Start-up Issues

New taxes and confusing policies await new business owners in 2019.

By João-Pierre S. Ruth, Contributing Writer On Dec 28, 2018

Entrepreneurs who take the plunge in the New Year to establish a new business in New Jersey need to gird themselves for a fresh set of rigors and changes that will come into play. The combination of state and federal policy developments underway may mean new or increased costs for businesses as well as potential liabilities. Accountants and attorneys around the state say new business owners in 2019 could face new questions from compliance to harassment policies.

The volume of complex laws and regulations being contemplated in New Jersey and at the federal level can seem daunting, says Frank Cannone, chair of the corporate department at law firm Gibbons. A split Congress can put federal policies in flux, he says, especially those that have not yet been ratified. At the state level, the policies of Gov. Phil Murphy are still being put into effect with more to come. The collective shifts and twists occurring within government can make the path ahead a challenge to navigate. “It creates an overwhelming amount of change and uncertainty,” Cannone says. “These are turbulent seas.”

For example, he says New Jersey legislators have been considering a bill to limit non-compete agreements in the state, which could affect companies that are seeking talent as they grow. That could affect staffing and hiring practices that can be critical to new businesses. The plan to increase New Jersey’s minimum wage to $15 per hour is also causing ripples, Cannone says, as well as deeper investigations by the state into the status of workers to determine if they are independent contractors or employees.

Some policy changes enacted in 2018 may see further clarification in the New Year. Final regulations for the Earned Sick Leave act, which went into effect at the end of October, are expected in 2019, says Anthony Rainone, an attorney with Brach Eichler. The law requires employers to pay for up to 40 hours of sick time per year for each employee.

During the first year of the law, employers might see the state taking a softer touch, Rainone says, to encourage compliance, but that may shift to stronger enforcement in the future. There may also be some confusing elements that need to be explained. “Business owners were told that if they have a paid sick leave policy in place, they would not need to change,” he says. “This is not always the case. The way the company’s rules are written might make them invalid.”

The attention that the #MeToo movement brought to issues of harassment and assault has highlighted the need for businesses to take proactive steps on these fronts. Rainone says New Jersey has not yet required companies to run harassment and discrimination training sessions, but labor attorneys have recommended that businesses put them in place. “You can’t just assume your employees understand what’s required of them,” he says. That includes members of management understanding how to handle employees having an argument or dispute.

How a business addresses harassment claims and other workplace issues is under new scrutiny as well, especially after 20,000 Google employees staged a walkout in November. That act was in response to the company’s use of mandatory arbitration for a sexual assault claim that led to a hefty payout for a disgraced former executive. Though the U.S. Supreme Court said arbitration is a valid way to address claims, Rainone says states such as New York have deemed that such arbitration cannot be used to resolve harassment claims.

State laws set the tone for the local business climate and may influence potential business owners’ decisions on where they setup operations. “Anyone opening a business in New Jersey should understand that the state is among the top employee-friendly states,” says Scott Ohnegian, partner and chair of Riker Danzig Scherer Hyland & Perretti’s labor and employment group. New Jersey has numerous regulations, such as anti-discrimination laws, that put it at the forefront of such matters.

For example, though debate continues at the federal level, New Jersey already has protections for gender identity, Ohnegian says. Unlike federal statutes on discrimination that only go into effect with companies of certain sizes, New Jersey laws apply to businesses with just one employee. “You’re not too small to be covered by New Jersey employment laws,” Ohnegian says. “If you’re an employer, those laws apply to you.”

There is a plethora of regulatory developments for which new business owners should also prepare themselves. The way a business is structured can have a significant effect on the way it is taxed and what will be necessary to comply with regulations. “We’re still in the early days of federal tax reform and businesses are adjusting to that,” says Jason Navarino, partner with the tax and corporate groups at Riker Danzig.

Federal tax reforms that have gone into effect may have provided some relief, but they also created new matters that businesses must adjust to. “There are limitations on SALT (state and local tax) deductions,” Navarino says. “The $10,000 cap can affect New Jersey business owners for whom the benefit of that deduction is not fully offset by the alternative minimum tax.”

There were state tax increases in New Jersey’s budget in June, he says, that are due to take effect in January. This includes an additional tax on income in excess of $5 million. The easing of federal taxes also led to some increases at the state level, Navarino says, with a 2.5 percent surtax on corporate business tax for 2019. That surtax is expect to decrease to 1.5 percent for the two years following.

New businesses have a weighty decision to make regarding how they structure their companies and how that relates to federal taxes, says Josh Chananie, a partner with accounting and advisory firm SAX. Federal tax reform policies may have gone into effect last January, but they will have an ongoing influence as entrepreneurs decide how to structure their businesses. “With an S-corporation or partnership, income flows through to the owner,” Chananie says. “At a C-corporation, all the income tax is paid at the corporate level.”

Changes under tax reform made C-corporations more attractive options for new businesses. For many years, the C-corporation effective tax rate was 35 percent. Under the reforms, the C-corporation rate is 21 percent. “Obviously, people don’t want to give their money to the government if they don’t have to,” Chananie says.

There is a catch though. C-corporations have less flexibility, he says. A C-corporation may pay 21 percent in taxes, but if a dividend is withdrawn, shareholders who benefit from the dividend must also pay taxes on that money. “This becomes an issue when you look to sell the company because you are dealing with double taxation,” Chananie says.

For entrepreneurs that aim to create and then sell a business within three years, C-corporation status might not be the best option, he says. It is possible for a company to change its status, he says, but the process can be a hassle.

Structuring a business as an S-corporation comes with potential drawbacks as well. Gianfranco A. Pietrafesa, partner with law firm Archer, says that under the tax reform, business owners who incorporate as S-corporations could see a pass-through tax rate as high as 37 percent. “It has become a much more difficult decision today than it was two years ago,” he says.

It may have once been easy to create a business, but 2019 could make the process more complex than ever. “For anybody starting a new business, the biggest issue is compliance,” says Steven Bortnick, partner, with accounting and advisory firm Bederson. A founder may have expertise in their chosen market, but they might not know the myriad of jurisdictions, tax rules, employment rules, benefit rules, minimum wage, and payroll taxes they must comply with. “Many times, a small business owner does not realize they have to supply an employee with a paystub, pay payroll taxes each month, and file returns each quarter,” Bortnick says.

He says that 2018 saw a watershed of new tax laws and the long-term effects are still taking shape. “Some things haven’t yet been defined clearly by the IRS or Congress on these new rules,” Bortnick says. Among the changes that may surprise to new business owners is that expenses for taking clients to dinner or other forms of entertainment might no longer be deductible. There is also more scrutiny on whether someone is classified as an employee or independent contractor and how they are paid.

The internet created a way for new businesses to quickly take form, but now regulators have changed a long running aspect of e-commerce. Sales tax is now collected where companies do business. This can include products shipped to a customer in a state or even if an online, digital benefit is received by a customer in that state. It is a shift away from the days of no sales taxes on online purchases and yet another cost that new businesses need to be aware of. “Most companies are considered to be doing business in multiple states and they have to file income tax returns and allocate their revenue and income,” Bortnick says.

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