Cleveland Construction Accounting

Advisor Insights

For the past several months, our Real Estate and Construction Group has been authoring a monthly column in Builders Exchange Magazine that offers advice to real estate and construction professionals.

So far this year, the following topics have been covered:

• The Benefits of Subprime Bonding  
• Selecting and Implementing Financial Software  
• The Value of a Niche Marketing Plan 
• Lessons Learned From the Construction Industry  
• Cancellation of Debt Income 
• Preventing Financial Fraud 
   

• Health insurers and group health plan sponsors are now prohibited from imposing pre-existing condition limitations on individuals who have not yet attained age 19 and from denying coverage to such individuals based on the existence of a preexisting condition. All such limitations and coverage denials, regardless of age, begin in 2014.
• Health insurers and group health plan sponsors are prohibited from imposing lifetime dollar limits on essential health benefits, and are required to sharply increase annual dollar limits on essential health benefits. Such annual limits will be eliminated starting in 2014.
• Coverage rescissions (except in the case of fraud or intentional misrepresentation) are prohibited.
• Plan-covered and insured individuals are given greater control over choosing a primary care physician and greater access to emergency services and related care.

To read more about these new rules, see this Executive alert from Baker Hostetler.

Go Directly From a 401(k) to a Roth  

Do you want to transfer your 401(k) plan assets to a Roth IRA? Under a recent tax law change, you can make the move in one fell swoop. Previously, it took two separate steps. In addition, another tax law provision taking effect this year may encourage this direct approach.

Click here to read more.

Should You Give to a Donor-advised Fund?

Wealthy entrepreneurs with charitable intentions may choose to set up a private foundation. But a more convenient alternative is gaining in popularity: the donor-advised fund.

This technique may be especially appropriate if you need to devote more time to business activities in the current economic environment. The fund does most of the hard work for you and requires less personal attention than a private foundation. In some cases, you might even convert an existing private foundation into a donor-advised fund.

Click here to read more.

New Law Revamps Student Loan Program

The new Health Care and Education Reconciliation Act of 2010—recently signed in conjunction with the monumental new health care law—includes dramatic reforms in the federal student loan program. This new legislation could affect families of all stripes for years to come.

Click here for a brief summary of four points you should know about.

Aurum Capital Markets Summary 

Please click here for a summary from Aurum Wealth Management Group on the performance of the major market indices through the end of May as well as a recap of the significant events influencing the markets.

According to this article at Cleveland.com, “The cases involve major violations at eight properties and less significant ones at five others. The earliest complaints date to January 2008. The judge calculated the fines from the number of violations, the number of days they continued, and the maximum daily fine amount, $1,000 to $5,000.”

Contact the Real Estate and Construction Group at Skoda Minotti, a CPA, business and financial advisory firm with offices in Cleveland and Akron, at 440-449-6800. 

The First Time Homebuyer credit has been extended, but not everyone is eligible to continue to take advantage of this credit. Only buyers who were under contract prior to the previous deadline of April 30 can take advantage of this extension to close by September 30 and receive the $8,000 credit.

One of the main reasons for the extension is that there are a high volume of short sales under contract but not scheduled to close by June 30^th. This is mainly due to short sales requiring seller side bank approval. As many banks are inundated with these requests, this backup could have caused buyers to miss out on the credit without the extension to September 30th.

For more information, see this article on examiner.com.  

Have questions about the First Time Homebuyer credit? Contact the Real Estate and Construction Group at Skoda Minotti, a CPA, business and financial advisory firm with offices in Cleveland and Akron, at 440-449-6800.

The Department of Labor (DOL) now wants practitioners to jump through hoops and the result does not add value to the client engagement.  Effective May 13, 2010, the DOL now requires that practioners obtain EFAST2 signing credentials – to do so, a client must sign an authorization form giving the practitioner the authority to electronically sign and file Form 5500 on their behalf.

This new rule is causing quite a stir with the Third Party Administrator (TPA) and CPA community who prepare Forms 5500.  Personally, I don’t quite understand how it got so complicated, since the Internal Revenue Service has permitted tax practitioners to electronically sign their clients’ returns for several years as long as the practitioner has obtained the proper signed authorization from their client. 

After 5 ½ months, the DOL came to terms with practicality.  Under the new set of rules, the practitioner must still jump through hoops but not quite as many as before. 

• Practioners will still need to obtain EFAST2 signing credentials, but plan administrators and plan sponsors who choose to have their service provider manage the process will not need any EFAST2 credentials.
• The practitioner must have written authorization from the plan administrator/employer to submit each plan’s electronic filing and is required to maintain the statement in their records.  I intend to require my clients to sign a statement for each filing for each year. Note: I am not an attorney and this is not offered, nor should it be treated, as legal advice.
• The plan administrator/employer must manually sign a paper copy of the completed Form 5500 or Form 5500-SF. It should be noted that this duty is required without regard to the method of electronic filing and applies to all Form 5500 series filers. The manually signed copy must be made available for inspection by participants and beneficiaries, as explained in the plan’s Summary Annual Report or Annual Funding Notice.
• The service provider must include a PDF copy of the first two pages of the manually signed Form 5500 or Form 5500-SF as an “Other Attachment” in the electronic filing.
• The service provider must inform the plan administrator/employer that this filing option will result in the image of the plan administrator’s/employer’s manual signature(s) being visible on the filing posted on the DOL’s electronic public disclosure web site.

If you have questions on the EFAST2 issue or filing Form 5500, post a comment below or contact our Third Party Plan Administration Group at 440-449-6800.
 

Click here to view Part 1 of our series and learn more about the stock option landscape or Part 2 to learn more about the accounting and tax ramifications of issuing stock options.

What To Do?

As discussed above, there are significant risks that a company brings upon itself if it decides to issue stock options without properly valuing the options and the equity of the company. Rather than issuing stock options, if a company wants to offer an employee the opportunity to obtain an ownership interest, the most efficient and “clean” method may be to allow the employee to purchase shares from the company or from existing owners. There is no valuation requirement in this case (unless a party wants to hire an expert to ensure that they the transaction price is fair and reasonable) which also eliminates the out-of-pocket cost for the employer. In fact, a business actually recognizes a cash inflow when an employee purchases shares directly from the company. 

I am a valuation expert and I directly benefit from work associated with the valuation of stock options, so why am I telling you to consider alternative routes of compensation? Too often, the companies that issue stock options without having them professionally valued are the same companies that will fight against having their options valued at all due to the cost associated with the valuation. I simply want to spread awareness that there are other avenues of compensating employees and giving them opportunities for equity ownership that may be more cost efficient for companies that are under the illusion that issuing stock options does not require a cash outlay.

If you take anything away from this article, remember that issuing stock options is not a “cashless” expense. Consider that there are other alternatives for compensating employees other than using stock options. Remember that there are transaction costs associated with issuing stock options, specifically, hiring a valuation expert, that will create real out-of-pocket cost for any company. Unless you are ready to comply with the valuation requirements associated with issuing stock options, you may be better off simply not using them and compensating employees in another manner. Finally, just like selling a home, if you are going to issue stock options make sure that you bring in an expert to ensure that the value of the company and options are determined and documented appropriately – and be prepared to pay the “commission” for these services.

The information in this article is not meant to represent legal or tax advice. Please consult with a Skoda Minotti business valuation professional or your tax/legal advisor regarding the applicability of these issues to your particular situation.

Visit our web site for more information on our business valuation services. Skoda Minotti is a CPA, business and financial advisory firm with offices in Cleveland and Akron.

Accounting and Tax Ramifications of Issuing Stock Options

 Click here to view Part 1 of our series and learn more about the stock option landscape.

To give you more perspective, first let us review the accounting treatment for the issuance of stock options (rest easy - this will not be too painful). When stock options are issued, an expense must be recorded based on the value of the option. A stock option’s value is derived from a variety of factors, two of which are the value of the stock as of the date of the option grant and the exercise price of the option (the price at which the option holder can purchase a share of stock). Determining the value of a company’s stock is not difficult when it is publicly traded, but privately-held companies do not have readily available market prices, which necessitates the services of a valuation expert. Unless the option is properly valued, a company cannot correctly record the associated compensation expense. If a company is unable to correctly record the results of its operations, it may find obtaining a clean audit opinion to be a difficult, if not impossible, task.

Now that I have warned you about the headaches that you may encounter on the “accounting” side of issuing stock options, let me further alarm you with the tax ramifications. If a company sets the stock option exercise price lower than the fair market value of its stock on the grant date, the stock option could be deemed to be deferred compensation according to Internal Revenue Code 409A. Under 409A, such deferred compensation would be immediately taxable to the employees receiving the grant and subject to regular income tax rates plus 1%. Perhaps even more distressing, a 20% penalty plus interest would also be triggered. In addition, employers would be responsible for withholding income taxes for employees on these types of option grants, which if not done, could result in additional tax penalties. The immediate taxability, penalty and withholding requirements do not apply when the stock option exercise price is equal to or greater than the fair market value of the company’s stock on the grant date. It is impossible to compare the exercise price of a stock option to the fair market value of a company’s stock unless a valuation of the company’s stock has been performed. In addition, when a valuation has been performed to establish the fair market value of a company’s stock, the burden of proof shifts to the IRS to disprove the appraised value. Therefore, unless there is documentation to support the fair market value of a company’s stock near the option grant date, there could be significant tax issues in addition to the accounting issues alluded to earlier.

The information in this article is not meant to represent legal or tax advice. Please consult with a Skoda Minotti business valuation professional or your tax/legal advisor regarding the applicability of these issues to your particular situation.

Visit us tomorrow for Part 3: What to Do?

In the meantime, visit our web site for more information on our business valuation services. Skoda Minotti is a CPA, business and financial advisory firm with offices in Cleveland and Akron.
 

According to the code section 179D, the designer primarily responsible for designing the energy efficient aspects of government buildings (including new construction and rehabilitation) may be able to take the federal energy efficient commercial property tax deduction for doing so instead of the owner of the property. This deduction is passed to them from the government agency for which the building was designed as the government agency does not pay tax and therefore would not get the benefit for this deduction. The designer is defined as the person(s) that create the technical specifications for installation of the energy efficient commercial building property, and can include architects, engineers, environmental consultants, and contractors in certain cases. Under this section, the word government includes Federal, state, and local government agencies, and although all government building categories have benefited from this, the most frequent projects are K-12 public schools, state universities and colleges. Other categories include post offices, military bases, libraries, courthouses, and hospitals.

The amount of the deduction passed to the designer is the lesser of the actual cost of the property or the calculation below:

(The square footage for the building (new construction) or area improved (rehabilitation))
x ($0.60 per each of the three areas that you pass ($1.80 total) the energy efficiency test (HVAC/Lighting/Building Envelope))

Section 179D has been beneficial for designers of this property who work with government agencies to build government buildings, depending on the size and level of energy efficiency, because they can take an additional tax deduction for the energy efficient improvements that were made. This deduction is a tax only deduction on the tax return of the designer.

In order to take this deduction, the designer will need two items to claim the deduction:

• First, a letter from the government agency must be provided to the designer allowing them to take the deduction. This letter essentially gives the permission to pass the deduction.
• The second item is an engineers report which must be prepared to support the energy efficient improvement of the building design. Of course, this report has a cost with it and companies need to compare that cost to the amount of tax they will save through the deduction.

Originally, this was only passed as a one or two year item and there was not much support for it, which is why it was not very popular and many firms were not acting on it. This past year, they extended it to include units completed or renovated between December 31, 2005 and January 1, 2013 and passed more tax guidelines to support these deductions. With that being said, it may makes sense to look at prior years as well to see if prior year returns can be amended to take advantage of the deduction.

With a small amount of information, we can quantify the deduction you would get and compare it to an estimate of how much the engineer’s report will cost in order to quantify the net savings.

To determine if your company can benefit from the Federal Energy Tax Credit, contact me or Nick Delguyd at 440-449-6800.
 

When selling your home, it is common to use an agent to list, promote and show the property. In exchange, you pay a portion of the sales price as a commission to the agent. The benefits of using an agent include: 1) the listing of your home in a database so that homebuyers can access information about it; 2) the agent acting as your middleman during the negotiation process; and 3) the incentive it gives the agent to sell your home quickly (so that her or she can earn their commission). 

Some people choose to sell their home by owner and forego using an agent. These are typically the homes that have “For Sale” signs in their yards for many months, sometimes even years (you know the ones), before they are actually sold. These people often believe that the benefit of not having to pay an agent commission on the sale of their home is worth the prolonged period it will likely take to sell the property. 

What does the choice of hiring a real estate agent or selling your home by owner have in common with private companies issuing stock options? The strange answer is: Much more than many of us realize. 

The Stock Option Landscape

More and more private companies are issuing stock options as part of their key employees’ compensation plans. This may be driven by the ideas that: 1) stock options don’t “cost” anything to the company; 2) stock options will positively influence employees’ performance; or 3) since public companies issue stock options, it must be a good idea and private companies should follow suit. Regardless of the motivation, what most private company owners and executives do not realize is that accounting for stock options, for both tax and financial reporting purposes, may actually have an out-of pocket cost that is greater than the value of the options themselves.

In order to value stock options issued by private companies, there are two major steps that must be undertaken:

1. Determining the value of the company’s equity (which is a key input to valuing a stock option)

2. Determining the value of the stock option

There are not many privately-held companies with the in-house resources or expertise necessary to perform either of the requirements above, both of which are essential in accounting for the issuance of stock options. This often puts accountants in the awkward position of trying to explain to business owners the “unseen” costs and accounting ramifications associated with issuing stock options.

Back to our analogy, hiring a valuation expert to determine the value of stock options is much like hiring a real estate agent to sell your home. A valuation expert is able to perform both of the tasks identified above that are necessary to value the stock options issued by a private company, much like a real estate agent takes care of the necessary steps to sell your home. This work is not free, however, and depending on the complexity of the company and the options issued, the cost to value a private company’s stock options can range in cost from thousands to tens of thousands of dollars. When private companies issue stock options, they often do not consider the “commission” that they will have to pay to a valuation expert to ensure that the options are properly valued. Unlike real estate agent commissions, however, which are based on the sale price of the home, valuation fees are relatively fixed. 

Just like selling a home “by owner,” some companies will issue stock options and try to determine the value themselves (or even worse, not value them at all). By not using a real estate agent, homeowners often find themselves making no headway in the sale of their home. Similarly, by not hiring a valuation expert to value the stock options that they have issued, private companies create the risk that their auditors will not sign off on their financial statements. Maybe even more importantly for business owners and employees, unsubstantiated option values leave both companies and their employees in danger of stiff tax consequences.

The information in this article is not meant to represent legal or tax advice. Please consult with a Skoda Minotti business valuation professional or your tax/legal advisor regarding the applicability of these issues to your particular situation.

Visit us tomorrow for Part 2: The Accounting and Tax Ramification of Issuing Stock Options

In the meantime, visit our web site for more information on our business valuation services. Skoda Minotti is a CPA, business and financial advisory firm with offices in Cleveland and Akron.

Real estate professionals may want to keep a close eye on the American Jobs and Closing Tax Loopholes Act (H.R. 4213). The bill, which would extend the filing deadline for existing tiers of unemployment benefits and extend COBRA health care subsidies for the unemployed, contains a provision to alter the way “carried interest” is taxed.

Carried interest, according to Building Owners and Managers Association International, is described as follows –

“Real estate is a long-term, risk–based investment which is regularly structured as a partnership, and therefore often involves a component known as “carried interest.” The partnerships are made up of limited partners and general partners. The limited partner(s) provides the money and capital, has very little say in the operation of the investment and is simply looking for a particular return on the investment. The general partner(s) brings the “sweat equity” to the investment and does the day-to-day work making sure the property is properly managed and is compensated by a flat fee that is taxed as ordinary income. They are also offered an additional percentage of the profits as incentive to make the investment prosperous without contributing any capital of their own; this compensation is what is known as “carried interest.” When the general partner receives the “carry” it is taxed as a capital gain. It is paid only when, and if, the real estate investment actually is successful.”

Current law taxes the “carried interest” of a general partner in a real estate partnership as a capital gain. The House bill treats carried interest as 50% ordinary income and 50% long-term capital gains for two years, then moves to a permanent 25/75 split (25% long-term capital gains/75% ordinary income) with an effective date of Jan. 1, 2011.  

This change in tax law could disrupt the investment relationship between entrepreneurs and their capital finance partners.

The U.S. Senate is expected to consider action on the House bill this week. Real Estate professionals who will be affected by the new law may want to consider contacting their senator.

For more information on how this potential law change may affect your real estate operation, please contact our Real Estate & Construction Group at 440-449-6800.

This issue of Construction Connections includes the following articles:

• Improving Your New Business Pipeline
• National Outlook

Improving Your New Business Pipeline
By CutterCroix

For many construction companies, today’s marketplace seems harder than ever to survive, let alone thrive.  There are many external challenges impacting the company’s ability to achieve its business goals.  Some of these external forces include the lack of available credit to support new projects, cost increases in equipment, materials and fuel, shortages of skilled trade workers, increased competition, and unrealistic bids (i.e. low or no-profit bids).  So, how does a company grow its business in this challenging environment?  The answer is to improve its critical business systems, in particular (1) the acquisition of jobs (i.e. sales), (2) building the job or work performed, and (3) key support and tracking systems (e.g. accounting, field support/stores, equipment, etc.).  We will focus our attention in this article on the development and management of a systematic and disciplined approach to securing more of the right kinds of jobs.  While the company’s leadership team cannot control the national credit market or how its competitors will bid jobs, it can control how their company:
 

• Manages sales opportunities,
• Communicates and strengthens the relationship with current and prospective customers,
• Tracks the touches with leads, prospects and customers,   
• Develops bids/estimates (e.g. efficiency, consistency and profile),
• Presents professional and timely quotes, and
• Utilizes the time and resources of its managers and employees.

Click here for more of this article.

National Outlook

One of the quirks of a major shift in the direction of the economy is that a little bit of news can influence sentiment in a short period of time. So it’s a bit dangerous to make too much of the raft of good economic news that greeted the start of the second quarter. With that caveat in place, the data and economic surveys, coupled with upbeat earnings reports from the stock market are showing the first signs of a sustained recovery.

Some of the news was good enough to embolden a minority of economists to start talking about a ‘V’ recovery instead of a double-dip ‘W-shaped’ recession.

Among the highlights of the data was a surprising rise in consumer spending during the first quarter, with the 3.5% rate of growth the highest in almost three years. March inflation was virtually flat from February and the core consumer price index was up only 1.7% in the previous twelve months, the smallest rate of inflation since early 2004. China reported stronger than expected growth in the first quarter at 11.9%, signaling better prospects that a global recovery was in higher gear. The Federal Reserve’s Beige Book of economic anecdotes showed that businesses here in the U. S. were reporting ‘somewhat faster’ rates of recovery than expected, even while indicating that loan volume and credit quality continued to decline. And in the bad news is better than worse news category, the NAHB reported on April 15 that its monthly builders’ index had risen four points in March, from 15 to 19.

The most encouraging report from the first quarter was the first significant growth in jobs during March. After mid-April revisions the Labor Department showed a gain of 220,000 jobs in March, approximately 150,000 of which were private sector created. March also marked the third straight month of job gains and the fourth month in the last five. Improving business conditions and consumer spending are only sustainable if steady progress is made in reclaiming the more than eight million jobs lost during the recession.

Click here for more of this article.

Prior issues are available at our E-Newsletter Archive. If you would like to subscribe to this free quarterly e-newsletter, send an email to info@skodaminotti.com.

If you have any questions about any of these articles, post a comment below or please contact our Real Estate & Construction Group at 440-449-6800.

Advisor Insights

With the passage of the the Patient Protection and Affordable Care Act both businesses and individuals will be feeling major effects of this bill in the coming years. To help you better understand how this bill impacts you and your business, we have put together several resources that you should find useful.

Health Care Reform Webinar

On May 5th, our own Jim Sacher participated in a Smart Business Live webinar presentation on health care reform. You can view the outline from his presentation here or you can view the webinar here.

Health Care Reform Blog Posts

Earlier this year, we covered many of the effects of health care reform in our blog:

• Effects of Health Care Reform on Small Businesses
• Effects of Health Care Reform on Employers
• Effects of Health Care Reform on Individuals
• Offsetting the Cost of the Health Care Package: Revenue Raisers
• Health Care Reform & Medical Expense Deduction
• Health Care Reform & FSAs and HSAs
• Health Care Reform & Market Sector Fees
• Health Care Reform & High-Cost Plans
• Health Care Reform & Additional Medicare Tax

For more information on the tax treatment of healthcare coverage for adult children under age 27, please click here.

Healthcare Reform Article

Finally, keep an eye out for the June issue of CPA Voice where my article on the tax implications of health care reform on individuals will appear. We will provide a link to the article in the June Special Delivery e-newsletter.

If you have any questions on how health care reform may affect you or your business, please contact me at 440-449-6800 or jsacher@skodaminotti.com. 

Six Ways to Improve Debt Collection

In the current economy, it is not enough to generate sales. It is just as important to ensure that your business is actually paid for your services or products. That is why debt collection is increasingly becoming a concern of small-business owners.

When pursuing debt collection activities, be careful to avoid violating any federal laws designed to protect debtors, including the Fair Debt Collection Practices Act and related legislation. In brief, you may be fined or forced to pay damages, or both. State law may also restrict these practices. In addition, debtors may be able to initiate civil actions.

The key is to maximize collections for your business without exposing it to liability.

Click here for six practical suggestions.

Are You in the AMT Danger Zone?

The alternative minimum tax (AMT) was originally designed to ensnare only the wealthiest individuals. But this "stealth tax" has been steadily hitting a far wider group of taxpayers than initially intended. If you are in danger of incurring AMT liability, you should familiarize yourself with the rules.

Basic premise: The AMT runs on a separate track beside your regular tax liability. After you have figured out your regular taxable income, your AMT liability must be computed.

Click here for the four basic steps.

Aurum Capital Markets Summary 

Please click here for a summary from Aurum Wealth Management Group on the performance of the major market indices through the end of April as well as a recap of the significant events influencing the markets.

Worker's Compensation: Reminder to Businesses Participating in Group-Rating Programs

The Ohio Bureau of Worker's Compensation Board passed a rule that requires group participants that have experienced a workers' compensation claim in the past two years (2007 and 2008) to complete two hours of safety training by 6/30/2010. If you have not completed your training by June 30, 2010, you will lose your group discount. 

For more information on how you can comply with this training requirement, including a low-cost and easy to use on-line training system, please contact Roger Gingerich at 440-449-6800 or rgingerich@skodaminotti.com.
 

The return of summer brings hot weather, blockbuster movies and orange construction barrels as road construction begins. This year’s construction season is shaping up to be a little different, however. 

Recently news broke that will affect heavy highway and asphalt paving contractors.  A shortage of paint used to stripe the roads will cause delays in finishing jobs for 2-6 months.  The shortage of 2 ingredients used to give the paint its reflectivity and color are the biggest causes of the shortage.  That shortage is in large part because a Texas plant owned by Dow Chemical -- the largest supplier of highway paint -- experienced issues a few weeks ago that resulted in low production rates.  It is estimated that U.S. state and local governments spend almost $2 billion annually on road markings and that to curb the shortage, some organizations may paint thinner lines, or use temporary tape and buttons.  Delays in the shipment of paint will cause jobs to remain open longer and contractors to not get paid as quickly as usual. 

Click here for more information on the paint shortage.

If you have any questions, post a comment below or please contact our Real Estate & Construction Group at 440-449-6800.
 

2010 Real Estate and Construction Survey

Skoda Minotti is conducting our 3rd annual survey of the Northeast Ohio real estate and construction industries. Every participant who completes the questionnaire will receive a free copy of the survey results and analysis and have a chance to win a $50 gift card to Dick's Sporting Goods.

The goal of the survey is to provide professionals in the real estate and construction industries in Northeast Ohio with the invaluable insight into their industries.

As an added bonus, one out of every 20 survey participants will be randomly selected to receive a $50 gift card to Dick's Sporting Goods. Note that only the first 100 survey participants will be eligible for the gift cards, so act quickly.

Click here to complete the real estate or the construction survey.

Please feel free to contact Bob Goricki at bgoricki@skodaminotti.com or 440-449-6800 with any questions related to the survey.

Green Building & Green Leasing: What is it, and why should I care?

By Peter D. Brosse, Esq., Meyers, Roman, Friedberg & Lewis

Since the establishment of Earth Day, the creation of the Environmental Protection Agency (EPA), and issues brought to public light by the Oil Embargo in the early 1970's, Americans have become more sensitive to the environment and use of resources, including petroleum. However, we still continue to use many of the same chemicals, gasoline and other resources as we did before, subject, however, to regulation.  Recently, a revolution has begun with new attention to conserving energy and resources. This new "green revolution" is evident with the use of a new vernacular that has entered into our common language. Only a few years ago, such words as "green","sustainable," "renewable energy," "greenwashing," "LEED" and "Energy Star" were rarely, if ever, used.  Today, these are part of everyday speech. Nowhere has this "green revolution" been more evident than in the real estate industry.  Such words as "building green" and "green leasing" are commonly heard and many articles are written about the subject. When discussing green building and green leasing, the question that owners, developers and tenants typically ask is "What is it, and why should I care?"

Is there a difference between "green" and "sustainable?"

Yes, there is a significant difference.  When one considers green building or green leasing, it is really sustainability and not "green" that is the focus. "Green" generally means to be environmentally friendly. To be "sustainable" means more. When one refers to sustainability, it takes into consideration the life cycle of a product or a building. To say a product is sustainable, one needs to look at processes, procedures, materials, how the product is manufactured, and whether the product can be reused or ultimately finds its way to the landfill.

Click here for more of this article.

Residential Real Estate: Making Modifications Work
By Brian Bader

Lew Ranieri, often credited with creating the mortgage-backed securities industry when he was at Salomon Brothers in the early 1980s, has returned to try to save America from the worst effects of that accomplishment. In 2008, Ranieri established the Selene Residential Mortgage Opportunity Fund, raising money primarily from foundations and pension funds, to buy and restructure failed mortgages created to feed the securitization process. In doing so, he is showing how mortgage modifications can work - and why the federal home-owners modification program (HAMP) has done so poorly by comparison.

Click here for more of this article.

CMBS: Special Servicers
By John Tax

Special servicers are the firms trying to correct mortgage loans in the later stages of delinquency or in actual default. Their role has become increasingly important as a result of the tremendous number of troubled loans According to a report by Standard & Poor's (S&P), servicers have been training their staffs to address the unique aspects of these loans, packaged as commercial mortgage-backed securities (CMBS). Almost 50 percent of these unresolved assets are loans originated in 2006 and 2007. Many of the loans are more complex than older ones, which mean it takes longer to resolve them, either by a full workout, a discounted payoff or foreclosure sale. Because of the time period in which they originated, many of the newer loans lack some of the safeguards present in the commercial loans originated before 2004.

Click here for more of this article.

Securitization: Covered Bonds
By Anthony La Malfa

The use of covered bonds as a source of home-mortgage funds is being encouraged by the U.S. Treasury Department and the Federal Deposit Insurance Corporation (FDIC) because they offer much greater certainty for the bondholders with respect to damages and rights.

Covered bonds contain a key element that is missing in many commercial mortgage backed securities (CMBS), i.e., a double layer of protection for investors, with the asset being backstopped by the issuer of the securities. The key difference between CMBS and covered bonds is that the latter requires lenders to retain the default risk. On the other hand, covered bonds fail to provide a good option for private labels because they require a capital base to retain loans on balance sheets and do not provide the higher level of leverage that was available with CMBS.

Click here for more of this article.

Leases: Subordination Clause Could Harm Tenants
By David Tevlin

Commercial lease agreements often are long and complex, with clauses neither party may expect will ever be triggered by events. But sometimes they are. One such is the lease subordination clause, by which the tenant agrees the lease is subordinate to any present or future mortgage that the landlord may put on the property. Accordingly, foreclosure of a mortgage (depending on the law of the state involved) either will automatically terminate the lease or entitle the lender, at its option, to terminate the lease.

Click here for more of this article.

Legal View: Second Circuit Rejects Champerty Defense
By Alvin Arnold

Champerty is not a word often heard these days, even though it is a living doctrine in modern law and on occasion has real bite. In a recent case, the Second Circuit Court of Appeals reversed a trial court ruling that had dismissed a mortgage trust's suit for indemnification for loan losses from the originator. Trust for Certificate Holders of Merrill Lynch Mortgage Investors v. Love Funding Corp., 391 F.3d 116 (C.A.2, N.Y.). However, the reasoning of the decision leaves some room for the distressed debt markets to be concerned.

Click here for more of this article.

Migration: Major Shifts
By Andrew Dalecki

Every type of real estate - housing, business, retail, and office - is impacted by population movements across the U.S. and across its borders. In its most recent report, based on new Census numbers, the Brookings Institution says the past ten years saw the greatest migration slowdown since the end of World War II. Significant events were the housing bubble and the worst recession in more than half a century, as well as major storms and terrorist attacks.

Click here for more of this article.

Cleveland Market Overview

Signs are pointed towards recovery for commercial real estate in Cleveland.  The vacancy rate was down over the previous quarter, with net absorption totaling positive 293,238 square feet in the first quarter.  In fact, with the exception of the Southwest and Downtown's Financial and Warehouse submarkets; all markets posted a positive overall net absorption for the first quarter of 2010.  The Cleveland office market ended 1st Quarter with a slight decrease in the overall vacancy rate, 21.8%, as sublease space outperformed direct deals.  Another good sign; rental rates are stabilizing, ending the first quarter at $17.90 per square foot. 

Nationally, as job losses abate and turn into employment gains across various industries and geographies, more markets are moving towards recovery.  This includes Cleveland because we lacked the high stock of inventory that plagued more developed markets (Las Vegas, Phoenix, Florida).  Cleveland should be in a good position to rebound quicker than other markets and continue to see an increase in activity and deal flow.

More information on the real estate markets in North America is available courtesy of Jones Lang LaSalle .  For questions on this information, please contact Andrew Coleman or J.R. Fairman at (216) 861-7171.

Welcome to the first edition of the Skoda Minotti IT E-Newsletter. At Skoda Minotti, we strive to be a resource for our clients and contacts. With that in mind, this monthly newsletter is our attempt to keep you up-to-date on what is going on in the the tech-world around us.

Each month, we will highlight a few important articles that we think you should read. Also, we'll give you a case study, or a client success story, from some of the work we've done.

If you have any questions or suggestions, please feel free to contact us.

Sincerely,
Robert Brenis, CGEIT, CISA, MCP, PMP

Brenis is a principal in Skoda Minotti's Business Applications Consulting and Technology Services Group. Reach him at rbrenis@skodaminotti.com or 440-449-6800.

FRx Discontinued; Paves Way for Microsoft's New Business Intelligence Program

Microsoft currently offers three Corporate Performance Management (CPM) programs: FRx, Forecaster and Enterprise Reporting, which aid businesses in the areas of financial reporting, planning/budgeting/forecasting, and consolidation. Starting in May 2010, the capabilities of these three CPM programs will gradually be combined into one program, Microsoft Dynamics Management Reporter, as part of an integration process that will take place over the next four years.

Click here to read more.

Popular "Scareware" Presents Virus Threat to Internet Users

A deceptive virus has been found in increasing frequency in the technology world. The scam, found in commonly visited Web sites such as the New York Times and WhitePages.com, is portrayed as an antivirus scanning program and has taken the popular names of "scareware" or "malvertising."

The virus initially appears in the form of a pop-up, resembling a typical windows message or error. The message will allude to the fact that your computer may be infected with viruses, and will give you the option to "click here to remove them." If and when you choose to click on the ad, it will appear to install an antivirus program on your computer and proceed to "scan" your system for infection. Following the scan, a message will appear claiming that there have been viruses, spyware and/or threats found within your system. Finally, the program will prompt you to purchase the "full version" of the scanning program to remove the threats.

Click here to read more.

How to Shield Your Network from Clever Hackers

You've got antivirus software and firewalls guarding your computers and routers. You religiously download security updates. You've done everything you can think of to stay secure. But your network is still at risk.

Visit the Microsoft Small Business Center to read more.

Microsoft Announces Dynamics GP Three Users for $1 Promotion

Microsoft has recently announced its "Three Users for $1" promotion, allowing all new Dynamics GP customers to purchase their first three user licenses to its Advanced Management (AM) or Business Essential (BE) programs for only $1 each. The offer will be good through the end of the business day on June 25, 2010.

Click here to read more.

• Completed a system risk assessment resulting in a recommendation to install new hardware and implement a new business system.
• Developed a detailed work plan with the vendor ensuring all major issues were addressed.
• Acted as project manager during the entire software implementation process
• Managed and installed all of their new hardware (21 workstations, two servers, various network components)

• Accurate and timely financial information
• A scaleable system that could grow with the company
• A new billing and route management system that improved critical processes

A smooth go-live process that culminated just over one month after on-site work began

• All needed data from the old system was cleaned up and converted to the new system
• All users were trained on new software
• Liberty can now independently manage all of its day-today operations using the new software

To read other Case Studies from the Skoda Minotti Technology Services Group, please click here. 

Join Us as We Introduce Microsoft Office 2010

Come and see how the new Microsoft Office 2010 can help you break through the barriers that are slowing your people down. Join Skoda Minotti for this exciting preview event.

Place:  Microsoft building
Date:  June 2, 2010
Time:  8 a.m. - 9:30 a.m.
Cost:  FREE
 

Event Schedule:
8:00 - Breakfast and Networking
8:30 - Office 2010 Presentation
9:00 - Improving Outlook Efficiency
9:15 - Q & A
9:30 - Closing Comments
 

Some of the topics we'll be discussing include:

• An in-depth look at the new features commonly used Office programs, including Word, Excel and Outlook
• Live demonstrations of several new features and benefits
• A Command Reference Guide for those users who will be making the upgrade from Office 2003 to Office 2010

Space is limited, so reserve your seat today. Click here to register online.

Advisor Insights

Skoda Minotti is conducting our 3rd annual survey of the Northeast Ohio real estate and construction industries. Every participant who completes the questionnaire will receive a free copy of the survey results and analysis and have a chance to win a $50 gift card to Dick's Sporting Goods.

The goal of the survey is to provide professionals in the real estate and construction industries in Northeast Ohio with the invaluable insight into their industries.

As an added bonus, one out of every 20 survey participants will be randomly selected to receive a $50 gift card to Dick's Sporting Goods. Note that only the first 100 survey participants will be eligible for the gift cards, so act quickly.

Click here to complete the real estate or the construction survey.

Please feel free to contact Bob Goricki at bgoricki@skodaminotti.com or 440-449-6800 with any questions related to the survey.

Lower Your Worker's Comp Premiums with the BWC's new Drug-Free Safety Program

The new Ohio BWC Drug-Free Safety Program (DFSP) will be available for all Ohio employers, including previous participants, beginning July 1, 2010. The DFSP is easier to understand and implement, and provides a long-term discount for an unlimited number of years of participation.

There are two levels in the DFSP; eligible employers may elect to join either level of the program:

BASIC LEVEL: Participating non-group-rated employers receive a 4-percent discount by meeting all program requirements. These include completion of a safety review, accident reporting, accident analysis training for supervisors, employee education, supervisor skill-building training, alcohol and drug testing, and a written DFSP policy.

ADVANCED LEVEL: Participating non-group-rated employers receive a 7-percent discount by meeting all of the Basic Level requirements, as well as conducting 15-percent random drug testing annually, and completing a safety action plan. Advanced level participants must also provide a second chance after employee’s first positive test with BWC to specify exceptions.

For more information on how you can sign up for this program, please contact me at rgingerich@skodaminotti.com  or 440-449-6800.

How to Raise Cash for a Business

It "takes money to make money," but some of the conventional sources of cash have dried up for small-business owners. But that does not mean you should give up. If you lack the necessary funds to start a business or you need more money to expand your current operation, there are still several possible ways to raise the cash.

Click here to read more. 

Sweep Away "Nanny Tax" Concern

If you employ a household worker, such as someone to watch young children, you may be liable for the so-called "nanny tax." However, you can sidestep any dire tax consequences if you pay close attention to the rules.

Click here to read more.

Protecting Your Business from Embezzlement

It seems that every other day the newspapers feature a story where a longtime employee has embezzled money from his or her employer. You may sadly shake your head and blithely continue to go about your business. After all, this cannot happen to you ... can it?

Click here to read more.

Aurum Capital Markets Summary

Please click here for a summary from Aurum Wealth Management Group on the performance of the major market indices through the end of March as well as a recap of the significant events influencing the markets.

Not-For-Profit Seminar - June 8th

Skoda Minotti is pleased to announce that we will once again be hosting a not-for-profit seminar featuring nationally recognized not-for-profit expert Dick Larkin of BDO Seidman.

Dick will be presenting a not-for-profit industry update that will contain valuable insights for anyone involved in the not-for-profit industry. In addition to Dick's presentation, two Skoda Minotti professionals will also be presenting on Form 990 as well as an information technology primer for not-for-profit entities.

Seminar Details

• Location: Hilton Garden Inn, 700 Beta Drive, Cleveland, OH
• Date: June 8th
• Time: 8:00 - 11:30am
• Cost: $25
• Registration: Click here - http://www.eventbrite.com/event/674362035 

If you have any questions on the seminar, please contact Bob Goricki at bgoricki@skodaminotti.com or 440-449-6800 with any questions.
 

The Tax Court has held that, under the regs, a land surveying firm is treated as performing engineering services even though it employed no engineers. As a result, the Tax Court found that the firm was a qualified personal service corporation subject to a flat 35% tax rate.

Background. C corporations generally are subject to tax at graduated rates on their taxable income. (Code Sec. 11(b)(1)) The benefits of the graduated rates phase out after taxable income reaches a specified amount. By contrast, qualified personal service corporations are subject to a flat 35% tax rate. (Code Sec. 11(b)(2))

A corporation is a qualified personal service corporation if it meets the function and ownership tests: 

• Substantially all of its activities involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting. “Substantially all” means that 95% or more of the time spent by the corporation's employees, serving in their capacity as employees, is devoted to performing such services. Brokerage services, including commission-based financial services, are exempted from consulting services.
• Substantially all (95% or more) of the stock (by value) is held directly or indirectly by: employees performing the services or retired employees who had performed such services; or the estates of such employees, or any other person who, during the two-year period starting with the date that such an employee died, acquired that individual's stock because of his death. (Code Sec. 448(d)(2); Reg. § 1.448-1T(e)(4))

Facts. Kraatz & Craig Surveying Inc. (Firm) is engaged in land surveying in Tennessee. Land surveying is Firm's only activity. It does not employ any licensed engineers, is not associated with any firm that employs licensed engineers, and does not provide any services that State law requires to be performed only by a licensed engineer.
IRS determined a deficiency of $9,762 in Firm's Federal income tax for its tax year ending Dec. 31, 2005. In the notice of deficiency, IRS determined that Firm is a qualified personal service corporation under Code Sec. 448 subject to a flat 35% tax rate under Code Sec. 11(b)(2).

Parties' arguments. Firm argued that it did not meet the function test because it was not engaged in any of the types of services specified in the statute. Firm did not dispute the ownership test.

IRS argued that Firm's land surveying constituted the performance of services in the field of engineering pursuant to Reg. § 1.448-1T(e)(4)(i), which specifically treats land surveying and mapping as engineering.

Firm argued that the reg was invalid. Alternatively, it argued that if the reg is valid, it means that surveying and mapping services, if performed by an engineer, would qualify as services in the qualifying field of engineering. Under this argument, the reg would not apply in Firm's situation since it has no engineers.

Firm said that the Court should look to State law to decide whether surveying is in the field of engineering. Firm also contended that land surveying in Tennessee can be performed only by a licensed land surveyor and that it is not licensed to perform any activity which State law requires to be performed by a licensed engineer.

Court sides with IRS. The Tax Court held that whether a service is performed in a qualifying field under Code Sec. 448(d)(2) is to be decided by examining all relevant indicia and is not controlled by State licensing laws. It found that Reg. § 1.448-1T(e)(4)(i) is supported by the legislative history, by the ordinary meaning of the term “civil engineering,” which encompasses surveying, and by other indicia that surveying is regarded as within the field of engineering. As a result, it concluded that the reg is valid. Accordingly, it held that Firm's land surveying is a service performed in the field of engineering under Code Sec. 448(d)(2) and Firm is subject to the flat 35% income tax rate under Code Sec. 11(b)(2).

The Moral of the Story.  Professional service firms that may provide personal services that subject the Corporation to the flat 35% income tax rate should consider all viable options for organizing the business.  Other options of business organization may allow the stakeholders to take advantage of graduated rates.

References: For the tax rate for qualified personal service corporations, see FTC 2d/FIN ¶  D-1006 et seq.; United States Tax Reporter ¶  114.02; TaxDesk ¶  600,901 et seq., TG ¶  650. Information Courtesy: Thomson Reuters

Whether it is through acquisition or organic growth, more and more of today’s companies have the ability to offer numerous services and/or products to multiple target audiences across vastly different industries.

However, according to Jonathan Ebenstein, the managing director of Skoda Minotti’s marketing services group, all too often companies are using a shotgun approach to marketing, when a rifle-based solution is needed.

“In other words, you can’t use the same broad-based, one-size-fits-all marketing approach to go after a construction company as you would for a law firm,” says Ebenstein. “These are two different industries with vastly different needs, hot buttons and challenges.”

Click here to read more of this article from SmartBusiness Cleveland.

And, for more information, post a comment below or contact our Marketing Services Group at 440-449-6800.

International Financial Reporting Standards (IFRS) exist as an alternative to U.S. generally accepted accounting principles (GAAP) as issued by the Financial Accounting Standards Board (FASB).  Designed to replace the “rules based” GAAP with a more principles based approach, FASB has been working with the international standard setters to conform and converge GAAP to IFRS.

The SEC has recently signaled their support for a switch to IFRS by 2015, so long as progress continues to be made in a number of areas.  For private companies, there is actually an IFRS–lite version (called IFRS-SME for Small and Medium sized Entities) that came out in 2009 and is a mere 230 pages, as contrasted to the 10,000+ pages of today’s GAAP.

CPA’s are now able to issue reports on either IFRS or GAAP. 

During 2010, the FASB has signaled that proposals will be forthcoming to continue the convergence in the following key areas:

• All leases, including operating leases, will likely be capitalized onto the balance sheet
• Financial reports will need to be comparative, not just show a single year
• The cash flow statement will need to be presented on a “direct” method to provide more information about operational cash inflows from customers, and cash outflows to vendors and employees

So, what are the differences between GAAP and IFRS-lite?  Here is our short list:

• Prepaid insurance and other expenses: Will be shown within trade and other accounts receivable under IFRS.
• LIFO inventory method: Will not be permitted under IFRS as a way to save on taxes.
• Deferred loan and other financing fees: Will no longer be spread over the life of the loan under GAAP’s matching concept, but rather would be expensed in the year paid under IFRS.
• Intangible assets, such as customer lists acquired in a business combination: Will no longer be stated separately from goodwill, but rather would be included as one category, subject to both amortization over a maximum of 10 years AND subject to an annual impairment test.  This may be attractive to some companies, as it avoids the expense of having an outside financial valuation consultant perform a study to allocate business combination consideration into buckets.
• Costs of a business combination: The former GAAP rule to include these costs as a part of the combination has been retained by IFRS.  Under current GAAP since 2009, these are period expenses.
• Internally developed software: Would always be a current period expense under IFRS.
• Fixed assets: Large assets would be separated into individual components, something that is only rarely done under GAAP.

Other, less common areas where there could be differences include revenue recognition in certain areas (including the completed contract method), some elements of balance sheet presentation, accounting for restructuring costs, lease escalation clauses, and pending litigation matters.  Under IFRS, there is greater flexibility in valuing stock options and doing asset impairment evaluations.  There is little or no industry specific guidance. 

We think having options is a good thing.  If you would like more information, post a comment below, call Pete Metzloff at 440-449-6800 or take a look at the IFRS web site at www.iasb.org.