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Excerpt from Money Matters TV

 

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Why your Financial Statements will never be the same

 

If your financial statements are in disarray because of the economic downturn, we've got good news and bad news for you:

First, the good news: they won't stay in their current condition for long.

Why not? That's the bad news: they're about to change much more drastically.

Recently, the Financial Accounting Standards Board (FASB) met to discuss proposed sweeping changes to how financial statements are prepared. The changes, some of which are detailed below, are surprising in how much they depart from current standards.

Some potential changes include:

  • Division of statements. CFO.com notes that "all three statements -- balance sheet, income statement, and cash-flow statement -- would be divided into two major sections: business and financing." Business, says the website, "would include what a company does to provide goods and services," while financing is intended to deal more with "activities that fund a company's business activities."
  • "Unbalanced" balance sheets. Because of the proposed division of statements mentioned above, balance sheets would not balance in a conventional sense; that is, assets would not equal liabilities and equity, since assets and liabilities would be broken up into categories.
  • Management decision on classifications. Ultimately, management would make the call on whether to classify items in financial statements as related to operations or financing. This could create a disparity between the financial statements at different companies, since one company's investment earnings could be another's operating earnings.

These changes and more -- such as using the direct method, rather than the indirect method, to generate a cash-flow statement -- are still being discussed through the accounting community, and some companies are already participating in field tests of some of the proposed changes. One thing is certain, however: in just a few years, financial statements will contain at least a few elements radically different from what we have today.

Learn More Contact DGK to discuss how to prepare for upcoming FASB changes

Learn More Learn more at CFO.com

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Construction Workplace Misclassification Act - Act 72

 

Attention Independent Contractors in the Construction Industry

who conduct there business in the State of Pennsylvania

We would like to reiterate the importance of the Construction Workplace Misclassification Act - Act 72 presented by the Pennsylvania Department of Labor and Industry effective on 2/10/2011.  This Act applies to the utilization of Independent Contractors in the Construction Industry.  We are posting the link to the PA Department of Labor & Industry website in order for you to review and reinforce this Act.  Please read the Overview and Requirements, as it defines, classifies, and directs sub-contract services with businesses or persons and violations and penalties, if you do not comply with the new Act.

http//.www.portal.state.pa.us/portal/server.pt?open=514&objID=953319&mode=2

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Identity theft, phishing top IRS’s “Dirty Dozen” tax scams

BYPAUL BONNER
MARCH 26, 2013

The IRS issued its “Dirty Dozen” list of tax scams Tuesday, highlighting fraudulent schemes commonly committed by and upon taxpayers. The annual warning, released to coincide with tax filing season, emphasizes the most egregious schemes involving filing false returns or return items, but it also advises yearlong vigilance against practices that prey upon the unwary and uninformed.

The 2013 list is little changed from a year earlier and for a second year is headed by:

  1. Identity theft: The IRS spotlighted its measures, including its new Identity Protection web portal, to prevent and combat the growing problem of tax fraud involving stolen identities, which it called one of its top priorities. During 2012, the IRS prevented issuance of $20 billion in fraudulent refunds including those related to identity theft, up from $14 billion in 2011, it said. The IRS also noted that its identity theft enforcement sweep in January led to nearly 300 indictments, complaints, and arrests, on top of thousands of enforcement actions against identity theft tax fraud in 2012. (See “Dozens indicted on stolen identity tax refund fraud charges.”)
  2. Phishing: The IRS again this year warned against fake electronic communications designed to obtain recipients’ information, reminding that the IRS does not initiate contact with taxpayers by email, text messages, or social media to request personal or financial information.
  3. Return preparer fraud: In addition to suggesting taxpayers make sure paid preparers sign returns and enter their preparer tax identification number (PTIN), the IRS this year included information about using Form 14157, Complaint: Tax Return Preparer, to report abusive tax preparers.
  4. Hiding income offshore: This warning also updated the number of participants in the IRS’s Offshore Voluntary Disclosure Program to 38,000 and its collections to $3.4 billion from the 2009 program alone (March 23, 2009,through Oct. 15, 2009) and $1 billion so far in “up-front” payments from the 2011 program (Oct. 16, 2009, throughbSept. 9, 2011). In 2012, the program was extended indefinitely. (See “IRS announces third offshore voluntary disclosure program.”
  5. “Free money” from the IRS and tax scams involving Social Security: With fliers and advertisements “appearing in community churches around the country,” promoters of schemes promising refunds for returns with little or no documentation have enticed “unsuspecting and well-intentioned” victims, some of whom have spread the word to friends and relatives, the IRS said. One scheme falsely advises taxpayers to claim the American opportunity tax credit even if they have no current qualifying educational expenses.
  6. Impersonation of charitable organizations: Some fraudsters have doubly victimized people hit by a natural disaster by claiming to be working on behalf of the IRS to help them claim a tax casualty loss but instead steal their financial and personal information. This replaced “abuse of charitable organizations and deductions” from the 2012 list.
  7. False/inflated income and expenses: Exaggerating wage or self-employment income is a common ploy by some unscrupulous preparers to inflate refundable credits, including the earned income tax credit, by more than any additional tax.
  8. False Form 1099 refund claims: One scheme involves issuing a bogus information return, often Form 1099-OID,Original Issue Discount, to the IRS. A refund is then claimed on a corresponding tax return. The IRS says this is based on the theory that “the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS.”
  9. Frivolous arguments: The IRS maintains a webpage describing some of the more common and legally fanciful of these theories.
  10. Falsely claiming zero wages: A Form 4852, Substitute Form W-2, or “corrected” Form 1099-MISC, Miscellaneous Income, is fraudulently filed to reduce or eliminate income on a legitimate information return. Sometimes it is accompanied by a frivolous argument regarding the income.
  11. Disguised corporate ownership: The IRS said it works with state authorities to identify entities by which taxpayers underreport income, claim bogus deductions, and engage in other misconduct.
  12. Misuse of trusts: The IRS said it has seen an increase in improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses.

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Tax Calculator:

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2013 Payroll Tax Facts:

2013 Payroll Tax Facts

Alternative Minimum Tax:

Alternative Minimum Tax may get New Patch.pdf

I.R.S. Leader Says Inaction on Tax Will Affect Returns of Millions

By JONATHAN WEISMAN

The acting commissioner of the Internal Revenue Service said Wednesday that if Congress fails to act this year to prevent the alternative minimum tax from expanding, as many as 100 million households — of the 150 million total taxpayers — will be unable to file their taxes on time as the I.R.S. scrambles to reprogram its computers. Some 30 million tax-filers will see an unexpected tax hit.

In a letter to the chairmen and ranking members of Congress’s tax-writing committees, the acting commissioner, Steven T. Miller, indicated that Congress’s inaction would lead to chaos.

The alternative minimum tax was enacted in 1969 to make sure that rich households could not avoid taxation through the creative use of deductions, credits and loopholes, but because Congress failed to say that the threshold where the tax kicked in would rise with inflation, its reach has expanded into the middle class. Each year, Congress has enacted temporary legislation raising that threshold for a year to prevent the A.M.T. from socking middle-class families.

But lawmakers have failed to do so this year.

I.R.S. computers now assume such a patch will be passed, but if nothing is done before Jan. 1, the agency will face a Herculean task of reprogramming its system.

“I want to reiterate that most taxpayers may not be able to file their 2012 tax returns until late in March 2013, or even later,” Mr. Miller wrote. “This situation would create two significant problems: Lengthy delays of tax refunds and unexpectedly higher taxes for many taxpayers, who will be unaware that they are newly subject to AMT liability.”

Mr. Miller had previously estimated that failure to act on the A.M.T. would keep 60 million taxpayers from filing their returns while I.R.S. computers were being reprogrammed.

“As we consider the impact of the current policy uncertainty on the upcoming tax filing season, it is becoming apparent that an even larger number of taxpayers — 80 to 100 million of the 150 million total returns expected to be filed — may be unable to file,” he wrote Wednesday.

Both President Obama and Speaker John A. Boehner of Ohio have proposed a permanent fix to the problem of “A.M.T. creep” in a “grand bargain” on deficit reduction, but the cost to the Treasury would be large. The speaker’s “Plan B” tax legislation, scheduled for a vote Thursday, includes a permanent A.M.T. solution, and it is by far the most costly piece of the bill. Measured against doing nothing and allowing all expiring tax provisions to disappear, the House tax bill’s A.M.T. fix would cost the Treasury $1.9 trillion over the next decade. In contrast, extending all the Bush-era income tax rates for incomes below $1 million would cost the Treasury $913 billion.

Independent Contractors may be the way to go...

In today’s economy, many companies are turning to independent contractors.
Firms and skilled workers have many issues to consider when deciding if taking this route is the right alternative to part-time, full-time or temporary employment. » Read More

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Newsletters

April 2013

The American Taxpayer Relief Act (ATRA)

Section 179 and Bonus Depreciation

ATRA hiked the immediate deduction that businesses can take for capital purchases (new and used, financed or leased equipment, and off-the-shelf software) from 2012's limit of $139,000 to $500,000 for 2013.

The limit on what a business can deduct is slated to fall to a mere $25,000 in 2014.

ATRA also extended bonus depreciation, which allows companies to write off equipment over time, by one year. But firms can now take it only on new equipment, not on software.

R&D Credit

The research-and-development tax credit was extended through 2013. It allows businesses to deduct capital expenditures on R&D as business expenses, either taken in the year they are incurred or amortized for no less than 60 months.

Payroll Tax

ATRA did not extend the 4.2% Bush-era rate for employee Social Security tax, which has gone back up to 6.2%.

Revenue Recognition

Whether your company is large or small, if you own or manage a business that generates revenues and you are thinking about going public, planning an exit or getting third party financing, accounting for revenue matters, a lot.

Bad revenue accounting can cost you time and money. This applies to all industries. Software companies face extraordinary complexities interpreting and applying GAAP to their business transactions. But the rules can also be confusing to low tech companies as well.

You need to know the implications of this topic to help you plan, allow remediation as necessary and before being confronted with a dilemma that has real economic implications.

Acquirers often look for GAAP financial statements and are especially concerned about revenue. The time and cost to restate revenues can be prohibitive. There is a risk that non-GAAP statements might actually depress selling price or even make the business less saleable.

It's important to know that revenue recognition "projects" can be very expensive and take time and attention away from running the business. A relatively small number of complicated, nonstandard sales arrangements can create a substantial accounting effort.

Regardless of your business' size, industry and proximity to some planned liquidity event, understanding the state of your revenue accounting is essential.

February 13

The New Norm...Pay Late!

It's the new normal: big companies are paying their bills late, later, and latest. When hard times hit in 2008 companies felt the pressure to improve their working capital positions . The longer they could hold on to cash, the more liquid they were and could avoid expensive external financing.

If getting paid late puts your business in a bind, perhaps a supply-chain-financing agreement is a good alternative. In this process you send your invoice to a bank-managed portal. The bank immediately pays you (less a discount, say 2%) and in turn gets paid by your customer.

Property - Tax Rules

New regulations mandate that costs to enhance or improve tangible property have to be capitalized, and those costs incurred to simply repair and keep tangible property in working order would be allowed to be deducted. Previously, determining which category improvements to a property would fall into was fuzzy.

The new rules include three tests to determine whether an expense is deemed a "betterment," a "restoration," or an "adaptation" of the property to a new and different use.

But nothing is as simple as it sounds when it comes to tax codes. The new tangible-property guidance, for instance, includes no fewer than 19 accounting-method changes that exist within the tangible-property rules' section 481(a) tax adjustments.

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December 2012

Tax Considerations

Tax Rate Hikes and New Medicare Contribution Tax

Unless Congress can act decisively before the end of this year, the marginal federal income tax rates will increase for taxable years beginning on or after January 1, 2013.

On January 1, the top individual marginal income tax rate will increase from 35 percent to 39.6 percent and the 10 percent tax bracket will be eliminated. The maximum marginal tax rate on long term capital gains will increase from 15 percent to 20 percent (with "qualified 5 year (capital) gain" at an 18 percent/8 percent rate structure). Corresponding rate increases of 5 percentage points will apply for 25 percent taxable gains (e.g., recapture of straight line depreciation) and 28 percent taxable gains (e.g., gain from the sale of collectibles). Another important item is the increase in the rate of tax from 15 percent to as much as 39.6 percent for dividend income with respect to "qualified dividend income" received from domestic and qualified foreign corporations.

The New Medicare Contribution Tax, which was enacted in 2010 as part of The Health Care and Education Reconciliation Act of 2010, goes into effect on January 1, 2013. For the first time Congress imposes an income tax on investment income for funding Medicare. This new tax of 3.8 percent on net investment income from passive activities applies to individuals, trusts and estates. It also applies to income passed through to partners, members of a limited liability company or shareholders in an S corporation. The new tax does not apply to non-resident aliens or corporations subject to federal income tax.

Gifting to Loved Ones

With the gift tax rate near a historical low and an increased exemption due to sunset by 2013, now could be an ideal time to transfer assets to your heirs.

Roth IRA

Before income tax rates increase in 2013, you may want to evaluate whether converting to a Roth IRA would be a beneficial move for you.

October 2012

Responding to an IRS 90-day letter

Under Sec. 6212(a) the IRS can issue a statutory notice of deficiency, also known as a 90-day letter, when it determines a deficiency in an income or estate and gift tax liability.

A 90-day letter is a formal legal notice, sent by certified or registered mail.

Taxpayers have a statutory 90-day window from the date of the notice to either agree to the government's adjustments or file a petition with the Tax Court for a redetermination of the deficiency.

Failing to agree to the adjustments or timely file a petition will result in the assessment of the tax and actions to collect it.

Essentially, the 90-day notice is the government's final determination of anassessable amount and its proposal to immediately assess and collect the tax.

Should you receive such a notice, contact us immediately.

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October 2012

Responding to an IRS 90-day letter

Under Sec. 6212(a) the IRS can issue a statutory notice of deficiency, also known as a 90-day letter, when it determines a deficiency in an income or estate and gift tax liability.

A 90-day letter is a formal legal notice, sent by certified or registered mail.

Taxpayers have a statutory 90-day window from the date of the notice to either agree to the government's adjustments or file a petition with the Tax Court for a redetermination of the deficiency.

Failing to agree to the adjustments or timely file a petition will result in the assessment of the tax and actions to collect it.

Essentially, the 90-day notice is the government's final determination of anassessable amount and its proposal to immediately assess and collect the tax.

Should you receive such a notice, contact us immediately.

August 2012

Crowdfunding

Because of the reporting and regulatory hurdles, crowdfunding as it's specified in the Jumpstart Our Business Startups (JOBS) Act may be too complex and onerous, and not very cost-effective for many early-stage companies.

The ability to raise capital from a bunch of individuals through social media without having to register with the Securities and Exchange Commission sounds like a great opportunity for someone starting a business. However, many entrepreneurs lack the financial knowledge and robust business plans they'll need to comply with the JOBS Act and possible further regulations from the SEC.

Contact us to learn more about the cost and compliance questions you could face.

1099-K

A tax law that will undoubtedly complicate your tax reporting!

Banks and other payment settlement companies that process credit cards, debit cards and electronic payments online now have to report annually to the IRS the gross amount of merchant (seller) transactions.

If your business accepts payments in any of these ways look for forms 1099-K at the end of the year.

Use of rentals exception can cut self-employment tax

Taxpayers who own closely held businesses can maximize their tax savings by taking advantage of the self-employment tax "rentals exception" under which rentals from real estate and from personal property leased with the real estate (and the corresponding deductions) are excluded in determining net earnings from self-employment. The tax savings can be significant.

June 2012

New standards for private-company accounting to be created

CFOs and their tax departments at privately held companies will no longer be faced with the difficult and costly task of applying public accounting standards to their situations. The Financial Accounting Foundation (FAF) has established a new council to improve standard setting for private companies.

The new Private Company Council (PCC) will be the go-to body for private-company accounting issues and will advise FASB on all things related to private companies. It specifically will have to determine whether U.S. generally accepted accounting principles need to be altered to better address private companies.

Unemployment Insurance Tax Increases

Expected Through 2014

As the economy continues to recover from the most recent recession, employers could experience some dramatic Unemployment Insurance (UI) cost increases through at least 2014.

Annual FUTA Tax per Employee
State 2012 2013 2014
PA & NJ $84 $105 $126

 

March 2012

S corporation underpay employment taxes by paying unreasonably low wages

The IRS feels that many service professionals try to minimize Medicare and Social Security taxes by routing what would otherwise be self-employment income through an S corporation and then paying themselves a nominal salary. Since the amount of compensation that an S corporation pays its employee-shareholder is within the employee-shareholder's discretion, he may have an incentive to claim less than a reasonable salary and take from the S corporation other payments (e.g., dividends) that aren't subject to employment taxes.

Employers are liable for FICA (Social Security) taxes on wages paid to their employees. S corporations must not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages.

"What is Cloud Computing?"

Cloud computing is the descriptor given to technologies that provide computation, software, data access, and storage services, in which the end-user does not require knowledge of the physical location and configuration of the system that delivers the services. In the software-as-a-service (SaaS) cloud model, the vendor supplies the hardware infrastructure and the software, and then interacts with the user through a front-end portal. Since the provider hosts both the application and the data, the end user is free to use the service anywhere.

SaaS has touched nearly every industry, changing the way countless organizations do business. The benefits are straightforward-cost reduction, greater flexibility, quick deployment, lower implementation risk, better functionality than existing solutions, and a high return on Investment. According to a 2011 survey by the Institute of Management Accountants on how finance views cloud-based solutions, the desire to streamline cross-functional business processes is the primary reason companies moved finance applications to the cloud.

The benefits of cloud computing helps explain why research organization Gartner predicts that by the end of 2012, 80 percent of Fortune 1000 enterprises will use cloud-computing services.

February 2012

Your Taxes

Worker classification becoming major tax administration issue

Between the recent voluntary classification settlement program introduced by the Internal Revenue Service, a memorandum of understanding between the IRS and the Department of Labor to share employment tax data, and the president's proposed economicgrowth plan, misclassification of workers and independent contractors has been receiving a lot of attention in Washington.

Handling IRS requests for accounting software backup data

Internal Revenue Service agents have begun requesting backup files from taxpayers' accounting software during examinations. DGK Group understands the scope of the IRS's authority to make these requests and how to help you provide the necessary data, but not more information than is required.

Companies reap tax benefits from granting stock options

The stock market rebound highlights the generous tax break that companies can receive for granting stock options to executives. Tax law allows companies to claim deductions for the options at current market value, which can be higher than the value when they were granted. Options granted to executives during the market crash of 2008 could cost the government tens of billions of dollars in corporate tax revenue over the next 10 years.

November 2011

Reducing Audit Fees

As audit fees increase due to the increasing complexity being required by regulation, becoming easier to audit is one way for small and midsize companies to climb out of the cost quagmire.

As the year end approaches, contact us to discuss how we may assist you in your audit preparation by streamlining the process and reducing the complexity by improving accuracy, transparency, accountability, and auditability.

October 2011

Avoid the "Trusted Bookkeeper" Syndrome

The key for any business owner to avoid the "trusted bookkeeper" syndrome is to have a strong system of internal controls in place. All business owners should understand that the purpose of internal controls is to foster reliable financial reporting, safeguard assets, and promote ethical conduct.

Ensuring the segregation of duties in the cash receipts and cash disbursements area is a critical internal control that no organization should overlook. Controls must also exist over the maintenance of vendor lists, especially the entry of new vendors, to decrease the likelihood that fictitious vendors are created and subsequently paid.

Restricting access to the accounting systems via passwords and user activity logs as well as ensuring that the person responsible for recording vendor transactions cannot also edit or manipulate vendor lists is an important control that should be in place in every organization.

September 2011

How Can Entrepreneurs Impress Their Bank?

A thorough business plan can be important and includes financial information showing how money flows in and out of your company. You can calculate your cash needs more precisely if you know your operation inside out and you maintain accurate financial statements.

About 25 percent of businesses with fewer than 500 employees keep financial statements, according to the Federal Reserve Board's Survey of Small Business Finances. For the rest, owners need to crunch a lot of numbers to arrive at the right loan amount.

With your financial information, explain to the banks why a loan of a specific amount will either help your business catch up to industry peers or drive your already-superior numbers higher.

Develop a solid relationship with a bank that targets entrepreneurs. Even if it cannot issue a loan, its lending officers might connect you with angel investors, grant opportunities and funding programs sponsored by universities, private foundations and government.

Consider hiring a certified public accounting firm to assist you in developing realistic financial figures.

Call us to see how we may assist you in preparing meaningful financial projections and statements.

July 2011

Tax considerations for early-stage and emerging growth companies

  • From the beginning owners should consider the tax ramifications of forming a C corporation, S corporation, limited liability corporation (LLC), partnership, or other form of legal entity. Each entity has its own set of tax benefits and limitations that may affect the growth and strategic objectives of the company.
  • Accounting methods vary based on the growth stage of a company. An early-stage company may use a cash basis financial statement for managing the business, and an accrual basis financial statement for banks and investors. Tax returns may use either method, within certain limitations. Accounting for transaction costs, deferred revenue, and depreciation are a few areas to consider.
  • Research & development tax credits can be significant deductible expenses. Tax credits are available for certain research activities however a thorough analysis of the creditable activities are required by the IRS guidelines.
  • Forms of compensation and benefits such as salaries, commissions, bonuses, equity compensation such as unrestricted and restircted stock, stock options, employee stock purchase plans, qualified pension plans, and profit sharing all have an impact on taxes.
  • State and local tax issues must be considered. There can be tax incentives and credits such as enterprise zones and other tax minimization strategies around location of activities and intercompany transactions. The issue of nexus, regarding sales and use taxes is something that needs to be reviewed.
  • Mergers, acquisitions, joint ventures, and other transactions need to be analyzed to maximize deductions of goodwill and intangible assets acquired in a tranaction. Companies should also plan for the best tax treatment in the purchase or sale of assets for stock.
  • Net operating losses (NOL) and other tax credits carry forwards into future years can be impacted by changes in a company's ownership structure. Limitations may restric the amont of NOL than can be utilized and potentially elimanate the benefit of a bonus depreciation deduction.

These are some of the tax considerations DGK Group can assist you with in making the right decisions and planning for the future.

Call us at 215-682-9047 and learn more about us at www.dgkgrouppc.com

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