Risk Factors – The SEC states that disclosure is needed if cybersecurity and cyber incidents are among the most significant factors for investment risk. Companies should consider the frequency and severity of prior cyber incidents and the chance of and risk from future attacks. The SEC specifies disclosures should not be “boilerplate,” and instead detail the following:

• the nature of the business that could lead to cybersecurity risk;
• any outsourcing functions that have material cybersecurity risks and how they are addressed;
• the costs and consequences of an incident;
• the impact of an event or possible event; and
• relevant insurance.

Management’s Discussion and Analysis (MD&A) – The guidance states that the M&D should address cybersecurity risks and incidents if they’ve had or are likely to have a material effect on the organization’s “results of operations, liquidity, or financial condition or would cause reported financial information not to be necessarily indicative of future operating results or financial condition.”

Description of Business – If cyber incidents materially affect a company’s products and services, relationships with customer or suppliers, or competitive conditions, disclosure should be made on the impact the cyber incidents have on each of their reportable segments.

Legal Proceedings – Disclosure is needed if a material pending legal proceeding involves a cyber incident where the company or any of its subsidiaries is a party to the litigation.

Financial Statement Disclosures – Financial statements can be significantly impacted before, during and after a cyber incident, and disclosure should address accordingly. Setting up preventative measures can be costly. And a company may incur cost from damage control efforts that provide customers with incentives to maintain the business relationship. During and after a cyber incident, a company may have significant losses and diminished cash flows that can result in impairment of certain assets.

Disclosure Controls and Procedures – If it is possible for a cyber incident to disrupt an organization’s ability to record, process, summarize, and report information required to be reported in a company’s SEC filings, the company may determine that their disclosure controls and procedures are ineffective. This must be reported.

If you have any questions regarding these developments and what disclosure may be necessary for you organization, or any other matters relating to internal control reporting, please don’t hesitate to contact your local Cherry Bekaert & Holland advisor today.

Although Obama has suggested lowering the corporate rate, Congressional Republicans will likely insist that any reform of corporate tax rules be combined with reforms for individuals. But as reported by Bloomberg, an election-year political stalemate remains the most likely scenario given Obama’s desire to raise the tax rate paid by the nation’s highest earners.

“I don’t think anything is going to happen this session,” said Neal Weber, a tax partner in the Washington office of Cherry Bekaert & Holland LLP. “People are going to posture during the next 10 months through the election.”

One of the biggest obstacles to a corporate tax overhaul is how to pay for it. Obama might seek to raise revenue for lowering the corporate rate by reviving calls to end tax breaks for oil and gas companies or corporate jets. Republicans have blocked such moves in Congress.

Any effort to revise corporate tax laws stands to divide the business community as well. Retail companies, whose assets are mostly inside the U.S., are more focused on lowering the corporate rate. Multinational companies with headquarters in the U.S. are interested in shifting to a territorial tax system, in which only domestically generated income would be taxed.

Obama’s desire to require a 30-percent effective tax rate for those individuals within annual income above $1 million could be proposed in a number of different ways, including limiting deductions, increasing the investment income tax rate, or revising the alternative minimum tax (AMT):

Taxes on capital gains could rise to as much as 25 percent for high earners next year once a new tax included in the 2010 health-care law and a provision that limits itemized deductions take effect, according to Donald Marron, director of the Tax Policy Center, a nonpartisan research group in Washington…. “There’s no way to get there unless you increase the rate on the lower-tax income,” he said. Another alternative for raising taxes for high earners…would be to prevent the deductibility of charitable giving for this group. While the Obama administration has proposed eliminating deductions for housing, health care, retirement and child care for the highest earners, it has spared charitable giving….

Another path could include revisions to the alternative minimum tax, or AMT, which is designed to prevent people from avoiding taxes legally. The parallel tax system doesn’t eliminate the preference for investment income, which is something Congress could change if lawmakers determined that was necessary, said Neal Weber, a tax partner in the Washington office of Cherry Bekaert & Holland LLP.

“In today’s tax law, capital gains are taxed at 15 percent for both regular tax purposes and for AMT tax purposes,” he said. “Perhaps under a new AMT tax regime, you would not use a 15 percent rate. You would use a different rate.”

Click here and here for more coverage.

• 55.5 cents per mile for business miles driven
• 23 cents per mile driven for medical or moving expenses
• 14 cents per mile driven in service to charitable organizations

Rates for business miles driven remain unchanged from the July 1, 2011 adjustment while rates for medical and moving purposes are reduced by 0.5 cents per mile.

Taxpayers may not use standard mileage rates after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS), or after claiming a Section 179 deduction for that vehicle. These and other restrictions are outlined in Rev. Proc. 2010-51.

Standard mileage rates for business, medical and moving purposes are based on an annual study of the fixed and variable costs of operating an automobile. Independent contractor Runzheimer International conducted the study.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using these rates. Notice 2012-01 contains the standard rates, guidelines for calculating reductions, and maximum rates under fixed and variable rate plans.

Who Does What

User organization – The entity that has engaged a service organization to perform various services for them. For example a company’s employee benefit plan record keeping.

Service organization – The entity that provides services to a user organization. Staying with the benefit plan example, a bank trustee, insurance company or benefits administrator, among others.

User organization auditor – The auditor (i.e., CPA firm) that conducts the financial statement audit on the user organization.

Service organization auditor – The auditor (i.e., CPA firm) that conducts the controls audit at the service organization.

The Act also expands the Work Opportunity Tax Credit (“WOTC”) by creating the Returning Heroes Tax Credit and the Wounded Warriors Tax Credit to encourage employers to hire unemployed and disabled veterans.

Withholding Relief

Originally established by the Tax Increase Prevention and Reconciliation Act of 2005, the effective date of the three percent withholding requirement was postponed twice, most recently scheduled to take effect in 2013. It was intended to help close the “tax gap” created by government contractors and vendors that fail to pay all of the taxes they owe.

However, the provision ignited a firestorm of complaints that tax-compliant companies would be unfairly penalized by cutting their much-needed cash flow. Also, some federal agencies estimated that the cost to implement the requirement would outweigh any potential improvements in tax compliance.

Lawmakers voted with near unilateral support to repeal the provision. This change will benefit government contractors in all sectors, including construction contractors, equipment providers and healthcare institutions.

Employer Tax Credits

The Act expands the WOTC to provide employers with a tax credit equal to 40 percent of a portion of qualified first-year wages paid to new hires from certain veteran groups.

In addition to extending the WOTC for qualified veterans through December 31, 2012, the Act expands the WOTC to allow a credit for hiring unemployed veterans and certain disabled veterans with service-connected disabilities. The Act:

• Doubles the maximum credit, to $9,600, for disabled veterans who have been unemployed for six months or more in the preceding year;
• Adds a credit of up to $5,600 for hiring nondisabled veterans who have been unemployed for six months or more in the preceding year; and
• Adds a credit of up to $2,400 for hiring nondisabled veterans who have been unemployed for four weeks or more, but less than six months, in the preceding year.

In addition to providing tax incentives for hiring veterans, the new law creates or expands several programs that provide training, rehabilitation and other vocational benefits for veterans.

The WOTC is still scheduled to expire on December 31, 2011 for other targeted groups.

Inquire Before You Hire

Please note that employers looking to take advantage of these new credits will need to take several steps before extending a job offer. These steps include checking a prospective employee’s eligibility and completing certain forms. Employers will also need to apply with their state workforce agency for a certification of eligibility within 28 days of the employee’s start date.

If you have any questions about the effect of the repealed withholding or how to claim the Work Opportunity Tax Credit, please contact your local CB&H tax professional. 

In particular, companies operating in a number of industries may benefit from a Repair and Maintenance Study. These will include many in the banking, retail, hospitality, manufacturing, pharmaceutical, warehouse, auto retailers, distribution and utility industries who regularly refurbish or freshen their stores or facilities. These rules will benefit virtually all capital-intensive companies that invest significant dollars on recurring and incidental repairs and maintenance expenses, and capitalized rather than depreciated such costs.

By taking a current deduction of previously capitalized repair and maintenance costs, taxpayers can accelerate deductions that otherwise might not have been available for years. This could lower a company’s tax liability for the current year and possibly generate net operating losses that can be used to obtain a refund of taxes paid in prior years.

How Does It Work?

The purpose of a 263(a) study is to analyze the taxpayer’s business operations, determine appropriate “Units of Property” for purposes of capitalization and depreciation, and identify routine repair and maintenance expenditures that may have been capitalized and depreciated incorrectly instead. A thorough analysis of the taxpayer’s expenses for repairs and maintenance for current and prior years could result in a reduction in the taxpayer’s tax liability, generating tax refunds and thus improve cash flow. Where a taxpayer has been capitalizing the cost of assets that could be expensed as repairs and maintenance costs, a catch-up deduction in the current year can be achieved by filing Form 3115.

What Qualifies as Deductible Repair Costs?

Some examples of repair items we frequently see that may be deductible include the following:

• Remodeling/refurbishing a store concept
• Replacing windows and doors
• Replacing lighting
• Roof repairs
• Wallpapering
• New floor coverings
• Caulking cracks or seams
• Lining basement walls and floors
• Replacing sidewalks and parking lots
• Repairing plaster walls or ceilings

Deductible repairs may also include “incidental repairs” that help to maintain a property’s efficient operating condition but do not necessarily prolong its life, add material value or adapt the property for new or different use. These are not considered as capital expenditures and may also be reclassified to accelerate deductions in the current year.

Final IRS Guidance Expected Soon

Proposed regulations were issued in August of 2006 that define a unit of property as “improved” if the costs paid materially increased the value of the unit of property or restored the unit of property. The 2006 regulations were criticized for not drawing enough of a bright-line test. In March 2008, the Treasury Department and the IRS re-issued Proposed Regulation 1.263(a)-3.

In general, these proposed regulations were intended to reduce controversy and provide clarity on how to determine whether an amount paid must be capitalized under Section 263(a) as an improvement cost. These proposed regulations are expected to be finalized, with revisions, later this month.

Your CB&H tax advisor can help you determine if you would benefit from a Repair and Maintenance Study. Please call us today as it would be our pleasure to help you with this determination.

FOR MORE INFORMATION ABOUT REPAIR AND MAINTENANCE STUDIES, CONTACT:

Ronald G. Wainwright, Jr., CPA | bio
Partner
919.719.4221
rwainwright@cbh.com

Prior to the Jobs Act, a taxpayer could claim a deduction for cell phone expenses only if required substantiation tests were met. These included maintaining books and records of all business use of the cell phone. No deduction was allowed for this listed property unless the taxpayer could substantiate each expenditure or use with adequate records or sufficient evidence.

Fortunately, cell phones no longer fall under the “listed property” category. Pursuant to the Jobs Act, the IRS has issued guidance to clarify the tax treatment of employer-provided cell phones. Notice 2011-72 provides that in the case of an employee’s use of an employer-provided cell phone for reasons related to the employer’s trade or business, the IRS will treat such use as a working condition fringe benefit, the value of which is excludable from the employee’s income.

The cell phone must be issued primarily for non-compensatory business reasons, such as the employer’s need to contact the employee at all times for work-related emergencies, or the employer’s requirement that the employee be available to speak with clients at times when the employee is away from the office or outside the employee’s normal work schedule.

If this standard is met, then any personal use of the employer-provided cell phone will be treated as a de minimis fringe benefit, excludable from the employee’s gross income. The IRS will not require recordkeeping of business use in order to receive this tax-free treatment. Cell phones provided for employee morale, recruiting, or additional compensation are not considered to be provided for qualifying business purposes. Therefore, cell phones provided for such purposes would not be exempt from the burdensome recordkeeping requirements and would not be considered tax-free.

Companies that do not provide their employees cell phones, but instead reimburse for cell phone use, are subject to similar requirements. The IRS recently released a Field Exam Memorandum to its examiners that outlines an administrative approach with respect to arrangements providing cash allowances and reimbursements for work-related use of personally owned cell phones.

In such cases, the employee must maintain the type of cell phone coverage that is reasonably related to the needs of the employer’s business, and the reimbursement must be reasonably calculated so as not to exceed the employee’s actual cell phone expenses. Additionally, the reimbursement must not be a substitute for a portion of the employee’s regular wages.

Under the recently issued guidance, tax-free treatment is available without burdensome recordkeeping requirements for employer-provided cell phones or reimbursement for business use of personally owned cell phones. Keep in mind that this provision only applies to cell phone use and reimbursement that is primarily provided for non-compensatory business reasons.

Whether a worker is performing services as an employee or as an independent contractor depends upon three factors, all related to the degree of control and independence:

1. Behavioral. Does the employer control, or have the right to control, what the worker does and how the worker does his or her job?
2. Financial. Does the employer control the business aspects of the worker’s job? For example, is the worker paid a salary? Does the employer reimburse the worker’s expenses? Does the employer provide the tools or supplies to do the job?
3. Type of relationship. Does the worker receive employee-type benefits? Will the relationship continue after the work is finished? Is the work a key aspect of the employer’s business?

An employer reclassifying workers would pay 10% of the past payroll tax obligations calculated under the reduced rates of IRC Section 3509. Effectively, the employer’s payment would equal just over 1% of the wages paid to the reclassified workers. For example, an employer that paid $500,000 in 2010 to workers, all of whom were compensated at or below the $106,800 Social Security limit, would have a payroll tax liability of $53,400 as determined under the IRS calculation. When reclassifying those workers under VCSP, the employer’s liability is reduced to 10%, or $5,340.

In addition to enjoying significant tax savings, the employer will not be liable for any interest or penalties and will not be subject to an employment tax audit on the classification of workers in prior years.

To participate in VCSP, the employer must have consistently treated the workers as nonemployees and have filed Forms 1099 for the workers in the previous three years. The employer also cannot currently be under audit by the IRS concerning the classification of workers. The employer’s application must be filed at least 60 days from the date the employer wants to begin treating its workers as employees. Employers who want to begin treating a class or classes or workers as employees for the 4th quarter of 2011 should apply as soon as possible.

Your CBH tax adviser can help you determine worker classification and eligibility for the VSCP. Please call us today as it would be our pleasure to help you with this determination.

• Maximum donation amount for Individuals: $1,000
• Maximum donation amount for joint filers: $2,500
• Maximum donation amount for married filing separate taxpayers: $1,250
• Maximum donation amount for C corporations: 75% of Georgia Tax Liability
  

Who is eligible?
Any Georgia taxpayer

What happens if my donation exceeds my Georgia tax liability?
The tax credit is a “non-refundable” credit. What that means is that you cannot receive a refund for any more than your Georgia tax liability. Any excess credit beyond your tax liability can be carried forward for up to 5 years.

Is this donation a charitable deduction on my federal return in addition to the Georgia credit?
Yes, you are eligible to receive a federal charitable deduction for the amount of your contribution. The law does require that you increase your state income by the amount of your charitable deduction on your federal return (donation amount).

DEADLINE
Submit participation forms as soon as possible to ensure your donation is processed before the program cap is met. The state has placed a yearly cap on the amount of credit available at $50 million. That means that every school, taxpayer, and corporation in Georgia is drawing from the same exact pool of credits. Once these funds are exhausted, you will have to wait until next year to participate in the program. As we near closer to the end of the year, it will become more and more difficult to secure approvals from the DOR in time to make your contribution and receive your tax credit.

HOW TO PARTICIPATE
Contact your local CB&H tax professional today, or consult with the independent school of your choice regarding how to claim the credit.

Even if you have already filed your 2010 tax return, you are allowed to recharacterize (any portion) of a 2010 conversion back from a Roth to a Traditional IRA within six months (October 17, 2011) of the original filing deadline (April 18, 2011).

This is one of the few situations where you are able to use 20/20 hindsight and undo something that didn’t work out as advantageously as originally planned. If the value of a Roth IRA is now significantly below the value on the date it was converted in 2010, undoing the conversion will avoid taxes being paid on the higher value at the time of the original conversion.

The original Roth IRA conversion will be treated as though it had not occurred, and any recharacterized contribution will be treated as having been originally contributed to the Traditional IRA. Also, any loss that occurred in the Roth IRA will be treated as having occurred in the Traditional IRA. This will allow you to take advantage of the lower value (and pay less taxes) by reconverting back to a Roth IRA in 2011, as long as the reconversion is done by the later of the following:

• the beginning of the tax year following the year of the original Roth conversion, or
• the end of the 30-day period beginning on the day the original conversion was recharacterized (i.e., the day the Roth IRA was converted back to a traditional IRA).

The panel recommended that the FAF establish a separate, private company standards board to develop appropriate changes to U.S. Generally Accepted Accounting Principles (GAAP) that would “better respond to the needs of the private company sector.” The new board would work closely with FASB, and its standards would be incorporated into FASB’s Accounting Standards Codification (ASC).

However, the board would have final authority over all exceptions and modifications. The panel also recommended the creation of a “differential framework” to guide the new board’s standard-setting activities.

Public GAAP applied to private companies

In the United States, public and private companies, for the most part, are subject to the same set of accounting standards — GAAP. Public companies are required under SEC rules to prepare audited, GAAP-compliant financial statements. Generally, private companies are not legally obligated to follow GAAP, but they may need to do so to satisfy lenders, sureties, venture capitalists or other stakeholders.

Preparing GAAP financial statements can be a challenge for private companies, particularly in the current environment. During the last several years, FASB has been shifting toward a fair-value-based accounting approach. In other words, GAAP increasingly requires companies to report assets and liabilities at fair value rather than historical cost. This trend is increasing the complexity and cost of complying with GAAP, which now demands periodic valuations and impairment testing for many financial statement items.

This type of information is valuable to public company investors, but lenders and other users of private company financial statements tend to be less interested in fair value and more interested in free cash flow and a company’s ability to pay its debts. In some cases, GAAP can make it more difficult for these users to get the information they need.

Consider, for example, employee stock options. Historically, these options were reported at their “intrinsic value” — that is, the amount (usually zero) by which the underlying stock’s market value on the grant date exceeded the option exercise price. Several years ago, however, FASB modified its standards to require companies to expense employee stock options based on their grant-date fair value, using one of several option-pricing models.

Valuing options can be complex — especially for private companies with limited trading data. Plus, many lenders view stock options as a noncash expense that has little effect on a company’s ability to pay its debts. From their perspective, reporting options at grant-date fair value actually distorts the company’s income. For that reason, they add the expense back into net income when evaluating a company’s financial statements.

Differing viewpoints and broad changes

Proponents of separate private company accounting standards point to fair value reporting as well as other GAAP provisions that may be either irrelevant or counterproductive in a nonpublic setting. They include:

• Reporting of uncertain tax positions,
• Consolidation of variable interest entities, and
• Accounting for derivatives.

As a result, many private companies prepare non-GAAP financial statements — on a cash or income tax basis, for example — while others opt to receive “qualified” opinions from their auditors. Many lenders accept these financial statements or waive certain GAAP requirements because they recognize that compliance can be burdensome and that many GAAP standards lack relevance for private companies.

Some opponents argue that financial statements are either correct or they aren’t, and that separate standards will lead to inconsistency and lack of comparability. They advocate a single set of standards that can be modified, if appropriate, on a case-by-case basis by agreement between a company and its financial statement users. They also contend that, if GAAP standards are overly complex or burdensome, they should be simplified for all companies, both public and private.

The panel’s recommendations

The blue-ribbon panel considered several models for addressing the needs of private companies, including a standalone GAAP built from the ground up and several versions of International Financial Reporting Standards (IFRS), including IFRS for Small and Medium Entities.

The panel concluded that a new board with standard-setting power would be the most effective approach. In the panel’s view, FASB is too focused on public company financial reporting to address the needs of private companies.

In settling on U.S. GAAP with exceptions and modifications for private companies, the panel explained that a standalone set of standards could take a significant amount of time to create and could be significantly different from current U.S. GAAP. It also rejected the various IFRS options, noting that “U.S. private companies should not be leading the charge, en masse, to an IFRS-based set of standards before the SEC makes a decision on U.S. public companies . . .”

The panel noted that FASB’s Private Company Financial Reporting Committee (PCFRC) has submitted approximately 40 recommendation letters since it was formed in 2007. Although FASB has modified some standards, generally by changing effective dates or disclosure requirements for private companies, the panel concluded that many private company stakeholders view the PCFRC’s work as “not being wholly successful because the FASB has not also shown a willingness to consider carefully and approve, where appropriate, the possibility of measurement, recognition, or presentation differences.”

GAAP in the coming year

It’s not yet certain how the FAF will respond to the blue-ribbon panel’s recommendations. But there’s widespread support for the panel’s approach among accountants and finance executives, as reflected in the vast majority of nearly 2,000 letters the FAF has received. Keep in mind that the FAF’s decision and ultimate approach may be affected by the SEC’s decision, expected later this year, on whether to adopt IFRS for U.S. companies.

If you own a private company and have questions about how the blue-ribbon panel’s proposed recommendations might affect how you prepare your financial statements, please give us a call. We would be happy to answer any questions you may have.

Current guidance requires an entity to test goodwill for impairment on an annual basis at a minimum. Testing requires the entity to compare the fair value of a reporting unit with its carrying amount, which is more commonly known as Step One. If the fair value of a reporting unit is less than its carrying amount, then the second step involves measuring the amount of the potential impairment loss.

Under the new guidance, you have the option to first assess qualitative factors that could result in avoiding even the Step One test. Only after assessing the entirety of events or circumstances that may indicate potential impairment would an entity determine whether impairment is more likely than not and proceed to perform the Step One test.

Examples of qualitative events and circumstances to be evaluated in determining whether goodwill impairment exists are similar to those used to identify impairments in your definite lived intangible assets (macroeconomic conditions, industry and market considerations, cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings, and other relevant entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation, etc.). The FASB exposure draft describes these examples and others in further detail.

This change applies to all entities, both public and nonpublic, and aims to reduce the complexity and cost for entities that can make qualitative evaluations of its reporting units. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, however, early adoption is permitted. The FASB is expected to publish final Accounting Standards Updates in September. Click here for the most recent FASB Exposure Draft or contact a CBH professional for further information.

Due to Hurricane Irene, the deadline has been extended to September 9, 2011.

Like the 15,000 offshore account owners who came forward under the first program, those seeking leniency won’t get IRS approval if federal investigators have already started probing the applicants’ accounts. Like the earlier program, those approved won’t face criminal prosecution.

2010-2011 proved to be a tumultuous year for taxpayers especially in the area of 1099 reporting requirements. Although the passing of the Comprehensive 1099 Taxpayer Protection and Replacement of Exchange Subsidy Overpayments Act of 2011 nullified some of the thorniest issues, companies, small businesses, and individuals need to understand the new 1099 requirements left over to stay ahead of the penalty curve.

Join us as we discuss:

• Update on all things 1099 for 2011 and beyond
• Impact of the repealed 1099-MISC reporting requirements expansion on Small Businesses and Landlords
• Small Business Paperwork Mandate Elimination Act of 2011
• Comprehensive 1099 Taxpayer Protection and Replacement of Exchange Subsidy Overpayments Act of 2011
• And other up-to-the-minute regulatory updates

This webcast will be presented by The Knowledge Group as part of The Knowledge Congress Live Webcast Series.

Click here for more details or to register.

However, the Act does outline expedited procedures for implementing another $1.5 trillion in deficit reductions, coupled with an additional increase in the debt ceiling of between $1.2 trillion and $1.5 trillion. To accomplish these future reductions, the Act created a bipartisan joint select committee on deficit reduction.

The committee, which will consist of six senators and six representatives with an equal number of Democrats and Republicans from each chamber, must make its recommendations (which require seven or more votes) and submit proposed legislation by December 2, 2011. Congress will then be required to vote on the bill, without the ability to make changes and pursuant to expedited procedures, by December 23, 2011.

Depending on the joint committee’s level of success, these additional savings will be coupled with an additional increase in the debt ceiling ranging from $1.2 trillion to $1.5 trillion (also subject to congressional disapproval by veto-proof resolution), which is expected to last until 2013. If the committee recommends, and Congress approves, between $1.2 trillion and $1.5 trillion in savings, the debt ceiling will increase on a dollar-for-dollar basis. So, for example, $1.3 trillion in savings would increase the debt ceiling by $1.3 trillion.

Failure to achieve at least $1.2 trillion in savings will trigger automatic spending cuts, beginning in 2013, coupled with a $1.2 trillion debt-ceiling increase. “Failure” under the Act translates to one of three things:

• The committee fails to produce a bill,
• Congress doesn’t pass the committee’s bill, or
• the legislation produces less than $1.2 trillion in savings.

If automatic spending cuts are triggered, half will come from defense spending and half from domestic programs. Certain benefits are exempt from cuts, including Social Security and Medicaid. But Medicare spending (on the provider side) is subject to cuts. The amount of automatic cuts is equal to the difference between $1.2 trillion and any savings achieved by the joint committee. The automatic cuts are designed to provide the joint committee and Congress with a powerful incentive to make a deal.

Alternatively, Congress can avoid automatic cuts by passing a balanced budget amendment and submitting it to the states for ratification. But a constitutional amendment requires a two-thirds majority in both the House and the Senate, a threshold that’s not likely to be met.

The Budget Control Act relieves some of the pressure the debt ceiling placed on the U.S. economy. At the same time, it creates a great deal of uncertainty over how lawmakers will satisfy their deficit reduction mandate. Once the joint committee makes its recommendations later this year, we’ll have a better understanding of how the law may affect your financial and tax planning strategies in 2012 and beyond.

While there are uncertainties as to what specific tax laws will be addressed and possibly recommended for change by the committee, it is clear that tax reform will be a part of the long-term deficit solution.

CB&H will continue to monitor the debates in Washington and the joint committee’s proposals and how they will impact you and your business.

• 55.5 cents per mile for business miles driven
• 23.5 cents per mile as part of moving and medical expenses
• 14 cents per mile driven in service of charitable organizations

Both the business and moving rates are up relative to last year from 51 and 19 cents, respectively. Taxpayers can use the actual cost of using the vehicle rather than the standard mileage rate. However, once actual costs are used, use of the standard mileage rate is not permitted. The standard mileage rate is also not applicable to any vehicle for hire or for more than four vehicles used simultaneously.

If you have any questions regarding deductions available to you in connection with operating a vehicle, please contact your local tax professional.

Business North Carolina and Cherry Bekaert & Holland, L.L.P. (CB&H) are please to announce the “NC Mid-Market FAST 40“, a program to honor those middle-market companies headquartered in North Carolina that have had the greatest growth in revenue and employees over the last three years.

Often overlooked as not among the largest corporations nor the smallest enterprises, mid-market businesses provide the backbone for sustained growth in North Carolina. Finally, there is a program to honor their achievement and contribution to economic growth in the state.

Top honorees will be featured in the December issue of Business North Carolina and designated as a “North Carolina Mid-Market FAST 40″ company.

“We are very excited to recognize and reward those companies in North Carolina that are catalysts for growth,” said Scott Duda, Partner with CB&H. “Mid-market businesses are crucial to the nation’s ongoing economic recovery and the future of our state.”

Eligible businesses must:

• be headquartered in North Carolina,
• be either a commercial enterprise or nonprofit,
• be either privately owned or publicly traded,
• have annual revenues in the $15 million $500 million range, and
• demonstrate sustained growth in revenues and employment over the past three years.

To nominate a company online, visit www.cbh.com/NC40. There is no fee associated with nominating a company or receiving this recognition.

A selection committee will evaluate all interested applicants and contact the finalists to schedule brief appointments to validate the submitted information and interview an executive for the related article. The deadline to nominate a company is July 8, 2011 and all applications are due in by July 29, 2011. Winners will be by selected September 1, 2011.

Under the final regulations, the new withholding requirements will apply to payments made after December 31, 2012. For existing contracts that are not materially modified, the new withholding requirements will not apply until payments made after December 31, 2013.

Background

In order to pay for the extension of a number of popular tax breaks (such as favorably taxed capital gains and dividends) that were due to expire either at the end of 2005 or shortly thereafter, the Tax Increase Prevention Act of 2005 (enacted in 2006) included a number of revenue-raising provisions. These provisions included a requirement for withholding on certain payments made by the U.S. government and each state, political subdivision thereof, and every instrumentality of the foregoing (including multistate agencies) to persons providing property or services. The rate of withholding is 3% on all covered payments regardless of whether the payments are for property or services.

Exceptions

When the new withholding requirements take effect, they will be subject to a number of exceptions. Withholding under the new rules will not apply to any payment:

• that is subject to withholding on payments made to nonresident aliens and foreign corporations, to withholding on income tax at source on wages, or to backup withholding on dividends, interest, and other reportable payments provided backup withholding payments are actually being withheld;
• that is less than $10,000 (subject to an anti-abuse rule);
• of interest;
• for real property (including purchasing or leasing, but not construction);
• to any governmental entity subject to the new withholding rules, any tax-exempt entity, or any foreign government;
• made under a classified or confidential contract with a federal executive agency;
• made by a political subdivision of a state (or any state instrumentality) that makes less than $100 million of these payments annually (Note: To simplify reporting for such political subdivisions, an optional rule under which a political subdivision of a state or an instrumentality can average the payments it made during any four of the five consecutive accounting years ending with the accounting year that ends with or within the second preceding calendar year can be used in determining its annual expenditures subject to withholding.);
• that is made in connection with a public assistance or public welfare program for which eligibility is determined by a needs or income test; or
• to any government employee not otherwise excludable with respect to his services as an employee.

Additional Considerations

If 80 percent of a pass-through entity is owned by government entities, payments made by that pass-through entity are subject to withholding. Payments by government entities made to pass-through entities are also subject to withholding unless at least 80 percent of the pass-through entity is owned by other government entities, tax-exempt organizations, or foreign or Indian tribal governments.

Once the withholding requirements are effective, information reporting will be required for payments subject to withholding. Each government entity will be required to furnish to the payee annually a written statement on Form 1099-MISC containing:

• the name, address, and taxpayer identification number of the person receiving the payment subject to withholding;
• the amount of the payment withheld upon;
• the amount of tax deducted and withheld;
• the name, address, and TIN of the government entity filing the form;
• a legend stating that such amount is being reported to the IRS; and
• other information required on Form 1099-MISC.

We Are Here to Help

The rules related to withholding on government contractors are extremely complex. If you are a government contractor and would like assistance determining whether these withholding requirements will apply to your business, please contact your CB&H advisor.

Core principle:

Recognize revenue to depict the transfer of goods or services in an amount that reflects the consideration expected to be received in exchange for those goods or services.

Steps to apply the core principle:

Step 1: Identify the Contract(s) with the Customer

Definition of a Contract: An agreement whether written, oral, implied by the entity’s customary business practices between two or more parties that creates enforceable rights and obligations.

All of the following criteria need to be met for the existence of a contract:

• The agreement has commercial substance.
• Both parties have approved the contract and are committed to fulfilling it.
• Each party’s enforceable rights can be identified.
• The terms and manner of settlement can be identified.

The proposed guidance would generally be applied on an individual contract basis. However, in certain cases, contracts would need to be combined or separated. The principle used in determining whether to combine contracts is whether the prices in the contracts are interdependent. Indicators of interdependent pricing include:

The contracts were entered into at or near the same time and one or more of the following criteria are met:

• The contracts are negotiated as a package with a single commercial objective.
• The amount of consideration in one contract depends on the other contract.
• The goods and services in the contracts are interrelated in terms of design, technology, or function.

Conversely, an entity must separate a contract when certain goods or services are priced independently from other goods or services in the same contract. However, to be considered priced independently the following must be met:

• The entity must regularly sell identical or similar goods or services separately.
• The customer cannot receive a significant discount for buying the goods or services together.

The same combination and separation principles would apply if there was a modification to an existing contract. If the modification is determined to be priced independently then it would be accounted for separately. If the modification isn’t determined to be priced independently then it would be accounted for as part of the original contract with the resulting cumulative effect recognized as income or expense in the period of modification.

Step 2: Identify the Separate Performance Obligations

Definition of a Performance Obligation: An enforceable promise in a contract to transfer a good or service (explicitly stated or implied by the entities customary business practices) to a customer.

Each performance obligation in a contract must be identified and accounted for separately. Goods or services that have both a distinct function different than from other goods or services in the contract and whose pattern of transfer to the customer is different from the other goods or services in the contract should be accounted for as separate performance obligations. Goods or services would be considered to have distinct function if either of the following is met:

• The goods or services are regularly sold separately by either the entity or any entity in the market; or
• The customer can use the good or service either independently or with resources already available to the customer.

From a practical perspective, if the goods or services are transferred at the same time, it would be difficult to consider them separate performance obligations. Conversely, when trying to determine whether a good or service has a distinct function, the fact that the entity sells the good or service separately would likely be considered a “safe harbor” rule.

Step 3: Determine the Transaction Price

Definition of Transaction Price: The estimated total amount of consideration to which the entity will be entitled to under the contract.

Determining the transaction price requires several chronological considerations. First, management would need to determine what the likely considerations to be received are.

An entity would start with the fixed cash considerations (if any) and adjust this amount for estimated variable considerations. In determining what the variable considerations are, an entity would use the more predictive of the following approaches:

• Probability-weighted amount (used if there is a large pool of homogeneous transactions with a various number of possible outcomes); or
• Most likely amount (used if there are binary outcomes).

This represents a significant change from current U.S. GAAP in which contingent fees are generally not recognized as revenue prior to the resolution of the contingency. However, with this being said, the contingent amount must be reasonably assured. If not, then the revenue recognized would be constrained to those amounts fixed and reasonably assured until the outcome of the contingency can be determined.

Once the expected considerations received are determined, an entity would further adjust for the time value of money, noncash considerations, and considerations payable to the customer.

This also represents a significant change from current U.S. GAAP in that the transaction price of the contract would be increased up (not only down) for the time value of money if it is determined that there is a financing component to the contract. (e.g., if there is significant timing difference between the transfer of goods or services and payment). However, as a practical expedient, an entity would not be required to assess whether a contract has a financing component if the period between payment and transfer of the goods or services was one year or less.

In addition, under current U.S. GAAP, revenue must meet the collectability criteria. If consideration is not reasonably expected to be collected then no revenue should be recognized. However, under the proposed standard, the risk of not collecting would not affect the transaction price. However, the expected bad debts on the contract would be presented in the income statement as a separate line item adjacent to revenue.

Step 4: Allocate the Transaction Price to the Performance Obligations

Transaction price should be allocated based on the relative standalone selling prices in relation to one another at inception. The best evidence of the standalone selling price of a separate performance obligation is the observable price of similar goods or services sold by the entity when sold separately. If that information is not available, then the entity should estimate the standalone selling price using observable inputs, such as the cost of those goods and services plus a margin or prices of similar goods and services sold separately by competitors adjusted for the entity’s own cost structure and margins. The proposed guidance on allocation of the transaction price of separate performance obligations is consistent with most current guidance except for the industry specific guidance of ASC Topic 985 “Software.”

In general, any subsequent change in the transaction price would be allocated to all performance obligations including those already satisfied in proportion to the original allocation percentages. The amount of a subsequent change in transaction price allocated to a performance obligation already satisfied would be recognized in revenue during the period in which the change in transaction price occurred. However, a change in transaction price would be entirely allocated to one performance obligation if both of the following are met:

• The change in transaction price relates to a contingent payment term that relates to a specific performance obligation, and
• The amount allocated (both original and subsequent change) to that particular performance obligation is reasonable relative to all performance obligations and payment terms of the entire contract.

Step 5: Recognize Revenue When a Performance Obligation is Satisfied

A performance obligation is satisfied upon transfer of control. This occurs when the customer has the ability to direct the use of, and receive the benefit from, the good or service.

Indicators of Control of Goods

• Transfer of risks and rewards of ownership
• Unconditional obligation to pay
• Legal title
• Physical possession
• Custodial risk
• Could use as collateral

For services, control is transferred continuously as the services are provided. The method used to determine the pattern of revenue recognition of services should be the method that best depicts the transfer of control to the customer and must be consistently applied. The method may include input data (e.g. cost incurred or labor hours expended), output data (e.g. units produced or delivered), or simply the passage of time.

This represents a significant change for certain industries such as those with construction contracts. Whereas, under the current guidance of ASC Topic 605-35 “Construction-Type and Production-Type Contracts,” entities who currently use the percentage-of-completion method to recognize revenue over the performance period would be required to defer revenue until the contract is completed unless the customer controls the goods or services as they are manufactured or constructed.

The proposed guidance also includes provisions for how to account for return rights, product warranties, optional goods or services, nonrefundable upfront fees, licensing, onerous performance obligations, and contract costs. Furthermore, the proposal provides guidance for presentation and disclosure.

The Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 specifically repeals:

• the requirement for businesses, charities, and governmental entities to report payments to companies for merchandise purchased in the aggregate of $600 or more (originally effective for 2012),
• the requirement for rental property owners to report expense payments in the aggregate of $600 or more (originally effective for 2011), and
• the requirement for businesses, charities, governmental entities, and rental property owners to report payments for services and merchandise to corporations (other than attorneys and certain health care providers) in the aggregate of $600 or more (originally effective for 2012).

The repeals under the new law are retroactive, thus reinstating the status quo for Form 1099 reporting as established prior to enactment of the 2010 Patient Protection and Affordable Care Act and the 2010 Small Business Jobs Act.

In general, only businesses must report payments to service providers in the aggregate of $600 or more, and the current exception for not reporting payments made to corporations (except attorneys and certain healthcare providers) remains intact. Furthermore, rental property owners must report payments to service providers if their activities rise to the level of a trade or business.

Please contact your CB&H tax professional if you have any questions as to how this new law affects your tax situation.