WILL THE HOUSE PASS THE INTERNET SALES TAX LAW?



Eddie Quigg, CPA, JD



After a lot of chest thumping about leveling the playing field for retailers, fairness and the rest of the blah blah that Congress specializes in, the Senate on May 6 overwhelmingly passed the Marketplace Fairness Act of 2013. In other words it's genuinely bipartisan because 21 Republicans voted in favor of it. Forget the details of the measure because the House is almost guaranteed to change them. The real question is whether the House will get on board and pass its own version, setting up a compromise bill that will eventually become law.

The pundits are weighing in: sampling a Google search provides the following results:

• Mother Jones: Says it will be tougher sledding in the House, still has a long way to go according to Rep. Bob Goodlatte, R-Va, chairman of the House Judiciary Committee, which would have jurisdiction over the bill. None of the House heavyweights has rejected it outright. With widespread support from just about everyone except E-Bay, it seems likely the House will get on board.

• LA Times: In a thorough treatment, this article basically says the House will take its time to air all the issues associated with the legislation, including whether the door might open to allow states to tax interstate income etc. which can't currently be taxed. Also, the procedures need to be simplified, and E-Bay insists that the exemption for sales less that 1 million should be raised to 10 million. So, expect a lot of changes.

• Washington Post: Again, joining in the chorus, the article cites the view that it will be a tougher sell in the House due to the specter raised by some Republicans and business groups  of the bill possibly causing a tax increase.It cites the current (judicially mandated) law that prevents states from taxing sales by retailers that do not have the necessary physical presence in the state.

• CNNTech: Another thorough article with roughly the same message, noting that the earliest the bill could go into effect would be October 1, 2013, and that states would have to then change their laws to allow them to collect the tax from internet-only sellers.

The bottom line--I get the sense that this will happen, we'll have to start paying tax on all those Amazon purchases, but when is unclear.

Documentation relief for home office deductions

Sandy Piper, CPA

The IRS recently published a good news/bad news announcement for those claiming home office deductions.  The good news is the IRS has decided to offer a simpler option for taking a home office deduction.  When you have a home office, the new way of doing things allows you to forgo filling in the 43 lines on Form 8829.  Instead you will be able to fill out a much simpler form, taking a flat five dollars per square foot of office space, which tops out at 300 square feet or $1,500.

The current requirements for claiming a home office deduction will still be in place. A home office must be used regularly and exclusively for business and it will still be limited by your related business income.  All of that said, it has the potential for making record-keeping a less onerous burden.

Now, for everyone breathing a sigh of relief that finally the IRS has done something that makes sense, are you ready for the bad news?  This will not apply until you file your 2013 taxes. 

Huh?

TAX PLANNING AFTER THE ELECTION: NOW WHAT?



Eddie Quigg, CPA, JD



No different, more of the same, status quo—Romney’s defeat, and an unchanged Congress—these are terms being used to describe our post-election tax and political landscape, which almost guarantees that a permanent solution to the so-called “Fiscal Cliff” will not be in place before the end of the year. Let’s call it “Gridlock—the Sequel”. We all know how the original ended---the can was kicked down the road, and here we are again, still staring at that can. Both sides are talking bipartisanship, but neither is retreating from their original positions—the Republicans in control of the House are against raising taxes-- and the Democrats in control of the Senate, following Obama’s lead, insist on raising taxes on the so-called rich.  Because of the dire consequences of inaction for the economy, some kind of temporary agreement before year-end or soon after is likely-- an extension of the current tax rates, and an agreement to raise the debt ceiling, until a permanent solution is passed sometime in 2013 or early 2014.

WHAT IS THE FISCAL CLIFF?

The short answer is that the Fiscal Cliff is what will happen on January 1, 2013—the higher taxes that kick in after the expiration of the Bush-era tax rates, and the date of implementation of the automatic spending cuts for defense and other government programs, if Congress fails to act before year-end, or early in 2013. Most importantly, there are the consequences to the economy of falling off the cliff-- a really noisy comic book type “Splat!”, only the consequences are real, and very unfunny. Hence the temporary agreement that is likely to be reached, mentioned above. We can be thankful that the noise of the election has largely died down, unfortunately the Fiscal Cliff noise is just beginning.

MAJOR 2013 TAX INCREASES

There are tax increases that are certain to take effect in 2013, notably those in the Patient Protection and Affordable Care Act, a/k/a “Obamacare”. The major increases include an additional tax of 3.8% on the lesser of your investment income or your “excess” modified adjusted gross income (MAGI) over $250,000 or more for those married filing jointly, and over $200,000 for single taxpayers. The types of income subject to the tax are dividends, interest, capital gains, rental income, income  from S corporations, partnership income, and income from annuities. There are important exceptions for retirement pay and “active” trade or business income. The details of what constitutes “active” income are unknown at this time.

The other major increase is an additional 0.9% Medicare hospital insurance tax (HI tax) that will apply to wages or self-employment income of individuals with MAGI over the above thresholds.

TAX PLANNING SUGGESTIONS FOR 2013

For taxpayers likely to be subject to additional taxes in 2013, the following tax planning ideas should be considered:

·         Taxpayers may want to sell long-term capital gain assets in 2012 rather than 2013 in anticipation of an increase in the rate, or the effect of the 3.8% surtax. This applies to stocks, bonds, appreciated real estate, and other capital gain assets.

·         Additional acceleration strategies include electing out of the installment method for qualifying assets sold in 2012, foregoing like-kind exchange  treatment, exercising non-qualified stock options, and accelerating the payment of year-end bonuses into 2012.

·         For owners of C corporations and S corporations with earnings and profits (E&P) from prior C years, they may want to pay dividends in 2012. There are various options available to S corporations to pay these dividends.

·         Conversely, it may be more tax advantageous to defer deductions to 2013 for those who anticipate being in a higher tax bracket, such as retirement plan contributions, health plan contributions, employee bonuses, not electing 50% bonus depreciation or section 179 expensing  for the purchase of business assets . Making certain accounting method elections or changes may also achieve these results.

·         For S corporation shareholders and  partners in non passive businesses, and potential real estate professionals, it is important to analyze your participation in the business to determine your “active” or “passive” status for 2013 in anticipation of the 3.8% surtax. Making changes in 2012 in this regard could be beneficial for 2013.

·         Before implementing the above ideas and strategies, it is important to factor in the effect of the alternative minimum tax.

For additional information or assistance please call or contact us at your convenience.

Here We Grow!

Megan Madden, CPA

If you have not heard the good news, Megan Madden, CPA has accepted a position as a Senior Associate in our Business Services Division.  Megan is an expert in Pension Plan and Not-For-Profit auditing.  Here at Purk she will be working primarily with our pension plan clients.  See the announcement in the St. Louis Business Journal here.

Preparing Your Business for Sale: Tips for Achieving a Happy Ending

Eddie Quigg, CPA/JD

Preparing a business for sale is more of a process than a task, and more importantly, it is usually only done once. One and done. That alone inspires deep dread for most owners, who have spent a lifetime refining and improving a single product or service—the business and its future. Let’s face it, no one likes to deal with their own mortality, and selling a business requires us to do just that. Accordingly, to stress its importance, this list begins with the soft stuff—the psychology of selling a business, and ends with a few practical suggestions—the harder stuff that most owners find is easier to implement.

The Head Game(s)

1.       To make it to the end, start early.  Selling your business is a process that can take months, even years. It starts with answering the following questions—Do I really want to retire and leave this business, am I really done, is the end in sight?  Do I want to sell to my employees, or try and keep the business in the family—are they, or will they be ready to take over when I’m ready to let go and move on?  The earlier these questions are asked, the sooner they can be acted upon.

2.       Be Objective.  Set your post-retirement goals and aspirations, and then crunch the numbers to see if they are a match, not the other way around. Many owners have unrealistic visions of buying  that beach house in Hawaii, as well as maintaining the condo close to the grandkids, which can lead to equally unrealistic expectations of what the business is really worth.  Making sure the retirement dream will work depends on your willingness to get an honest appraisal of the value of the business. The opposite also applies, some owners set the price of their business too low, which can often lead to seller’s remorse, and a busted deal, which will unnecessarily prolong the process. You may think you know what your business is worth, but getting a professional appraisal is a necessary step, for both the seller and the buyer.

Practical Tips

1.       Get your Financial House in Order.  Ask yourself how your business will look to a prospective buyer, and act accordingly. Trim unnecessary expenses, especially those personal expenses such as club dues, excessive meals and entertainment—and control your expenses in general to make the bottom line look better. Plan early to divest the business of “other assets” like investment portfolios, land , and real estate used in the business. The buyers’  focus is on the revenue producing assets and liabilities of the business, the extras are a distraction that sends the buyer the wrong message, like a cluttered desk indicates a cluttered mind. This extends to the office, the plant, even the landscaping and signage.

2.       Documention   and Transparency.  Make it easy for a prospective buyer to see how your business works. Document key processes and procedures, including the duties that key employees that are responsible for and how all these systems contribute to the success of the business. Include key documents such as leases, supplier contracts, employee contracts and manuals. Be prepared to answer the buyer’s questions, the same questions that you would ask if you were buyer.

3.       Get Help!  Selling the business is a team effort, and requires an experienced team to get you successfully to the finish line. Make sure your CPA and attorney are qualified to handle the sale, and if you employ a business broker, thoroughly investigate them before committing to a contract of representation.

Conclusion

The final step in the life of your business requires the same level and degree of commitment and preparation that you had when you started it, don’t let the end of the dream become a nightmare—prepare yourself!

Lease Accounting Changes Coming Down the Pipeline

Joe Boruff

The proposed change in accounting for leases will apply to all entities, including privately held companies and nonprofit organizations, who prepare their financial statements in accordance with US generally accepted accounting principles (“GAAP”). Entities with a significant amount of leasing activity could see dramatic changes to their balance sheet.

Overview:

Simply put, the goal of a recent exposure draft jointly published by the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board (“IASB”) is to eliminate operating leases and get virtually all leasing transactions on the balance sheet for all entities. Generally speaking, all leases will have to be capitalized on the balance sheet once this proposed requirement is adopted. It will supersede the guidance in Topic 840 (FASB Accounting Standard Codification) on leases and IAS 17, Leases, in IFRSs (International Financial Reporting Standards).

Under current US GAAP, leases are treated as either capital leases or operating leases. These models have been criticized because they do not provide the user of the financial statements with an accurate representation of leasing transactions as they may not necessarily reflect the underlying economic reality. Current lease accounting allows for off-balance-sheet treatment of leases.

The exposure draft proposes that lessees and lessors should apply a right-of-use model in accounting for all leases. This means that the lessee recognizes an asset representing its right to use the leased property and a liability for the obligation to make future lease payments. The lessor recognizes an asset representing its right to receive lease payments and then must consider one of two approaches: the performance obligation or derecognition approach.

In light of the overall issues discussed in the IFRS convergence and its differences from GAAP, this is one area that will be pervasive for all entities ranging from the smaller privately-held companies to publicly traded companies, whether they are domestic or international.

Summary:

-          All leases for all entities must be reflected in the balance sheets of lessors and lessees.

-          There is no distinction between a “capital” lease and “operating” lease.

-          Smaller companies will be able to treat the change prospectively, upon adoption

-          Larger companies will treat the change retroactively (affecting each year presented in the current year financials), upon adoption

-          Lease terms of 12 months or less would not be capitalized by either the lessee or lessor.

-          Changes will increase debt and may affect loan covenant ratios. Changes will also likely increase EBITDA as leases currently recognized as “operating” will now have “amortization” expense and payments will reduce liability obligations under the new framework.

-          As this will apply to all entities preparing financial statements according to GAAP, some entities may opt to prepare their financial statements in accordance with an Other Comprehensive Basis of Accounting (“OCBOA”), for example, income tax basis, for third party use where OCBOA basis presentation is accepted.

Important Dates:

August 17, 2010 - The initial exposure draft for the proposed accounting standards update was issued.

June 13, 2012 - a joint press release was issued noting all decisions reached to that date were preliminary and a revised joint exposure draft would be issued in the fourth quarter of 2012. The revised exposure draft will address both the balance sheet and income statement treatment of leases to be adopted for lessees and lessors.

The FASB and IASB anticipate completing this important convergence project during 2013.

Let me know how I can be an asset to you and make this convergence one of the lease(t) of your worries!

Please follow this link to the actual FASB/IASB Exposure Draft for further details:

Are you compliant with new 401(k) Fee Disclosure Rules?

Jennah Purk, CPA, MST

You may have noticed that new rules regarding fee disclosures for retirement plans from the Department of Labor have been in the news recently.  Note that these are not new fees, but the fee disclosure requirement is new.  Two of the new requirements include:

1.       Retirement plan vendors were required to provide plan sponsors with required fee disclosures by July 31, 2012.  This is referred to as the 408(b)2 disclosure.

2.       Plan sponsors are required to provide plan participants required fee disclosure information by August 31, 2012.  This is the 404(a)5 disclosure.

The new rules also impose a requirement that plan sponsors not only fulfill the disclosure requirements but that they now examine the disclosures to ensure they are adequate and determine that the fees charged are reasonable and fair.  Many plan sponsors may not be aware of these additional duties.

Be aware that these new fee disclosure rules are different from fiduciary standards for plan sponsors.  The DOL has prepared a fact sheet on these new requirements you may view here.