Senate Moves to Repealing 3-Percent Rule

On November 7, the senate voted to take-up legislation that would repeal the 3-percent withholding tax imposed on federal contractors.  Senate Majority Leader Harry Reid plans to amend the bill with legislation that would provide tax credits for companies that hire veterans with service-connected disabilities.

The withholding tax repeal is estimated to cost $11.2 billion over 10 years, according to the Joint Committee on Taxation.  The House approved a measure that would offset the cost by changing the calculation of modified adjusted gross income in determining eligibility for some health care credits, including Medicaid, and the Children’s Health Insurance Program.  Reid said he would prefer a different pay-for but may change his mind if passage of the VOW to Hire Heroes Bill of 2011 is assured with the House offset.

The VOW to Hire Heroes Bill of 2011 proposes a tax credit of up to $5,600 for hiring veterans who have been looking for a job for more than six months, as well as a $2,400 credit for veterans who are unemployed for more than four weeks, but less than six months.  In addition, the measure calls for a tax credit of up to $9,600 for hiring veterans with service-connected disabilities who have been looking for a job for more than six months.  It also provides expanded training and education opportunities for all veterans.  Democrats have proposed paying the $1.6-billion cost of the legislations by delaying scheduled fee reductions on mortgage application for loans guaranteed by the Department of Veterans Affairs.

President Urges Passage

President Obama on November 7 appealed to members of Congress to pass tax credits for employers who hire unemployed veterans of the wars in Iraq and Afghanistan at a time when nearly three-million former service members are transitioning to civilian life.  “Our veterans did their jobs.  It’s time for Congress to do theirs,” Obama said at a Rose Garden event attended by former service members and representatives of veterans’ organizations that support the hiring incentives.  The president urged lawmakers to “put our veterans back to work, and pass this element of the jobs package that benefits our veterans and gives businesses an incentive to hire veterans.”

2011 Year-End Tax Planning - What You Need to Know

Twenty-five years ago, Congress overhauled the Tax Code in the Tax Reform Act of 1986. At that time, the 1986 Tax Reform Act was praised for simplifying a Tax Code that had grown too complex. Since 1986, complexity has returned to the Tax Code, largely because Congress has enacted a host of temporary tax incentives with a variety of expiration dates.

Few tax laws have complicated tax planning as much as the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). EGTRRA was enacted as a temporary tax law although many predicted that a future Congress would make EGTRRA permanent. And while some of EGTRRA's retirement savings provisions were made permanent in 2004, other provisions have only been extended one or two years at a time. Many of the extended tax provisions are scheduled to expire at the end of 2011 or the end of 2012, leaving year-end 2011 tax planning a challenge for many individuals and businesses.

Individuals

Income/deduction shifting. Income and deduction shifting is a traditional year-end tax strategy that is worth a look at year-end 2011. However, one key complication is uncertainty over the individual income tax rates after 2012. We know that the individual income tax rates will be 10, 15, 25, 28, 33, and 35 percent for 2012. Under current law, the 10 percent rate is scheduled to expire after December 31, 2012 and the remaining rates are scheduled to revert to 15, 28, 31, 36, and 39.6 percent after December 31, 2012. As a result, some taxpayers may want to abandon the traditional strategy of shifting income into a future year and recognize income in 2011or 2012 when the lower rates are available.

Capital gains/dividends. Reduced tax rates on qualified dividends and capital gains are scheduled to expire after December 31, 2012.  Taxpayers need to carefully review when to recognize income from qualified capital gains and dividends to maximize their tax savings in 2011 or 2012.

AMT. For many individuals, year-end tax planning requires "running the numbers" for regular federal tax liability and alternative minimum tax (AMT) liability, and this year is no exception. Taxpayers may want to explore if certain deductions should be more evenly divided between 2011 and 2012 and which deductions may qualify, or will not be as valuable, for AMT purposes.

Gift tax exclusion. Many individuals overlook gift-making as a year-end tax strategy.  Under current law, the annual gift tax exclusion per recipient on which no gift tax is due is $13,000 for 2011 and 2012. Married couples may make combined tax-free gifts of $26,000 to each recipient.  Use of a “lifetime” estate and gift tax exclusion should also be considered for larger gifts.

Bíg ticket purchases. Taxpayers planning a big ticket purchase in 2012 may want to accelerate that purchase into 2011 to take advantage of the deduction for state and local general sales taxes. The deduction for state and local general sales taxes is scheduled to expire after December 31, 2011. Taxpayers may take the deduction for state and local general sales taxes in lieu of the deduction for state and local income taxes.

Energy improvements. In recent years, Congress has enacted a number of tax incentives to encourage homeowners to make energy efficient improvements to their primary residences. The Code Sec. 25C tax credit for certain nonbusiness energy property is scheduled to expire after December 31, 2011. The credit is complex; if you are considering installing energy efficient improvements such as windows, doors, heat pumps, and other items, please contact our office to determine if your purchase qualifies for the credit.

More incentives. More individual incentives scheduled to expire after December 31, 2011 include (not an exhaustive list):

• Employee-side payroll tax cut
• Above-the-line deduction for qualified tuition and related expenses
• Tax-free distributions from individual retirement plans for charitable purposes by individuals age 70 1/2 and older
• Deduction for classroom expenses of qualified educators
• Expansion of adoption credit and adoption assistance
  

Businesses

Bonus depreciation. Business taxpayers have a limited window in which to take advantage of 100 percent bonus depreciation. One hundred percent bonus depreciation applies to qualified property acquired after September 8, 2010 and before January 1, 2012, and placed in service before January 1, 2012. Bonus depreciation is scheduled to drop to 50 percent for calendar year 2012.  State depreciation rules may differ.

Code Sec. 179 expensing. Business taxpayers also have a limited window in which to take advantage of enhanced Code Sec. 179 expensing. For tax years beginning in 2011, the Code Sec.179 dollar limit is $500,000 and the investment limit is $2 million. The dollar limit for years beginning in 2012 is scheduled to fall to $139,000 and the investment limit is scheduled to fall to $560,000. State depreciation rules may differ.

Real property expensing.  After 2011, special expensing rules for qualified real property are scheduled to expire.  A taxpayer that places qualified leasehold improvement property, qualified restaurant property or qualified retail improvement property in service in a tax year that begins in 2011 may elect to treat the property as Code Sec. 179 property and expense up to $250,000 of the cost of the property.

WOTC.  The Work Opportunity Tax Credit (WOTC) is scheduled to expire after December 31, 2011). The WOTC rewards employers that hire individuals from one of nine groups of targeted job seekers. Under current law, the WOTC applies to wages paid to qualified individuals who begin work for the employer before January 1, 2012.

 Research tax credit. The research tax credit is designed to encourage businesses to increase their spending on research and development of new technologies. The 2010 Tax Relief Act extended the credit through December 31, 2011.

FUTA Surtax. The 0.2 percent FUTA surtax expired after June 30, 2011. As a result, the FUTA tax rate falls to 6.0 percent for the remaining six months of 2011 before any state unemployment tax credits are taken into account. The IRS has indicated it will provide guidance for employers. Our office will keep you posted of developments.

Energy tax incentives. A number of tax credits for alcohol fuels and biodiesel/renewable diesel will expire after December 31, 2011. Tax credit for construction of new energy efficient homes and manufacture of energy efficient appliances will also expire after December 31, 2011.

FASB Issues Accounting Standards Updates for Certain Health Care Entities

The Financial Accounting Standards Board issued an Accounting Standards Update in July 2011 regarding “Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities.”

This update applies to entities within the scope of Topic 953, Health Care Entities that recognize large amounts of patient service revenue at the time of service even though the entities do not assess a patient’s ability to pay. The changes are as follows:

• Reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue on their statement of operations.  
• Providing enhanced disclosure about their policies for recognizing revenue and assessing bad debts.  
• Disclosing patient service revenue as well as qualitative and quantitative information about changes in the allowance for doubtful accounts.  

Click here to read the full report.

Get To Know MORE About Chris Honkomp.

Chris was recently honored to be recognized by the Corridor Business Journal as one of the 40 of the Corridor’s outstanding leaders under the age of 40.  We spent 15 minutes with him to pick his brain on leadership, family and writing papers in college!


1.    What are some of the more important leadership lessons you’ve learned in your career?
I have learned the true meaning behind the cliché, “you’re only as strong as your weakest link.”  To me, leadership is about developing young talent as fully and quickly as possible so that the overall team succeeds.

2.    Why accounting?  What brought you to this career and what do you like most about it?
To be honest, I chose a major in college that would require me to write the least amount of papers.  And although that was beneficial to me at the time, I’ve since learned what a career in accounting really means.  Today it’s a challenging environment that is different every day and is conducive to my competitive nature.  I put that competitive energy toward helping clients consistently get better!

3.    Why BP?  What differentiates this firm for you?
You know, coming out of school, I thought about leaving Iowa but with four younger brothers still here and active in school and sports, I knew that I wanted to stick close to home.  I chose to invest in my family and community and work for the firm that had the reputation as the best and that was – and is – Bergan Paulsen!

4.    What do you look for when you hire?
We look for individuals that come from a good educational program but beyond that we look at their work experience.  We want people to come to us with developed communication skills and a desire to help clients succeed.

5.    How would you summarize your leadership philosophy?
Balance.  This is an interesting and important word to me.  I think with most things, in work and in life, the right answer usually lies somewhere in the middle.  The word pertains to work / life balance as well as the balance you bring to providing the right solution for a client.

6.    What advice would you give someone getting out of school right now?
Find what you’re passionate about and good at, set goals and go after it!  Be confident in your ability to share fresh ideas and make an impact!

FASB Committee Considers Nonprofit Financial Reporting Changes

Nonprofit organizations are neither public nor private businesses creating a unique situation in regards to accounting standards. Because nonprofits are accountable to the public, the Financial Accounting Standards Board’s (FASB) Not-for-Profit Advisory Committee (NAC) is studying ways to improve financial reporting for nonprofit entities. The NAC has identified several potential projects for the FASB’s standard-setting agenda, three of which are:

1. Net Asset Classes – Redefine or relabel classifications to better convey nonprofit liquidity. 
2. Form of Financial Statements – Improve statements to better communicate the financial landscape. 
3. Management Discussion & Analysis – Include commentary from nonprofit directors to further explain the financial story. 

For more information, read the full article: FASB Not-for-Profit Advisory Committee Recommends Improvements to Financial Reporting.

Tax Strategies for a New Economy

During economic downturns, states are often searching for ways to supplement their declining tax revenues while businesses are formulating strategies to improve their profitability by reducing tax liabilities. Businesses look to sales and property taxes to reduce their overall tax payments but in an economic environment that has been declining, companies must prepare themselves to deal with states’ more aggressive pursuit of sales and property tax revenues.

Options to Minimize Corporate Sales Tax 

• Restructuring Individual Transactions or Business.
  Vendor contracts often offer good opportunities to restructure transactions to be more tax advantageous. For instance, a vendor that bills one lump sum for both telephone support and software updates could be restructured to bill them separately so that the support is not subject to state sales tax.
  In addition, a company may look at restructuring its business. For instance, a company may operate an internal fleet of trucks and delivery vehicles. By restructuring, the company could isolate the delivery of its own products to possibly take advantage of a exemption on the trucks, tires and fuel used for delivery of business’ goods. 
• Request Formal Rulings on State Tax Interpretations.
  Companies can also request formal rulings on state tax interpretations which could provide further insight into what is taxable. 
• Adjust Business to Market Products that are Exempt from Sales Tax.
  Companies may be able to tweak their offerings in order to remain exempt from sales tax. As an example, an electronic information service company may change its model so that consumers are unable to print anything tangible. 

External Obsolescence and Property Taxes
External obsolescence can be used to reduce the assessed value of property and, in turn, property taxes. While sales taxes may increase, there is potential to offset that cost with reductions in property taxes during a down economy. External obsolescence occurs when external forces beyond a company’s control – such as the economy – negatively influence property value. In today’s market, it’s not a question of whether a company or industry is experiencing external obsolescence but rather to what extent is it experiencing external obsolescence?

In a tight economy, companies must be aware of the effects that sales and property taxes can have on their profitability. As always, it’s important to work with a trusted advisor who can help you navigate tough times so that you can weather the storm and come out the other side better than before!

Fraud: No Organization is Immune

Bergan Paulsen Partner, Mike Regan, was published in the most recent Fall edition of the Minnesota Grain and Feed Association’s Mill & Elevator Magazine. The full article, “Fraud:No Organization is Immune” dives into what agribusiness organizations can do to protect themselves from the three types of fraud.  Read the highlights below.

Businesses purchase insurance to protect their companies from natural disasters and develop procedures to secure trade secrets from outside competitors, but not all businesses have developed the proper processes to protect themselves from internal corruption and fraud.  Because instances of fraud can cost a company millions, it is important to know that there are ways to prevent fraud and to detect these instances early. 

The top five things agribusiness organizations can do to protect themselves from fraud:

1.      Fraud hotline – Allowing others in the organization to submit anonymous tips of fraudulent activity accounts for over 40% of initial detections and is, by far, the most effective action an organization can take. 

2.      Internal procedures established by management – Developing budgets and establishing measurable financial objectives set clear expectations of acceptable employee behavior.

3.      Fraud awareness/ethics training – Ensure that all employees are aware of what to look for and understand company policies and procedures on reporting potential fraudulent activities.

4.      Internal audits – Internal auditors provide ongoing monitoring and assessments of activities.

5.      Surprise audits - An unannounced audit or a different auditing process can bring to light fraud that perpetrators did not have time to cover up. Surprise audits can also be useful at deterring fraud, not just detecting it.

Source: 2010 Report to the Nations on Occupational Fraud and Abuse, published by the Association of Certified Fraud Examiners.