Cofounder Conflict Could Be One of the Biggest Threats to Your New Business

If you asked brand-new entrepreneurs to make a list of everything they think might one day pose a threat to their startup, you’d probably hear a variety of answers with similar themes. 

Some might be (rightfully) worried about ultimately developing a product in search of a marketplace. Others may be worried about how they’re going to overcome the cash flow issues they’ll likely face. Others still might be worried about getting “taken for a ride” by the venture capital people they’re putting so much of their faith in. 

While all of these are understandable concerns, none of them should be at the top of that list. The fact of the matter is, the number-one threat to your business isn’t an external factor at all. 

It’s the people you’ve cofounded that business with. 

While it’s absolutely true that founding a business with at least one other person increases your chances of becoming a success, it’s equally true that about 50% of cofounder relationships fail, and most of those failures are ugly. 

This is because cofounder conflict is very real and far more common than many people prefer to assume. But by taking the time to learn as much about it as you can, you put yourself (and your colleagues) in the best position to mitigate risk from these issues as much as possible — before it’s too late. 

Why Cofounder Conflict Happens 

Cofounder conflict can ultimately happen for a myriad of reasons, and not all of them are going to be immediately obvious. 

Sometimes when you start a business with someone else, you don’t realize just how incompatible your managerial styles are because you’ve never had the chance to put them on display. But once your startup is up on its feet and real decisions are being made on a daily basis, you might discover that you and your cofounder have two very different working styles. 

Other times it comes down to the fact that roles and responsibilities among cofounders are not clearly defined. Who is actually supposed to be doing what? What is your specific job description and how does it overlap with that of your cofounders? What boundaries are in place that give each of you your necessary space, but that also allow you to truly collaborate with one another in the way you need in order to run a successful business? 

Another issue could be the absence of stipulations on how “significant future changes will affect the management and control of the business.” Without a buy-sell agreement and succession plan in place, your business is at risk if any major event — like your partner’s death, divorce, or bankruptcy — may occur. 

Finally, one of the biggest causes of cofounder conflict is that entrepreneurs make the mistake of taking any conflict as a warning sign that something sinister is afoot. 

The truth is that running a business is hard and there are times where you will have arguments and disagreements with the people around you. This is true regardless of how similar your backgrounds are or how closely your visions align. 

If you go through life assuming that conflict is something you can totally avoid, you’re in for a number of surprises and almost none of them are good. The key to a successful, long-term relationship with your cofounders involves not running from that conflict but embracing it. Have the argument, talk through your differences, hash things out and come to a solution together.  Every moment may not be as fun as you’d hoped, but you will absolutely come out better for it. 

Mitigating Cofounder Conflict: Breaking Things Down 

Here’s the good news: once you’ve taken steps to learn about what cofounder conflict actually is and why it happens, you put yourself in the best position to avoid it in your own efforts — at least as much as possible. 

By far, the key to at least relieving some of this conflict involves first identifying why it is happening with your particular startup. Are you having frequent arguments with your cofounders because of significant personality changes? Is it because your work ethics differ a great deal? Do you come from different backgrounds? Do you have totally contrasting management styles? 

When left unchecked, these differences can form a major chasm that can be difficult to overcome. But, if you identify them in your early days as an entrepreneur, you may be able to find a way to meet your cofounders “in the middle,” so to speak, to avoid bigger issues later on. 

Remember that being an entrepreneur and founding a business with someone else ultimately requires a fair amount of give and take. Your startup does not belong exclusively to you and it would be unfair of you to act that way. Therefore, once you start to see conflict develop, don’t be afraid to address it head-on… but also understand that you must be willing to make compromises, too. Don’t just spend time identifying problems with someone else — offer up solutions of your own. 

In terms of mitigating some of these potential risks, a buy-sell agreement can be very effective (and should be viewed as a necessity). This legally-binding document “anticipates the intent and needs of the owners, as well as the potential conflicts that may arise among them if one or more wishes to sell his/her interest in the business, or is forced to dispose of such interest.” 

If you acknowledge your startup for what it really is — a collaboration between two or more people — you stand the best possible chance at ending the lion’s share of these cofounder conflicts before they’ve ever had a chance to start. At that point, the proverbial runway will be clear and there really is no limit to what you can accomplish together.

Consulting with a tax and accounting professional during the process of negotiating a buy-sell agreement can be very beneficial for all parties involved. Contact us for more information. 

Year-End Tips for Charitable Contributions

As the end of the year and the holiday season approaches, we will all see an uptick in the number of charitable solicitations arriving in our mailboxes and by email. Since some charities sell their contributor lists to other charities, frequent contributors may find themselves besieged by requests from all sorts of charities with which they are not familiar. 

Watch Out for Charity Scams – Scammers may pretend to be legitimate charities looking to take advantage of your generosity for their gain. 

When making a donation to a charity with which you are unfamiliar, you should take a few extra minutes to ensure that your gifts are going to legitimate charities. The IRS has a search feature, Tax Exempt Organization Search, which allows people to find legitimate, qualified charities to which donations may be tax-deductible. You can always deduct gifts to churches, synagogues, temples, mosques, and government agencies—even if the Tax Exempt Organization Search tool does not list them in its database. 

Here are some tips to make sure your contributions go to legitimate charities. 

  • Be wary of charities with names that are similar to familiar or nationally known organizations. Some non-legitimate charities use names or websites that sound or look like those of respected, legitimate organizations.

  • Don’t give out personal financial information, such as Social Security numbers or passwords, to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money. Using a credit card to make legitimate donations is quite common, but please be very careful when you are speaking with someone who calls you; don’t give out your credit card number unless you are certain the caller represents a legitimate charity.

  • Don’t give or send cash. For security and tax-record purposes, contribute by check, credit card, or another way that provides documentation of the gift.

Another long-standing type of abuse or fraud involves scams that occur in the wake of significant natural disasters. In the aftermath of major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information.  They also may set up phony websites claiming to solicit funds on behalf of disaster victims. Unscrupulous individuals may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims to get tax refunds. 

Scammers may also attempt to get personal financial information or Social Security numbers, which can be used to steal the victims’ identities or financial resources. Disaster victims with specific questions about tax relief or disaster-related tax issues can visit the IRS website for Disaster Assistance and Emergency Relief for Individuals and Businesses

Tax Benefits of Charitable Contributions – Contributions to charitable organizations are deductible if you itemize your deductions on Schedule A. Generally, the deduction is the lesser of your total contributions for the year or 50% of your adjusted gross income, but the 50% is increased to 60% for cash contributions in years 2018 through 2025, and lower percentages may apply for non-cash contributions and certain types of organizations. Itemized deductions reduce your gross income when determining your taxable income. 

However, with the increase in the standard deduction as a result of the 2017 tax reform, many taxpayers are no longer itemizing their tax deductions (because the standard deduction provides a greater tax benefit). For those in this situation, there are two possible workarounds: 

  • Bunching Deductions – The tax code allows most taxpayers to utilize the standard deduction or itemize their deductions if doing so provides a greater benefit. As a rule, most taxpayers just wait until tax time to add everything up and then use the higher of the standard deduction or their itemized deductions. If you want to be more proactive, you can time the payments of tax-deductible items to maximize your itemized deductions in one year and take the standard deduction in the next.

  • Qualified Charitable Distributions – Individuals age 70½ or older – who must withdraw annual required minimum distributions (RMDs) from their IRAs—are allowed to annually transfer up to $100,000 from their IRAs to qualified charities. Here is how this provision works, if utilized:

(1) The IRA distribution is excluded from income; 

(2) The distribution counts toward the taxpayer’s RMD for the year; and 

(3) The distribution does NOT count as a charitable contribution deduction.

At first glance, this may not appear to provide a tax benefit. However, by excluding the distribution, a taxpayer lowers his or her adjusted gross income (AGI), which helps with other tax breaks (or punishments) that are pegged at AGI levels, such as medical expenses when itemizing deductions, passive losses, and taxable Social Security income. In addition, non-itemizers essentially receive the benefit of a charitable contribution to offset the IRA distribution.

Substantiation – Charitable contributions are not deductible if you cannot substantiate them. Forms of substantiation include a bank record (such as a canceled check) or a written communication from the charity (such as a receipt or a letter) showing the charity’s name, the date of the contribution, and the amount of the contribution. In addition, if the contribution is worth $250 or more, the donor must also get an acknowledgment from the charity for each deductible donation. 

Non-cash contributions are also deductible. Generally, contributions of this type must be in good condition, and they can include food, art, jewelry, clothing, furniture, furnishings, electronics, appliances, and linens. Items of minimal value (such as underwear and socks) are generally not deductible. The deductible amount is the fair market value of the items at the time of the donation; as with cash donations, if the value is $250 or more, you must have an acknowledgment from the charity for each deductible donation. Be aware: the door hangers left by many charities after picking up a donation do not meet the acknowledgment criteria; in one court case, taxpayers were denied their charitable deduction because their acknowledgment consisted only of door hangers. When a non-cash contribution is worth $500 or more, the IRS requires Form 8283 to be included with the return, and when the donation is worth $5,000 or more, a certified appraisal is generally required. 

Special rules also apply to donations of used vehicles when the claimed deduction exceeds $500. The deductible amount is based upon the charity’s use of the vehicle, and Form 8283 is required. A charity accepting used vehicles as donations must provide Form 1098-C (or an equivalent) to properly document the donation. 

Don’t be scammed; make sure you are donating to recognized charities. Donations to charities that are not legitimate are not tax-deductible. Contributions to legitimate charities need to be properly substantiated if you plan to claim them as part of your itemized deductions. If you have any questions related to charitable giving, please contact us.

Holiday Gifting with a Tax Twist

Some holiday gifts you provide to members of your family, employees, and others may also yield tax benefits. Here are some examples: 

Employee Gifts – It is common practice this time of year for employers to give employees gifts. Although gifts are generally excluded from the recipient’s gross income, an employee cannot exclude gifts from his or her employer as a gift. 

However, if the gift is infrequently offered and has a fair market value so low that it would be impractical and unreasonable to account for it, the gift’s value would be treated as a de minimis fringe benefit. As such, it would be tax-free to the employee and tax-deductible by the employer. 

A gift of cash, regardless of the amount, is considered additional wages and is subject to employment taxes (FICA) and withholding taxes. 

Caution: When a gift recipient is a W-2 employee, the employer must not issue them a 1099-MISC for a holiday gift of cash; the amount must be treated as W-2 income. This is a common error made by employers.

If an employer gives gift certificates, debit cards, or similar items that are convertible to cash, their value is considered additional wages, regardless of the amount.

If, as a means of promoting goodwill, an employer makes a general distribution of hams and turkeys to employees, they would not be taxable to the employee and would be deductible by the employer. That also goes for a coupon that is nontransferable and convertible only into a turkey, ham, or gift basket at a particular establishment. However, if that coupon can be converted into cash, then the value would be treated as employee wages. 

A Gift of College Tuition – An interesting quirk to the gift tax laws is that an individual can pay a student’s tuition directly to a qualified school, college, or university, and it will be exempt from gift tax and gift tax reporting. What student wouldn’t love to have part of his or her tuition paid? It would make a great gift. 

As an aside, college tuition generally qualifies for a tax credit. Another quirk in the tax laws says that the education credit goes to the individual who claims the child as a dependent, resulting in another gift from the individual who pays the tuition.

Example: Whitney is attending college and is the dependent of her mother and father. Whitney’s grandfather makes a tuition payment directly to the college; since it was made directly to the school, Whitney’s grandfather does not have any gift tax issues. Since Whitney is a dependent of her parents, her parents would claim any available tuition credit. Thus, by paying the tuition, Grandpa made a gift of tuition to his granddaughter and a gift of the tuition credit to her parents.

College Student’s Supplies – If you have a spouse or child attending college, the costs of certain course materials qualify for the American Opportunity Tax Credit (AOTC) if the course materials are needed as a condition of enrollment and attendance. Thus, for example, if a computer is needed as a condition of enrollment and attendance at the college, the computer’s cost would qualify for the AOTC of the individual who claims the student as a dependent if the individual otherwise qualifies for the credit. 

Electric Car Credit – If you purchase an electric car as a holiday gift for your spouse or even yourself, you will find that most electric cars come with a tax credit. To qualify to claim the credit on your 2019 tax return, the car will have to be “placed in service” by December 31, 2019. So merely ordering the vehicle, even if payment for it is made at the time when the order is placed, won’t be enough – you will need to receive the car and start using it before New Year’s Day. Before you leap, you should know that the credit is non-refundable, meaning it can only offset your actual tax liability and that any excess credit over your tax liability will be lost. However, there is an exception when the electric vehicle is partially used for business, in which case the portion of the credit allocated to business use will become a general business credit that is first applied to the tax in the credit year. Any remaining credit will be carried back one year, and then if not all of it is used still, the rest will be carried forward. 

Work Equipment – If your spouse is self-employed and you purchase tools or electronics used in the spouse’s business, the costs of these items will qualify as a business tax deduction on the return for the year when the equipment is put into service. 

Solar Electric Credit – If you and your spouse or another resident of the home decide to gift a home solar system to each other, you will qualify for a non-refundable tax credit equal to 30% of the cost of the home solar property (note that the credit will drop to 26% in 2020). If your tax liability is less than the credit, then the excess credit can be carried over to a future year. The solar credit is available to all residents of the home, even if they do not have an ownership interest in the home. Example: A mother and son live together in a home owned by the mother. The son purchases a solar system; as a result, the son will get the tax credit since he resides in the home. Caution: To claim a credit for the system’s costs on your 2019 return, the installation must be completed by December 31, 2019. 

Charitable Gifts – Of course, contributions to qualified charitable organizations can be deducted, provided you itemize your deductions. If you are over age 70.5 and have not taken your required minimum distribution (RMD) from your IRA account for 2019, you might consider making direct transfers to the charities of your liking, thereby satisfying your RMD requirement while avoiding taxation of the distribution. Contact your IRA custodian or trustee to arrange the transfer, which would need to be completed by December 31, 2019, to count for 2019. It’s best not to wait until the last minute to initiate the transfer. 

Some words of caution about charitable contributions during the holiday season: When you are shopping at a mall and drop cash into the holiday kettle, you won’t get a receipt for your contribution, and a cash charitable contribution cannot be claimed as an itemized deduction without documentation. The same goes for buying and then giving new, unused toys to holiday toys-for-kids drives, which have become very popular. Tip: Save the purchase receipt for the toys and request verification of the contribution from the sponsoring organization. If the drop point is unmanned and it is not possible to obtain a contribution verification from the organization, the IRS will allow a deduction of up to $249, provided you document the purchase of what you’ve donated. 

Also, during the holiday season, all of the scammers will climb out from under their rocks and do their best to trick you out of your well-intended contribution dollars. Be cautious, and make sure your contributions are going to legitimate charities. 

If you have questions about how any of these suggestions might impact your tax situation, please contact us.

Tax Changes For 2019

As the end of the year approaches, it is a good time to review the various changes that impact 2019 tax returns. Some of the changes are likely to apply to your tax situation. In addition, be aware that various tax-related bills currently in Congress may or may not pass this year. If any of them do pass, we will quickly get the details to you. 

Medical Threshold – Medical expenses are deductible as itemized deductions only if the total medical expenses for the tax year exceed a specified percentage of a taxpayer’s income. After dropping to 7.5% for 2017 and 2018, this threshold reverts to 10% for 2019. As a result, any medical expenses from 2019 are deductible only to the extent that they exceed 10% of a taxpayer’s adjusted gross income for the year. 

Electric Vehicle Credit Phaseout – As an incentive to get taxpayers to move away from conventional-fuel (gasoline or diesel) vehicles, Congress has provided tax credits of up to $7,500 for the purchase of plug-in electric vehicles. However, Congress’s rules limit the full credit to the first 200,000 vehicles sold by a given manufacturer. Once a company sells 200,000 qualifying vehicles, the credit begins to phase out for that company. Tesla, Chevrolet, and Cadillac have all reached the phaseout point. The table below shows the credits available depending upon the quarter when the vehicle is purchased. 

Vehicles Beginning Phaseout out 2019
Date Acquired

>>>

Vehicle

Before 2019 Jan – Mar 2019 Apr – June 2019 July – Sept 2019 Oct – Dec 2019 Jan – Mar 2020 After Mar 2020
Tesla* $7,500 $3,750 $3,750 $1,875 $1,875 $0 $0
Chevrolet* $7,500 $7,500 $3,750 $3,750 $1,875 $1,875 $0
Cadillac* $7,500 $7,500 $3,750 $3,750 $1,875 $1,875 $0

*All qualifying models

If a qualifying vehicle is used partiality for business, the credit is proportionally allocated between personal and business tax credits. The personal portion can only offset the individual’s current-year tax liability; any excess is lost. The business portion can be carried back for one year and then forward up to 20 years until it is used up; any credit remaining after the 20th year is lost. As a tip, please note that the credit limit is per vehicle, not per taxpayer, so individuals who make multiple purchases can receive multiple credits. 

Alimony – One delayed effect of the 2017 tax reform is that the treatment of alimony changes for some individuals starting in 2019. 

For divorces or separations entered into before 2019, alimony payments continue to be deductible for the payer and taxable for the recipient. These payments also still qualify as earned income for purposes of the recipient’s qualification for an IRA deduction. For divorces or separations that occurred after December 31, 2018, alimony payments are no longer deductible for the payer. Also, for the recipient, they are no longer taxable income and do not count as earned income IRA deduction. 

Divorces or separations entered into before 2019 continue to follow the pre-2019 rules unless they have been modified after December 31, 2018. In that case, the alimony payments are subject to the post-2018 rules if the modification expressly provides for this. 

Finalization of State- and Local-Tax Deduction Limitation – The 2017 tax reform limited the itemized deduction for state and local taxes (SALT) to $10,000 (or $5,000 for married individuals filing separately). This has adversely impacted taxpayers in high-tax states such as California, Connecticut, New Jersey, and New York. Elected officials in several states have attempted to work around this restriction by establishing (or proposing to establish) state charities. The idea is that taxpayers would make deductible contributions that, in return, would give them tax credits against their SALT equal to most of the value of the charitable contributions. Unfortunately, these officials have overlooked the 1986 U.S. Supreme Court ruling that, if a taxpayer receives something in return for a donation (i.e., a quid pro quo), the contribution is not deductible.

The final regulations generally reduce the charitable contribution deduction by the amount of any SALT credit received. However, as an exception, if the credit does not exceed 15% of the contribution, the entire contribution is deductible.

Penalty for Not Being Insured – The Tax Cuts and Jobs Act (tax reform) that was enacted at the end of 2017 eliminated the Obamacare shared-responsibility payment, effective starting in 2019. Congress didn’t actually repeal this penalty; instead, it effectively abolished it by setting zero values for both the percentage of household income used in the calculation and the flat dollar amount of the penalty. As a result, the amount of the penalty is always zero. However, keep in mind that the penalty could be restored in the future if the direction of the political winds changes. In addition, beginning in 2020, some states may pick up where the federal government left off and charge a penalty to residents without qualified health insurance coverage.

Qualified Opportunity Funds – Taxpayers who receive capital gains on the sale or exchange of property (if the other party is unrelated) may elect to defer – and, potentially, partially exclude – those gains from their gross income if they are reinvested in a qualified opportunity fund (QOF) within 180 days of the sale or exchange. The amount of the gain (not the amount of the proceeds, as in Sec. 1031 deferrals) needs to be reinvested to defer the gain. The deferral period ends when the QOF investment ends or on December 31, 2026 – whichever is sooner. At that time, taxes must be paid on the deferred gain.

However, 10% of the deferred gains are forgiven QOF investments that have been held for at least five years, and 15% of the gains are forgiven when those investments have been held for at least seven years. Note that, with the deferral end date of December 31, 2026, qualifying for the 15% forgiveness requires a QOF investment on or before December 31, 2019.

Seniors Get a Special Tax Form – Lawmakers have long sought to provide taxpayers who are age 65 and older with a simplified tax form in place of the Form 1040. In the 2018 budget bill, Congress finally included a requirement that the IRS create such a form. As a result, the IRS will introduce Form 1040-SR, which will look a lot like the old form before the 2018 tax reform instituted its division of the Form 1040 into multiple postcard-size schedules. It is unclear how much simpler the Form 1040-SR will be, but it will be available for 2019 returns. Note: Form 1040-SR will be optional.

Family and Medical Leave Credit – The employer credit for family and medical leave, which was created in the 2017 tax reform, ends after 2019. This two-year program provides employers with a tax credit equal to 12.5% of the wages they paid to qualifying employees during any period when those employees were on family and medical leave, provided that the rate of the leave payments are at least 50% of the employees’ regular wages. The credit can be claimed for a maximum of 12 weeks of leave for any employee during the tax year. For each percentage point for which the leave payments exceed 50% of regular wages, this credit increases by 0.25 percentage points (up to a maximum of 25%). Participation in this credit program is optional.

Inflation Adjustments – Just about every tax-related value is adjusted for inflation. Some values are adjusted for any level of change, but others are adjusted only if the change reaches a specific dollar amount (so these values may not change every year). The table below includes the actual 2019 inflation adjustments and the projected 2020 adjustments for some of the most frequently encountered values.

 

Year 2018 2019 2020
Standard Deduction
Single or Married Filing Separately 12,000 12,200 12,400
Head of Household 18,000 18,350 18,650
Married Filing Jointly 24,000 24,400 24,800
Additional Standard Deduction (Age 65+ or Blind)
Unmarried 1,600 1,650 1,650
Married 1,300 1,300 1,300
Other Values
Annual Gift-Tax Exclusion 15,000 15,000 15,000
Foreign Earned-Income Exclusion 103,900 105,900 107,600
IRA Contribution Limit 5,500 6,000 6,000
IRA Contribution Limit (Age 50+) 6,500 7,000 7,000
401(k) Contribution Limit 18,500 19,000 *
401(k) Contribution Limit (Age 50+) 24,500 25,000 *

All values are in U.S. dollars. 

* Value not available as of publication

Form W-4 Revision – During the previous tax season, many people received a smaller federal tax refund than normal, or actually owed taxes despite usually getting a refund. In most cases, this was due to the last-minute passage of the tax-reform law at the end of 2017, which did not give the IRS sufficient time to adjust the W-4 form and related computation tables for the 2018 tax year so as to account for all of the new law’s changes. The planned major revision to the W-4 for the 2019 tax year has since been delayed until 2020, so all taxpayers should make sure that their 2019 withholding is adequate. 

If you are conversant with tax terminology, you can use the IRS’s newly updated withholding estimator. This tool helps taxpayers to determine whether their employers are withholding the right amount of tax from their paychecks. However, please note that the results are only as good as the information that is put into the estimator. Users need to properly estimate their other income for the year from various sources. 

If you have questions related to any of the subjects discussed in this article, please contact us.