We are pleased to congratulate Joy Broderick on passing the Advanced QuickBooks ProAdvisor Exam!

The QuickBooks Advanced Certification Course is designed to deepen the expertise of ProAdvisors who are already knowledgeable in QuickBooks, and distinguish these “QuickBooks experts” as highly proficient in this field.

Joy Brodrick has completed:

1. 2009, 2010, and 2011 QuickBooks ProAdvisor Certification Courses
2. The QuickBooks Advanced Certification exam with a score of 85% or higher
3. The bi-annual Continuing Education requirement

Congratulations!

Written by Randall Webb, CPA

The Department of Labor’s Employee Benefits Security Administration (“DOL”) has recently released the finalized ruling on fee reasonableness and disclosure regulations for retirement plans under the Employee Retirement Income Security Act of 1974 (“ERISA”) section 408(b)(2).  The effective date for the 408(b)(2) regulations is July 1, 2012.

The new ruling under 408(b)(2) will require certain service providers to disclose retirement plan fees to the plan sponsor.  Service providers that will be required to disclose information to plan sponsors effective July 1, 2012, include service providers that received direct compensation from a plan.  Direct compensation includes fees paid directly to the plan’s investment adviser, record keeper, and third party administrator from the plan’s assets.  Service providers that expect to receive significant indirect compensation will also be required to disclose their fees to plan sponsors.  Indirect compensation includes fees paid to service providers from sources other than the plan, the plan sponsor, or an affiliate of the plan or plan sponsor.

Most service providers have been disclosing compensation in excess of $5,000 for their services (both direct and indirect) to large plan sponsors (plans with at least 100 eligible participants).  Large plan sponsors have been receiving this information since the rules came out a couple of years ago for the 2009 Form 5500, Schedule C reporting.  The new 408(b)(2) regulations that are effective July 1, 2012 will require this information to be provided to plan sponsors with fees in excess of $1,000, for both large and small filers of Form 5500.  The DOL estimates that this will affect “about 48,000 defined benefit pension plans with over 42 million participants and almost 669,000 defined contribution pension plans with approximately 83 million participants.  Out of these pension plans, about 38,000 are small defined benefit plans and 597,000 small individual account plans.  Most of the defined contribution pension plans, approximately 498,000, are participant-directed individual account plans.”

After the 408(b)(2) regulations go into affect on July 1, 2012, plan sponsors will be required to disclose certain information to plan participants in accordance with ERISA section 404(a)(5) within 60 days of July 1, 2012.

Information that plan sponsors will be required to disclose to plan participants under 404(a)(5) includes information that should enhance participants’ decision making process in respect to the investments they may choose to select as an investment option.  The information that will need to be disclosed includes both plan related disclosures and investment related disclosures.  Plan related disclosures will include investment options available for participants with the current investment menu; disclosure of administrative fees paid out of the plan’s assets; how the fees are allocated among the participants; disclosure of individual fees, such as transaction fees, loan fees, etc.; and how they are allocated to the individual participant’s accounts.  Investment related disclosures will provide detailed information about the investment options available within the plan, including fee and expense information related to each investment.  The new disclosures will also include performance and benchmark data with respect to each investment option available under the plan.

The DOL’s intentions with these new regulations is to assist plan fiduciaries in determining whether or not the fees that are being paid by the plan and the plan sponsor are reasonable and free of conflicts of interest that may negatively affect a service provider’s decisions and performance.  The DOL believes that the new regulations will also help increase the service value that plan sponsors are currently receiving.  Lastly, these new regulations should also bring clarity to plan participants regarding the retirement plan fees they will be charged when choosing certain investment options within a participant directed plan.

Article Originally Published in the Atlanta Business Chronicle by Markita Jones on March 2, 2012.

The IRS has increased its efforts to audit more tax returns of S corporations.

Given the popularity of the S corporation form of business and the amplified focus on reducing the tax gap, this increased scrutiny is no surprise.

However, if an IRS audit is one of your biggest nightmares (and one that has come to fruition for many S corporations in the past few years), this article will address some primary issues that you should be aware of, including the heightened attention to S corporation compensation practices and shareholder loans. It will also provide some guidance for meeting IRS expectations as you prepare your S corporation for success in the new year.

Reasonable compensation
The issue of reasonable compensation has been a hot topic for some time. The IRS is aware that owner-employees of many S corporations have avoided paying payroll taxes by taking distributions from the corporation instead of paying themselves a “reasonable” wage. By taking tax-free distributions or passing profits through to the shareholder as income rather than paying reasonable wages, shareholders and their company have avoided the employer and employee payroll taxes. The likelihood of an IRS audit is increased when S corporations have relatively low officer salaries and wages in relation to profits, or when they make large distributions with low salaries.

For the S corporation acting in good faith, it is best to avoid these issues and review W-2 wages and distributions to owner-employees made during the year. The IRS will reclassify distributions as salaries if it determines the wages are unreasonably low. Payroll taxes will be assessed on these salaries, along with interest and large penalties for failure to pay.

Determining compensation
In the ongoing debate on reasonable compensation, it is often asked, “Who determines what is ‘reasonable’?” What may be considered reasonable for a company making millions may not be reasonable for a small business or a young corporation, and there is plenty of room for discretion in setting salaries. However, there are obvious pitfalls one can avoid.

A critical look at the financial status of the corporation is an excellent starting point. If most of the gross receipts and profits are associated with the shareholder’s personal services, then most of the profit distribution should be allocated as compensation. In addition to gross receipts, the corporation should also look at comparable salaries in the industry. If most managers in your industry are earning $200,000 a year, it would be unwise to pay yourself only $25,000 and take $175,000 in tax-free distributions. This will almost guarantee scrutiny from the IRS. Other factors to consider are the size and complexities of the business as well as economic conditions. It is not unreasonable for smaller companies to pay lower wages, and many companies have reduced wages in recent years due to the economic downturn. Ultimately, the salaries of all employees should be in line with the work performed. The IRS has experts to determine the market value of services performed and they will put them to work if wages appear unreasonable.

Loans from shareholders
In poor economic times, one advantage of the S corporation is that its losses are passed through to the owners’ personal tax returns to potentially offset other income. However, it is important to remember that the amount of deductible losses is limited to the basis the shareholder has in the corporation.

Many S corporation owners have discovered they have losses but are unable to deduct the losses in the current year because their basis has reached zero.

One solution to this problem is for the shareholder to loan the corporation money, increasing their debt basis in order to enable deduction of the losses in the current year. In its audits of S corporations, however, the IRS is finding a lack of direct economic outlay by the shareholder. Bank loans to the company that are personally guaranteed by the shareholder do not create debt basis, nor do loans from related companies. The loan must be made directly by the shareholder to create debt basis and allow losses to be deducted.

Loans to shareholders
Sometimes a company distributes money to its shareholders and intends to treat it as a loan rather than a distribution. Without proper documentation and facts supporting this treatment, the IRS may make the argument that this payment is actually a distribution. The IRS is taking a closer look at the facts and circumstances surrounding loans to shareholders to determine whether they are in fact bona fide loans. If the shareholder does not repay the loan or there is no clear intention to repay, the IRS will reclassify the loan as distributions or compensation.

Document loans
To avoid problems with the IRS, shareholder loans should be properly documented through interest-bearing promissory notes and recorded in corporate minutes. It is also a good idea to have records showing interest payments on the loan. Lack of proper documentation and failure to prove intent to repay are the biggest reasons the IRS is successful in its challenges.

Being aware of common red flags and trends in IRS examinations can help ensure your company’s policies are in line with IRS guidelines and that proper documentation is maintained. Each company’s tax situation is unique and often complex, so you should always consult with your tax professional for specific guidance.

Are you ready for the big leagues?

Plan to attend our 2012 SFA Audit Seminar to make sure all your bases are covered.

This three day program will not only provide an overview of the current regulations; we will address the significant changes to program integrity for 7/1/2011 and 7/1/2012. Don’t let the DOE throw you a curveball – register today!

Our team will see you on the road to coach you and your staff on all the new regulations and program revisions!

2012 Registration now OPEN!

San Diego, CA ~ Paradise Point Resort
April 30, 2012 -  May 2, 2012

 Chicago, IL ~ Hilton Chicago Indian Lakes Resort
May 14 – 16, 2012

Atlanta, GA ~ Hilton Atlanta Airport
July 9-11, 2012

Boston, MA ~ Hyatt Harborside
September 5-7, 2012

By Rhonda Williams

Do you want to know how to better serve your present and future team members? If so, start conducting an exit questionnaire and follow-up exit interview with team members who leave the employment of your firm. Sometimes, we are “afraid” to know why team members leave the firm. We sometimes feel hurt, betrayed, or even upset. If you have those types of feelings, get rid of them! This is a time to transform those feelings into something positive. In our experience, the information received from an exit questionnaire and follow-up one on one exit interview with the team member leaving is a time we learn vital and important information that assists our firm in analyzing factors attributing to turnover, and/or unhappiness in the work place.

We started implementing exit questionnaires and interviews at our firm last year. We conduct exit questionnaires and interviews with team members who voluntary or involuntary leave the firm.

Designing the Exit Questionnaire and Interview

There are several key points and guidelines to obtaining the best information possible from the exiting team member. Here are a few:

1) Be sure to send by email or hand deliver the exit questionnaire to the team member leaving. Ask for the completed questionnaire back the day before the team member’s last day of employment. If the team member is leaving involuntarily, it is best to give the exit questionnaire to them on their last day of employment and request that they email back to you when possible. (Obviously, a few team members leaving involuntarily will not take the time to complete the survey and return. However, you might be surprised at those that do could receive beneficial information.)
2) Be sure the exiting team member realizes the answers provided in the questionnaire will be kept confidential. At our firm, only the HR Representative and the Managing Partner review the exit questionnaire. It is critical that the survey be kept confidential. Otherwise, you will not get the vital information you are looking for in order for improvement or encouragement on the positives at the firm. Please note: The questionnaire is not to be filed in their personnel file and the team member needs to know this as well
3) In receiving the questionnaire the day before an employee’s departure, this gives the HR Representative ample time to review the answers, and write additional comments or questions in preparing for the exit interview.
4) Establish in advance (by Outlook calendar) the exit interview time with the team member. We prefer to do this the morning of their last day of work (if possible).
5) At our exit interviews, the HR Representative and team member exiting are the only participants in the interview. If you have multiple locations, like we do, it might not always be possible for a face to face exit interview, but rather a conference call.
6) The Firm Representative conducting the exit interview should be very sincere and approachable during the interview. This is a good time to be a listener once you have asked the additional questions or made comments about answers given on the survey. Reemphasize to the team member that the survey results will be kept confidential. The Firm Representative needs to take good notes and be attentive to what the team member is saying (their answers will probably lead you to ask additional questions during the interview). At the conclusion of the interview, the Firm Representative should always thank the team member for his or her answers and assisting the firm IN creating a better place to work.
7) After the exit interview (at our firm), the HR Representative gives a recap to the Managing Partner with the questionnaire attached. There should be discussion on the positives, suggestions for improvement, and a game plan on how to go forward with communication, if needed, to the appropriate Partner in Charge. If improvements were suggested, the Managing Partner relays these at an appropriate time to the Partner in Charge. The team member’s name providing the suggestion is not revealed.

Some of the questions you could ask on the questionnaire are:

1. What prompted you to seek alternative employment?

____ Type of work ____Quality of supervision
____ Compensation ____ Benefits
____ Working conditions ____ Lack of supervision
____ Family circumstances ____ (Other, please explain: _______________________________)
____ Career opportunity (please explain: __________________________________________________)

2. Is there one thing the firm could have done to prevent you from leaving?
___________________________________________________
___________________________________________________
___________________________________________________

3. Was your workload usually:

____ Too great ____ Varied, but all right
____ About right ____ Too light

4. What did you like most about your job?
_________________________________________________
_________________________________________________
_________________________________________________

5. What did you like least about your job?
_________________________________________________
_________________________________________________
_________________________________________________

6. What does your new job offer that your job with us did not?
_________________________________________________
_________________________________________________
_________________________________________________

7. Would you recommend working at Deemer Dana & Froehle LLP to a friend?
( ) Yes, without reservations ( ) Yes, with reservations ( ) No

This is just a sample of the questions we ask in our exit questionnaire and exit interview. We are glad to share our exit questionnaire. If you wish to obtain a copy, please feel to contact Rhonda Williams at 678.242.1303 or by email at rwilliams@ddfcpas.com.

By Matt Stringfellow, CPA and Brad Whitfield, CPA, CVA

With a large segment of the business population beginning to enter their retirement years, ownership transition has become a hot topic lately.  Senior owners, who are often the founders of their business, begin to grapple with the issue of planning for the long term future of the firms they have built. When such succession planning happens to involve family dynamics where the children or grandchildren are a part of the business and therefore part of the succession plan, family succession brings with it a host of issues that are more difficult to deal with than a typical ownership transition plan.

One of the most prevalent issues in any succession plan is the inability of the owner to “step aside” and allow the new team to function without interference. Founders especially have a hard time letting go after building and growing the company from its inception. Rather than functioning as a valuable advisor, the founders stay too involved in the day to day operational issues. This is even more acute when the successor is the child of the owner.  If the owner is too hands-on during the pre-succession training period, the necessary skills may not be effectively passed along experientially to “the kid(s)” or the next business generation.

Another important issue in succession planning is the value equation. What will it cost to buy out the owner and how will it be structured? Business owners almost always have an inflated idea of the true value of their business- it’s just human nature.  The established value must be able to withstand scrutiny as an arm’s length transaction. Any value calculation is advisedly arrived at by a properly drawn formula that is relevant to the particular industry in which the company operates or by an independent business valuation by a credentialed appraiser. This is even more important in a family setting, both from a tax standpoint and to prevent subjectivity in setting a value, which could cause a disruption in family harmony.

There are several ways a sale can be structured.  In its simplest form, it can be a sale of stock between the owner and the buyer.  An alternative structure is an internal partial or full redemption of the stock by the company, which results in a step-up in ownership percentage for the other shareholders.  Or it can be a combination of a sale of stock and compensation to the seller. Both buyer and seller should be aware that the way the sale is structured can result in radically different tax results for both parties. A professional tax advisor should be closely involved in the determination of the sale structure to prevent unforeseen tax results.

While there are many other issues involved with any good succession plan, those mentioned here are especially important in any family business. As in all business matters, always seek competent, experienced advisors to guide you through the business transition process.

By John E. Matthews, CPA, CFE

Finding the right professional service firm to meet your needs seems like a daunting task to many.  Often  we ask people we know and respect which law firm, accounting firm, etc. they use and if they are happy with them.  Many times this works out to our satisfaction, but not always.  While I believe the above first step is a good one, I would suggest you consider some additional questions in the selection process.

 What are the firm’s beliefs and values?

 Do they have a Mission Statement and set of Core Values?  Do these line up with my organization’s values?  Much can be gleamed from a firm’s Mission Statement and Core Values as it relates to how they view serving their clients.  The lack of published ones should also cause you concern.  Take the time to get to know this about the firm you are considering.

 What is the firm’s reputation in the business community?

Are they considered a firm of high integrity and character?  The news has been filled with organizations that have failed due to issues of financial malfeasance motivated by short term gains.  Many unsuspecting employees and investors have been significantly damaged by these failures in character.  Unfortunately in many of these cases the professional services firms that were engaged to protect these organizations were contributors to the failures.

 What is the firm’s involvement in the community?

 Are they involved with issues that have an impact on the community at large?  How about issues that affect my organization?  A firm’s service to the community is usually a good indicator of their service philosophy to clients.

 How does the firm treat its team members?

 A firm that has an environment that values its team members creates team members that bring that same sense of appreciation to the clients they serve.

 While not an all encompassing list, the above are a few things you should know in general about the professional services firm you are considering.  In Part II I will cover those items that are more specific to your organization’s industry that should be considered in this selection process.

Federal tax law changes frequently and these changes seem to be occurring closer to the end of every calendar tax year.  Given the last-second theatrics relating to the tax rates at the end of 2010, nothing is ever certain.  However, despite the unpredictability of these changes, the current federal depreciation laws will likely never again be this generous.

Section 168(k) “bonus depreciation” – a one-time depreciation deduction taken in the year a new capital asset is purchased – has been allowed for an immediate 50% deduction upon the purchase of newly-manufactured machinery and equipment.   The additional depreciation resulting from bonus depreciation can still be taken during a year that already has net losses.  For the remainder of 2011:

• Bonus depreciation can be used to expense all (100%) of the purchase price for qualified assets
• Qualified Assets:
  • Must be new
  • Must be depreciable over a period less than 20 years (most non-real estate purchases)
  • Includes full-business use SUVs rated over 6,000 pounds
  • Includes qualified leasehold improvement property (restaurant & retail improvement)

For assets placed into service after December 31, 2011, bonus depreciation is allowed for only 50% of the purchase price.

Section 179 depreciation is a one-time depreciation deduction taken in the year a capital asset is purchased.  Unlike bonus depreciation, section 179 depreciation is available for “used” asset purchases. Unfortunately, section 179 can only be used to offset positive net income.  However, if unused, Section 179 can be carried forward for use at a later date.  For the remainder of 2011:

• Section 179 depreciation can be used to expense up to $500,000 worth of asset purchases
• Phase-outs of eligible depreciation start after an entity has purchased over $2,000,000 worth of capital assets during a year
• Section 179 depreciation can be used to expense up to $250,000 of qualified real property.

The section 179 depreciation will drop precipitously  to $125,000 with a phase-out that starts at $500,000 of overall purchases for all assets bought and placed into service after December 31, 2011. 

Of course, taking full advantage of the accelerated depreciation available in 2011 does necessitate a business being in position to expand its machinery and equipment in service.  Moreover, the purchasing decision should be based on sound business judgment and not just on short-term tax laws.  Other factors weigh into if and how to apply the current and future tax laws to business purchases.  For example, accelerated depreciation may not make optimal use of soon-to-expire Net Operating Losses. Also, some states disregard different federal statutes, offsetting tax benefits (for example, Georgia does not recognize bonus depreciation).  Please consult your Certified Public Accountant in implementing your year-end tax planning strategies and purchases.

To download the PDF article that was featured in the November/December issue of The Georgia Engineer, click here.