McKonomics

The McKonomics Blog is Moving to M&A News

2011-06-17T09:43:02-04:00

In case you haven’t heard, our firm recently started a news blog called McKonly & Asbury News. In addition to our other blogs which are specific to many of the segments our firm serves, this new blog will include more general content including information that would formerly be posted on the McKonomics blog. Take a look at the articles we’ve posted since the beginning of May:

You can also look up articles by category. The new blog covers content on the following categories:

In an effort to make this transition process as easy as possible for you, we will automatically transfer your subscription from the McKonomics blog to the McKonly & Asbury News blog. We trust the information provided through the new blog will be just as beneficial as that provided through the McKonomics site. Additionally, past articles will continue to be on this site for your reference and enjoyment.

If you have any questions or concerns, please don’t hesitate to contact Reed Horanburg at rhoranburg@macpas.com.

When Should You Keep and Throw Out Tax Documents?

2011-04-25T07:42:30-04:00

Once your 2010 tax return has been put to bed, you can rest easy until it's time to prepare for filing next year...right? Wrong. Before you turn out the lights, collect all the vital materials from your 2010 return and store them in a safe place. The documents you don't need anymore can be thrown away, after shredding them or destroying them, of course.

In many cases, tax returns are now filed electronically, so that cuts down on the mound of paperwork you've faced in the past. But you still have to keep certain records for a minimum period of time. We're not a "paperless society" quite yet. Also, you must also cope with recordkeeping burdens for the 2011 tax year.

What sort of records are we talking about? It depends on your particular situation, but here are several common areas where record retention is a must. Otherwise, you can run any extraneous papers through the shredder.

Securities: Normally, you're advised to keep records of trading activities and 1099 forms for securities, especially as they relate to the "basis" of these investments.

New rules have eased the responsibilities for securities, but you're not completely home-free.

Under a 2008 tax law, financial institutions must provide you with information indicating the basis of securities sold, the amount of the sales proceeds and whether a gain or loss is long-term or short-term. These new rules are being phased in over a three-year period, but they generally apply to sales of stocks and mutual funds acquired after 2010. To establish basis, you still must retain the information for securities purchased before 2011.

In addition, retain 1099 forms for dividends and capital gains reported from mutual fund investments. Set up a system for tracking dividend reinvestments. If you don't, you might end up paying tax on these amounts twice -- once when they are reported as dividends and once when the securities are sold. Finally, it's recommended that you hold onto year-end reports.

Charitable donations: These tax rules were changed back in 2007. Now you have to meet stricter substantiation requirements for cash and cash-equivalent donations.

For starters, it's necessary to have a written confirmation from the charity or bank statements or other receipts to prove deductions. For contributions of $250 or more, you should corroborate gifts with a contemporaneous written acknowledgement. If you've donated property valued at more than $500, you must document the information about the gift. Note that an independent appraisal is required for gifts of property above $5,000.

Travel and entertainment: The IRS often zeroes in on travel and entertainment (T&E) deductions that look suspicious. Sometimes, special limits for luxury cars and other T&E items are ignored or misrepresented by taxpayers.

Keep a contemporaneous record of your T&E events listing all the details on dates, locations, amounts, the business parties involved and your business purposes. For convenience, you can set up a spreadsheet. Receipts for any expenses of $75 or more must be retained.

Home expenses: Hold onto the 1098 forms you've received for mortgage interest and property taxes. For home improvements, keep receipts of expenditures that may be added to your basis. If you sell the home in the future, the basis adjustments can reduce any taxable gain above the usual $250,000 home sale exclusion ($500,000 for joint filers). The improvement documents should be held until you sell the property.

IRA and retirement plans: Keep records of contributions to traditional and Roth IRAs as well as amounts contributed to a 401(k) or other employer-provided retirement plans. Note: You can't extend the deadline for making an IRA contribution for the 2010 tax year if you've obtained a filing extension. As with securities (see above), retain year-end statements for retirement accounts.

Finally, remember that organization is important. Store your records neatly in a manner where you can access them quickly. This can also help with the preparation of your 2011 return.

Is Time on Your Side?

How long do you have to keep the tax records described in this article? Like many issues in tax law, it depends.

Practically speaking, the statute of limitations on additional tax assessments runs for three years from the time that you've filed your tax return or the due date, whichever comes later. For example, you should hold onto 2010 records until at least April 18, 2014 (October 17, 2014 if you've obtained a filing extension).

However, the IRS has the ability to go beyond three years -- up to a period of six years -- to audit a tax return if it suspects that gross income has been substantially underreported. In this case, "substantially" means an understatement of 25 percent or more of the gross income reported on the return.

And there is no time restriction if a false or fraudulent return is filed. In those cases, the IRS can go back as long as it wants to assess taxes plus penalties and interest.

To play it safe, some tax experts recommend keeping records for as long as ten years. Conversely, if you're trying to remove clutter from your files, three years is the bare minimum.

Two Sets of Burdensome 1099 Rules are Repealed

2011-04-17T11:30:16-04:00

President Obama has signed a law that repeals two sets of rules that had business owners, company managers and landlords up in arms because of the paperwork nightmare they created. The rules that involved businesses issuing a blizzard of 1099 forms were created by two laws enacted in 2010. Rental property owners had to begin complying with one of the sets of rules this year. The second set for other types of businesses was not scheduled to go into effect until next year.

The new rules ignited an immediate firestorm of criticism, but repealing them took longer than some expected.

Thankfully, all the attempted 1099 rule changes have finally been quashed by the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act, which was signed into law on April 14, 2011.

Just so you understand where we stand now, here's the 1099 story from beginning to end. We will start with the longstanding 1099 rules, which will now continue to apply without any changes.

Longstanding 1099 Rules Remain in Force

For many years, businesses have been required to report various types of payments to the IRS and to recipient taxpayers.

For instance, when a business pays $600 or more during a calendar year to an unincorporated independent contractor for services rendered, the business must file a Form 1099-MISC with the IRS to report the total amount paid in that year. The business must also send a copy of the Form 1099-MISC to the payee (a so-called payee statement). This reporting procedure helps the contractor remember to include the payments as income on his or her tax return, and it helps the IRS to make sure that happens.

Under the longstanding rules, other types of payments that businesses must report to the IRS on 1099s and to payees on payee statements include:

Commissions, fees, and other forms of compensation paid to a single unincorporated payee when the total amount paid in a calendar year is $600 or more.
Interest, rents, royalties, annuities, and other income items paid to a single unincorporated payee when the total amount paid in a calendar year is $600 or more.

When a 1099 is required, it must show the total amount of payments in the calendar year, the name and address of the payee, the tax ID number (TIN) of the payee, contact information for the payer, and the payer's TIN. (For privacy reasons, it's OK to show a truncated TIN on a 1099 that reports payments to an individual recipient.)

If your business doesn't have a recipient's TIN, you may be required to institute backup federal income tax withholding at a 28 percent rate on payments to that payee.

In most cases, the rules summarized above apply equally to payments made by non-profit organizations, because they are generally considered to be businesses for 1099 reporting purposes.

For 2011, if a payer fails to file a proper 1099 with the government, the IRS can assess a penalty of $100 or more per failure. For 2011, if a payer fails to send a proper payee statement, the IRS can assess an additional penalty of $100 or more for each failure.

Important: Penalties for failing to file 1099s and issue payee statements were increased by a 2010 law. The increased penalties remain in effect. To sum up, each time you fail to file a 1099 and issue the related payee statement, the IRS can still assess a penalty of $200 or more.

Most Payments to Corporations Need Not Be Reported

Most payments to corporations are exempt from any 1099 reporting requirements. There are a few exceptions. For instance, payments of $600 or more in a calendar year to a corporate law firm must be reported on a Form 1099-MISC for that year.

Example 1: Your business makes monthly payments to rent office space from a corporate lessor. Under longstanding rules that will now remain in force, there is no 1099 reporting requirement for the payments, because they are made to a corporation.

Payments for Property Need Not Be Reported

There is generally no requirement to issue 1099s to report payments for property (merchandise, raw materials, equipment, and just about anything else you can put your hands on).

Example 2: Your business buys a delivery van, display shelving, and computer equipment. Under the longstanding rules that will now remain in force, there is no 1099 reporting requirement for these payments, because they are for property.

2010 Legislation Tried to Change the Rules

Last year's healthcare legislation and a separate small business law attempted to make big changes to the 1099 reporting rules. The repealed changes are briefly summarized below.

Payments to Corporations: Starting in 2012, if your business paid a corporation $600 or more in a calendar year, you generally would have been required to file a 1099 and issue a statement to the payee.

Also, your business would have been required to obtain a taxpayer ID number from each corporate payee to avoid the requirement for backup federal income tax withholding.

On the other side of the coin, if your business is incorporated, it would have had to supply customers with your company's TIN to avoid backup withholding on payments to your business.

Payments for Property: Starting in 2012, if your business paid $600 or more in a calendar year to any payee as "amounts in consideration for property," you would have been required to file a 1099 and issue a payee statement. Once again, the term "property" means equipment, merchandise, raw materials, and many other items.

Also, your business would have been required to obtain a TIN from each affected payee to avoid the requirement for backup withholding of federal income tax.

On the other side of the coin, if your business sells property, you would have had to supply customers with your TIN to avoid backup withholding on payments to your business.

Payments of Gross Proceeds: Starting in 2012, a third new rule would have required filing a 1099 and payee statement if your business paid $600 or more in "gross proceeds" to any payee in a calendar year. Apparently, this provision was intended to force the filing of millions of 1099s and payee statements to report business expenditures for things like meals at unincorporated restaurants, repairs of business vehicles at unincorporated auto shops, and seminars presented by unincorporated providers (the list could go on and on).

Payments by Rental Property Owners: Starting this year, owning rental property would have generally been considered a "business" for purposes of the 1099 reporting rules. Therefore, property owners would have generally been required to file 1099s and issue payee statements for any unincorporated service providers that were paid $600 or more during 2011 (for jobs including yard care, maintenance, and accounting). Starting in 2012, rental property owners would have been required to comply with the other burdensome 1099 changes explained earlier.

All of these now-repealed mandates would have undoubtedly required many millions of additional 1099s and payee statements each year.

Where We Stand Now

Thanks to the just-passed Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act, none of the attempted 1099 changes will take effect. So if your business is currently handling 1099s and payee statements without any problems, you can continue with the status quo. On the other hand, if you know you have compliance deficiencies, the harsher penalties that are now in effect dictate in favor of cleaning up your act (the harsher penalties will remain in force).

Finally, you might wonder how Congress compensated for the estimated $22 billion of revenue that was allegedly lost by repealing the attempted 1099 changes. The Feds will try to recoup the revenue by collecting more "excess advance payments" of health insurance premium assistance credits collected by individuals. This change will take effect in 2014.

Not Ready to File Your Taxes?

2011-04-13T10:10:29-04:00

If you need more time to get your tax information together, don't panic. You can get six additional months to finalize your return by filing Form 4868, Application for Automatic Extension of Time to File by the April 18th tax deadline. Remember, this is an extension to file your return, not to pay your taxes. Getting an extension to file allows you to avoid being hit with a failure-to-file penalty.

To complete Form 4868 you will need to estimate your tax liability and pay the amount you owe by check, debit card or credit card.

If your state has an income tax, you will also need to check with your state tax authority to find out how to extend your state return.

What if you Can't Pay the Tax You Owe? The IRS recognizes that in extreme circumstances, some taxpayers may be unable to pay the full amount of taxes owed by the April 18th deadline. Consult with your tax adviser if you have questions about your situation.

Here are some possible options.

Entering into an installment agreement. Taxpayers owing less than $25,000 in tax, penalties and interest, may be able to enter an installment agreement with the IRS.
Using a credit card or debit card. The IRS accepts most credit and debit cards.
Borrowing the money.
Request additional time to pay. Taxpayers may be able to get an extended time to pay their tax bills in full (60 to 120 days) due to undue hardship. This will generally result in paying less in penalties and interest than paying through an installment agreement.

New IRS Guidance on Reporting of Employer Health Coverage

2011-04-06T09:06:06-04:00

The IRS issued interim guidance to employers on the informational reporting on each employee's annual Form W-2 that lists the cost of the health insurance coverage they sponsor.

The IRS emphasized that this new reporting to employees is for their information only, to inform them of the cost of their health coverage. It does not cause excludable employer-provided health coverage to become taxable. Employer-provided health coverage continues to be excludable from an employee's income, and is not taxable.

The new requirements to provide employees with this information on W-2 Forms stems from the Patient Protection and Affordable Care Act, which was enacted just over a year ago. The interim guidance is generally applicable beginning with 2012 W-2 forms, which would be issued to employees by January 2013.

Exception to the general rule for smaller employers: Employers that issue less than 250 W-2 Forms in 2011 will not be required to comply before January 2014.

However, all employers can chose to rely on the guidance for 2011 W-2 Forms, even though it is not required.

Under the new requirements, an employer must provide written information on W-2 Forms to employees showing them the remuneration paid during the calendar year. This must be done on or before January 31 of the following year (there are different rules if an employee terminates employment during the year.)

Your Employee Handbook: Include 12 Critical Issues - Important Points to Spell Out

2011-03-30T09:10:20-04:00

An employee handbook serves as a guide for managers and employees alike. It can help avoid conflict when specific situations arise and head off potential problems before they happen. A good handbook can also create an incentive for employees to make a long-term commitment to your company.

The following list includes 12 major topics your employee handbook should include:

Scope of duties and hours. Distinguish between clerical and other positions. For non-professional staff, state normal office hours (such as 9 a.m. to 5 p.m.) and note lunch and break times.

Company property. Describe your policy for misuse of company property, such as computers, fax machines, copiers, telephones and online services. For example, what is your policy on personal e-mail and what are the consequences for violating it?

Overtime. Under federal and local laws, payment for overtime is mandatory for some employees. In certain limited situations, "comp" time may be provided in lieu of cash overtime payments. Describe these situations.

Sick leave. State the maximum time permitted (with and without pay), the rate of accrual and eligibility. Also cover the effect of unused sick leave - for example, if any portion carries over to the next year or if unused sick leave results in a bonus.

Holidays and vacation. List the federal and local holidays that your company observes. Address how much vacation is permitted, when an employee is eligible, the accrual rate, and whether any portion carries over to the next year. Also cover how vacation increases for additional years of service and whether the employee is entitled to payment for unused vacation time upon termination.

Sexual harassment and discrimination. Clearly state that your company will not tolerate sexual harassment or discrimination based on race, religion or national policy. Instruct employees to report violations immediately.

Part-time employment. Describe what constitutes a part-time employee and how this affects benefits.

Retirement benefits. This is usually addressed in a separate document with only a cross-reference in the employee handbook.

Insurance. Describe group term life, health, and other insurance benefits that are available. List any cost to employees. Address how claims are processed and who is responsible for handling questions in the organization. Obviously, the nature of insurance options and coverage depends on the cost and extent of coverage. However, it is appropriate to include a general outline of the process, with qualifications for changes.

Leave. State the amount of time permitted for maternity and paternity leave with pay and without pay. Address how leave for adoptions is treated. What about family medical leave? (Make sure your policies comply with legislation that requires leave in certain circumstances.) Also include your policy on military leave, disability and jury duty.

Smoking and drug policies. State your company's smoking and drug policy. On the subject of drugs, mention whether all applicants are tested and if random tests and searches are permitted for cause. In addition, address whether the employer pays for drug testing and if there is a rehabilitation policy. Special care must be taken in articulating these provisions to avoid legal challenges.

Termination provisions. Clarify the circumstances that lead to termination. Clearly state that employment is "at will" and may be terminated at any time by the employer with or without cause. Notice periods for terminations should be stated. Any payment upon termination should also be stated. Other possible issues: Is severance paid based on years of service or some other standard? Also describe procedures for exit interviews or any appeals.

IRS Throws a Lifeline to Struggling Taxpayers - New Help for Taxpayers Who Fall Behind

2011-03-23T10:03:33-04:00

The IRS recently unveiled a new program to help struggling individual taxpayers and small business owners pay off tax debts and avoid tax liens.

The new program is the latest in a series of efforts designed to assist taxpayers who can't pay. In 2008, the IRS provided lien relief for individuals trying to refinance or sell their homes. A year later, the tax agency created more flexibility for taxpayers facing payment problems.

Here's a brief summary of the new five-step program.

Step #1: Increase the dollar threshold for issuing tax liens.

The new rules generally prohibit the IRS from filing a lien unless unpaid taxes exceed $10,000. This doubles the previous limit of $5,000, which had been in effect since the mid-1980s. The IRS plans to review the results and the impact of this change in about a year.

A federal tax lien gives the IRS a legal claim to the taxpayer's property for the amount of an unpaid tax debt. Usually the government isn't the taxpayer's only creditor. The lien notifies the public that the U.S. government has a claim against all of the property -- and any rights to property -- of the taxpayer.

Step #2: Make it easier for taxpayers to obtain lien withdrawals after paying a tax bill.

The IRS will modify its existing procedures so that taxpayers can obtain lien withdrawals with less hassle. Liens can now be withdrawn once full payment of tax is made if the taxpayer requests it. The IRS has determined that this approach is in the government 's best interest. Furthermore, to help streamline the process, the IRS will also modify its internal policies to allow collection personnel to withdraw liens.

Step #3. Withdraw liens in most cases if a taxpayer enters into an installment agreement.

For a taxpayer with an unpaid assessment of $25,000 or less, the IRS will now allow lien withdrawals in these situations:

If a taxpayer enters into a Direct Debit Installment Agreement (DDIA), which automatically takes payments out of a bank account.
If a taxpayer on a regular Installment Agreement converts to a DDIA
If a taxpayer with an existing DDIA requests a lien withdrawal
Liens will be withdrawn after a probationary period demonstrating that direct debit payments will be honored.

Step #4: Allow greater access to Installment Agreements for struggling small businesses.

The IRS will offer streamlined Installment Agreements to more small businesses. A small business with $25,000 or less in unpaid tax will be able to participate. Currently, only a small business with less than $10,000 in unpaid tax can participate. Small businesses will have 24 months to pay off the debt.

A streamlined Installment Agreement will be available for a small business that files either as an individual or as a business. Small businesses with an unpaid assessment amount greater than $25,000 would qualify for the streamlined Installment Agreement if it pays down the balance to $25,000 or less. To participate, the small businesses must enter into a DDIA.

Step #5: Expand a new streamlined Offer in Compromise (OIC) program to cover more taxpayers.

The new streamlined program will be available to taxpayers with annual incomes up to $100,000. Also, a participant can have a tax liability reaching as high as $50,000. This doubles the current limit of $25,000.

An offer-in-compromise is an agreement between a taxpayer and the IRS settling the taxpayer's debt for less than the full amount owed. Generally, offers aren't accepted if the IRS believes that the liability can be paid in full as a lump sum or through a series of payments. The IRS examines the income and assets to arrive at a determination regarding a taxpayer's ability to pay off the debt.

IRS Announces New Effort to Help Struggling Taxpayers Get a Fresh Start

2011-03-16T10:23:26-04:00

In its latest effort to help struggling taxpayers, the Internal Revenue Service announced a series of new steps to help people get a fresh start with their tax liabilities.

The goal is to help individuals and small businesses meet their tax obligations, without adding unnecessary burden to taxpayers. Specifically, the IRS is announcing new policies and programs to help taxpayers pay back taxes and avoid tax liens.

"We are making fundamental changes to our lien system and other collection tools that will help taxpayers and give them a fresh start," IRS Commissioner Doug Shulman said. "These steps are good for people facing tough times, and they reflect a responsible approach for the tax system."

This effort centers on the IRS making important changes to its lien filing practices that will lessen the negative impact on taxpayers. The changes include:

Significantly increasing the dollar threshold when liens are generally issued, resulting in fewer tax liens.
Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.
Withdrawing liens in most cases where a taxpayer enters into a Direct Debit Installment Agreement.
Creating easier access to Installment Agreements for more struggling small businesses.
Expanding a streamlined Offer in Compromise program to cover more taxpayers.

"These steps are in the best interest of both taxpayers and the tax system," Shulman said. "People will have a better chance to stay current on their taxes and keep their financial house in order. We all benefit if that happens."

This is another in a series of steps to help struggling taxpayers. In 2008, the IRS announced lien relief for people trying to refinance or sell a home. In 2009, the IRS added new flexibility for taxpayers facing payment or collection problems. And last year, the IRS held about 1,000 special open houses to help small businesses and individuals resolve tax issues with the Agency.

This effort comes after a review of collection operations which Shulman launched last year, as well as input from the Internal Revenue Service Advisory Council and the National Taxpayer Advocate.

Tax Lien Thresholds

The IRS will significantly increase the dollar thresholds when liens are generally filed. The new dollar amount is in keeping with inflationary changes since the number was last revised. Currently, liens are automatically filed at certain dollar levels for people with past-due balances.

The IRS plans to review the results and impact of the lien threshold change in about a year.

A federal tax lien gives the IRS a legal claim to a taxpayer's property for the amount of an unpaid tax debt. Filing a Notice of Federal Tax Lien is necessary to establish priority rights against certain other creditors. Usually the government is not the only creditor to whom the taxpayer owes money.

A lien informs the public that the U.S. government has a claim against all property, and any rights to property, of the taxpayer. This includes property owned at the time the notice of lien is filed and any acquired thereafter. A lien can affect a taxpayer's credit rating, so it is critical to arrange the payment of taxes as quickly as possible.

"Raising the lien threshold keeps pace with inflation and makes sense for the tax system," Shulman said. "These changes mean tens of thousands of people won't be burdened by liens, and this step will take place without significantly increasing the financial risk to the government."

Tax Lien Withdrawals

The IRS will also modify procedures that will make it easier for taxpayers to obtain lien withdrawals.

Liens will now be withdrawn once full payment of taxes is made if the taxpayer requests it. The IRS has determined that this approach is in the best interest of the government.

In order to speed the withdrawal process, the IRS will also streamline its internal procedures to allow collection personnel to withdraw the liens.

Direct Debit Installment Agreements and Liens

The IRS is making other fundamental changes to liens in cases where taxpayers enter into a Direct Debit Installment Agreement (DDIA). For taxpayers with unpaid assessments of $25,000 or less, the IRS will now allow lien withdrawals under several scenarios:

Lien withdrawals for taxpayers entering into a Direct Debit Installment Agreement.
The IRS will withdraw a lien if a taxpayer on a regular Installment Agreement converts to a Direct Debit Installment Agreement.
The IRS will also withdraw liens on existing Direct Debit Installment agreements upon taxpayer request.

Liens will be withdrawn after a probationary period demonstrating that direct debit payments will be honored.

In addition, this lowers user fees and saves the government money from mailing monthly payment notices. Taxpayers can use the Online Payment Agreement application on IRS.gov to set-up with Direct Debit Installment Agreements.

"We are trying to minimize burden on taxpayers while collecting the proper amount of tax," Shulman said. "We believe taking away taxpayer burden makes sense when a taxpayer has taken the proactive step of entering a direct debit agreement."

Installment Agreements and Small Businesses

The IRS will also make streamlined Installment Agreements available to more small businesses. The payment program will raise the dollar limit to allow additional small businesses to participate.

Small businesses with $25,000 or less in unpaid tax can participate. Currently, only small businesses with under $10,000 in liabilities can participate. Small businesses will have 24 months to pay.

The streamlined Installment Agreements will be available for small businesses that file either as an individual or as a business. Small businesses with an unpaid assessment balance greater than $25,000 would qualify for the streamlined Installment Agreement if they pay down the balance to $25,000 or less.

Small businesses will need to enroll in a Direct Debit Installment Agreement to participate.

"Small businesses are an important part of the nation's economy, and the IRS should help them when we can," Shulman said. "By expanding payment options, we can help small businesses pay their tax bill while freeing up cash flow to keep funding their operations."

Offers in Compromise

The IRS is also expanding a new streamlined Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers.

This streamlined OIC is being expanded to allow taxpayers with annual incomes up to $100,000 to participate. In addition, participants must have tax liability of less than $50,000, doubling the current limit of $25,000 or less.

OICs are subject to acceptance based on legal requirements. An offer-in-compromise is an agreement between a taxpayer and the IRS that settles the taxpayer's tax liabilities for less than the full amount owed. Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer's income and assets to make a determination regarding the taxpayer's ability to pay.

Business Valuation Building Blocks

2011-03-09T08:20:37-05:00

I have had the opportunity and pleasure to review many valuation reports with my clients and answer general valuation inquiries from a multitude of other interested individuals. The majority of the questions and my comments during the reviews center on three of the building blocks of valuation: the Standard of Value, the Premise of Value, and the Ownership Interest being valued.

I have found that the end users of valuation services do not fully appreciate the impact that these different building blocks can have on a valuation engagement. Developing a better understanding of these critical valuation building blocks is one of the most important services that I perform for my clients. In this series of articles, we will look at these building blocks in more depth.

Let me take you back in time. If you are like me, you probably have a memory similar to this...It's Saturday and you and your family are going to visit your grandparents for the evening. When you got to their house, you ran up to them, knocked them over with hugs and kisses and then head to the toy room! I always went straight for a gigantic wagon full of wooden building blocks. I toppled it over and began building my tower/castle of doom. What my grand construction was going to turn into was irrelevant because it would be forcibly knocked over scant minutes after I was finished.

For me, the important part of the building process was deciding which blocks would be the foundation. If I chose the arc, triangle, or round pegs to begin with, I knew that I would not end up with a very tall building, but it would be one that looked cool. If I started with the squares and rectangles, I knew it wouldn't look as nice but it would have a good base that I could really build upon (and have more fun knocking down at the end). Valuation is the same type of exercise. How you start determines how you end up.

The first building block for valuation is the Standard of Value. At its most basic level, a Standard of Value should answer the questions "Value to whom" and "Under what conditions and circumstances". There are several standards of value, but the two predominant standards which I focus on in my full article are Fair Market Value and Investment Value. The differences between the two standards are important and must be understood before you enter into a valuation engagement.

The standards are defined as follows:

Fair Market Value – "The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts." This standard of value applies to virtually all federal and state tax matters and assumes prevalent market and economic conditions at the date of valuation.

Investment Value – "The value to a particular investor based on individual investment requirements and expectations." This standard of value is applied in many transactions which have taken place in the marketplace.

For a copy of my full article, in which I answer the questions "Value to whom" and "Under what conditions and circumstances", discuss the critical differences between Fair Market Value and Investment Value, and provide illustrations on how using the wrong standard of value could cost you money, contact me, T. Eric Blocher CPA, CVA.

And be sure to look out for the next article in this series, which will discuss the Premise of Value and the Ownership Interest in greater detail.

Pennsylvania Bonus Depreciation Issue - Big Change for Business

2011-03-02T08:43:34-05:00

The federal government has provided for the acceleration of depreciation expense on qualified assets for various periods of time since 2001. The main purpose for providing the acceleration of depreciation was to encourage businesses to make investments in their company in an effort to stimulate the economy.

The initial bonus depreciation deduction provided for a 30% deduction to income of eligible assets purchased between September 10, 2001 and September 10, 2004. The bonus depreciation amount was increased from 30% to 50% for assets purchased between May 5, 2003 and January 1, 2005. The second provision of bonus depreciation provided for a 50% deduction to taxable income for assets placed in service after December 31, 2007 and before January 1, 2011. In both instances, the depreciation deduction can be taken on the remaining 50% of the assets value over the useful life of the asset. Finally, the Tax Relief Act of 2010 expanded bonus depreciation to allow for a 100% deduction of qualified assets purchased from September 8, 2010 through December 31, 2011. The 100% bonus depreciation preempts the previous 50% depreciation for assets placed in service from September 8, 2010 through December 31, 2010 as previously provided.

States have dealt with issues regarding how they wished to treat the bonus depreciation in calculating their taxable income. The reason the federal bonus depreciation is having an impact on various states' taxable income is the fact that many states use federal taxable income as their starting point in calculating state taxable income. In order to avoid reducing state taxable income by the bonus depreciation, many states have decoupled from bonus depreciation or have specifically added back bonus depreciation.

Pennsylvania is one state that previously decided against allowing federal bonus depreciation. Originally Pennsylvania determined that they would add back the additional bonus depreciation and then take 3/7 of the amount of allowable depreciation not including those assets subject to federal bonus depreciation until the full amount of disallowed bonus depreciation has been recovered by the taxpayer. Pennsylvania allowed that any unrealized bonus depreciation would be realized when the asset was disposed of. The 3/7 calculation worked well enough for assets subject to the 30% bonus depreciation. The calculation became more burdensome with the 50% bonus depreciation and especially now with the 100% bonus depreciation. The 50% add-back calculation resulted in unused bonus depreciation at the end of the assets useful life. In this scenario, Pennsylvania provided that any unused bonus depreciation would be used in the taxable year in which the asset was fully depreciated for federal purposes. Based on this calculation, those assets subject to 100% bonus depreciation would not provide for any Pennsylvania depreciation until the time those assets are disposed. It is important to note that the bonus depreciation issue for Pennsylvania is only for C Corporations. S Corporations are still required to follow depreciation as calculated under MACRS.

Pennsylvania's Department of Revenue issued a Corporation Tax Bulletin 2011-01 on February 24, 2011. The Bulletin was issued to provide taxpayers and tax preparers guidance with regards to handling the 100% federal bonus depreciation for Pennsylvania Corporate Net Income Tax. Pennsylvania is informing taxpayers that they will take the position that assets subject to the federal 100% bonus depreciation will be allowed to deduct these amounts for Pennsylvania purposes in the same year as federal. Those assets subject to 100% bonus depreciation will not be included in Pennsylvania's RCT-101, Schedule C – Adjustment for Bonus Depreciation. The schedule will still be used for assets subject to the 30% and 50% bonus depreciation. In addition, Pennsylvania also provided guidance that they allow the full recovery of 30% and 50% depreciation disallowed in previous years in the year in which a complete write-off of the assets occur for federal purposes.

We will continue to provide updates on this issue as we move forward with tax season. If you have any questions or concerns, please feel free to contact Jason Skrinak, Principal of our State and Local Tax Group.