according to the Small Business Administration, and entrepreneurship is a hot topic, especially here in the Pioneer Valley.

Local colleges have created centers and degrees around entrepreneurship, and organizations have been created to help startup companies prosper through coaching and education.

Whether you call yourself an entrepreneur or not, starting a business can be a significant challenge. Having an idea that inspires you is a good place to start. Once you have that, your passion for the business or its purpose is the most important factor to keep you pushing through the inevitable challenges and decisions that are ahead and are inherent to starting a business. The following helpful tips and guidance will provide resources to get you started down the right path.

The Business Plan

A business plan is a sales tool that should be considered as a first step in any business creation. It will help you raise money, get partners, and, most importantly, get people interested in your business.

Start by creating a document that describes your business inside and out. Describe your product or service. Your product description should take 30 seconds or less to explain. It should be simple and straightforward so that other people (even children) can understand and repeat it back to you. Lengthy or overly detailed pitches, while seemingly chock-full of great information, can actually be counterproductive and aren’t usually as effective at getting the attention of your audience.

Describe the product’s unique value proposition. What advantage does your product offer that no one else does? How is it different from other businesses? Also, describe the market opportunity by answering the following questions: how large is the market? How many total dollars are spent on similar products? How fast is the market growing? Who is your competition? Always remember to state who your customers are. Next, describe how you plan to generate revenue and sell your product or service.

Your customer may want the product or service, but who is actually paying for it? Is the customer paying subscriptions, or are you generating revenue via advertising from other businesses? Next, describe the business strategy or long-term vision. Where do you see the business in three, six, nine, and 12 months, and then in five to 10 years? Think of key metrics and set smart goals to help get you there and monitor your progress.

Describe who the management team will consist of to help you achieve the business strategy. You want qualified employees with relevant experiences to fill the needs of the business. Beware of simply bringing on friends and family — always ensure your team members understand your mission and objective, and not just their relationship with you personally.

A business plan should include projected financial information for the next three years. Explain the basic assumptions and key drivers behind your financial model. Revenue assumptions consist of the number of customers and how much will be charged for the product or service. Startup expenses may include lease/rent expense, building improvements (if needed), equipment, labor, supplies, and utilities.

There are certain costs when you start a business, and there is no negotiating some of it, such as safety precautions, filing fees, and fees for permits and licenses. However, you may be surprised by how many expenses you can cut or at least postpone — for example, using pre-owned equipment until you are making some sales.

Financial projections help determine how much outside financing you need to obtain. There are several financing options, including starting your business on the side while continuing to work full-time, working a part-time job until your business becomes established, waiting to start your business until you have saved up a financial reserve, and borrowing or raising funds, if necessary.

You may already be using the friends-and-family funding technique. Make it clear to them that the money is intended as risk capital, and they might lose it completely, or it may not be returned in the short term.

Technology has made asking the general public for donations and monetary support for a business commonplace. Crowdfunding is a form of finance that does not require repayment, and it will help you not only gauge interest in what you have to offer, but also help you build a customer base. Many times, the startup business will provide perks, such as free products or discounts, as a thank-you for the donations. Also, small-business grants are available from a number of resources, including state governments and private groups.

Although the grant-application process can be time-consuming, it is well worth it if you win the award. Also, even locally in the Pioneer Valley, there are investors and venture capitalists who are willing to fund a promising, high-risk startup business in exchange for a share of the business. They often bring experience, management expertise, and contacts to the table.

Prepare a business-plan deck to pitch to investors and venture capitalists. Create a PowerPoint presentation that addresses each of the major items in your business plan. Each item should have its own slide, and the presentation should be no longer than 15 slides. Begin with a high-level concept and brief, ‘grabby’ statement that sticks in the mind and most importantly tells a story.

Consider including a video of what the product or service does and how it interacts with customers. Investors and venture capitalists will want a preliminary valuation of the company. The valuation helps determine what share of the business you are giving up for what value. It can be a calculation of the future revenue (net earnings) of the business which then uses a discount factor to value it in today’s dollars. No matter which source you raise funds from, be sure to provide key operating, strategic, and accounting information to your financiers periodically.

Business Structure

The business structure can be impacted by your sources of financing. You can change the structure as the financing and business needs change. There are a few options to choose from, including sole proprietorships, general partnerships, limited-liability companies, C-corporations, and S-corporations, as detailed below.

• A sole proprietorship has no legal distinction between the owner and the business. It is a business of one person such as a lawyer, plumber, etc. There are minimal requirements, such as a business license.

• A general partnership is a joint business where the profit and debt are shared by general partners. A partnership agreement is created to dictate how the profit and debt are shared. For both sole proprietors and general partnerships, the business owner has primary personal liability.

• In a limited-liability company (LLC), owners are not personally liable for the debts of the business. LLCs are easy to use, have low setup fees, provide protection of the corporate veil, and are a pass-through tax entity.

• C-corporations are taxed separately from owners, the shareholders own stock in the business, and they require a board of directors who are hired by shareholders and are responsible for the business. C-corporations are perceived as providing the most protection between personal and corporate assets.  However, they may have double taxation upon the sale. Your salary is taxed at your personal rate, and business earnings are taxed at the corporate rate.

• In S-corporations, the business pays no federal taxes, and profit and losses are divided among the shareholders to be taxed at their personal rate. The number of shareholders is limited. Work with your accountant and lawyer to determine the best structure for your business.

Business Name

Determining the business name can be the most important and potentially challenging step. The right business name will help distinguish you from a sea of competitors, provide your customers with a reason to hire you, and aid in the branding of your company. Your name projects your image, brand, and position in the marketplace, so consider your mission statement, your business plan, and your unique selling proposition, and don’t forget to think about your target audience.

The more ideas you generate, the more possibilities you will have to choose from. You may want to conduct a series of brainstorming sessions or use a free business-name generator, such as Biznamewiz, Name Thingy, or Naming.net. Avoid wordplay dangers, and if you want a local name, add it to your marketing materials, such as “exclusively serving the (town) area.” Lastly, put your business name through the spelling test and ask others to spell it.

Once you have chosen a name for your business, you will need to check if it’s trademarked or currently in use. Search the federal database of the U.S. Patent and Trademark Office. You should also run a series of searches with Google and other search engines for your desired business name to make sure there isn’t another company already using your name. Then, you will need to register it with your county or state office. Also, don’t forget to register your domain name once you have selected your business name. Your website address should be the same as your business name.

Licenses and Permits

For a list of licenses and permits, go to the Small Business Administration (SBA) website. The SBA has compiled state-by-state information on small-business registration and license and permit information. Also, obtain a tax/employer identification number from the IRS.

Accounting System

An accounting system is necessary in order to create and manage your budget, track your actual results, set your rates, conduct business with others, and file your taxes. You can set up your accounting system yourself or hire an accountant to take away some of the guesswork. This should include opening a business checking account. Also, understand employer regulations such as new-hire reporting, employer corporate and payroll tax responsibilities, minimum-wage laws, workers’ comp, unemployment insurance, and health-insurance laws.

Lastly, get training and have a support network, which may include family, friends, colleagues, a mentor, a coach, and anyone else who can help you navigate roadblocks and be a successful entrepreneur. When you have an effective support system in place, you will find that you have a cheerleader, consultant, moral support, and even a devil’s advocate when necessary. Continually review and update your business plan and question its key assumptions by using a SWOT (strengths, weaknesses, opportunities, and threats) analysis of the business.

Melyssa Brown, CPA is a senior manager with the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 322-3484; [email protected]

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Be Ready to Launch

By Carolyn Bourgoin, CPA

 

Carolyn Bourgoin

Carolyn Bourgoin

Crowdfunding has become a popular vehicle to raise money for personal, charitable, or business endeavors due to its ease of use and accessibility. However, many businesses and individuals who enter into a crowdfunding campaign have not considered potential tax implications prior to launching a campaign.

Here’s how it works. Websites such as Kickstarter, Indiegogo, and GoFundMe provide a forum for persons seeking funds (i.e. project initiators) to present their project or products in order to attract potential contributors, referred to as ‘backers.’ Project initiators may offer contributors rewards of nominal value, such as T-shirts, in exchange for a contribution, while others may offer sample products or rewards based on the level of contribution.

Campaigns can be set up with a fixed funding goal where the project initiator receives contributions only if funding goals are met, or with flexible funding goals that allow the initiators to keep funds even if the funding goal is not met. The websites charge initiators a fee per transaction; fixed funding goal campaigns are charged a lower fee.

Contributions are made via credit cards, so the crowdfunding websites often use financial intermediaries like PayPal or Amazon Payment to track the credit-card transactions. If more than 200 separate transactions worth more than $20,000 are generated by a campaign, the intermediary has to file a Form 1099-K to report the proceeds. Though a 1099-K is not required in many cases, this does not mean that the funds received are excludable from the recipient’s taxable income.

Tax Treatment of Crowdfunding Revenues

Under general income-tax principles, gross income is broadly defined to include income from all sources. Only items specifically exempt can be excluded from income. Based on these principles, most crowdfunding revenues will be includible in the recipient’s gross income unless he or she can show that the funds are excludible as: (1) contributions to capital in exchange for an equity interest in the entity, (2) loans that must be repaid, or (3) gifts made with donative intent where the donor does not receive a tangible economic benefit in return for his contribution.

Proceeds from donation-based campaigns may qualify as non-taxable gifts if the funds are for the benefit of an individual or a public charity, depending on the purpose and intent of the payment. For instance, if a campaign is to help an individual with unanticipated medical bills due to a tragedy, then the contributions might qualify as a gift. Where a gift exceeds the annual gift-tax exclusion of $14,000 (2016 exclusion amount), the donor may have a gift-tax filing responsibility.

Whether the proceeds from a reward-based campaign should be included in the recipient’s gross income is more difficult to determine because the value of the ‘reward’ must be determined. Crowdfunding often involves the project initiator providing a new product to the contributor in exchange for their ‘contribution.’ If the reward given to the contributor equals or exceeds the amount of the pledge, then the full payment is considered gross income to the recipient.

In essence, the contributor has paid for the reward, and there is no donative intent. Where the value of the reward is less than the ‘contribution,’ then the difference between the contribution and the value of the reward must be evaluated to determine whether it qualifies as a gift or some other type of contribution. In this situation, only a portion of the payment received by the recipient may be characterized as gross income.

Newer to the crowdfunding scene are equity-based campaigns, where crowdfund contributors are provided with an ownership stake in a startup venture in exchange for their contribution. These payments are a contribution to capital and are not gross income to the startup entity. However, there may be tax implications to the investor depending on the valuation of the interest, which is beyond the scope of this article.

Tax Treatment of Crowdfunding Expenditures

Once it has been determined that crowdfunding revenues should be included in federal gross income, the project initiator must determine what expenses, if any, are deductible. A detemination must be made whether the activity is a trade or business or a hobby. Distinguishing between the two is based on a fact-and-circumstances determination that looks to a series of nine factors.

In addition, the timing of when crowdfunding expenditures may be deducted can be an issue. The crowdfunding activity must be considered an active trade or business for the expenses to be eligible for deduction.

Tax Treatment of Contributions to Crowdfunding Campaigns

The tax treatment of a contribution made by a backer to a crowdfunding campaign depends on the motive of the backer as well as whether he or she receives anything in exchange for the payment. If the backer is making a campaign contribution out of disinterested generosity and does not receive anything in return, he has most likely made a gift. Only if the gift is to an approved public charity will it be deductible as a charitable contribution. A gift to a private individual seeking funds is not going to qualify as a charitable contribution even though it may be to help defray medical costs.

Contributions made to a campaign where the contributor receives goods or services of equivalent value in return are not tax-deductible. If a backer wants to make a significant contribution to a cause or project, it may be worth consulting with an advisor as to whether there are more beneficial or efficient ways to provide support.

Other Tax Issues

State and local taxes as well as sales and use taxes are other areas of concern for crowdfunding campaigns. Advance consideration should also be given to the most beneficial accounting method and best form of doing business for project initiators in a startup trade or business. Proper planning before entering into a crowdfunding campaign can help avoid undesirable tax consequences and surprises to project initiators.

Carolyn Bourgoin, CPA is a senior manager with Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 322-3483; [email protected]

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Finance

  By RACHEL CURRY

With year-end fast approaching, taxpayers are looking for any deduction available in order to minimize their personal income taxes. If you have young children, childcare may be one of the highest deductible expenses you will encounter.

Most individuals have a requirement to file a tax return annually, and if you have young children, the likelihood is that you have paid some form of child-care expense throughout the year. If this applies to you, then you may be eligible to enroll in an employer-sponsored cafeteria plan (also known as a Section 125 plan), or you may receive a federal tax credit against your federal tax owed at the end of the year. In order to decide which benefit would be the best option for your situation, you need to know all the details. With either option, it is important to note that, if you are married, both spouses need earned income, and the child must be 12 years old or younger and your dependent.

A cafeteria plan is a benefit that may be provided by your employer. This would allow you to contribute up to $5,000 per year of pretax earnings into a specific, employer-controlled account. This account would then be used to reimburse you for any dependent-care expenses. A cafeteria plan allows you to reduce your gross income, which in turn reduces the amount you pay in federal, Social Security, and some state taxes.

Unless your employer specifically states otherwise, the money in your cafeteria account at the end of the year will be lost. This is an important factor to think about when deciding how much to contribute into this specified account. Another consideration is the cash-flow effect. Your salary is reduced, but you must provide proof of payment of daycare expenses to receive the reimbursement. You want the total amount contributed to not exceed the expenses you pay out throughout the year. This way, you are maximizing the benefits of having this type of plan.

Since the amount you contribute to the cafeteria plan is not included in your wages, you will see a separate line item on Form W-2, Box 10 that states ‘Café 125.’ You would report the W-2 wages as seen on the form, and since you already received a pre-tax benefit from being enrolled in this plan, you may not be eligible to also receive an additional credit on your taxes for the expenses paid through this plan. You are required to file a Form 2441, which is explained later in this article.

If your employer does not offer a cafeteria plan, there is another dependent-care option available in the form of a personal federal tax credit. Similar to the cafeteria plan, this credit has specific guidelines that need to be met in order to receive the total credit. As mentioned above, you must have earned income, which includes wages, salaries or tips, and self-employment income. If you are filing a joint tax return, your spouse must also have earned income. If you are out of work for a period of time but are actively looking for a job, you may still be eligible for the credit.

If you believe the credit may apply, you should provide your tax professional with a list of all applicable expenses. Be sure to note that expenses may include day care or education costs below kindergarten. These expenses are for the care of the child. The credit is equal to 20% to 35% of the total qualified expenses. The percentage of the total expenses that you can deduct depends on your adjusted gross income. The maximum amount of qualified expenses you’re allowed to use to calculate the credit is $3,000 for one qualifying person and $6,000 for two or more qualifying persons. To claim this credit on your tax return, you must complete Form 2441: Child and Dependent Care Expenses and attach it to your Form 1040. On this form you must disclose the name, address, and taxpayer identification number of the individual or organization that is providing the care. It is important to keep supporting documentation in your records in case of an IRS inquiry. If the information is incorrect or incomplete, your credit may not be allowed.

In conclusion, taxpayers with taxable income that is taxed at a rate higher than 20% (married filing joint $74,900, single $37,450) are more likely to obtain greater benefit from a cafeteria plan than taking the tax credit. Another additional benefit of the cafeteria plan is the Social Security tax savings on the amount contributed to the plan. When you receive a credit on your tax return, this also means you are reducing your tax, not receiving an actual refund.

When you are enrolled in a cafeteria plan, you are getting the benefit of reducing your taxable wages before you even begin to prepare your tax return.

If you have any questions, be sure to contact your tax professional.

Rachel Curry is a tax associate with the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 322-3488; [email protected]

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Business Law: Marking a Milestone

By OLGA M. SERAFIMOVA, Esq.

Olga Serafimova

Olga Serafimova


July 26 marked the 25th anniversary of the passage of the Americans with Disabilities Act (ADA) — landmark legislation that created rights for individuals with physical and mental disabilities in employment, government facilities and services, places of public accommodations, telecommunications, and transportation.

In recent years, employers have seen a significant increase in discrimination litigation under the ADA and its state law counterpart, M.G.L. c. 151B. According to the Equal Employment Opportunity Commission (EEOC), the federal agency responsible for the enforcement of the ADA’s employment provisions, over the past 10 years there has been a fast and steady increase in the number of charges filed with the EEOC premised on disability discrimination, from about 19% of all charges in 2004 to almost 29% by 2014. This increase is particularly noticeable since the 2008 amendments to the ADA went into effect, which significantly expanded the medical conditions that qualify as disability for purposes of the act.

The same bears true with regard to complaints filed before the Mass. Commission Against Discrimination (MCAD), the agency that enforces c. 151B. Specifically, since at least 2008, disability discrimination claims have been present in approximately one third of all complaints filed with the MCAD, resulting in more than 1,000 disability complaints each year. For example, last year, of the 3,127 complaints filed with the MCAD statewide, 1,187 contained at least one count of disability discrimination.

Given these statistics, it is absolutely crucial for businesses to be familiar with the responsibilities imposed upon them by the state and federal disability anti-discrimination statutes.

In the employment context, there are four types of possible disability discrimination claims: (1) disparate treatment; (2) failure to accommodate; (3) hostile work environment; and (4) retaliation.

A disparate-treatment claim alleges that a disabled person is treated differently (less favorably) than non-disabled co-workers solely because of the person’s disability. The difference in treatment does not have to come from a malicious place to be unlawful and may constitute a less-obvious omission, such as the failure to consider someone for a promotion or to offer training necessary for advancement.

Disparate treatment claims are most often brought by employees who are currently suffering from a serious physical or mental impairment. In addition to apparent disabilities, such as an inability to see, hear, speak, or walk, employees with latent physical afflictions, such as diabetes, disc herniation, cancer, and HIV/AIDS, may also be covered. Employees diagnosed with a wide spectrum of mental disabilities may also be protected, including, for instance, major depression, ADHD, and bipolar disorder.

Many employers are unaware of the fact that disability-discrimination claims may also be brought by employees who are not currently disabled. Specifically, a disparate-treatment claim may be brought by an employee with a past history of a serious medical impairment, as well as by a healthy employee who, for one reason or another, may be perceived by his or her employer as disabled.

Also, under what is known as “associational discrimination,” an employee who is closely associated with a disabled individual, such as a spouse or a child, is likewise protected from discrimination.

The second type of disability discrimination — failure to accommodate — is perhaps the most complicated area of the law. Employers must provide reasonable accommodations to employees who are actually disabled. The most important thing for employers to know is that, once a request for an accommodation is made or the need for one becomes apparent, an employer must engage with the employee in what is called the “interactive process.”

This process can be as simple as a conversation aimed at finding out what accommodation is necessary and sufficient to permit the employee to perform the essential functions of his or her job. Employers should also keep in mind that taking too long to engage in this process or to grant a request for a reasonable accommodation can likewise lead to litigation and result in liability. Lastly, while there is an exception for requests that would put an undue financial burden on the employer, this standard is very hard to meet, and so the exception should rarely be relied upon.

As suggested by its name, a hostile-work-environment claim alleges that an employee who is disabled is subjected to an abusive work environment by others in the workplace. The law prohibits speech or conduct that is severe or pervasive and not merely unpleasant or uncivil. Nevertheless, employers are well advised to take all complaints of harassment seriously in order to reduce the risk of litigation.

Lastly, in retaliation claims, employees most often allege that they were fired in retaliation for either requesting a reasonable accommodation or speaking up about what they believe to be discrimination. Employers should know that conduct short of a termination, such as a reduction in hours or a change in shifts, may also result in litigation if perceived by the employee as retaliatory.

One way employers can reduce their risk of litigation is to have a well-trained management team. Supervisors need to know how to recognize requests for accommodations and how to handle complaints of harassment. Good documentation is also crucial. Oftentimes, employers find themselves defending against a disparate treatment or retaliation claim after taking well-deserved disciplinary action towards an employee. In these situations, a written record of poor performance, attendance, or other employment issues and a documented consistency in application of policies will make all the difference.

Olga M. Serafimova, Esq. is an attorney at Royal LLP, a woman-owned, boutique, management-side labor and employment law firm. Royal LLP is a certified women’s business enterprise with the Mass. Supplier Diversity Office, the National Association of Minority and Women Owned Law Firms, and the Women’s Business Enterprise National Council; (413) 586-2288; [email protected]

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To Avoid That Fate, Do Battle with Your Assumptions

By JOHN GRAHAM

Selling is never easy. Never. But salespeople often make it even tougher for themselves by letting customers get away empty-handed. It isn’t that customers don’t find what they want or what they’re looking for. It’s just that they don’t want to deal with the salesperson.

With the 800-pound Internet gorilla lurking over every sale, today’s customers are much more demanding when dealing with salespeople. If the experience doesn’t meet their expectations, they’re gone.

More often than not, misreading customers causes them to look elsewhere—missed sales. It doesn’t need to happen and here’s how to avoid it:

1. Be sure you’re speaking with the right “customer.” Wrapped up in every customer is a handful of different customers, who behave differently depending on the situation. The first job is figuring out which of these customers you’re dealing with at the moment so you can respond correctly. Here they are:

• The “I want to know more” customer. This individual requires patience, so ask clarifying questions and get them talking. Don’t push, but gently pull them along until they’re comfortable.
• The “I have all the answers” customer. Let this customer talk and tell you all about it; don’t cut them off. This person wants to be the salesperson so let them feel they made the buying decision on their own.
• The “I know what I want” customer. By listening carefully to these customers, you may find inconsistencies in their thinking. Then by asking them follow up questions, these customers may recognize that what they thought they wanted was not a good idea after all.
• The “I can’t make up my mind” customer. Here, the salesperson becomes a resource, offering options and comparisons and making note of the customer’s responses so the person can recognize the best solution.

By making sure you’re talking with the right customer, salespeople take a big step toward making the sale rather than losing it.

2. Think individuals, not groups. Even though everyone is unique, we lump people into groups — doctors, servers, business owners, blue collar, boomers, Gen Z, old people, Hispanics, and on-and-on. In reality, we know that all Hispanics, accountants, or electricians are not the same.

For example, out of the nearly 80 million 18 to 35 year-old Millennials, there’s a segment of 6.2 million with an annual family income of $100,000 or more. They’re the affluent Millennials and they’re quite different from the other 62 million non-affluent Millennials of the total group.

According to a study, Money Matters: How Affluent Millennials are Living the Millennial Dream, this group is in a second phase. “Compared to non-affluent Millennials, affluent Millennials over index when it comes to changing jobs, buying a home, and making home improvements in the last 12 months,” and they also “over index when it comes to expecting a child in the next 12 months,” states FutureCast, the study sponsor.

It’s clearly good to be cautious when making marketing and sales assumptions about any group. Basing decisions on opinion, inaccurate information, or hearsay leads to misreading customers — and missed sales.

3. Don’t stop with first impressions. A marketing manager called about meeting to talk about working with his company. After a 400-mile drive, he arrived in a near-ancient pick up truck, wearing ragged jeans, a wrinkled shirt, and dirty boots. There was little doubt about that first impression: the meeting was going to be a waste of time.

Not recognizing it, we instantly pigeonhole customers — and that can be a mistake. First impressions may not tell the whole story. The man in the dirty boots is a good example. He was for real; his company became our largest account.

Never get carried away with first impressions, and be prepared to discard those that don’t fit.

4. Always offer options. There’s a lot to learn from companies that do a great job capturing customers by offering options. The Honda Accord, for example, comes in several models, each with a basic price: LX, Sport, EX, and EX-L. Choices engage customers so they don’t go away.

To be effective, options must be realistic and not so many that they become confusing or frustrating to customers. A financial advisor may present three scenarios for a client’s consideration, while a real estate agent may show a client several styles of homes. Options should create discussion and further interaction.

5. Don’t tell customers what to think. “Do you love it?” asked the interior decorator after delivering the reupholstered sofa cushions. The couple murmured a few words, “It’s bright and different.” But at that moment, one thing was certain; they didn’t love it.

Far too often, salespeople make the mistake of trying “to guide” customers, tell them what to think: “This a great buy.” “Isn’t this a perfect floor plan for your family?” “Don’t you just love the color?” “This is going to look great in your home.”

Customers want help and suggestions, but they don’t want salespeople telling them what to think. When that happens, it’s a turn off.

6. Forget about customer loyalty. It’s only human to believe that we have loyal customers. When some leave, we make excuses as to why they left. It’s tough seeing customers leave. It’s as if they are rejecting us. It negates everything we’ve done for them. Breaking up is painful, particularly after making customer care a top priority and bending over backwards to satisfy them.

We think that customers show their appreciation by being loyal to a company, brand, or salesperson. However, what we label as loyalty may be something quite different. It may be nothing more than convenience, price, laziness, inertia, or habit. Nothing more.

In other words, customer loyalty is an illusion. It lets us think the interchange with customers should result in their loyalty — and that’s a big mistake. Today, nothing — absolutely nothing —stands in the customer’s way from getting what the customer wants, the way the customer wants to get it, and where they want to get it.

We misread customers and lose them when we expect their loyalty. Our task is to focus on doing everything possible to give them a great experience. That’s the only reward that counts.

Misreading customers costs sales. To prevent this from happening, it takes doing battle with our assumptions, particularly those that influence how we think about customers and what we expect from them.

John Graham, of GrahamComm, is a marketing and sales strategist-consultant and business writer. He publishes a free monthly eBulletin, “No Nonsense Marketing & Sales Ideas.” Contact him at [email protected], (617) 774-9759; johnrgraham.com

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EEOC Targets Gender Discrimination Against Transgender Individuals


By KARINA L. SCHRENGOHST, Esq.

Karina L. Schrengohst

Karina L. Schrengohst


Discrimination based on transgender status or gender identity is a developing area of employment law.

Some states, including Massachusetts, have recognized gender identity as a protected class under state anti-discrimination laws. Federal courts are increasingly finding that laws prohibiting gender discrimination apply to transgender individuals. In the past year, the Equal Employment Opportunity Commission (EEOC), the federal administrative agency responsible for enforcing Title VII of the Civil Rights Act of 1964, the federal law prohibiting, among other things, sex (gender) discrimination in the workplace, has filed the first three lawsuits ever filed by the EEOC alleging sex discrimination against a transgender individual.

The EEOC has identified sex discrimination against lesbian, gay, bisexual, and transgender individuals as an enforcement priority. Citing a 2011 UCLA study, Mary Jo O’Neill, regional attorney for the EEOC Phoenix District Office, stated that “78% of transgender employees nationwide reported harassment or mistreatment at work because of their gender identity.”

On Sept. 25, 2014, the EEOC filed the first lawsuit alleging that a transgender employee of a Detroit funeral home was fired two weeks after telling her employer that she was transitioning from male to female. (See EEOC v. R.G. & G.R. Harris Funeral Homes, Inc., Civ. No. 2:14-cv-13710.) That same day, the EEOC filed a second lawsuit alleging that a transgender employee of a Florida eye clinic was fired after she began to present at work as a woman and informed her employer she was transitioning from male to female; in April 2015, this case was settled for $150,000. (See EEOC v. Lakeland Eye Clinic, P.A., Civ. No. 8:14-cv-2421.)

Most recently, early last month, the EEOC filed a third lawsuit alleging that Britney Austin, a long-term and satisfactorily performing transgender employee, was subjected to sex discrimination by her employer, Deluxe Financial Services Corp., a check-printing and financial-services corporation. (See EEOC v. Deluxe Financial Services Inc., Civ. No. 0:15-cv-02646.)

Specifically, the EEOC alleges that, after Austin began to present at work as a woman and told her supervisors that she was transgender, her employer refused to let her use the women’s restroom. In addition, it is alleged that Austin’s supervisors and co-workers subjected her to a hostile work environment, including making derogatory statements and intentionally referring to her by the wrong gender pronoun.

Commenting on this case, Rayford Irvin, district director for the EEOC’s Phoenix District Office, noted that “a long-term, well-respected employee should not be rewarded for her years of dedicated service by being forced to face the indignity and danger of using a restroom inconsistent with her gender identity, simply because a company’s management subscribes to sex stereotypes and believes co-workers may feel uncomfortable.”

This case is similar to the most recent EEOC decision involving sex discrimination against a transgender individual. On April 1, 2015, the EEOC ruled that denying employees use of a restroom consistent with their gender identity and subjecting them to intentional use of the wrong gender pronouns constitutes sex discrimination in violation of Title VII. (See Lusardi v. McHugh, Appeal No. 0120133395.)

This litigation follows the landmark case of Macy v. Bureau of Alcohol, Tobacco, Firearms and Explosives. Mia Macy, a transgender woman, filed a complaint against ATF alleging employment discrimination in violation of Title VII.

Macy applied for a job as a ballistics technician with ATF. After a telephone interview, Macy was informed that she would be hired if she passed the background check. However, after learning that Macy was transitioning from male to female, ATF informed her that the position was no longer available due to budget cuts. Macy later learned that ATF hired someone else for the position.

On April 20, 2012, the EEOC, for the first time, concluded that discrimination against a transgender individual because that person is transgender is gender discrimination prohibited by Title VII. The EEOC stated that gender discrimination occurs when “an employer discriminates against an employee because the individual has expressed his or her gender in a non-stereotypical fashion, because the employer is uncomfortable with the fact that the person has transitioned or is in the process of transitioning from one gender to another, or because the employer simply does not like that the person is identifying as a transgender person.” (See Macy v. Department of Justice, Appeal No. 012012082.)

Following the EEOC’s decision, the Department of Justice investigated and, on July 8, 2013, found that ATF discriminated against Macy based on her transgender status.

The year before Macy filed her complaint with the EEOC, Massachusetts became the 16th state to prohibit discrimination on the basis of gender identity. An Act Relative to Gender Identity (also known as the transgender equal-rights law), which was effective July 1, 2012, prohibits private employers with six or more employees from discriminating against applicants and employees on the basis of gender identity. Under Massachusetts law, gender identity is defined as “a person’s gender-related identity, appearance, or behavior, whether or not that gender-related identity, appearance, or behavior is different from that traditionally associated with the person’s physiology or assigned sex at birth.”

Massachusetts state and federal law prohibit discrimination based on gender, transgender status, and gender identity. This means that employers may not make decisions regarding hiring, promotion, termination, and other terms and conditions of employment based on an applicant’s or an employee’s transgender status, gender identity, or perceived non-conformity with gender stereotypes.

To reduce the risk of litigation, employers should ensure that their policies and practices are compliant with state and federal law. Also, employers should educate employees that discrimination and harassment based on transgender status and gender identity is unlawful and will not be tolerated in the workplace.

In addition to ensuring that policies related to discrimination and harassment are compliant with state and federal law, as a proactive measure, employers should consider implementing written policies and guidelines for managing gender transition, which address use of gender-specific facilities such as bathrooms and locker rooms, dress code and appearance standards, confidentiality and privacy rights, and updating personnel records. Employers should also consider working with transgender employees to develop individual plans for workplace transitions.

Finally, employers should train their managers and supervisors on how to respond when employees approach them regarding gender transition and how to address questions and reactions from co-workers. Because this is a developing area of the law, employers would be wise to consult with their employment-law counsel when issues arise in the workplace concerning transgender employees.


Karina L. Schrengohst, Esq. is an attorney at Royal LLP, a woman-owned, boutique, management-side labor and employment law firm. Royal LLP is a certified women’s business enterprise with the Massachusetts Supplier Diversity Office, the National Assoc. of Minority and Women Owned Law Firms, and the Women’s Business Enterprise National Council; (413) 586-2288; [email protected]