How entrepreneurs must treat expenses on their tax returns

Have you recently started a new business? Or are you contemplating starting one? Launching a new venture is a hectic, exciting time. And as you know, before you even open the doors, you generally have to spend a lot of money. You may have to train workers and pay for rent, utilities, marketing and more.

Entrepreneurs are often unaware that many expenses incurred by start-ups can’t be deducted right away. You should be aware that the way you handle some of your initial expenses can make a large difference in your tax bill.

Key points on how expenses are handled

When starting or planning a new enterprise, keep these factors in mind:

1. Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.
2. Under the federal tax code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. We don’t need to tell you that $5,000 doesn’t go far these days! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
3. No deductions or amortization write-offs are allowed until the year when “active conduct” of your new business commences. That usually means the year when the enterprise has all the pieces in place to begin earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Has the activity actually begun?

Examples of expenses

Start-up expenses generally include all expenses that are incurred to:

• Investigate the creation or acquisition of a business,
• Create a business, or
• Engage in a for-profit activity in anticipation of that activity becoming an active business.

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example would be the money you spend analyzing potential markets for a new product or service.

To qualify as an “organization expense,” the outlay must be related to the creation of a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing the new business and filing fees paid to the state of incorporation.

An important decision

Time may be of the essence if you have start-up expenses that you’d like to deduct this year. You need to decide whether to take the elections described above. Recordkeeping is important. Contact us about your business start-up plans. We can help with the tax and other aspects of your new venture.

© 2019

Tesla Inc. will bid farewell to longtime directors and reduce the size of its 11-member board to nine as the automaker ushers in a new era of corporate governance.

Director terms will be cut to two years from three, allowing shareholders to vote on the board’s performance with greater frequency, according to a proxy filed Friday. Directors Brad Buss, a former chief financial officer of Solarcity Corp., and Linda Johnson Rice, chief executive officer of Johnson Publishing Co., won’t seek re-election when their terms expire at the June 11 annual shareholder meeting.

If shareholders vote to reduce director terms to two years, venture capitalist Stephen Jurvetson -- who returned from an extended leave of absence this month -- has indicated he will not seek re-election in 2020. Antonio Gracias, a private equity firm founder, has also indicated he won’t stay on Tesla’s board after his term ends next year.

Buss, Gracias and Jurvetson have long been associated with Tesla CEO Elon Musk. Gracias and Jurvetson are both on the board of the billionaire’s closely held SpaceX.

“It strikes me as an important step towards more effective corporate governance,” said Stephen Diamond, an associate professor of law at Santa Clara University. “I would call this a board shakeup. The trio of Buss, Gracias and Jurvetson are the heart of the Musk crowd and the old boy network. Maybe this will bring some fresh air and light into the board.”

Jurvetson and Gracias should retire this June as opposed to waiting until 2020, said Dieter Waizenegger, executive director of CtW Investment Group, which works with union pension funds that are Tesla investors. Jurvetson went on leave in November 2017, and is just returning after being away for nearly 18 months, while Gracias faced some investor opposition last year.

“This is a first good step, but there’s more work to do,” Waizenegger said. “Tesla should look for people who have really strong manufacturing expertise.”

Tesla is also proposing to eliminate a supermajority amendment that requires the approval of two-thirds of shares to make certain major changes. Instead, a simple majority would suffice.

The news, released on the afternoon of the Good Friday holiday when the U.S. stock market was closed, comes ahead of a busy week for the company. On Monday, Tesla will host an “Autonomy Day” for investors to showcase its progress with its driver-assistance system Autopilot. The company reports first-quarter earnings on Wednesday.

Musk and the U.S. Securities and Exchange Commission have until April 25 to resolve their legal fight over the CEO’s penchant for tweeting, after both said they needed more time.

Tesla Board Shakeup Seen as ‘Important Step’ in Governance

Tesla Inc. will bid farewell to longtime directors and reduce the size of its 11-member board to nine as the automaker ushers in a new era of corporate governance.

Director terms will be cut to two years from three, allowing shareholders to vote on the board’s performance with greater frequency, according to a proxy filed Friday. Directors Brad Buss, a former chief financial officer of Solarcity Corp., and Linda Johnson Rice, chief executive officer of Johnson Publishing Co., won’t seek re-election when their terms expire at the June 11 annual shareholder meeting.

If shareholders vote to reduce director terms to two years, venture capitalist Stephen Jurvetson -- who returned from an extended leave of absence this month -- has indicated he will not seek re-election in 2020. Antonio Gracias, a private equity firm founder, has also indicated he won’t stay on Tesla’s board after his term ends next year.

Buss, Gracias and Jurvetson have long been associated with Tesla CEO Elon Musk. Gracias and Jurvetson are both on the board of the billionaire’s closely held SpaceX.

“It strikes me as an important step towards more effective corporate governance,” said Stephen Diamond, an associate professor of law at Santa Clara University. “I would call this a board shakeup. The trio of Buss, Gracias and Jurvetson are the heart of the Musk crowd and the old boy network. Maybe this will bring some fresh air and light into the board.”

Jurvetson and Gracias should retire this June as opposed to waiting until 2020, said Dieter Waizenegger, executive director of CtW Investment Group, which works with union pension funds that are Tesla investors. Jurvetson went on leave in November 2017, and is just returning after being away for nearly 18 months, while Gracias faced some investor opposition last year.

“This is a first good step, but there’s more work to do,” Waizenegger said. “Tesla should look for people who have really strong manufacturing expertise.”

Tesla is also proposing to eliminate a supermajority amendment that requires the approval of two-thirds of shares to make certain major changes. Instead, a simple majority would suffice.

The news, released on the afternoon of the Good Friday holiday when the U.S. stock market was closed, comes ahead of a busy week for the company. On Monday, Tesla will host an “Autonomy Day” for investors to showcase its progress with its driver-assistance system Autopilot. The company reports first-quarter earnings on Wednesday.

Musk and the U.S. Securities and Exchange Commission have until April 25 to resolve their legal fight over the CEO’s penchant for tweeting, after both said they needed more time.

Tesla’s other board members are chairman Robyn Denholm, Ira Ehrenpreis, Larry Ellison, James Murdoch, Kimbal Musk and Kathleen Wilson-Thompson. Ellison, co-founder of Oracle Corp., and Wilson-Thompson, global human resources chief at Walgreens Boots Alliance Inc., joinedTesla’s board in December.

Tesla shares have plunged 18 percent this year, compared with a 21 percent gain in the Nasdaq Composite.

Canopy Growth CEO bets pot users will pay more for its legal products than go back to street dealers

Canopy Growth CEO Bruce Linton is betting that marijuana consumers will be willing to shell out more cash for his company’s products now that they’re legal for recreational use in Canada, instead of going back to illegal street dealers.

‘Better’ will be a big argument,” Linton told CNBC’s Deirdre Bosa from a Canopy store in Newfoundland on Wednesday as Canada became the world’s largest country with a legal national marijuana marketplace. “People are going to start realizing that the product that they get from the illegal dealer comes from officially, nowhere.”

Linton, whose Canada-based pot firm’s partners include rapper Snoop Dogg and alcohol giant Constellation Brands, said unregulated marijuana products can come with risks, including being sprayed with unnecessary chemicals.

In August, U.S.-based Constellation upped its bet on the cannabis industry, announcing an additional $4 billion stake in Canopy. At the time, the maker of Corona and Modelo beers and top shelf liquors said it does not planning to sell cannabis drinkables in its home country before legalization happens everywhere.

As more governments legalize cannabis, Linton told CNBC earlier this month, cannabis-related products could disrupt $500 billion worth of existing industries, ranging from alcohol, cigarettes and pharmaceuticals.

Marijuana stocks have been booming in advance Canada’s legalization, with Canopy’s U.S. shares soaring more than 400 percent over the past 12 months. But share prices of Canopy and another high-flying Canadian pot company, Tilray, were down 3 and 6 percent, respectively, on Wednesday.

Japan Still Beats China for Private Equity

Japan lost its position as the world’s second-biggest economy to China awhile ago. But it’s beating out its Asian rival in one area at least: private equity. For restructuring experts such as KKR & Co. LP, whose founders recently declared Japan the company’s “highest priority” outside the U.S., the smaller country offers much more attractive opportunities. And the reasons are as much political as financial. 

That might seem surprising, given that the Chinese market dwarfs Japan’s. (Private equity investment value in greater China, including domestic yuan funds, averaged $72 billion annually in the past five years, compared to just $9 billion in Japan.) The mainland features growth companies galore and easy exit opportunities through initial public offerings in Hong Kong, the U.S. and soon, for tech firms, Shanghai.

Private-equity companies from around the world have raised billions of dollars to invest in China, hoping to take advantage of its domestic consumption story and tech frenzy. Even KKR has bought into Chinese firms such as pork producer Cofco Meat Holdings Ltd. and personal-finance platform Shenzhen Suishou Technology Co. Ltd.

Yet several factors undercut China’s attractiveness. Typically, for instance, most targets aren’t as mature as those in Japan or the U.S.; they’re still in empire-building mode, so only minority stakes are available for purchase. Deals are in the range of a few hundred million dollars on average -- small potatoes compared to Bain’s $18 billion purchase a couple years of ago of Toshiba Corp.’s memory chip business. Valuations, too, are frothy. 

By contrast, as in the U.S., Japan’s dying conglomerates offer rich pickings. They house a slew of underloved or non-core assets: About a quarter of the companies on the Nikkei 400 have 100 or more subsidiaries apiece, and many have more than 300 divisions below the parent company.

There’s a real chance to create global leaders from these assets -- an opportunity that China’s domestic-focused private equity investors don’t enjoy. KKR, which has been in Japan since 2010 and invested in six carve-outs since then, has put this strategy to work with the healthcare business of Panasonic Corp., which it acquired in 2013. Since renamed PHC, the unit bought  Bayer AG's diabetes care unit and is in the midst of acquiring Thermo Fisher Scientific, Inc.’s pathology business. In 2016, KKR also bought auto-parts maker Calsonic Kansei Corp. from Nissan for $4.3 billion. The takeover target then bought Fiat Chrysler’s high-tech parts-making business last year. 

Equally important is the fact that the Japanese government now actively supports such buyouts, a big change from the insular boom years when private equity firms were decried as rapacious foreign raiders. There was remarkably little public backlash after Toshiba sold off its crown jewel, or when Nissan sold Calsonic. At least in part, that’s because Prime Minister Shinzo Abe has pushed for a greater focus on corporate governance and shareholder returns. That means slimming down unwieldy conglomerates and revamping management at underperforming companies. 

Foreign private equity firms can help do both, and then get these essentially mature businesses to expand globally. They can address another problem as well: Thousands of Japanese family-owned firms are facing potential succession crises as founders near retirement. That’s much less of a problem in China, where companies are newer. 

Investors clearly see opportunity. A study by Bain & Company found that private equity firms in Japan are willing to pay 9.7 times Ebitda in the form of enterprise value for their targets, while corporate acquirers and the stock market pay almost 25 percent less.

Boeing Nears Completion - Software Fix

Boeing Co. is working through the final steps before asking U.S. regulators to review an update for anti-stall software linked to two fatal 737 Max accidents, an early milestone to lifting a global grounding of its best-selling jet.

But there are many steps in the Federal Aviation Administration’sassessment of the proposed fix, and that process could stretch well into June even if there are no complications, said a person familiar with the matter. Boeing must also convince authorities from Beijing to Brussels that the plane is safe. Canada has already signaled it won’t follow an FAA panel’s recommendation against requiring additional simulator training for pilots.

Boeing has completed its engineering trial of the updated software, and its technical and engineering leaders were on board the final flight test earlier this week, Chief Executive Officer Dennis Muilenburg said in a video message late Wednesday. Up next is what he described as a “certification flight,” as Boeing prepares to submit the final paperwork to U.S. regulators.

For that flight, Boeing will hand over the controls of a 737 Max to FAA pilots to test design enhancements that the company says ensure the system won’t ever again overwhelm flight crews -- as it did in two crashes that killed a total of 346 people. The regulator will determine when the certification flight takes place.

“We’re making steady progress toward certification,” Muilenburg said, with a Max aircraft and Boeing Field, an airport south of Seattle, as backdrops. Earlier in the day, he had been a passenger on a demonstration flight, watching the final update to the so-called MCAS software “operating as designed across a range of flight conditions.”

Muilenburg has stepped up Boeing’s campaign to boost public confidence in the safety of the 737 Max, and the company’s airplane designs, after two of the jets crashed within five months. The Max, which debuted in May 2017, is the newest version of a single-aisle jetliner family that is Boeing’s biggest source of profit.

In all, Chicago-based Boeing has conducted 120 flights, spending 203 hours in the air testing the new system, Muilenburg said. The campaign has included a 737 Max 7 outfitted with flight-testing instrumentation, as well as aircraft that have rolled out of a Boeing factory south of Seattle with the updated software already installed.

The upgrade is designed to make the anti-stall system less aggressive and prevent the repeated nose-down commands that overwhelmed flight crews for Lion Air and Ethiopian Airlines. In addition, MCAS -- it stands for Maneuvering Characteristics Augmentation System -- would no longer be triggered by a single erroneous sensor reading.

Boeing’s ultimate goal is “to make the 737 Max one of the safest airplanes to ever fly,” Muilenburg said.

Three questions you may have after you file your return

Once your 2018 tax return has been successfully filed with the IRS, you may still have some questions. Here are brief answers to three questions that we’re frequently asked at this time of year.

Question #1: What tax records can I throw away now?

At a minimum, keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return. So you can generally get rid of most records related to tax returns for 2015 and earlier years. (If you filed an extension for your 2015 return, hold on to your records until at least three years from when you filed the extended return.)

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.

You’ll need to hang on to certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)

Question #2: Where’s my refund?

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Refund Status” to find out about yours. You’ll need your Social Security number, filing status and the exact refund amount.

Question #3: Can I still collect a refund if I forgot to report something?

In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later. So for a 2018 tax return that you filed on April 15 of 2019, you can generally file an amended return until April 15, 2022.

However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.

We can help

Contact us if you have questions about tax record retention, your refund or filing an amended return. We’re available all year long — not just at tax filing time!

© 2019