2011 Form 990 Changes

Posted on February 9, 2012 by Richard_Wolf

The IRS has recently posted the final 2011 Form 990, Return of Organization Exempt From Income Tax, and the related instructions on its website. The latest version of the Form 990 contains a few important changes that may be of significance to tax-exempt organizations.

The first required change is that an organization must complete Form 990, Part I of Schedule F, Statement of Activities Outside the United States, if it had foreign investments valued at $100,000 or more during the tax year. The prior requirement for completion of this schedule was if the organization had aggregate revenues or expenses or more than $10,000 attributable to various foreign activities.

Another change is the requirement that organizations complete Part X, Balance Sheet, by reporting their distributive share of assets in any joint ventures and other entities treated as partnerships for federal tax purposes according to the ending capital account as reported on Schedule K-1. In addition, an organization’s distributive share of investment income, royalties and rental income from joint ventures should be reported on specific lines of Part VIII, Statement of Revenue.

The Form 990 instructions also contain several changes including revising the definition of “grants and other assistance” to exclude certain payments by voluntary employees’ beneficiary associations. In addition, Appendix K, Contributions, was amended to clarify that in the case of a text message contribution, the donor’s phone bill meets the Section 170(f)(17) recordkeeping requirement if it shows the name of the donor organization and the date and amount of the contribution.

If you have any questions about these changes to the Form 990, please contact a Hertzbach professional.

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FIN 48 Post-Implementation Review

Posted on January 26, 2012 by Richard_Wolf

The Financial Accounting Foundation (FAF) has conducted its first post-implementation review of an accounting standard, starting with FIN 48, Accounting for Uncertainty in Income Tax Positions. No surprise that the FAF found that the standard generally achieved its purpose. What was surprising was that the FAF acknowledged the standard needs some improvement.

The report, which was compiled by an independent committee appointed by the FAF Board of Trustees, found that consistently applying FIN 48’s guidance may not increase the comparability of information as management’s judgments and the increasing complexity of the tax code. Management has to assess each tax position separately on its technical merits and as a result different judgments may result in different reported outcomes, even for similar uncertain tax positions.

The committee found that the information FIN 48 provides “may not be predictive or confirmatory of future cash flows because FIN 48 employs a benefit-recognition approach, not the best-estimate approach for liabilities to be settled.” Overall, the report found that the benefits of FIN 48’s improved consistency and reporting of uncertain tax positions outweigh its costs.

It is unclear as to what changes this review will have on the current standard. The FASB will examine the post-implementation review report and provide a written response in the next few weeks.

The FAF has also been receiving a steady stream of input on its proposal for a Private Company Standards Improvement Council. More than 6,200 CPAs, lenders, investors, other financial statement users, private companies and small business owners sent comment letters to the FAF in response to its proposal for changing private company financial reporting. The comment letters urged FAF to accept the Blue Ribbon Panel on Standard Setting for Private Companies’ recommendation that an independent, authoritative standard-setting board be set up to modify U.S. GAAP, where warranted, for private companies. In response, the FAF has scheduled roundtable discussions in various cities through March 1 to gain further input from stakeholders.

As always, Hertzbach will keep you updated on any changes.

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What Are Normalizing Adjustments and Why Do We Make Them?

Posted on January 16, 2012 by Richard_Wolf

by Larry Epstein, MS, CPA, CVA, ABV, CFF and Rob Carter, AVA

As a business valuation professional, the most often asked question from clients revolves around the adjustments made to their company’s income stream. After all, if their company is managed in a way that doesn’t leave much income on the bottom line, then so be it. That’s how their company operates and that’s how it should be valued, right? Not exactly…

Valuations are necessary for a variety of reasons but most commonly they are completed for tax or litigation purposes which require a company to be valued at “Fair Market Value” rather than “Investment Value.” According to the IRS, “Fair Market Value” is considered to be the price at which two hypothetical people that are not being forced to buy or sell the company would agree to the transaction when they both have knowledge of the relevant information about the company. For tax purposes, the “Fair Market Value” standard is used because the IRS needs to know what the business would be worth on the open market, not to the current owner. “Investment Value” on the other hand, is the value of the business to the current owner. Normalizing adjustments are the adjustments made to the earnings stream to convert the value of a company to “Fair Market Value.”

Most people have difficulty with this concept. Adjustments are made to revenues and expenses to ascertain the earnings stream if a non-owner officer was running the company. In other words, we need to adjust the company’s financial statements to show income and expenses at amounts similar to industry averages, while leaving other company specifics the same. For example, adjustments are commonly made to owner/officer compensation for those who are over/under paid. Rent expense is typically adjusted for a company that doesn’t pay market rent because it rents from a related party. Another common adjustment is for extraordinary transactions (income and expense items that aren’t part of normal business operations) such as gain/losses from a lawsuit or the sale of a business asset. The resulting financial information (after adjustments) must demonstrate the profitability of a company without any related party, discretionary, or one time items influencing the bottom line profits.

Owners are generally concerned that making adjustments will result in a different value than what they believe is the value of their business. Owners need to understand the current/actual level of earnings translates to a value to the current owner, not the value to an outside investor. These adjustments reflect the value of the business to an outside buyer who is looking for what earnings/cash flow could be produced with a normalized level of revenues and expenses.

Ultimately, it is important to note that the “Fair Market Value” standard is used for many purposes and it is required by the IRS. Since normalizing adjustments are based on hypothetical assumptions, the value derived may not reflect the value of your business to you or to specific potential buyers that may be interested for synergistic purposes. For that reason, it is important for owners to talk to a valuation professional to determine which standard should be utilized given their specific needs. For more information, please contact a Hertzbach professional.

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Filing Deadline Extended for Certain Exempt Organizations

Posted on January 6, 2012 by Richard_Wolf

by Linda Vonderschmidt, CPA

The IRS announced that Exempt Organizations with a filing due date in January or February will have until March 30, 2012 to file their annual returns. The extension is the result of the IRS e-file system that handles these returns being offline for maintenance.

The extension applies to Forms 990, 990-EZ, 990-PF, and 1120-POL as well as extensions for those forms which are due at the same time. It generally applies to organizations with a fiscal year ending on Aug 31 or Sept 30, 2011 and those that have already obtained the initial three month extension.

If the organization has already obtained a first extension that expires during the e-file blackout and intends to apply for a second three-month extension the second extension should be timely filed on paper. Penalty relief is available to those affected by this issue under Notice 2012-4.

Form 990-N, which is filed by smaller organizations, was not granted the extension and should file by its original due date.

As always, please contact a Hertzbach professional if you have questions.

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IRS Announces 2012 Mileage Rates and Other Limits

Posted on December 29, 2011 by Richard_Wolf

by Linda Vonderschmidt, CPA

The IRS has officially announced many of the rates and limits in effect for 2012. Below is a summary of some of the most widely used.

Mileage Rates
Business 55.5 cents per mile
Medical/Moving 23 cents per mile
Charity 14 cents per mile

Retirement Plan Contribution Limits
IRA (under age 50) $5,000
IRA (age 50 & older) 6,000

401(k) & 403(b) 17,000
Catch-up 50 & older 5,500

Health Savings Account Contribution Limits
Single 3,100
Family 6,250
Catch-up 55 & older 1,000

As always, please contact a Hertzbach professional if you have any questions.

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IRS Cracks Down on Foreign Assets’ Reporting

Posted on December 27, 2011 by Richard_Wolf

by Kelley Strong, MS, CPA

For tax years beginning after March 18, 2010 (the 2011 filing season for most), the IRS is requiring an additional disclosure related to foreign financial assets. The new requirement is Form 8938 which has been released only in draft form. The form requires disclosure of account number, maximum value, foreign currency conversion, and name and address of the financial institution for each deposit and custodial account. Similar information is required for other foreign assets. The form also includes a summary chart of the tax items attributable to specified foreign financial assets (including the form or schedule and exact line of the tax return that the information has been reported) and a part to summarize the foreign assets that are not reported on Form 8938 because the foreign asset reporting on other tax forms has fulfilled the disclosure requirements.

Individual taxpayers living in the U.S. that have ownership of “specified foreign financial assets” (i.e., accounts held at foreign financial institutions, foreign stocks or securities, or interests in a foreign entity) valued greater than $100,000 at any time during the year ($50,000 for single or married filing separate taxpayers) are subject to the reporting.

This requirement will not replace Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (applicable for foreign accounts valued at the threshold of $10,000 and above).

The penalties associated with failure to file or report are heavy (i.e., $10,000 in addition to a penalty for continuing the failure to file and even including criminal penalties).

In addition, the Statute of Limitations will remain open for all or a portion of the taxpayer’s income tax return until 3 years after Form 8938 is filed (not 3 years after the return is filed).

The IRS anticipates expanding the filing requirements to include any domestic entity formed for purposes of holding, directly or indirectly, specified foreign financial assets, in the same manner as if they were an individual.

If this sounds like a requirement you might be subject to, please contact your advisor at Hertzbach & Company right away! The costs of noncompliance are severe and easier for the IRS to collect than with Form TD F 90-22.1. The requirements have been designed to penalize the substantial evaders but it can also be a trap for the unwary.

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IRS Releases Information on New Settlement Program

Posted on November 15, 2011 by Richard_Wolf

by Brian Ray, CPA

The Internal Revenue Service (IRS) has recently released information regarding a new settlement program to allow certain taxpayers to voluntarily reclassify workers. The program, Voluntary Classification Settlement Program (VCSP), provides relief from federal employment taxes for taxpayers that agree to classify its workers (or a group of its workers) as employees as opposed to independent contractors.

The VCSP is designed to provide an incentive to those taxpayers who either improperly or aggressively classified workers as independent contractors to treat such workers as employees on a prospective basis. The VCSP is available for both for-profit and non-profit taxpayers.

In exchange for participating in the program, eligible taxpayers will receive the following benefits:

• Requirement to pay only 10% of the employment tax liability which would have been due on the compensation paid to the workers for the most recent tax year;
• Waiver of all interest and penalties that would have been due on the tax liability; and
• Audit protection for all prior years with respect to the workers included in the program.

Although the VCSP does provide a participating taxpayer some attractive benefits, the taxpayer must agree to extend the statute of limitations for the assessment of employment taxes an additional three years for the first, second and third tax years beginning after entering into the VCSP. Additional consideration must also be given to the state and local impacts of participating in the VCSP at the federal level.

To participate in the VCSP, certain requirements must be met. The taxpayer:

• Must have consistently treated included workers as nonemployees and filed all required Form 1099s for the previous three years;
• Cannot currently be under audit by the IRS; or
• Cannot currently be under audit concerning the classification of workers by the Department of Labor or by a state government agency.

Additionally, to the extent a taxpayer was previously audited for this issue by the IRS or Department of Labor, the taxpayer is only eligible under the VCSP if it complied with the results of such audit.

Once a taxpayer determines it is eligible and wants to voluntarily classify workers as employees, participation in the program is as simple as filing an application, Form 8952, with the IRS. The IRS does recommend filing the application at least 60 days prior to the date the taxpayer wants to treat the workers as employees. Once approved, the IRS and taxpayer will entered in a closing agreement at which time payment of tax will be due.

Additional information regarding the requirements for participating in the VCSP, obtaining the VCSP application and a list of frequently asked questions can be found on the IRS website at the links below.

Voluntary Classification Settlement Program Application, Form 8952
http://www.irs.gov/pub/irs-pdf/f8952.pdf

Frequently Asked Questions
http://www.irs.gov/businesses/small/article/0,,id=246014,00.html

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How Prohibition Shaped the Business Valuation Industry

Posted on October 31, 2011 by Richard_Wolf

by Larry Epstein, MS, CPA, CVA, ABV, CFF and Rob Carter, AVA

Probably not the type of beginning expected for a business valuation industry, but believe it or not, alcohol, or rather a lack thereof, is one of the reasons the Business Valuation Industry exists. It is common knowledge that the government’s enactment of prohibition in the 1920’s negatively affected millions of Americans; however, what people rarely reflect on, is how the alcoholic beverage industry changed. Many of the companies in the industry closed their doors and many more lost significant portions of sales. As a result, the U.S. Government allowed these companies tax breaks or in very few cases, compensated the companies that went out of business for the damages sustained (i.e. the lost profits of the companies).

Up until this point of time, it was widely accepted that the value of a business was simply the value of its equity, in other words, its total assets less total liabilities. Of course, now we know that a business can have value well beyond its equity and that value is generally considered to be goodwill. Goodwill is the value created by the cash flow the company has generated and will generate above that of its assets. It can be comprised of many different components such as an assembled workforce, customer relations, trade secrets, or business reputation among others.

In order for the businesses to accurately determine the damages they suffered as a result of the enactment of prohibition, the value of their intangibles or “goodwill,” as described above, had to be determined. The government’s resolution to this issue came in a document called the Appeals and Revenue Memorandum (ARM) 34. ARM 34 proposed two innovative concepts: 1) if a business has earnings in excess of another “like business,” goodwill exists and 2) the “current value” of those excess earnings is the value of goodwill. These two ground-breaking ideas formed the first earnings-based valuation method. Since the days of prohibition, more complex and exact methods of valuation have been developed, although it stands to reason that a lack of alcohol is the reason for the unexpected beginning of the Business Valuation industry.

Contact a Hertzbach professional for more information on business valuations.

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