Dear Drebit

New Tax on Shale-Related Rent Monies and Landowner Royalty Payments

Jim Fracker, CPA — Wed, 22 May 2013 19:16:44 +0000

If you receive shale-related advance rent monies or landowner royalty payments from an existing well, you should be aware of a potential increase in tax that may hit in 2013. With the passing of the Patient Protection Act, a new tax provision took effect in 2013 – and it could impact the amount of tax you need to pay when you receive your royalty and rent payments.

Brief Overview of New Tax

Surtax on investment income is also known as unearned income Medicare contributions tax. A 3.8 percent surtax is imposed on the lessor of a taxpayer’s net investment income, or the excess of the taxpayer’s modified adjusted gross income totaling more than $200,000 ($250,000 for joint filing taxpayers). Net investment income includes interest, dividends, annuity, capital gains, passive rental income (less expenses associated with the income) and royalty income (less expenses associated with the income). The Patient Protection Act also contains a new tax provision that becomes effective in 2013 that could increase your Medicare tax rate from 1.45 percent of earnings to 2.35 percent to the extent your earnings (wages and self-employed income) exceed $200,000 ($250,000 for joint filers). Additionally, the American Taxpayer Relief Act of 2012 created a new tax bracket for 2013. The tax bracket structure now includes a new rate of 39.6 percent for married filing joint taxpayers with taxable income of $450,000 and greater. The Act contains many other tax provisions (winners and losers) that might apply to your tax situation.

Why It Is Important

It is imperative that you are aware of all the applicable changes for the 2013 tax year to properly calculate your estimated tax amount on any rental or royalty payments you receive during the year. Failure to do so could result in a tax underpayment amount, thereby potentially creating a tax underpayment penalty when filing your 2013 return.

The ever-changing tax landscape can be difficult to navigate. Reach out to your trusted financial advisor for help understanding how the tax law changes impact your individual situation.

Get Help from Ohio Oil and Gas CPAs

If you’re receiving monetary payments related to shale and have questions or need help understanding how tax law changes impact your individual situation, contact Rea & Associates. Our team of Ohio oil and gas accountants and tax professionals stand ready to help.

What Happens if My 401(k) Plan is Out of Compliance with an IRS or DOL Rule?

Wed, 22 May 2013 18:34:56 +0000

With all of the rules in the business world, it sometimes can be difficult to know and understand all of the rules we need to follow – there are a lot of them. So what happens if you find yourself in an unintended situation where your business’s 401(k) plan is out of compliance? Simply put, a plan out of compliance with Internal Revenue Service (IRS) or Department of Labor (DOL) rules is subject to disqualification. But what does that mean? It is very important that you fix any compliance issues when they are identified – whether they are document-related issues, government reporting issues (5500) or plan operational issues.

Plan Disqualification 101 – The Basics

Congress has extended to retirement plans three valuable tax benefits:

Immediate deduction for employer contributions
No tax on retirement plan trust earnings
Deferral of participant taxation on contributions until distribution.

You will only receive tax benefits if your plan meets the qualification requirements in both form (document) and in operation. The disqualification of the plan by the IRS can result in serious tax consequences for both you – as the employer – and your employees. Many plan errors often are discovered by the IRS and practitioners years after they occur.

Principal tax consequences if a retirement plan is disqualified

When a plan is disqualified by the IRS, the plan loses its three tax benefits which are:

The trust income is taxable.
The employer only may deduct vested contributions (i.e., loses the deduction for non-vested contributions).
The employee takes into gross income contributions to the extent they are vested. With respect to non-vested contributions, the employer can deduct such contributions in later years as they become vested. When the non-vested contributions become vested in later years, the employee would include such contributions in his/her gross income.

Additional Consequences

Losing your plan’s tax benefits are not the only consequences you might face if your plan is disqualified. You may face three other major consequences:

Amounts from the plan cannot be rolled over.
Employer contributions are subject to payroll taxes when vested.
The participant is taxed on remaining amounts when they are made available, rather than deferring income until receipt of the distribution.

Ohio 401(k) Help

If you sense something is not right with your 401(k) offering or become aware of a problem with your plan, contact Rea & Associates. Our Ohio Retirement Plan Services team can help you correct any problems and minimize potential penalties and taxes.

How Can the Ohio Incumbent Workforce Training Voucher Program Work for Your Business?

Joseph Popp, JD, LLM, Senior Tax Associate — Fri, 17 May 2013 18:05:11 +0000

It’s almost half way through the year. When thinking about your employees, how have you helped them develop professionally during the past few months? Investing in your people pays off. It helps them, helps you, and helps your customers. But, it’s expensive and time consuming – training is one of those things that always seem to get pushed until tomorrow. But now the state of Ohio is taking away one of your excuses – it’s picking up part of the tab.

Ohio Incumbent Workforce Training

The Ohio Incumbent Workforce Training Voucher Program is offering to pay half of the cost of qualified training programs for Ohio businesses. The program provides up to $4,000 per employee per year to companies in the following industries:

Advanced Manufacturing
Aerospace and Aviation
Automotive
BioHealth
Corporate Headquarters
Energy
Financial Services
Food Processing
Information Technology and Services

Who Can Participate?

Employees who are Ohio residents, over age 18, work more than 25 hours per week, earn more than 150 percent of the federal poverty level and work in any one of the following functions qualify:

Production
Back Office Operations
Information Technology
Logistics
Research and Development

What Qualifies?

So, the state pays for up to 50 percent of the training cost, but what about the other half? Either you or your employee can pay for it – this gives you and your employees flexibility to put together a training program that fits both of your needs.

Not every kind of training qualifies. Because this program is being offered as part of a workforce development effort, it funds only certification or skills-based training. What qualifies? Anything from Lean efficiency training, upgraded computer skills, or training towards an industry certification. Basically, something that you’d put on a resume! What doesn’t qualify? Trainings that are already being reimbursed by another agency, are required to maintain professional certification, or teach soft-skills like management or sales, among other restrictions.

Ohio Incumbent Workforce Training Voucher Program Help

Need help with your application? Contact Rea & Associates. Our Ohio tax professionals will help you gather the information and complete your Ohio Incumbent Workforce Training Voucher Program application. Don’t leave money on the table – contact Rea now to make sure you are ready for the application frenzy that is soon to come!

Does Your Business Have Cracks in its Foundation?

David Cain, CPA, Executive Vice President of Operations — Thu, 09 May 2013 20:19:40 +0000

During the recession, the fiscal cliff and the so-called recovery, did your business develop cracks in its foundation? If you answered “yes,” you are not alone. Many businesses of all shapes, sizes and industries are still trying to rebuild cash flow strategies and bottom line results. Do any of the following eight foundational cracks apply to your business? Take a few minutes to answer the following questions and consider if you need to do some repair work.

Entity Foundation: Is it time to examine your entity structure? Should you be operating as a C corporation, S corporation, general partnership or a limited liability company taxed as partnership or corporation? Should you consider preferred units and founders’ rights? The tax laws and economy continue to change. Has your entity structure changed accordingly?
Capital Structure and Banking Relationship: Are you utilizing your line of credit properly and integrating it with your cash flow strategies? It may be time to review your loan covenants and determine if the covenants have changed in accordance with your business model.
Buy-Sell Agreements: When was the last time you updated your buy-sell agreement? Has the value of your business changed during the past few years? What options do you have to increase the visibility and value of your company?
Organizational Agreements: Do you have outdated leases or loans with related parties? Does your company have management or royalty agreements with related companies?
Insurance Review: How will the new health care reform rules impact your business? How will the “pay-to-play” concept impact your cash flow? Do you have outdated life insurance policies or corporate-owned policies?
Lean Principles: Do these economic times present an opportunity for your business to apply strategic Lean principles to your business operations?
Accounting System and Software: Is your accounting system providing meaningful and forward-looking information? Have you considered different accounting methods for financial reporting and income tax reporting?
Benefit Plans: Your employees are your business’s most important resource. Is it time to review your benefit packages to determine if the benefits are competitive in the marketplace?

If you find your business is experiencing any of these foundational cracks, maybe it’s time to contact your trusted financial advisor to evaluate what repair work you need to do to reinforce your business’s foundation. With so much economic uncertainty in our world today, don’t wait until it’s too late to fix problems.

Cash Flow is King: Where Do You Need to Focus?

Tom Jeffries, CPA, Principal — Thu, 09 May 2013 19:46:05 +0000

Do you know the current balance of your business checking account? If you don’t, keep reading. Cash flow is the key to business survival. A healthy business generates money for the operations of the business. Check out a few areas to focus on when looking to improve your business’s cash flow:

Accounts receivable. Do you send invoices regularly and timely? Do you utilize reports, such as an accounts receivable aging report? Don’t ignore this area. If you follow solid and sound collection policies regularly, you can help increase the cash flow of your business. Review your accounts receivable aging report weekly to discover where to focus when collecting cash.
Accounting software. Do you reconcile cash monthly and immediately after the bank statement is available? This issue is seen on a regular basis within the industry. You should reconcile your bank account regularly enough to be able to know how much cash you have. Accounting software is an inexpensive way to keep better track of your accounts, and this software typically has many additional capabilities that can help you in other areas.
Banking relationship. Do you have one? There are only a few outcomes that can occur when a business runs out of money. Having a solid, working relationship with your banker can assist you in times of need. The bank is not always the answer, as the business has to be profitable in order for the bank to want to work with you. If you are having trouble paying the bills, you may have trouble paying the bank back.

No two businesses are alike, but all businesses need positive cash flow. There is nothing that will miraculously change the fortunes of your business. However, by being mindful of the areas of focus listed above and by possibly making a few subtle changes, you can begin to improve the cash flow of your business.

Why is the Timeliness of Employee Contributions Under Scrutiny?

Darlene Finzer, CPA, QKA, CSA, Director of Benefit Plan Audit Services — Fri, 03 May 2013 20:40:07 +0000

The Department of Labor (DOL) has focused on the timely remittance of employee contributions to retirement plans for a few years. And recently, they stepped up efforts during agency-conducted audits, making this a key area of detailed review. The timeliness of your remittances will be under the microscope, and not only the frequency, but also the consistency.

You must remit retirement plan contributions that are withheld from a participant’s wages to the plan on the earliest date on which the contributions can reasonably be segregated from the employer’s general assets. This can’t happen later than the 15^th business day of the month following the month in which the participant’s contributions were withheld from the payroll (payroll date).

In years past (and maybe even now), employers operated under the misconception that the 15^th business day of the following month was a safe harbor date. They believed that, as long as contributions were remitted by that date, they were operating properly under the DOL guidelines.

Not so. You should remit contributions as soon as you can segregate the amount of the contributions from your general assets.

Forgiveness for small plans

Good news for small (non-audited) plans! There is a safe harbor for you. If you remit contributions within seven business days of the payroll date, the DOL considers that “timely” under this safe harbor. The DOL may consider any deposits made outside of the seven-day window to be untimely.

What about large plans?

Unfortunately, the DOL hasn’t implemented a similar such safe harbor for large (audited) plans. Why? It’s hard for the DOL to set a safe harbor for large plans because of varying levels of complexity in payroll systems and the sophistication of the accounting function. So, the guidance for large plans remains “as soon as administratively feasible,” which is subject to interpretation by both the DOL and the plan sponsor.

The DOL doesn’t operate under the idea that large plans are more complicated and, therefore, should have more time than a small entity. It finds that, with more sophisticated systems in place, large plans are able to remit contributions more quickly than small plans. A large plan that simply adopts the small plan seven-day safe harbor doesn’t necessarily alleviate the plan from DOL scrutiny relating to the timeliness factor.

What if the deposit is late?

If the DOL finds a violation of timely deposits, it will typically review three years of contributions. This period can be expanded if the DOL believes the situation is abusive. Not only can this process result in fines and penalties, but you may have to spend a lot of time gathering the data that the DOL requests in its investigation.

Employee Contribution Compliance Help

Not sure if you’re meeting the DOL’s guidelines? Have questions about the DOL’s guidelines on employee contribution? Contact Rea & Associates. Our Ohio benefit plan administration and benefit plan audit teams can help you determine if you are compliant with these guidelines or how you can become compliant.

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Have You Ever Considered What the Real “Cost” of Litigation Is?

Gary Moll, CPA, ASA, Senior Manager — Tue, 30 Apr 2013 16:07:54 +0000

Whether you’re embroiled in litigation as a Plaintiff or Defendant, or whether the case is related to divorce, injury or breach of contract, the actual cost of litigation can be quite staggering. And while we immediately think of the economic costs associated with attorney fees, insurance premiums and damages, it is imperative that you consider the emotional costs as well.

According to a study completed near the end of the last decade, in one year, Fortune 500 companies spent the equivalent of one-third of total profits directly on litigation activities (approximately $210 billion). To put this amount in perspective, total CEO compensation for these same companies in a one-year timeframe amounts to approximately $7.5 billion. And yet, public policy appears to be more concerned with controlling “excessive” CEO compensation than addressing tort reform or other ideas designed to bring litigation costs under control.

Considerations For Litigation

Pursuing or continuing litigation (versus settlement) should be based on objective criteria and include a cost / benefit analysis when possible. Alternative dispute resolution (ADR) processes and techniques should be considered as well. ADR is a collective term that encompasses a variety of ways in which parties can settle disputes or come to an agreement short of litigation. ADR is generally classified into broad categories including negotiation, mediation, arbitration and collaborative law.

The retainers paid to legal and financial professionals and the monthly statements from both help to keep the economic aspects of the litigation at the forefront of our minds. But often what we don’t consider is the time, energy and focus that the litigation demands from us. The emotional costs often take more of a toll on a party involved in litigation than the financials aspect but are often difficult to quantify.

Lean On Your Trusted Advisor

Few, if any, businesses and business owners have a core competency involving litigation. What this means is that for every hour that you or your staff spend involved in the litigation process, it is one less hour that is spent growing the business and doing what it is you do best. For the individual as well, the litigation process and related stress and demands on time and energy are rarely a recipe for improving one’s health and well-being.

Even though your financial professional may not have the technical training or background to counsel you through the emotional aspects of the litigation, as your most trusted business advisor, he or she has the responsibility to assist you in that endeavor as well. Trust him or her to assist you with the numbers, but rely on them for much more.

Need A Trusted Advisor?

Are you dealing with pending litigation? Do you need litigation support in matters including presenting credible case and negotiating settlements? Contact Rea & Associates. Our Ohio litigation support team is available to help you.

How Can Retirement Provisions in the President’s 2014 Budget Proposal Affect You?

Darlene Finzer, CPA, QKA, CSA, Director of Benefit Plan Audit Services — Thu, 25 Apr 2013 19:43:03 +0000

The past few weeks have been full of high visibility news stories ranging from the tragic Boston Marathon bombing to the devastating plant explosion in West, Texas. Amidst these stories and others, there was one important story you may have missed that could affect you and your retirement in a very significant way. President Obama recently unveiled his 2014 budget proposal that resulted in varied opinions over the retirement-related provisions that could greatly impact the retirement industry.

Overview of key retirement-related provisions

The proposal seeks to cap an individual’s retirement account at $3 million.Simply put, this provision would limit an individual’s total retirement account balance (including 401(k)s, IRAs, and other similar tax-preferred accounts) to an amount sufficient to finance an annuity of not more than $205,000 per year in retirement. This would result in the imposed $3 million maximum account balance for a 2013 retiree. According to current statistics, this cap would affect only about 5 percent of individuals; however, the effect cannot simply be measured by the individuals whose ability to contribute is affected. Consideration must also be given to how this change could affect all employees and their employer’s continued support of the 401(k) program.
Small business owners making more than $250,000 per year would be required to pay tax on retirement plan contributions in the year they are made.They’ll also be required to pay these taxes again when these funds are distributed at retirement, thus resulting in double taxation, according to Brian Graff, chief executive officer and executive director, National Association of Professional Advisors and American Society of Pension Professionals & Actuaries.
Small businesses would be required to offer an auto-IRA for employees not benefiting under a company-sponsored retirement plan.This provision would require the employer to automatically withhold contributions from paychecks and directly deposit into a retirement account for the employee unless the employee elects to opt out of such participation. Although tax credits for the administrative costs of setting up the plans would be available, concerns still exist regarding the added administrative burden for such a program and potential fiduciary liability associated with it.
Another provision affecting retirement accounts is the request of eliminating the Internal Revenue Code section 404(k).This code section provides an incentive for employee stock ownership plans (ESOPs) that permits C corporations to deduct the value of dividends paid on ESOP stock passed through to employees in cash. These deductions would be used to pay the ESOP acquisition loan or when an employee reinvests in more company stock in his/her ESOP account balance. This provision could result in a disincentive to create and operate an ESOP, and could hurt people who are trying to be responsible when saving their money.

What Others Are Saying And What You Can Do

The availability of long-term Social Security benefits has been a topic of discussion for several years and has even included advice about not depending on Social Security as your sole source of retirement income. Although Americans are generally not in favor of reducing the cost-of-living adjustment for Social Security benefits, a proposed change in this year’s budget would decrease the cost-of-living adjustment by approximately 0.3 percentage points. This would result in reducing the deficit by $230 billion during the next 10 years. This reduction supports the message to not rely on Social Security as a sole source of retirement income.

Lee Topley, managing director of Unified Trust, captures the dichotomy of the proposed retirement-related provisions: “On one hand, we’re trying to get people to save more for retirement and on the other hand, we’re penalizing those that save well.”

Ohio 401(k) Help

Are you concerned about the impact these provisions may have on your retirement plans? Contact your U.S. congressional representative to express your thoughts. To stay informed about the budget proposal and how it could affect you, contact Rea & Associates. Our Ohio pension TPAs will help you stay up-to-date on current issues.

Does Your Audit Process Protect You From Fraud?

Mark Van Benschoten, CPA, Principal, Director of Not-for-Profit Services — Mon, 22 Apr 2013 19:33:07 +0000

Fraud Reporting Hotline Could Be the Answer to Your Problems

Picture this: You have an annual audit. You comply with the auditors’ requests, provide the necessary documentation and never end up with any findings. So you’re good. Your finances are safe, right? Wrong.

Some people think conducting an audit is like a trip to the doctor – it should catch any and all financial problems. But, just as a visit to the eye doctor won’t include a check for cavities, an audit isn’t designed to uncover all financial troubles. For example: fraud. In very rare instances, an auditor may catch an occurrence of fraud, but it’s not his job to uncover it.

The Purpose of An Audit

When business owners don’t understand the purpose of an audit – both what it can do and what it can’t do – the experience can be frustrating for both the client and the auditor. Many well-meaning clients ask auditors about fraud and aren’t satisfied with the limited answers they get. Like dentistry, fraud detection is a specialized service, and requires specialized skills. Part of being a good doctor means knowing when to recommend a specialist; the same goes for being a good auditor.

So how can you protect yourself? Implement a confidential fraud reporting hotline where employees can anonymously alert decision-makers to fraud, waste, abuse and other problems within the organization. Since 48 percent of frauds are uncovered by someone speaking up, instituting a fraud hotline can help you catch fraud early – and even stop it before it starts.

The Seriousness of Fraud Prevention

Taking a serious approach to fraud prevention can change the culture of a business and the behavior of employees. Telling employees that you take fraud seriously is part of setting a strong tone at the top. It makes would-be fraudsters think twice and also proves to good employees that the company takes them, their work and their opinions seriously. Many business owners don’t recognize that fraud doesn’t just hurt them – it hurts their employees, too. From having to forgo pay increases because funds were embezzled to experiencing the stress that comes from working with dishonest co-workers, fraud can hurt good employees. Fraud deterrence isn’t just about driving out the bad; it’s about keeping the good and making your business a place where your star performers want to work.

Obviously, there are also financial benefits to fraud deterrence. Catching problems early – and stopping them before they start – can result in large financial savings. Here’s a telling statistic: at organizations without hotlines, the average instance of fraud costs the company $180,000 – at organizations with hotlines, that drops to $100,000.

We’re glad that our clients rely on us for their audits and internal controls. But, when it comes to fraud prevention, we Ifknow that we need to bring in the specialists. That’s why Rea has joined together with Red Flag Reporting, a simple, yet effective fraud prevention program.

With today’s economic downturn, employee fraud is high. Although you don’t like to think that it can happen to you, it can. Fraud always hurts, but a fraud reporting helpline can help to lessen the pain. Ask your Rea advisor about how a Red Flag Reporting fraud hotline can help protect your business.

Red Flag Reporting Help

Concerned about the potential for fraud in your organization? Think that a Red Flag Reporting hotline could help lower the risk of fraud in your organization? Contact Rea & Associates. Our audit team will help you set-up a fraud reporting hotline and other fraud deterrence policies to reduce your organization’s risk of fraud.

What Do You Mean My Company Is Not Worth As Much As Facebook?

Gary Moll, CPA, ASA, Senior Manager — Mon, 22 Apr 2013 14:24:57 +0000

Whether you’re negotiating a divorce settlement or your company is for sale, the value of your company is critically important. And while there are times that you’re happy with a relatively low value, there are certainly situations when you might ask, “but what about Facebook?”

Facebook is the world’s largest social network, with more than 900 million users. In a highly anticipated and followed Initial Public Offering (IPO) in 2012, Facebook’s implied company valuation approximated $100 billion, making it one of the largest in the history of technology stocks.

But for an industry that prides itself on fundamentals, what did Wall Street anticipate when Facebook opened up at $38 per share? The $38 per share price implied that Facebook was worth 89 times its historical earnings and 76 times its projected earnings, according to Barron’s online. Contrasted with established companies such as Google (14 times projected earnings), Apple (11 times projected earnings) and the NASDAQ and S&P 500 (11 – 15 times earnings), was Facebook valued properly or was it simply a case of irrational exuberance?

Investopedia defines irrational exuberance as “unsustainable investor enthusiasm that drives asset prices up to levels that aren’t supported by fundamentals.” That term was first coined by then Federal Reserve Board Chairman, Alan Greenspan, in 1996, in reference to the dot-com bubble where companies were going public at large multiples simply due to their status as a technology or e-commerce company. Some of these companies never had profits and in fact, some of them never even had established revenues!

A poster child for this dot.com bubble is Priceline.com. In 1998, Priceline.com’s IPO led to an implied company valuation of $10 billion. Despite the fact that this company consisted of a website, a couple of William Shatner commercials and the ability to lose $3 for every $1 in revenue, Priceline.com was worth more than nearly the entire airline industry!

Over the long-term, the market appears to have the ability to correct itself back to levels supported by underlying fundamentals. Business owners must take heed though, that the fundamentals displayed in the public markets are not the same as those in the private marketplace. In general, there are just too many differences between public and private companies (i.e. access to capital, professional management, size etc.) to extrapolate the public company multiples on to the private company results.

Private Company Valuation Help

To properly determine the value of a private company, it will be necessary to engage the services of a business valuation analyst – one who doesn’t get carried away with irrational exuberance and can help you to know and grow the value of your business. Feel free to contact me via Facebook [$100 billion IPO], LinkedIn [$10.2 billion IPO] or Twitter [~$10 billion IPO] to learn about how a business valuation can help you build business value. Who knows – with the right guidance, your company could be the next Facebook! Contact Rea & Associates to learn more about private company business valuation services.