VIEWpoint NEWSLETTER Insight, Oversight and Foresight for Your Business Tax Reform Proposal: What Lies Ahead President Obama recently said that he wants a tax reform/ deficit reduction package by August, and lawmakers now have many proposals to consider, including House and Senate blueprints as well as the Simpson-Bowles Plan. Whatever is adopted, it is sure to impact your tax strategy and planning. All of the proposals have one common goal: reduce the federal government s approximate $16 trillion federal budget deficit. Many of the plans propose to cut spending and raise revenues. Let s take a look at how some of the tax proposals would affect individuals, businesses and others. Individuals New individual tax rates have been set at 10, 15, 25, 28, 33, 35 and 39.6 percent for 2013 and beyond. The House GOP budget blueprint would consolidate the current seven individual income tax rate brackets into two rates. The lower rate would be 10 percent with the goal of a top rate of 25 percent. A proposed minimum 30 percent tax on individuals with incomes exceeding $1 million (full phase-in at $2 million). These taxpayers would also be limited to reduce their tax liability to a maximum of 28 percent. Potential to limit contributions and accruals on tax-favored retirement accounts, including IRAs, qualified plans, tax-sheltered annuities and deferred compensation plans. A Doeren Mayhew Quarterly Newsletter Inside This Issue Tax Reform Proposal: What Lies Ahead Could You Be Overpaying Your Vendors? How Personal Goodwill Can Boost Your Business Sale Proceeds New Lease Proposal Includes Dual-Recognition Approach On Our Blog IC-DISC Tax Benefits for Exporters: Could You Qualify? How Updated Retirement Plan Correction Procedures Impact Your Business New Medicare Tax: Watch Out for Withholding Issues And More (Continued on page 2) Michigan Texas Florida 248.244.3000 713.789.7077 954.928.3340 3rd Quarter 2013
(Tax Reform Proposal: What Lies Ahead Continued from page 1) Across-the-board limits on itemized deductions claimed by the top 2 percent of income earners, by capping the rate at which itemized deductions and other tax preferences reduce tax liability, a percentage of income cap or a specific dollar cap. Repeal of the 3.8 percent net investment income surtax, the 0.9 percent alternative minimum tax and additional Medicare tax. Increase in federal estate tax by raising it at a maximum rate of 45 percent with a $3.5 million exclusion (not indexed for inflation) after 2017. Businesses President Obama says he supports lowering the corporate tax rate in exchange for businesses giving up unspecified tax preferences. These could include tax incentives for fossil fuels, the Code Sec. 199 deduction and more. The House blueprint would reduce the top corporate tax rate to 25 percent, paid for by tax savings elsewhere. The Simpson- Bowles plan also calls for a reduction in the corporate tax rate, contingent on businesses relinquishing unspecific tax preferences. President Obama and the House and Senate budgets also propose a number of incentives to encourage business spending and job creation, including: Enhanced small business expensing (Obama and House at different amounts) Permanent research tax credit (Obama, House and Senate) Temporary tax credit for increasing payrolls (Obama) Special incentives for manufacturing in the United States (Obama) Another key difference among the competing proposals: the House budget plan would repeal the Patient Protection and Affordable Care Act, including all of its business tax-related provisions, such as employer-shared responsibility provisions, the medical device excise tax, and more. The Senate approved a non-binding resolution to repeal the medical device tax but is not expected to go along with repeal of the entire Affordable Care Act. Whatever proposals are adopted, they are sure to impact your tax strategy and planning. Text goes here. Internet Sales Tax In May, the Senate passed the Marketplace Fairness Act (H.R. 743). The bill, if passed in the House and signed by the President, gives states the authority to compel online merchants, no matter where they are located, to collect sales tax at the time of a transaction. However, states would be able to compel collection of sales tax only after they have simplified their sales tax laws, such as by adopting the Streamlined Sales and Use Tax Agreement. The bill has the support of President Obama. However, the bill may not pass in the House, where many lawmakers view it as a tax increase. Looking Ahead Tax reform coupled with deficit reduction is starting to gain momentum. Whether this will lead to legislation this summer or before year-end is unclear. As long as the key players continue their discussions, there is the chance of tax reform. Doeren Mayhew will keep you posted of developments. In the meantime, please contact our professionals with any questions about how reform might impact you personally. Doeren Mayhew 2
Could You Be Overpaying Your Vendors? For most businesses, vendors are part of day-to-day operations, generating thousands of payments to suppliers and service providers over the course of a year. Does your business have the internal controls in place to detect whether you may be overpaying? Overpayment to vendors is a very real risk that could impact your organization s bottom line and result in significant financial loss if not quickly detected and resolved. A variety of errors can result in overpayment, including miscalculations, duplicate payments, neglected rebates and allowances, misunderstanding of contract terms, tax overpayment, and charges for goods and services not received. To avoid financial loss, you may want to consider a vendor audit. A vendor audit is an external audit of invoices, contracts and other related data from your suppliers. Other best practices for detecting overpayment include: Consider the most favored nation clause, which is a contract provision in which a seller agrees to give the buyer the best terms it makes available to any other buyer. During a recent Doeren Mayhew audit, the vendor refused to reveal invoices distributed to other clients, which triggered our client to question whether the supplier was in compliance with the agreement. Compare estimates and invoices to ensure charges are accurately reflected. Often times estimates are used to create contracts, and buyers may forget to review actual invoices versus estimated prices. Ensure vendor invoices are being regularly monitored. Look out for double costs that may not catch your eye as a mistake. Conduct select testing on larger suppliers, some of which may tend to increase prices each year. A Doeren Mayhew client was assured a discount for each purchase under a three-year contract with a major automobile parts supplier. Our vendor audit specialists found that thirdyear prices were significantly higher. Review contracts before renewing them and take note of percentage-of-fee increases. Overpayment to vendors is a very real risk that could impact your organization s bottom line and result in significant financial loss if not quickly detected and resolved. Text goes here. Frequently gain bids from other vendors to ensure you re receiving market prices. Regularly review vendor charges for expenses to ensure there are no duplicates, such as charged meals to hotels and meal receipts for the same day. Verify that audit clauses are written into vendor contracts and purchase orders, so that auditors may obtain and review any documents related to your contract and agreement. Should you need a vendor audit, this clause will ensure auditors can review all data necessary to provide an accurate report. Strong vendor relationships are essential to your business, and while they are trusted suppliers, miscommunication and missteps may sometimes occur. Vendor audits not only help improve supplier relationships, but help detect fraud and improve systems and controls both in your business as well as the vendor s. To assess whether you may need a vendor audit, contact Doeren Mayhew s audit professionals. Doeren Mayhew 3
How Personal Goodwill Can Boost Your Business Sale Proceeds If you re a business owner, you undoubtedly have created some personal goodwill in the business intangible assets that originated from your personal efforts. You may not realize that these same efforts that have helped build your business into what it is today can help you minimize taxes and increase your proceeds upon sale, without much negative impact on your buyer. Goodwill Definitions The International Glossary of Business Valuation Terms defines goodwill as that intangible asset arising as a result of name, reputation, customer loyalty, location, products and similar factors not separately identified. Sometimes goodwill is defined as the difference between a company s fair market value and its net tangible (asset) value. This broad definition may lump identifiable intangible assets together with goodwill. In fact, Financial Accounting Standards Board (FASB) Statement No. 142, Goodwill and Other Intangible Assets, lists the identifiable intangible assets that appraisers can value separately from goodwill. Goodwill can be further broken down into two types: 1. Business (or entity) goodwill is intangible value attributable to the business itself, including its established processes and location(s). Businesses retain this portion of goodwill even if owners retire, sell or otherwise part ways. 2. Personal (or professional) goodwill is tied to the efforts and reputation of owners. It generally cannot be transferred to a third party without significant time and effort. Some distinguishing features considered when analyzing goodwill include: Personal attributes of the owner(s). Companies that rely heavily on the reputation, skills and knowledge of owners possess personal goodwill. For example, state laws require partners in an accounting or law firm to possess the requisite education, training and professional designations. When used effectively under an asset transactional structure, allocating purchase price to personal goodwill can help you mitigate tax exposure and get a bigger piece of the pie. Marketing techniques. When categorizing goodwill, appraisers consider how the business attracts and retains customers. Businesses that typically generate leads via walk-ins and Yellow Page ads more likely possess business goodwill. When customer (and employee) loyalty is based on the efforts, contacts and referrals of individual owners, it suggests personal goodwill. Management structure. Business owners who are unwilling (or unable) to relinquish control may unwittingly create personal goodwill especially if they also possess specialized knowledge, experience and training. Centralized management structures make it harder for businesses to transition to new ownership without sellers ongoing involvement. Using Goodwill in Your Favor Tax implications are a major seller concern in any transaction, but especially in the case of a C corporation, which is taxed at both the corporate and personal levels. For such business sales, a (Continued on page 6) Doeren Mayhew 4
New Lease Proposal Includes Dual- Recognition Approach Companies dealing with leases will finally receive guidance on how the accounting for these leases will be implemented in the future, with the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) announcing a revised proposal of financial reporting standards for leases. In August 2010, FASB and IASB proposed several new accounting standards in line with the goal of converging U.S. and international accounting rules. The boards believe that U.S. generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) can be improved by developing one global standard on revenue recognition. U.S. GAAP comprises broad revenue recognition concepts and numerous requirements for particular industries or transactions, which can result in different treatment of economically similar transactions. FASB and IASB have called for nearly identical treatment in regards to the approach, measurement and presentation of expenses and cash flow as a result of lease activity. Lessees would recognize assets and liabilities for leases exceeding 12 months. The main difference in the proposal was the switch from a single approach to dual-approach accounting. Other changes include: Recognition of assets and liabilities for leases exceeding 12 months. Use of a straight-line lease expense method in income statements for leases that are only paid for the use of the asset. Most real estate properties fall into this category of recognition. Reporting of amortization of assets separately from interest on the lease liability during the time period when consumption is a significant portion of the asset. Additionally, this type of lease would be recognized as a non-financial asset measured at cost, less amortization. Typically, equipment and vehicle leases will need to follow this method. Lessors will need to account for equipment and vehicle leases that are categorized as offbalance-sheet for the lessees to provide more transparency related to the lessor s credit and A dual-recognition approach will help provide transparency for businesses with investors since leases will be recognized as liabilities on the balance sheet. Text goes here. asset risk. Most commonly, this is related to operating leases. Due to the varied nature of leases, it was difficult to develop one approach to financial reporting that applies to all of them, hence the dual approach. This approach will help provide transparency for businesses with investors since leases will be recognized as liabilities on the balance sheet with disclosures related to them. An effective date has not yet been set by the boards, but it is anticipated to go into effect in 2014. Comments are due by Sept. 13. For more information on the changes and how to prepare, contact Doeren Mayhew s Accounting, Audit and Assurance Group. Doeren Mayhew 5
305 West Big Beaver Road Troy, Michigan 48084 doeren.com 248.244.3000 PRESORT FIRST-CLASS MAIL U.S. POSTAGE PAID ROYAL OAK, MI PERMIT NO. 903 Doeren Mayhew is a leading group of CPAs and trusted advisors who go beyond traditional accounting to help mid-sized companies grow and prosper. Founded in 1932, we are today a top 100 firm recognized globally and applauded nationally among INSIDE Public Accounting s Best of the Best. Stay up to date on the issues and trends affecting your business on our VIEWpoint blog. doeren.com/blog This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted. Offices in Michigan, Texas, Florida. 2013 Doeren Mayhew. All rights reserved. (How Personal Goodwill Can Boost Your Business Sale Proceeds Continued from page 4) good deal of trade-off exists when weighing the transaction type what s favorable for the buyer is often not as optimal for the seller, and vice versa. Where personal goodwill comes into play is the asset sale. While this transaction type can position the buyer more favorably, it also allows the seller to allocate purchase price to personal goodwill to reduce tax rates and increase after-tax proceeds. Consider the example on the right. In closing, when used effectively under an asset transactional structure, allocating purchase price to personal goodwill can help to mitigate tax exposure on the sale and increase after-tax proceeds. The *Assumes material participation; 3.8% Medicare tax added otherwise buyer benefits from the step-up basis under an asset deal, while the seller increases his dollars a win-win for all parties. For assistance maximizing your business sale proceeds, contact our certified mergers and acquisitions advisors and licensed investment bankers. Securities offered through Decosimo Corporate Finance, member FINRA and SIPC. Doeren Mayhew 6