Nebraska Supreme Court Addresses Evidentiary Standards for Approving Average Weekly Wages in Workers’ Compensation Court

One of the issues evaluated by the Nebraska Supreme Court in the recent case of Bortolotti v. Universal Terrazzo and Tile Company, 304 Neb. 219, 933 N.W.2d 851 (Neb. 2019), was what evidence is necessary for a Plaintiff to prove applicable average weekly wages for an owner/operator of a business. In Bortolotti, the Plaintiff was the sole stockholder and president of Universal Terrazzo and Tile Company (Universal), a subchapter S corporation. The Plaintiff had been an installer of terrazzo tile and fabricator and installer of granite for over 30 years before becoming the sole stockholder and president in 2011. The injury at issue occurred in June 2013 and the Plaintiff’s operative petition for workers’ compensation benefits alleged weekly earnings of $3,625 at the time of the injury, but Universal and their compensation insurance provider denied the allegation. At trial the Plaintiff offered one page from his 2013 tax return noting that the employer was an S corporation, and his earnings for the year were $3,950. The compensation court did not believe the Plaintiff’s earnings were so low as president of the company. The evidence at trial also discussed the total gross income of the corporation, but offered no evidence regarding what business expense deductions were taken by the Plaintiff from business earnings. Thus, the compensation court was unable to verify if business expenses had been properly deducted from the company’s gross earnings or the Plaintiff’s testimony that his weekly draw from the corporation was $3,625. Ultimately, compensation court determined that the Plaintiff sustained a compensable injury, but had difficulty in determining the Plaintiff’s average weekly wage due to a lack of exhibits, and instead held the Plaintiff’s average weekly wage was $1,399.95, entitling him only to a statutory maximum compensation rate of $728 per week.

The Supreme Court affirmed the Court of Appeals’ determination that there was not sufficient evidence to support the high average weekly wage and that the only competent evidence in the record supported the Court of Appeals’ determination of an average weekly wage of $49, the minimum weekly income benefit provided by statute based on the 2013 earnings of $3,950. The Supreme Court held that net profits or net income of an S corporation do not necessarily qualify as “wages” under the Nebraska Workers’ Compensation Act, as the statute requires focus on the “money rate at which the service rendered is recompensed,” not payments received solely because of a recipient’s status as a shareholder.

As the Supreme Court notes, the burden was on the Plaintiff, the president and sole shareholder of the S corporation to provide evidence differentiating his wages as a corporate employee from his profits as a corporate shareholder. The co-mingling of ownership and employment burdens the party seeking workers compensation to provide sufficient evidence of what their total income is. Bortolotti demonstrates that simply indicating the total revenue of a company will not be sufficient evidence for computing an average weekly wage.

VW Contributor: Ryan Coufal
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New Nebraska Law’s Impact on Filing Requirements for Corporations and Partnerships

LB 512 signed into law on May 30^th, 2019, requires all S Corporations, limited liability companies, and partnerships with Nebraska source income to file a Nebraska return for all tax years beginning on or after January 1^st, 2019.

Previously, S Corps, LLCs, and partnerships had to file a Nebraska income tax return if they had nonresident owners and were apportioning income.

The Nebraska Department of Revenue (DOR) encourages all S corporations, limited liability companies, and partnerships to e-file their pass-through entity returns. A Nebraska state ID is required when e-filing a pass though entity return.

A pass-through entity without an assigned Nebraska identification number will need to apply for a number before e-filing a 2019 Nebraska tax return. If your business does not have a Nebraska Tax ID Number, follow the link below to the Nebraska Department of Revenue to register your business.

http://www.revenue.nebraska.gov/electron/online_f20.html

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IRS Announces Increase in De Minimis Safe Harbor Rule for Small Business Capital Expenses

It is a common decision for a small business to not keep audited financial statements, which means they do not get some of the tax benefits given to companies that have “applicable financial statements.” One such tax provision is the amount a company can claim under the de minimis safe harbor for capital items.

The de minimis safe harbor is designed to reduce paperwork and recordkeeping requirements, but still allow business to deduct expenses for improvement in tangible property that would normally qualify as a capital item. Under the previous Internal Revenue Service (IRS) regulation, the small business not keeping applicable financial statements were limited to $500, while those with audited financial statements were allowed up to $5,000. Starting with the 2016 tax year, the small business not keeping audited financial statements will be able to deduct up to $2,500 per invoice under the de minimis safe harbor for expenses to improve tangible property.

What this means for many small business owners is that expenses for the “acquisition or production of new property or for the improvement of existing property” may be deducted if the expenditure is less than $2,500 per invoice. This should ease accounting burdens and paperwork requirements for small business that sought to deduct these types of expenses under the previous rule.

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New Proposed Regulations Issued on Debt Basis Planning

Debt basis planning is a tool often used by shareholders of S corporations to allow them to use S corporation losses at the shareholder level. The amount of losses that a shareholder can use is limited to her adjusted basis in the S corporation’s stock. When a shareholder loans a corporation money, that loan may in some cases increase her basis in the stock. Loaning an S corporation money, therefore, can in some circumstances increase the amount of losses that a shareholder can use. However, debt basis planning has been a frequent subject of audit and litigation by the IRS, and such planning can be very uncertain.

The IRS has recently issued proposed regulations which may clarify the requirements for debt basis planning. Under the new proposed regulation, indebtedness of an S corporation to a shareholder will increase that shareholder’s basis if it is “bona fide indebtedness.” Some of the factors that might indicate bona fide indebtedness include a legally enforceable written note, appropriate provisions relating to interest, reporting of loans on financial statements, and timely payments on the loan. S corporation shareholders should be aware that debt basis tax planning should be undertaken carefully. However, the proposed regulations indicate that the opportunity to make use of this planning technique to increase the amount of usable losses may be less uncertain than in prior years.

© 2012 Parsonage Vandenack Williams LLC

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S corporation Under-compensation

The IRS continues to attack S corporation distributions as a method of avoiding payment of employment taxes and has been successful in a recent case.  The IRS succeeded in reclassifying distributions as salary resulting in underpayment by the corporation of employment taxes.  See Watson, P.C. v U.S. 109 AFTR 2d

© 2012 Parsonage Vandenack Williams LLC

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Benefits of Making an S Corporation Election

In an S Corporation, all income and losses are divided and passed through to its shareholders.  The shareholders then report the income or loss of the corporation on their own individual income tax returns.  A corporation can elect to be treated as an S Corporation by filing Form 2553.  Eligibility restrictions to make the election include not having more than 100 shareholders, all shareholders must be individuals, estates, exempt organizations, or certain types of trusts (note: cannot be another corporation), there can only be one class of stock, and no shareholder can be a nonresident alien.

The main benefit of an S corporation versus its C corporation counterpart is that S Corporations do not pay federal income taxes and accordingly there is only one level of taxation.  In contrast, a C corporation has a double level taxation: It pays a corporate income tax and then shareholders pay tax on most received distributions.  Also unlike a C corporation, an S corporation is not subject to the corporate alternative minimum tax.

Another benefit is how corporate losses can be deducted on the shareholders individual income tax return.  This is especially useful for start-up companies that typically will have losses in its early years.

If you are planning on starting a new corporation that may have early losses or minimal profits, you should consider making an S Corporation election.  If you do, then also consider adopting a shareholder restriction agreement to ensure that you do not accidentally lose eligibility by transferring stock to a non-qualified shareholder.

© 2012 Parsonage Vandenack Williams LLC

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