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Archive for August, 2012

Don’t Hire an Unregistered Subcontractor After 9-15-2012!

Tuesday, August 14, 2012 @ 03:08 PM
Author: Peter Brehm

As of 9-15-2012, subcontractors in the State of Minnesota may have to register with the state, or they will deemed to be employees. The law replaces the old exemption certificate process with a (purportedly) simplified online registration. Hiring an unregistered contractor to perform subcontracted work will reclassify the worker as an employee of the party hiring them. That means increased workers compensation, unemployment compensation, state and federal withholding, FICA, penalties and interest on these and general liability premium increases. Further, there is a $2,000 penalty for violating the registration law. This reclassification is a bright-line test to state and federal authorities, and will increase the likelihood of a successful audit because proof requires only the absence of registration.

The following people and entities must register:

1. Individuals or business entities;
2. That performs commercial or residential building construction or improvement services;
3. Do not have a current license, certificate or registration issued by DLI;
4. Do not have a current independent contractor exemption certificate;
5. Do not have an employee of a business performing construction services; and
6. Are not exempt from licensing under Minnesota Statutes 326B.805, subd. 6 (5) or excluded from registration requirements under Minnesota Statutes 181.723, subd. 4a.

If you are a subcontractor, and you don’t know if you have to register, the DOLI has a site that can help you, you can read the Summer 2012 CCLD Review, or you can call our offices. To register, you can go the DOLI’s web site here.

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Gifting Stock: Use a Formula, Not a Savings Clause

Thursday, August 9, 2012 @ 02:08 PM
Author: Peter Brehm

Small business owners often struggle finding ways to transfer the value of what they have built to their children and grandchildren.  The current tax law permits a parent to gift $13,000 to each child without paying gift tax.  So, for example, a husband and wife with 4 children could gift $26,000 in stock every year to each child ($104,000 per year) without paying tax.   As most small business owners know, however, establishing the value of small business stock is not easy to do, and if the IRS decides that the amount of stock you gave exceeds the annual exclusion amount, there is the potential for a rather punitive gift tax.

Many practitioners have tried to remedy this situation by adding a ‘savings clause’ to the gift that says: we are gifting X number of shares to each child with the expectation that the value of the shares does not exceed the gift tax exclusion amount, and if the IRS finds that  X number of shares exceeds the gift tax exclusion amount, we take back enough of the gift so that no tax is owed.  The IRS, and most court have rejected this approach.

However, the Tax Court has held that a gift of stock based upon a formula, where the gift is for a set dollar amount (not a specific number of shares) the taxpayer can effectively create a gift that will never exceed the exclusion amount.  In Wandry v. Commissioner, the court held that “[a] savings clause is void because it creates a donor that tries ‘to take property back’.  On the other hand, a ‘formula clause’ is valid because it merely transfers a ‘fixed set of rights with uncertain value’.  The difference depends on an understanding of just what the donor is trying to give away.”

For the small business owner the solution is clear: when planning around the gift tax exclusion, you should use a formula based gift, not a savings clause.

Peter Brehm is a small business and estate lawyer practicing in Minneapolis, Minnesota and Scottsdale, Arizona.

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