Skoda Minotti

On December 16, 2009, the Securities and Exchange Commission ("SEC") issued final regulations related to annual disclosure of executive compensation matters and corporate governance. These regulations, which are effective for proxy statements and annual reports filed after February 28, 2010, contain some significant changes from the proposals in this area that the SEC issued in July 2009. The final regulations focused on several areas, and this Tax Alert will briefly summarize the provisions of the regulations concerning executive pay and the impact on corporate filers.

Click below to view each section:
 

• Management of Compensation Risk (and other risks)
• Changes to the Summary Compensation Table
• Enhanced Disclosure of Director Qualifications
• Corporate Structure
• Fees Paid to Compensation Consultants
• What Employers Should be Doing Now

In the fourth quarter or 2009, Northeast Ohio saw a decrease in vacancy rates and an increase in net absorption, indicating that things may be turning around. When the economy will fully recover, though, has yet to be determined with certainty, and real estate companies are still suffering from various challenges including the absence of credit and the economic loss in the value of underlying real properties. Companies can adapt to these challenges and survive in this market, though; click here to learn more.

For more information, post a comment below or contact our Real Estate and Construction Group at 440-449-6800.
 

SFAS 157 – A Not-for-Profit Perspective
By Dick Larkin

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.

Click here for more of this story.

Endowment Funds and FSP 117-1
By Dick Larkin

A question has come up as to just what constitutes an endowment fund for purposes of application of Financial Accounting Standards Board (FASB) Staff Position (FSP) 117-1, Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) and Enhanced Disclosures for All Endowment Funds, (now part of ASC 958-205). For example,must a perpetual, irrevocable third-party trust be included with endowments?

Click here for more of this story.

Budgeting in the Current Economic Environment
By Lee Klumpp

In the not-for-profit world it is often the case that the budget is not issued on time, nor is the first issuance typically the last. Instead there are a multitude of last minute changes that force the budget process to continue into the next year. As a result the budget may not be usable on a comparison basis as an effective management tool until several months into the next year.

Click here for more of this story.

GAAP Codification

The Financial Accounting Standards Board (FASB) has issued its "Accounting Standards Codification" (ASC) which includes all Statements on Financial Accounting Standards and Interpretations (SFAS’s and FIN’s), Emerging Issues Task Force (EITF) consensuses, Accounting Principles Board (APB) opinions, American Institute of Certified Public Accountants (AICPA) Statements of Position (SOP) and AICPA Audit Guides and other literature. The codification was formally issued July 1, 2009 and is effective for all periods ending after September 15, 2009.

Click here for more of this story.

Summary of Recent Accounting Pronouncements and Effective Dates
By Tammy Ricciardella

There have been numerous accounting pronouncements issued and the following is a brief summary of those applicable to nonprofit organizations and their effective dates.

FIN 48, Accounting for Uncertainty in Income Taxes

Effective for fiscal years beginning after December 15, 2008 for a nonpublic entity unless they are a consolidated entity of a public enterprise or have already issued a full set of financial statements in accordance with generally accepted accounting principles that included the disclosure requirements of FIN 48. A nonpublic entity is one that does not have (a) debt or equity securities that are traded in a public market or (b) whose financial statements are filed in accordance with a regulatory authority.

The effective date above reflects the two deferrals of FIN 48 for nonpublic entities addressed by FSP FIN 48-2 and FSP FIN 48-3.

Click here for more of this story.

Schedule of Expenditures of Federal Awards Illustrative Auditee Practice Aids
By Tammy Ricciardella

In response to the federal study on the quality of audits performed under Office of Management and Budget (OMB) Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations (OMB Circular A-133) the American Institute of Certified Public Accountants’ Governmental Audit Quality Center (GAQC) launched a series of task forces to address the deficiencies noted in the study. One of the task forces established was the SEFA (Schedule of Expenditures of Federal Awards) task force.

Click here for more of this story.

IRS Extends FBAR Filing Deadline for Persons with Signature Authority
By R.Michael Sorrells

With the growing number of investments in offshore funds, the IRS is boosting its scrutiny of accounts established in certain tax havens to identify possible sources of income that are not currently being taxed. As part of its efforts, the IRS is focusing more attention on Form TD 90-22.1, Report of Foreign Bank and Financial Accounts ("FBAR"). The FBAR is required to be filed by US persons (including tax-exempt organizations) having a financial interest in or signature authority over any financial account in a foreign country if the aggregate value of those accounts exceeded $10,000 at any time during the calendar year. The FBAR is due annually on June 30, with no permissible extension. Penalties for failure to file this form are significant: $10,000 per return.

Click here for more of this story.

403(b) News
by Bob Lavenberg

On July 20, 2009 the Department of Labor ("DOL") Employee Benefits Security Administration ("EBSA") issued Field Assistance Bulletin ("FAB") 2009-02 Annual Reporting Requirements for 403(b) Plans which provides some relief with regard to the reporting requirements for 403(b) plans beginning with the 2009 plan year.

Click here for more of this story.

Update on Management and Governance
By Laura Kalick

Although there is no specific Internal Revenue Code section that grants IRS authority to ask management and governance questions on the new Form 990, IRS takes the position that a well-governed organization is more likely to be tax compliant. In fact, the IRS has agent training materials on its website and will produce a post-audit checklist to see if an organization has fewer adjustments to an audit if the organization has used best management and governance practices.

Click here for more of this story.

When completing Form 990 for your nonprofit organization, it is important to report the correct number in the governing body.  By definition, the governing body is the group of persons authorized under state law to make decisions on behalf of the organization.  The governing body is, generally speaking, the board of directors or trustees.  All of the directors or trustees must maintain independence in order to participate in the decision-making process.

The number of directors to be reported on Page 1 and Page 6 Section A of the Form 990 is the total number of members of the governing body as of the end of the organization's tax year who have the power to vote on all matters that may come before them.  Anyone who does not participate in the actual decision-making for the organization is not part of the governing body.  Therefore, advisory boards and committees and other trusted advisors of the organization are not part of the governing body.

Determining Independence

Independent voting members of the organization's governing body are those members who:

• Are not compensated as an officer or other employee of the organization or of a related organization, 
• Did not receive total compensation or other payments exceeding $10,000 during the organization's tax year from the organization or from related organizations as an independent contractor, and
• Were not involved in a transaction with the organization either directly or indirectly through affiliation with another organization that would be required to be reported on Schedule L.

Transactions that would be required to be reported on Schedule L include excess benefit transactions, loans, grants to interested persons, and business transactions.  Learn more about these items in, “About Form 990 Schedule L – Excess Benefit Transactions."

• The member is a donor to the organization, regardless of the amount of the contribution or
• The member receives financial benefits from the organization solely in the capacity of being a member of the charitable class serviced by the organization in the exercise of its exempt function.

The organization need not engage in more than a reasonable effort to obtain the necessary information to determine the independence of members of the governing body and may rely on information provided by such members.

Family or Business Relationships

Although family and business relationships do not negate independence, the organization is still required to disclose any such relationships among the members of the governing body or between any of those members and the organization. 

Family relationships are ancestor/descendant and siblings including spouses.

A "business relationship" between two people on the governing body includes any of the following:

• One person is employed by the other in a sole proprietorship or by an organization with which the other is associated as a trustee, director, officer, key employee, or greater-than-35% owner.
• One person is transacting business with the other (other than in the ordinary course of either party's business on the same terms as are generally offered to the public), directly or indirectly, in one or more contracts of sale, lease, license, loan, performance of services, or other transaction involving transfers of cash or property valued in excess of $10,000 in the aggregate during the organization's tax year.
• The two persons are each a director, trustee, officer, or greater than 10% owner in the same business or investment entity.  There may be ownership through multiple tiers of entities.

A "business relationship" does not include a relationship between:

• Attorney and client, 
• Medical professional and patient, or
• Priest/clergy and penitent/communicant

The organization is not required to provide information about a family or business relationship between two officers, directors, trustees, or key employees if it is unable to secure the information after making a reasonable effort to obtain it.  One way to make a reasonable effort is to make it part of the conflict of interest questionnaire that is required of these people each year.

When reporting the number of directors, it is important to consider independence, family and business relationships.

For more information on Form 990, post a comment below or contact our Tax Planning & Preparation Group at 440-449-6800.
 

Form 990 Schedule L is required for all nonprofit organizations that answered questions 25, 26, 27, or 28 in Part IV of the Form 990 relating to transactions between various parties.

Transactions that are required to be reported on Schedule L include:

• Excess benefit transactions
• Loans to and/or from interested persons
• Grants or assistance benefitting interested persons
• Business transactions involving interested persons

The definition of interested persons is different for each one of these transactions.

Excess benefit transactions:

An excess benefit transaction is an excess payment to a disqualified person.  An excess payment means that the value of the benefit received from the organization is greater than the benefit given (including services) by a disqualified person.

The definition of a disqualified person for purposes of the excess benefit transaction begins with a five year look back period.  Anyone in a position to exercise substantial influence over the affairs of the organization in the last five years ending on the date of the transaction is a disqualified person.  It is not necessary for the person to actually exercise substantial influence, only that he be in a position to exercise substantial influence.  Certain individuals are automatically deemed to have the requisite substantial influence:

• Voting members of the organization's governing body (Board of Directors/Trustees)
• Anyone who regardless of title is in charge of implementing the decisions of the governing body
• Anyone who regardless of title is in charge of managing the organization's finances

Others who are considered to have substantial influence unless the organization can prove otherwise include:

• Family members of anyone listed above
• Substantial contributors i.e., those who have contributed $5,000 or more or more than 2% of all contributions to the organization
• A person who manages a discrete segment or activity that represents a substantial portion of the organization's total activities, assets, income or expenses

To determine whether an excess benefit transaction has occurred, all consideration and benefits exchanged between a disqualified person and the organization and all entities it controls are taken into account. Common examples of an excess benefit transaction include:

• Payment of unreasonable compensation
• Sale of property by the organization for less than fair market value
• Sale of property to the organization for more than fair market value
• Expense reimbursements under a nonaccountable plan not treated as compensation
• Payment of personal expenses
• Embezzlement

If none of these transactions has occurred or any other transaction where more value is given than received, there is no excess benefit transaction.

An excess benefit transaction can be alleged where there is no documentation regarding the method that the organization uses to determine compensation for its disqualified persons including the appropriate comparable data used in the determination.  If it is determined that the compensation exceeds the appropriate comparable compensation levels, an excess benefit transaction will be deemed to exist.
 
An excess benefit transaction may have serious implications for the disqualified person that entered into the transaction with the organization, any organization managers that knowingly approved of the transaction, and the organization itself.  The disqualified person is subject to an excise tax of 25% of the excess benefit received.  If the excess benefit transaction is not corrected, i.e., the excess benefit returned to the organization within the prescribed time, a penalty equal to 200% of the excess benefit is assessed.

In addition, if the excise tax is assessed against a disqualified person, then any organization manager who participated in the excess benefit transaction is subject to a tax of 10% of the excess benefit.  This tax will not be assessed if the manager can prove that their participation was not willful and is due to reasonable cause.  If more than one manager participates in a transaction, each of them is liable for the tax.

Transactions that can become excess benefit transactions should be carefully monitored by the organization for the benefit of all interested parties.  Procedures for maintaining relevant records can help alleviate any problems in this area.

For more information on Form 990, post a comment below or contact our Tax Planning & Preparation Group at 440-449-6800.

The IRS posted the following announcement on its web site:

“People who give to charities providing earthquake relief in Haiti can claim these donations on the tax return they are completing this season, according to the Internal Revenue Service.”

“Taxpayers who itemize deductions on their 2009 return qualify for this special tax relief provision, enacted Jan. 22. Only cash contributions made to these charities after Jan. 11, 2010, and before March 1, 2010, are eligible. This includes contributions made by text message, check, credit card or debit card.”

Click here to read the complete release from the IRS.

Looking for tax assistance during this tax season? Contact Skoda Minotti’s Tax Planning and Preparation Department at 440-449-6800 for more information.
 

With the recent declines in the real estate market, it is important that you ensure your commercial property is valued correctly for real estate tax purposes. In 2009, many Ohio counties reappraised or updated their real property values for the tax year. These new valuations apply through 2012.

Despite the declining real estate market, it is our understanding that most tax values for commercial properties were not lowered for the 2009-2011 tax years in many Ohio counties. Owners of commercial property have until March 31, 2010 to contest the new valuations.

If you own high value properties (office; industrial; apartments) we encourage you to review these updated tax values. We would be glad to discuss with you if a challenge makes sense and also refer you to legal professionals who are equipped to handle these matters.

Please contact our Litigation Advisory Services Group at 440-449-6800 if you have any questions regarding this matter.
 

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

• Finding the Appropriate Valuation Standard
• How Valuators Assess the Rising Risk of Fraud
• Lost Profits or Lost Value?

Finding the Appropriate Valuation Standard           

Valuation isn't static and can change depending on the purpose of the valuation. This article looks at the three most common standards of value: fair market, investment and fair. It briefly defines each standard and discusses the circumstances in which one standard may be more appropriate than another. The article points out that identifying the appropriate valuation standard up front can minimize confusion down the road. The goal is to arrive at a reasonable and supportable value conclusion in light of all the surrounding facts and circumstances.

Click here to read this article.

 
How Valuators Assess the Rising Risk of Fraud

The current economic downturn has produced an upswing in incidents of occupational fraud, so it's imperative for businesses to step up efforts to deter and detect it. An important part of the valuation process is identifying potential risks and gauging whether management has taken appropriate action to mitigate those risks. This article explains how valuators evaluate internal controls and corporate culture, tailoring their analyses of fraud risks based on the subject company's size, complexity, industry and goals.    

Click here to read this article.
 

Lost Profits or Lost Value?

Lost profits and lost business value are common measures of damages in commercial litigation. They're also a common source of confusion. What do they have in common? How are they different? Can a plaintiff recover both? This article addresses these questions. A basic understanding of the similarities and differences between lost profits and lost business value can help build a case for business damages or challenge an opponent's calculations.

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.

If you have any questions about any of these articles, please contact our Valuation & Litigation Advisory Services Group at 440-449-6800.

Beginning with the 2009 Form 5500 filings (due in 2010), employee benefit plans that are qualified under section 403(b) of the Internal Revenue Code that are sponsored by charitable organizations and covered under the Employee Retirement Income Security Act of 1974 (ERISA) will be subject to the same reporting and audit requirements that currently exist for section 401(k) plans.

What does this mean for affected organizations? It most likely means that they face significant challenges with:

• Establishing plan accounting records and proper controls
• Identifying all participant accounts to be included as plan assets
• Determining beginning account balances (i.e. - comparative balances are also required as of December 31, 2008 for calendar year plans)
• Obtaining other financial information to be included in the plan’s financial statements
• Obtaining an unqualified opinion on the plan’s financial statements from an independent auditor.

If you are affected by these new regulations, we recommend that you review “403(b) Plans – 2009 Frequently Asked Questions.”

We are able to assist you at any stage of your transition process.   Our Skoda Minotti Benefit Plan Audit Department has vast experience auditing employee benefit plans and would be happy to provide you a quote for your upcoming 403(b) plan audit. For more information, please contact us at 440-449-6800.

As you begin preparing your 2009 tax individual or corporate tax return, there are several items to keep in mind.

What Individuals need to watch out for when filing 2009 returns:

• Effects of the American Recovery and Reinvestment Act of 2009:
      - Making Work Pay Credit
      - Changes to the Alternative Minimum Tax
      - First Time Home Buyer Credit
      - American Opportunity Credit
      - Long-Time Resident Home Buyer Credit
      - Energy Efficiency Credits
      - For more information, read our overview of the American Recovery and Reinvestment Tax Act of 2009 – 
        Individual Tax Provisions.
• Definition of a dependent:
      - More detailed (and confusing) definition of  who qualifies as a dependent 
      - Detailed rules for non-custodial parents to take qualifying child as a dependent
• Changes for homeowners:
      - Mortgage Forgiveness Debt Relief Act of 2007 and the rules for reporting cancellation of debt
      - Deduction for real estate taxes paid for non-itemizers
• The amount of the phase-out for itemized deductions is reduced
• Installment agreements can now be applied for online

What Businesses need to be aware of for 2009 returns:

• Bonus depreciation of 50% is extended for property placed in service before 1/1/10
• Section 179 expense limit of $250,000 remains in effect for 2009
• Net Operating Loss (NOL) carrybacks can be carried back 3,4 or 5 years, with some limitations
• New IRS rules regarding Cancellation of Debt income for S Corps
• 15 year write-off allowed for certain leasehold, restaurant and retail improvements
• Penalty for late filing of Partnership or S Corporations raised to $195 per owner
• Possibly minimizing self-employment tax of LLC
• Proposed IRS regulations contain rules for expensing vs. capitalizing repairs and property acquisitions
• For more information, read our overview of the American Recovery and Reinvestment Tax Act of 2009 – Business Tax Provisions. 

With all of us experiencing the harsh new economic realities, how do you plan to market your brand in the coming year? One thing is for sure, if you want to be successful, the same old strategies will not work as well as they once did.

Marketing Web has compiled a list of 10 marketing and branding trends that you’ll want to keep in mind for 2010. For more detail on each trend, click here to view the full article.

1) Value is the new black

2) Brands increasingly a surrogate for "value"

3) Brand differentiation is Brand Value

4) "Because I Said So" is so over

5) Consumer expectations are growing

6) Old tricks don't work/won't work anymore

7) They won't need to know you to love you

8) It's not just buzz

9) They're talking to each other before talking to the brand

10) Engagement is not a fad; It's the way today's consumers do business

For more information on Skoda Minotti Marketing Services, visit our web site or call us at 440-449-6800.

There are many tales behind the origin of the phrase “rule of thumb”, some of which are more realistic than others. The story that is the most widely accepted is that woodworkers used to use the width of their thumb, rather than rulers, for quick measurements.  Regardless of how the phrase got its start, a rule of thumb is considered to be an imprecise, yet convenient measurement standard. Relying solely on a rule of thumb to value a business, however, can lead to unreliable valuation conclusions.

Rules of thumb used for valuing businesses are often industry specific and are stated as multiples of revenues, EBITDA, net income, or some other metric. Rules of thumb often have their foundation in industry hearsay mixed with multiples derived from actual transactions for similar companies (although which transactions and companies are anybody’s guess). Considering the unprecedented economic environment today, older rules of thumb may no longer be reliable regardless of their predictive power of value in previous years. In addition, rules of thumb often do not take into consideration the profitability of the company being valued, the industry outlook, the depth of management, and many other factors that are considered when a full business valuation is being prepared. Finally, nearly every professional valuation association (if not all of them), does not allow for a rule of thumb to be used as the primary valuation methodology. As a result, relying on a rule of thumb alone to value a business will result in a value that will not be defensible before the IRS or in litigious situations.

Although using a rule of thumb is frowned upon as a primary valuation method, rules of thumb may still be beneficial to business owners and valuation analysts.  For business owners, rules of thumb offer quick and dirty estimates of value that can be useful for high-level strategic planning.  For valuation analysts, rules of thumb can be used a reasonableness check for the value of a company determined by asset, income, and market-based approaches.

The important thing to remember is that a rule of thumb is a great shortcut for a business owner to use to determine the value of his or her company for strategic planning. If a defensible value is required, however, a rule of thumb should be used as no more than a cross-check against the more traditional valuation methods, such as the capitalization of earnings/cash flow method, discounted earnings/cash flow method or private company transaction method.

Looking for business valuation assistance in Cleveland or Akron? Contract our Business Valuation Group at 440-449-6800 for more information.

Most adults know the importance of having at least a basic estate plan in place. This normally includes a will, living will, life insurance, and maybe even a trust.  These are all good tools but like everything in life, change happens so change will be necessary to some, if not all, of these documents.

• Mistake #1: Not regularly reviewing your will.  A will outlines how property is to pass from the decedent to his heirs. For a young family, all property is normally left to a spouse and then to the children. If the children are young, the will usually directs any inheritance to them be held in a trust, until the children reach a particular age.  This is all well and good until a divorce, a death, or a marriage within the family. These life events may trigger a reason to make changes to who inherits and when they inherit.  If your will has not been reviewed following such a change, property may not be passed to the heirs you intend.
   
• Mistake #2: Drafting unclear documents.  Living wills spell out the types of treatments an individual would want or not want if they become incapacitated. If these documents are too vague and don’t cover all the many end of life scenarios, family members may not agree on the intent of what was written in a living will resulting in disputes.  Be sure to communicate to family your personal feelings about extending your life under various situations. Also, consider drafting a power of attorney for health care so someone is named as in charge of making health care decisions just in case disputes still arise.
   
• Mistake #3: Purchasing inadequate (or holding more than enough) life insurance.  Life insurance policies are usually purchased to provide coverage in the event the income provider or providers meet an untimely death. The amount of insurance should be enough to replace the annual income lost so that the family can continue to live as they have been accustomed. 
  
  Once children are grown and self sufficient and mortgages have been repaid, be sure to review your policies.  At that time, it might make sense to reduce or even eliminate policies. In addition, many policies were purchased years ago to pay for estate taxes. Under current law, if Congress doesn’t act to make changes, there are no federal estate taxes for those dying in 2010.  For those dying beyond 2010, the uncertainty of future laws make tax planning, which includes insurance, very tricky.
   
• Mistake #4: Not funding trusts.  A revocable trust allows the maker or grantor the ability to outline how property is to be distributed before and after the maker’s death.  This type of trust will avoid probate, which can be time intensive and costly. In addition, some estate taxes can be avoided if a credit shelter-type trust is included. All this planning works well but only if trusts are funded and titling of assets is proper for the outcome desired.  All too often the planning is done perfectly, but the trusts are never funded which takes the estate back into the probate courts costing time and money. As mentioned above, trusts also need to be reviewed to reflect current estate tax law. The planning which may have been smart for those dying in 2009 may not be for those dying this year and beyond under current law.

Have questions about your estate plan? Contact us at 440-449-6800.

Although the manufacturing industry is facing challenges (three main ones, in particular), there are ways manufacturers can adapt and succeed.  Click here to learn more.

For more information, contact our Manufacturing Industry Group at 440-449-6800.

The Ohio Commercial Activity Tax was fully phased-in as of March 31, 2009. For those taxpayers with Ohio gross receipts between $150,000 and $1 million, the tax is $150. For taxpayers with Ohio gross receipts over $1 million, the tax is $150 plus a .26% tax of any Ohio gross receipts over $1 million.

Several key changes include:

1.      The Ohio personal property tax has been completely phased out. For most businesses the final report was the 2009 personal property tax report.

2.      The Ohio franchise tax has been completely phased out. The filing of 2009 franchise tax report was the final report for both C-corporations and S-corporations. 

The Ohio Department of Taxation (“the Department”) has provided guidance on several changes to the due date of the minimum tax. Beginning 2010, the $150 annual minimum tax will be due no later than May 10^th of each year with the annual return for calendar year taxpayers or with the first quarter return for calendar quarter taxpayers, a change from the original February 9^th which will benefit most taxpayers.

The Department also provided some consistency for quarterly CAT filers. Quarterly CAT returns are now due the 10^th day of the second month following the end of the quarter or May 10^th [January 1 – March 31 quarter], August 10^th [April 1 – June 30 quarter], November 10^th [July 1 – September 30 quarter] and February 10^th [October 1 – December 31 quarter].

The Department also changed the date to cancel a CAT account. That date has been moved to May 10^th of the tax year. If a CAT account is cancelled by May 10^th, the taxpayer is not subject to the annual minimum tax. 

See the Department’s information release CAT 2009-01 - http://tax.ohio.gov/divisions/communications/information_releases/CAT/cat_2009_01.stm

Looking for assistance with State and Local Tax Issues? Contact us at 440-449-6800 or visit our State and Local Tax Services Web page.

Some of these opportunities may apply regardless of whether your business is conducted as a sole proprietorship, partnership, limited liability company, S corporation, or regular corporation. Other opportunities may apply only to a particular type of business organization. This Tax Letter is organized into sections discussing year-end, and year-round, tax-saving opportunities for:

1.      All businesses

2.      Partnerships, limited liability companies, and S corporations

3.      Regular (C) corporations

Tax planning for businesses also requires consideration of the tax consequences to the individual owners. Accordingly, we suggest you also review Tax Planning Considerations for Individuals Including Year-End Ideas.

Effective January 1, 2010, Ohio has made a few changes to the way sales of tangible personal property and taxable services are sourced. According to the Ohio Department of Taxation, the purpose of sourcing is to determine the location of the sale for sales tax purposes. If a sale is taxable, the sourcing of the sale will determine the appropriate jurisdiction’s tax rate for the seller to charge.

Below is guidance on the Ohio sales tax sourcing rules.

1. Ohio vendors who sell tangible personal property to Ohio consumers are required to collect sales tax based on where the order is received (origination) rather than the delivery location.  Those vendors who previously switched to destination sourcing are now required to switch back.   

Penalties will not be assessed so long as the vendors are compliant by April 1, 2010.

2. Sales of tangible personal property by out-of-state sellers to Ohio consumers will be sourced to where the consumer receives the tangible personal property. 

3. Sales of services (regardless of whether the provider is in Ohio or outside Ohio) should be sourced to the location where the consumer receives the service.

For a complete description from the Ohio Department of Taxation, please click here.

Looking for assistance with State and Local Tax Issues? Contact us at 440-449-6800 or visit our State and Local Tax Services Web page.

Location, location, location - the most important factor in the decision to lease (or to continue leasing) or to buy is the value of the location - low cost vs. an attractive, marketable, expandable, site.  Don't give up a flexible site (due to transportation alternatives and zoning, for example) for a low cost deal today.

Some considerations in the lease vs. buy quandry:

• Interest rates today and projected for tomorrow (favors buying)
• The power of negotiation in regards to lease terms (favors leasing)
• Ability to obtain local, state and federal grants and low-cost loans (favors buying)
• Flexibility of lease cancellations and going dark clauses (favors leasing)
• Appreciation and growth rate: Believe it or not, the slump in real estate values and construction starts really does represent a "correction," and not a "recession."  Look at values over the past 30 years, and "normalize" them.  You will find in most markets that a "normal" appreciation and growth rate annually is the net result. (favors buying)
• Facility expenses: As an owner, facility expenses are readily available, and paid monthly; a lessee may get an invoice at year-end for their share of facility expenses that may be unexpected (favors buying)
• Although the internet puts everything at our fingertips, having resources close to the location is imperative to attract the best talent (favors leasing)
• Consider your reporting requirements and tax strategy - there are vastly different definitions of tenant allowances, tenant improvements, inducements, rent holidays, etc. that can affect net operating income and debt covenants. (favors buying)
• Tax deductions and tax credits in the current environment may make buying more attractive, but don’t forget about your tax liability once those accelerated deductions go away (favors leasing)

Another important issue when determining lease vs. buy is the purchaser/renter's intention.  Is the site a stop-gap during slow growth, and capacity could soon be an issue?  Does the purchaser/renter view the site as an investment?  Is the building easily expandable, lending itself to a long-term hold?  Is building quality important?  Would the officers and directors be willing to relocate to the site? 

Just as buying your first home was the biggest decision at that time, so should the consideration of lease vs. buy for your business be taken seriously.

Have questions about whether your company should lease or buy space? Contact our Real Estate and Construction Group at 440-449-6800.

When you think of a crystal ball, what types of people come to mind? Prophets? Magicians? Shady fortune tellers? While all of these people are associated with the act of attempting to predict the future using a crystal ball, there is another group of people who still today rely on their figurative crystal balls whether they know it or not: business owners.

Every day, business owners must make estimates and guesses about the future of their companies with the intent to position themselves to take advantage of whatever opportunities may arise. Whether through preparing budgets for next year or creating 5 year projections for use in business planning, business owners often need to gaze into their crystal balls and attempt to predict the future.

Getting business owners to dust off their crystal balls is essential during the business valuation process. Owners or management are often hesitant to provide projections or estimates to business valuation analysts, sometimes under the notion that if the analyst has access to the company’s historical financial statements, they have all that they need to properly determine the company’s value. While historical financial statement analysis is a key component of any reliable business valuation, it is the future operating expectations of a company that truly drive its value.

Imagine being presented with the option to invest in either of two companies for the same price. Company A generated $10 million in annual cash flow up to the valuation date, but due to changes in the industry, is only expected to generate $1 million in annual cash flow going forward. Company B only generated $1 million in annual cash flow up the valuation date, but is expected to generate $10 million in annual cash flow going forward due to the development and release of a new product. Which company would you rather invest in? Obviously, considering the limited facts presented, the rational investor would choose to invest in Company B due to its superior operating expectations compared to Company A.

Value is driven by future operating expectations, not historical results. Only in cases in which management’s expectations are that future results will mirror the company’s historical operations can historical results reasonably be relied upon to determine a company’s value. Historical results can also be relied upon to determine the reliability of a company’s projections.

Therefore, if a business owner is in need of a business valuation, it is important that he or she dust off their crystal ball and spend some time thinking about the operating expectations for their company. While none of us can predict the future with any certainty, obtaining some sort of expectation for a company’s future operating results is essential to the development of any properly performed business valuation.

Looking for business valuation assistance in Cleveland or Akron? Contract our Business Valuation Group at 440-449-6800 for more information.