Cleveland Cost Segregation

This month's issue of Valuation & Litigation Advisory Insights includes the following articles:

• New Expert Discovery Rules Should Reduce Litigation Costs
• Zubulake Revisited: New Guidance on E-Discovery
• How the Recession Has Impacted Business Valuation

New expert discovery rules should reduce litigation costs         

This article discusses proposed amendments to the Federal Rules of Civil Procedure that will likely have a big impact on the attorney-expert relationship. One of the most significant changes is amended Rule 26, which will extend attorney work-product protection to draft reports by testifying experts and, with certain exceptions, to communications between experts and retaining counsel. It’s hoped that this will avoid needless discovery costs.

Click here to read this article.

Zubulake revisited: New guidance on e-discovery

A recent court case shows that sanctions can not only be awarded for deliberate destruction of discoverable data, but also when a party is grossly negligent. The court found that "failure to issue a written litigation hold constitutes gross negligence…." A sidebar to this article lists specific examples of gross negligence.

Click here to read this article.

How the recession has impacted business valuation

Should businesses that were valued on the eve of the economic downturn be revalued in light of subsequent events? This article looks at a Florida marital dissolution case in which a restaurant valued in December 2007 lost value during the recession that followed. This case confirms that, when valuing a business, appraisers generally shouldn’t consider events that take place after the valuation date. A sidebar examines Financial Accounting Standards Board standards regarding the treatment of subsequent events for accounting purposes.

Click here to read this article.

Prior issues are available in the E-Newsletter Archive of our Valuation & Litigation Advisory Services Resource Center. If you would like to subscribe to this free, monthly, business valuation and litigation support 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 Valuation & Litigation Advisory Services Group at 440-449-6800.

This month’s issue of Valuation & Litigation Advisory Insights includes the following articles:

• Nonqualified Deferred Conpensation: Independent Appraisals Offer Protection Against 409a Challenge
• Damage Control: Surviving a Business Interruption
• Fair Value in a Troubled Economy
   

Nonqualified deferred compensation: Independent appraisals offer protection against 409A challenge         

Businesses that provide employees with stock options, stock appreciation rights (SARs) and other types of nonqualified deferred compensation have been subject to Internal Revenue Code Section 409A for years. As you can imagine, compliance is particularly challenging in the current economic environment. To avoid Sec. 409A problems, options and SARs must be issued at or above fair market value, so accurate valuations are critical. It’s important to know what Sec. 409A requires and how to establish fair market value. Three "presumptive" valuation methods are discussed.

Click here to read this article.

Damage control: Surviving a business interruption

Whether it’s minor, such as a lightning strike that shuts down production for a day, or major, such as a lengthy labor strike, a business interruption not only reduces income, but also simultaneously creates new expenses. The key to surviving a business interruption is to restore normal operations as quickly as possible. Insurance plays a critical role. This article explains business interruption insurance, how to file a claim, what to do to mitigate loss, and how to establish a loss period. A sidebar addresses scope-of-coverage issues.

Click here to read this article.
 
"Fair value" in a troubled economy

Last year, Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 157 took effect. The statement, entitled Fair Value Measurements, provides guidance on measuring fair value for purposes of several accounting standards, and establishes a "fair value hierarchy" that emphasizes market-based valuation methods. This article explains how it works. A sidebar discusses a few opportunities to explore in this down economy.

Click here to read this article.


Prior issues are available in the E-Newsletter Archive of our Valuation & Litigation Advisory Services Resource Center. If you would like to subscribe to this free, monthly, business valuation and litigation support e-newsletter, send an email to info@skodaminotti.com.

CPAs are increasingly being asked to solve the information technology problems of their clients and prospective clients, according to a new survey by the American Institute of CPAs.

This year, the AICPA’s Top Technology Initiatives Survey asked AICPA members to rank a list of questions heard most often from audit committees, chief financial officers and chief information officers. With a renewed focus on IT-related issues, the survey makes it clear that CPAs need to understand information technology in order to collaborate effectively with clients.

Here are the top 10 most frequently asked questions accountants are hearing, how well do they line up with your concerns?

1. Are we ensuring that our data and technology resources are protected against hacking, viruses or other compromises? This includes from outside the company as well as someone within the company.
2. Are we considering or implementing organizational security precautions even though we haven’t had a data breach or loss? Why wait for a disaster to put in the prevention precautions – we should all be learning from the BP Gulf of Mexico crisis.
3. Are our current internal controls and IT governance policies and procedures effective? Just having policies and procedures in place isn’t enough.  Are they updated regularly and do they meet the changes that the business has put in place?
4. Are we receiving the most relevant and current information from our reporting functions (business intelligence, dashboards, etc.) or are there areas for improvement?  Companies rely on their systems to help run the business – are these systems being utilized to their fullest potential?
5. Have we implemented sound, appropriate privacy policies and procedures in place within the organization and for our customers?  You just have to go to http://www.privacyrights.org/ar/ChronDataBreaches.htm to see a list of privacy breaches and you will get a sense of how important this is.
6. Are we appropriately considering the IT risks associated with the organization in the initial planning of any audit or attest engagement?  The AICPA is focusing on this more and, for certain types of Attestation engagements, it is even necessary to do a Risk assessment.  When was the last time the organization did a risk assessment?  Have we done anything with the risks identified in the first assessment?
7. Are we capturing the appropriate control objectives during the initial planning of any audit or attest engagement to address the IT risks associated with the organization? 
8. Should we refresh our core and financial accounting software to leverage technology efficiencies every few years?   Are we getting the most out of our current ERP system?
9. Can our data remain safe if we utilize cloud computing or Software-as-a-Service?   More and more companies are looking at this – not only the question about data security but also the total cost of ownership is a big question.
10. . Can we deliver on our service and product promises to our customers if we utilize cloud computing services?

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.
 

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.

The original ‘milestones’ in ancient times often had no markings of distance or location on them. Today, we use the term in contractual agreements of various sorts, often with very detailed definitions of what it means to reach a milestone. Research and development projects often include required milestones that must be met; until recently, the existing guidance was subject to interpretation. The Financial Accounting Standards Board (FASB) has recently issued guidance as it relates to recognizing revenue that is tied to achieving a milestone – Topic 605. The guidance first defines the term ‘milestone’ and then moves through the details of revenue recognition. We will refer to the entity attempting to reach a milestone as a ‘vendor.’

So what is a milestone, for our purposes? A milestone has four characteristics:

1.      an uncertainty of its being achieved, even if the vendor fully expects to achieve it

2.      a reliance on the vendor’s performance, either directly or indirectly

3.      a result of additional payments being due the vendor

4.      a substantive event

The last item gets its own definition in the guidance. We will focus on one piece of the definition of “a substantive event” – that the milestone event be completed in full. 

By way of example: Meds R Us has an R&D project where it earns its grant funding through meeting certain milestones. Phase I of the project calls for the production of 1,000 non-defect capsules of their new drug. At the end of May, Meds R Us has produced 999 such capsules. Under this method of revenue recognition, no revenue would be recognized in May. However, the single non-defect capsule produced in June will result in grant revenue recognition attributable to that milestone. 

If your business model relies on contracts tied to milestones, you should consider researching the impact on your business of adopting this form of revenue recognition.

Click here for more information on Skoda Minotti’s Biotechnology industry group or call Paul Etzler or Ken Haffey at 440-449-6800.

With increased attention from the IRS in the areas of foreign operations and investments/holdings, it is important to review your situation to determine whether you will need to comply with the FBAR disclosure requirements.  The report is due at the end of June and it must be received, not postmarked, by the end of the month.  Although the reporting is technically a disclosure, the penalties for failure to do so can be severe and in some cases the penalties can be in excess of the actual amount invested or held in the foreign account!  Typically, a FBAR filing requirement is needed if either of the following is applicable:

1.      Ownership of a foreign bank account, or

2.      Control over or signing authority for a foreign bank account  

Please note, these disclosure requirements apply at the entity and individual level.  One bank account owned by an entity can result in multiple filings since the entity owns the account, but there may be a number of individuals employed by the entity that have control over or signing authority for the same account.  Controllers, cash management personnel and CFO’s are likely to have the requisite control or signing authority to meet the filing threshold.  Individual accounts held jointly or accounts held by pass-through entities also present the potential for disclosure.

In addition the information above, you can click here to learn more about some of the technical details that might be applicable or helpful to your situation.

To learn more about our tax planning and preparation services, call us 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.

How much life insurance do you need?

Your life insurance needs will depend on a number of factors, including the size of your family, the nature of your financial obligations, your career stage, and your goals. For example, when you're young, you may not have a great need for life insurance. However, as you take on more responsibilities and your family grows, your need for life insurance increases.

Here are some questions that can help you start thinking about the amount of life insurance you need:

• What immediate financial expenses (e.g., debt repayment, funeral expenses) would your family face upon your death?
• How much of your salary is devoted to current expenses and future needs?
• How long would your dependents need support if you were to die tomorrow?
• How much money would you want to leave for special situations upon your death, such as funding your children's education, gifts to charities, or an inheritance for your children?
• What other assets or insurance policies do you have?

Types of life insurance policies

The two basic types of life insurance are term life and permanent (cash value) life. Term policies provide life insurance protection for a specific period of time. If you die during the coverage period, your beneficiary receives the policy's death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period. Term policies are typically available for periods of 1 to 30 years and may, in some cases, be renewed until you reach age 95. With guaranteed level term insurance, a popular type, both the premium and the amount of coverage remain level for a specific period of time.

Permanent insurance policies offer protection for your entire life, regardless of your health, provided you pay the premium to keep the policy in force. As you pay your premiums, a portion of each payment is placed in the cash value account. During the early years of the policy, the cash value contribution is a large portion of each premium payment. As you get
older, and the true cost of your insurance increases, the portion of your premium payment devoted to the cash value decreases. The cash value continues to grow--tax deferred--as
long as the policy is in force. You can borrow against the cash value, but unpaid policy loans will reduce the death benefit that your beneficiary will receive. If you surrender the policy before you die (i.e., cancel your coverage), you'll be entitled to receive the cash value, minus any loans and surrender charges.

Many different types of cash value life insurance are available, including:

• Whole life: You generally make level (equal) premium payments for life. The death benefit and cash value are predetermined and guaranteed (subject to the claims paying ability of the issuing insurance company). Your only action after purchase of the policy is to pay the fixed premium.
• Universal life: You may pay premiums at any time, in any amount (subject to certain limits), as long as the policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value will grow at a declared interest rate, which may vary over time.
• Variable life: As with whole life, you pay a level premium for life. However, the death benefit and cash value fluctuate depending on the performance of investments in what are known as subaccounts. A subaccount is a pool of investor funds professionally managed to pursue a stated investment objective. You select the  subaccounts in which the cash value should be invested. 
• Universal variable life: A combination of universal and variable life. You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value goes up or down based on the performance of investments in the subaccounts.

With the passage of Health Care Reform, the big question is, "How will it affect my business?" SmartBusiness Cleveland recently hosted a webinar series which looked at this topic from five angles: tax implications, legal issues, economy, benefits, and health care.

Click here to download my segment which looked at how the accounting and tax implications of the health care reform will affect your business, and how you should react and adapt to absorb the changes.

For more information on how health care reform will affect your business, post a comment below or contact our Tax Group at 440-449-6800.

This month’s issue of Valuation & Litigation Advisory Insights, includes the following articles:

• Struggling Economy Presents Business Valuation Challenges
• Nonpublic Information Considered in Valuing Securities
• Are Valuations Recyclable?

Struggling Economy Presents Business Valuation Challenges     

In bad times, appraisers may face a disconnect between the income and market approaches, creating a wide gap between valuations. The challenge becomes reconciling these differences. This article explains how to approach valuation for both profitable and distressed companies, and notes that the purpose of a business valuation can have a big impact on the valuation methods that are used. A sidebar looks at one case in which a court rejected the uses of the discounted cash flow method by both the creditors’ and the debtors’ experts.

Click here to read this article.

Nonpublic Information Considered in Valuing Securities

In one recent case, a district court held that it was reasonable for a jury to conclude that material nonpublic information possessed by the defendants affected the fair market value of certain securities. The case is significant because it seems to offer a novel interpretation of the phrase "reasonable knowledge of relevant facts" in the definition of fair market value. The decision suggests that even nonpublic information can be a "relevant fact."     

Click here to read this article.

Are Valuations Recyclable?

The paper a valuation report is printed on may be recyclable, but in most cases the content is not. This article points out that recycling valuations poses two major problems: First, the value of a business or other asset can change dramatically over time — in some cases, overnight. Second, a valuator’s methods depend to a large extent on the valuation’s purpose.  The article discusses the problems that can ensue when business owners are tempted to stretch their valuation dollars by using a single valuation for several different purposes.

Click here to read this article.

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

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

Details

The Patient Protection and Affordable Care Act, signed into law on March 23, 2010, Pub. L. No. 111-148 (the “Act”), provides additional requirements for hospitals to qualify as charitable organizations under section 501(c)(3). In order to qualify as a section 501(c)(3) hospital, a facility must meet the following requirements of new section 501(r):

1. The community health needs assessment requirement;
2. The financial assistance policy requirements;
3. The charges requirement; and
4. The billing and collection requirement.

Community Health Needs Assessment

An organization will meet this requirement if, in the applicable year or in either of the two taxable years immediately preceding such taxable year, the hospital (1) conducts a community health needs assessment made widely available to the public which takes into account input from representatives of a broad cross section of the community, including those with public health expertise, and (2) adopts an implementation strategy to meet the community health needs identified through such assessment.

Financial Assistance Policy (Including Emergency Care Policy)

An organization will meet this requirement if it establishes a written financial assistance policy which includes eligibility criteria for financial assistance and whether such assistance includes free or discounted care; the basis for calculating amounts charged to patients; the method for applying for financial assistance, and in the case of an organization which does not have a separate billing and collections policy, the actions the organization may take in the event of non-payment, including collections action and reporting to credit agencies; and measures to widely publicize the policy within the community to be served by the organization.

The policy must also provide that the organization will provide emergency medical care regardless of an individual’s eligibility under the financial assistance policy.

Charges Policy

The organization must have a policy that limits amounts charged for emergency or other medically necessary care provided to individuals eligible for assistance under the financial assistance policy to not more than the lowest amounts charged to individuals who have insurance covering such care, and prohibits the use of gross charges.

Billing and Collection Requirements

An organization will meet this requirement only if the organization does not engage in extraordinary collection actions before the organization has made reasonable efforts (to be defined by future regulation) to determine whether the individual is eligible for assistance under the financial assistance policy described above.

Penalties and Reporting Requirements

If an organization fails to meet the requirements of new section 501(r), then new section 4959 imposes a $50,000 excise tax for any taxable year for which there is such failure.

The law imposes new reporting requirements (section 6033(b)(15)) so that a hospital will have to provide a description of how the organization is addressing the needs identified in the community health needs assessment and a description of any such needs that are not being addressed, together with the reasons why such needs are not being addressed. Hospitals will have to provide this report and their audited financial statements as attachments to Form 990, Return of Organization Exempt from Income Tax.

Effective Dates and Mandatory Review

The new provisions are generally effective for taxable years beginning after the date of enactment of the Act. Thus, for example, if an organization uses a March 31 taxable year, most of the new requirements are currently effective as of April 1, 2010. The community health needs assessment requirement is effective for taxable years beginning two years after the date of the enactment of the Act, i.e., March 23, 2012.

Finally, the new law provides that there will be mandatory review of tax exemption for hospitals at least once every three years regarding the community benefit activities of each hospital organization to which the new provisions apply.

For more information, post a comment below or contact our Healthcare Consulting Group at 440-449-6800.

Information Courtesy: BDO

This is the fourth part of a five part series where we have been elaborating on why niche marketing is a vi­tal concept to consider when developing a marketing plan, while addressing some of the key elements to developing a niche marketing plan.

The basics start with a description of your target market, competitors and products or services. Additionally, you’ll need to put together a marketing plan and budget, which will contain your advertis­ing and promotional plan along with a detailed account of costs allocated for the development, creation and execution of the marketing initiatives and tactics detailed in your plan (i.e., Web site, ad creation, PR, sales collateral, SEO, Social Media, etc.). You’ll also want to make sure you’ve thought through such things as geo­graphical boundaries (i.e., do you want to be local, regional, national or global?) and industry trends. Completing a SWOT anal­ysis of your company’s strengths, weak­nesses, opportunities and threats is often very helpful in forcing yourself to better understand the nature of the market space you are playing in. Lastly, you’ll also need to determine your pricing strategy and rev­enue goals.

Click here for part one, part two or part three of this series. Or, for more information on niche marketing or any of our other Marketing Services, contact Jonathan Ebenstein at 440-449-6800 or visit our marketing web page.

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.
 

This issue of the Nonprofit Organization Update includes the following articles:

• Moving Toward Clarity - IRS Releases 2009 Form 990 Changes
• Foreign Accounting Reporting - More IRS Guidance is Here!
• SFAS 157 Fair Value Measurements - Additional NFP Perspectives
• Effective Policies - Building the Foundation of Your Organization
• Employee Benefits Security Administration's (EBSA) 2010 Priorities
• FIN 48 Update for Nonprofit Organizations

Moving Toward Clarity - IRS Releases 2009 Form 990 Changes
By Joyce Underwood, CPA

With the first year of filing the new Form 990 well on its way, the Internal Revenue Service (IRS) has released the revised 2009 forms for calendar year 2009 and fiscal year 2010 returns. In addition to improving the wording of the trigger questions, revising definitions, and clarifying many instructions, IRS has attempted to guide organizations in preparing a more complete return. Among the top errors reported on 2008 forms was the omission of Schedule O which requires certain disclosures from all organizations. IRS has added instructions to elicit a more complete filing and ensure all necessary disclosures are made.

Click here for more of this story.

Foreign Accounting Reporting - More IRS Guidance is Here!
By R. Michael Sorrells, CPA

As we have reported previously, Treasury and the IRS have greatly stepped up enforcement of the filing requirements for Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts ("FBAR"). Penalties for non-compliance are steep: $10,000 per occurrence. There is generally a filing requirement for both organizations with such accounts and individuals with signature authority (but no financial interest in) a foreign financial account. The FBAR report is filed on a calendar year basis and is due annually on June 30.

Click here for more of this story.

SFAS 157 Fair Value Measurements - Additional Not-for-Profit Perspectives
By Dick Larkin, Director, Institute for Nonprofit Excellence

Now that SFAS 157 has been in effect for a while, it is worthwhile to discuss a few practical issues that often arise during its implementation.

First a couple reminders:

Nonprofit organizations use fair value accounting when they are:

1. required by certain accounting standards to use fair value for certain transactions and balances, and
2. permitted by certain other accounting standards to use fair value for certain other transactions and balances
    

Effective Policies - Building the Foundation of Your Organization
By Lee Klumpp, CPA

Policies are guidelines that regulate organizational action and control the conduct of individuals within an organization and ensure that an organization has the foundation to accomplish its mission. Procedures on the other hand describe the normal operating method and provide the protocol for implementation of the policies or the "how to." Both policies and procedures are required by all organizations in order to operate efficiently, avoid confusion among employees, and ensure that an organization is in compliance with its legal and regulatory requirements. In this article we will explore the best practices for developing sound and effective policies for an organization.

Click here for more of this story.

Employee Benefits Security Administration's (EBSA) 2010 Priorities
By Bob Lavenberg

Recently the Department of Labor’s (DOL) EBSA revealed its priorities for 2010 and at the top of the list is enforcement relating to the timely remittance of employee deferral contributions to defined contribution plans.

Click here for more of this story.

FIN 48 Update for Nonprofit Organizations
By Laura Kalick

Nonprofit organizations are now beginning the process of documenting tax positions. Material uncertain tax positions will have to be disclosed in a footnote to the financial statements and that footnote is now required to appear on Schedule D of Form 990. Most organizations were not required to implement FIN 48 (now called ASC 740-10) until years ending on December 31, 2009 or later. Thus, all nonprofits that have not previously implemented this provision will have to do so soon.

Click here for more of this story.

For more information, post a comment below or contact our Nonprofit Services Group at 440-449 6800.

Information courtesy: BDO