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 AICPA’s new service organization reporting standard, Statement on Standards for Attestation Engagements (SSAE) No. 16, is now effective as of June 15, 2011. This new standard replaces the previous Statement on Auditing Standards (SAS) No. 70.
What is the SAS 70 Report?
It’s likely you have heard of it. In essence, the SAS 70 report was a report prepared “by auditors for auditors.” Its purpose was to assist a user organization auditor in completing the user organization’s financial statement audit. (See box at right for definition of names.)
However, this report has been used widely with audiences outside its intent. As such, there has been a need for reporting requirement changes, especially in regards to information technology. On June 15, 2011, these changes took place.
What has changed?
The key change has to do with a service organization auditor’s use of the SAS 70. They will no longer use the SAS 70 and are now required to follow SSAE No. 16 instead. User organization auditors must still follow the guidance of SAS 70 until the clarified SAS Audit Considerations relating to an Entity Using a Service Organization becomes effective.
What is SSAE 16?
SSAE No. 16 is a standard for “Reporting on Controls at a Service Organization.” It was developed as a way for the service organization to issue a report on subject matter (controls over employee benefit plan record keeping, for example).
Most important, however, the AICPA defined three report options when they issued SSAE 16:
- SOC1 Report – It essentially “Reports on Controls at a Service Organization Relevant to User Entities’ Internal Control over Financial Reporting.” In layman’s terms, it’s what the SAS 70 report was intended to be — financial reporting controls at a service organization used as auditor to auditor communication. The reports are limited to the management of the service organization, user entities and user auditors.
- SOC 2 Report – This addresses non-financial controls related to compliance and operations at a service organization. It covers one or more of the following: security, availability, processing, integrity, confidentiality and privacy. It’s used by management of the user organization and service organization, and customers, suppliers, business partners and others associated with the service organization.
- SOC 3 Report — This is intended for general use and can be distributed and promoted with the AICPA SOC 3 seal on the service organization’s website. It reports on non-financial controls related to compliance and operations at a service organization listed under the SOC 2 description.
As you can see, having new report options will certainly assist with non-financial reporting control objectives as well as technology-related controls. If you have any questions regarding these developments and what reports best fit your organization, or any other matters relating to internal control reporting, please don’t hesitate to contact your local Cherry, Bekaert & Holland advisor today.
On November 21, 2011, President Obama signed into law the Three Percent Withholding Repeal and Job Creation Act, or H.R. 674 (hereafter, “the Act”). This new legislation repeals a controversial law that would have required federal, state and local government entities with total annual expenditures of $100 million or more to withhold three percent of certain payments for goods and services to government contractors and vendors.
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.
Repair and maintenance expenses are currently tax deductible. Capital costs are not. Through a Repair and Maintenance Study (also known as a Sec. 263(a) Study), you may be able to achieve significant tax savings by reclassifying assets improperly treated as capital expenses.
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
Posted Under:
Tax
This post was written by admin on November 7, 2011
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