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White House Signs 1099 Repeal Into Law
by Dennis V. King, CPA, Managing Partner
Listen carefully and you're sure to hear the collective sigh of relief expressed by business owners across the nation over the repeal of last year's expanded 1099 reporting provision, which President Obama signed into law on April 14, 2011. Prior to the president's signature, the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 was approved by the House on March 3, followed by the Senate in April.
The repeal bill was passed in response to two pieces of legislation enacted in 2010 that significantly expanded information-reporting requirements for businesses and for taxpayers who receive rental income. The expanded provisions, initially part of the Patient Protection and Affordable Care Act and The Small Business Jobs Act, were considered by many small business owners to be too burdensome. Without the repeal, businesses and rental property owners would have faced significant compliance burdens.
The Affordable Care Act would have required businesses to expand the 1099 reporting requirements to include all payments from businesses aggregating $600 or more made during 2011 and for payments made for property and to corporations beginning in 2012. The Small Business Jobs Act enacted a requirement for individuals who receive rental income to issue Form 1099 to service providers for payments of $600 or more in a calendar year to a single payee, inclusive of
corporations, and payments made for property starting with payments in 2012. Both of these provisions are repealed by the bill.
Since both of the 1099 reporting requirements were intended to raise revenue, offsetting measures aimed at subsidies that low- and middle-income people will receive to purchase health insurance under the new law will help pay for the repeal. Those subsidies are tax credits paid in advance and based on income reported in prior years.
Taxpayers who earn more than anticipated and receive a larger subsidy than entitled to, must return at least some of the overpayment to the government. The bill
increases the amount of excess subsidy that many taxpayers earning more than twice the federal poverty level would have to pay back. Those earning between four and five times the federal poverty level will be required to pay all of it back. If you would like further information on the repeal of the expanded 1099
information-reporting requirements, please contact your advisors at KKAJ at 818-848-5585.
College Savings Plans: Pros and Cons
By Robert N. Jensen, Jr., MAcc, CPA, Partner
With high school graduation season rapidly approaching, it may be a good time for parents to review their 529 college savings plans. As the economy continues to sing the blues and with many states now reviewing their treatment of 529 plans, parents may want to take a closer look at the advantages and disadvantages of these specialized accounts.
As background, a 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs, offering parents a way to save money for tuition in tax-deferred accounts. There are two basic types. The first type, the prepaid savings, generally allows parents who are state residents to pay money today to lock in prices at a state university later. Families usually pay some sort of a premium over the current tuition price to make up for the tuition inflation expected to occur. For individuals whose children do not attend a state college after all, there's usually a refund available. The second type is a savings plan, where you invest in a handful of mutual funds and other investments. As long as you use the money for higher education expenses, you don't have to pay taxes on capital gains.
College savings plans can be a great way to save for your child's college expenses. You can make monthly or annual contributions that add up and grow during the life of your child. Investment options often include stock mutual funds, bond mutual funds, and money market funds, as well as age-based portfolios that automatically shift toward more conservative investments as the beneficiary gets closer to college age. Withdrawals from college savings plans can generally be used at any college or university. If you would like to know whether a college savings plan is right for your situation, please contact your advisors at KKAJ at
818-848-5585.
The 529 plan, as with any investment, has advantages and disadvantages.
ADVANTAGES
· People of all income levels are eligible to contribute to a 529 plan.
· College savings plans are open to residents of any state.
· Plan contributions grow income tax free.
· Withdrawals that are used to pay the beneficiary's qualified education expenses are completely income tax free.
· Plan contributions qualify for the $13,000 ($26,000 for joint gift annual gift tax exclusion. A special election lets you contribute up to $65,000 ($130,000 for joint gifts) in a single year and avoid gift tax by treating the amount as a gift in equal installments over five years (no additional gifts can be made to the beneficiary during
the five-year period without incurring a potential gift tax).
· Plan contributions generally aren't considered part of your estate for federal tax purposes, yet you still retain control of the account during your lifetime as the account owner.
· You can change the beneficiary without penalty if certain conditions are met.
· You can contribute to a 529 plan and a Coverdell education savings account (ESA) in the same year for the same beneficiarywithout triggering a penalty.
· Once every 12 months you can roll over the beneficiary's 529 account to a different 529 plan for the same beneficiary without tax or penalty implications.
· Some 529 college savings plans let you change your investment portfolio once each calendar year and/or anytime you change
the beneficiary.
· A 529 account is treated as a parental asset for federal financial aid purposes (if parent is the account owner) and assessed at a rate of 5.6 percent (distributions aren't counted as parent or student income).
· A 529 account owned by someone other than the parent (like a grandparent) is not considered an asset for financial aid purposes.
DISADVANTAGES
· 529 plans charge various fees and expenses to cover investment expenses and the administration of your account.
· Withdrawals from a 529 plan that are not used for the beneficiary's qualified education expenses are taxed and penalized (the earnings portion of the withdrawal is subject to a 10 percent federal penalty and is taxed at the income tax rate of the person who receives the withdrawal).
· For college savings plans, your investment choices are limited to the pre-established investment portfolios offered by the plan; prepaid tuition plans give you no opportunity to choose you investments.
· You are generally limited to the prepaid tuition plan offered by your state of residence.
· Prepaid tuition plans are generally designed to pay the undergraduate tuition (but not room and board) costs at in-state public colleges, so the beneficiary won't get the maximum benefits under the plan if he or she attends a private or out-of-state college.
· Prepaid tuition plans generally require that all tuition credits be used before the beneficiary reaches age 30, and all withdrawals completed within 10 years of the time the beneficiary starts college.
· College savings plans don't guarantee your return and are subject to risk?you could lose some or all of the money you've contributed.
· College savings plans aren't legally required to let you change the investment option on your existing contributions once per calendar year or allow you to choose a new investment option for any future contributions (though most plans do give you this flexibility).
Lease Accounting Set for Change
by Mike Wilford, CPA, Partner
Among the many regulatory changes under review by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) aimed at improving financial transparency, the ones being discussed that impact lease will most likely change the real estate industry in a significant and dramatic way.
As background, an operating lease is a lease in which the ownership of the asset stays with the lessor, but the lessee is given a right of use of the leased asset during the period of the lease. In contrast, a capital lease is a lease in which the lessee assumes some of the risks and enjoys some of the benefits of ownership.
Under current FASB guidelines, which govern only U.S. companies, most real estate leases are considered operating leases. Only one year's worth of rent expense shows on the company's profit and loss statement. Any remaining obligation, such as the rest of the lease payments due, is disclosed in a very limited manner in the footnotes to the company's published financial statements. Effectively, a company can have multiple and large lease obligations that are kept "off balance sheet" through creative use of sales and leasebacks or through careful structuring that ensures operating lease accounting treatment.
Fast forward to what is happening today. The FASB and IASB formed a joint task force in 2009 to address two concerns. First, that financial statements did not properly reflect the scope and magnitude of companies' lease obligations and expenses, and second, that IASB and FASB standards did not match, making translation of financial statements across borders difficult.
In August 2010, both boards issued exposure drafts with new proposed regulations governing the accounting treatment of leases. Under the new proposed rules, companies using Generally Accepted Accounting Principles (GAAP) will have to capitalize leases for their facilities. This means that all rents over the term of a lease, including operating expenses, renewal options and contingent rents, will become liabilities on the balance sheet. This may dramatically affect financial ratios, loan covenants and earnings before interest, taxes, depreciation and amortization.
As proposed, the drafts called for the complete elimination of the operating lease, requiring both lessors and lessees to:
· Recognize a right of use asset and a corresponding liability equal to the net present value of the required lease payments at the lessor's or lessee's incremental borrowing rate;
· Perform estimates of percentage rents or other variable rental rate structures and include those in the calculation;
· Redo the calculation each time financial statements we published;
· Have at least a three-year history in place as soon as the regulations took effect;
· Accrue any renewal options if there was a history of renewals or a greater than likely chance of renewal;
· Amortize the right of use assets and liabilities and convert rent expense to depreciation/amortization and interest expense with "front-weighted" methodology;
· Treat all leases, even month-to-month leases or leases with less than a year left in term, the same way as outlined above.
Bottom line, the new regulations would create wide swings in earnings and in earnings per share for public companies, almost impossible assessments of renewal options and percentage rents, and big changes in debt to equity and interest coverage ratios.
As a result, we may see companies move to shorter term leases to minimize the reportable liability. This move could have a devastating effect on real estate values as shorter term leases add more risk to the investment. There would also be a significant cost to companies for changing their financial reporting processes to retroactively convert operating leases to capital leases.
Following release of the initial draft, the FASB and IASB received hundreds of responses from industry stakeholders expressing the need for major revisions and clarification of many of the proposed changes. While both boards have eased some of the initial proposed regulations, they remain firm on their basic goal of unified standards and on-balance sheet treatment for leases.
The changes that are coming are some of the largest to affect lease accounting, whose rules have been in place for decades. Staying informed is vital for business owners, real estate brokers, and others. Please contact your advisors at KKAJ at 818-848-5585 for updates and more information.
Jensen Elected President of Hart School Board
It's been a fast uphill climb for Partner Bob Jensen, who was elected by his peers to serve as Governing Board President of the William S. Hart Union High School District last December. Elected to office in November 2009, Bob previously served a four-year term on the Newhall School District (2005-2009) and as that district's president in 2008.
The time Bob spent in the Newhall School District served him well and laid a strong foundation allowing him to hit the ground running. Being well versed in labor negotiations, superintendent evaluations, budget considerations and other school-related issues, the learning curve was minimized.
"At times, the district's budget and state's financial crisis are overwhelming and dominates everything we do," Bob stated. The struggle comes in maintaining programs, employing teachers and other aspects of providing quality education when funds are scarce or uncertain. "Often the good or bad of a community is directly related to the quality of its public education. When education stays strong, businesses remain solid and property values high."
In his role as president, Bob enjoys meeting with members of the community, conferring with other officials and developing business contacts. "Being out in the community has opened doors for the firm and created awareness for who we are and what we do."
