In 2009, the IRS issued temporary and final regulations that reinterpreted the established precedent for IRC 6501(e), Colony Inc. v. Commissioner, where the court had ruled on the language of the Code. The IRS regulation claimed that an overstatement of basis in property was an “omission” of gross income under the statute. The regulation would apply to any taxpayer whose statute of limitations remained open at the time the regulation was issued. The IRS then used this regulation as the basis for challenges to certain taxpayers. The Supreme Court rejected the 2009 IRS interpretation and reaffirmed its ruling in Colony.

In a recent exchange with AccountingWEB, Todd Welty, a partner in the Tax Litigation practice of SNR Denton in Dallas, reviewed the facts of United States v. Home Concrete and discussed its significance for the IRS and accountants. In 2007 through 2009, Welty, along with Senior Managing Associate Laura Gavioli, achieved rare taxpayer victories under the IRS’s six-year statute of limitations, including Grapevine Imports, Ltd. v. United States and MITA Partners v. Commissioner. These cases – like Home Concrete – test the boundaries of an agency’s authority to issue retroactive regulations, and the consequences have broad-reaching effects beyond tax law.

Q: What were the facts of the Home Concrete case? What was the government’s argument? What did the court conclude?

A: These cases began because the government alleged that the taxpayers had engaged in Son of Boss transactions, which the IRS has characterized as abusive tax shelters. Most taxpayers at issue disputed this characterization. Despite the IRS’s claim that failing to audit these taxpayers would result in massive losses of government revenue, the IRS had failed to open examinations against these taxpayers within the normal three-year window for examination and assessment under IRC 6501. According to a Treasury Inspector General report, the IRS “deliberately delayed” examining these taxpayers and allowed the three-year statutes to lapse, citing a need for further issue development.

The IRS instead sought to rely on a statutory exception under IRC 6501(e), which gives the IRS six years to pursue taxpayers who “omit” items of income exceeding 25 percent of the amount shown on the return. According to the IRS, since the taxpayers substantially underreported their taxable income due to the alleged Son of Boss transactions, the taxpayers met the statutory test, and the IRS argued it was entitled to three additional years to audit them.

Q: What was the problem with this view?

A: The IRS’s position was in direct conflict with the Supreme Court’s interpretation of the predecessor statute to IRC 6501(e) in Colony Inc. v. Commissioner, 357 U.S. 28 (1958). In that case, the Supreme Court had examined the exact same language relied on by the IRS and reviewed the legislative history of the statute. The court concluded that the statute was designed to give the IRS additional time to examine returns not just because the amount at issue was large. Rather, the statute gave the IRS this additional time only when the taxpayers’ reporting left the IRS at a “special disadvantage” in detecting errors. Thus, the focus was not on the size of the amount at issue, but on what the IRS could have known or should have known from looking at the return.

Consequently, the Supreme Court in the Colony case held that the term “omits” in the statute should have its plain meaning, that is, to “leave out” entirely. Since the taxpayer in the Colony case had adequately disclosed the disputed transaction and his tax position – even though that position disagreed with the IRS’s view – the IRS had no recourse in the extended statute of limitations. At the end of Colony, the court noted that the predecessor statute had been recently replaced with the current IRC 6501(e) and that the court’s result was “in harmony” with the current statute.

The present taxpayers further argued that Colony was directly on point because, like the taxpayer in Colony, all of the present taxpayers were alleged to have underreported their income due to an overstatement of their basis in property. In Colony, the property was a series of residential lots. In the present cases, the property usually was a short position in Treasury notes. Many of the taxpayers’ disclosures on their returns met or exceeded the disclosures that the taxpayer had made in Colony.

In 2009, after the IRS had lost numerous high-profile cases on this issue, the IRS issued temporary and final regulations that purported to reinterpret IRC 6501(e) in a manner that directly conflicted with the central holding of Colony. The regulations explicitly held that an overstatement of basis in property was an “omission” of gross income under the statute. This regulation purported to apply to any taxpayer whose statute of limitations remained open at the time the regulation was issued. In other words, the regulation was intended to apply to any pending cases that had not become final following an appeal, even if the IRS had already litigated and lost these cases. Essentially, the regulation was meant to undo unfavorable judicial decisions that the IRS had received.

The Supreme Court decision in Home Concrete soundly refused to deviate from Colony. The regulation at issue was an act of overreaching on the government’s part. In particular, the majority noted that it would be difficult to distinguish between the predecessor statute and IRC 6501(e) because they use identical language, the term “omits.” Further, because the court in Colony found the language of IRC 6501(e) to be “unambiguous” on this issue, the court held that the IRS had no discretion to issue a regulation that contradicted a prior controlling interpretation from the court.

Q: On May 1, CCH published a list of cases: Supreme Court Docket: Cert Granted and Cases Remanded Due to Home Concrete. Does this mean that the cases are no longer before the court?

A: This means that the cases are no longer before the court and that the IRS has effectively lost all of the cases. The Supreme Court has reversed any cases where the government won in lower courts and has sent instructions to the lower courts to enter judgment for the taxpayers.

Q: How should accountants use this case in their practice?

A: This case has several important consequences for accountants. First, it is an important reminder that when the IRS intends to rely on an exception to the statute of limitations to audit your client beyond the normal three-year window, the IRS must have a sound argument for relying on that exception and must be able to back that up with solid proof. Accountants should seriously scrutinize any late-received audit notices and carefully consider whether to advise their clients to consent to extending any statutes of limitations in this situation.

Further, this case will have implications for the proper deference to give any Treasury Regulation or other administrative regulation. Under the court’s decision last year in Mayo Foundation v. United States, 562 U.S. (2011), Treasury Regulations are generally entitled to heightened deference. However, Home Concrete shows that not all regulations are created equal and not all are infallible. A regulation issued much later than its originating statute (here, more than fifty years later) may be subject to greater scrutiny. Also, a regulation motivated by an improper purpose (here, interfering with unfavorable judicial decisions) may also be subject to challenge.

Full Article: http://www.accountingweb.com/topic/tax/irs-cannot-extend-three-year-limitation-due-overstatement-basis

TIGTA’s audit was initiated to determine whether fraud is recognized and pursued in accordance with IRS procedures and guidelines during field audits of individual tax returns. They found that:

Of the 116 field audits closed between July 2009 and June 2010, twenty-six audits with fraud indicators were not recognized and investigated.

Each of the field audits involved unreported income and/or overstated expenses that resulted in the taxpayers agreeing they owed additional taxes of at least $10,000.

“Our review found that a combination of factors caused indicators of fraud to not always be recognized and properly investigated,” said Treasury Inspector General for Tax Administration J. Russell George. “Because of this, the IRS may be missing opportunities to further promote voluntary compliance and enhance revenue for the Department of the Treasury,” he added.

In its report, TIGA recommended that in order to assist examiners, the IRS should list in the Internal Revenue Manual (IRM) the following six categories of fraud indicators:

1. Income
2. Expenses or deductions
3. Books and records
4. Conduct of taxpayer
5. Methods of concealment
6. Income allocation

Each category, in turn, would contain specific examples of supporting behavior that range from:

1. Omitting income
2. Overstating expenses that are substantial
3. Failing to keep adequate records in an attempt to hinder the audit
4. Making false statements
5. Failing to disclose relevant facts to an accountant

TIGTA recommended that the Director, Exam Policy, Small Business/Self-Employed Division:

1. Enhance the job aid examiners are required to maintain in audit files related to documenting and investigating fraud indicators.
2. Provide specific examples in the IRM for examiners and first-line managers to use when considering whether to consult IRS technical advisors when field audits of returns suggest possible fraud.

IRS officials did not agree with the first recommendation. They indicated that the job aid (Fraud Development Lead Sheet) was significantly enhanced in March 2011. In addition, IRS officials did not agree with the second recommendation, but stated that they do plan to take alternative corrective action. IRS officials will issue a memorandum to all examination employees emphasizing the importance of involving the technical advisors in audits.

As part of the review, TIGTA evaluated the enhanced Fraud Development Lead Sheet and continues to believe further enhancements to it would be beneficial.

TIGTA considered the alternative corrective action IRS officials plan to take and concluded that it is responsive to the recommendation. However, TIGTA encourages IRS officials to go beyond merely reiterating existing procedures in their memorandum by providing additional instructions and guidance to clarify when the assistance of a technical advisor should be sought.

IRS officials agreed that TIGTA’s recommendations have the potential to increase revenue by some $19.7 million over a year ($98.5 million over five years) from approximately 1,872 field audits.

Full Article: http://www.accountingweb.com/topic/tax/tigta-irs-can-take-action-recognizeinvestigate-fraud-indicators

Here is what the survey revealed:

• 41 percent said they would cut back on eating out, making it the most popular money-saving action.
• 21 percent said they would cut off cable TV.
• 8 percent said they would end cell phone service.
• 8 percent said they would stop downloading songs and digital products.

The survey also found, however, that Americans are still amazingly frugal and farsighted when it comes to planning for their financial futures. Only a small number would take actions that could hurt their long-term financial well-being:

• 2 percent said they would stop contributions to retirement accounts.
• 1 percent said they would skip utility payments.
• 1 percent said they would put paying rent or mortgage payments.

“Financial success depends on setting clear goals and priorities and sticking with them in good times and bad,” said Jordan Amin, chair of the National CPA Financial Literacy Commission. “While it’s clear that Americans’ priorities are changing, these results suggest that in tight times, they won’t jeopardize tomorrow to deal with the financial challenges.”

Since 2007, the AICPA has conducted an annual survey of Americans to determine their top financial concerns and assess their financial well-being. In 2011, 29 percent of Americans said they were “worse off” than “better off,” compared to the prior year’s 16 percent. Today, 24 percent say they are better off, while 23 percent say they are worse off.

This year, 94 percent of survey participants said they have financial concerns of one sort or another. Interestingly, for the first time in three years, the price of gas – not retirement – is the top financial concern in America.

Addition survey findings include:

• 41 percent said basic living expenses, including the cost of gas, uninsured medical expenses, and lack of emergency savings, as their top financial concern.
• 27 percent said their main concerns are related to long-term goals, such as paying for education and saving for retirement.
• 53 percent reported they are in the same financial position as they were the prior year.
• 35 percent of those aged 18 to 44 say their financial situation has improved over the past year, compared with 13 percent of older adults.
• 31 percent of college graduates say they are better off today, compared with 22 percent of those who have not completed college.

The CPA profession has a comprehensive financial literacy program – 360 Degrees of Financial Literacy – to help Americans achieve long-term financial success. The website is the centerpiece of the program, with tools, calculators, and advice to help Americans understand and manage their financial needs during the ten life stages, from childhood to retirement.

The site is a rich resource for small and mid-sized CPA firms, giving them tools and information to help explain key issues, not only to their clients, but to members of their communities and the media. The AICPA regularly hears stories from CPAs who find that their clients go on to use Feed the Pig.org, to educate their children about financial issues.

Harris Interactive conducted the telephone survey on behalf of the AICPA within the United States between March 8 and March 11, 2012, reaching a nationally representative sample of 1,005 adults eighteen and older by landline and mobile phone.

Full Article: http://www.accountingweb.com/topic/cfo/aicpa-survey-reveals-americans-concerns-about-finances-and-saving

Now the intrigue begins. Many questions arise from this new legislation. What kind of impact will the JOBS Act have on small businesses, start-ups, and the economy in general? Will the JOBS Act open the door for new IPOs? Or will it provide more incentive for companies to stay private? What impact will the JOBS Act have on investors who rely on full disclosure when reviewing the filings of IPOs?

These open-ended questions have answers that vary depending on who you are asking – the opponents or proponents. Those in favor of the JOBS Act see it as an opportunity for growth; while those against it worry that loosened regulations may lead to investor fraud and abuse. Whether for or against the legislation, the JOBS Act will:

Create emerging growth companies. One provision of the JOBS Act essentially creates a new category of public companies. Businesses that have under $1 billion in annual revenue during its most recent fiscal year would qualify “emerging growth companies” (EGCs) and would not be required to comply with certain Securities and Exchange Commission (SEC) reporting regulations for up to five years; less than five years if the company reaches $1 billion in gross revenue, $700 million in public float, or issues more than $1 billion in non-convertible debt in the previous three years. Companies that complete or have completed an IPO after December 8, 2011, will be eligible to qualify as an EGC. Through this legislation, EGCs would be exempt for their first five years on the public market from the compliance burdens of Sarbanes-Oxley (SOX) Section 404(b), such as requiring an auditor’s attestation report on internal controls over financial reporting. The JOBS Act will also allow pre-IPO EGCs to confidentially submit a draft registration statement for SEC review. Other reporting requirements will be “phased in” over the initial five-year period. These relaxed regulations will allow smaller companies to go public sooner.

Allow equity-based “crowdfunding.” New businesses will be able to raise up to $1 million in equity capital from unaccredited investors. This provision facilitates the utilization of online trading portals, a mechanism used to solicit a large number of smaller investors. The Senate version of the JOBS Act created a number of restrictions aimed at protecting investors. Among those restrictions are limiting individual investments to (1) the greater of $2,000 or 5 percent of the investor’s annual income or net worth if either annual income or net worth is less than $100,000; and (2) 10 percent of the investor’s annual income or net worth, not to exceed $100,000, if annual income or net worth is greater than $100,000 and also requiring registration by intermediary platforms and issuers with the SEC. Federal law would preempt state regulations, meaning that issuers could raise funds from across the United States. The SEC will have 180 days after the bill’s enactment to publish rules for crowdfunding.

Remove prohibitions on general solicitation of Regulation D offerings. The JOBS Act allows for advertising of Regulation D 506 offerings, as long as advertisements are focused on accredited investors. Affluent individuals who provide capital for a business start-up, also known as “angels,” should especially note the McHenry Amendment, which clarifies that angel and incubator platforms that do not charge a fee connected to the purchase or sale of securities would be exempt from broker-dealer registration. This exemption from registration will be helpful for Internet platforms, such as AngelList or Gust and venture forums aimed at accredited investors, and also for some angel groups.

Increase the threshold for Regulation A “mini-public offerings.” Regulation A currently allows companies to go public and be exempted from SEC registration for offerings up to $5 million. The JOBS Act will increase the offering threshold for this little-used exemption to $50 million, perhaps making it a more useful option for angel-backed companies.

Raise the cap on private shareholders from 500 to 2,000. Many private companies are forced by regulations to file as a public company once they exceed 500 shareholders and $10 million in assets. The bill will increase the shareholder limit to 2,000 accredited investors or 500 unaccredited investors. The increased limit will give some flexibility to companies like Facebook in deciding whether to stay private or go public, and it could also benefit secondary market platforms that can offer a more robust market for the shares of private companies.

From the above analysis of the bill, it is clear how the JOBS Act will help small businesses, start-ups and entrepreneurs raise capital, but the question that remains is how will the bill create jobs? Here are a couple of thoughts: (1) the $1 billion ceiling on regulation will spur job growth since it will provide an incentive for companies to go public instead of selling, and (2) the cost savings for new IPOs will allow them to spend more money on growing their businesses and hiring personnel instead of regulatory compliance.

Despite the apparent benefits of the bill, the legislation still has its detractors. Critics fear that the JOBS Act will lead to massive fraud due to a lack of regulation and oversight. Investors will not see the “full picture” when making their investments. For example, the online coupon company, Groupon (that who went public in 2011 and had over $1 billion in revenue at the time), was faced with major SEC scrutiny over its accounting methods during its IPO. The company suffered a significant market capitalization reduction when going public due to reported questionable accounting methods and the loss of investor confidence. Had the JOBS Act been in effect prior to its IPO, Groupon could have gone public before it reached the $1 billion mark and not dealt with the intense scrutiny that resulted in its reduction in market capitalization. Conversely, the investing public would not have been aware of the apparent “red flags” had the reporting regulations been relaxed.

To address these concerns, the Senate attached an amendment to the bill, requiring the business to warn investors that there are risks when it comes to investments. The amended bill requires that a business “takes reasonable measures to reduce the risk of fraud with respect to such transactions” and gives the investor its company address and website, which must be kept up-to-date. The JOBs Act also requires the SEC to implement various actions on a tight time line from as little as 90 days after enactment of certain aspects of the law, while up to 270 days for other portions.

The President and Congress are hoping the JOBS Act will generate as much economic growth as it did bipartisan support. It originally passed the House by a vote of 390 to 23, and then passed the Senate 73 to 26. However, only time will tell.

Full Article: http://www.accountingweb.com/topic/accounting-auditing/jobs-act-economic-solution-or-investor-nightmare

The due date for filing 2011 federal income tax returns is April 17, 2012, but that deadline isn’t etched in stone. You can buy yourself more time by filing Form 4868, Application for Automatic Extension of Time to File US Individual Income Tax Return, by April 17. This provides an automatic extension for filing your return for six months until October 15, 2012 – with absolutely no questions asked by the IRS!

Of course, an extension to file is NOT an extension to pay the tax that’s due. You still have to pay estimated tax in a timely manner to avoid penalties and interest charges.

If you don’t pay the requisite amount of tax by the April 17 deadline, the IRS will impose a penalty of one-half percent each month on the amount of tax owed. And, if you fail to file a return by the October 15 extension date, the IRS will ramp up the penalty to 5 percent per month, up to a maximum of 25 percent.
Why would you need a filing extension? Typically, it’s used by taxpayers who simply couldn’t get their act together in time. But here are few other common reasons for seeking an extension:

1. You don’t have all the information you need for your return or it’s been lost or misplaced. For instance, delays may be caused if you haven’t received a K-1 stating income received in 2011 from a pass-through business entity.

“Frequently, an extension is needed because the business or partnership hasn’t completed its own return,” says Chris Hesse, a partner in CliftonLarsonAllen’s federal tax resource group in Minneapolis, Minnesota. “This has become common because pass-throughs are being used to avoid the double taxation issue. The client must make a payment based on a reasonable estimate.”

2. Circumstances dictate a delay. Even if you fully intended to file your tax return by April 17, sometimes life gets in the way. If there’s been an unexpected illness or death in the family, you might not able to file on time. Similarly, a natural disaster can cause interruptions, although the IRS usually offers relief to those in harm’s way.

3. You don’t have the cash on hand for a retirement plan contribution. If you’re self-employed, you might be using a Keogh plan or SEP to save for retirement. The annual contributions reduce your tax liability, but only if the deposits are made on time, notes Hesse. He says that filing for an extension effectively gives you an extra six months to come up with the money.

4. Obtaining an extension might reduce your tax liability. For example, if you converted a traditional IRA to a Roth in 2011, you must pay tax on the entire account balance at the time of conversion. But the value of the account may have declined since then. By recharacterizing your Roth back into a traditional IRA before you file your tax return, you can avoid an unnecessary tax “overpayment.”

5. You’re concerned about tax audits. There’s a school of thought that filing for an extension reduces your chances of being audited. Here’s why: Normally, IRS auditors examine a certain percentage of returns to randomly check for tax cheats. If you obtain an extension, you might sidestep this auditing procedure entirely, thereby reducing your overall exposure to an audit.

In any event, if you don’t pay the requisite amount of tax by the April 17 deadline, the IRS will impose a penalty of one-half percent each month on the amount of tax owed. And, if you fail to file a return by the October 15 extension date, the IRS will ramp up the penalty to 5 percent per month, up to a maximum of 25 percent.

As with your regular tax return, you can e-file your filing extension request or send it by snail mail. If you’re going to a US Post Office, we recommend using certified mail so you can prove to the IRS that you requested the extension on time.

How do you know how much you have to pay with the filing extension application? It’s not an exact science. Hesse says that his firm refers to figures in prior returns to help arrive at a reasonable amount. Contact your CPA immediately for guidance.

Full Article: http://www.accountingweb.com/topic/tax/five-good-reasons-obtain-filing-extension

The basic premise is that you can deduct unreimbursed casualty and theft losses in excess of 10 percent of adjusted gross income (AGI) after subtracting $100 per event. For simplicity, let’s use the example of a couple with an AGI of $100,000 in 2011. Suppose that a storm caused extensive damage to their house costing them $9,000 after insurance reimbursements. Also, the couple paid $2,000 out-of-pocket for repairs due to a car accident. Due to the limits, they can deduct $800 ? not that much, but better than nothing.

Under a unique tax rule, a loss in a federal disaster area this year can be deducted on the 2011 tax return you’re about to file for the client, instead of waiting to file the 2012 return next year. If you’ve already filed the 2011 return, file an amended return claiming the loss.

Note that damage caused by a taxpayer’s own negligence may be deductible as well as losses that occur, even though they could have been foreseen or prevented. Furthermore, losses aren’t necessarily limited to damages to the home. However, clients aren’t entitled to any tax relief for damage occurring over a long period of time, such as withered landscaping caused by a severe drought.

Theft losses are grouped with casualty losses for this purpose. Again, each event must be reduced by $100 before the 10-percent-of-AGI limit is applied.

Under a unique tax rule, a taxpayer may claim a loss suffered in a federal disaster area on the tax return for the year preceding the year in which the casualty actually occurred. This can provide some much-needed relief in a pinch. For example, suppose a client’s vacation home was destroyed in a wildfire in a federal disaster area earlier this year. The loss can be deducted on the 2011 tax return you’re about to file for the client instead of waiting to file the 2012 return next year. If you’ve already filed the 2011 return, file an amended return claiming the loss.

The tax law limits only apply to personal losses claimed by a taxpayer on Schedule A of an individual return. There is no AGI limit or $100-per-event reduction for losses to business property.

Full Article: http://www.accountingweb.com/topic/tax/tax-tip-how-do-you-spell-tax-relief-c-s-u-l-t-y-loss

Before any company can delve into strategic ways to save money, it must first set aside time to devote to money management. Even if a company is small, this step is crucial to a company’s success – no other advice is more important.

“You have to be focused enough to dedicate the necessary time weekly, if not more frequently,” said Robin Bell, CPA, member in Brown Smith Wallace (BSM) Tax Services group. “Bill frequently, collect often, and stay on top of billing and receivables. Pay attention to it.”

Set up a budget, then each month, compare the actual to the budget to see where improvements need to be made, suggests Patricia Schreiber, a New Orleans-based CPA.

And if you don’t have the time, delegate.

Look at what you need to have versus what you want to have when determining cash outflow, whether for your clients or your own firm. Once you have what you need, don’t pay more for it than is necessary to effectively operate your business.

“Segregation of duties: Learn it love it. Otherwise, stuff walks out the door,” says Chris Spivey, who has worked as a consultant to the accounting profession for several years.

If you’re an entrepreneur with tons of action items on your plate and collections isn’t your competency, refer it to someone else.

Bell’s longtime retail clients, who are used to bulk-buying seasonal products, have recently experienced difficulties managing their cash flow. Instead of stocking up on the “hot trends” for the season, Bell teaches its retail clients not to purchase more than they need. That way, they don’t have spend money to house products in a warehouse. However, when retail companies do this, they also must pay attention to what their customers might need in the near future. This ensures the retailers’ customers won’t have to wait too long if a product is out of stock.

According to Bell, some retail companies survey their clients to gauge what they’ll want to buy, or they beef up their marketing campaigns. This could put them at an advantage because most companies tend to trim their advertising and marketing dollars when times are tough. It’s not a matter of spending more, it’s just reallocating dollars to draw in more prospects, she said.

Do You Really Need That?

Look at what you need to have versus what you want to have when determining cash outflow, whether for your clients or your own firm, Bell said.

For example, look at telephone costs. If you’ve been using the same telephone provider for years, you might not think about changing vendors. But what about calling your provider to talk about your plan and whether it still makes sense given your current needs. You could also contact other providers to see what they offer.

Ask, “Do I have what I need, and am I paying for what I need versus paying more than what I need to operate my business,” Bell says.

Other potential areas to trim include:

Employee benefits. Can you save money without raising premiums if you have a group of employees who are healthy? “Especially in really small companies, it’s very easy to assess your pool and ask, ‘If I raise my deductible, how much can I save on my premium?’,” Bell said.

Mileage reimbursement. Encourage employees to travel less by visiting several clients on the same day who are based in the same area. Ask employees if they really need to fly nonstop or if they can fly on off hours or off days, Bell added.

While discussing money management is clearly a way to help your clients better manage their money, if they don’t ask you about it, how can you broach the subject?

BSW took a proactive approach by offering its clients a “health checkup,” which included a five-page questionnaire that asked some thought-provoking questions. It also provided BSW financial data that allowed the firm to see client trends and to learn what keeps business owners up at night, Bell said.

“Most clients were interested in seeing what we can do for them,” she said.

Clients want the help, so why not broach the subject?

Full Article: http://www.accountingweb.com/topic/accounting-auditing/money-management-possible-even-todays-economy

The Jumpstart Our Business Startups (JOBS) Act has been touted as the latest attempt to revive and stimulate the economy, with its key element focused on applying a concept called crowdfunding to small businesses. Crowdfunding is a term used to encourage donations of money to help artists and non-profit ventures. One element of this program has been that often those who donate get some token gift in return for their donation.

Taking crowdfunding to the small business arena, investors will be able to put money into small businesses in exchange for a share of equity without the company needing to jump through all of the hoops normally required by the Securities and Exchange Commission (SEC) of companies that want to issue shares of stock.

This is excellent news for investors who would like to take part in initial public offerings (IPOs) that would normally only be offered to certain qualified institutional investors and for small companies looking to grow capital without having the restrictions that were previously in place.

Here are the key elements of the JOBS Act:

Small privately-held companies with revenue under $1 billion (or $2 billion if the company provides potential investors with audited financial statements) will be able to sell up to $50 million in shares as part of a public offering without having to register with the SEC.

New public company start-ups with revenue up to $1 billion are excused from having an outside audit of internal controls for five years.

Small Companies will be able to have as many as 2,000 shareholders (previous limit was 500) or 500 unaccredited investors without registering with the SEC. According to the SEC, an accredited investor is an individual with a net worth of over $1 million not including primary residence, has earnings of at least $200,000 – or $300,000 for joint earners – for the past two years, or is a general partner, director, or executive officer of the company issuing the security.

A crowdfunding investor is limited to investing in all private companies that are governed by this Act the lessor of $10,000 or 10 percent of his income if the investor earns less than $100,000 a year.

Businesses will be able to use advertisements to solicit new investors.

You should be talking to your clients about these points:

Because SEC registration is no longer required for these small private companies, the standard disclosures to investors will not be required. Companies that want to take advantage of these new rules should consider what types of disclosures they expect to make that will encourage but not mislead potential investors.

Companies considering using crowdfunding techniques need to develop controls to prevent potential fraud and abuse. An accountant is well-suited to help the companies develop these controls.
Remind clients that assurances to potential investors should include descriptions of the controls that will guarantee the safety of investments.

Websites already exist that provide a platform for companies to make themselves available for crowdfunding investments. Sites such as Launcht, Crowdfunder, 40Billion, MicroVentures, and many more help businesses reach a wide audience. Accountants can help their clients choose the right site for their business and also monitor progress and performance.

Clients who are interesting in investing in small companies using crowdfunding techniques should be aware of potential fraud and abuse. Encourage them to learn as much as they can about the companies, their products, their history, and their leaders, before investing. Also work with your clients to explain how they should oversee the investments they make.

Full Article: http://www.accountingweb.com/topic/cfo/obama-expected-sign-jobs-act-whats-it-you

It’s not often you find “stress-free” and “tax” in the same sentence, especially during busy season, but for Noy, it’s a philosophy that carries through her Manhattan-based CPA firm.

Noy, who offers tax planning, budget advice, and bookkeeping services, works with a variety of different clients – from individuals and small businesses to start-ups and medium-sized companies. However, she said her sweet spot tends to be start-ups and companies in their second or third year of business – those moving toward a big growth stage.

According to Noy, many new businesses will experience a net loss in their first year – especially in the start-up phase – and she said that’s not necessarily a bad thing.

“If you have other income (such as W2), losses from your business can offset it, reducing your overall tax burden,” she said. “In other words, losses don’t have to be a total loss. However, they can impact your cash flow, your ability to grow your business, and attract investors and financing.”

She said many of her clients – especially those just starting a business – have to deal with correctly identifying whether they’ve hired an employee or a contractor. In the case of an employee, the business owner will be responsible for self-employment tax and keeping and filing additional documentation. Incorrectly identifying an employee’s status may expose the business owner to potential audits and penalties.

“My role in my clients’ business is to educate them,” Noy said. “Spending extra time, especially with new clients . . . educating them, helps them to succeed. I give my clients baby steps in tax, finance, and budgeting.”

It may only be a part, but for Noy, if her clients don’t understand the importance of tax in their business, they’re most likely not going to understand the importance of other financial matters.

“Especially with people who make a transition from working with a company and being self-employed, you feel like you’re floundering in the ocean. The income you earn isn’t always yours to keep, and you have to be responsible enough and realize that with the freedom of being a freelancer, you get a lot of responsibility.”

Noy recommends individuals just starting out to wait on incorporating and operate as a sole proprietor. She suggests saving the money on those start-up fees by purchasing insurance instead, and perhaps incorporating later on.

Many small business owners underestimate the responsibilities of running their business, and simply providing good service isn’t enough, Noy said.

“It’s very important to bill your clients, it’s very important to collect money from those clients and pay your bills on time. One thing leads to another. I find a lot of business owners will work extremely hard but will take a back seat to the financial part.”

And often, entrepreneurs and those just starting out will listen to advice from their friends and family rather than a professional, and they start making decisions, such as forming an LLC, without really having the information they need.

In January, Noy was a presenter at the Reboot Workshop in New York City, a networking event and “unconference” for freelancers and entrepreneurs. She said 90 percent of attendees’ questions were about incorporation and how entrepreneurs should move forward – “Should I incorporate, what type of incorporation should I be, when should I incorporate,” she recalled. “A lot of people incorporated but didn’t know what to do with it.”

Most new business owners are misinformed about write-offs as well. Noy said there are several that aren’t taken advantage of, including setting up a business retirement plan.

“Many clients don’t realize that they can put away as much as $49,000 for 2011 or $50,000 in 2012. Instead of looking for small deductions, business owners should start thinking big. By putting away money for retirement, they can save on taxes and provide for their future.”

Noy also added that many freelancers and entrepreneurs think health insurance is unapproachable and too expensive; therefore, they just put it to the side.

“There’s a way to offset a high deductible – put away pretax money into a Health Savings Account (HSA),” she said. “Tax savings are there. A little planning can go a long way.”

Cash flow management is vital to the successful operation of a small business. Noy says that once she walks her clients through their financial records, figures out how the money is flowing in and out, helps them value their business, and discusses how to price their services, the stress for the client goes away.

For many small business owners, especially freelancers, coming up with rates for services is often a trying and daunting process. Noy said she doesn’t figure out the rates for them, but she does walk them through their expenses and overhead to do some budgeting.

“A lot of people ask me what they should be charging. Of course, it really depends on what the industry expectations are, but it also depends on what their costs are,” she said.

If business owners’ costs are high due to their industry or overhead, then they may need to target corporate clients or more high net worth individuals. On the flip side, if business owners or entrepreneurs have low overhead and work out of a coffee shop on a laptop for the first two years, they can keep their pricing low and target a higher volume of clients – as many as they can service – and grow their business. They can raise their rates later.

The other piece, Noy points out, is knowing your market and pricing competitively. A business or entrepreneur charging too little, say $75 an hour for a service where everybody else is charging $125, could actually deter potential clients.

“I’m going to think something is wrong with your service because it’s too cheap,” she said. “I advise clients that you might want to offer $125, but offer a discount and say ‘I love your business, I really want to do work with you and I can give you a 20 percent discount.’”

Noy stresses that the most important thing for a small business owner or freelancer to remember is to learn how to budget and realize that money management is the key to their success.

“Without managing what’s coming into their business and what expenses have to be paid to come out of their business, it will be harder for them to grow.”

Full Article: http://www.accountingweb.com/topic/tax/making-taxes-less-taxing

The new process, which was set to go into effect next year, would have mandated that companies explain the differences between numbers on 1099-K forms and their internal records. This rule was termed an “onerous and unnecessary extra step” by the National Federation of Independent Business (NFIB).

The NFIB explained the situation this way: “Section 6050W of the Internal Revenue Code, added by Section 3091 of the Housing and Economic Recovery Act of 2008, requires information returns (Form 1099-K) to be made regarding annual gross receipts reimbursements to settle merchant card transactions. Recently, the IRS added a Line 1a-e on business tax returns requiring business taxpayers to reconcile their actual gross receipts with the aggregate gross receipts amounts from Form 1099-K.”

The IRS announced it would not go forward with Line1a-e on business tax returns. The NFIB had protested the rule, saying that a company’s internal record of gross receipts would “rarely match” the amount payments processors report on 1099-K forms. That figure on the forms could include cash refunds, sales tax, tips, and other fees that merchants would not consider part of gross receipts, CFO magazine reported.

The IRS said in its letter to the NFIB, “There will be no reconciliation required on the 2012 form, nor do we intend to require reconciliation in future years.” The reporting of gross receipts and sales on the 2012 income tax forms will be modeled on the 2010 income tax forms.

“The many complications in our country’s tax code often put the small business owner at a disadvantage with government compliance,” NFIB CEO Dan Danner said in a statement. “For this reason, NFIB fought so hard to have this provision eliminated and we count this as a small, but important, step in the direction of simplifying the tax code overall.” Small businesses spend more than $74 per hour on meeting their tax compliance obligations, the NFIB says.

Lewis Taub, tax director at McGladrey & Pullen LLP, told CFO magazine that business groups might want to change their record keeping. Payment processes must continue to submit 1099-K forms, and a difference between the numbers on the forms and the gross receipts on the merchant’s tax returns could trigger an audit.

Full Article: http://www.accountingweb.com/topic/tax/irs-ends-tax-rule-unpopular-small-businesses