Author Archives: grkbadmin

Tsunami Relief and Charitable Contributions

Posted on by

January 12, 2005

Tsunami Relief and Charitable Contributions

John J. M. Lareau, CPA

Over the past two weeks we have all been inundated with pictures and excerpts of the horrors the tsunami has caused to the people of Indonesia, Sri-Lanka, Indiaand beyond.  At GRKB, our thoughts and prayers go out to those victims of the December 26, 2004 tragedy.With relief aid pouring into the region at record pledge levels of over $4 billion, GRKB offers its clients and the general public the following tax related information.  As the engines of American caring and generosity are revved once again, please keep in mind the following so that support can be submitted in the most cost and tax efficient manner.Many governments have promised relief for the victims and countries affected by the disaster across the world, including the United States, from which President Bush has promised around $350 million.  Of equal importance to government aid is the charity of individuals and corporations.  Recognizing the same, the United States Congress, led by Sen. Baucus (D-MT) and Rep. Thomas (R-CA), have passed a provision, signed by President Bush on Jan. 7th, which allows for charitable contributions made in January 2005 to be deducted on taxpayer’s 2004 tax returns.
 

Executive Summary

1.    Contributions made in January 2005 qualify as December 31, 2004deductions

2.       Contributions must be made in cash

3.       Deduction election is allowed only for relief to victims of the December 26, 2004 Indian Ocean tsunami

4.       States’ tax treatment may vary

5.       Make contributions only to qualified organizations

6.       Obtain written, contemporaneous support of contributions.

  The special provision allows taxpayers to treat contributions made in January 2005 as a contribution made on December 31, 2004, giving them the option to deduct the contribution in 2004 or 2005.  The deduction requires no additional form(s) or reporting and taxpayers, from a recordkeeping standpoint, should separate January 2005 deductions from other deductions to avoid duplicating the deduction.The election, in essence, to ‘back-date’ the deduction is available for cash contributions only.  The Internal Revenue Service has clarified that checks qualify, but presumably, cash equivalents such as money orders and credit card contributions would also qualify under current regulations for charitable contributions.
 
The provision specifies that the contribution must be made as relief to victims in areas affected by the December 26, 2004 Indian Ocean tsunami.  It is recommended that taxpayers identify contributions as such, for example, by including notation of the purpose of the contribution in the memo field of checks.  Additionally, taxpayers should also use caution when contributing to funds that provide relief to victims of multiple disasters and should specify that their contribution be earmarked as relief for the December 26, 2004 tsunami victims.For most states allowing a deduction for charitable contributions, the election should also be available for state tax purposes.  Depending on the specific jurisdiction, most state provisions ‘piggy-back’ the federal deduction.  Therefore, without further action by the states – as seen during the bonus-depreciation decoupling debacle – the deduction could be used for state tax purposes.  Here in Massachusetts, the deduction for charitable contributions, as voted by the citizens, has been temporarily postponed by the legislature until certain fiscal benchmarks are met by the state.  Therefore, the state tax treatment is moot for full-year Massachusetts residents.The most important part of making a tax-deductible contribution is making sure the contribution is made to a qualified organization.  Contributions to foreign organizations are generally not deductible.  Therefore, contributions made for overseas disaster relief are usually made through domestic conduit organizations (set up to maintain expenditure responsibility).  Qualified domestic charitable organizations are required to provide a copy of their IRS exemption letter upon request and GRKB clients are specifically reminded to obtain written, contemporaneous proof of contributions from recipient organizations.  Directors and trustees of private foundations, in particular, should use caution in providing grants for overseas relief to avoid costly taxable expenditures.  Also, certain States’ Attorneys General have warned of unscrupulous characters falsely soliciting contributions for the tsunami disaster relief.  Suspicious solicitation activity can be reported directly to the Massachusetts Division of Public Charities of the Office of the Attorney General at (617) 727-2200.

 

As always, feel free to contact your GRKB advisor for guidance on transaction planning and execution.

 

 

A taxing year Tax law for ’04 has plenty of ‘sleepers.’

Posted on by

Worcester Business Journal – December 13, 2004

A taxing year

Tax law for ’04 has plenty of ‘sleepers.’

Prepare now to keep them from becoming nightmares.

CHRISTINA P. O’NEILL

The federal government giveth, and the federal government taketh away. While the Bush adminis­tration is most known for its propensity for tax cuts, Congress, in a post-Enron era, has been busy this year passing tax laws meant to clamp down on past abus­es at the same time it gives out much-welcomed tax breaks for small businesses and manufacturers.

 Some of the new provisions are what Bill Philbrick calls “sleepers” – the stealth-mode rules that seem to be hiding in plain sight. We spoke to about a half dozen CPAs and a tax attorney in the Central Mass. finance community to get their input on the tax changes and what they’ll mean to you for tax year 2004. Their message – enjoy the breaks, but look out for some tightened provisions that have real teeth.

 William Philbrick, partner at Greenberg, Rosenblatt, Kull & Bitsoli LLP in Worcester, is one of many tax professionals who warn that the federal tax law that goes into effect for 2004 will have significant consequences for the unwary.

The American Jobs Creation Act of 2004, signed into law just this past Oct. 22, is effective for the 2004 tax year. It contains many goodies – a new tax deduction on income earned from manufacturing; a tax break that favors domestic over offshore production; and more generous (and more realistic) depreciation schedules for equipment purchase, particularly software. Additionally, S Corporations are now allowed 100 eligible shareholders, up from 75 – and family members of a business can count as one shareholders’ unit.

 The rules that have been tightened up – Philbrick’s “sleepers” – can be taxpayer nightmares for the unprepared. Congress put teeth into the American Jobs Creation Act of 2004 in two key areas – deferred-­ compensation plans and so-called “listed transactions” which have far-ranging consequences for the non-compliant.

 In addition, says Joy Child of Westboro ­and Worcester-based Alexander, Aaronson & Finning & Co., PC, the law imposes other restrictions, including the following:

• Shutting down “abusive” tax shelters

• Tightening rules for charitable contributions of patents, motor vehicles, boats and airplanes

• Limiting the deduction for SUVs to $25,000 a year, down from $100,000 a year ago.

 Here, in compact form, and with “carrot” and “stick” symbols, is our checklist of the tax changes most likely to impact businesses for the tax year that’s about to end – and what our experts say about them.

 “Stick” Non-qualified deferred-compensation plans 

What they are: In these plans, which are not available to rank-and-file employees, key executives can defer bonuses or other compensation into later tax years.

 What changed and why: The American Jobs Creation Act of 2004 contains stricter legislation to deal with non-qualified deferred-compensation plans. Congress got tough on these plans as a result of the abuses at Enron Corp. Executives at that company were able to cash out of their deferred ­compensation plans just before the firm filed for bankruptcy, getting millions of dollars in non-qualified benefits, observes Robin Lazarow, a tax attorney at Worcester-based Mirick O’Connell. The 2004 law imposes severe penalties for failure to follow Internal Revenue Code Section 409A. Those who fail to do so will owe current income tax on all amounts deferred, plus a 20 percent tax penalty on the amount that’s included in income, and interest assessed on the underpayment at the underpayment rate plus 1 percent. Additionally, as of 2005, all amounts deferred must be reported on W-2 forms, even though that money isn’t taxable, to provide the IRS a way to track the amount of deferred compensation.

 Before 2005, says Lazarow, executives who, say, were still working at their previously agreed upon retirement date were allowed to postpone receipt of deferred-compensation amounts, which they often did in order to receive the distribution in a later year in which they would be in a lower tax bracket. Conversely, they could take early distribution with a penalty, or receive accelerated benefits. Not any more.

 Under the new rule, according to a newsletter from Worcester-based Alexander, Aaronson & Finning, executives are going to have to elect up front when they want to receive their distribution, and only six specific events will trigger a distribution in which the recipient does not have to pay a penalty. Some of these events have yet to be officially defined. In short, they are:

• Separation from service

• Death

• Disability

• A specified distribution time or distribution schedule

• Change in control of the corporation

• Unforeseeable emergency

 Meanwhile, executives taking deferred compensation need to make an election in 2004 for their 2005 deferrals. As this issue went to press, lawyers and accountants were waiting for guidance by the U.S. Treasury to help taxpayers through the transition period.

 Consequences:          Employers must be aware of the consequences of early distribution. “You cannot violate the provisions later on, otherwise you disqualify the plan altogether,” warns Philbrick, who warns businesses, “you may end up losing an employee over it.”

 What to do about it: “Deferred compensation isn’t something that many employers have necessarily paid attention to over the years,” Lazarow says. “They could have been promising deferred compensation in an employment agreement, for instance, and not realize that, because they don’t keep track, necessarily, of all of their promises to pay deferred compensation. So now, employers will really need to take an inventory of those arrangements.”

“Stick” Listed transactions

What they are: Listed transactions are a subset of so-called “reportable” transactions under IRS code. Reportable transactions include membership in hedge funds, for example. Under existing tax rules, there are currently 30 different scenarios dealing primarily with some type of tax shelter, for which the IRS requires a special disclosure on a person’s tax return. Additionally, taxpayers and their accountants who take a contrary position in reporting the nature of income must also file a disclosure of that position, regardless of whether the tax consequences would change. These provisions have been in place for years.

 What changed and why: While members of investment partnerships have been required to report the relationship to other partners and to the IRS for years, the law never had any teeth. But in 2004, the law regarding disclosure of these transactions has been tightened. The intent is to crack down on abusive tax shelters.

 Consequences: Taxpayers who fail to report a listed transaction face a $100,000 fine under Code Section 6662A with no “reasonable cause” exception, warns Philbrick. Penalty for deliberately omitting such disclosure is $200,000.

 What to do about it: Taxpayers need to obtain confirmation from whatever investment partnership of which they’re members, documenting whether or not the partnership has been engaged in any reportable, listed transactions. Those who have investment relationships which they believe do not count as listed transactions need to file disclosure statements with their return documenting how they are treating the transaction to justify why they do not believe it’s a listed transaction. 

“It really is going to behoove people who have made these investments, even though they think they’re innocuous, to make sure that they confirm that there were no reportable listed transactions for which they must be liable,” Philbrick says. “This goes to show that this whole idea of dealing with shelters, [demonstrates] how seriously Congress is taking this.”

 “Carrot” Deduction for U.S. production activities; repeal of ETI exclusion

 What it is: Cited by many as the most significant part of the AJ CA, this is a tax break on a percentage of business income earned from manufacturing and certain other production activities in the U.S. Originally the impetus behind the AJCA, it’s meant to encourage companies that do business internationally to do more of that business in the U.S. It’s available to regular C Corporations, S Corporations, partnerships, sole proprietorships, cooperatives and estates and trusts. The deduction is expected to generate about $77 billion in benefits over 10 years.

 What changed and why: The new rule repeals the extra territorial income exclusion, or ETI, a law that formerly excluded from a company’s gross income certain offshore income. The deduction is currently a percentage of the net income from U.S. manufacturing activities. Set at 3 percent for tax years 2005 and 2006, it rises to 6 percent in 2007-2009, and then to 10 percent for 2010 and later. It measures domestic production gross receipts less certain reductions, such as factoring in the cost of goods sold. According to Newkirk, domestic production gross receipts include the sale or lease of qualified production property manufactured, produced, grown, or extracted by the taxpayer in the U.S. It also includes sale or lease of a qualified film produced by the taxpayer; the sale or lease of electricity, natural gas or drinking water; construction performed in the U.S.; and engineering or architectural services.

 Consequences: “The definition of manufacturing is going to get a lot broader,” notes Philbrick. However, he says, for companies which are newly defined as manufacturers may find it’s more expensive than it’s worth it to implement a complex accounting system to actually account for the costs now defined as manufacturing. Such systems can cost in the vicinity of $25,000 and up, he says.

 There are other consequences as well, says Katherine Caron, tax partner for Worcester-based Shepherd & Goldstein LLP. She notes that manufacturers who haven’t been exporting to date will benefit the most, because those who had been exporting are losing the ETI, which has been repealed.

 “Congress was really backed into a corner where they had to find a way to encourage U.S. employment and U.S. manufacturing, without directly subsidizing exporting,” Caron says.

 This break subsidizes companies which manufacture in the US. and export if they want. At a disadvantage, she says, are reseller exporters. They won’t get the break, and they’ll have to push for price reductions from their suppliers and manufacturers who do get it.

 “Presumably, manufacturers are going to have to give a little bit of the price break up, but reseller exporters aren’t going to qualify for this any more. That’s the flip side to [the provision that] all U.S. manufacturers will qualify,” she says.

 The Financial Accounting Standards Board is set to issue guidance by yearend on how companies should account for the change — whether it’s estimated as a rate change or whether it’s going to be a special deduction phased in over time. Companies with calendar fiscal years could take a considerable hit on their balance sheets if they have to make the change all at once.

 “The other way to do it will be to treat it as a special deduction, which then the effect would come in over time,” Caron says.

 “Stick & Carrot” Section 179 expensing

Al Bisceglia, partner at Worcester-based Bisceglia, Steiman & Fudeman, LLP says the Section 179 depreciation expense election has been a significant sales tool this year. It’s been reinstated for 2005 at $100,000 in annual allowable deductions. An additional $50,000 bonus depreciation, which expires Dec. 31, has been a sales tool for vendors this year.

 What it is: The AJCA extends existing tax law under Code Section 179, allowing businesses to immediately expense more than $100,000 of new investments through 2007, rather than writing off the cost of the equipment over its depreciable life.

 What changed and why: A 2003 law expanded the election, raising the dollar limit from $25,000 to $100,000 for 2003-2005. For 2004 and 2005, inflation-adjusted expensing limits are $102,000 and an estimated $105,000 respectively, according to Newkirk, Albany, NY-based provider of marketing communications for financial and health-care companies.

 The Section 179 expensing limit is reduced dollar for dollar when total assets placed in service during the year exceed a certain dollar amount, Newkirk says. The 2003 law doubled the limit to $400,000 for tax years 2003-2005, adjusted for inflation. The AJCA extends the higher dollar amount through 2007.

However, the new law has an exception from the depreciation and expensing caps on so-called “luxury cars,” as that applies to sport utility vehicles. Liberal caps had encouraged many businesses to buy large SUVs for their executives, taking advantage of the expensing election of up to $100,000 to write off the full cost in the first year. AJCA caps the deduction for SUVs to $25,000, effective for vehicles put into service after Oct. 22, when the AJCA was signed.

 “A lot of people were buying the Yukons and the Tahoes and all those big vehicles,” says Dede Labonte, a tax partner at Worcester-based Bollus Lynch LLP. Now, she says, SUVs weighing between 6,000 pounds and 14,000 pounds can take only a $25,000 deduction with the remainder getting written off over a longer period of time. “I don’t know if that will change business people’s minds about buying or leasing but we’ll see going forward,” she says.

 Consequences: Clients are calling their accountants before they take the plunge on equipment because of the retained expense level of $100,000 capital acquisition. The elimination of the so-called bonus depreciation of another potential $50,000 asof yearend 2004 may have an impact on some companies, some concur. Al Bisceglia, partner at Worcester-based Bisceglia, Steiman & Fudeman, LLP, says vendors use the depreciation cap as a sales tool and are urging their customers to make purchases by yearend. 

“Carrot” Ease of qualifying as an S Corporation

 What it is: The AJCA contains 10 provisions to make it easier for businesses to qualify and operate as S Corporations. In an S Corp., income, losses, deductions and credits are passed through to shareholders, who report them on their own tax returns. Corporate income is taxed only once.

 What changed and why: Increasing the number of eligible shareholders from 75 to 100 allows S Corporations to be able to issue shares to key employees. Electing to treat family members as one shareholder supports the growth of family-owned businesses. “Nobody’s giving up their voting rights,” says Philbrick. “It doesn’t mean that all of a sudden, Dad has everybody’s shares.”

 And, if a shareholder’s stock is transferred to a spouse or former spouse in a divorce, any suspended loss or deduction attributable to the S Corp. goes with it, according to Newkirk.

 Consequences: “It’s a friendlier, pro-business environment,” says Alexander, Aaronson & Finning’s Joy Child. Encouraging the creation of more S Corps. and making it easier to maintain status as an S Corp. encourages the growth of small business.

 “Stick” Charitable donation of vehicles

What it is: The AJCA tightens restrictions on deductions taxpayers can take on vehicles donated to charity. It’s supposed to be based on fair market value on the date of the contribution.

 What changed and why: Under previous law, the donor has been responsible for determining the deductible value. The IRS has been concerned that donors deduct far greater amounts than what charities could realize from selling the vehicles to third parties. “People are taking the Kelly Blue Book value. But if the car’s not running, you would never get that if you traded it in somewhere,” says Child. But unless the charity uses the vehicle in their business or agency, it usually sells it, and the taxpayer’s deduction is supposed to be limited to the sale price. “Any donation that’s non-cash that’s over $5,000 requires an appraisal, except for publicly-traded stock,” she says. “That’s always been the case but I’m sure [the IRS will] be scrutinizing their appraisals more.”

 Consequences: AJCA limits the charitable-contribution deduction for donations of motor vehicles, boats and planes for which claimed value exceeds $500. If the charity sells a donated item without having used it or materially improved it, the deduction is limited to the gross proceeds from the sale. A penalty applies if the charity knowingly fails to provide a timely acknowledgement or makes a false acknowledgement. 

What are you doing New Year’s?

 “We’ll be busy,” says Mirick O’Connell’s Robin Lazarow. “Treasury has told us that we won’t have to sit at our desks on New Year’s Eve, that we’re going to have some relief.”

 Christina P. O’Neill can be reached at editorial@wbjoumal.com

 For more information

o        American Institute of Certified Public Accountants, www.aicpa.org/info/sarbanes_oxley

o        PricewaterhouseCoopers, www.pwcglobal.com

o        Tax Policy Center www.taxpolicycenter.org

 

Tax Planning – Do It Now!

Posted on by

Worcester Jewish Chronicle, November 18, 2004

Tax Planning – Do It Now!

William E. Philbrick, CPA, MST, CVA

The key to substantial tax savings is timely tax planning. This applies equally to all taxpayers. Each dollar saved can be used to meet your personal and business financial goals. Timely planning allows you to take advantage of favorable tax provisions and at the same time avoid costly pitfalls.

Too many individual taxpayers’ idea of planning is to hunt for evidence of deductions before they file their annual tax return. This is too late, as their tax year has closed and they are limited to what happened in the closed year with certain limited exceptions such as IRA and Keogh plan contributions made after year-end.

It is critical to do the planning and take appropriate action before the close of the tax year. While we will discuss some of the basic tax-planning rules from the viewpoint of the individual, they are applicable to businesses as well.

Timing is everything with the reporting of income and the claiming of deductions and credits. The basic rule is to be able to report your income when you are in a lower tax bracket and claim your deductions and credits when you are in a higher tax bracket.

If you expect to be in a lower bracket in 2004 than in 2005, you would want to accelerate income for 2004 and defer deductions and credits until 2005. On the other hand, if your tax bracket is stable, timing is still critical.

Assume that you expect to be in the 15 percent bracket for 2004 and 2005 but want to remodel your kitchen. You plan to make a qualified withdrawal of $50,000 from your IRA to pay for the new kitchen. If you take the money in one lump sum, you will push yourself into the 25 percent bracket.

By splitting the withdrawal between the two years, you will be able to take maximum advantage of the lower rates, saving real money, and avoid or postpone the higher rate for at least a year.

Recognizing income in a lower bracket, claiming deductions and credits in a higher bracket and postponing the tax whenever possible are the keys to successful planning. However, your tax bracket can be influenced and affected by other factors.

Your individual tax bracket is affected by your filing status. Married taxpayers file either using married filing jointly (MFJ) or married filing separately (MFS). While the MFJ schedule will usually produce a lower tax result, there are unusual circumstances where MFS will be a benefit.

Single taxpayers generally file using single status unless they qualify for head-of-household (HOH) status. To claim HOH status, a single person must generally live with and provide support for a dependent.

The HOH rates are lower than the rates for single status but are not as favorable as MFJ rates. As your filing status is determined as of the last day of your tax year, marriage, divorce and qualified dependents play a critical role.

Another key factor that affects your tax bracket is your income level. Swings in income from one year to another can result from a variety of circumstances and events.

Divorce, marriage, death, job changes, retirement, illness, cash windfalls, sales of assets such as stock or a residence or business, and business startups can produce dramatic impacts on your income and present unique tax-planning situations that you may be able to take advantage of with timely planning.

Once you have made a careful analysis and taken all of your circumstances into consideration and planned to maximize your planning opportunities by deferring income to a lower bracket year, claiming your deductions and credits in a higher bracket year or spread income and deductions over more than one year fully utilizing your filing status, you are not done.

A key critical factor you will need to address is the alternative minimum tax (AMT). Failure to properly plan for the impact of the AMT may see all of your efforts to effectively plan crash and burn.

The AMT was originally enacted to provide that taxpayers pay a minimum amount of tax. It was targeted at high-income taxpayers who took advantage of planning opportunities to eliminate all their tax.

However, as the AMT is not adjusted for inflation, more and more middle-income taxpayers are finding they are liable for this tax, which may very well put them in a higher tax bracket than they had planned on. It has been estimated by the Joint Committee on Taxation that without any legislative intervention, the number of taxpayers subject to AMT will grow from 1 million taxpayers in 2000 to over 17 million on 2010.

The AMT is a complex calculation. It treats certain tax breaks and deductions as “tax preferences” and either modifies or eliminates the “preferences” in the calculation. The very nature of the AMT is counterintuitive. Thus you may not receive any tax benefit for the deductions you planned to claim in the higher tax bracket year.

There are still tax-planning opportunities to minimize the impact of the AMT on your effective tax bracket, particularly when you are subject to the AMT in one year and not another, further adding to the complexity of the planning process.

As you can see, timely planning should not be a last-minute effort, and you will probably need the advice of a knowledgeable tax adviser to take advantage of all your tax saving opportunities and avoid the pitfalls. Your number one rule should be “Do it now!”

 

 * * * * *

William E. Philbrick, CPA, MST, CVA, CFF is a Senior Vice President and Director of Taxes and Forensic Services with Greenberg Rosenblatt Kull &Bitsoli, P.C. of Worcester, Mass. He can be reached at wphilbrick@GRK&B.com.

Study to shed light on ‘gray economy’ of misclassified workers

Posted on by

Worcester Business Journal – October 18, 2004

Study to shed light on ‘gray economy’ of misclassified workers

MICKY BACA

For decades, unscrupulous construction contractors, as well as employers in other industries, have dodged paying workers compensation, unemployment insurance and other mandated payroll expenses by misclassifying workers as independent contractors. Now researchers at Harvard University are conducting a study to find out how widespread the practice is and how much it is costing in lost state and federal revenue, worker hardships and unfair competition to legitimate contractors.

 While the results are expected to have significance for those on all sides of the construction labor market, general contractors have added incentive to monitor the outcome after a recent state Superior Court ruling upped their potential liability by allowing a misclassified worker of a subcontractor to sue the general contractor for damages if the worker is injured on the job site.

 The study is taking place as construction union officials contend misclassification of workers in on the rise in the region and as the state’s Attorney General’s office has vowed to make prosecution of misclassification a priority in the wake of new state laws clarifying regulations.

 How it works

Here’s an illustration of how misclassification works: Drywall subcontractor X has been hired to work on an area housing project. It has workers report to the job at a prescribed time and supplies them with tools, materials and direction.  But X doesn’t list the workers as employees. Instead, it deems them “independent contractors,” who, among other things, must take care of their own workers compensation, unemployment insurance, social security and other workers benefits.

 With no deductions and an opportunity to under-report income, the workers may get more money in their paychecks, but they lose out on overtime, health insurance and unemployment benefits if they are laid off. Company X, in turn, saves as much as 20 to 30 percept in payroll expenses it would have incurred if it paid the “independent” workers like regular employees.

 So goes the “gray economy” of misclassifying workers in the construction industry, an illegal practice that industry leaders and regulators admit is tough to quantify, even tougher to enforce and could have far-reaching ramifications for workers, taxpayers and the construction industry overall. 

Offloading private problems to the public purse

The study is being done by the Construction Policy Research Center, a research and public policy group that is a collaboration of the Harvard School of Public Health, the Harvard Law School’s Labor and Worklife Program, according to Elaine Bernard, executive director of the Labor and Worklife Program. The issue of misclassifying workers was brought to the program’s attention by the various groups, Bernard says, including the Boston-based N.E. Regional Council of Carpenters, who see the practice as a growing problem in the region.

 From six percent to 20-25 percent of employers misclassify workers, depending on the state and the industry, says researcher Francoise Carre of the McCormack School, UMass-Boston. 

While misclassification is a major concern of unions because it undermines their organization of workers, Bernard says the practice hurts those on all sides of the construction labor world. “It’s an interesting situation, where workers and companies are harmed and the government is harmed,” she says. “A number of individuals and institutions are taking advantage…by offloading the cost of their failure to comply onto everybody else.”

 When companies, don’t pay their share of workers comp, Bernard notes, other companies must pickup the slack. Workers who become disillusioned with being classified as subcontractors have difficulty changing back to being classified as employees because they could be liable for back taxes, she says. And if an uninsured worker is injured, the cost of their care often gets transferred to the public purse. Bernard says. What’s more, other subcontractors bidding on the same work as those who misclassify workers are at a decided pricing disadvantage, she says.

 General contractors, under which unscrupulous subcontractors may work, also have a stake in the misclassification dilemma – that got even higher with the recent court ruling, notes James Grosso, legal council for the Associated General Contractors of Mass. Labor Relations Division. Not only are they potentially liable for illegal actions on their job sites, but general contractors are also required to pay worker comp benefits to workers (misclassified or not) of subcontractors when such workers are injured on their job site and the sub has no workers comp insurance. The Sept. 14, 2004 ruling extended the general contractors’ potential liability in such cases even further when it determined that an uninsured masonry worker, Daniel Larson, is entitled to sue Burlington-based general contractor Fred Salvucci Corp. for damages even though Salvucci paid workers comp benefits for Larson’s injuries on the job. Larson was a worker for Methuen-based subcontractor Great Eastern, which did not provide workers comp insurance for him, according to the suit.

 In a traditional employee relationship, Grosso says, when an employer provides workers comp insurance, that company cannot be sued by the worker for damages. While Larson was not listed as a misclassified worker in the court decision, Grosso says the ruling certainly ups general contractors’ exposure in misclassification cases.

 A reliable source

Grosso says misclassification of workers isn’t a top concern of AGCM but it is a concern. He says he thinks the Harvard study is a good idea to quantify just how big a problem the practice is. Grosso says he is confident that a study of the issue by Harvard will be balanced. He says he would be “suspicious” of such a study if it were done by a less reputable researcher with links to labor unions.

 The misclassification issue is a key focus of the N.E. Regional Council of Carpenters, which sees it as a growing problem in the construction labor market and seeks to publicize alleged violations by contractors. Stephen Joyce, research director for the union’s labor management program, say the practice is “rampant” and isn’t just a threat to the union but is harmful to workers, companies and taxpayers. Some contend, however, the union uses the issue in its effort to discredit contractors who aren’t committed to using union labor.

 One contractor dogged by the carpenters union for allegedly using questionable subcontractors because, its owner says, it has not agreed to sign a contract with the union, is Worcester-based Cutler Associates Inc. Cutler CEO Frederic Mulligan says that, while he is not familiar with the Harvard study, he thinks it would be helpful if the issue of misclassification of workers could be clarified.

 Mulligan says there’s a lot of confusion about who can be classified as an independent contractor. “The problem from my view is that it is so unclear,” he says, noting that state and federal guidelines vary. “If there were more clarity, it would benefit the companies trying to do it right,” he adds.

His company, he says, does the right thing, has never had a claim against it for misclassification and hasn’t had any violations by subcontractors on its work sites.  He says some subcontractors his company uses have been cited but found innocent.

 “It’s real, real easy to fall into the trap,” says William Philbrick of Greenberg, Rosenblatt, Kull & Bitsoli.  The savings a company can realize from misclassifying workers as independent subcontractors can be up to 30-3 percent.

 This could happen to you

Bill Philbrick, director of tax and business valuation services at Worcester-based accounting firm Greenberg, Rosenblatt, Kull & Bitsoli, agrees that the distinction between who is a valid independent contractor and an employee is a complex one about which companies need to be careful. In some cases, he says, a company may have crossed the line between using someone as an employee instead of a subcontractor and not even realize it.

 For example, he notes, a general contractor who has long done business with a particular subcontractor that also works for other jobs may not realized that, if the relationship changes to the point where that subcontractor only does work for that general contractor and begins to take direction from them, they have become an employee.

 Straying into misclassifying workers can have tremendous financial repercussions for companies, Philbrick says. If a company hires a worker as a subcontractor and has other employees who have tax-exempt pension and benefits plans and is found by the IRS to have misclassified that one subcontractor, the IRS could declare the benefits program invalid because it wasn’t offered to all employees. In such a case, he says, the IRS could revoke the tax-exemption status of all other employee benefits. Such a ruling could bankrupt a company, according to Philbrick.

 Philbrick cautions that when it comes to independent contractors, companies should seek professional advice. “It’s real, real easy to fall into the trap,” he says. On the other hand, Philbrick says, the savings companies can enjoy from misclassifying workers as independent subcontractors are substantial, as much as 30-35 percent. “Let me put it this way, it’s very tempting,” he says.

 “The problem from my view is that it is so unclear,” says Frederick Mulligan, CEO of Cutler Associates, on varying state and federal guidelines for classifying employees.  “If there were more clarity, it would benefit the companies trying to do it right.”

 In a nutshell

•  Worker misclassification, which researchers and union officials speculate is on the rise in the region, is the practice by which companies can save between 20 and 30 percent on labor costs by listing employees as “independent contractors” rather than as employees.

•  But treating an independent contractor in the same manner as employees can have significant financial repercussions, such as loss of tax benefits for pension plans and, in the case of a recent state Superior Court ruling, allowing a misclassified worker to sue the general contractor for damages if the worker is injured on the job site.

•  A Harvard study is seeking to establish patterns of subcontracting practices in New England to enable researchers to estimate how much misclassification may be occurring. Researchers are using unemployment insurance data but they don’t have access to information on specific companies or individuals. The study is expected to be finished next spring.

•  The state Attorney General’s office says new laws have clarified misclassification and that the office expects to prosecute more violators.

Taxing Decision Bush, Kerry present stark decisions for America’s electorate

Posted on by

Telegram and Gazette • October 17. 2004 7:20AM

Taxing Decision Bush, Kerry present stark decisions for America’s electorate

By Jim Bodor TELEGRAM & GAZETTE STAFF

During a campaign stop in New Hampshire in February 1988, then-candidate George H.W. Bush made an infamous pledge: "Read my lips: No new taxes," he said.

He repeated the pledge at various events in the next few months, making it a mantra of his run for the presidency.

Two years later, on June 26, 1990, faced with a growing deficit and a sluggish economy, then-President Bush issued a statement calling for, among other things, "entitlement reform, tax revenue increases and discretionary spending reductions."

The media immediately pounced on the statement as a reversal of Mr. Bush’s earlier promise. Two years later, it was widely regarded as one of the top reasons why Mr. Bush lost the presidency after one term to a youthful Arkansas Democrat named Bill Clinton.

The episode stands as a reminder of why taxation is one of the touchstone issues for American voters, the kind of singular issue that can determine the outcome of an election in a blink.

This year, both voters and the candidates have been more preoccupied with the issues of terrorism and the wars in Iraq and Afghanistan. But taxation continues to run a close second to those issues, taking up long stretches of the candidates’ televised debates and leading to some of the most heated exchanges between Sen. John F. Kerry, D-Mass., and President George W. Bush.

It’s also an issue on which the two candidates diverge widely.

The president wants to make permanent all of the lower tax rates established with the 2003 Jobs and Growth Tax Relief Reconciliation Act, including the 15 percent tax rate on dividends and most long-term capital gains. Most of those tax breaks were passed with "sunsets," dates when they will expire.

Mr. Kerry wants to return the top two tax brackets to Clinton-era levels, by raising the 35 percent bracket to 39.6 percent, and the 33 percent bracket to 36 percent. This is the proposal behind his pledge to raise taxes "only on Americans who earn more than $200,000 per year." According to a review of 2001 tax returns by Bloomberg News, 2.2 million households would be affected by that proposal.

He also wants to allow the tax rate on dividends to return to as much as 39.6 percent, and to increase the tax rate on most long-term capital gains from 15 percent to 20 percent.

"People vote looking backward and forward," said Chris Edwards, director of tax policy for the Cato Institute "If they think Bush’s tax cuts were reckless, that’ll be a boost for Kerry. If they have made money in the stock market and like paying lower taxes on dividends and capital gains, they’ll support Bush."

Mr. Kerry proposes the creation of $177 billion in new health care tax credits for small businesses, as well as another $142 billion in tax credits for manufacturers that hire new employees. He also supports lowering the corporate tax rate by 5 percent.

The president argues that maintaining the tax breaks passed during 2003 will help small-business owners, many of whom report their business income on their personal income taxes, putting them in the top two upper tax brackets Mr. Kerry is targeting. About 900,000 Americans are small-business owners who would be affected by Mr. Kerry’s proposal, according to President Bush.

Democrats argue that the president’s figures, which are based on the type of tax form used by less than 20 percent of small-business owners, are misleading because many wealthy Americans use the same form to record income they receive from passive investments, such as real estate.

"The administration is seriously exaggerating the benefits of its tax cuts to the vast majority of small businesses," said Joel Friedman, a tax policy analyst at the Center on Budget and Policy Priorities, a Washington, D.C., research institute that studies state and federal budget policies. "The fact is that those benefits will flow disproportionately to business owners with high incomes or large accumulations of wealth."

Both candidates support the continued elimination of the so-called "marriage penalty," which before 2003 required married couples to pay more in taxes than two single people earning the same amount of money.

Either candidate, if elected, may struggle to pay for his proposal, said Timothy J. Rupert, associate professor of taxation at Northeastern University.

"I’ve read through what both of them plan and I’m not sure either one is a real viable plan, given the deficit concerns," he said. "Congress has given taxpayers a lot of tax breaks, which can have a positive impact on the economy, but has given them with sunsets, which tells you we really can’t pay for them."

Mr. Bush’s proposals may increase the $413 billion federal deficit, he said. Mr. Kerry’s proposals may not generate enough money to fund the efforts he supports, he said.

"Mr. Kerry is talking about targeting high-income taxpayers," he said. "But we did that in 1993, and the question then and now is, ‘Will it generate enough revenue?’ "

Earlier this week, a group of 368 economists, including six Nobel laureates, raised similar issues about Mr. Kerry’s proposals, saying his elimination of the tax cuts for the wealthiest families would jeopardize U.S. growth.

In August, the Kerry campaign released a similar letter from 10 Nobel Prize-winning economists calling Mr. Bush’s economic policies "reckless and extreme."

Some Worcester County small-business owners said they think Mr. Kerry’s tax proposals could hurt them.

Robb B. Ahlquist, owner, along with his wife, Madeleine, of the One Eleven Chop House and the Sole Proprietor restaurants in Worcester, said he fears that increasing taxes on small-business owners will prevent reinvestment in those businesses and the hiring of new employees.

"When you have to pay higher taxes, it definitely affects how you run your business," he said. "I’m much more comfortable making my own decisions about my money than having the government make decisions about it. We reinvest heavily in our businesses when we can."

Small-business owners who make more than $200,000 annually are the entrepreneurs who keep the economy growing, said Bruce A. Taylor, president of ERA Key Realty Services of Milford, a real estate company that has Central Massachusetts offices in Spencer, Worcester, Oxford, Whitinsville and Westboro.

"When you give those top earners a tax cut, they don’t eat that money," he said. "They invest it, which multiplies itself throughout the economy. When you give those people more disposable income, they invest it. I personally think the only reason the economy did not go into a deeper recession was because of those tax cuts."

Not all business leaders are behind Mr. Bush’s economic policies, however.

Peter S. Cohan of Marlboro, a former venture capitalist and author of several books about technology business trends, has joined forces with a group called Business Leaders for Kerry. The group, which includes billionaire investor Warren Buffett and Apple Computer founder Steve Jobs, has publicly stated its support for Mr. Kerry’s fiscal policies and are supporting his campaign.

Mr. Cohan has never gotten so directly involved in politics before, he said, but was motivated by his deep concerns about the federal deficit and the drag he believes that is placing on the stock market and the economy.

"The ultimate difference between the two is that the Kerry campaign talks about how to pay for what it proposes," he said. "I actually think Kerry is more concerned about deficit reduction, and Bush is more concerned about cutting taxes and doesn’t care about the deficit. Kerry believes it’s more important to bring the budget back into balance."

The deficit, increases in energy costs and the threat of terrorism have sapped the economy of its energy, Mr. Cohan contends.

"The economy is not doing as well as it should be for an economy coming out of a recession," he said. "A lot of costs are going up, and income is going down."

Some observers say that when it comes to taxes, it makes no difference which candidate is elected. Congress determines which tax packages pass, often making dozens of amendments and changes to the proposals as they move along, they said. Republicans currently hold a majority in both the House and the Senate.

"The truth of the matter is, they can rail away at each other, but Congress makes tax policy," said William E. Philbrick, senior vice president of the accounting firm Greenberg, Rosenblatt, Kull & Bitsoli of Worcester.

Whichever candidate wins also will have to deal somehow with the federal deficit, said Mr. Philbrick, who is a certified public accountant and writes a weekly e-mail newsletter about tax topics. That is likely to hinder any new proposals, he said.

"Bottom line, somebody’s going to have to deal with the deficit," he said. "They’ve got all these ideas, but we’re in a terrible deficit situation."

Business Reporter Jim Bodor can be reached at jbodor@telegram.com.

 

GREENBERG, ROSENBLATT, KULL & BITSOLI, P.C. GAINS ADMISSION TO AUDIT QUALITY CENTER FOR EMPLOYEE BENEFIT PLAN AUDITS

Posted on by

August 20, 2004 – Worcester, MA—Greenberg, Rosenblatt, Kull & Bitsoli, P.C. has been accepted as a member of the American Institute of Certified Public Accountants’ (AICPA) Employee Benefit Plan Audit Quality Center for CPA firms. This new Center is a national community of CPA firms that demonstrate a commitment to performing quality employee benefit plan audits by voluntarily agreeing to adhere to membership requirements, including designating a director responsible for their employee benefit plan audit practice and establishing firm-wide training and quality control programs.  Sr. Vice President John E. Wornham has been designated as the firm’s responsible director.

“We strive to provide excellent service to our clients.  We believe that our involvement with the Employee  Benefit Plan Audit  Quality Center furthers our commitment to our clients and our profession,” said Mr. Wornham. 

*****

GRKB (www.GRKB.com) of Worcester, Massachusetts is one of the region’s largest independent accounting firms and a member of JHI, an association of worldwide independent CPA firms.  GRKB provides comprehensive accounting, tax, valuation and consulting services for business entities, non-profit organizations, individuals, trusts and estates.

Tales of Tax Fraud Are a Hoot, but the Penalties Are No Joke

Posted on by

The Washington Post – April 1, 2004; Page E03

Tales of Tax Fraud Are a Hoot, but the Penalties Are No Joke

Michelle Singletary

For decades, unscrupulous construction contractors, as well as employers in other industries, have dodged paying workers compensation, unemployment insurance and other mandated payroll expenses by misclassifying workers as independent contractors. Now researchers at Harvard University are conducting a study to find out how widespread the practice is and how much it is costing in lost state and federal revenue, worker hardships and unfair competition to legitimate contractors.

 While the results are expected to have significance for those on all sides of the construction labor market, general contractors have added incentive to monitor the outcome after a recent state Superior Court ruling upped their potential liability by allowing a misclassified worker of a subcontractor to sue the general contractor for damages if the worker is injured on the job site.

 The study is taking place as construction union officials contend misclassification of workers in on the rise in the region and as the state’s Attorney General’s office has vowed to make prosecution of misclassification a priority in the wake of new state laws clarifying regulations.

 How it works

Here’s an illustration of how misclassification works: Drywall subcontractor X has been hired to work on an area housing project. It has workers report to the job at a prescribed time and supplies them with tools, materials and direction.  But X doesn’t list the workers as employees. Instead, it deems them “independent contractors,” who, among other things, must take care of their own workers compensation, unemployment insurance, social security and other workers benefits.

 With no deductions and an opportunity to under-report income, the workers may get more money in their paychecks, but they lose out on overtime, health insurance and unemployment benefits if they are laid off. Company X, in turn, saves as much as 20 to 30 percept in payroll expenses it would have incurred if it paid the “independent” workers like regular employees.

 So goes the “gray economy” of misclassifying workers in the construction industry, an illegal practice that industry leaders and regulators admit is tough to quantify, even tougher to enforce and could have far-reaching ramifications for workers, taxpayers and the construction industry overall. 

Offloading private problems to the public purse

The study is being done by the Construction Policy Research Center, a research and public policy group that is a collaboration of the Harvard School of Public Health, the Harvard Law School’s Labor and Worklife Program, according to Elaine Bernard, executive director of the Labor and Worklife Program. The issue of misclassifying workers was brought to the program’s attention by the various groups, Bernard says, including the Boston-based N.E. Regional Council of Carpenters, who see the practice as a growing problem in the region.

 From six percent to 20-25 percent of employers misclassify workers, depending on the state and the industry, says researcher Francoise Carre of the McCormack School, UMass-Boston. 

While misclassification is a major concern of unions because it undermines their organization of workers, Bernard says the practice hurts those on all sides of the construction labor world. “It’s an interesting situation, where workers and companies are harmed and the government is harmed,” she says. “A number of individuals and institutions are taking advantage…by offloading the cost of their failure to comply onto everybody else.”

 When companies, don’t pay their share of workers comp, Bernard notes, other companies must pickup the slack. Workers who become disillusioned with being classified as subcontractors have difficulty changing back to being classified as employees because they could be liable for back taxes, she says. And if an uninsured worker is injured, the cost of their care often gets transferred to the public purse. Bernard says. What’s more, other subcontractors bidding on the same work as those who misclassify workers are at a decided pricing disadvantage, she says.

 General contractors, under which unscrupulous subcontractors may work, also have a stake in the misclassification dilemma – that got even higher with the recent court ruling, notes James Grosso, legal council for the Associated General Contractors of Mass. Labor Relations Division. Not only are they potentially liable for illegal actions on their job sites, but general contractors are also required to pay worker comp benefits to workers (misclassified or not) of subcontractors when such workers are injured on their job site and the sub has no workers comp insurance. The Sept. 14, 2004 ruling extended the general contractors’ potential liability in such cases even further when it determined that an uninsured masonry worker, Daniel Larson, is entitled to sue Burlington-based general contractor Fred Salvucci Corp. for damages even though Salvucci paid workers comp benefits for Larson’s injuries on the job. Larson was a worker for Methuen-based subcontractor Great Eastern, which did not provide workers comp insurance for him, according to the suit.

 In a traditional employee relationship, Grosso says, when an employer provides workers comp insurance, that company cannot be sued by the worker for damages. While Larson was not listed as a misclassified worker in the court decision, Grosso says the ruling certainly ups general contractors’ exposure in misclassification cases.

 A reliable source

Grosso says misclassification of workers isn’t a top concern of AGCM but it is a concern. He says he thinks the Harvard study is a good idea to quantify just how big a problem the practice is. Grosso says he is confident that a study of the issue by Harvard will be balanced. He says he would be “suspicious” of such a study if it were done by a less reputable researcher with links to labor unions.

 The misclassification issue is a key focus of the N.E. Regional Council of Carpenters, which sees it as a growing problem in the construction labor market and seeks to publicize alleged violations by contractors. Stephen Joyce, research director for the union’s labor management program, say the practice is “rampant” and isn’t just a threat to the union but is harmful to workers, companies and taxpayers. Some contend, however, the union uses the issue in its effort to discredit contractors who aren’t committed to using union labor.

 One contractor dogged by the carpenters union for allegedly using questionable subcontractors because, its owner says, it has not agreed to sign a contract with the union, is Worcester-based Cutler Associates Inc. Cutler CEO Frederic Mulligan says that, while he is not familiar with the Harvard study, he thinks it would be helpful if the issue of misclassification of workers could be clarified.

 Mulligan says there’s a lot of confusion about who can be classified as an independent contractor. “The problem from my view is that it is so unclear,” he says, noting that state and federal guidelines vary. “If there were more clarity, it would benefit the companies trying to do it right,” he adds.

His company, he says, does the right thing, has never had a claim against it for misclassification and hasn’t had any violations by subcontractors on its work sites.  He says some subcontractors his company uses have been cited but found innocent.

 “It’s real, real easy to fall into the trap,” says William Philbrick of Greenberg, Rosenblatt, Kull & Bitsoli.  The savings a company can realize from misclassifying workers as independent subcontractors can be up to 30-3 percent.

 This could happen to you

Bill Philbrick, director of tax and business valuation services at Worcester-based accounting firm Greenberg, Rosenblatt, Kull & Bitsoli, agrees that the distinction between who is a valid independent contractor and an employee is a complex one about which companies need to be careful. In some cases, he says, a company may have crossed the line between using someone as an employee instead of a subcontractor and not even realize it.

 For example, he notes, a general contractor who has long done business with a particular subcontractor that also works for other jobs may not realized that, if the relationship changes to the point where that subcontractor only does work for that general contractor and begins to take direction from them, they have become an employee.

 Straying into misclassifying workers can have tremendous financial repercussions for companies, Philbrick says. If a company hires a worker as a subcontractor and has other employees who have tax-exempt pension and benefits plans and is found by the IRS to have misclassified that one subcontractor, the IRS could declare the benefits program invalid because it wasn’t offered to all employees. In such a case, he says, the IRS could revoke the tax-exemption status of all other employee benefits. Such a ruling could bankrupt a company, according to Philbrick.

 Philbrick cautions that when it comes to independent contractors, companies should seek professional advice. “It’s real, real easy to fall into the trap,” he says. On the other hand, Philbrick says, the savings companies can enjoy from misclassifying workers as independent subcontractors are substantial, as much as 30-35 percent. “Let me put it this way, it’s very tempting,” he says.

 “The problem from my view is that it is so unclear,” says Frederick Mulligan, CEO of Cutler Associates, on varying state and federal guidelines for classifying employees.  “If there were more clarity, it would benefit the companies trying to do it right.”

 In a nutshell

•  Worker misclassification, which researchers and union officials speculate is on the rise in the region, is the practice by which companies can save between 20 and 30 percent on labor costs by listing employees as “independent contractors” rather than as employees.

•  But treating an independent contractor in the same manner as employees can have significant financial repercussions, such as loss of tax benefits for pension plans and, in the case of a recent state Superior Court ruling, allowing a misclassified worker to sue the general contractor for damages if the worker is injured on the job site.

•  A Harvard study is seeking to establish patterns of subcontracting practices in New England to enable researchers to estimate how much misclassification may be occurring. Researchers are using unemployment insurance data but they don’t have access to information on specific companies or individuals. The study is expected to be finished next spring.

•  The state Attorney General’s office says new laws have clarified misclassification and that the office expects to prosecute more violators.

Getting Your Financial House In Order Is A Must

Posted on by

Worcester Jewish Chronicle, March 24, 2004

Getting Your Financial House In Order Is A Must

William E. Philbrick, CPA, MST, CVA, CFF

Ever tear your bedroom apart looking for that birth certificate; sure you had safely stashed it in your sock drawer? Or pulled an all-nighter organizing your tax records after spending the previous three days looking for documents and receipts? If you have, this information will help you gain control of your financial house.

Whether you are a pack rat, saving every piece of paper in the first draw or shoe box you find or the laissez faire filer, who saves some and discards some, depending on your mood, you’ll be left scrambling when you actually need to find an important document.

The time and effort to organize your financial records pays off in more ways than less frustration. First, organized records will make your tax preparation easier and less time consuming. Complete tax records will help remind you of deductions you might otherwise overlook and they come in handy if the IRS questions your return, helping to avoid interest, penalties, or additional taxes. Second, good records will give you a better handle on your overall financial situation and help your CPA identify financial and tax-planning opportunities. Lastly, should you die or become incapacitated, a well-organized records system will ease the burden on your loved ones by providing a road map to your financial affairs.

To get started, begin at your local office supply store and pick up the items you need to start your filing system such as hanging files and manila folders, as well as a container to keep them in. If you prefer to keep electronic records, many software systems allow you to download electronic statements. You can help on space by scanning documents onto your computer. Make sure to keep a backup file in case your computer is ever damaged or destroyed. Don’t forget to get a quality paper shredder, more identity theft occurred last year from non-online sources than from the Internet. Discarded documents in the trash are prime sources for personal information.

You should divide your records into three categories. First are “current” files that you will be adding to through the year. Be sure they are located in a convenient location. Now find a spot for “dead” files. This is information you need to keep but won’t have to access often. A safe out of the way space, which is dry, will work for this purpose. The third category is your safe-deposit box. It is where you will keep documents that are costly or difficult to replace, like wills, deeds and car titles.

Now you need to sort that pile. What do you keep and what do you discard? While your personal circumstances will dictate your needs, consider six universal subject areas- taxes, banking, investments, retirement plans, insurance policies and your home for starters.

Starting with taxes, maintain a current file for this year’s return. Include all your income information and backup documentation for deductions, including receipts and cancelled checks. Add your past year’s return to this file. All other returns and related documents can be moved to the “dead” storage area. Plan to keep the prior year returns for six to ten years to be safe you are beyond the period the IRS has to question your return.

Banking records can take up a large part of your system. Keep separate files for each account for the current year and compare them to your 1099s at the end of the year. If they agree, discard the statements. After a year, you can discard cancelled checks except for those that support tax deductions and tax payments. Pull these and put them with your current tax file. Also keep cancelled checks that relate to a home purchase, capital improvements to your home, investments, and non-deductible IRA contributions.

Investment records files need to be maintained so you will have the documentation to establish your cost basis. Failure to do this could result in double tax. For example, reinvested dividends are currently taxable, but add to your cost basis when you sell.

Plan on holding your investment records a minimum of three years after the sale.

Set up a separate file for each retirement plan that you have. Each file should include enrollment papers, statements, a list of beneficiary designations and contact information.

This information will be very important if you have IRAs, which have contributions, which were made with pre-tax and post-tax income. You can avoid being taxed on the non-deductible contributions when you start to withdraw, if you maintain these files.

Your insurance record keeping is fairly simple. Make a file for each policy with the policy number, insurance company name, your agent’s name, what is covered and any beneficiaries. Imagine the ease of filing a claim with all these details at your fingertips.

If you own a home, set up a file on the purchase of your home. Next add a file on all improvements and additions. While there is a $250,000 exclusion on the sale gain, double if you are married. Don’t count on that to excuse keeping the records, as inflation can drive up prices and what Congress has given, Congress can take away.

Also set up an inventory file on your belongings. Include brand, model and serial numbers, purchase prices and replacement costs for big-ticket items. Photos or videos of your property are invaluable in the event of an insurance claim. Make copies of the inventory list, photos and video for your safe deposit box in case your home is damaged or burglarized.

If you don’t have a safe deposit box, rent one. It should contain personal records such as birth and marriage certificates, as well as adoption, citizenship and divorce papers. You also should have your proof of ownership for major possessions such as real estate, autos, boats, as well as stock or bond certificates. Again, while these can all be replaced, but not without a lot of time and effort.

You should also store your signed, original will in your safe deposit box. But you should also keep a copy at home and an additional copy with your attorney. Old originals and copies should be destroyed if you make any changes to avoid any confusion after your death.

Once you have gotten this far, one remaining step needs to be taken. This is the preparation of a personal financial review. Use a three ring binder and include a list of all your assets and liabilities. Include the account numbers, names and phone numbers of contacts. Then prepare a list of important documents, such as wills, power of attorney, and insurance policies, noting where they are located. Be sure to include the bank and location of your safe deposit box. Add the names of all your financial advisors, including your attorney and CPA. Once this is complete give copies to your next-of-kin, attorney, CPA and trustees, if any. Your CPA will use this information to make tax-planning recommendations, which could have been missed without it.

Once you have tamed the paper tiger, keep it under control by making it a weekly habit to go through your paperwork. Pay your bills and file any documents that you need to retain in the appropriate files. Once a year, give your system an overhaul. Discard any unneeded documents and files and move the old tax returns to the dead storage area.

Remember clutter is the enemy. Discarding unneeded paperwork is key to maintaining an organized financial record keeping system under control.

 * * * * *

William E. Philbrick, CPA, MST, CVA, CFF is a Senior Vice President and Director of Taxes and Forensic Services with Greenberg Rosenblatt Kull &Bitsoli, P.C. of Worcester, Mass. He can be reached at wphilbrick@GRK&B.com.

Is It “Good” For You? – Business Valuation is the Key

Posted on by

Worcester Jewish Chronicle, February 12, 2004

Is It “Good” For You? – Business Valuation is the Key

David J. Mayotte, CPA, CVA

There will be more wealth transferred in the next 10 years than in any other time in history:  The baby boomers will be retiring.  With their retirement comes the disposition and transfer of their businesses.

 Successful planning (along with a minimum of tax) is dependent upon the succession plans drawn up and, more importantly, having these plans put into action and followed.

 According to a recent study, conducted by the MassMutual Financial Group, of the 1,143 companies that responded to the MassMutual Financial Group/Raymond Institute American Family Business Survey, more than two-thirds (67.5 percent) reported a “good” understanding of the amount of estate tax that will be due upon their deaths.

 So, this sounds good, right?  This does, but their expectations might be unrealistic.

 Approximately 55.3 percent of the respondents to this survey indicated that they do not conduct formal business valuations of the company share value.  Without this information, they cannot accurately calculate their estate tax bill.  So, how can 67.5 percent of the respondents answer that they have a “good” understanding?

 It appears that a “good” understanding may be “bad” news for many business owners.

 So, what does this all mean?  Simply put, there should be a documented succession plan that is established based on current facts and circumstances using realistic sustainable values.  The succession plan should to be revised to reflect the current wants, needs and desires of the business owners as circumstances change.

 How much is your business worth?

Have you ever had a formal business valuation performed?  Why not?

If selling a business (known as a divestiture), a business valuator would help establish the value of the entity as a whole.  The business valuator would look at similar companies in similar industries to help establish the value of the business.  The business valuator would also examine the industry in which the entity operates; is the industry going through consolidation or rapid expansion?  The business valuator would also examine the national, regional and local economies as it relates to the entity being valued.  Today, more than ever, companies are dealing with customers all over the world.

 If gifting a business (to family members, for instance), a business valuation may be needed and attached to the gift tax return.  Documentation, such as a business valuation, needs to be included with the gift tax return if minority interest and/or lack of marketability discounts are taken against the value of the interest gifted.  Of course, without proper documentation, the IRS could successfully argue that the statue of limitations (generally three years for gift tax returns) never started because adequate documentation was not given.  Do not let that happen to you.

 A minority interest is usually defined as an interest that is less than 50 percent.  Lack of marketability tries to compensate for the illiquidity of the entity’s common and preferred stock.  The vast majority of all businesses out there are closely held, non-publicly traded.  The stock of these entities cannot be exchanged or sold on a timely or efficient manner.

 Maybe, instead of selling a business, one is buying a business (known as an acquisition).  Wouldn’t it be nice to see what an independent third party thinks of the company that you are buying?  And, more importantly, the price that you are paying?  A business valuator would examine the company’s strengths and weaknesses and determine the fair market value of the company.

 This leads to a very important phrase:  “fair market value.”

The IRS and the courts have defined this as follows:

“The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.”

 Even when succession plans come together, circumstances beyond your control may go awry.  The best succession plans and implementation could be affected unexpectedly by litigation.

Many times, business valuations are required for litigation support such as shareholder disputes and divorce.  State law governs disputed property settlements.  In fact, most states have yet to establish standards of value.  Fair market value is usually not used in such cases.

Instead, fair value is usually the required premise of value.  The definition of fair value is as follows:

 “The value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable.”

 This is a far cry from fair market value and can be more subjective.

In divorce proceedings, the business valuation is performed under the guidelines of the state in which the couple is getting divorced.  In most states, discounts for minority interests and lack of marketability are not allowed.  The court usually determines the date of the business valuation.

 As one can see, business valuations are important to today’s business owners as a key part of their succession plans.  Business owners should seriously consider if they should obtain an independent opinion of value on their business.

 Most importantly, succession plans should reflect the current wants, needs and desires of the business owners.

________________________________________________________________________

David J. Mayotte, CPA, CVA is a manager with Greenberg, Rosenblatt, Kull & Bitsoli, P.C., located at 306 Main St., and specializes in business valuations and closely held businesses.  He can be reached at 508-791-0901.

GRK&B’s Mayotte Earns Certified Valuation Analyst Designation

Posted on by

WORCESTER, Mass., July 1, 2003 – Greenberg Rosenblatt Kull & Bitsoli, P.C. (GRK&B), one of the region’s leading accounting firms, announced today that David J. Mayotte of Woodstock, Conn., a manager at the firm, has earned the designation of Certified Valuation Analyst (CVA) from the National Association of Certified Valuation Analysts (NACVA®).

The CVA’s expertise is useful in the purchase or sale of a business, succession planning, buy-sell agreements, charitable contributions, estate and gift taxes, and initial public offerings. In the litigation arena, valuations are necessary when there is a business disruption, dissenting shareholder actions, a divorce or partner disputes.

"An increasing number of accounting firms are offering this important service, but many lack the experience and certification needed to ensure the business owner that the valuation is comprehensive and accurate," said Senior Vice President William E. Philbrick, CVA. "Greenberg Rosenblatt Kull & Bitsoli now has two CVAs and valuations are becoming a growing part of our business."

Mayotte joined GRK&B in 1994. He performs audits and provides tax consulting to manufacturers, retailers, investment firms and other clients. He has experience in valuing a wide variety of businesses including manufacturers, insurance agencies, and technology companies, as well as companies that hold private investments and provide personal services. He graduated from Nichols College in Dudley, where he majored in accounting and economics. He is a member of NACVA, the American Institute of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants.

The NACVA is a global, professional association that supports the business valuation and litigation consulting disciplines within the CPA and professional communities.

*****

GRKB (www.GRKB.com) of Worcester, Massachusetts is one of the region’s largest independent accounting firms and a member of JHI, an association of worldwide independent CPA firms.  GRKB provides comprehensive accounting, tax, valuation and consulting services for business entities, non-profit organizations, individuals, trusts and estates.