|
S Corporations Are a Better-Than-Ever Tax Shelter
TAX HOTline
(April 2005)
Plenty of Accountants
in Bartlett’s Family Tree?
Atlanta Business Chronicle
(March 18, 2005)
Sound-Off – Ruth Bartlett
Atlanta
Business Chronicle
(January 28, 2005)
Trust Restored?
Atlanta Business Chronicle
(January 28, 2005)
Smaller firms soaking
up bigger clients– Business improving in post-Enron
world
Atlanta Business Chronicle
(January 28, 2005)
No Escaping Far-Reaching Sarbanes-Oxley
Rules
Atlanta Business Chronicle
(March 12, 2004)
Moving On
Financial Planning
(March 2004)
CPAs Gearing Up for Growth
Atlanta Business Chronicle
(February 6, 2004)
Atlanta's Economy Stays Hot
Atlanta Business Chronicle
(February 6, 2004)
Persistence Pays Off
for Accounts Receivable
Atlanta Business Chronicle
(January 20, 2004)
Disappearing Tax Breaks
CBS MarketWatch
(December 2, 2003)
Your Money: 1-person 401(k)s
a new wrinkle
Atlanta Journal Constitution
(November 30, 2003)
Tax Endgame: AMT Not Just
a Worry for the Wealthy
Atlanta Journal Constitution
(November 30, 2003)
Tax Tips: Is my WorldCom
stock worthless?
Atlanta Journal Constitution
(September 29, 2003)
Tax Planning Ideas
By: Roger W. Lusby, III, CPA, CMA, AEP
(September 3, 2003)
The Client: Mid-Year Tax
Strategies - Paying Dividends
Financial Planning
(August 2003)
The SUV Tax Loophole
By: Roger W. Lusby, III, CPA, CMA, AEP
(August 1, 2003)
Some Still Await Tax Refunds
11 Alive News
(July 21, 2003)
Perfecting Your Proposal
Practical Accountant
(July 21, 2003)
The Accounting Profession:
Under Review
The Bottomline
(March 2003)
Tax Tactics
Atlanta Journal Constitution
(March 23, 2003)
Hotline callers hungry to
find ways to save
Atlanta Journal Constitution
(March 23, 2003)
Even as e-filing spreads,
many will procrastinate
Atlanta Journal Constitution
(February 16, 2003)
Turner’s Florida Tax
Path Familiar
Atlanta Journal Constitution
(February 5, 2003)
Accountants on Accounting
Georgia Trend
(December 2002)
New Planning Strategies
with Retirement Plans
The Tax Adviser
(November 2002)
CRTs - Using a Trust Beneficiary
The Tax Adviser
(November 2002)
SIMPLE Retirement Plans Become
Popular
TAX HOTline, Volume 22, Number 9
(September 2002)
Bloomberg
Annual Ranking of Independent Investment Advisors
Bloomberg Wealth Manager
(June 26, 2002)
New Tax Law May
Offer Some Potential Savings for Physicians
Physicians Financial News, Vol XX No 8
(June 15, 2002)
By Roger W. Lusby III, CPA, CMA, AEP
For years, S Corporation
status has been an effective tax structure. If you run
your company
as an S corporation, you
avoid the “double taxation”—first
to the corporation and then as dividends—that applies
to regular (C) corporations and their shareholders.
As S corporation shareholders, you’ll have any income
or loss incurred by the company passed through and taxed
or deducted on your personal tax return.
Also, you do not have to worry about certain other problems faced by C corporations,
namely, unreasonable compensation issues and the excess accumulated earnings
tax. To enjoy such tax benefits, S corporations must comply with various rules.
Fortunately, some of the restrictions were eased in the American Jobs Creation
Act of 2004.
Result: The tax advantages of electing S corporation status have increased
as of 2005. More Shareholders
The new tax law relaxes the ownership constraints placed on S corporations.
S corporations can have no more than 100 shareholders (up from 75). Moreover,
family members include common ancestors, lineal descendants, and spouses
and former spouses.
Example: You are the founder of an S corporation. You have three children,
all married, and six grandchildren. You, your spouse, your children, their
spouses, and your grandchildren (14 individuals in all) own shares of your
S corporation.
This group will count as one shareholder in determining the 100-shareholder
limit. Generally, the election to combine family members may be made by
any member of the group. This election is effective until terminated.
Key: Increasing the shareholders limit and allowing family members to be
combined will make S corporations more flexible. As a result, you could
distribute shares
to more employees to enhance their loyalty. Trust Tactics
Family members may hold stock directly or as beneficiaries of certain types
of trusts, such as an electing small business trust (ESBT) or a qualified
subchapter S trust (QSST). An ESBT can have multiple beneficiaries, such
as the creator’s children and spouse, while a QSST must have one beneficiary.
Unlike a QSST, the current distribution of all income is not required for
an ESBT. You may want to use an ESBT for children or a financially unsophisticated
spouse.
Example: You create an ESBT to hold some of your company’s shares.
Your three children and six grandchildren are named as beneficiaries. Under
the
new law, all nine of them may be grouped as one shareholder, along with you
and your spouse.
Exception: Each person entitled to receive distributions from an
ESBT is treated as a shareholder during the period in which distributions
are received.
However,
the new law clarifies that unexercised powers of appointment will be disregarded
in determining potential current beneficiaries of an ESBT.
Example: You create an ESBT, naming an unrelated trustee. The trustee
has the right (but not the obligation) to distribute current income
among your
three
children, who are trust beneficiaries. In this situation, your three
children can be combined with other family members and be treated
as one shareholder.
However, if the trustee must distribute to your three children, each
one of them will be treated as one of 100 permissible shareholders.
Extra time: The new law also extends the time in which an ESBT can
dispose of S corporation stock after an ineligible shareholder
becomes a potential
current beneficiary. The limit is now one year, up from 60 days.
Example: A foreign taxpayer is named as a current beneficiary of an
ESBT. Although the trust may continue to exist, it must dispose of
its S corporation
stock
because foreigners cannot be S corporation shareholders. Under the
new law, the ESBT can take a year to dispose of the stock.
Key: The new rules increase the appeal of ESBTs, which provide much
greater estate planning opportunities, compared with other types
of trusts eligible
to hold S corporation shares. However, all income in an ESBT is taxed
at 35%. Loss Leaders
As mentioned above, S corporation losses can be taken on personal tax returns.
Such losses are limited to your basis in the S corporation.
Example: You are the 75% owner of an S corporation that reports
a $100,000 loss this year. Therefore, up to $75,000 may be
deducted on your personal tax
return. However, you basis in the company (amount of cash contributed plus
shareholder loans) is only $50,000. Thus, you can take a $50,000 current
deduction and carry the $25,000 excess loss forward to future
years. Old
law: Such losses must be used by you, the shareholder who
incurred the loss.
New law: In the case of transfers to a spouse, or to a former
spouse as a result of divorce, any suspended losses will automatically
shift to the recipient
of the shares.
Key: This rule may make a suspended S corporation loss more valuable
in divorce proceedings, strengthening your negotiating position.
Another new rule regarding suspended losses involves QSSTs. (In
a QSST, the income beneficiary is treated as the owner of the
portion of the
trust that
consists of the S corporation stock.) A QSST owes tax on the disposition
of its S corporation stock.
New law: Now, any suspended losses may be deducted when a QSST
disposes of S corporation stock.
Key: This provision makes owning S corporation stock via a QSST
more appealing because suspended losses can be deducted, providing
more
flexibility for
S corporation owners. Passive Income
S corporations are subject to certain “passive income” rules. Investment
income and dividends are considered to be passive income. Over certain levels, “excess” net
passive income is subjected to corporate tax. In some situations, the presence
of excess passive income can result in a company losing its S corporation election.
New law: If a bank or another financial company requires an
S corporation to hold certain assets, perhaps as a condition
for a loan, income produced by
those assets won’t be subject to the S corporation passive investment
rules. Inadvertent Expirations
Some actions by an S corporation will invalidate its election and terminate
its status as an S corporation.
Loophole: In some cases, waivers have been granted, allowing S corporation
status to remain in effect.
Example: XYZ, an S corporation, transferred some shares to a shareholder’s
IRA, not realizing an IRA is an ineligible shareholder. As soon as XYZ realized
the error, the shares were repurchased from the IRA. No tax avoidance was intended,
so a waiver was granted, allowing XYZ’s S corporation status to be maintained.
New law: Rules regarding such waivers have been extended to “QSubs”—domestic
corporations that are 100% owned by an S corporation parent, which elects to
treat the subsidiary as a QSub to reduce the parent company’s administrative
burdens.
Result: It has become much less restrictive to operate your business
as an S corporation.
back to top
By Karen Dean
For Ruth Bartlett, accounting isn’t just a job. It’s almost
become a family tradition. A partner at Frazier & Deeter LLC, she has
a family filled with skilled number crunchers. The middle child of three
girls, Bartlett, her older sister, and younger sister all graduated from
The University of Georgia with accounting degrees. Her sisters took things
one step further. Both married accountants. And the single Bartlett? “I
have a rule that I don’t hang out with accountants,” she joked. Frazier & Deeter is the last stop in a career that included early
years at both PricewaterhouseCoopers LLP and Laventhol & Horwath. With
15 years at Frazier & Deeter, she plans to work “until I drop.” As
manager of the firm’s assurance services section, Bartlett focuses
on accounting and auditing. Her clients cover a wide range of industries,
and she specializes in the hospitality and real estate industries.
Bartlett has also been very active in the Georgia Society
of CPAs, and in 1993 had the distinction of being elected the organization’s first
woman president. That same year, she was also named the first woman partner
at Frazier & Deeter. With the increase of women in the profession,
Bartlett has seen a definite shift in attitude toward female employees. “Women
have been recognized as valuable assets, “ she said. “Firms
finally realized the need to be more flexible on things like alternative
work schedules, or part-time work. There’s now more of a change toward
accommodating a work/life balance.
back to top
Atlanta Business Chronicle asked prominent
accountants about changes in their field.
Affiliation/Title: Frazier & Deeter
LLC, head of assurance services (1.)What changes will occur in 2005 as the accounting profession
continues to respond to Sarbanes-Oxley?
Changes will occur as the marketplace reacts to the failure
of some public companies to comply with the requirements
of Sarbanes (2.) To what do you attribute the recent upsurge in undergraduate
accounting majors?
The accounting industry is “hot” right now. (3.) Has the outsourcing of accounting services to foreign
countries impacted the Atlanta accounting community?
Not to a large extent. (4.) What will be the most prosperous sectors of the accounting
field in 2005?
Overwhelmingly, assurance services are where the
most growth is occurring. Auditing, Sarbanes-Oxley
compliance and forensic
accounting continue to experience growth.
back to top
By Tom Barry
Welcome to the World of Accounting in 2005. With scandals
waning and standards waxing, accounting firms work to reclaim
their stature.
After the accounting scandals of several years ago, Big Four
accounting firm Deloitte & Touche LLP created a chief
ethics officer position, set up an ethics hotline and mandated
ethics training for its 120,000 employees worldwide (30,000
in North America).
Employees must take a two-hour ethics course online and
spend another four hours in the classroom. "
The training focuses on case studies and how to work through
problems in an ethical manner," said Guy Budinscak,
managing partner of Deloitte's Atlanta office. "It brings
to the forefront many things we were doing right already,
helps people figure out how to solve ethical dilemmas, and
tells them where to go to get help. "
It's really a whole support system on ethics," he said. "Anybody
who works here can report an incident and do so anonymously,
and there's a choice of places to go with any concerns." Welcome to the World of Accounting in 2005. Enron and WorldCom
are names that will live in business infamy, associated
with duped shareholders. Arthur Andersen, once one of
the Big
Five accounting firms, imploded along with Enron. Reacting to public outrage, Congress in 2002 passed the
Sarbanes-Oxley Act, which set strict disclosure requirements
for publicly
traded companies, created a powerful oversight board to
discourage irregularities, made key executives vouch
for financial statements
and established criminal penalties for wrongdoing. It also
prohibited accounting firms from providing specified consulting
services to companies they audit. Accounting firms, meanwhile, scrambled to regain the public
trust. Have they?
"
Certainly people are talking a different line, and actually
I think things are changing, with the real driver being the
oversight board," said the University of Georgia's
Michael Bamber, referring to the Public Company Accounting
Oversight
Board (PCAOB) birthed by Sarbanes-Oxley. Bamber, who holds the Heckman Chair of Public Accounting
in UGA's Terry College of Business, noted that legislation
requiring publicly traded companies to have audited financial
statements was passed by Congress in the 1930s. "
It was a quid pro quo," he said. "Auditing firms
essentially were guaranteed that job in return for protecting
the public's interest."
But over time, especially in the go-go 1990s, auditors
increasingly sold consulting services to the same firms
they audited,
creating major conflicts of interest. Auditing came to
be viewed as a foot-in-door means to upsell other, more
lucrative
services. "
The big firms sort of lost track of their central auditing
function," Bamber said. "They called themselves
professional service firms, and their Web sites didn't much
mention auditing. But that's come back a lot now."
Siva Nathan, associate professor of accountancy at Georgia
State University, believes that trust has been restored,
pointing to the growing number of students studying accounting
today. "
If the trust wasn't there, you wouldn't have so many students
entering the profession," he said. "
Accounting firms are now very careful about what type of
nonauditing work they do for their clients," Nathan
said. "Plus, these days, boards of directors will hire
an auditor only as an auditor. It isn't able to do anything
else for the company it audits." The major accounting firms have had varying reactions to
the troubles in the industry. New initiatives launched
"
We've taken every opportunity to talk about the profession
and the issues and tobe very open and transparent about what
we're doing," said Tim Bentsen, managing partner of
KPMG's Atlanta office. "That includes being very positive
and proactive with PCAOB (officials), giving them full access
and cooperating with them fully as they develop their processes.
We understand that we now live in a new, regulated environment." KPMG LLP -- a Big Four firm along with Deloitte, PricewaterhouseCoopers
LLP and Ernst & Young LLP -- also has significantly boosted
employee training (including required annual training on
ethics), created a vice chairman of risk and regulatory matters,
and updated its code of conduct.
The firm also launched its 404 Institute, which stages seminars
on Section 404 of Sarbanes-Oxley (the formidable compliance
hurdle that pertains to internal controls within public companies).
The new entity mirrors KPMG's Audit Committee Institute,
begun in 1999 to bring clients and auditors together to discuss
key concerns. Bentsen said outreach efforts have struck a chord.
"
Our round tables are not only about understanding the new
rules but practical ways to apply them," he said. "Both
institutes have been very well-received by our clients." Compliance a priority
Certainly Sarbanes-Oxley weighs heavily on executive minds.
KPMG recently surveyed 80 senior executives of Atlanta-area
public companies. Ninety-five percent of those surveyed listed
compliance with the act as a priority, and 34 percent said
it was their highest priority. Eighty-seven percent believed
their company's ethical "tone" was a "very
important" factor affecting stock price. KPMG, which has 18,000 employees in the United States and
100,000 worldwide, spun off its consulting business in
early 2001, before the scandals broke, Bentsen said. "
We were seeing the conflicts that were arising," he
said. "The writing was on the wall, and luckily we got
out ahead of the game. Today we're a lean and mean accounting
firm." John Knapp, president of The Southern Institute for Business
and Professional Ethics in Decatur, believes the jury is
still out on whether public trust has been restored. Knapp said auditing is more complex with Sarbanes-Oxley,
yet corporations needing an auditor "with huge resources
and deep technical know-how" have fewer choices than
before, given Andersen's collapse and with other firms scrambling
to avoid conflicts of interest. Knapp cited a federal study that reported the Big Four audit
97 percent of public companies with sales over $250 million.
The report expressed concerns about limited competition and
called the audit market an "oligopoly." "
The question is whether the (large) firms are able to consistently
provide the high quality of audit services needed to assure
the integrity of the financial markets," Knapp said. "Some
of them have taken on substantially more audit business in
the last two years, even as the audit process has become
more demanding and complex. "
Yet they still place a high priority on growing their nonaudit
fees in every way possible under the new rules," he
said. "Audits are less profitable and riskier than many
of the services they sell to their nonaudit clients." PricewaterhouseCoopers, which has 125,000 employees worldwide,
has had an ethics officer and helpline in place for 10
years now, well before the scandals broke, said Mark
Friedman,
U.S. experienced recruiting leader for the company. "
It's something we've been doing all along," he said. "We
feel very confident that ethics training is sufficiently
embedded in our core training programs. So we haven't seen
the need for new initiatives, only ongoing enhancements of
existing efforts." Deloitte didn't spin off its consulting business, instead
focusing its consulting on companies it doesn't audit. "We
don't audit roughly 75 percent of the public company market," said
Budinscak. "It's those companies we provide our consulting
services to." A work in progress
Budinscak believes that the industry's well-chronicled
woes painted accounting firms with too broad of a brush. "
I believe 99 percent of the people in this profession have
the highest ethical character," said Budinscak, adding
that restoring trust remains "a work in progress" but
that the industry is stronger after having gone through its
travails. "
We've all been doing a lot of introspection and belt-tightening
to make sure that we comply not only with the rules and regulations
but the spirit behind them," he said. Beyond its in-house initiatives on ethics, Deloitte also
sponsors ethics training in Junior Achievement programs across
the country.
"
The goal is to make sure that youngsters understand that
there's a good way of doing business and a bad way," Budinscak
said. One legacy of the scandals is that smaller auditing firms
have landed business they didn't get before. "
Our firm grew 26 percent this (past) year," said David
Deeter, managing partner of Frazier & Deeter LLC, a 90-employee
CPA firm in Atlanta. "The Big Four firms are so focused
on doing a good job with public companies that they just
don't have the time for privately held ones. It's ended up
helping us a lot." Jim Howard, managing partner of Smith & Howard, a 60-employee
CPA firm in Atlanta, tells a similar tale. "
The Big Four have their plates full, what with all the Sarbanes-Oxley
compliance. We've had opportunities we otherwise would not
have had."
GSU's Nathan takes the long view of an age-old profession. "
I believe accounting's future is very bright," he said. "By
law, public companies have to be audited. Besides that, these
things go in cycles. There will always be scandals, and the
profession goes on. Arthur Andersen was very, very unusual.
Something like that doesn't happen very often."
back to top
By Steven Sloan
The collapse of accounting giant Arthur Andersen LLP has
created a flood of big-name clients flowing into small
and midsized accounting firms.
Many midsized firms are taking on larger clients that had
been handled by the Arthur Andersen-level firms for decades.
These firms, in turn, have had to let go of some of their
smaller clients to make room for the larger accounts.
This restructuring may have been a difficult adjustment
for some accountants who have incurred higher costs,
but it means
great business for Atlanta's smaller accounting firms,
such as Williams, Benator and Libby LLP. "
This creates a great opportunity for us. It may seem small
for some of [the larger
accounting firms] but this is our target market," said
Bruce Benator, managing partner at the firm. David Deeter, managing partner at Frazier & Deeter LLC,
echoed that sentiment. "
This is absolutely great for us," he said. "There's
no doubt that Arthur Andersen was a big part of this trend." In this restructuring, it seems as if many of the firms have
won something. Guy Budinscak, managing partner at Deloitte & Touche
LLP in Atlanta, said losing the smaller clients has helped
the firm become more efficient.
"
We've done a good job of analyzing clients' portfolios and
have moved away from those clients," he said. Budinscak added that increased regulation of public companies
means accounting firms now spend more time on fewer clients.
"
To audit a public company today, which is subject to Section
404 of Sarbanes-Oxley, is more intensive than ever before.
It requires a higher leverage and drives the cost of auditing
up," he said. Some of the smaller clients of the larger firms realize
they don't need that specialized service and move on
to a smaller
firm, Budinscak said.
Benator's firm has 40 employees and does not take on public
companies as clients. The firm has been getting the new,
larger clients for about a year and a half. Most of his
new clients have been in the nonprofit sector.
Deeter employs 90 people at his firm and said he has been
taking on clients from all sectors, including private equity
and manufacturing companies. In fact, the firm's workload
has gotten so heavy that 30 new employees were hired in
2004 to help manage it. But moving an organization's accounting to a new firm can
be a sensitive task. Benator said that most clients do
not take offense when their old accounting firms can
no longer
take care of them. "
My experience has been that they're happy. They're getting
more attention," he said. Budinscak said Deloitte has not cut off a large number
of smaller clients, mostly because the company assesses
its
clients often, he said. But when a transition has to be
made, Budinscak said all the parties work together to
find a solution. "
In our case, it's always collaborative. It's not a matter
that we go to a client and say that we don't want to serve
you. We ask if this is the best use of your resources," he
said. In the past several years, Budinscak said they have lost
fewer than 50 clients to smaller firms. As those in the accounting industry prepare for the future,
it seems many small-firm accountants are not concerned that
the clients they gained from the larger firms will go away
any time soon. "
We think we'll keep all of them," Deeter said. Whether this trend will continue indefinitely, however,
is not certain.
In the end, the restructuring will help the accounting
industry because it will enhance efficiency, Budinscak
said. It might
also help the industry move on from the black eye of the
recent accounting scandals. "
It's suffered reputational damage over the past few years
but today people look at the profession with new-found respect," he
said. "But we understand there's lots of work left to
be done." back to top
By Bobby Hickman
It’s becoming a tidal wave’
Business executives just starting to gather
their teams around the table to tackle the latest reporting
requirements for the Sarbanes-Oxley Act of 2002 may want to
think about getting a bigger table.
Section 404 of Sarbanes-Oxley means compliance
isn’t just for financial folks anymore.
Sarbanes-Oxley, designed to curb corporate fraud, already
requires that chief financial officers and CEOs certify
a
public company’s internal controls. But Section 404
means companies must document, test and have their auditors
sign off on company procedures affecting the numbers on their
annual reports as well. “Sarbanes started in the financial area with CFOs”,
said David Brookmire, president of Corporate Performance Strategies
Inc. “With Section 404, it is spreading out into information
technology, human resources, even sales training. It’s
becoming a tidal wave.”
Nailing Jell-O
It doesn’t help that Section 404 is somewhat
of a moving target. The SEC just extended the dates for companies
to include Section 404 requirements in annual reports, from
June 15 to Nov. 15 for companies with more than $75 million
in outstanding shares. For smaller firms, the date moves from
April 15, 2005 to July 15 next year. However, the Public Company
Accounting Oversight Board still is finalizing the standards.
“Large companies have been going great guns for quite
a while,” said Mark T. Miller partner in charge of business
consulting at Frazier & Deeter LLC. “Smaller companies
are just getting started.”
Robin Hensley of Personal Construction LLC, who chairs
the audit committee for Florida-based Superior Uniform
Group Inc.,
said the company will have to make a report on internal
controls in its next annual report. “We can’t wait until
a couple of months beforehand, so we’re getting an early
start now.”
The costs can be steep. A survey by Financial Executives
International (FEI) shows total costs of first-year compliance
with Section
404 could exceed $4.6 million for the largest U.S. companies.
The average across all companies was nearly $2 million.
FEI
said only 25 percent of the companies responding have already
deployed a permanent solution for Section 404.
Miller said even smaller organizations are spending 15
to 30 man-weeks to comply. “If you don’t have the
resources internally – and most companies do not –
it’s significant dollars,” he added.
Hensley said at Superior, Section 404 work is a companywide
project. “I don’t know [the exact cost], but it
is going to take some considerable staff time to do this.”
Questions raised include “What progress
are we making to comply?” and “Do we have the
extra manpower – and at the right levels – to
proceed?” she said.
Miller said his clients want more than just “hard-core
audit and control backgrounds” for their compliance
teams. “They need business process knowledge as well.
We’re bringing in blended teams… that also include
process engineering, technology and reporting experts.”
This means you
Although Section 404 compliance is optional
for private companies, some may find themselves expected to
meet the requirements anyway. Miller noted more companies
are being asked to follow “the spirit of Sarbanes “
by bankers and investors.
And companies that want to go public “have to address
it on the front end. You can’t wait until you’re
listed to comply.”
Although most areas of a company should contribute to 404
efforts, several advisers say involvement is lacking. Nearly
half of all companies ignore Internet technology in their
Sarbanes-Oxley compliance efforts, according to a survey
by
The Hackett Group. The business advisory group says IT, functional
areas and business units need to evaluate risks and implement
controls for Sarbanes-Oxley.
Brookmire, a human resources consultant, estimates 80 percent
of human resources departments are not involved in Sarbanes-Oxley
implementation. He said a typical area of HR concern is outsourced
401(k) plan administration. Human resources professionals
must be sure their 401(k) vendor is following the proper
guidelines
from the IRS and the Employee Retirement Income Security
Act (ERISA)—and that they have documented processes and
controls in place, Brookmire said.
Accounts payable also “needs to verify and document
that controls are in place,” said Rob Rogers, vice president
of content development at The Accounts Payable Network.
“Internal controls over cash disbursement are in place
for AP,” he said, “but now they must be clearly
documented throughout the organization."
“Although we hear grumbling about Sarbanes-Oxley, what
it really says is that you need to follow good business practices,”
Rogers added. “For many companies, it’s a small
boon of sorts. They can shake up their systems, undergo a
thorough review and find any gaps. They’ll get some
benefit from that process.”
Training
Sales training is another area of concern for
Brookmire. He said there have been cases where sales teams
made promises or quoted terms that the company could not honor.
When the sales fell through, companies had to restate revenues
and earnings.
Hensley, the audit chairman, said Superior has tight inventory
and accounts payable controls, “but we need to look
at documentation. For example, some of our overseas plants
will need procedures written in two languages.”
Hensley has chaired Superior’s audit committee for six
years. She attended four days of Sarbanes seminars last year
alone.
“Everyone spends more time on governance than we used
to – and we will even more with Section 404,”
she said.
On the brighter side, once a company becomes compliant
the first time, annual certification should become easier.
Frazier & Deeter’s Miller said, “It should be a more
structured process to follow the next time.”
Unfortunately, regulators and legislators could bring more
changes to Sarbanes-Oxley. “Hitting the target is not going to get any easier,”
Miller said. “More likely, any changes will bring more
stringent rules. Some of the wounds that caused [the act’s
passage] are still fresh.” back to top
By Donald Jay Korn
Williamsville, New York, is just northeast
of Buffalo, so it’s not surprising thata some of Allan
Lipman’s clients have two homes, including some in warmer
locales. “One of my clients had been spending six months
here and six months in Palm Beach, Fla.,” says Lipman,
a partner in the Willimasville law firm of Lipman & Biltekoff.
“Recently, he changed his pattern to spend more time
in Florida.” The goal, according to Lipman, is to establish
Florida as his “domicile,” or legal residence.
“The main reason for this decision is to reduce his
estate taxes,” Lipman explains. “He’s a
widower, 85 years old, with a hear condition and an estate
of about $5 million. His accountants have told us that his
estate would owe more than $400,000 to New York if he dies
as a resident here. That figure would be much less, however,
if he become a resident of Florida instead.”
Many financial planners and their clients also may be rethinking
relocation these days because of a quirk in the 2001 tax law.
That law reduced (and may even eliminate) the impact of federal
estate taxes. As federal estate tax wanes, though, state taxes
are waxing. In order to avoid being whacked, clients may want
to consider various strategies, including a change of address.
“The 2001 tax law hurt the states,” says Bob Pomeroy,
a partner in the law firm of Goodwin Proctor in Boston. According
to one estimate, states stand to lose $100 billion in estate
tax revenues over the next 10 years.
These losses result from a reversal of the existing estate
tax system. “Prior to 2002, a decedent’s federal
estate tax obligation was reduced by a credit for state taxes
paid,” explains Jim Cundiff, a partner in the law firm
of McDermott, Will & Emery in Chicago. Many states then
pegged their own death tax to allowable federal tax credit.
Georgia is one such piggyback state, says Roger Lusby, a tax
partner at Frazier & Deeter, an accounting firm in Atlanta.
“The state tax credit on the federal estate tax return
is the state estate tax,” he notes. “A copy of
the federal estate tax return and the appropriate payment
(equal to the credit) is sent in to the state of Georgia.”
The amount of the state tax paid is reduced from the amount
sent to the IRS, so an estate’s total tax bill is unaffected.
“Previously, the maximum credit was 16%, while the top
federal estate tax rate was 55%,” Pomery says. “For
large estates, the executor would send a check to the state
for an amount equal to the 16% credit and the other 39% would
go to the federal government.”
The 2011 tax act changed the rules by phasing out the credit.
For decedents dying in 2004, the credit will be only 25% of
what it was ( a 4% maximum); the credit will disappear after
2004. “In about half of the states, all state death
taxes will be eliminated as of January 2005, unless some action
is take,” Pomeroy reports.
While some states like Georgia have retained the existing
rules so far, at leas 18 others have passed their own estate
tax laws. “These states have chosen to “decouple”
from the federal system because of huge revenue losses,”
says Marty Shenkman, a lawyer in Teaneck, N.J. “Every
state reacted differently, so the rules differ considerably.”
back to top
Atlanta Business Chronicle
By Meredith Jordan
Atlanta’s top accounting
firms are gearing up for big growth in 2004.
The Atlanta office of KPMG LLP has added eight partners
since last year. Deloitte & Touche LLP’s office here expects
revenue growth of 25% this year, on top of significant expansion
last year. PricewaterhouseCoopers LLP in Atlanta has seen
a 20 percent annual compound growth in its revenue the last
three years. That growth is going to continue, said Tim Bentsen,
managing partner of KPMG. “There’s probably more
work out there than all of the Big Four can handle today,” he
said.
The primary engine behind the growth remains the Sarbanes-Oxley
Act of 2002, sweeping legislation passed in the wake of accounting
scandals at Enron Corp., the Houston-based energy trader.
Although the legislation was passed in 2002, it is becoming
law in stages.
Turning down work?
Meanwhile, the number of resignations, or accounting firms
stepping down as auditors of public companies of their own
volition, also is on the rise, said Jonathan Hamilton, editor
of Public Accounting Report, a national newsletter. “The
Big Four are able to be selective about who they work with,” he
said.
Clients who don’t meet minimum pay requirements or don’t
meet the “risk profile” of the accounting firm
are vulnerable to being dropped, Hamilton said.
Other firms are benefiting from Sarbanes-Oxley for different
reasons. “The Windham Brannons, the Frazier & Deeters,
the Porter Keadle Moores, those firms are uniquely positioned,”
Hamilton said, referring to smaller firms in Atlanta. Ranked
number of professionals in Atlanta, Windham Brannon P.C. placed
13th on the Chronicle’s Jan. 16 list, Frazier & Deeter
LLC ranked 10th, and Porter Keadle Moore LLP ranked 20th.
back to top
Atlanta Business Chronicle
By Jim Lovel
Local economy expanding
Atlanta created about 61,800 new jobs in 2003. Nationally,
the number of jobs decreased by 74,000 a number buoyed by
the creation of 278,000 jobs during the last five months of
the year.
All but about 1,000 of the new jobs in Georgia are in Atlanta,
and more than half of them are in the professional services
industry, which includes lawyers, accountants, engineers,
consultants, architects and computer technicians. Those jobs
usually pay more than jobs in the manufacturing and service
industries, Miller said.
Roger Lusby, a partner in the Atlanta accounting firm of Frazier
& Deeter LLC, said he is seeing the growth at his company.
The firm hired 14 new employees last year, seven of them to
replace employees who left the company. The firm already hired
four more this year and plans to hire at least three more,
he said. Currently, the firm has about 70 employees.
The expansion is a stark contrast to the past few years, Lusby
said. The firm averaged about one new employee in 2001 and
2002, he said.
We saw a large increase in demand for our services last year,
Lusby said.
back to top
Atlanta Business Chronicle
By Karen Dean
Wine and whiskey get the better with age. However, debts are
a different story. The older they are, the harder they are
to collect. Your business can’t survive on payment promises,
but following a few rules will make managing accounts receivable
as smooth as a glass of chardonnay.
Have a good system
Have a workable system in place and use financial software
to track payments and expenses. Even simple off-the-shelf
software provides detailed financial reports.
It’s also important to have the right person in the
job. Money issues make some people uncomfortable. Customers
deserve cordial and courteous treatment, but certain situations
may call for a firmer approach.
Preparation
No
financial institution would lend money without reliable
background information. The same should be true in
your company.
Use available resources to establish creditworthiness
before the sale. Business credit reports obtained
through firms
such
as Dun & Bradstreet show the company’s credit
and payment history, as well as any previous liens
of lawsuits.
If the history is minimal or questionable, consider asking
for a retainer or deposit on goods. For example,
a 50 percent deposit ensures the customers return,
while reducing your
financial risk.
Deliver the goods
“The secret to collecting your accounts is giving good
service,” said James Frazier Jr., partner at Frazier
& Deeter LLC, an Atlanta accounting firm. “When
clients get the bill, if they feel you’ve gone out of
your way to give good service, meaning prompt, polite and
correct, they’ll feel an obligation to pay. If it’s
a choice between paying you and someone who didn’t give
good service, they’ll pay you first.”
To minimize potential problems, Frazier suggested
a follow-up phone call. If there is a problem,
deal with it immediately.
“Too often, if the customer is dissatisfied, the service
provider is afraid to deal with the issue head-on,”
he said. “So they put off calling them. But the quicker
you deal with the problem, the quicker the money comes
in.”
Consider outside sources
Not every company wants to deal with billing
issues. For them, passing the buck might be the
right option
if
they don’t
mind paying a fee for the convenience.
Factoring offers many different options and
payment terms, with charges and fees deducted
from money
collected.
Follow-up
The most critical part of the process is
keeping in touch with the customer. No
account should
go past
30 days without
an inquiry. “Sometimes there’s an explanation,” Potter
said.
If the debt remains unpaid, Klein suggested
having the owner or manager step into
the picture. Document
all your
collection
efforts. “Memories fail,” said Rick Rachmeler,
a vice president at T.D. Farrell Construction Inc. “If
it’s in writing, there’s a record. It’s
hard for someone to claim they weren’t aware
of something you have in a printed e-mail record.”
Offer to set up payments,
or waive interest and penalties if the customer
pays in
full by a certain
date. Whatever
the
method, perseverance and consistency
are key. Pruitt admits to calling
several times
a day
if necessary.
Rachmeler summed it up more simply. “If you have
to pester, then pester.”
back to top
CBS MarketWatch
By Andrea Coombes
More taxpayers to be hit by AMT; plus year-end AMT tips
SAN FRANCISCO (CBS.MW) -- The tax cuts of 2003 may be a boon
to the economy and provide welcome padding to some taxpayers'
wallets, but for others those cuts will prove to be a mirage.
That's because lower tax rates will push more
people into paying the Alternative Minimum Tax, rendering
some of those much-heralded breaks moot.
An estimated 2.5 million U.S. taxpayers will
be caught in the AMT's noose when they file their 2003 taxes,
rising to 3 million in 2004, according to the U.S. Congress'
Joint Committee on Taxation. That's up from about 1.1 million
in 2001, according to the IRS' most recent figures.
On its face, the AMT is simple: You pay the
higher of the tax owed under the regular income tax system
or under the AMT. Lower regular rates make it more likely
that your AMT, which doesn't allow as many deductions, will
be higher.
But there the simplicity ends. If you think
the AMT might apply to you, the recommended strategy is perhaps
a fate worse than AMT itself: Do tax projections under both
systems for 2003 and 2004. Understanding your tax situation
for both years will help you determine how to proceed now.
"People that don't plan right now could
be in for an unpleasant surprise come tax time," said
John Battaglia, a director in the private client advisers
practice at Deloitte, a tax and financial services consulting
firm. "It's very important to do a projection. I can't
stress that enough."
Pushed over the AMT edge
Taxpayers who exercised incentive stock options,
claim a lot of miscellaneous itemized deductions or personal
exemptions or live in high-tax states such as California,
New York, New Jersey or Pennsylvania are particularly likely
to pay the AMT.
"What I've seen in most cases is that (an
individual's) income tax is almost equivalent to AMT. It's
maybe a few hundred to maybe a few thousand dollars above
AMT. It doesn't take a whole lot of ISO (incentive stock option)
exercises to generate AMT," said Kent Noard, a certified
financial planner and enrolled agent based in San Jose, Calif.
Also, those earning income mainly from capital
gains and dividends "should be concerned," said
Tom Ochsenschlager, a partner with Grant Thornton, an accounting
and business advisory firm.
The beneficial 15 percent rates apply under
the AMT as well as the regular tax code, but the lack of deductions
pushes many into the AMT, he said.
AMT tax rates are 26 percent on alternative
minimum taxable income up to $175,000, and 28 percent on income
over that amount.
AMT-free
There are those who need not fear. "Anybody
who has adjusted gross income less than the AMT exemption
probably doesn't need to worry," said Roger W. Lusby
III, a partner with Frazier & Deeter LLC, a certified
public accounting firm.
Those exemptions, designed to shield middle-income
people from the AMT, were recently raised to $58,000 for married
couples filing jointly, $40,250 for single filers, and $29,000
for married filing separately. (These exemptions start phasing
out for married filers earning $150,000, single filers earning
$112,500, and married filing separately taxpayers at $75,000.)
If your adjusted gross income is higher than
the exemption amount but all of your income is from wages,
you're still likely to be free of the AMT, Ochsenschlager
said.
But, he said, "it's awfully difficult to
generalize" when it comes to the AMT.
Consider the following year-end strategies when
faced with the AMT:
Flip the usual end-of-year strategy
The common tax advice as year-end approaches
is to push income, such as a year-end bonus, into next year
and pull deductions into this year, perhaps by prepaying a
mortgage or a state tax bill.
For those in the AMT, the opposite is true.
"If you find yourself in AMT in 2003, you would not want
to prepay your state and local income taxes. You're not going
to get the benefit of that deduction in AMT," Battaglia
said.
The same holds true for prepaying investment
advisory fees or real estate taxes, a strategy that makes
sense under the regular tax code but not under the AMT.
As for income, "if I'll be in AMT in 2003
but not in 2004, I may want to accelerate income into 2003
because I'm only paying 28 percent on that. Shifting income
from one year to another, you could benefit from the lower
AMT rate," Battaglia said.
Consider a disqualified disposition on incentive
stock options
Many people hold onto their exercised incentive
stock options for at least a year after exercise to be eligible
for beneficial long-term capital gains rates when they sell.
However, while exercised (but unsold) options
are not taxed under the regular code, they are under the AMT,
with the tax incurred on the difference between the grant
price and the value of the stock on the day you exercised
"If the stock has decreased in value it
may be to your advantage to do a disqualifying disposition
before the end of the year," Battaglia said. That means
you sell the stock before you've been able to realize the
more beneficial long-term capital gains rates, but the sale
triggers a better AMT calculation.
Instead of being taxed on the difference between
the grant price and the price at the time of exercise, you're
taxed on the difference between the grant price and the sale
price, which is lower (if the stock price has dropped).
"You'd probably want to do this if the
stock decreased in value," Battaglia said. "If the
stock went down, you'd pick up less income."
One caveat: The sale has to take place in the
calendar year ending Dec. 31 to effect a change in your AMT
calculation. "They may think 'I exercised in April so
I can wait until almost next April to decide about making
a disqualifying disposition," said Bruce Brumberg, editor-in-chief
of MyStockOptions.com, an education source on all things related
to stock options.
"That's true. However, since the calendar
year ended with you still holding the stock, for tax purposes
you do still have an AMT calculation."
Also, remember that selling stock options then
incurs tax under the regular code. "Seek the advice of
a tax professional," Battaglia said. Also, check MyStockOptions.com
for more information.
Avoid AMT traps
The AMT has some nasty surprises. For instance,
interest on a home equity loan can only be deducted if the
funds were used to buy, build or remodel your home.
"For example, let's say I took out a home
equity line and I paid $6,000 of interest on that line and
I used it for personal purposes," Lusby said. "That
$6,000 is deductible for regular income tax purposes but not
deductible for AMT purposes."
Also, interest on a type of municipal bond known
as "private activity" bonds is not tax-free under
the AMT, Noard said. These bonds finance public arenas, for
example. "People may want to check their portfolios"
to ensure this type of interest is not increasing the likelihood
of an AMT bill, he said.
And, while there is an AMT credit that can be
used in future years for some items such as depreciation or
the exercise of ISOs, it's hard to take full advantage of
the credit, and it's not available for some disallowed deductions
such as state income taxes, Lusby said.
Also, "that credit carries forward and
it can offset your tax liability dollar for dollar, but never
below next year's AMT tax," Lusby said.
back to top
By Hank Ezell
Tom Cooksey wanted to invest his retirement money in what
he knew best --- real estate.
He also wanted to separate himself from investments like WorldCom,
where much of his early retirement savings disappeared.
"A building may go vacant, but it's still there,"
said Cooksey, who has 20 years' experience as a commercial-industrial
real estate broker. "But if it's WorldCom --- well, I
think I've still got some paper, but that's about it."
As an independent contractor, Cooksey was able to take advantage
of a 2001 change in the tax law that allows a sole proprietor
to open his own, one-person 401(k) plan. Such plans must be
adopted by the end of the calendar year.
Before, only companies could fund a 401(k) and take advantage
of the deductible contributions and tax-sheltered growth.
The 401(k) was known mainly as a perk for employees of large
companies.
But solo 401(k) plans can be expected to grow in popularity
as more people hear of them.
"It can help a person put a lot more dollars aside for
retirement," said Roger W. Lusby III, a certified financial
planner with Frazier & Deeter. "That's important,
because all the studies show most us have not saved enough
for retirement."
Indeed, the main attraction of the solo 401(k) --- compared
to individual retirement accounts --- is that you can stash
away more money. The annual maximum contribution to a solo
401(k) is the lesser of $40,000 --- $42,000 if you are age
50 or over --- or a percentage of your income.
These plans not just for rich people, said Rick Meigs, founder
and president of www.401khelpcenter.com. "People setting
them up often have a business on the side," he said.
"They can put aside a substantial portion of that side
income."
One-person businesses, like Cooksey's, are another major market.
Real estate agents, consultants and free-lance or contract
workers often establish the plans. Corporate directors have
been known to put their pay for board service into a solo
401(k).
There are other advantages. The plan owner can change the
amount he or she contributes in any given year, escaping the
strictures of some other plans.
"If you pick the right vendor, you can get a pretty wide
range of investment options," said Meigs. That can include
investments like real estate, which are out of bounds for
some other plans.
There are drawbacks, of course. "They are relatively
easy to self-administer, but not like IRAs," Meigs said.
"You need help setting them up."
They also are relatively costly, he added. Shoppers should
expect to pay $500 to $2,000 a year for that professional
help.
A solo 401(k) is truly a one-person plan, though a working
spouse can join under some circumstances. Thus the plans are
not for companies that expect to grow and hire other employees.
ON THE INTERNET
> www.401khelpcenter.com has lots of information, including
an extensive list of money managers.
> Go to www.individualk.com/IndividualK/theMath.jsp for
formulas to figure out how much you can contribute.
.
back to top
By Hank Ezell
The alternative minimum tax often is called
a parallel tax structure, a shadow tax, the AMT, plus a number
of other things that you never want to hear coming from your
child's mouth.
It was designed to prevent rich people from generating astonishing
amounts of deductions and avoiding taxes entirely.
By definition, the AMT raises the tax bill of anyone who has
to pay it.
Another reason for fear and loathing: You have to fill out
Form 6251 to find out if you owe AMT. Form 6251 gives headaches
even to tax professionals.
All this raises questions for average taxpayers, or slightly
above average ones.
Q: I'm not rich. Why should I have to worry?
A: The standard for establishing who is rich
and who has unfair levels of deductions has rarely been adjusted
by Congress, and the adjustments haven't kept up with inflation.
Thus people with midrange incomes have become vulnerable.
It's a bit like educators' complaints about grade inflation
--- it doesn't take as much effort these days to make an A.
Q: Why is it important?
A: The AMT may turn things upside down for
people who are trying to cut their tax bills. "As a rule,
you want to defer income and accelerate deductions,"
said certified public accountant Roger W. Lusby III, a partner
with Frazier & Deeter. "But those people who are
subject to the AMT may want to do the exact opposite."
Q: Huh?
A: Some deductions don't count for AMT purposes,
and AMT tax rates are lower than the highest regular income
tax rates. AMT taxable income is subject to a flat rate of
26 percent, though wealthy taxpayers pay 28 percent.
To calculate the AMT, you have to fill out a regular tax return,
then fill out Form 6251 to find out whether you would have
to pay any AMT. You essentially have to pay the higher amount,
either AMT or regular income tax.
Under the AMT rules, you add back to your income a number
of the deductions you got to take under the regular rules.
For most taxpayers, the biggest ones include a portion of
medical and dental deductions, state and local income taxes,
real estate and ad valorem taxes, and any part of a home equity
loan that you didn't use to buy, build or improve your home.
Q: Who needs to worry about the AMT?
A: "People need to figure out their
AMT obligation if they exercised incentive stock options,
had large depreciation deductions or got a large portion of
their incomes from long-term capital gains," said Lusby.
Other factors include high state and local income tax bills
--- more of a problem in New York, say, than in Georgia ---
lots of unreimbursed business expenses or a large number of
exemptions for children.
Q: Who doesn't need to worry?
A: You're probably safe, Lusby said, if your
adjusted gross income is less than AMT exemptions. That's
$58,000 for married filing jointly, $40,250 for singles and
$29,000 for married filing separately in 2003.
The exemption is the AMT's replacement for personal exemptions
claimed on regular income tax calculations. This will make
more sense, sort of, when you get to line 29 of Form 6251.
Q: What should I do?
A: If you think you might be caught by the
AMT rules and you don't like surprises, you'll have to do
a dry run on both tax calculations. Form 6251 is 65 lines
long, by the way.
If you use tax software, such as TaxCut, TurboTax or CCH's
CompleteTax, the process will be somewhat streamlined. Go
to www.taxsites.com/software.html for access to software Web
sites.
You can also find interactive calculators on the Internet.
This is not a walk in the park, but it's easier than using
more primitive tools, like pencils and paper.
If it appears you will owe a substantially higher amount under
AMT rules, you need to consider taking the whole thing to
a CPA or other tax adviser. Make an appointment right now.
ON THE INTERNET
> For help estimating an AMT obligation, www.hrblock.com/taxes/tools/amt/index.html
and click on 2003 AMT Calculator
> The horse's mouth is www.irs.gov.
back to top
By Roger W. Lusby, III, CPA, CMA, AEP
Q: My wife and I own a number
of WorldCom or MCI shares of common stock. I have heard that
when it comes out of bankruptcy, that in many/all cases the
stock is worthless. Is that true in this case? We acquired
in a 104k/IRA. I am told that the loss on the stock is not
deductible from federal and state income taxes. Would appreciate
being enlightened on the above.
--John Tidd, Canton
Roger W. Lusby III is a certified public accountant
with Frazier & Deeter in Atlanta. His answer:
A: WorldCom has gone into bankruptcy,
so the stock is virtually worthless. The company may emerge
from bankruptcy, but I doubt that the common stock shareholders
are going to receive much value, if any at all.
If WorldCom stock was held within an Individual
Retirement Account or other retirement plan, then none of
the losses are tax deductible. Remember, with retirement plans,
your money taxable only when you take distributions out.
With the WorldCom stock being valueless,
it just means it will never be coming out, because there’s
nothing to come out.
back to top
By Roger W. Lusby, III, CPA, CMA, AEP
There is an excellent article
in the August 2003 issue of Estate Planning entitled, "Planning for
Split-Dollar Under the Latest Proposed Regulations - 20 Questions".
The article does a great job of explaining where taxpayers
are with the new split-dollar life insurance rules. As a
general rule, the proposed regulations do not apply to existing
split-dollar arrangements or to any split dollar arrangements
implemented before the regulations are finalized. Regulations
are to take effect upon the publication of the regulations
in the Federal Register, which is estimated to be issued
the week of October 20, 2003. However, Notice 2002-8 will
apply to all existing split-dollar plans and will continue
to apply to these arrangements even after the final split-dollar
regulations are issued. Once these regulations are issued,
PS 58 rates will no longer be used. Various strategies have
been suggested. They include: (1) leaving the split-dollar
arrangement intact and the taxpayer's options open (Notice
2002-8 provides that as long as the employee is taxed on
the yearly economic benefit, the equity will not be taxed);
(2) making a taxable roll-out of the life insurance policy
for no consideration (this would include the amount in income
of any forgiven collateral assignment balance); (3) rolling-out
the life insurance policy for consideration; and (4) re-classing
the split-dollar plan as a loan.
Many of our clients have standardized "off the shelf" retirement
plans sponsored by financial firms. Although the sponsors
may have updated the original plan documents, employers must
formally adopt the updated plans by September 30, 2003. The
IRS is concerned that many small businesses may inadvertently
miss the deadline. Please have your clients contact their
plan sponsors to verify the status of their plan. (See IRS
News Release 2003-81).
Private placement variable life insurance and annuities
have come under attack by the Internal Revenue Service. The
IRS issued in late July 2003, Revenue Ruling 2003-91 and
2003-92. The revenue rulings target the use of private placement
insurance wrappers around hedge fund investments, a structure
that had been expressly authorized by IRS regulations until
the new revenue rulings appeared? For more information, see
Bloomberg Wealth Manager.
back to top
By Donald Jay Korn
One of Richard Vitale's
clients is an entrepreneur who owns a building that he
leases to his company. "This
client wants to move his company to a different building," says
Vitale, who heads a CPA firm in Boston. "He asked me
about entering into a like-kind exchange to defer the taxes
on the sale of the old property."
Vitale ran the numbers and came to a
surprising conclusion: A like-kind exchange wouldn't be
as attractive as a sale
followed by a purchase of the new property. "Under the
new tax law, the capital gain on the sale will be lower,
while the rapid depreciation provisions of the new law will
deliver substantial deductions," he says.
This episode is only one of the unexpected results that
the Jobs and Growth Tax Relief Reconciliation Act of 2003
is likely to produce. News coverage of the recently passed
tax law has focused largely on the reduced rates on dividends
paid to investors and how they might affect investment strategies.
Nevertheless, the third-largest tax cut in U.S. history contains
many other provisions with potentially important implications
for financial planners.
Ironically, one area that lends itself to sophisticated
planning is the flip side of the Top 40 hit, the 15% tax
on dividends. Yes, Joe and Jane Investor now will pay less
tax on their General Motors dividends, provided they hold
the stock in a taxable account and meet certain holding period
requirements. The new tax law, however, extends the 15% rate
(actually, capital gains treatment) to any dividends received
by an individual from domestic corporations. Therefore, this
new tax break also applies to clients who are business owners
and receive dividends from their own corporations.
"In some ways, the dividend rate reduction reverses
traditional planning, which focuses on maximizing compensation
and minimizing dividends in a C corporation," says Alan
Gotthardt, a financial planner in Norcross, Ga. "Many
cases and rulings from the IRS have had the effect of forcing
dividend treatment. Now that may be what we want to achieve."
As an example, Gotthardt describes a
business owner client who previously reduced corporate
income to zero by taking
a large salary. "Now the owner might leave $50,000 in
the company to be taxed at a 15% corporate tax rate. The
net amount could be distributed as a dividend, taxed again
at 15%." There could be thousands of dollars of tax
savings, versus paying a 35% income tax plus Medicare tax
on the salary, he explains.
"Some clients with C corporations have earnings and
profits trapped inside the company," says Vitale. "Now
it's a lot less expensive to pay that money out as dividends
if cash is needed. No one likes to prepay taxes, but it might
make sense to remove the money from the company before the
dividend tax break sunsets." Unless this provision is
extended, dividends will be taxed as ordinary income once
more starting in 2009.
Other planners report similar discussions. "Some of
my clients with family businesses operating as C corporations
have had some problems with excess accumulated earnings," recounts
Dennis Kroner, a planner in Chicago. "They have been
paying dividends to reduce this surplus, but that was expensive
because dividends were taxed at high rates. Now, those companies
probably will pay larger dividends because the clients can
collect the money and pay much lower taxes on it."
The impact of this provision may be broader
than an inclination to pay more dividends, however. "Some of your clients
might re-think S corporation elections," Kroner theorizes.
One of the reasons to elect S corporation status is to avoid
double taxation of dividends, because S corporations pay
no corporate income tax. Double taxation won't be as large
a threat with the reduced tax rate on dividends.
The low tax rate on dividends might affect
other planning for business owners, such as company sales
and succession
planning. "Their ability to sell a business may be enhanced," Gotthardt
says. "Normally, buyers want to acquire assets rather
than stock for favorable tax treatment. If the business owner
can end up in the same place, everyone goes away happy." That
is, under the new tax law it won't matter to the business
owner if sale proceeds are taxed as capital gains from a
stock sale or if cash received from an asset sale is distributed
as a dividend.
Rather than sell to an
outsider, business owners may want to keep the company
in the family, a process
that might be
easier under the new law. "One of our clients has a
son who is going to succeed him in the business," says
Roger Lusby, a CPA in Atlanta. "Both are now shareholders."
One strategy
would be for the company to redeem Dad's stock, which would
increase
Junior's interest
in the company. "Dad
would have to sell all of his shares and end his involvement
with the company in order to qualify for a capital gains
rate," Lusby explains. "A partial redemption will
be treated as a dividend." Because dividends were highly
taxed, traditional planning advice often was to avoid partial
redemptions.
"Under the new tax law there is no difference in the
tax on dividends or capital gains," Lusby says. "It
appears that partial redemptions may qualify for the favorable
rate on dividends. That would make it practical to do a partial
redemption, which would let Dad stay active in the business
after reducing his ownership interest and getting some money
out."
The low dividend rate also may have an
effect on private equity investors. "One of our clients is investing in
a family business, bankrolling the younger generation," says
Frank Butterfield, a planner in Atlanta. "His investment
is behind that of the bank, so I suggested that we look at
structuring his interest as preferred stock rather than subordinated
debt. That way, the payments he receives would be favorably
taxed dividends rather than fully taxed interest."
As it turns out, the family would be
at a net disadvantage because the corporation could not
deduct the dividend payments. "He
probably will use subordinated debt," Butterfield says. "For
non-family investments, however, you probably will see investors
requesting preferred stock. I expect creative accountants
to try playing games with these laws, such as structuring
investments as preferred stock to get the tax break but allowing
a conversion to debt when a start-up corporation turns profitable
and can begin to benefit from the interest deductions."
Accountants also will do more number-crunching
to see whether proposed transactions such as like-kind
property exchanges
still make sense. As mentioned previously, Vitale advised
one client to sell his old property and buy a new one, but
that client had some special circumstances. "My client
had a large capital loss carryover, which will substantially
offset the gain he'll incur on a sale," the planner
recalls. "Each client's circumstances are different,
but the new tax law changes the economics of real estate
exchanges, so planners should run the numbers before making
a recommendation."
Indeed, the lower capital gains rate may have other planning
implications for clients. Sidney Blum, a planner in Northbrook,
Ill., says the so-called net unrealized appreciation (NUA)
tax break looks more attractive under the new tax law. This
tax code provision permits retirement plan participants to
take company stock out of the plan and pay tax only on the
shares' basis, while appreciation will qualify for capital
gains treatment.
"Clients using the NUA strategy will be better off
with the lower rate on capital gains," Blum says. "We
have a couple of clients who have been considering this,
and the new law makes it seem more enticing." Such a
move would be especially powerful if the clients wind up
with dividend-paying stock taxed at only 15%, according to
the adviser.
Similarly, executives holding stock options
might decide to exercise them sooner. "One of my clients holds options
on thousands of shares of Wrigley," Kroner says. "The
unexercised options pay no dividends, so he may want to exercise
them now and start to receive the dividend income." Glenn
Frank, a planner in Waltham, Mass., notes that clients holding
incentive stock options (ISOs) might consider exercising
some of these options to start the clock on favorably taxed
long-term gains.
Unfortunately, exercising ISOs may cause
clients to pay the alternative minimum tax (AMT), a problem
that's likely
to increase. "More people will be in the AMT category
because of the new tax law," says David Polstra, Gotthardt's
partner at Polstra & Dardaman. As personal income taxes
drop below AMT obligations, the latter will have to be paid.
"Clients may have to do more AMT planning, such as
structuring large capital gains as installment sales to spread
the gains over more than one year," Polstra recommends.
Such sales can qualify for the new 15% rate on long-term
gains.
Along with AMT planning, income shifting
may merit more attention now because low-bracket taxpayers
owe only 5% on
dividends and capital gains. Parents who intend to sell appreciated
stock, for example, might give the shares to children aged
14 or over, assuming gift tax issues are considered. Then
the children could take the gains at a 5% rate. "It's
even possible to begin planning for 2008, when people in
low tax brackets are scheduled to have a zero tax rate on
capital gains," says Benjamin Tobias, a financial adviser
in Fort Lauderdale, Fla.
"What's more, many baby boomers are doing better than
their parents, whom they're helping out," Tobias adds. "In
those situations, income might be shifted to low-bracket
retirees." Parents could be given appreciated securities
for a low-taxed sale or dividend-paying stocks for lightly
taxed income. Such stocks might eventually come back to the
children, via bequests, with a basis step-up for further
tax shelter.
Not surprisingly, there are a variety of tax-saving tactics
for planners to consider. But which vehicles may not be as
inviting in the near future? Lower tax rates make investing
in tax-deferred retirement plans look less appealing now,
according to Polstra. (Roth IRA conversions, however, have
become more affordable). Frank says that 529 college savings
plans also are losing some advantages because parents can
hold investments personally and pay less tax.
"Lower tax rates make variable annuities less attractive," Frank
adds. "I still might use low-cost annuities for rebalancing,
though." That is, a variable annuity can provide a portfolio
to take gains on appreciated asset classes without paying
current taxes.
Press reports claim that variable annuities
will be the new tax law's biggest losers, but Eric Henderson
dissents. "When
tax rates on capital gains fell from 28% to 20%, everyone
thought sales would plummet," says Henderson, an individual
variable annuity product officer at Nationwide Financial
in Columbus, Ohio. "Instead, there was virtually no
impact at all. Although it's still too early to talk about
the results of this year's tax cut, we don't think it will
be a huge negative for variable annuities. Investors now
seem to be extremely interested in the protection features
that variable annuities will continue to offer."
The events of the past three years probably have increased
interest in all forms of protection. By learning the ins
and outs of the new tax law, planners may be better able
to protect clients' wealth from the IRS.
back to top
By Roger W. Lusby, III, CPA, CMA, AEP
The Jobs and Growth Tax Relief Reconciliation
Act of 2003 quadrupled the §179 expensing election
from $25,000 to $100,000 for tax years beginning in 2003
through 2005.
This provision allows small businesses and self-employed
individuals, which includes many real estate agents, doctors,
lawyers and CPAs, to expense in the first year the purchase
of certain business equipment. Business equipment includes
a SUV which is used for business purposes!
§280F(d)(5)(A) and (B) provide that
a truck or van (including a SUV or minivan) is only treated
as a passenger
automobile (and thereby subject to annual depreciation limitations)
if it has a gross vehicle weight of 6,000 pounds or less.
Gross vehicle weight is defined as the weight of the vehicle
plus its maximum payload, which is typically printed on the
inside of the driver's door.
The §179 deduction only applies
to the business use of a SUV and the business use must
be more than 50% to qualify.
Therefore, if a SUV costs $60,000 and is used 80% for business,
the first year deduction is $48,000. This saves $16,800 in
taxes at the top tax bracket! This tax savings now makes
it more attractive to purchase a SUV for business purposes
rather than leasing it.
Another tremendous tax benefit is the
fact that the §179
deduction is not pro-rated for a short year or adjusted for
when the business property was purchased. Therefore, the
purchase of a qualifying SUV in December results in the same
tax benefits as one purchased in January.
Below is a listing from MSN Money of the SUVs that currently
qualify for this loophole and their manufacturer's suggested
retail price:
SUV |
MSRP |
| BMW X5 |
$39,500 |
| Cadillac Escalade |
$53,855 |
| Chevrolet Suburban |
$39,750 |
| Chevrolet Tahoe |
$35,015 |
| Dodge Durango |
$28,995 |
| Ford Expedition |
$34,390 |
| Ford Excursion |
$39,690 |
| Hummer H2 |
$48,455 |
| Hummer H1 |
$105,160 |
| GMC Yukon |
$35,725 |
| Land Rover Discovery |
$34,350 |
| Land Rover Range Rover |
$71,200 |
| Lexus LX 470 |
$63,625 |
| Lexus GX 470 |
$44,925 |
| Lincoln Navigator |
$49,225 |
| Mercedes-Benz M Class |
$37,320 |
| Mercedes Benz G 500 |
$74,320 |
| Porsche Cayenne |
$55,900 |
| Toyota Land Cruiser |
$54,465 |
| Toyota Sequoia |
$32,135 |
There are also
three tax concerns that a taxpayer needs to be aware of:
(1) the State of Georgia
does not recognize the increased §179 expensing election;
(2) a taxpayer must have taxable income from an active trade
or business to be able to use the §179 deduction; otherwise,
it carries over indefinitely until it can be deducted in
a future year; and (3) depreciation recapture rules apply
to the §179 deduction if the business use fails to exceed
50% during any year of the SUV's depreciation period, which
is 5 years.
As with all things too good to be true, Congress could close
this loophole. So you may want to hurry out to your nearest
dealer!
back to top
Reported by: Dennis O'Hayer
Some Georgia taxpayers are still trying to get
their refunds from the state government three months after
the April 15 tax-filing deadline. For years, the state has
struggled, with some success, to speed things up, but the
overhaul is not complete.
Certified public account Jim Frazier said a few clients have
already called to say their state income tax refunds still
haven’t arrived. Based on past experience, he expects
a few more calls. “We have inquiries from clients with
large refunds. We would define large as $10,000 and up that
are going six, eight, 12 weeks, sometimes as long as three
to four months,” he said. Last fall, he sent letters
to the state revenue department. He said tax officials then
responded quickly and politely with refund check. They, however,
never explained the delays. “There’s either a
hold in the system that says if the refund is of a certain
size, either look at the return or if the refund is of a certain
size, drag your feet,” he said.
Revenue Commissioner Bart Graham, who has been in office for
just three weeks, promised that new financial reporting in
his department will ensure all refund get the same treatment
and refunds get to taxpayers faster.
“The department has done things over the last three
or four years to increase its technology offering for imaging
equipment, for better staffing,” he said.
But while the state government is trying to get taxpayers’
checks faster, the top money people in state government are
saying the budget crisis at the capitol is not going away.
Graham, however, insisted any cuts in his office will not
slow down refunds. “Most of what we do is statutorily
required to do. You really can’t cut a program, you
can assign it to another division, but you can’t get
rid of it,” he said.
Frazier, however, said politicians can be tempted to borrow
from taxpayers.
11Alive News checked with 15 Metro Atlanta accounting firms
and about half said refunds are faster now and that firms
are getting fewer complaints.
By: Howard W. Wolosky
When competing for an engagement, many accounting
firms have a similar belief. “They believe all they
have to do is show their qualifications; a sort of meritocracy.
A belief that the cream will rise to the top and the intrinsic
value of the services that they provide will be seen. What
they don’t realize is there are five other firms who
believe the exact same thing about themselves.” This
reflects the experience with professional service proposals
of Dan Safford, CEO of PS Associates, a proposal development,
consulting, and training company located at Vashon Island,
Wash.
Erinn Keserica, director of marketing with the Atlanta accounting
firm of Frazier & Deeter indicates proposals are often
boilerplate giving an overview of the firm and its qualifications,
rather than going into its unique differentiation factors
or addressing the clients’ needs and concerns.
Saying “I’m great for you” is not enough,
and the smart firms are changing their proposal process both
in form and substance.
Firm and Client Centric
Lisa Tierey, director of marketing for the Bala Cynwyd, Pa.
accounting firm of Margolis & Company indicates in the
physical sense that their proposals that their proposals were
presented in a dull green fodler as a simple Word document.
Now she indicates the proposals are in clear folders with
both the firm’s and prospect’s logos, and graphics
being widely used.
Closer Scrutiny
There are also significant changes in the process. Julie Tucek,
marketing director of the accounting firm of Legacy Professionals,
headquartered in Chicago, reports that partners used to handle
requests for proposals setting the fees without really investigating
the situations. Now each proposal opportunity goes through
and evaluation team comprised of herself and two partners.
Before any proposal is made, partners must sign a cost sheet
detailing what they think the engagement will cost, how many
hours will be involved, as well as any expected write-off.
In evaluating each opportunity, Tucek indicates the team decides,
“Does it make sense to bid? What do we need to price
it at to win?” The firm specializes in nonprofits, benfit
plans and labor organizations and work that is inappropriate
is declined and referred to other Chicago firms.
Branding
Lyne Noella, president of Lyne Noella Marketing, a Minneapolis-based
marketing strategy and consulting firm serving accounting
firms nationwide, indicates it is important t that the proposal
material reflects the firm’s brand. “A prospect
should be able to identify your firm’s brand without
looking too closely,” she concludes. She does caution
about automatically using a client’s logo in a proposal
as she indicates, “some companies are very proprietary
about using their brand or logo”
Keserica also believes in the importance of branding. “In
terms of brand images, we try to use elements consistently
throughout all of our pieces whether in the first folder with
marketing collateral piece, in the firm brochure, or in the
firm proposal,” she says.
No Stone Unturned
Because proposals now tend to focus more on the prospects,
a great deal more investigative work should precede their
preparation. Both Tierney’s and Tucek’s firms,
have a list of questions that they try to have the partner
or a staff person pose to a potential client. Similarly, Roger
Lusby III, partner with the Atlanta accounting firm of Frazier
& Deeter, indicates, “Most of our face time is spent
up-front asking questions and gathering information.”
Another resource comes from those who know the prospect. “You
want to get in touch with the referral sources that may know
the prospect and ask them for advice, feedback, introductions,
and recommendations,” advises Noella. In that regard,
Elliot Davis networks within community and within the firm
to gain intelligence. “By doing this we are able to
gain the off-record intelligence of who is really the decision
maker and what business factors are going to most dramatically
impact the decision,” says Patrick.
Most firms widely use the Internet for research, especially
with regard to the industry issues. Substantial information
about the prospect can often also be found on the Internet.
Lusby indicates his firm likes to find out which other firms
are proposing. His reasoning is, “Within our differentiating
factors, we will address why we are stronger than the other
firms without mentioning them by name. and we know they will
be pitching a particular strength, we want to be able to counter
that in our proposal as well.”
Tierney, and other marketing personnel, spend time helping
presenters prepare and rehearse their presentations, and always
remind the presenter not to criticize the potential client’s
current accountant.
The Proposal and its Presentation
Lusby also favors a summary. “We now try to include
a one-page executive summary that really talks more about
the client and why Frazier & Deeter might be uniquely
qualified to handle their work.” Interestingly, Patrick
has indicated in one case, Elliot Davis customized each of
the executive summaries for the five individuals to whom a
presentation was being made. Although there were some common
elements, each summary was different based on due diligence
work, which found out that each of the individuals had different
concerns.
Lusby reports that his firm always tries to figure out why
they are best suited to handle the engagement, and explain
that in a clear manner in the proposal. He also loves to tantalize
the prospect significant dollars. The proposal also always
addresses the ease in making the transition to Frazier &
Deeter.
Marketing personnel tend not to go on proposal presentations
unless they have a specific role to play, although Keserica
indicates she will go to initial meetings with potential clients
to help pull out the drivers and motivations for why they
are switching accounting firms.
A Preferred Route for Som
Roger Lusby, III, partner with the Atlanta accounting firm
of Frazier & Deeter, agrees. “What we prefer is
to get a nice referral into a client and go in and meet them
and basically get the engagement without having to do a formal
proposal.”
Appraising Aftermath
Margolis & Compnay reviews how every proposal fared and
each is tracked. If not successful, a specific reason is attributed
as to why it wasn’t successful. Tucek’s firm also
has a formal tracking process, which includes the referral
sources that provide the opportunities.
Winning the Bid
In today’s competitive environment, our firm will be
increasingly requested to submit proposals. Saying you are
great won’t cut it. The key will be how clearly you
state what you uniquely offer, and how the prospect will benefit.
Think of major purchases that you have made. Weren’t
you most happy when those from whom you made the purchase
understood what you really needed?
By Ruth Bartlett, CPA and Sean T. Lager,
CPA
There has been great concern over the public’s
diminished confidence in the integrity of audited financial
statements. Over the past few years, the Securities and Exchange
Commission (SEC) has been concerned with the effectiveness
of the audit process which is due to a wide range of issues
involving the public accounting profession or more specifically
the independent auditors of public companies. Their concerns
have been expressed in various public forums which ultimately
have been publicized in the press. In addition, there have
been several major instances of earnings misstatements which
have had devastating effects on the capital markets of the
effected companies. The former SEC Chairman, Arthur Levitt,
had expressed concerns about the quality of auditing due to
highly publicized negative restatements of earnings which
resulted in a significant loss of market capitalization of
the affected companies.
Public companies are required to file audited
financial statements with the SEC. Those financial statements
are required to be audited by an independent public accounting
firm. The auditor, if possible, provides reasonable assurance
that the financial statements are free from material misstatement.
The auditors do not guarantee that the financial statements
are free of obvious error, but state that the financial statements
are presented fairly, in all material respects, in conformity
with U.S. generally accepted accounting principles. The standards
the auditors follow are promulgated by the Auditing Standards
Board of the American Institute of Certified Public Accountants
(AICPA).
The Public Oversight Board (POB) was created
in 1977 to oversee the accounting profession in the United
States. The POB existed to help assure investors that audited
financial statements of public companies can be relied upon
to provide an accurate picture of the financial status and
results of operations of a company. The POB was created to
oversee and report on the programs of the SEC Practice Section
(SECPS) which was also created in 1977 by the AICPA. The SECPS
self-regulatory structure was created to provide oversight
control over accounting firms that audit public companies.
The SECPS also establishes quality control requirements for
the member firms. Currently, members of the SECPS are required
to undergo peer review every three years.
The Panel on Audit Effectiveness (the Panel)
was established in 1998 by the POB following a request from
Arthur Levitt. The POB appointed the eight member panel which
comprised distinguished members from the profession and academia,
two former commissioners of the SEC and representatives from
corporate America. The POB was asked to review and evaluate
how independent audits of the financial statements of public
companies are performed and assess whether recent trends in
audit practices are in the public interest and to determine
whether the external audit adequately served the needs of
investors. Over a two year period, the Panel reviewed audit
methodologies, fraud and earnings management, the profession’s
current governance and a range of other factors that can affect
the quality of the external audit. The Panel’s goal
was to report their findings and recommendations in order
to improve the reliability of financial statements, enhance
their credibility, and increase investor confidence in audited
financial statements. The Panel released its final report
in August 2000, noting several recommendations to improve
the audit process. The Panel also emphasized that it found
no instances in which the performance of non-audit services
by the audit firm had caused a failure in the audit process.
Charles A. Bowsher, Chairman of the POB and former Comptroller
General of the United States, praised the Panel's work and
reiterated Shaun O'Malley's (Chairman of the 2000 POB) call
for cooperation. Mr. Bowsher noted "The Panel members
and their staff have completed the most thorough examination
of the audit process ever undertaken in the long history of
the accounting profession".
QUASI PEER REVIEW OF THE ACCOUNTING
PROFESSION
The Panel took a Quasi Peer Review (QPR) approach to investigate
the audit services of the eight largest firms (Arthur Andersen
LLP; BDO Seidman, LLP; Deloitte & Touche, LLP; Ernst &
Young, LLP; Grant Thornton, LLP; KPMG, LLP; McGladrey &
Pullen, LLP; and PricewaterhouseCoopers, LLP). The in-depth
reviews included 126 audits of SEC registrants in 28 offices.
In addition to the reviews of the quality of audits, the Panel
interviewed various audit partners, managers and seniors whom
worked mostly on SEC clients. The QPR was a major source of
the Panel’s findings and are published in exposure draft
form which was issued for comment in August of 2000. You can
find the report in its entirety at www.pobauditpanel.org.
The exposure draft includes the QPR process and the Panel’s
recommendations. The Panel believes that the recommendations
are necessary to improve audit effectiveness; however, it
recognizes that implementing those recommendations will increase
audit costs for most companies.
IMPROVING THE CONDUCT OF AUDITS
Auditors are required to follow generally accepted auditing
standards (GAAS) when performing an audit of an entity’s
financial statements. Those standards and how they are applied
were reviewed by the Panel when conducting the QPR. The Panel
did not find instances where there where failures in the audit
process; however, it did discuss instances where procedures
and standards could be strengthened. "Clearly the conduct
of audits and the governance of the profession need substantial
improvement, particularly as the global economy grows more
complex and the demand on our capital markets grows more intense,"
said Shaun O'Malley, the Panel Chair, at a press conference
in September 2000 when the report and recommendations were
released. "While our report demonstrates that both the
profession and the quality of its audits are fundamentally
sound, the recommendations we put forth are vital to spur
the needed improvements. Their implementation will require
the efforts, support, and cooperation of the profession, the
SEC, and all the others to whom the recommendations are addressed."
The Auditing Standards Board (ASB) issued a
new exposure draft of seven proposed statements relating to
the auditor’s risk assessment process. The exposure
draft was released for comment in December 2002 and includes,
but is not limited to, audit risk and materiality, understanding
the entity and the risks of material misstatement, planning
and supervision, audit sampling and evaluating audit evidence
obtained. The release of the exposure draft was in response
to the Panel’s findings and the ASB’s continuing
effort to develop stronger auditing standards to improve audit
effectiveness. More effective audits leads to higher investor
confidence in the financial statements enhance the credibility
of those financial statements and can improve management decision
making.
FRAUD AND EARNINGS MANAGEMENT
There are increasing pressures on management to meet earnings
projections especially when those corporate executives’
compensation is dependent on meeting those expectations. Due
to growing concerns about earnings management and fraudulent
financial reporting investor confidence has been diminishing
rapidly and the question of “Where are the accountants?”
has surfaced.
Since the Enron debacle it has been abundantly
clear that the profession’s century-old reputation has
been tarnished. The sudden failure of Enron, one of the nation’s
largest corporations, has, among other things, led to severe
criticism of the nation’s financial reporting and auditing
systems. John Goble, the former head of Vanguard, recently
pointed out that US companies restated their earnings 607
times in the past three years, more than in the entire previous
decade.
The Panel examined the profession’s standards
that define the auditor’s responsibility and provide
guidance for auditors in considering fraud in a financial
statement audit. Both auditors and users of financial statements
have varying views about the auditor’s responsibility
to detect misstatements in financial statements, particularly
misstatements caused by management fraud.
In late 2002, the AICPA issued Statement on
Auditing Standards (SAS) 99 – “Consideration of
Fraud in a Financial Statement Audit”. SAS 99 provides
U.S. auditors with expanded guidance in detecting material
fraud and evaluating earnings management. The new standard
incorporates recommendations made by the Panel. “We
feel strongly that the standard will substantially change
auditor performance, thereby improving the likelihood that
auditors will detect material misstatements due to fraud”
said Barry Melancon, AICPA President and CEO. “The standard
reminds auditors that they must approach every audit with
professional skepticism and not assume that management is
honest. It puts fraud at the forefront of the auditor’s
mind.” In releasing the new standard Barry Melancon
stated that the AICPA reaffirms that their mission is to help
investors regain confidence in audited financial statements
in order to improve our country’s capital markets.
SELF-REGULATION
An entire chapter of the Panel’s exposure draft was
devoted to the governance of the auditing profession. A major
portion of the chapter was related to discussions of a new
independent POB. The Panel examined the profession’s
then current self-governance over the auditing profession,
the limitations of the system and recommendations in strengthening
the system. Even though the Panel did not address alternative
models of governing the accounting profession it did discuss
the limitations of the self regulatory system. The Panel noted
that the self-regulatory system is maintained through the
AICPA which includes establishing professional standards,
disciplining members, monitoring compliance with professional
standards and general oversight of the profession. Member
firms of the AICPA’s SECPS are required to undergo a
peer review every three years. The objectives of a peer review
are to evaluate whether the reviewed firm’s quality
control system for its accounting and auditing practice meet
the objectives of the quality control policies set by the
AICPA.
In January 2002, the Chairman of the SEC outlined
a proposed new regulatory structure to oversee the accounting
profession. The SEC’s proposal provided for creating
an oversight body that would include monitoring and disciplinary
functions, have a majority of public members, and are funded
through private sources. The existing oversight body, the
POB, was critical of the SEC’s proposal and passed a
resolution of intent to terminate its existence. The SEC announced
in March 2002 that the POB had entered into an agreement with
the staff of the SEC, the SECPS, and the AICPA that a Transition
Oversight Staff, led by the POB’s executive director,
will carry out oversight functions of the POB, including monitoring
the status of implementing the Panel’s recommendations
effective April 1, 2002.
Announced in October 2002 was the creation of
the new Public Accounting Oversight Board – created
by the Sarbanes-Oxley Act of 2002. William Webster was announced
as the Chair of the new board. The new board members are as
follows:
1) Daniel Goelzer, the SEC general counsel for
past seven years
2) Kayla Gillan – 13 year pension fund legal adviser
3) Willis Gradison Jr. – former congressman
4) Charles Niemeier, chief accountant to the SEC’s division
of enforcement.
After a controversial election of the Chair,
Webster stepped down from the position in November 2002. The
inaugural meeting of the Board was held in January 2003 without
a Chair.
The new board will oversee the audits of the
financial statements of public companies, set general policy
and recourse for the auditing profession and structure the
actual board itself and what each of their specific roles
are to be. The new board will determine how much they are
going to rely on the existing auditing standards set by the
AICPA’s Auditing Standards Board or write completely
new standards on their own. This is an independent board appointed
by the SEC to set standards to uphold the integrity of public
audits. The board has the authority to investigate and discipline
offenders. The AICPA will work closely with the new Public
Accounting Oversight Board to help insure audits are of the
highest quality and help restore investor’s confidence.
LOOKING AHEAD
The past decade has seen unprecedented changes in the global
economy and capital markets. Since the issuance of the exposure
draft of the Panel’s recommendations, in August 2002,
the profession has made plausible efforts to regain investor
confidence by considering the Panel’s recommendations.
Although studies of the profession may not be the answer as
expressed by Paul Sarbanes in his opening statements to the
U.S. Senate Committee on Banking, Housing, and Urban Affairs
at a March 2002 hearing, the continued consideration of the
Panel’s recommendations could have a major effect on
how audits are conducted in the future. This study was focused
on improving the effectiveness of audits and required the
efforts of many of the profession’s constituencies.
The continued efforts of the audit firms, those who establish
standards, and those who oversee the profession and monitor
auditors’ performance will only elevate the image of
the auditing profession and continue to increase investor
confidence in audited financial statements.
back to top
By Hank Ezell
Atlanta Journal Constitution (March 23,
2003) - Fifteen-year-old Stephen Wieschhaus earned a Georgia
income tax credit for his family simply by learning to drive.
The trick is in signing up with a privately
owned driver education school. Then the cost, up to $150,
can be subtracted from the Alpharetta family's bottom-line
tax bill.
It's one of dozens of tax breaks, many largely
unnoticed, that are drawing more interest with the approach
of the April 15 deadline for paying state and federal income
taxes.
"I've taught all my kids to drive,"
said father John Wieschhaus. But they go to school for the
book work --- and the tax break. Wieschhaus called The Atlanta
Journal-Constitution's 13th annual tax hotline, and certified
public accountant Roy D. Burke confirmed the family could
claim the deduction.
Wieschhaus was one of 400 people who took
advantage of free tax advice from 17 volunteer CPAs.
back to top
Atlanta Journal Constitution (March 23,
2003) - More than 400 people called
the AJC's 13th annual tax hotline - nearly 50 percent omore
than last year.
Harsh economic conditions accounted for much
of the growth. "More people are nterested in reducing
their tax bills as much as legally possible," said CPA
Larry W. Nichols. Another factor: People want to know who
to take advantage of new tax laws.
Question were almost as varied as the tasx code
itself. This year, many people were concerned with retirement
issues and tax breaks for educators. Other question focused
on taxpayer mistakes and the ever-popular search for one more
deduction.
Here are some of the most-asked questions:
Retirement
Q: I have a small business
in which I am the only employee. I file on Schedule C as a
sole proprietor. My tax liability is too high. What can I
do?
A: For 2002, consider setting
up and funding a SEP plan. A SEP is the only qualified retirement
plan that you can set up after the end of the year. Plus,
the retirement contributions were increased for 2002. You
can now contribute 25 percent of wages (as adjusted) up to
a maximum of $40,000, for 2002. For a Schedule C filer, the
adjustments result in an effective rate of 20 percent of your
net Schedule C income. -- Roger W. Lusby, III
Q: Can I make a contribution
to an individual retirement account even though I have a retirement
plan at work?
A: Yes, under certain conditions.
An individual who has a qualified retirement plan at work
can contribute to a Roth IRA if his or her modified adjusted
gross income falls below certain levels ($150,000 for married
filing jointly).
For a traditional IRA, an individual who is
under 70 1/2 years old by the end of the taxable year and
who has compensation can make a contribution, with or without
a quaslified plan at work. But if the taxpayer's modified
adjusted gross income is above certain levels ($54,000 for
married filing jointly), the contribution may not be fully
deductible.
For details see IRS Publication 590, Individual
Retirement Arrangements. This, and most other IRS publications
and form, can be downloaded from the IRS Web site at www.irs.gov/formspubs/index.html.
--Sherry Robertson
Q: I borrowed from my 401(k)
to buy a car. I'm paying it back, but I can't get a deduction
for the interest on hte loan. Is ther esome way I can get
a tax deduction?
A: If you have sufficient equity
in a qualified residence, you could take out a home equity
loan secured by the house, pay off the 401(k) loan and deduct
home mortgage interest. The deduction is limited to interest
attributable to an aggregate $100,000 of home equity debt.
There may be other limitations. Check out IRS Publication
936 for further details. --Larry W. Nichols
Education
Q: I'm a teacher. Is it true
that I can get a deduction for money I spent to buy supplies
for my students?
A: Yes. Educators can deduct
up to $250 of qualified expenses from their adjusted gross
income, before itemized deductions. Eligible educators include
kindergarten through grade 12 teachers, instructors, counselors,
principals or aides in a school for at least 900 hours during
a school year.
Qualified expenses are books, supplies, computer
equipment, other equipment and supplementary materials ordinarily
used by the educator in the classroom. They do not include
expenses for home schooling or for nonathletic supplies for
courses in health or physical education.
If you have more than $250 of qualified expenses,
the excess can still be reported on Schedule A as an unreimbursed
employee expense, but this is limited by 2 percent of adjusted
gross income. --Dee Tilmann
Q: Can I get a deduction for
the interest I paid on my student loans?
A: yes, if you qualify. Individuals
may deduct a maximum of $2,500 annually for interest paid
on qualifying higher education loans. This year, the income
limit has been raised. The deduction phases out ratably for
tax-income between $50,000 and $65,000 (single) and $100,000
and $130,000 (married filing jointly). Check the instructions
for Form 1040, Line 25, for other limitations. --Daniel C.
Lee
Around the ballpark
Q: My wife and I filed by telephone
with the IRS. The IRS has already processed our return. But
we made a mistake. Can we amend our return by telephone?
A: No, unfortunately you will
have to file a Form 1040X with the IRS. This must be filled
out on paper and mailed in. You get a copy of this form online
at www.irs.gov/formspubs/index.html. If you filed your Georgia
return by telephone, then you have to fill out a Georgia Form
500X. You cannot amend your return by telephone. You may obtain
a Form 500X online at www.gatax.org. --Bo Jackson
Q: I have stock that is worthless.
Can I get any tax benefit?
A: Yes, you may deduct the
cost basis of the stock as a capital loss the year the stock
becomes worthless, as long as the stock is completely worthless
by IRS standards. The stock can't merely have taken a huge
dive in price or be in bankruptcy. It must be impossible to
sell for more than the commission you would have to pay to
sell the stock. Note that the deduction for net capital losses
is limited to $3,000 a year. --Richard Stern
Q: I won't have the money to
pay my tax bill on April 15. What can I do?
A: A taxpayer may receive an
automatic extension of time to file their tax return by filing
Form 4868. At the time of filing the extension, the taxpayer
is supposed to make an honest effort to estimate and pay the
tax liability that is due for the prior tax year. If you do
that, any interest charges for underpayment will be minimal.
If you don't make a payment, expect to pay interest as well
as a potential penalty. --Chris CallQ: Can
I really take a $40,000 deduction for buying an SUV?
A: Assuming a new (not previously
owned) SUV with a gross vehicle weight of at least 6,000 pounds
is 100 percent utilized in a trade or business, the owner
can deduct the first $24,000 ($25,000 in 2003) of its cost,
expense 30 percent of the remaining cost and depreciate the
reminder over five years. For example, a $40,000 qualifying
vehicle purchased in 2002 is eligible for a $24,000 deduction,
another $4,800 deduction and, finally, up to another $2,240
depreciation. This totals $31,040. (Note that the state tax
deduction will be adjusted downward.) --Mark Wyssbrod
DEDUCTIONS: HOW DO YOU STACK UP?
Average amounts claimed on 2000 tax returns
Adjusted............................Medical
gross income..................expenses..Taxes.....Interest.....Charity
$20,000 to $30,000........$5,815.....$2,297.....$6,317........$1,700
$30,000 to $50,000........$5,038.....$3,093.....$6,595........$1,829
$50,000 to $75,000........$5,565.....$4,324.....$7,406........$2,123
$75,000 to $100,000......$7,364.....$5,896.....$8,578.......$2,604
$100,000 to $200,000...$11,226...$9,239.....$11,310.....$3,733
$200,000 and up............$31,470...$39,691..$26,144.....$21,301
If your deductions are well above average,
make sure you can document them.
Don't try to match these numbers; the IRS will frown.
Source: CCH Inc.
back to top
By Hank Ezell
For many of America's 132 million taxpayers,
this year may be a little less taxing.
Tax rates are down, and so are some of the paperwork
requirements.
In addition, the Internal Revenue Service has
set up a program that will allow as many as 78 million Americans
to prepare and file their returns online, for free.
That doesn't mean everybody will get the job
done before the April 15 deadline for filing federal and state
returns. As always, millions of Americans will put it off
until the last minutes, then stress themselves out in a race
to the bottom line and the post office.
Why would that be? "One reason is that
it can be so overwhelming, and we tend to push asisde difficult
things," explained Atlanta psychologis Jennifer Kelly.
"The other reason is that it's like a little ritual,
a deadline thing, like waiting until Christmas Eve to do your
shopping."
At last count 23.2 million had filed. That includes
924,063 of the 3.6 million taxpayers in Georgia.
A stupefying amount of money is involved. Last
year the federal government collected $1.038 trillion in income
tax deposits on 2002 income. That comes to about $7,900 per
taxpayer.
The time commitment is large, too. People who
fill out Form 104 for themselves will psend an average of
six hours and five minutes on the job, by federal estimate.
That doesn't count time spent keeping records and reading
the instructions.
Still, there are ways to streamline the process
and to save money on taxes. A number of changes are in effect
for 2002 returns, including items that offer tax breaks related
to education, retirement savings and other areas.
One across-the-board break is the lowered tax
rates. Most tax rates have been cut by 0.5 percentage points.
if you paid a maximum of 27.5 percent last year, for example,
the nick will be only 27 percent this year.
And the 10 percent tax bracket, which applies
to all filers with net income, was in effect all year. Last
year many thousands of taxpayers goofed in reporting the $300
to $600 rebate checks mailed out in 2001 -- when the 10 percent
bracket was being phased in. This year, there's no room for
confusion.
"Our clients are most encouraged by the
decrease in tax rates and the increases for retirment plans,"
said Roger W. Lusby, III, A partner at Frazier & Deeter
in Atlanta.
One offbeat point: The IRS has decided hat obesity
is a disease. That means that the cost of weight-loss programs
can be deducted as a medical expense, if the programs are
part of your treatment for a specific disease. But diet foods
are not deductible if they replace what you would regularly
eat, and your total medical expenses costs must exceed 7.5
percent of adjusted gross income.
Here are the highlights of the new wrinkles
that will help taxpayers on their 2002 returns:
Education
Educators get a break if they bought classroom
supplies with their own money. Now they can deduct up to $250
for books, supplies, computer equipment and software, whether
they itemize or not -- provided they were not reimbursed for
the purchases.
Graduates with student loans also have some
good news. Interest paid on student loans now can be deducted,
up to $2,500, even if the loans are more than 60 months old.
In addition, the maximum income limits for claiming
the deduction have increased. You can get the full deduction
if your modified adjusted gross income is below $50,000. Before,
the limit was $40,000. for joint returns, the limit for the
full deduction is $100,000, up from $60,000.
Some current students may even be able to deduct
the cost of higher-education tuition and fees, up to $3,000,
even if they do not itemize. There are maximum income limits,
however.
coverdell education savings accounts, named
for the late Georgia Sen. Paul Coverdell, are more attractive.
The limit on contributions has gone up, from $500 to $2,000,
and the deadline for putting money into an account has been
extended into this calendar year.
In addition, distributions are now tax-free
for elementary and secondary education expenses, assuming
all the qualifications are met.
The details for these and other new opportunities
are in IRS Publication 970.
Retirement
You can contribute more to a traditional IRA
or Roth IRA. These must be funded by April 15. The maximum
for 2002 is $3,000, or $3,500 for those who turned 50 before
2003. That's up from $2,000.
If you contribute to a tarditional IRA, the
maximum income limit for claiming a deduction is higher. For
details and restrictions, check out Publication 590.
Other types of retirement savings plans also
go breaks in 2002. The deduction limits have increased for
contributions to profit-sharing plans and Simplified Employee
Pension plans.
The maximum that can go into 401(k) and similar
plans increased, from $10,500 to $11,000.
"These are things people need to continue
taking advantage of, especially if their retirement accounts
were devastated by the declines in the stock market,"
Lusby said.
Making it easier
For many taxpayers, Schedule B is a thing of
the past. That's the form you ahd to use if you had interest
and dividend income of $400 or more. This year the limit was
raised to $1,500. If you come in under $1,500, forget about
the extra form.
In general, the IRS has tried to make itself
more userfriendly. Online filing is one method, and improvements
in the services at www.irs.gov is another.
"They've worked very hard at this,"
said Ned Montag of the investment management firm A. Montag
and Associates in Atlanta. "Problems that once were nearly
insoluable are muc more manageable."
The IRS has even put together a 40-page booklet
describing the free services it offers. It's Publication 910.
Expecting a refund? Once you've filed, you can
track the status of any refund by going to www.irs.gov. Click
on Where's My Refund.
back to top
By David McNaughton
Atlanta Journal Constitution (February
5, 2003) - Ted Turner is relocating to Avalon, Florida. The
decision to move was made for tax reasons. Florida, unlike
Georgia, has no personal income tax.
In Florida, filling out a court document declaring
you live in the state, qualifying for a homestead exemption
or registering to vote will make you a legal resident.
Legal residency can be a gray area, tax specialists
say, but there is a rule of thumb about it.
“Your primary residence is generally defined
as where you spend the most time,” said Roger Lusby
III, a certified public accountant with Atlanta firm Frazier
& Deeter.
Turner, “spends twice as much time in
Florida” as elsewhere, said Donolan.
“He felt it was important to stay [in
Atlanta] when he was an important part of the company,”
She added.
Turner, the biggest shareholder of AOL Time
Warner, announced last week that he’ll step down in
May as vice chairman.
For more information about state residence
tax issues, please contact Roger W. Lusby at rlusby@frazier-deeter.com
or for a full reprint of this article, please contact the
Atlanta Journal Constitution.
back to top
By Susan Percy
Representatives from Metro Atlanta accounting
firms gathered this fall, at Georgia Trend’s invitation,
to talk about changes and challenges facing their profession.
Participants included the managing partner of the Atlanta
office of Deloitte & Touche, on of the profession’s
Big Four, and representatives of eight other firms of varying
sizes.
All attendees indicated they have been shaken by the Enron
scandal and the subsequent demise of Arthur Andersen. Most
felt that the reputation of the entire industry had been tarnished
by the actions of a small minority. On everyone’s mind
were the likely effects of the Sarbanes-Oxley Act of 2002,
which requires that CEOs and CFOs personally certify the accuracy
of the reports their companies file with the Securities and
Exchange Commission. The Act currently applies to public companies
only, but participants discussed its ramifications for private
companies, as well.
Rountable participants were Guy Budinscak, managing partner,
Deloitte & Touche LLP in Atlanta; Jonathan Miller, managing
partner, Habif, Arogeti & Wynnne, LLP; Carolyn Riticher,
Windham Brannon, P.C., president-elect of the Georgia Society
of CPAs; Elton Wolf, managing partner, Mauldin & Jenkins
LLC; David A. Deeter, managing partner, Frazier & Deeter
LLC; Richard C. Ingwersen, Gifford, Hillegass & Ingwersen
P.C.; Bruce V. Benator, managing partner, Williams, Benator
& Libby LLP; James L. Underwood, P.C.; and Frank Moore,
Moore & Cubbage, LLP. Georgia Trend Editor and Publisher
Neely Young served as moderator. Here are excerpts from the
session.
Young: Congress recently passed
the Sarbanes-Oxley Act of 2002. Most of the provisions are
specific to auditors of public companies. What effect do you
think this law will have?
Deeter: I think we see this
as really good news for firms like ours. We see the sense
of awareness and concern about the splitting of services –
the consulting, income tax, auditing. I think that’s
going to be an issue for a lot of firms, even auditing and
income tax services. We have opportunities of working with
larger companies as they start splitting services.
Young: Would you go a little
more into the splitting up services?
Deeter: Our practice focuses
on privately held companies. Not much has changed yet. We,
as always, get representation letters. There’s a little
bit of a gut-check. Often, the CEO will sign income tax returns
under penalties of perjury. So that’s often a gut-check,
because we reconcile the tax returns with the accounting financial
statements. But it does seem, in general, that even (with)
our owner-operator clients, there’s a ….. little
bit higher awareness that they’re publishing accurate
financial statements. My sense is that all of the financial
statements out there are a tad more conservative than they
were a year ago. So that has a ripple effect through the financial
markets.
Wolf: I’m still struggling
with the fact that Andersen is gone. All of our lives most
of us have looked up to them as king of the hill. And, effectively,
the federal government just decided to execute them on spot.
I really think the press needs to examine how this happened.
Obviously there were some leadership issues and value system
issues. But there were 28,000 jobs that were just destroyed.
I hope the press will continue to examine the effect of this
reaction that we had, Sarbanes and everything that went along
with it. Frankly, the “perp walk” have been kind
of good, because they got the CEOs attention.
Deeter: Take out some of the
early headlines on Enron and WorldCom, I think the press has
been reasonably on balance.
Miller: I think there’s
tremendous opportunity for all of us to work together. I sse
the future as establishing relationships with each other.
Deeter: When we get back to
our offices, our red buttons will be on, our voice mail will
be on, and there’ll be clients looking for problem-solvers.
And I don’t know that a year from now that changes.
back to top
By Roger W. Lusby, III, CPA, CMA, AEP
One factor that influences the decision of an
employer (particularly a small business) to adopt a retirement
plan is the extent to which the business's owners will benefit.
Recognizing this, Congress enacted the Economic Growth and
Tax Relief Reconciliation Act of 2001 (EGTRRA), which increased
the maximum annual amount that employers can contribute to
a defined contribution plan, from the lesser of $35,000 or
25% of compensation in 2001 to the lesser of $40,000 or 100%
of compensation in 2002. (The $40,000 threshold will be indexed
in $1,000 increments.) The EGTRRA also increased the annual
compensation that may be taken into account for purposes of
determining contributions and benefits under a plan and for
nondiscrimination testing, from $170,000 in 2001 to $200,000
in 2002. (The $200,000 threshold will be indexed in $5,000
increments.)
The above increases have drawn much attention
to the fact that employees can now reach the maximum contribution
level through a defined contribution plan, so that any existing
money purchase pension plan (MPPP) could be terminated in
2002 without sacrificing contribution levels.
Conversions of MPPPs are popular with plan
sponsors, because they require annual contributions of a set
percentage of participants' compensation. Contributions to
profit-sharing plans, on the other hand, are discretionary
and can be based on whether the plan sponsors can afford to
make plan contributions. Given the current economic turmoil,
this flexibility could prove valuable to plan sponsors. In
fact, in Rev. Rul. 2002-42, the IRS clarified some of the
tax issues in a merger or conversion of an MPPP into a profit-sharing
plan. (For further information, see Tax Trends, "Merger of
Pension Plan into Profit-Sharing Plan is Not Partial Termination,"
TTA, August 2002, p. 545.)
However, little attention has been given to
the change in percentage of the compensation level. The EGTRRA
effectively increased this percentage from 25% in 2001 to
100% in 2002. With the family-aggregation rules repealed,
closely held businesses should consider putting spouses or
other family members on the payroll at $40,000 and amending
their defined contribution plan to allow for contributing
100% of salary (or $40,000) to their defined contribution
plan in 2002. This strategy could really benefit a number
of profitable, closely held businesses with few retirement
savings, while generating significant tax deductions.
Addendum: The Tax Clinic item,
"New Planning Strategies with Retirement Plans," TTA, Nov.
2002, p. 700, explains the changes to the profit-sharing-plan
contribution limits after the Economic Growth and Tax Relief
Reconciliation Act of 2001. While the maximum contribution
amounts have increased, the profit-sharing deduction still
has an overall corporate limit of 25%, under Sec. 404.
back to top
By Jennifer S. Spillman, CPA
The IRS recently amplified an earlier decision
that annuity or unitrust amounts paid to a trust by a charitable
remainder trust (CRT) for the life of a "financially disabled"
individual will not disqualify the CRT. According to Rev.
Rul. 2002-20, superseding Rev. Rul. 76-270, a trust will qualify
as a CRT if:
- The separate trust's sole function is to
receive and administer the annuity or unitrust amounts for
the disabled beneficiary's benefit; and
- On the beneficiary's death, the separate
trust's remaining assets will be distributed to the beneficiary's
estate or, after reimbursing the state for any Medicaid
benefits provided to the beneficiary, will be subject to
the beneficiary's general power of appointment.
By meeting these requirements, the trust mirrors
the beneficiary's actions (i.e., its assets are controlled
by the beneficiary). Thus, the IRS position is that the annuity
or unitrust amounts are deemed to go directly to the beneficiary
for Sec. 664(d)(2)(A) purposes, because the trust's only function
is to receive and administer the payments received from the
CRT for the beneficiary's benefit. The Service also concluded
that the CRT's term under these circumstances "can be for
the life of the beneficiary and is not limited to a term of
years."
Under Reg. Sec. 1.664-3(a)(5)(i), a beneficiary
of annuity or unitrust amounts must be either an individual
or a charity. To qualify as a CRT with other types of beneficiaries
under Rev. Rul. 2002-20, the beneficiary who receives the
annuity or unitrust amount must qualify as a "financially
disabled" individual under Sec. 6511(h)(2)(A). This requires
the individual to be unable to manage his or her financial
affairs due to a "medically determinable physical or mental
impairment" that will result in his or her death of which
has lasted or is expected to last for at least one year. If
the individual has a person acting on his or her behalf for
financial matters, he or she is not financially disabled for
Sec. 6511(h)(2)(A) purposes.
According to Regs. Sec. 1.664-2(a)(5)(i), the
annuity or unitrust amount must continue either for the life
or lives of a named individual(s) or for a term not to exceed
20 years. However, under Rev. Rul. 2002-20, a CRT's term can
be for the life of the financially disabled individual and
not limited to a term of years.
Rev. Rul. 2002-20 also describes a situation
in which an individual creates a CRT and Trust B to benefit
individual C. The CRT will pay annual unitrust amounts to
Trust B for the life of C, who is financially disabled. Trust
B is to pay a portion of the unitrust amount to C each month.
If this amount is insufficient to provide C's proper care,
maintenance, support and general welfare, Trust B's trustee
could authorize additional payments to C. On C's death, the
balances remaining in the CRT and Trust B will be distributed
subject to C's general power of apportionment.
The ruling provides an excellent tax planning
strategy for high-net-worth individuals who care for an incompetent
individual. By using the ruling, wealthy individuals can reduce
their estates, avoid gift taxes, benefit an incompetent individual
and produce a charitable contribution.
back to top
Simples (savings incentive match plans for employees)
allow you and your fellow principals to maximize pretax contributions
regardless of whether any employees elect to participate.
The tax law increases the amount you can contribute to a SIMPLE
plan in future years so these plans will become increasingly
attractive.
Caution: Evaluate your options
carefully before choosing a SIMPLE plan. The law increases
the amounts that can be sheltered in other retirement plans
even more.
Simple and straightforward
SIMPLE plans may be either SIMPLE IRAs or SIMPLE
401(k)s. In practice, most are SIMPLE IRAs.
Choosing a SIMPLE IRA offers
these advantages . . .
- Administrative costs are typically lower.
- Each employee can direct his/her own account,
with many investment alternatives.
- Your fiduciary responsibility as a plan sponsor
may be reduced.
- You'll have more freedom investing your own
funds.
But SIMPLE IRAs do pose some pitfalls for employees
who want to build up a large retirement plan . . .
- There's a 25% penalty for early withdrawals
(before age 59 1/2) in the first two years you participate.
Then the regular 10% early withdrawal penalty goes into
effect.
- Rollovers from a SIMPLE IRA to a regular
IRA aren't permitted until after eh two-year period.
- Loans aren't permitted from any IRA, including
a SIMPLE IRA.
Lifting the limits
In either type of SIMPLE plan, employees can
defer 100% of their compensation, up to $7,000 in 2002. Under
the new tax law, the maximum elective deferral for an employee
will rise to $8,000 in 2003, $9,000 in 2004, and $10,000 in
2005.
SIMPLE plans require employers to make contributions.
Of two permitted methods, the "3% match" is usually
preferred. With this method, the employer provides a dollar-for-dollar
match of up to 3% of a participating employee's salary.
Otherwise, the employer can make a 2% nonelective
contribution for all eligible participants (whether or not
they make any elective deferrals).
Ceilings: The maximum contribution
to a SIMPLE plan in 2002 is $14,000 – a $7,000 salary
deferral plus a 3% employer match on compensation. The usual
compensation cap – $200,000 in 2002 – is waived
for SIMPLE IRAs when the 3% match is used.
Catch-up contributions
The tax law adds yet another wrinkle to SIMPLE
plans. Participants age 50 or older can make extra catch-up
contributions. These can also be matched by the employer.
The maximum add-on contribution for those age
50-plus employees is $500 in 2002. That will increase in $500
increments, to $2,500 in 2006. You must earn at least as much
as you contribute, counting the regular elective deferral
plus the 50-plus add-on.
Higher limits: In 2002, as much
as $15,000 might be contributed to your SIMPLE account made
up of . . .
- $7,000 regular contribution.
- $7,000 employer match.
- $1,000 more if you're at least age 50 ($500
from you and $500 from your employer).
By 2006, that maximum amount will be up to $25,000,
including the catch-up provision if matched.
Defined-contribution plans, such as profit-sharing
plans, permit even greater contributions, up to $40,000 in
2002.
When SIMPLE makes sense
Given that SIMPLE plans restrict contributions
more than other retirement plans, when should you consider
them? When these conditions apply . . .
- Your company does not sponsor a retirement
plan. You can't have a SIMPLE plan if you offer
another plan. Also, you can have no more than 100 employees
who earn at least $5,000.
Key: All employees who earn more than $5,000
a year must be eligible to participate in a SIMPLE plan.
- You want a plan with little paperwork.
Compared with other plans, SIMPLE plans are easy to administer.
Reporting requirements are modest.
- You want to trim costs. With other
plans, you may have to make much larger contributions for
your employees. With a simplified employee pension (SEP)
plan, for example, you may have to contribute 15% of pay
for all of your eligible employees. Defined-contribution
plans might require a 25% contribution.
By comparison, SIMPLE IRAs require only a 3% match –
and then only for participating employees.
- Low participation is likely. The fewer
employees who are likely to elect to reduce their current
earnings for SIMPLE contributions, the smaller your company's
match will have to be. All SIMPLE contributions are fully
vested, so employees who leave will take your matching contributions
with them.
SIMPLE plans are not subject to nondiscrimination
testing. You and your fellow principals may maximize pretax
contributions regardless of whether any employees elect
to participate.
Thus, SIMPLE plans may be a good choice if you have a low-paid,
high-turnover workforce.
- You have family members on the payroll.
If your company pays your spouse, children, or other relatives
at least $7,000 this year, each can make the maximum contribution.
Often, with a SIMPLE IRA, most of the money contributed
goes to the company's principals and their relatives.
You and your relatives can push the upper limits of SIMPLE
IRAs even if none of your other employees contributes and
no further company match is required.
- You have modest self-employment income.
If you have, say, $20,000 in self-employment income this
year, you could contribute around $2,400 to a SEP, which
is another low-paperwork plan. Profit-sharing plans involve
more paperwork for a slightly greater contribution level.
In this case, a SIMPLE plan permits a larger contribution
than either a SEP or profit-sharing plan.
Example: You're covered by an retirement plan
at your day job and you earn $20,000 this year as a freelancer.
You can contribute $7,000 to a SIMPLE IRA from your self-employment
income plus $554 (3% of $20,000 x 0.09235) as an employer
match.
Caution: If you are already maximizing a 401(k)
plan at another company, you may be prohibited from using
a SIMPLE IRA plan.
New incentive
SIMPLE plans may also qualify for a new tax
credit. The credit applies to new plans started after 2001
– it's worth up to $500 in annual tax savings for three
years.
To qualify for the credit, an employer cannot have sponsored
a qualified retirement plan within the previous three years.
Urgent: The deadline for setting up a SIMPLE
plan for 2002 is October 1.
back to top
back to top
By Donald Jay Korn,
Contributing Editor
Physicians Financial News
(June 15, 2002) - Now there’s a “new”
new tax law. The law signed by President Bush in mid-2001
has been succeeded by the Job Creation and Worker Assistance
Act of 2002, which became law last March. Some provisions
of the latest law may be tax-savers for physicians; indeed,
you may be able to retroactively enjoy tax savings for 2001.
Here are some of the key elements:
• Bonus depreciation. You can claim greater first-year
write-offs for purchases of computers, machinery and other
equipment. A 30 percent “bonus” applies to most
types of business property (except for real estate) purchased
between Sept. 11, 2001 and Sept. 10, 2004, so purchases made
late last year are included. If you spent $100,000 on diagnostic
equipment in the last quarter of 2001, for example, you can
claim a special $30,000 deduction for 2001 while the remaining
$70,000 of the purchase price can be depreciated under the
usual rules.
“The special rules that let you ‘expense’
equipment still apply,” says Michael Andreola, partner
in the New York office of the accounting firm BDO Seidman.
“That is, you may be able to deduct up to $24,000 worth
of equipment purchases in 2001, and again in 2002. For amounts
left over, you can take an immediate 30 percent depreciation
deduction.” He notes that the new law covers leasehold
improvements, too, which would entitle you to faster depreciation
deductions if you have paid to renovate office space that
you lease.
• Business cars. A quirk in the
tax code caps first-year depreciation of a car used for business;
for 2001 and 2002, that cap had been set at $3,060, assuming
100 percent business use. The new tax law raises the ceiling
on first-year depreciation for passenger autos to $7,660,
during the three-year period mentioned above.
Roger W. Lusby, III,
tax partner in the Atlanta accounting firm Frazier
& Deeter, says that the new depreciation rules,
allowing greater depreciation deductions for business use
of cars, will be especially useful for physicians who are
not employees and thus not subject to the 2 percent miscellaneous
itemized deduction rules.
“If your vehicle is used less than 100
percent for business, the $7,660 maximum depreciation figure
must be reduced accordingly,” says Marty Abo, a CPA in
Voorhees, N.J. Suppose, for example, you purchased a business
car last year, placed it in service after Sept. 10, and claim
75 percent business use.
“In that case,” says Mr. Abo, “you
could take an extra $3,450 depreciation deduction for 2001:
75 percent times $4,600. This would be above the normal depreciation
you would have been entitled to for a business car purchased
in 2001: 75 percent times $3,060, or $2,295.” Altogether,
then, the total write-off would increase from $2,295 to $5,745,
with 75 percent business use.
If you are in such circumstances, and you already
have filed your 2001 tax return, what should you do? “You’d
probably want to file for a refund,” says Mr. Abo. “Presumably,
the fee you’d have to pay your accountant would be dwarfed
by the refund you’d receive. If you’re in the 39
percent tax bracket, for example, the extra deduction would
be worth approximately $1,345.”
Indeed, Mr. Andreola says that computer programs
issued to tax prepares in early 2002 do not provide for the
new law’s bonus depreciation deduction.
“We obtained filing extensions for those
clients who might be affected,” he says. “If you
already have filed your return, and you qualify for extra
2001 depreciation deductions because of the new law, you can
file an amended return and receive a refund.”
Some taxpayers are leery that filing amended
returns may bring unwanted attention from the IRS, but that’s
not likely this year if you have a well-documented equipment
purchase.
• Medical savings accounts (MSAs).
The new law extends the pilot program for MSAs through the
end of 2003. Previously, the program was scheduled to expire
at the end of 2002.
MSAs, which are limited to self-employed individuals
and companies with up to 50 employees, require participants
to buy a health insurance policy with a high deductible. In
2002, those deductibles must range from $1,650-$22500 for
individuals and $3,300-$4950 for families. Moreover, the policy
must limit the total out-of-pocket expenses (deductibles and
co-payments) to $3,300 per year for an individual and $6,050
per year for a family. (These numbers may be adjusted periodically,
based on changes in the Consumer Price Index.)
In addition, employers or employees (but not
both) can make tax-deductible contributions to participants’
MSA accounts. MSA contributions may be as much as 65 percent
of the deductible for individuals and 75 percent of the deductible
for families. Thus, a family with a $4,950 deductible could
contribute up to $3,712.50 this year to an MSA.
If you’re an employer, premiums paid for
the high-deductible policies are fully tax deductible, along
with any contributions made to employees’ MSAs. (Contributions
to employees’ MSAs can’t be discriminatory.) You
likely will come out ahead, compared with the cost of providing
a standard health plan, because high-deductible policies are
relatively inexpensive.
An MSA acts like an IRA, so contributions can
grow without being subject to income tax. MSA money can be
withdrawn to cover healthcare outlays before the insurance
kicks in; withdrawals also can be used for uncovered healthcare
items such as vision and dental care.
When eligible payments are made from an MSA,
no income tax will be incurred. Thus, with an MSA you and
your employees will be paying for healthcare with pre-tax
rather than after-tax dollars. The higher your tax bracket,
the greater the advantage of using an MSA.
If all the money you contribute to an MSA is
not needed for medical outlays, any unused funds can be carried
over from year to year. In fact, the excess can stay in your
MSA until there is a need. MSA withdrawals for non-medical
reasons are subject to income tax, plus a 15 percent penalty
before age 65.
• Simplified employee pension (SEP)
plans. The new law corrects a technical mistake in the
2001 tax act. As a result, the SEP contribution limit for
2002 jumps from 15 percent to 25 percent of compensation,
up to a maximum of $40,000 this year. Therefore, with a SEP
you can contribute as much as you can to any type of a defined
contribution plan (such as a profit-sharing plan), but with
less paperwork.
According to Barry Picker, a CPA and financial
planner in Brooklyn, N.Y., physicians who work as employees
(even employees of their own professional corporations) can
maximize SEP contributions this year if they earn at least
$160,000. They can contribute 25 percent of pay.
“For a sole proprietor filing a Schedule
C, it’s a little more complicated,” he says. “You
can still contribute up to 25 percent of compensation, but
there’s a different definition of ‘compensation’
for taxpayers filing a Schedule C.”
In these cases, compensation is the net income
on the Schedule C, reduced by the deduction for one-half of
the self-employment tax, and also reduced by the SEP contribution
itself.
“The computation may vary for some individuals,”
says Mr. Picker, “but many doctors who are not employees
will need to earn about $208,000 this year in order to contribute
the maximum $40,000 to a SEP.”
Now that the contribution limits have been raised,
you may want to consider a SEP rather than your existing retirement
plan. “If you are part of a practice, the decision on
choosing a retirement plan usually is made at the entity level,”
says Mr. Lusby. “If
you’re a sole proprietor, you probably should just do
a SEP – that is the easiest and least expensive solution.”
The downside? “You will have to contribute
for any employees,” says Mr.
Lusby, “and they are vested 100 percent in
any contributions.”
That’s the key tradeoff, according to Oscar
Destruge, director of technical services at Diversified Investment
Advisors in Purchase, N.Y. “When you sponsor a SEP,”
he says, “you must cover all employees who are at least
21 years old and who have worked for you three of the past
five years. You must make a contribution on their behalf that’s
proportionate to your own contribution.”
For example, if you earn $200,000, you can max
your SEP with a 20 percent ($40,000) contribution this year.
If so, you would have to put in $6,000 for an employee earning
$30,000, $8,000 for an employee earning $40,000, and so on.
“Unless you’re willing to make those
types of contributions,” says Mr. Destruge, “you
may prefer some other type of retirement plan, one that’s
more expensive to administer but will permit you to contribute
less for your employees.”
That is, a physician with a small, low-paid
staff that turns over frequently may prefer the simplicity
of a SEP; with a higher payroll, you might want to investigate
a sophisticated version of a profit-sharing plan that will
let you maximize your own contributions while minimizing those
made for employees.
back to top
|
