Economic Assistance Programs for California Small Businesses Affected by Coronavirus (COVID19)

Federal, state, and local governments are announcing economic aid and loan programs to assist small businesses impacted by COVID-19 (coronavirus). These include:

U.S. Federal government (IRS): https://www.irs.gov/coronavirus?utm_source=Summit+CPA%2C+Inc.&utm_campaign=f247223cfa-EMAIL_CAMPAIGN_2020_03_22_02_30&utm_medium=email&utm_term=0_c3b50b8184-f247223cfa-356485491

IRS tax filing and payment deadlines extended to July 15, 2020: https://www.irs.gov/newsroom/payment-deadline-extended-to-july-15-2020

Federal government (SBA loans): https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources

State of California: https://oewd.org/covid-19-small-business-resiliency-fund

New 4/2/2020: Gov. Newsom announces additional small business loans for those that may not be eligible for federal SBA loans: https://www.gov.ca.gov/2020/04/02/governor-newsom-announces-new-help-for-small-businesses-workers-displaced-by-covid-19/

State of California Franchise Tax Board (FTB) tax filing and payment deadlines extended: https://www.ftb.ca.gov/about-ftb/newsroom/covid-19/index.html

State of California Employment Development Department (EDD): https://www.edd.ca.gov/about_edd/coronavirus-2019.htm

City of Los Angeles: https://www.lamayor.org/mayor-garcetti-announces-economic-relief-package-small-businesses-impacted-novel-coronavirus

City and County of San Francisco: https://oewd.org/assistance-guidance-businesses-and-workers-impacted-covid-19

Facebook Small Business Assistance Program: https://www.facebook.com/business/boost/grants

For businesses that are permitted to remain open by state and local authorities, guidance from the U.S. Center for Disease Control has best practices to avoid spreading coronavirus.

Posted March 22, 2020, updated April 2, 2020.

How to Avoid Tax Audits by Incorporting Your Business

Updating my 10-year old post, How to Avoid an IRS Tax Audit: Incorporate Your Small Business, the IRS' own most recently available data (for tax year 2017), show that, for a taxpayer with $100,000 or more in gross revenue, the chances of being subjected to an audit vary substantially based on whether the business was operating as a sole proprietorship reporting taxable income on Schedule C of the owner's personal income tax return (1040) or an incorporated business reporting income on a corporate tax return (1120 for C corporations, 1120S for S corporations), with unincorporated sole proprietors being 12 times more likely to be audited by the IRS:

Sole proprietor:  2.40%

Corporation:  0.20%

Out-of-state Online Retailers Now Required to Collect California Sales Tax

As a result of the U.S. Supreme Court's Wayfair decision, starting 2019, California will require remote sellers with no presence in the state to register and collect and pay over to the state sales taxes (technically, "use tax") on sales made to California consumers. This requirement will apply if the seller has made 200 or more transactions, or $100,000 or more in sales, into California in the preceding calendar year.

Other states are also rolling out similar requirements, so California businesses selling tangible goods to consumers in others states will need to be aware of any out-of-state filing requirements.

FTB Loses in Out-of-State LLC "Doing Business" Tax Case

The recently created California Office of Tax Appeals (OTA) has issued a ruling in the Satview case against the Franchise Tax Board (FTB)'s position that a 25% member of a California limited liability company was "doing business" in California and subject to California's minimum annual corporate franchise tax. The OTA found that passive ownership, without management, did not subject the out-of-state corporate member to California tax (although the LLC that was conducting the business in the state, and that the out of state company had invested in, was of course subject to it).

With this and other decisions, the OTA has shown that it will not rubber stamp positions taken by the FTB or other California tax agencies, especially when they make little sense, like the FTB's position in this case. Nonetheless, the FTB is anticipated to continue to apply the prior Swart case narrowly, and continue to maintain that passive members of LLCs organized or doing business in California are themselves also doing business in the state.

California Supreme Court Ruling Makes Independent Contractor Classification More Difficult

The California Supreme Court has made an important change to employment classification law for California employers, that will make it more difficult for companies to appropriately classify workers as independent contractors.

The new "ABC" standard is simpler but more strict than the prior classification scheme. In order for the company to properly classify a worker as an independent contractor, the company must prove the following (note that the burden is on company seeking IC treatment and if the burden is not met, the worker is an employee, the criminal law equivalent of "guilty until proven innocent"):

A - that the worker controls his or her work,

B - that the duties go beyond what the business normally does, and

C - that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Any of these can derail a would-be independent contractor relationship, but it is the second of these prongs - the "B" in "ABC" - that will be perhaps the most difficult for many California companies including ride-sharing services that claim all drivers are independent contractors.

Whether Uber and Lyft, who have just received subpoenas for more information from the California Attorney General, will be able to argue they are in the business of providing a mobile app, rather than actual transportation, remains to be seen. If not, their business model will need to change dramatically, at least in California.

Companies whose consulting arrangements with ICs previously may have passed muster may find themselves unable to show that the pre-existing relationship still qualifies under the new ABC standard and are well advised to have a business and employment law attorney review the circumstances and agreement and then implement any needed changes.

The case is Dynamex Operations West, Inc. v. Superior Court, County of Los Angeles, Supreme Court of California, No. BC332016, April 30, 2018.

In 2012, a California law went into effect providing for additional civil penalties for wilfully misclassifying workers as independent contractors of $5,000 to $15,000 per violation.

Update: On January 1, 2020, AB 5 became law, which essentially codified Dynamex into statutory law.

SCOTUS Rules for Employee Arbitration Class Action Waivers

The Supreme Court has resolved a conflict amongst the U.S. Federal Circuit Courts, and once again the Ninth Circuit has been overruled. This time it was for SCOTUS to confirm that class action waivers in employee arbitration agreements are enforceable (if properly drafted). The Supreme Court had previously ruled these as enforceable in consumer arbitration agreements in 2011.

Despite the favorable ruling for employers that was opposed by the Obama Administration and supported by the Trump Administration, California employers need to ensure their arbitration clauses are carefully drafted and be aware of the trade-offs in selecting arbitration over litigation in the first place.

The cases are Epic Systems Corp. v. Lewis, No. 16-285; Ernst & Young LLP et al. v. Morris et al., No. 16-300; and National Labor Relations Board v. Murphy Oil USA, Inc., et al., No. 16-307 (May 21, 2018).

Suspended Corporations and LLCs Lose the Right to Conduct Business in California

Jonas M. Grant was recently quoted as a California corporate law subject matter expert in an article in an online journal covering Los Angeles real estate news:

[The] corporation ... continues to conduct business even though the state of California suspended its registration over two months ago. Operating without a valid registration is illegal under California law, legal experts said. ...

Jonas Grant, an L.A.-based attorney who practices corporate entities law, said as a business without a valid corporation registration, “you’re basically dead in the water until you fix the problem.” ...

Suspension temporarily strips corporations of a number of rights ... including being able to defend itself in court or bring a lawsuit. Such corporations could also have contracts voided by a court, according to California law.

“If you don’t have the right to conduct business that would include the right to contract,” said Grant.

Inside Mercer Vine: A suspended brokerage, a potential fraudster at the helm, and $260M in dead deals by Natalie Hoberman and Will Parker, The Real Deal, December 1, 2017.

A suspended corporation cannot conduct any business in the State of California until it is revived to active, good standing, a process called revivor. This is generally accomplished by filing any past due annual reports or tax returns, and by paying any past due taxes, interest, and penalties with the Franchise Tax Board.

Recommended steps to avoid a suspension include engaging an accountant to assist with tax preparation and filing and to keep track of associated deadlines, and enrolling the LLC or corporation in a lawyer's corporate maintenance program to ensure legal compliance.