Navigating - RubinBrown

Transcription

Spring | 2012
certified public accountants
business consultants
horizons
A Publication of RubinBrown LLP
Navigating
the Changing
Regulatory
Environment
How Organizations are Adapting
Is your organization successfully
preventing fraud?
How efficient and effective administrative
processes add to your bottom line
How specific industries manage the
regulatory landscape
Table Of Contents
horizons
A publication of RubinBrown LLP
Spring | 2012
Chairman
James G. Castellano, CPA
Managing Partner
John F. Herber, Jr., CPA
Denver Office
Managing Partner
Gregory P. Osborn, CPA
Kansas City Office
Managing Partner
Todd R. Pleimann, CPA
Editor
Dawn M. Martin
Art Director
Joe Ebeler
Horizons, a publication of
RubinBrown LLP, is designed
to provide general information
regarding the subject matters
covered. Although prepared
by professionals, its contents
should not be construed as the
rendering of advice regarding
specific situations. If accounting,
legal or other expert assistance
is needed, consult with your
professional business advisor.
Please call RubinBrown with any
questions (contact information is
located on the back cover).
Features
2
Welcome From RubinBrown’s Managing Partner
3
RubinBrown News
7
Chairman’s Corner
9 Is Your Organization Successfully Preventing Fraud?
13How Efficient and Effective Administrative Processes
Add To Your Bottom Line
58
Timely Reminders
Industry-Specific Articles
17
Media & Entertainment
Focusing The Lens On Film Tax Credits
19
Automotive
Beyond Skin Deep: The Effect of
Facility Image Programs
23
Home Builders
Profitability Is In Sight; A Blessing For
Weary Eyes
25
Hospitality & Gaming
The Best of Both Worlds: Maximizing
the Benefits of Licensing Relationships
While Managing Risk
29
Colleges & Universities
Federal Funding of Higher Education
32
Life Sciences
Entity Considerations for The Life Science Start-Up
35
Public Sector
How Regulatory Changes Will Affect Your Entity’s Audit
40
Construction
Inching Toward A Recovery
43
Not-For-Profit
Staying Afloat Among Changing Regulations
47
Manufacturing & Distribution
Considerations During International Expansion of Your Business
51
Real Estate
President’s Budget Proposal Includes Tax Credit Implications
Raise Your Expectations
1
55
Professional Services
Managing a Medical Practice in Today’s Regulatory Environment
Welcome From RubinBrown’s
Managing Partner
There’s no doubt that the most sweeping regulatory changes within the accounting
profession came in the early 2000s with the introduction of the Sarbanes-Oxley Act
and its related trickle-down effect on all organizations.
Over the past 10+ years, our profession has continued to experience regulatory
change and, even more significantly, increasing complexity of rules and standards.
The CEO of Financial Executives International reported earlier this year that the top
challenges for financial executives include:
John F. Herber, Jr., CPA
Managing Partner
• Tax reform
• Healthcare uncertainty
• Dodd-Frank Act implementation and revision
• XBRL
• Convergence of U.S. GAAP and IFRS
• Private company accounting
While all of these are considerable, RubinBrown recently reported in our monthly
electronic newsletter, “RubinBrown Accounting & Auditing Alert,” that the private
company accounting debate continues.
RubinBrown has and continues to support the Blue Ribbon Panel’s recommendation
for a separate, authoritative standard-setting body, under the Financial Accounting
Foundation for the promulgation of accounting and financial reporting standards for
private companies.
On behalf of our clients, RubinBrown remains committed to supporting a solution
for relevant, decision-useful accounting and financial reporting standards for private
companies.
Please review all of our recommendations and guidance on private company financial
reporting by reviewing past issues of the RubinBrown Accounting & Auditing Alert. It
can be found on the left-hand side of our website at www.rubinbrown.com.
As always, I personally welcome your feedback on this issue of Horizons and, overall,
on your business views. Please email me directly at [email protected].
Pleasant reading,
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News
RubinBrown Around Town
When three young accountants formed
Rubin, Brown, Gornstein & Co. in St.
Louis in 1952, they only dreamed that
their enterprise would evolve into a
national leader in the accounting and
business consulting profession.
Today, RubinBrown LLP, with more than
400 team members working out of offices
in St. Louis, Kansas City and Denver,
is the largest accounting and business
consulting firm in St. Louis, among the
largest firms in both Kansas City and
Denver, and is ranked 46th in the nation
by Inside Public Accounting.
This year serves as RubinBrown’s 60th
anniversary. Jim Castellano, chairman,
cites RubinBrown’s founders’ high
professional standards, a dedication to
client satisfaction and an exceptional
team for the firm’s growth and success.
“We wouldn’t be where we are today
without the support of our clients and
the exceptional work of our partners,
managers and other team members,”
observed Castellano. “Mahlon Rubin,
Harvey Brown, and Sidney Gornstein
set very high values for all of us. We feel
privileged to follow in their footsteps.”
RubinBrown Sign Debuts On
St. Louis Office
The One North Brentwood Building in St. Louis now proudly
displays the RubinBrown logo illuminated in full color. The
new sign debuted in early 2012 to help commemorate
RubinBrown’s 60th Anniversary.
3
Denver Offices Have
Combined & Moved
RubinBrown has consolidated two
Denver area offices and expanded
into 26,440 square feet of new space
in the 1900 Sixteenth Street building
in the LoDo district of downtown
Denver.
More than 60 accounting, tax and
business professionals now occupy
the new third-floor suite, which
includes the RubinBrown Center, a
state-of-the-art conference facility with
videoconferencing capabilities used for
client seminars and training sessions.
RubinBrown Sponsors
RCGA Greater St. Louis
Top 50 Awards
RubinBrown is proud to serve as the
presenting sponsor of The Greater St.
Louis Top 50 Awards, presented annually
by the St. Louis Regional Chamber &
Growth Association. This event recognizes
50 of the most significant companies for
their positive effects on the future of St.
Louis’ business community.
RubinBrown Chairman Jim Castellano
presents the Spirit of St. Louis
Technology Award to
AT & T’s John Sondag
Above: RubinBrown Managing Partner John
Herber welcomes the 700+ guests at the
RCGA Top 50 Awards dinner.
4
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News – continued
RubinBrown Awarded Ronald
McDonald Award
The Ronald McDonald House of Charities of Metro
St. Louis recently honored RubinBrown with its 2011
Heart and Sole Award. The award recognizes one area
company for its long-term commitment and generosity
to the non-profit organization.
RubinBrown Staff
Member Scores Top 10
On CPA Exam
RubinBrown is proud to have
one of the highest scorers of
the CPA exam in the U.S. on its
team. Chris Tkach, assurance
staff member, was one of the
winners of the American Institute of Certified Public
Accountants 2011 Elijah Watts Sells Award.
The award is presented annually to candidates
who have obtained the 10 highest cumulative scores
on all four sections of the computerized Uniform
CPA Examination.
These candidates must have completed testing
during the previous calendar year and passed each
exam section on their first attempt. More than 93,000
individuals sat for the Exam in 2011.
RubinBrown Partners (left to right) Jim Mather, Felicia Malter,
and Steve Hays accept the Ronald McDonald Heart & Sole
Award, along with Managing Partner John Herber and
Chairman Jim Castellano.
RubinBrown Awards
& Recognitions
RubinBrown Partner
Named to St. Louis 40
Under 40
RubinBrown Partner Chelle Adams
has been named one of the 2012
St. Louis Business Journal 40
Under 40 winners.
RubinBrown Named in Regional
Leader List
RubinBrown is proud to have been named the “fastest
growing firm in the Midwest” by Accounting Today.
The publication stated that the Midwest lagged the
rest of the regions, and even managed to grow less
in 2011 than it did in 2010. It further stated, “Growth
rates at most firms were fairly meager -- St. Louis’
RubinBrown broke the trend, but some of that is no
doubt due to its aggressive expansion in Colorado.”
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RubinBrown
Chairman and
Managing Partner
Named Most
Influential
The St. Louis Business
Journal recently named
RubinBrown’s Chairman
Jim Castellano and
Managing Partner John
Herber to its list of Most
Influential St. Louisians.
Castellano and Herber were featured among top area
business leaders and decision makers in the Feb. 17,
2012 issue of the St. Louis Business Journal. This year’s
list of honorees included health-care administrators,
energy executives, life-science pioneers, politicians,
civic leaders and real estate developers.
RubinBrown New Hires
New Partner
New Managers - continued
Henry Rzonca, CPA, has joined
RubinBrown as a partner in the
St. Louis Office’s Federal Tax
Services Group. Rzonca, who
also serves as partner in the
Manufacturing and Distribution
Services Group, specializes in
“C” corporation taxation as
well as privately held business
and individual tax planning
and compliance.
Firm Management
Rich Bradt recently joined the
RubinBrown team as director
of internal technology. Bradt
oversees the technology
planning and operations of
all RubinBrown offices. Bradt
worked previously as director of
information technology at the
Home Depot.
New Managers
Kristin Bettorf, CPA, has
re-joined RubinBrown as a
manager in the St. Louis office in
its Federal Tax Services Group.
Bettorf provides tax consulting
and planning and tax return
preparation services for clients
primarily in the manufacturing
and distribution industry.
RubinBrown added Thomas
Brecks, CISA as a manager in
its Business Advisory Services
Group in St. Louis. Brecks
provides enterprise resource
planning, IT internal audit and
compliance services to clients
primarily in the public sector,
not-for profit and manufacturing
and distribution industries.
Dave Collet, CPA has returned
as a manager in RubinBrown’s
Assurance Services and
Manufacturing and Distribution
Services Groups in the St. Louis
office. His previous experience
and specialties include several
large multinational audits
acting as a member of the lead
engagement team, audits of
internal control over financial
reporting, income taxes, revenue
recognition, and much more.
Eric Garrett, CPA recently
joined RubinBrown’s Denver
office as a manager in the firm’s
Assurance Services Group. In
addition, Garrett serves clients
in the not-for-profit, public
sector and manufacturing
and distribution industries,
specializing in audits, internal
accounting controls, and SEC
registrations and filings.
Mary Jo Larsen, CPA, joined
the Denver office as a manager
in its Tax Consulting Services
Group. Larsen provides tax
consulting, preparation and
planning services to a variety
of clients, including high-net
worth individuals, estates and
trusts, real estate and other
professional practices.
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Chairman’s Corner
The Continued Strength
and Reach of the Baker Tilly
International Network
By Jim Castellano, CPA
To better serve our clients with international operations,
RubinBrown proudly serves as an independent member of
Baker Tilly International.
Baker Tilly International is one of the world’s leading networks
of independently owned and managed audit, accounting and
business advisory firms.
Every day, 24,000 professionals in 125 countries worldwide
help privately held businesses and public interest entities meet
challenges, proactively respond to opportunities and stay
competitive. International capability and global consistency of
service are central to the way RubinBrown operates.
Baker Tilly International just released its financial results for
the 2011 fiscal year through publication of its Global Annual
Review 2011.
The results are impressive. Combined revenues of Baker Tilly
International’s member firms rose, year-on-year, 5 percent to
$3.2 billion and, overall, Baker Tilly International maintained its
position as the world’s 8th largest network.
These results reflect a two-tier economic recovery. Combined
revenues of Baker Tilly International member firms in Asia
Pacific leapt 40 percent as economic recovery across the region
forged ahead, closely followed by 24 percent combined growth
from member firms in Latin America.
In the U.S. and across Europe, Middle East and Africa
progress was more sedate, reflecting the uncertain economic
environments.
Overall, this growth demonstrates our commitment to building
a network capable of competing effectively in the global
marketplace.
7
Jim Castellano, CPA
Chairman
2012 Baker Tilly
Statistics At A Glance
Combined revenues ............. US$3.2bn
Member firms..................................149
Countries ........................................125
People........................................24,000
Partners .................................... 2,500+
Offices ............................................642
Baker Tilly Secondment Program
The Baker Tilly Secondment Program has been designed to provide
a unique working experience for staff of its member firms, as well as
give the opportunity to learn the cultures of another country.
A Secondment Program provides the opportunity to work from
another office for a set amount of time, typically 3 or 6 months.
Team members who participate in secondments are quickly immersed in
client engagements and given authentic work assignments to complete.
The goal of the program is to be able to share knowledge with your
home office upon returning and to better understand the regulations
and challenges each independent firm faces.
RubinBrown has been an active participant of the Baker Tilly
International Secondment Program over a number of years. It has
been advantageous for the firm because it focuses on building
talented professionals in a growing global economy.
RubinBrown’s Casey Pohl provides insights to Secondee
Julia Cameron.
RubinBrown was proud to host two secondees from Staples Rodway
in Auckland, New Zealand this winter—Katherine Morgan and Julia
Cameron.
“My secondment at RubinBrown has been very beneficial as I have
widened my knowledge, having now been exposed to several
different service lines within the accountancy profession,” states
Katherine Morgan.
Her fellow teammate, Julia Cameron, agrees and notes that while
a majority of the audit work in the U.S. is similar, there are some
notable differences.
“Most transactions in the U.S. are paid with checks. In New Zealand,
very few companies use checks as the majority of payments are
electronic payments.”
Throughout this spring
and summer, RubinBrown
team members Hannah
Castellano (far left) and
Eric Bouselli (left) will be
traveling to New Zealand
and will be hosted by
Staples Rodway for their
secondment assignments.
Katherine Morgan (right) from Auckland New Zealand
worked closely with RubinBrown’s Elise Sambol during
her time in the U.S.
8
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Features
Is Your Organization
Successfully
Preventing
Fraud?
By Dan McCabe, CPA, CFE
9
A
typical U.S. organization loses 7% of its
annual revenue to fraud.
As if this statistic, provided by the
Association of Certified Fraud Examiners
(ACFE), isn’t staggering enough, the organization also
reports that in 63% of the cases, the losses were at
least $100,000. In 25% of the cases, the losses were $1
million or more.
While preventing and detecting fraud has its
challenges, organizations that employ clear, and
sometimes even simple, strategies can mitigate their
risk dramatically. The ACFE reports that the single
biggest method of fraud detection in a company is a
system of tips or complaints.
While no fraud prevention system can completely
prevent all fraud from occurring, a strong system can
significantly reduce an organization’s fraud risk. To
assist our clients with fraud prevention strategies,
RubinBrown has developed the following checklist.
RubinBrown’s Fraud Prevention Checklist
Is ongoing anti-fraud training provided to all
employees of the organization?
• D
o employees have an understanding of what
constitutes fraud?
• H
ave the costs of fraud to the company and
everyone in it — including items such as lost
profits, adverse publicity (including loss of
customers), job loss and decreased morale
and productivity — been made clear to all
employees?
• Is there an anonymous fraud reporting channel
available to employees, such as a third-party
hotline?
• D
o employees trust that they can report
suspicious activity anonymously and/or
confidentially and without fear of reprisal?
• H
as it been made clear to employees that
reports of suspicious activity will be promptly
and thoroughly evaluated by management or
internal audit?
To increase employees’ perception of detection,
are the following proactive measures taken and
publicized to employees?
• Is possible fraudulent conduct addressed
proactively rather than reactively?
• A
re surprise fraud audits performed in addition to
regularly scheduled fraud audits?
Does top management stress honesty and integrity?
• A
re employees surveyed to determine the extent
to which they believe management and the
board acts with honesty and integrity?
• Are performance goals and budgets realistic?
• H
ave fraud prevention goals been incorporated
into the performance measures against which
managers are evaluated and which are used to
determine performance-related compensation?
• D
o employees know when and where to seek
advice when faced with uncertain ethical
decisions?
• Do employees believe that they can speak freely?
• H
as a policy of zero-tolerance for fraud been
communicated to employees through words
and actions?
Does the company have an effective fraud reporting
mechanism in place?
• H
ave employees been taught how to
communicate concerns about known or
suspected wrongdoing?
10
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Features – continued
• H
as the organization established, implemented
and tested a process for oversight of fraud risks
by the board of directors or others charged with
governance (e.g., the audit committee)?
Do the HR and hiring policies include the following
(where permitted by law)?
• P
ast employment verification
• C
riminal and civil background checks
Are fraud risk assessments performed regularly
to proactively indentify and reduce the company’s
vulnerabilities to internal and external fraud?
• C
redit checks
Are strong anti-fraud controls in place and
operating effectively, including the following?
• Reference checks
• Proper segregation of duties
• Use of authorizations such as passwords
• Restriction of data to a need to use basis
• Periodic job rotations
• Mandatory vacations
Does the internal audit department have sufficient
resources and authority to operate effectively
and without excessive influence from senior
management?
• Drug screening
• Education verification
Are employee support programs in place to assist
employees struggling with addictions, mental/
emotional health, family or financial problems?
Are employees aware of the existence of support
programs?
Is an open-door policy in place that allows
employees to speak freely about pressures? Is it
done in a timely manner enabling management the
opportunity to alleviate such pressures before they
become acute?
Are anonymous surveys conducted to
assess employee morale and awareness
of potential fraud?
RubinBrown’s Assurance Services Group
Your company will benefit from our highly trained professionals with experience in many industries. We utilize our renowned
Business Performance Analysis (BPA) to bring value-added ideas and feedback while performing attest services.
Fred Kostecki, CPA - St. Louis
Partner-In-Charge
Assurance Services Group
[email protected]
314.290.3398
Bert R. Bondi, CPA - Denver
Partner
Assurance Services Group
[email protected]
303.952.1213
11
Todd Pleimann, CPA Kansas City
Managing Partner,
Kansas City Office
[email protected]
913.499.4411
Tom Zetlmeisl, CPA, CPE, CFF St. Louis
Partner
Business Advisory Services Group
[email protected]
314.290.3395
Hiring
Accounting and Business Professionals?
ABACUS Recruiting, an affiliate of RubinBrown, can help. Our specialty includes both
permanent and temporary placement in the following areas:
• Accounting/Financial Management
• Marketing
• Bookkeeping
• Operations
• Administrative
• Information Technology
ABACUS Recruiting’s reputation for quality service
stems from our industry knowledge, commitment
to personalized service, confidentiality and
dedication to maintaining the most ethical
standards in the recruiting industry.
Having successfully placed financial and business
professionals in positions at Fortune 1000
companies, regional businesses and entrepreneurial
firms, ABACUS Recruiting has become one of the
Tamara Vazquez, President
314.878.5522
[email protected]
most respected names in our industry.
Whether you are a company in search of high
caliber professionals or a candidate searching
for a job change, ABACUS Recruiting is uniquely
qualified to assist you.
Contact us today!
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314.878.5522
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ABACUS Recruiting is an affiliate of RubinBrown LLP
Features
How Efficient and Effective
Administrative Processes
Add To Your Bottom Line
By Maureen Runge, CPA
E
nsuring company processes are functioning
efficiently and effectively will not only aid
in compliance, but just as importantly, it
will reduce costs to your organization and
boost the bottom line.
Often, management may find that processes that were
productive in the past are now unsuccessful because
the processes have not adapted to changes in the
organization.
The question remains…what should be done when a
good process has gone awry?
Breakdowns in a process can occur for a multitude
of reasons. They can be a result of centralization
of back-office functions, changes in employee job
responsibilities, an acquisition event, or new system
implementation, to name a few.
13
When a process becomes inefficient or ineffective due
to changes, negative consequences can occur such as
resource constraint, inaccuracy, unnecessary fines, and
a decline in reputation.
For example, an inefficient accounts payable process
that causes payments to be paid late may lead to
costly late fees, the risk of paying an invoice twice,
employees losing benefits because of late payment,
and damage to the company’s reputation.
To identify the root cause of the issues and mitigate
the negative consequences of an inefficient process,
management must take a step back and review the
entire process from start to finish.
To accomplish this, management needs a team
that can objectively execute the process, follow a
methodology to identify inefficiencies and improve the
effectiveness of the process.
The SIPOC Process
While various methodologies are available,
RubinBrown recommends a tool that can assist you.
A SIPOC diagram outlines the Suppliers, Inputs,
Process, Outputs, and Customers in a process. This
tool can help management quickly outline each step of
the process and determine where problems may exist.
The elements of the SIPOC diagram should be
discussed by all personnel involved in the process
to ensure that all areas of the process are covered.
A designated employee should be assigned as
the SIPOC lead to ensure that the group stays on
task when discussing these elements and that all
discussions are recorded in meeting notes.
Once each of the SIPOC elements has been discussed
and evaluated, possible issues and inefficient or
ineffective procedures will begin to appear. These
items, identified through the use of a SIPOC diagram
need to be further evaluated to determine if they are
truly an issue or simply a false negative.
For example, a possible issue identified in the
SIPOC discussion could be that payroll information is
entered into the payroll system late due to company
departments submitting in time sheets after the
prescribed deadline.
To confirm or disprove this theory, a report could be
run from the system to determine when the payroll
information was entered and compared to emails from
department managers containing the time sheets.
SIPOC Diagram
Using the Automotive Industry as the subject, below is an example of a SIPOC Diagram. While in this example, ‘Suppliers’ and ‘Customers’ are third-party
organizations, if the diagram is created for an internal administrative process, the suppliers and customers may be third-party organizations or internal
personnel (such as the Marketing Department or the Controller).
Suppliers
• Paint Wholesaler
• Local Metal Suppliers
• Glass Distributor
• Wiring Distributor
Inputs
Process
• Paint
• Metal
• Glass
• Wiring
• Tires
Output
• Vehicle
Customers
• Car Dealerships
• Consumer
• Rental Car Chains
Weld Body
of Vehicle
Create Doors,
Hood, and Trunk
Attach Doors,
Hood, Trunk,
Windows, Tires
Connect Wiring
Paint Vehicle
Inspect Vehicle
Create Windows
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Features – continued
The new process could be that the purchasing card
statement is reviewed and approved by the person’s
manager to ensure all purchases are valid and within
company policy.
To change a process, the right stakeholders need to be
involved and must agree that the change is needed.
Stakeholder understanding and agreement is a crucial
step in the process as it ensures that there will not be
barriers to resolving the issue.
Case Study
Below is a real-life example of how a well-thought
out plan can help an organization run efficiently,
meet its goals, and save the company from paying
unnecessary costs:
Company XYZ reorganized its four administrative
offices into one centralized administrative office.
The centralized accounts payable department
was now processing four times the number
of invoices and disbursements than they had
processed in the past.
Obtaining measurable support for why the issue is
problematic is key in this process. This data driven
approach will help you obtain buy-in from your
employees and management, so that all involved
understand the problem and start formulating ideas to
address the issue.
Once problem areas within the process have been
identified and confirmed, your team should map out
the process. This will help everyone visualize at what
stage in the process an issue occurs. The process
should then be re-mapped (or re-engineered) to
resolve the issue.
For example, if the current purchasing card policy—
which requires purchasing card expenses to be
approved by the person who made the purchases—is
not effective in monitoring purchases, then the team
should brainstorm and map a new process that would
ensure adequate control of the purchasing cards.
15
Shortly after the centralization occurred, however,
the AP process began to fail and invoices were
regularly paid late. These late payments resulted in
late fees and vendors calling periodically in an effort
to collect funds.
If the company continued on the road it was on, it
could easily be paying $50,000 and $70,000 each
year in late fees plus suffer immeasurable damage
to the company’s reputation.
Company XYZ decided that the process had to
be re-engineered and an outside consultant was
brought in to assess the process. The first step
performed by the consultant was to hold SIPOC
meetings to determine where the process was
breaking down.
The SIPOC meetings led to many
preliminary findings:
• Invoices were still being sent to
branch locations
• T
hose invoices were not being sent timely to
the centralized office
The new process was communicated to the controller
and the AP staff to ensure they understood the new
process and were on board with the implementation
of the new process.
• Invoices were not being entered into accounts
payable until the invoice was coded
• U
norganized flow of information to the
centralized office
• Invoices were handled multiple times before
entry into accounts payable
Once these issues were identified, the consultant
measured the days between the invoice date, the
date received at the centralized office, the date of
entry into the system and the payment date.
This analysis helped confirm that each of the above
issues was causing a delay in payment.
After a month of following the new process, the
outstanding invoices began to decrease to a
manageable level.
Like this example, it is possible your company can
decrease costs, and utilize employees to their full
capacity by assessing the administrative processes that
are the backbone of your business.
Next, the consultant re-mapped the process to:
1. Eliminate wasteful activities that required
the AP department to handle invoices
multiple times
2. Ensure invoices were sent directly to the
centralized branch and
3. Create a procedure for entering uncoded
invoices into accounts payable if certain
conditions were met
RubinBrown’s Business Advisory Services Group
Your company can improve your processes, comply with regulations, embed risk management programs, and strengthen
information technology support through RubinBrown’s advisory services.
Michael T. Lewis, CFA - St. Louis
Todd Pleimann, CPA - St. Louis
[email protected]
314.290.3397
[email protected]
913.499.4411
Matt Wester, CPA, CFE - Denver
Mike Ramirez, CPA
[email protected]
303.951.1277
[email protected]
314.290-3455
Partner-In-Charge
Partner
Managing Partner
Kansas City Office
Director
16
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Media & Entertainment
Focusing the Lens
on Film Tax Credits
By Leah McCormick
The idea behind film tax credits is growth—to
encourage film production in the state issuing the
credit, which in turn creates jobs and revenue within
that state.
While most states have participated in the film tax
credit program at one time, only 35 currently have
programs available. Some states offer an actual tax
credit, while others offer a rebate program. Most states
will offer other incentives such as waiving the hotel
occupancy tax for production employees if their stay
exceeds a certain number of days (usually 30 days).
Film tax credits have been in a constant state of
change. When financing a film, it is important to be
knowledgeable about the differences in the various
state options to determine where to produce a film
project. This is especially important in the current
state of our economy as financing is difficult to obtain
without these incentives.
Some states require an audit to be completed by a
CPA as part of obtaining film credits. More and more
states are also requiring training for audit firms that
perform audits of film tax credits.
Below is an overview of film credit programs in
the states where RubinBrown has offices, but we
are qualified to perform these audits and assist in
planning in many other states as well.
Colorado
Colorado currently offers a rebate program in lieu of
film tax credits. It offers a 10% rebate for productions
that spend at least $100,000 in qualified local
expenditures or qualified payroll.
In order to qualify, the production must originate in
Colorado. For productions that do not originate in
Colorado, a 10% rebate is available for productions
17
that spend at least $250,000 on qualified local
expenditures or qualified payroll.
Origination of the production is based upon the
company’s headquarters and principal place of
business. The application process must be started
prior to any production activities beginning in
Colorado. Colorado also offers a waiver of hotel
occupancy tax for stays over 30 days.
Kansas
Kansas currently offers a non-transferable, nonrefundable credit. This makes usage of the tax credit
difficult because the film investors must have an actual
Kansas tax liability in order to use the Kansas tax
credit.
The tax credit is 30% of direct production
expenditures, meaning any expenditure incurred
in the state of Kansas that directly relates to the
production. The budget of the film must be at
least $50,000 if less than 30 minutes in length and
$100,000 if over 30 minutes in length.
The credit is currently limited to productions filming
during 2011 - 2013 and are limited to $2 million per
year. Kansas also offers a waiver of hotel occupancy
tax for stays over 28 days.
Missouri
Although The Missouri Film Commission is no longer
being funded, the film tax credit law still exists.
It consists of a 35% transferrable tax credit of qualified
expenditures. The tax credit has an annual cap of
$4.5 million, none of which is currently funded. The
Missouri Department of Economic Development is
now handling the film tax credits.
Other State Facts
Similar to the Kansas film tax credit, the film budget
must be at least $50,000 for films that are less than 30
minutes and $100,000 for films that are longer than
30 minutes. Missouri film tax credits may be carried
forward 5 years and are transferrable and sellable.
Some governors are attempting to use censorship
when issuing the tax credits. For example, the
Governor of New Jersey requested a stop payment on
the rebate check issued to the producers of “Jersey
Shore.” The Governor does not think that taxpayer
money should be used for films of this content.
The key part of the program is that the department
will give approval based on whether or not they
think the film will be a good fit and provide a
positive economic impact. Senate Bill 1209 has been
introduced to eliminate the film tax credit program
effective December 31, 2012.
States like North Carolina have seen an increase in
revenue directly related to film productions. In 2011,
the NC film office reported $220 million in production
spending.
States that either do not have film tax credit programs
or have ended their programs include: Arizona, Idaho,
Iowa, Indiana, Nebraska, Nevada, New Hampshire,
North Dakota, South Dakota, and Washington.
Even though this is just the first step in the legislative
process, this Bill has a good chance of passing and
being signed into law by mid-May 2012. Missouri has
all but abandoned attempts to attract film ventures
into its state any more.
RubinBrown’s Media & Entertainment Services Group
We serve individuals and organizations of all sizes throughout the broadcast, cable, publishing and
entertainment industries.
Larry Rubin, CPA - St. Louis
Partner-In-Charge
Media & Entertainment Services Group
[email protected]
314.290.3338
Todd Pleimann, CPA - Kansas City
Managing Partner, Kansas City Office
[email protected]
913.499.4411
Greg Osborn, CPA - Denver
Managing Partner, Denver Office
[email protected]
303.952.1250
Jessica Sackman, CPA - St. Louis
Manager
Media & Entertainment Services Group
[email protected]
314.290.3308
18
www.rubinbrown.com
Automotive
Beyond Skin Deep: The Effect of
Facility Image Programs
By Mark Conrad, CPA
During the recent 2012 National Automotive Dealers
Association (NADA) convention in Las Vegas,
facility image programs remained a hot topic and a
significant concern for dealers across the country.
As a result of the continued improvements in the U.S.
economy and the significant increase in new vehicle
sales from 2010 to 2011, manufacturers continue
to increase their pressure on dealers to renovate
facilities.
The facility image programs are different for each car
brand; however they all contain the same three basic
attributes:
19
1. E
xpansion: Focused on correctly sizing
dealership sales, storage and service areas to
meet current and projected demand
2. M
odernization: Bring the inside and outside
facilities to contemporary standards
3. Standardization: Ensure that every dealership
carrying a given brand looks more or less alike
Generally, all parties involved in the American auto
industry agree that dealers, original equipment
manufacturers (OEMs) and consumers alike are
justified in expecting that new cars be sold from wellmaintained, clean, and modernized facilities.
However, dealers have expressed concern about these
requirements for the past several years and still remain
concerned that some of the facility standards are both
unreasonable and unnecessary, and will ultimately
place significant financial burden on the dealers.
They also continue to argue that certain costly
upgrades will not lead to a return on their investment.
In some cases, the lack of available financing and
unwillingness of dealers to infuse significant amounts
of capital into their businesses for these upgrade
requirements have forced dealers to make the critical
decision to cash out and exit the auto industry.
Some of the perceived unreasonable and unnecessary
facility standards include specifications about towel
bars in restrooms, tile color used on the sales
floor, picture frames and computer accessories on
salesperson desks, and the height of salespersons’
cubicle walls.
In response to numerous expressions of concern by
dealers across the country, NADA launched a Factory
Image Program Study in August 2011. According
to Glen Mercer of NADA, the ultimate goal of this
study “was to open up a dialog in which all parties
could discuss facility requirements on a more rational,
informed and fact driven footing.”
The results of this study were released on February
4, 2012 at the NADA/ATD convention in Las Vegas.
As a result of the project, NADA was able to identify
common issues for each attribute of facility image
programs and was also able to pinpoint issues that cut
across all three attributes of a typical program.
Overall, the study found that the best approach for a
dealer facing facility upgrade pressure is to engage the
manufacturer in a timely business discussion around
the cost-benefit analysis of the demands in hopes of
coming to a reasonable solution for both parties.
A full download of the study, as well as an executive
summary of the study, can be found at
http://www.nada.org.
Tax Impact of Factory Image Upgrades
Funded by the Manufacturer
Over the past several years, manufacturers have
developed certain programs to help soften the amount
of financial burden placed on dealers for these factory
image upgrades.
Under these programs, manufacturers will absorb
certain costs associated with the upgrades to
encourage dealers to construct new dealership
properties or to upgrade their current facilities.
Typically, manufacturers will agree to pay a specific
amount to dealerships based on:
• C
ompletion of facility construction and
satisfaction of program requirements
• N
umber of vehicles sold for a given period
of time upon completion of construction and
satisfaction of program requirements
• N
umber of vehicles sold for a given period of
time based on meeting certain facility milestones
and possibly additional requirements
The programs vary by manufacturer, but all programs
generally provide payments to dealers related to
facilities’ upgrades. Over the past few years, these
payments made by manufacturers for dealership
upgrades have caused some tax debate.
Some in the auto industry maintain that all imaging
payments must be reported in income. Others claim
that the payments should be excluded from income
and reduce the basis of the property being renovated
and or constructed.
In response to this tax debate, the IRS issued an
IRS Automotive Alert in January 2012 regarding the
dealerships’ tax treatment of factory upgrades. In
general, each program must be evaluated individually
by the dealership with the help of its tax advisor and
treatment of the manufacturer payments should be
determined based on the facts and circumstances of
that particular program.
20
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Automotive – continued
A Look At Trucking: How Local and
State Taxes Make for a Bumpy Road
The tax code has become more
complex over the years, and state
taxes are no exception.
As companies grow and expand into
new states, they often overlook the
impact on their state taxes. In some
cases, companies may just believe the
state tax laws are similar and attempt to
operate under a similar structure as their
home state.
By doing so, companies leave
themselves open to potential tax liability.
This article will provide an overview of
the special income tax apportionment
rules used by transportation companies
and also discuss the issues associated
with multistate businesses that operate
transportation companies in addition
to other lines of businesses, including
apportionment rules and filing income
tax returns on a unitary basis.
Most states have enacted laws,
which provide for unique, special
apportionment formulas for trucking
companies to report income among
the various states in which they
conduct business.
Under these laws, the standard threefactor (property, payroll and sales
apportionment) formula is modified
by basing the computation on the
numerator of the ratio of the truck miles
in a state to the total trucking miles in
all states. Some states have adopted
formulas based on revenue miles.
In general, the property and payroll
factors are the ratios of property
and payroll used in the state to all
the property and payroll used by
the trucking company in its trade or
business. A special sourcing rule applies
to trucking companies.
21
Mobile property
(trucks and trailers) and
payroll to the drivers
are included in the
in-state’s numerator
of this calculation
based on the ratio of
mobile property miles
in the state to total
mobile property miles.
A mobile property
mile is defined as the
movement of a unit
of mobile property a
distance of one mile,
whether loaded or
unloaded.
With regard to the
sales factor, the
numerator is generally
the trucking company’s
total revenue in a
given state as it relates
to all revenue derived from transactions
and activities in the regular course of the
trucking company’s trade or business.
The trucking company’s in-state revenue
from hauling includes the entire amount
of the receipts from intrastate shipments
(i.e., the shipment both originates
and terminates within the state) and a
pro-rata portion of the receipts from
interstate shipments (i.e., shipments
passing through, into, or out of the state),
determined by the ratio of the mobile
property miles traveled by the shipments
in the state to the total mobile property
miles traveled by the shipments from its
point of origin to its destination.
The in-state portion of any non-hauling
revenues is determined under standard
rules used for sourcing sales (i.e., to
destination or dock state for tangible
personal property sales or by using
cost-of-performance or market-based
sourcing for service income.)
Complications arise when the trucking
company is operating as part of an
integrated group of affiliated multistate
businesses. Depending on individual
state requirements, companies will
have to file on a consolidated basis,
separate company basis or unitary
basis. Limitations are set by each state
regarding which way a company may file.
For example, a few states will not allow
taxpayers to file as a group unless all
members use the same apportionment
methodology. All of this could affect the
tax liability of your company.
States also have increased their
discovery activites in identifying
companies that have sufficient activity
in a state to require filing a return.
This concept of sufficient activity is
known as “Nexus,” meaning a physical
or, in some cases, an economic presence
in a given state.
The states use a variety of criteria
in determining whether a multistate
trucking company’s activities have
sufficient nexus to file an income tax
return. Most states assert that nexus is
created by trucks passing through the
state on a regular basis.
Several determine nexus is created
based on one of the following:
• The driver’s residence
• O
nly if the driver uses a vehicle
owned by the taxpayer
• O
nly if the driver back-hauls goods
originating in the state
• O
nly if the driver makes a delivery
or pickup in the state
The concepts above are not mutually
exclusive. A filing requirement by one
business entity can affect all companies
within the entity.
For example, if Illinois were to claim
nexus was created by one of the
operating entities of a business, then
all activities would be subject to Illinois
filing requirements under their unitary
approach. Thus, all companies under
the entity structure have nexus and are
subject to Illinois income tax.
the losses cannot be used to offset
the income.
Multistate businesses face many hurdles,
especially from those states with unique
filing requirements. These requirements
can be complex.
You should take time to visit with
your tax advisor and discuss the
changes in the states in which your
company operates.
Where this filing requirement creates a
liability or a tax advantage depends on
the state. The trucking company, which
maintains a fleet in Illinois, is operating
at a profit (“income”), while other
members of the unitary group are not.
The income of the organization would
be netted, allowing the losses to offset
the income. In states, like Wisconsin,
where separate returns must be filed,
RubinBrown’s Automotive Services Group
RubinBrown assists the automotive industry through accounting, income tax, retirement, estate and fringe benefit planning.
John Butler, CPA - St. Louis
Mary Ramm, CPA - Kansas City
[email protected]
314.290.3333
[email protected]
913.499.4406
Russ White, CPA, MBA - Denver
Mark Conrad, CPA - St. Louis
[email protected]
303.952.1247
[email protected]
314.290.3425
Partner-In-Charge
Automotive Services Group
Partner
Partner
Manager
22
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Home Builders
Profitability Is In Sight;
A Blessing For Weary Eyes
By Steve Hays, CPA
At the National Home Builders Association Annual
Convention in February, attendees were greeted with,
and at times overwhelmed by, something they have
not seen in nearly half a decade—optimism!
The mood of this national gathering was generally
upbeat as evidenced by a crowded exhibitor floor
and educational seminars that were largely standingroom only.
Despite ongoing concerns expressed by Federal
Chairman Bernanke that there is no “silver bullet” for
housing and economists predicting gradual recovery
starting now and escalating into 2013, it appears a
better day is now in sight.
As the industry returns to profitability, the importance
of managing the components of gross profit percent,
including sales price, developed lot cost, direct
construction costs and indirect construction costs
remains key.
RubinBrown experts have compiled 30 ideas for home
builders to improve their gross profit:
Selling and Pricing
1. Review your pricing weekly or periodically
2. Maximize your premium lots – charge premiums
as the market will vary
a. Market your “less desirable” lots at the
beginning of the project
3. Sell and maximize the options on which you
make money
a. Group high margin options with low
margin items
4. Don’t allow presales to get too far ahead of
production
23
a. Limit the number of lots sold under preconstruction pricing
5. Reduce the number of plans available
Developed Lot Costs
6. L ocation, location, location is even more
important today with an even more careful buyer
7. Prepare budgets for land and development
costs and update periodically
8. U
nderstand all hidden costs for each lot
9. A
ll costs to “exit” a project should be included
in your original land and development budget
Direct Construction Costs
10. U
tilize a purchase order system
11. New models should be designed to
attain a predetermined direct construction
cost percentage
a. U
se anticipated sales price and expected
profit to determine house to build – Rule
of 80% is minimum to achieve which is
the combined developed cost and direct
construction percentage of sale price
12. J ob cost budgets should be prepared to
include all options and upgrades
13. Never start a house without a budget for every
item in the house
14. D
on’t price by the square foot
15. B
uild specs “wisely,” meaning produce those
that are known winners
16. Re-estimate continuously
17. H
ave detailed direct construction budgets on
display homes
18. U
se periodic walkthroughs to control costs
19. Develop relationships with subcontractors and
suppliers and be proactive in scheduling as they
can save you money with efficiency and also serve
as your eyes and ears on the job
20. Actively solicit all available supplier rebates
21. Change orders should be documented to avoid
any misunderstandings
Indirect Construction Costs
22. Maintain relationships of productivity. How many
people do you need for volume of production?
23. Charge and account for all costs to specific units
whenever possible
24. Budget warranty costs and monitor costs incurred
on units closed in prior years
25. Enforce controls on automobile and phone
expenses by field personnel
26. Don’t purchase field equipment you don’t need
27. Make sure architectural costs are in your budgets
Other
28. Perform an “autopsy” of each house upon closing
29. D
emand internal financial and job cost reporting
be done by a predetermined time each month
30. Reconcile everything, every time
These components of gross profit will have the greatest
impact on improving the bottom line of a company’s
performance.
RubinBrown’s Home Builders Services Group
As a recognized leader in the home building industry, we serve home builders across the country.
Steve Hays, CPA - St. Louis
Partner-In-Charge
Home Builders Services Group
[email protected]
314.290.3336
Glenn Henderson, CPA, CFP Kansas City
Partner
[email protected]
913.499.4429
Jim Massaro, CPA - Denver
Partner
[email protected]
303.952.1211
24
www.rubinbrown.com
Hospitality & Gaming
The Best of Both Worlds:
Maximizing the Benefits of Licensing
Relationships While Managing Risk
Revenue and net income growth have become
increasingly difficult for organizations to attain in
today’s economic environment.
capital investments for expansion, while still trying
to identify areas of excess costs not integral to the
overall value of the organization’s brand.
In many cases, organizations are aligning resources
on two fronts in an effort to achieve top and bottom
line growth.
Other variables worth mentioning include the lack
of credit currently available to organizations for
potential expansion, as well as increasing labor and
raw material costs. These challenges exist for all
organizations, regardless of size or industry.
Efforts include:
• E
xpansion – including products, service
offerings and geographical locations
• R
estructuring of workforce and capital assets for
improved, cost-efficient operations
One can quickly ascertain that the two strategic
directions are somewhat paradoxical. On one hand,
an organization must consider making significant
25
A relatively cost-effective method of expansion
is through licensing. Licensing, also known as
franchising, is a contract between parties: the
owner of the licensed property, known as the licensor,
and a licensee.
The licensing agreement grants the licensee
permission to use the property subject to specific
terms and conditions, which may include the
purpose of use, a defined territory and/or a
defined time period.
In exchange for this usage, the licensor receives
financial remuneration - normally in the form of a
guaranteed fee and/or royalty. Licensing agreements
are found in virtually every industry, including, but not
limited to:
• Restaurants
• Retail
• Mining
• Publishing
• Manufacturing
• Agriculture
Brand image, intellectual property, raw materials,
and expert services or products are all examples of
licensed property. Licensing agreements are intended
to benefit all parties involved.
These agreements allow the licensor to expand
their brand, product or service with minimal capital
investment. They also allow the licensee to attain an
instant competitive advantage within their respective
industry, generally for an agreed-upon fee.
Depending on size and resources available,
organizations can mitigate the aforementioned
risks by utilizing their internal audit, compliance
departments (if applicable), or an independent
party to design appropriate monitoring controls and
perform licensing audits.
Licensee Reporting and
Remitted Payments
Before performing substantive procedures, the
auditor must first understand the foundation for
how the licensing fees are calculated. Completing a
detailed license contract review will assist the auditors
in control and performance indicator identification.
License contract terms can vary greatly depending on
the industry and are highly customizable. Licensing
fees can be based on, but are not limited to, the
following factors:
• Percentage of licensee gross or net sales
• T
iered licensee sales escalators in which sales
thresholds attained result in higher or lower
licensing fees
• Percentage of product or raw material usage
The general purpose behind licensing agreements is
the perceived reduction in risk to the involved parties.
In many cases, particularly from a capital investment
perspective, that statement is true.
However, the parties involved face numerous
financial, operational, and reputational risks resulting
from licensing agreements.
Licensor Risk
To fully maximize the financial benefits of a licensing
agreement, the Licensor must focus on two main
risk areas:
• L icensee is accurately reporting sales/material
usage/services provided and remitting the
appropriate payments to the Licensor.
• T
he brand image and/or resources are not being
compromised.
26
www.rubinbrown.com
Hospitality & Gaming – continued
Transparency in regard to reported sales/usage can
be attained by granting the licensor access to the
licensee’s sales/usage reporting system or developing
substantive procedures to detect deficiencies in
historical sales/usage reporting.
The auditors should also consider how the licensee
could potentially understate sales/usage and develop
audit procedures accordingly.
In the case of licensee retailers where, in general,
percentage of net sales is the basis for determining
the licensing fee, auditors should agree external
reporting to general ledger activity and bank deposit
activity to determine completeness.
In order to further verify proper reporting and
fee remittance, the auditor should recalculate the
licensing fees and agree the amounts to licensee
reporting and to the amounts received by the licensor.
Brand Image and Resource Compromise
In many industries, such as hospitality, retail, or
manufacturing, brand image is critical and just as
important as the licensor’s products or services.
Additionally, many license agreements require
licensees to remit standard fees for certain types
of expenses.
Examples of additional fees may include:
• R
equired spend over advertising and marketing
• Required expenses for product or service quality
• A
nnual fees retained for future capital
investment
• Required expenses toward workplace safety
Auditors should assess both the licensee’s and
licensor’s internal control framework around sales/
usage reporting. The auditors should document and
understand how sales/usage data is being captured,
reconciled, and ultimately reported by the licensee.
Additionally, the auditor must determine whether
controls are in place at the licensor level to detect
inaccurate licensee reporting. Transparency is
integral to satisfying licensor concerns over
accurate reporting.
27
Conversely, in other industries, such as agriculture
and mining, the protection and enrichment of raw
resources are critical to the licensor. In all cases, all
licensors have particular assets, whether tangible
or intangible, they want protected from licensee
compromise.
Through coordination with licensor management,
auditors can develop and execute additional quality
procedures to test the licensee’s compliance with
company-directed operating procedures and other
specified areas such as: customer service standards,
product/service quality standards and local/national
area advertising spend requirements.
Continuous Monitoring
Licensor management should not only consider the
control framework and audit procedures required
to mitigate key risks, but should also consider the
development of a continuous monitoring program
over identified licensing risks.
The program should consist of:
• P
rocess improvement recommendations
• Identifying responsible personnel (“risk owners”)
for monitoring risks and risk indicators
• B
enchmarking data
• M
onitoring timeline which defines the frequency
of assessment and reporting
• A
ssisting licensee with data analytic usage
• R
eporting requirements, including the method
of gathering information from all risk owners and
adjusting mitigation strategies as needed
Licensee Perspective
Licensors have the opportunity to provide value to
their licensees by leveraging the information received
from the licensing audits. Success from the licensee
generally equates to additional success for the licensor,
depending on the structure of the licensing agreement.
If, as a result of the licensing audit, the licensee was given
feedback that could improve its respective organization,
licensing audits would be seen as more than just a
compliance mechanism; they would be viewed as a
valued component of the business partnership.
Feedback could include:
• Industry trends
• IT recommendations around ERP and
POS systems
By sharing information generally already available to
the licensor, the licensing audit becomes a collaborative
team approach that provides value to the licensee.
Additionally, the licensor would have the benefit of
being notified of concerns and challenges arising at the
licensee level that would otherwise go undetected.
In closing, organizations can take advantage of
cost-effective expansion efforts through licensing
agreements. In order to maximize the benefits of the
agreement and mitigate risk factors resulting from
the agreement, licensing audits can be executed to
provide value for all parties involved.
Emphasizing value in the audit process will not only
satisfy compliance objectives, but will create a business
relationship in which all licensing parties will benefit.
• Company best practices
RubinBrown’s Hospitality & Gaming Services Group
Many hotels, country clubs, retailers and gaming operations seek out RubinBrown’s accounting, consulting, and tax services.
Chelle Adams, CPA - St. Louis
Partner-In-Charge
Hospitality & Gaming Services Group
[email protected]
314.290.3329
Todd Pleimann, CPA - Kansas
City
[email protected]
913.499.4411
Managing Partner
Denver Office
[email protected]
303.951.1250
28
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Colleges & Universities
Federal Funding of Higher Education
By Brent Stevens, CPA
Following recent trends, the Department of Education
(ED) and Congress have continued to make numerous
and substantial changes to Federal Student Aid.
The information in this article highlights some of the
key changes; however, please feel free to contact us
directly if you would like further detail.
These changes, as well as recommendations for
future award years, are summarized to provide an
understanding how they may affect institutions of
higher education and how Student Financial Aid
funds received from ED should be managed in
consideration of these new rules.
The most substantial changes to the AVG for the 2012
award year relate to the program integrity rules that
were passed in 2011. The revisions to verification are
substantially different than prior award years.
The Application and Verification Guide (AVG) can be
found in the Federal Student Aid handbook which is
updated periodically and posted to www.ifap.ed.gov.
29
The most substantial revisions relate to:
• E
D removed the 30% cap related to verification
of applicants
• T
he IRS data retrieval process has been
determined to be the preferred method for
verifying and populating the FASFA electronically
• C
ertain students who were previously exempt
from verification (Pacific Islanders, Incarcerated,
and recent immigrants) are no longer excluded
• T
he institution must have a correct, valid ISIR or
SAR for subsidized Title IV programs (includes
Pell, SEOG, Work Study, Perkins and Direct
Subsidized Loans).
• T
he $400 verification tolerance has
been removed
• P
rovides some clarification on when/how
dependency overrides can be utilized
The AVG includes a section on computing the
applicant’s EFC. While the overall formula to
compute this crucial amount (which has a significant
determination on how much Federal Student Aid
the applicant will receive) has remained relatively
consistent, the maximum income for an application
to default to a zero EFC has been reduced from
$31,000 in the 2011/2012 award year to $23,000 in
the 2012/2013 award year.
This decrease could possibly result in a reduction of
Pell awards for certain applicants at certain institutions.
In addition, the AVG stipulates several different
changes in items that have to be verified for the 2012
award year, with a long-term goal of customizing such
items on a student-by-student basis.
For the 2012 award year, the following items are
required to be verified:
• Household size
• Number of dependents in college
• S
upplemental Nutritional Assistance Program
(previously food stamps)
• Adjusted Gross Income (for tax filers only)
• U.S. Income taxes paid (for tax filers only)
• Education credits claimed (for tax filers only)
• IRA distributions on which no tax was paid (for
tax filers only)
• P
ension distributions on which no tax was paid
(for tax filers only)
• IRA deductions
• Tax-exempt interest
The AVG also stipulates that an institution must
complete the verification process prior to exercising
professional judgment to adjust the Expected Family
Contribution (EFC). It should be noted that this only
applies to applicants who were already chosen by the
institution or ED for verification.
In other words, the use of professional judgment
does not always require an institution to complete the
verification process.
30
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Colleges & Universities - continued
More Changes on the Horizon
Given the current state of the federal budget as
well as the upcoming presidential election, it is very
difficult to predict what the 2013/2014 award year will
look like. However, the President’s fiscal 2013 budget
request did contain the following provisions that
would directly impact institutions of higher education:
• A
1.5% increase in the maximum Pell Grant
award. If the budget request is fulfilled, the
maximum amount students would receive in
an award year would rise to $5,635 from the
previous level of $5,550.
• V
astly increasing the accessibility and allocations
related to the Federal Perkins Loan Program and
shifting the responsibility of the administration of
the loans to the Department of Education.
• R
evisions to the allocation of campus-based aid
to schools that provide good value to students
as indicated by whether students are able to
find employment after graduation, those schools
that set responsible tuition rate policies and
those schools that admit and graduate higher
proportions of low-income students.
• Increase of $150 million (approximately 15%) to
the Federal Work Study Program.
• A
one-year reprieve preventing the scheduled
increase of subsidized direct loans from 3.4%
to 6.8%.
• Increases in the grant allocations to the National
Science Foundation programs and other agencies
that are charged with scientific research.
• C
reating competitive grants designed to
promote the development and innovation
of more productive and effective college
campuses.
These grants coincide with the President’s directives
that call for college campuses to implement more
lean operating structures and echo the majority of the
budget directives and objectives that are currently
being communicated at the State level.
RubinBrown’s Colleges & Universities Services Group
RubinBrown provides assurance, tax and management consulting services to colleges and universities,
both public and private.
Brent Stevens, CPA - St. Louis
[email protected]
314.290.3428
[email protected]
303.952.1213
Partner-In-Charge
Kaleb J. Lilly, CPA - Kansas City
Partner
[email protected]
913.499.4417
31
Partner
Life Sciences
Entity Considerations
for the Life Science
Start-Up
By Steve Hays, CPA & Dan Raskas, CM&AA
Companies in the life sciences industry face a variety of issues,
especially during their “early stage” years.
In particular, these companies will find that determining the
appropriate entity structure is an important decision to make based
on their overall investment and business strategy goals.
Entity structure options include:
• Sole Proprietorship
• Limited Liability Company (LLC)
• Partnership
• S Corporation
• Limited Partnership
• C Corporation
The following contrasts the advantages and disadvantages of each:
Entity Structure Comparison
Issue/Entity
Sole Proprietorship
Partnership
LLC
S Corporation
C Corporation
Liability
Owners can be
100% liable.
Partners generally 100% liable
(joint and severable liability)
- General – General partner can
be 100% liable
- Limited – Limited partners
generally liable only to the
extent of their investments.
Company is
liable, except for
withholding taxes
and personal
guarantees.
Corporation is liable,
except for withholding
taxes and personal
guarantees.
Corporation is liable,
except for withholding
taxes and personal
guarantees.
Number of
Owners
One
Need at least two partners
Requires a
minimum of a single
member
Limited to 100
shareholders (spouses
are treated as one
shareholder).
Unlimited
Classes of
Owners
N/A
May be a general or limited
partnership
Several classes –
Common (stock) or
Preferred
One class of stock only,
with many limitations on
the types of shareholders
(trusts, corporations, etc.).
Cannot have non-U.S.
residents as shareholders.
May have several
classes of owners –
Common (stock) or
Preferred
Transfer of
Interest
Assets sold
Generally, no. May be limited
by buy/sell provisions in
partnership agreement or
separate agreement.
Generally, no. May
be limited by buy/
sell agreement of
other agreement.
Yes, but stock ownership
must be monitored. Also
may be limited by a buy/
sell agreement.
Yes
Stock Options
No
No
Consult with tax
advisor.
Yes
Yes
There is no standard answer to which entity structure is best for your startup. As described in the table above, each entity type
contains unique characteristics and can only be selected after considering how each aligns with your strategy for the company.
Information gleaned from: Nolan & Associates
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Life Sciences - continued
Entity Structure Tax Considerations
Issue/Entity
Sole Proprietorship
Partnership
LLC
S Corporation
C Corporation
Required Tax
Elections
None
None
None
Yes
None
Ability to Select
Tax Year
Calendar year, unless
a substantial business
purpose supports a
fiscal year end.
Calendar year, unless a
business purpose supports a
fiscal year end.
Limited
Limited, unless a service
corporation business
purpose supports a fiscal
year end.
No restrictions
Tax treatment of
fringe benefits
for owners
Poor
Poor
Poor
Poor, if own more than
2% of stock
Good
Tax on Income
Taxed to owner
Flows through to individual tax
return, whether taken or not.
Flows through to
individual tax return,
whether taken or not.
Flows through to
individual tax return,
whether taken or not,
based on proportionate
ownership interest.
Corporate tax rates,
shareholders also
taxed on dividends.
Operating
Losses
Deductible
Deductible
Deductible
Deductible, subject to
legal limitations (such as
owner’s basis).
Generally carried
back two years and
forward twenty
years.
Passive Loss
Rules Apply
Yes
Yes, at partner level. Treatment
of limited partners is
unfavorable.
Yes, at member level.
Unclear if members
treated as limited partners.
Yes, at shareholder level.
Generally no.
Favorable Tax
Rate on Longterm Capital
Gains
Yes
Yes
Yes
Yes
Yes
Many of the tax considerations may seem to be of little importance to a startup; however, as the business evolves,
significant dollars may be at stake, particularly upon an exit. You should consult your tax advisor for further guidance.
RubinBrown’s Life Sciences Services Group
RubinBrown provides specialized accounting services to life sciences, renewable energy, pharmaceutical, and medical
device companies across the country.
Steve Hays, CPA - St. Louis
Dan Raskas, CM&AA – St. Louis
[email protected]
314.290.3336
[email protected]
314.678.3530
Partner-In-Charge
Life Sciences Services Group
33
Vice Chair
Investors/Buyer Types
Buyer Type
Description
Strategic Buyer
Strategic buyers are interested in a target’s fit into their own long-term business plans. Their interest includes vertical
expansion (toward the customer or supplier), horizontal expansion (into new geographic markets or product lines),
eliminating competition, or enhancing some of its own key weaknesses (technology, marketing, distribution, research and
development, etc.).
- Pure Play
Company in the same industry providing the same services. Looking to expand expertise, market share, geographic
reach, etc. Typically leverage resources across both businesses.
- Periphery
Company in the same or similar industry providing complementary services. Looking to expand capabilities and provide
additional services. Typically leverage customer base or some other aspect of the business.
Financial Buyer
Financial buyers can generally be classified as investors interested in the return they can achieve by buying a business,
which is a function of the firm’s cash flow. Their hold periods vary, but are typically 5-8 years. Exit plans include selling the
company at a later date or, in some cases, IPO.
- Private Equity
(Funded)
Investment company with a pool of capital (the fund) to draw from to make investments. Groups typically target specific
types of businesses (size, industry, profitability, management, etc). Investment horizon is typically less than 7 years.
- Private Equity
(Funded)
A private equity group without a fund. They make investments on a similar basis, but have to go out and raise money
each time they invest in a company.
- Search Fund
Typically an individual looking to buy and operate a business. The individual is backed by a group of investors who will
provide the capital for the acquisition.
- Holding
Company
Company that wholly or partially owns a group of businesses. Businesses could have related products or services, but not
necessarily. Usually they are long term investors.
- Family Office
/ Individual
Investor
High net worth families that pool their capital for investment purposes. Many family offices have a division that acquires
middle market businesses. Independently wealthy individual looking to acquire a business for investment and/or
operating purposes.
- Mezzanine
Mezzanine investors typically are a junior financing source, but sometimes participate in the equity of transactions in the
form of warrants or the direct purchase of equity. It is important to understand the different types of buyers or investors so that you are aware of their motivations and the
amount of control they will impose on the company.
Both the entity structure and type of buyer or investor to pursue eventually require careful planning, consideration and
assistance from outside experts.
Todd Pleimann, CPA Kansas City
Rodney Rice, CPA - Denver
[email protected]
913.499.4411
[email protected]
303.952.1233
Partner
34
www.rubinbrown.com
Public Sector
How Regulatory Changes Will Affect
Your Entity’s Audit
By Julia Stone, CPA
In recent months, there have been various regulatory
changes in the governmental sector affecting both
auditors and preparers of governmental financial
statements.
services for your entity. The reason for this inability
is because rules that govern independence changed
significantly in 2002 after the Enron collapse and other
unprecedented financial frauds.
These changes include modifications to “Yellow
Book” standards as well as pending changes in the
threshold requiring an audit in accordance with Office
of Management and Budget (OMB) Circular A-133.
The accounting profession addressed these changes
by creating new rules that expand what services
impair independence. Independence is one of the
most important cornerstones of the audit profession.
2011 Yellow Book Independence and
Other Changes
You may have noticed that your external auditors are
sometimes unable to perform nonaudit or consulting
35
Without independence, auditors would not be able
to remain objective, which affects our ability to render
opinions on your financial statements. As auditors, we
need to maintain our independence both in fact and
in appearance.
In December 2011, the Government Accountability
Office (GAO) issued the 2011 version of Government
Auditing Standards (commonly known as the Yellow
Book).
Under the 2003 and 2007 versions of the Yellow
Book, external auditors were required to assess their
independence related to an audit engagement using
two divergent sets of standards: those promulgated
by the American Institute of Certified Public
Accountants (AICPA) and those significantly changed
by the GAO.
The updated guidance no longer includes references
to the AICPA’s Statements on Auditing Standards
because these two definitions are now consistent.
In some instances, this previous guidance could have
created a problem if the auditor was independent
under AICPA standards, but not under the GAO
standards. For example, it is very common for an
auditor to assist in the preparation of the financial
statements.
Under the new guidance, financial statement
preparation is a nonaudit service; however, if
certain safeguards are met and management takes
responsibility for the financial statements, the auditor
can provide that nonaudit service and not impair
his or her independence.
When engaging an external auditor, it is important
for the entity being audited to inquire about the
individual auditor’s and the audit firm’s independence
in relation to the entity.
Independence in the revised Yellow Book refers to
both “independence of mind” and “independence
in appearance.”
Per the Yellow Book, independence of mind is
defined as “the state of mind that permits the
performance of an audit without being affected by
influences that compromise professional judgment,
thereby allowing an individual to act with integrity
and exercise objectivity and professional skepticism.”
Independence in appearance is “the absence of
circumstances that would cause a reasonable and
informed third party, having knowledge of the
relevant information, to reasonably conclude that the
integrity, objectivity, or professional skepticism of an
audit organization or member of the audit team had
been compromised.”
These are important guidelines to keep in mind when
interviewing and selecting an external auditor to
perform your financial statement and Single Audit.
When an entity needs certain nonaudit or consulting
work performed, it is often logical to have your
external auditor involved. Depending on the service,
your auditor may be prohibited from providing that
service.
The 2011 Yellow Book highlights numerous nonaudit
services that are prohibited, including:
• D
esigning, implementing or maintaining internal
control
• D
esigning or developing an information system
that would be subject to an audit
• Internal audit assistance services such as
setting internal audit policies or the strategic
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Public Sector - continued
direction of internal audit activities, performing
procedures that form part of the internal control
and determining the scope of the internal audit
function and resulting work.
• P
roviding valuation services that would have a
material effect, separately or in the aggregate,
on the financial statements or other information
that is subject to an audit, and the valuation
involves a significant degree of subjectivity.
• D
isbursement activities such as authorizing,
signing or maintaining disbursements or bank
accounts
• Benefit plan administration
• Investment advisory or management services
• C
orporate finance activities, either consulting
or advisory
• Business risk consulting
If a service is not specifically listed as prohibited,
it still may impair the auditor’s independence and
should not be performed by him or her. A revision to
the Yellow Book to address this is the inclusion of a
conceptual framework model to use when assessing
auditor independence.
Oftentimes, the determination of independence is not
clear nor is the unique situation specifically addressed
in the Yellow Book guidance. The new conceptual
framework should provide a better tool for auditors to
make this determination.
An addition to the independence standards is the
period of time in which an auditor must be free of
impairments to independence.
This is defined as:
• T
he period of the professional relationship
includes the period covered by the financial
statements or subject matter of the audit; AND
• T
he date the auditors sign the engagement
letter (or other similar agreement to complete
attest work) through the entire duration of
the professional relationship until the later of
the date the auditor or audited entity gives
notification of terminating the professional
relationship or until the audit report is issued.
For example, independence must remain unimpaired
during the period after the prior year audit report is
issued and before the signing of a new engagement
letter because the professional relationship is
ongoing.
Finally, the revised guide includes changes
in documentation requirements related to
communication of certain internal control deficiencies
and noncompliance. There is a new emphasis placed
on early communication of any deficiencies.
Therefore, as an auditee, you should expect to hear
from your auditors earlier in the audit process, such
as at the conclusion of interim fieldwork, about any
deficiencies identified.
The new guidance removes the documentation
requirements for auditors to communicate
inconsequential internal control deficiencies and
instances of noncompliance with provisions of contracts
or grant agreements or abuse that do not warrant the
attention of those charged with governance.
Previously, this was considered a matter of
professional judgment, but the auditors were required
to document any communication about these
inconsequential items. Depending on your entity’s
situation, this may mean a reduction in the reporting
of audit “findings” in the Schedule of Findings and
Questioned Costs; however, the auditor may still
consider it important to include these items in a
management letter.
37
It is very important for government
finance officials responsible for
the external audit to be familiar
with the independence rules
their auditors are required to
follow. The effective date of the
new Yellow Book standards is
for period ending on or after
December 15, 2012 and early
implementation is not permitted.
Expected Changes to the
A-133 Threshold and the
Compliance Supplement
Currently, state and local
governments expending over
$500,000 in federal financial
assistance are required to undergo
an audit in accordance with OMB
Circular A-133, otherwise known
as a “Single Audit.”
The Single Audit Act Amendments
of 1996 included a requirement for the director of the
OMB to review this threshold every two years. This
Single Audit threshold was last increased in June of
2003 from $300,000 to $500,000.
When this change was implemented for June 30 and
December 31, 2003 audits, several local governments
were exempted from the A-133 provisions, which in
some cases resulted in cost savings for the entity.
However, in recent years, as federal funding
(specifically American Recovery and Reinvestment
Act (ARRA) assistance) was distributed, many local
governments such as smaller school districts that had
previously not met the threshold, found themselves
required to receive a Single Audit.
OMB has recently issued proposed rule changes for
Single Audits that would increase the threshold to
$1,000,000; however, they may still require some
type of audit for entities expending federal financial
assistance between $500,000 and the new threshold.
Should this threshold be increased substantially, some
local governments may no longer require an A-133
audit of the federal funds expended.
In addition, the proposed rule changes include a new
category of reporting for those entities expending
between $1 and $3 million. For these entities, major
program audit procedures would focus on testing
only two compliance requirements – allowable and
unallowable costs and one additional requirement that
would be selected by the federal agency responsible
for the program.
The proposed changes are silent regarding the level
of testing of internal control over compliance that
would be expected.
For entities expending more than $3 million in federal
awards, a full Single Audit would be required. Under
the proposed changes, the revised compliance
supplement would have streamlined compliance
requirements, there would be more audit follow-up by
federal agencies, and there is a reduced burden on
pass-through entities and subrecipients.
With this pending threshold change on the horizon, it
is still important to continue to monitor spending of
federal funds and to implement strong internal control
procedures to prevent the unauthorized use of these
monies in the event an A-133 audit is required and
also to protect your organization.
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Public Sector - continued
In addition to changes to the Single Audit threshold, the
OMB is currently discussing areas to improve efficiency,
such as making the current cost principles that entities
are required to follow (i.e. OMB Circular A-87, Circular
A-122, etc.) more consistent. This change could result
in combining some of these circulars. In addition, there
is a proposal to use a flat rate instead of a negotiated
rate for indirect costs.
Finally, there are several expected changes to the 2012
Compliance Supplement. For those entities that are
receiving federal awards, these changes mean that
these entities may have additional guidance to use
when setting up internal controls and determining
compliance requirements applicable to their funding.
• More than 40 programs are identified as having
more than minor changes from the previous
guidance.
• The OMB is eliminating references to outdated
reports identified in the “L – Reporting” section of
Part 3 of the Compliance Supplement.
• In Part VII – Other OMB Circular A-133 Advisories
– the listing of ARRA programs has been updated
for those not covered in Parts 4 or 5 of the
supplement, but potentially are subject to an
A-133 audit. The 2012 Compliance Supplement
became available in March.
RubinBrown has summarized the majority of these
changes:
• F
our new programs have been added to the
draft of the 2012 Compliance Supplement
(CFDA#14.879, 15.507, 93.090, and 93.505)
• T
en programs have been removed (15.426,
15.518, 15.520, 20.603 – 20.605, 20.933, 93.712,
93.713, and 97.004)
RubinBrown’s Public Sector Services Group
Through our many governmental clients, we understand the issues unique to the public sector.
Jeff Winter, CPA - St. Louis
[email protected]
314.290.3408
[email protected]
303.952.1213
Kaleb Lilly, CPA - Kansas City
Julia Stone, CPA - Denver
[email protected]
913.499.4417
[email protected]
303.952.1290
Partner-In-Charge
Public Sector Services Group
Partner
39
Partner
Partner
Construction
Inching Toward a Recovery
By Frank Hogg, CPA
While the overall economy has shown some signs of
improving, the construction industry remains in very
difficult economic times.
While many agree that the recovery will be far from
normal, the general consensus is a long and slow
recovery of construction markets. Funding for many
projects remains a challenge, resulting in cancelled
projects or delays in getting started.
In addition, increased budget constraints are
expected to result in decreased federal, state and
local government spending. This public spending had
helped to sustain many contractors during the early
part of the construction slowdown.
Cash Flow Management
As the construction economy slowly moves toward
recovery, big challenges still face contractors.
Maintaining a strong cash flow remains critical. Cash
is king and more contractors will go out of business
because of poor cash flow than from a lack of work or
fading profits.
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Construction - continued
Customer and Subcontractor Health
In today’s challenging economic environment, it is
critical to carefully monitor doing work with others
that may be on shaky ground and could still go
out of business. For contractors, it is important to
diligently research potential customers, looking at
work previously performed, payment history, credit,
character and ethics.
For general contractors, it is important to pre-qualify
subcontractors and vice versa. All parties need
to closely scrutinize the financial stability of those
that you will be working with – your success and
profitability on the project is entwined with theirs.
Collections & Change Orders
Maintaining and improving cash flow also revolves
around a strong collections function. Collections
must be a daily mindset and not an end of the
month activity. This mindset begins with the fact that
collecting your accounts receivable is a right and not
a privilege.
During lean economic times, a natural tendency is to
take work – any work – at little or no margins just to
utilize company resources. Such practices may put
serious strains on a company’s finances if done on a
regular basis. Effective cash flow management can
actually occur when contractors decline to bid on
certain low margin jobs.
Contractors should also be careful on bidding work
outside of their “sweet” spots or areas of expertise.
These challenges could include both technical skill
and geographic location. If contractors are unfamiliar
with certain types of work, they may not have the
technical expertise to properly execute and safely
perform the project, or leave important elements out
of their bid. If a company is operating in an unfamiliar
region, geographic hurdles could include labor and
state/local regulatory approvals.
41
It may help delivering large invoices in person or
personally collecting checks to help reduce excuses
and delays. Although it may involve offending a
customer, the rights of the company must always
be protected. With already low margins, delays in
receiving payments or failure to collect for all work
performed could be disastrous to a company’s
cash flow.
Other cash flow areas to focus on include change
orders and retentions. Change orders should be
monitored closely. For scope changes, encourage
signed authorizations in the field before beginning
work to reduce subsequent disputes on billings arising
from change orders.
In addition, the retention percentage and phaseout period should be carefully negotiated. In order
to speed up recovery of the retention as soon as
possible, it is important that contractors focus on
being great “closers.” All punch list items should
be quickly completed along with understanding and
exceeding the final expectations of the customer.
Questions To Ponder
Although the recovery for the construction industry is
moving along much slower than any of us would like,
we should continue to plan for the time when this
cycle finally arrives.
Will we have enough cash to support a rapidly
expanding backlog? Have we established lines of
credit and are they sufficient? Do we have adequate
bonding capacity? After downsizing our workforce
and cutting overhead expenditures, when and how
quickly should we expand?
These are all critical questions that should be
addressed with your accountant, banker, surety agent,
and attorney to ensure that your company is in the
best possible position to capitalize when economic
conditions become more favorable.
RubinBrown’s Construction Services Group
We provide services to general contractors, specialty subcontractors and related companies in the construction industry.
Frank Hogg, CPA - St. Louis
Mark A. Jansen, CPA – St. Louis
[email protected]
314.290.3413
[email protected]
314.290.3208
Jim Massaro, CPA - Denver
Partner-In-Charge
Construction Services Group
Partner
[email protected]
913.499.4429
Vice Chair
Partner
[email protected]
303.952.1211
42
www.rubinbrown.com
Not-For-Profit
Staying Afloat Among
Changing Regulations
By Judy Murphy, CPA
The sea of constantly changing regulations has caused
waves for many not-for-profit organizations.
And while not-for-profits are regulated by a number
of federal and state agencies, the regulator charged
with ensuring organizations comply with the Internal
Revenue Code and maintain tax exempt status is the
Internal Revenue Service (IRS).
To assist not-for-profits in understanding compliance
requirements, the IRS maintains an informative
website and periodically holds workshops and
webinars and issues publications to educate
organizations of all sizes and types.
Recently, the IRS released the instructions to the 2011
Form 990 and the 2011 Annual Report and 2012 Work
Plan for Exempt Organizations.
43
Modifications were made to the Form 990 for 2011.
However, the actual changes to the form were not
as significant as the IRS’ interpretation as to how the
form should be completed.
RubinBrown has compiled some of the more
prominent IRS interpretations:
• P
artnership Investments: Partnership
investments may no longer automatically be
presented according to generally accepted
accounting principles.
The 2011 instructions appear to call for
reporting some or all partnership interests
owned by the filer based on Form 1065
Schedule K-1 information for the partnership
year ending with or within the tax-exempt
organization’s tax year.
The new Form 990 instructions do not appear to
address this change in a consistent and concise
manner. Note: The IRS subsequently announced
on its website that new partnership reporting is
“optional” for the 2011 tax year.
• C
ontributions: Refunds of contributions or
uncollectible pledges should no longer be
shown as netted against revenue or shown as an
expense item.
Rather, such items should be reported as an
“other change in net assets.” In prior years,
only items such as unrealized gains and losses
were presented as an “other change in net
assets.”
• Independent Status: Outside directors who are
“key employees” of for-profit entities involved
in Schedule L “business transactions” will no
longer lose their independent status on account
of certain transactions for goods or services in
excess of $10,000.
The IRS has reiterated that reasonable attempts
should be made by exempt organizations to
obtain information from third parties for other
required disclosures on the Form 990.
• Small Employer Health Care Tax Credit:
Form 990-T was revised to enable eligible
organizations to claim the small employer health
care tax credit under Internal Revenue Code
Section 45 R.
In addition, RubinBrown has summarized some
highlights from the 2011 IRS Exempt Organizations
Division Annual Report:
• T
he IRS continues to look for novel ways of
accomplishing its mission while facing the same
budget constraints as not-for-profits.
• In fiscal year 2011, the IRS reviewed 14,893
returns, of which 11,699 were traditional
examinations and 3,194 were “less resourceintensive” compliance checks.
This compares to a total of 15,342 in fiscal year
2010 (11,449 traditional and 3,893 compliance)
and 16,960 in fiscal year 2009 (10,187 traditional
and 6,773 compliance).
• T
he 3-year phase in of the redesigned Form 990
is over. All not-for-profits with gross receipts over
$200,000 or total assets over $500,000 are now
required to file the full Form 990.
The IRS plans to use the enhanced information
provided in the form to guide its efforts to
uphold transparency and stewardship of not-forprofits as further explained below.
The 2012 Exempt Organizations Division Work Plan
identifies areas on which the IRS will focus resources in
2012. These are in addition to ongoing responsibilities
such as determinations and examinations.
• U
nder the Pension Protection Act (PPA) of 2006,
even not-for-profits with gross receipts under
$25,000 are required to file an annual return or
notice with the IRS.
If a not-for-profit does not file for three
consecutive years, under PPA, it automatically
loses its exempt status.
In 2011, the IRS published a list of the notfor-profits that had lost their status due to
non-filing. In November 2011, there were
approximately 380,000 not-for-profits on the list.
The IRS has reached out to these organizations
and provided information with respect to
reinstatement and the transition relief that is
available for certain small organizations.
This transition relief has already been utilized by
more than 5,000 organizations. The IRS plans
to continue to reach out to the organizations
whose status has been revoked.
As mentioned above, the IRS plans to use
information obtained from the newly designed
Form 990 over the past three years to develop
risk models which will enable them to focus their
examination resources more effectively.
Areas of focus will include:
-E
nforcing rules relating to political campaigns
and campaign expenditures, as well as
reporting and payment compliance with
Section 527(f), during this campaign year.
(See related article on page 46.)
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Not-For-Profit – continued
• T
he IRS will continue to examine not-for-profits
with overseas operations, including large private
foundations (assets or total revenue in excess
of $500 million) with international activities, to
ensure their activities are consistent with their
charitable missions.
• O
rganizations reporting ownership of foreign
bank accounts will be scrutinized. The IRS wants
to ensure these organizations maintain adequate
records to support their assets’ use for charitable
purposes and proper control over funds that are
leaving the United States.
- Exempt organizations that report unrelated
business activities but don’t file a Form 990-T.
In connection with a future project, the IRS
will also begin to analyze data with respect
to organizations that report significant gross
receipts for unrelated business activities but
pay no tax.
- The IRS will also begin to look at the
connections between certain governance
practices – as reported on the redesigned
Form 990 – and tax compliance.
In addition, compliance with filing requirements
and determining that the foreign operations
further the organization’s mission will also be
reviewed.
• T
he IRS also plans to examine a sample of
the largest private foundations to determine
compliance with private foundation rules.
If you have any questions or concerns, please
contact us.
RubinBrown’s Not-For-Profit Services Group
As a recognized leader in the not-for-profit sector, we have the resources essential to serve arts and cultural organizations,
foundations, private schools, religious organizations, social service agencies and trade and membership associations.
Judy Murphy, CPA - St. Louis
Chip Harris, CPA - Kansas City
[email protected]
314.290.3496
[email protected]
913.499.4426
Evelyn Law, CPA - Denver
Jim Ritts, CPA - St. Louis
[email protected]
303-952.1245
[email protected]
314.290.3268
Partner-In-Charge
Not-For-Profit Services Group
Partner
45
Partner
Partner
How Politics Can Affect Your Not-For-Profit
By Jim Ritts, CPA
In addition to our U.S. presidential
election, 2012 brings many state and
local election campaigns.
Many of these races could have a
significant impact on not-for-profit
organizations and/or their missions;
however, the Internal Revenue Code
prohibits or limits the political activities
that can be performed by not-for-profit
entities, and, in particular, Section 501(c)
(3) organizations.
Political activity costs of several types of
not-for-profit organizations (e.g. Section
501(c)(4) Civic Leagues and Social
Welfare Organizations and Section 501(c)
(6) Business Leagues) must be reported
to membership or the organization will be
subject to taxes on political expenditures.
The activities of some not-for-profit
entities might subject them to disclosures
under Campaign Finance legislation.
Section 501(c)(3) organizations, however,
are prohibited from participating or
intervening in (including the publishing
or distributing of statements) any political
campaign on behalf of or in opposition to
a candidate for public office.
Ignoring this prohibition could result in the
loss of the organization’s tax exempt status.
The prohibition does not encompass
all activity related to elections. Section
501(c)(3) organizations can participate in
or sponsor voter education events.
They can also engage in insubstantial
amounts of lobbying activity, as long
as the lobbying does not involve
participating or intervening in a political
campaign. In planning activities, especially
in a major election year, Section 501(c)
(3) organizations must consider whether
an activity constitutes permissible voter
education or lobbying versus whether the
activity constitutes becoming involved in a
political campaign.
This can be a very subjective
determination, and different people may
come to different conclusions concerning
the same activity.
Due to the subjective nature of these
determinations, there is little authoritative
guidance for Section 501(c)(3)
organizations to rely on.
However, the Internal Revenue Service
(IRS) has issued a ruling (Revenue Ruling
2007-41) that contains 21 hypothetical
fact situations and the IRS’s determination
of whether the organization would be
considered to have been participating or
intervening in a political campaign.
Two of these examples are
summarized below:
• T
he incumbent and a challenger
are running for a seat in a state
legislature. The candidates take
different positions concerning various
environmental issues. A Section
501(c)(3) environmental educational
organization supports the positions
of the challenger. The organization
sponsors a phone bank to call
registered voters in the district. The
calls made first provide information
on the importance of environmental
issues, then solicit the voter’s views
on the issues. If the voter appears to
agree with the incumbent’s positions,
the call is ended. If the voter appears
to agree with the challenger, the
organization stresses the importance
of voting in the election and offers to
provide transportation to the polls. In
this situation, the IRS concluded that
the organization was engaged in a
political campaign.
local paper, listing the name of the
hospital President and several other
prominent healthcare officials in the
area. The individuals’ employers and
their positions are listed in the ad,
along with a statement that indicates
that the titles and affiliations of the
individuals are listed for identification
purposes only. In this case, since the
ad was not paid for by the hospital,
and it was not listed in an official
publication of the hospital, the IRS
concluded that the endorsement was
made by the hospital President as an
individual and therefore the hospital
did not intervene in a political
campaign.
RubinBrown recommends that not-forprofit entities, especially Section 501(c)
(3) organizations, carefully analyze any
activities that might be considered
intervening or participating in a political
campaign.
If the only time a not-for-profit engages in
an activity is close in time to an election,
it might be political. When an event is
conducted in a manner that tends to
benefit one candidate over another, it
might be political.
The IRS does investigate organizations,
particularly if they receive complaints
from the public. So, even the appearance
of political activity could result in the notfor-profit bearing costs of an IRS exam.
We have only addressed a few of the
federal tax aspects of political activity.
There are numerous state and federal
rules that may also require the attention
of a not-for-profit.
• In another example, the President
of a Section 501(c)(3) hospital is
well known in the community. A
candidate for local office takes out
and pays for an advertisement in a
46
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Considerations During International
Expansion of Your Business
By Kirk Wonio, CPA
As the economy has become more global, many
small to mid-size firms have begun exploring the
international markets to expand their business.
However, with this increased footprint comes new
complexities in dealing with foreign jurisdictions’ laws
and regulations.
RubinBrown offers a few tax issues to consider as you
expand your business outside the United States.
Extensive U.S. Income Tax Treaty Network
As you expand outside the U.S., you should consider
the impact of the U.S. treaty network.
47
While there are many types of treaties the U.S. may
have with foreign jurisdictions, including income
tax, estate and gift tax, social security totalization
agreements and shipping and aviation treaties, a
particular focus should be on income tax treaties.
Income tax treaties facilitate international trade and
investment by minimizing double taxation of crossborder transactions and allow for limited activities with
income tax protections.
The U.S. has an extensive network of income tax
treaties with many foreign jurisdictions. Under these
treaties, a U.S. resident company that receives income
from a treaty country and that is subject to taxes
imposed by foreign countries may be entitled to certain
credits, deductions, exemptions, and reductions in the
rate of taxes of those foreign countries.
The U.S. has income tax treaties with more than 60
countries, including virtually all of Europe and most
other major trading partners, including Canada,
Mexico, China and Australia.
Permanent Establishment
One of the most important advantages of an income
tax treaty is the concept of permanent establishment.
By defining a permanent establishment with our treaty
partners, the U.S. is able to provide guidance to
businesses as to how and when they create “nexus”
or permanent establishment in a foreign jurisdiction.
The permanent establishment provisions in treaties
provide that certain activities will create a permanent
establishment. Alternatively, these provisions
provide that certain limited activities will not create a
permanent establishment.
Some examples related to permanent
establishment include:
1. U.S. company uses independent commission
agents to sell goods in a foreign treaty jurisdiction.
- Selling products solely through an
independent commission agent does not
create a permanent establishment. (U.S.
Model, Art 5(6))
2. U.S. company establishes a liaison office in a
foreign treaty jurisdiction to handle advertising,
collect information, and display U.S. company’s
products.
- Although it is a fixed place of business,
the office does not create a permanent
establishment as long as U.S. company’s
employees limit their activities to auxiliary or
preparatory activities, with sales concluded
abroad (U.S. Model, Art. 5(4)).
3. U.S. company establishes a sales office in a foreign
treaty jurisdiction that solicits sales and negotiates
and concludes sales agreements.
-A
branch sales office where employees
conclude sales contracts in U.S. company’s
name does create a permanent establishment
(U.S. Model, Art. 5(1), (2) and (5)).
4. U
.S. company organizes a subsidiary in a foreign
treaty jurisdiction that operates as a buy-sell
distributor for U.S. company’s products.
-M
ere ownership of foreign subsidiary does not
create a permanent establishment for the U.S.
parent. The foreign country would likely tax
the subsidiary’s profits, however. (U.S. Model,
Art. 5(7)).
A permanent establishment is an important concept
for your business because this is the first step in
determining whether you may have an income tax
filing requirements and payment obligations in a
foreign jurisdiction.
Expanded Foreign Activities
If you find that you conduct more extensive business
outside the U.S. that is not covered by the permanent
establishment protections of treaties, it will be necessary
to evaluate your tax status in the foreign jurisdiction.
Operation as a Foreign Branch
When operations of a U.S. entity exceed certain
thresholds, the U.S. entity will be taxed in a foreign
jurisdiction as a branch operation. This taxation can
be in the form of withholding taxes or income taxes.
It may be necessary to register the branch in the foreign
location and obtain any local permits to do business.
A branch operation generally allows for easier
flow of funds, including payment of local country
expenses and remittance of the profits back to the
U.S. In certain countries, care must be given to the
movement of cash across borders.
Operation as a Foreign Subsidiary
When operations in a foreign jurisdiction take a more
expanded role, it may be necessary to incorporate in
that foreign jurisdiction.
48
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Manufacturing & Distribution – continued
• A
re there any restrictions on payments of debt
principal or interest?
• W
ould there be limitations on dividend
payments or capital distributions?
• W
hat are the withholding taxes imposed on
dividend and interest payments?
Any incorporation or drafting of documents would
likely require local country legal assistance.
Non-Income Taxation in
Foreign Jurisdictions
VAT
Additional foreign taxes to be aware of include value
added taxes (VAT) and goods and services taxes
(GST). More than 130 countries have a VAT or similar
type of tax (including GST, consumption tax, etc).
There are VAT systems in Canada, Australia, Asia,
Central & South America, Europe, and Africa – many
based on the European Union model. In fact, of
the 34 member countries of the Organization for
Economic Co-operation and Development (OECD),
only the U.S. does not have a VAT!
This requires more time and effort to ensure that the
proper legal entity is formed, funded and registered
with the federal and local authorities. In addition, it
will be necessary to file income tax returns as dictated
by local law.
When funding the new foreign legal entity, you must
determine whether to fund with debt or equity. Care
must be given to consider what is legally necessary for
equity purposes.
However, steps may be taken to structure the funding
in the most tax efficient manner.
Questions to consider:
• A
re funds needed on a short-term basis for startup expenses?
• A
re there local law restrictions on the minimum
capital required?
• W
ould there be limitations on the amount
of interest that could be deducted for tax
purposes?
49
A VAT is a tax on consumer expenditures, collected
on business transactions and importations, charged at
each stage of the transaction on goods and services.
This tax should not be a cost to a manufacturer as
the amount that is paid in VAT is allowed as a credit
against the amount collected from customers. The net
VAT collected is remitted to the foreign government.
If a U.S. business is not registered to do business
in a foreign jurisdiction for VAT purposes, the VAT
assessed on items purchased may not be able to be
recovered. In addition, if the foreign government
determines that the U.S. business should have
collected VAT from a foreign customer, penalties may
be assessed.
Customs
When importing goods into another country, the
goods must enter into that country and be considered
for customs and duties purposes.
The customs are assessed based upon the type of
goods, and the rates vary by country. Generally, the
customs are assessed on the owner of the goods
when they enter the country.
Alternatively, if title of the product transfers to
the foreign customer before entering the foreign
country, this customer then becomes responsible for
importation and the related costs.
When a U.S. manufacturer is considering selling to a
foreign customer, it must be determined which party
will own the property when it crosses into a foreign
country. If the U.S. manufacturer retains ownership, it
may have to retain the services of a third party in the
foreign country to assist with importing the product,
clearing customs and filing the appropriate returns in
the foreign jurisdiction.
While the list of issues that you may encounter
expanding overseas may be extensive, with a little
planning, it can be manageable. With the expansion
of the global economy, U.S. businesses should be
informed so that they can position themselves for the
best outcome.
RubinBrown’s Manufacturing & Distribution Services Group
RubinBrown’s Manufacturing & Distribution Services Group is nationally recognized for superior assurance, tax and consulting
expertise coupled with solid international business knowledge, exceptional inventory management and process improvement
services.
Jim Mather, CPA - St. Louis
Rick Feldt, CPA - St. Louis
[email protected]
314.290.3470
[email protected]
314.290.3220
Mike Lewis, CPA - St. Louis
Todd Pleimann, CPA - Kansas City
Partner-In-Charge
Services Group
Partner
Services Group
[email protected]
314.290.3391
Partner
Services Group
Partner
Services Group
[email protected]
913.499.4411
Russ White, CPA - Denver
Kirk Wonio, CPA - St. Louis
[email protected]
303.952.1247
[email protected]
314.290.3335
Partner
Services Group
Manager
Services Group
50
www.rubinbrown.com
Real Estate
President’s Budget Proposal
Includes Tax Credit Implications
By Bryan Keller, CPA
In February, the Obama Administration introduced
a fiscal year 2013 budget that includes provisions
related to federal low-income housing, new markets
and renewable energy tax credits.
Most promising is that these housing-related items
will likely receive serious consideration going forward
given the great need to create jobs and provide
quality, affordable housing.
Although this budget is not likely to pass through
Congress, it is promising and demonstrates that the
efforts of many industry advocates have made an
impact in educating the government on the long-term
values of these programs.
There are four proposed changes related to the lowincome housing tax credit program (LIHTC).
51
Income Mix
One modification would provide for a greater income
mix within LIHTC projects through a third income
set-aside targeting requirement, whereby at least 40%
of the units in a project could be occupied by tenants
with incomes that average no more than 60% of the
area median income (AMI).
Further, some units could be rented to tenants with
incomes as high as 80% of AMI, provided other units
are rented to tenants with incomes below 60% of AMI,
such that the average of the income limits for all lowincome units does not exceed 60% of AMI. Any units
with tenant income limits below 20% of AMI would be
treated as being 20%.
A special rule would apply to rehabilitation projects
with units receiving ongoing subsidies (rent,
operating, interest) through the U.S. Departments of
Housing and Urban Development or Agriculture.
Under this provision, a tenant at or below 60% of AMI
when admitted to a property, but whose income has
risen to 61%-80% by the time of measurement for
LIHTC income eligibility, could stay on as a resident
without reducing the LIHTC earned by the property.
However, it should be noted that an allocation from a
tax-exempt bond authority in an amount sufficient to
qualify for the 4% credit would have to be obtained
for the project. Likewise, a state’s annual bond
volume cap would be reduced as if the bonds were
issued.
Additionally, state housing agencies could provide a
30% basis boost for all, or a portion, of the qualified
basis of projects that have a “federal investment
protection designation,” regardless of whether
they were bond-financed or met the alternative
requirement to qualify for 4% credits without the
issuance of bonds.
In regards to these 30% basis boosts, state agencies
would be limited to no more than 0.8% of their annual
private activity bond volume cap. Unused amounts,
though, could be carried forward for up to five years,
thereby allowing state agencies to “save up” and
maximize the provision for certain priority projects.
Preservation of Projects
The second proposed change is designed to
encourage the preservation of projects. Under this
provision, state housing agencies would be able
to provide a new federal investment protection
designation to a project that:
• Involves the preservation, recapitalization and
rehabilitation of existing housing
• D
emonstrates a serious backlog of capital needs
or deferred maintenance
• Involves housing previously financed with federal
funds or that benefited from LIHTCs
• B
ecause of federal support, the housing was
subject to a long-term use agreement limiting
occupancy to low-income households
Projects receiving this designation could qualify
for 4% housing credits (30% present value) without
the issuance of tax-exempt private activity bonds
financing more than 50% of the project’s cost, as
normally required.
52
www.rubinbrown.com
Real Estate – continued
Tax Exempt Dividends & Abuse Protections
A third modification would allow real estate investment
trusts (REITs) investing in LIHTC to designate a portion
of the dividends they distribute to shareholders as taxexempt.
And finally, the fourth change would require LIHTC
projects to provide appropriate protections for victims
of actual or threatened domestic violence.
RubinBrown Partner
Appointed To AHTCC
Congratulations to Bryan Keller
who was appointed to the Board of
Directors for the Affordable Housing
Tax Credit Coalition (AHTCC).
Other Tax Credit Programs
The AHTCC, a national, not-for-profit
headquartered in Washington, D.C.,
is comprised of a group of leading
developers, syndicators, lenders,
nonprofit groups, public agencies and
others concerned with the low-income
housing tax credit and plays a major
role in assuring the continuance of the
low-income housing tax credit.
Regarding other tax credit programs, there is a proposal
that calls for an extension of the New Markets Tax
Credit (NMTC) for one year through calendar 2012; $5
billion in additional allocation authority for 2012; and
permits NMTC investments to permanently offset the
federal alternative minimum tax liability.
AHTCC works year round to take
a leading role in coordinating the
efforts of many concerned groups and
individuals, both on Capitol Hill and
throughout the country.
Long-term use agreements first executed or modified 30
days or later after the date of enactment would have to
contain protections comparable to those mandated by
the Violence Against Women’s Act for affordable housing
supported by various federal programs.
The budget also proposes extending the production
and investment tax credits for wind energy facilities
placed in service before 2014, as well as the Section
1603 cash grant program for renewable energy projects
placed in service before 2014, and the Section 1603
cash grant program for renewable energy projects
placed in service or beginning construction in 2012.
Finally, the budget provides for:
• R
enewing and making permanent the Build
America Bond program with increased eligible
uses of these bonds
• E
stablishing 20 new “growth zones” around the
country that would qualify for certain tax incentives
• T
axing “carried interest” as ordinary income
• C
onverting the Section 179D tax deduction
for commercial building energy efficiency
improvements to a tax credit
• M
odifying certain tax-exempt bond rules
For more information:
www.whitehouse.gov/omb/budget
53
AHTCC represents the interests of the
tax credit community before groups
which effectively have regulatory
control over the program including the
Treasury, IRS, FASB, and the National
Council of State Housing Agencies.
For more information:
www.taxcreditcoalition.org
2012 Apartments
Stats To Be Released
In Fall 2012
As we went to press with this
publication, the RubinBrown
Real Estate Group was compiling
data for the 2012 Apartment
Statistical Analysis.
The RubinBrown Apartment
Statistical Analysis© is published
annually and assesses the financial
and operating performance of
multi-family properties located
throughout the country. Please
look for it this fall.
RubinBrown Real Estate Group
2012 Conference & Speaking Schedule
Date
Event
Location
February 22-26
NH & RA 2012 Annual Meeting
Palm Beach, Florida
March 21-22
2012 Illinois Housing Council Annual
Conference
Chicago, Illinois
May 17
NYSAFAH 13th Annual Conference
New York, New York
June 26-29
NCSHA 2012 Housing Credit
Conference & Marketplace
Denver, Colorado
September 2012
Missouri Governor’s Conference on
Economic Development
Springfield, Missouri
September 19-21
NASLEF Conference
San Francisco, California
October 2012
Housing Colorado Now
Vail, Colorado
October 11-12
Historic Tax Credits for Developers
Philadelphia, Pennsylvania
October 25-26
New Markets Tax Credit Investors
Conference
Chicago, Illinois
November 5-6
AICPA National Real Estate
Conference
Las Vegas, Nevada
November 14-16
AHF Live
Chicago, Illinois
RubinBrown’s Real Estate Services Group
RubinBrown has developed a strong reputation nationally as a leader in accounting and advisory services. Today, we provide
specialized services to more than 2,000 real estate entities.
Bryan Keller, CPA - St. Louis
Partner-In-Charge
Real Estate Services Group
[email protected]
314.290.3341
Partner
[email protected]
913.499.4429
Dave Herdlick, CPA - St. Louis
Frank Seffinger, CPA - Denver
[email protected]
314.290.3383
[email protected]
303.952.1240
Partner
Partner
54
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Professional Services
Managing a Medical Practice in
Today’s Regulatory Environment
By Steve Moro, CPA
Currently, the healthcare industry (as well as the
rest of the country) braces for the full impact of the
healthcare reform laws to be implemented in 2014.
However, over the last few years, physician practices
have been dealing with various other regulatory
issues, which have put pressure on the “bottom line”
of these organizations.
The issues that have been grappled with the most
include:
• Initiative to move to electronic health records
• R
equirement to move to version 5010 electronic
transaction code set
• M
igration from International Classification of
Diseases – Clinical Modification (ICD-CM) - 9
codes to ICD-CM-10 codes
• C
onstant fear of declining reimbursement
from Medicare
• F
uture reimbursement structure under
Accountable Care Organizations (ACOs)
• N
eed to adopt corporate compliance programs
In addition to this cost, practices report that they
are generally less productive during the EHR
implementation process.
Electronic Transaction Code Set
As of the beginning of 2012, providers are required to
use the new version 5010 electronic transactions code
set, as required by federal law.
The code set regulates the electronic transmission
of specific data elements, such as: eligibility, claims
status, referrals, claims and remittances. The upgrade
from version 4010 was necessary to accommodate the
forthcoming implementation of ICD-CM-10 in 2013.
There have been numerous problems associated with
the transition process, namely: sporadic payment of
re-submitted claims, unsuccessful claims processing,
lost claims and other claims processing related issues.
These problems have been slowing down the billing
and collections process, resulting in cash flow issues
for many practices.
Electronic Health Records
Code Migration
With the enactment of the Health Information
Technology for Economic and Clinical Health (HITECH)
Act and the Patient Protection and Affordable Care
Act (PPACA) as amended by the Health Care and
Education Reconciliation Act of 2010 (commonly
known as the Affordable Care Act), Congress provided
the opportunity to modernize the health care delivery
system through financial incentives for deploying
electronic health record (EHR) systems.
Under the current regulations, beginning on October
1, 2013, providers will be required to switch from
using ICD-CM-9 codes to ICD-CM-10 codes.
Over the five-year incentive period, the maximum
incentive money could be as much as $44,000 per
provider to deploy electronic health records. However,
the hardware and software cost, in most cases,
exceeds $50,000.
55
However, after receiving pressure from the American
Medical Association and other industry associations, the
Center for Medicare and Medicaid Services (CMS), in a
February 2012 press release, indicated that the timeline
will be re-examined through a rulemaking process.
The ICD-CM codes are used to code and classify
diagnosis data from the inpatient and outpatient
records, physician offices and most National Center
for Health Statistics (NCHS) surveys. Based on
information from the Medical Group Management
Association (MGMA), it is estimated that the
implementation of ICD-CM-10 will cost a three
physician practice approximately $85,000.
Medicare Reimbursement
Since 2008, Medicare has threatened to reduce the
physician fee schedule payments anywhere from 16%
to the latest proposal to cut the fee schedule for 2012
by 29.5%.
However, like in prior years, the proposal was not
implemented. These reductions would have been
disastrous to the financial position of most physician
practices.
While over the years the physician fee schedule cuts
have been avoided, Congress still needs to find a
“fix” for the current reimbursement methodology
while ensuring that physicians are compensated in an
equitable manner.
when it comes time to negotiate a larger share of the
ACO payment.
With the shift to ACOs, it is unknown what the future
will hold for some physician practices.
Corporate Compliance Programs
An additional requirement of the Affordable Care
Act is for providers, including physician practices, to
adopt corporate compliance programs.
An effective compliance program will consist of
appropriate policies and procedures governing the
billing process and guidelines for performing ongoing
monitoring of claims processed. Attorneys and
accountants can work together to ensure the program
is established and monitored appropriately.
Under the current Medicare payment structure, each
provider that provides care to a patient gets paid
under a different payment methodology.
To ensure compliance with the various regulatory
requirements, the CMS—collaborating with the
Health and Human Services Office Inspector
General—has initiated several audit processes
to identify incorrect or fraudulent billings to the
Medicare and Medicaid programs.
For example, hospitals get paid based on diagnosisrelated groups (DRGs), physicians get reimbursed
based on a resource-based relative value scale (RBRVS),
skilled nursing facilities receive payment based on a
resource utilization groups (RUGs) and so on.
The Recovery Audit Contractors (RAC) program is
the most notable. Under the RAC program, CMS
hires non-governmental auditors who are paid a
percentage of claims recovered that are deemed to
have been overpaid.
Accountable Care Organizations
Within the healthcare reform laws, there is a provision
that establishes Accountable Care Organizations (ACOs).
An ACO is group of healthcare providers in a care
delivery system that accepts joint responsibility
for the medical care of a patient. Under an ACO
arrangement, a single payment for the patient care is
shared among the participating providers. Currently,
participation in an ACO arrangement is voluntary.
However, in anticipation of ACO arrangements being
the norm in the future, health systems are actively
purchasing physician practices and physicians are
reluctantly selling their practices to health systems or
merging with other physicians to gain more leverage
The RAC program initially focused on hospitals but
most recently the program was extended to other
healthcare providers, including physician practices.
The RAC auditor process is as follows:
• A
“probe” letter is sent requesting a small
sample (10-50 records).
• B
ased on the error rate in a sample, a much
larger sample is selected under an “additional
document request.”
• U
pon completion of the audit, the provider will
receive a letter indicating the audit results and
action taken by the auditor.
• If an overpayment is identified, the provider will
receive a demand letter, which is a demand for
re-payment.
56
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Professional Services – continued
In the event that a provider receives a “probe” letter,
it is strongly recommended that the provider consult
with legal counsel.
While all of the aforementioned factors are exerting
pressure on the financial performance of physician
practices, practices still need to stay focused on
enhancing the value of their practices.
To enhance value, practices need to target
four areas:
1. Cost management
RubinBrown’s healthcare professionals can help
you with:
• Practice valuation
• Corporate compliance programs
• RAC audits along with a healthcare attorney
• Billing reviews
2. Staff productivity
3. Patient receivable management
4. Patient satisfaction
In the event that a physician decides to sell or merge, a
business valuation should be initiated to ensure that an
equitable price is received for the value of the practice.
While it is clear that physician practices are facing
many regulatory challenges over the next several years,
physicians need to initiate appropriate steps to protect
the economic value and integrity of the practice.
RubinBrown’s Professional Services Group
Specializing in law firms, architects, engineers and healthcare practices, we have expertise in the accounting and tax
requirements needed by professional services firms.
Ken Rubin, CPA - St. Louis
Partner-In-Charge
Professional Services Group
[email protected]
314.290.3417
57
Managing Partner, Denver Office
[email protected]
303.952.1250
Mary Ramm, CPA - Kansas City
Steve Moro, CPA - St. Louis
[email protected]
913.499.4406
[email protected]
314.290.3244
Partner
Manager
Reminders
RubinBrown Timely Reminders
JUN Individuals. Individuals (other than farmers and
15
2012
fisherman) must pay the second installment of
2012 estimated tax (Form 1040-ES).
Corporations. Calendar year corporations must
pay the second installment of 2012 estimated
income tax.
AUG Employers. Employers of non-agricultural and
01
2012
non-household employees must file Form 941
to report income tax withholding and FICA
taxes for the second quarter of 2012. Form
5500 must be filed for calendar year taxpayers.
If you want a two and one-half month extension
to file the 5500, file Form 5558.
AUG Exempt Organizations. If extended, file a
15
2012
MAY Exempt Organizations. Exempt organizations
15
2012
with a calendar year must file the annual return
(Form 990, Form 990-EZ, 990-N or Form
990-PF) for 2011. Exempt organizations with
unrelated business income must file income tax
returns (Form 990-T). If you want a three-month
automatic extension of time to file the return,
file Form 8868.
JUN IRA or SEP. Annual statements to the IRS must
01
2012
SEP
17
2012
2011 calendar year return (Form 990, Form
990-EZ or Form 990-PF). An additional
three-month extension can be requested
on Form 8868.
Individuals. Individuals (other than farmers and
fisherman) must pay the third installment of
2012 estimated tax (Form 1040-ES).
Partnerships. If extended, file a 2011 calendar
year return (Form 1065).
Corporations. If extended, file a 2011 calendar
year return (Form 1120 or Form 1120-S).
Calendar year corporations must pay the third
installment of 2012 estimated income tax.
be filed regarding 2011 account balances
for an IRA or SEP (Form 5498). Participants
and the IRS must be provided with IRA plan
contribution information.
Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this entire publication is not intended or written to be
used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of
promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no
limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.
58
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RubinBrown is one of the nation’s largest accounting and business
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in Denver, Kansas City and St. Louis.
Founded in 1952, the firm’s award-winning team members hold leadership
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Saint Louis, Missouri 63105
ph: 314.290.3300
fax: 314.290.3400
For more information, visit www.rubinbrown.com

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