As I sat late Tuesday evening on November 4^th watching the President Elect, Barack Obama, deliver his victory speech, a reality became apparent that the Bush administration is actually approaching its close and a new administration will be entering Washington.

It’s hard to believe that eight years have passed so quickly and also, as I reflect, that such an incredible number of historic tax law changes were enacted throughout Bush’s term. From tax rate cuts to Alternative Minimum Tax (AMT) relief to economic stimulus packages, the past eight years have been an extremely active time in taxation. As the country enters its next presidential term under new leadership, tax policy will undergo significant change.

One challenge for the new administration is the daunting task of balancing taxation with the government’s commitment to fiscal and social responsibility. If it reduces taxes, vital government programs face cuts, while an increase in taxes would result in a reduction of consumer and corporate spending, thus hampering the economy. President Elect Obama has addressed this dilemma by offering to reduce taxes to families making under $250,000 per year and subsidizing this reduction with increases to families making over $250,000 per year, a reduction of government spending and the elimination of abusive tax loopholes.

Under Mr. Obama’s plan, the following tax incentives are highlighted.

Middle Class Incentives (under $250,000/family)

- Tax credits of up to $1,000 for workers

- A $4,000 refundable credit for qualified tuition expenses

- A 10% refundable credit for mortgage interest payments

- Eliminate income tax for seniors making under $50,000

- Expand Earned Income Credit, child care credits, clean vehicle credits and retirement savings incentives

Business Incentives

- Elimination of capital gains tax on investors in small businesses

- Cutting corporate tax rates for companies creating jobs in the US

- 50% refundable credit for small businesses paying employee premiums

- Making the Research and Development Credit permanent

On the flip side, Mr. Obama’s plan includes the following tax increases and reform:

Tax Increases to Families Exceeding $250,000 and an adjustment to Estate Tax

- Top tiered income tax rates restored to pre-Bush levels of 36% and 39.6%

- Long-term capital gain tax rate increase from 15% to 20% (families making under $250,000 will continue to pay 15%)

- Qualified dividend tax rate increase from 15% to 20% (families making under $250,000 will continue to pay 15%)

- Estate tax will retain a rate 0f 45% for those estates over $7M

Tax Reform

- Reforming international tax loopholes by eliminating incentives for shipping jobs overseas

- Closing domestic tax loopholes by clarifying the economic substance doctrine and increasing reporting on capital gains

- Elimination of tax incentives of oil and gas companies

- Closing other loopholes such as taxing carried interest as ordinary income and closing the CEO pay loophole

- Increase in the investigation of offshore tax havens

As evidenced by the items above, it’s easy to conclude that embodied in Mr. Obama’s plan is an underlying (and well-publicized) theme of “redistribution of wealth.” The goal is primarily to lessen the gap between the middle class and upper class — a gap that has widened to historic proportions under President Bush’s administration. Using AMT as an example, a number of middle class taxpayers become subject to a tax that was intended for the wealthy, thus subsequently forcing temporary patches included in various economic stimulus packages.

“Change” was the theme of Mr. Obama’s campaign and this will be what we can expect with taxation. We also should keep in mind that regardless of the items listed above, it is likely that events will occur that can drastically change his comprehensive tax plan. We only have to look as far back as the changes enacted by the Bush administration, and certainly we don’t need to be reminded of the famous words uttered by the elder George H.W. Bush that helped him win the 1988 presidential election.  Luckily, we were not very good lip readers.

At this point, everyone has heard of the new Emergency Economic Stabilization Act of 2008 (EESA), more commonly known as the “Bailout Plan.” This plan authorized the US government to spend up to $700B to rescue US financial institutions from the lingering effects of the sub-prime mess (to put it lightly). But the Bailout reached further than the banks and brokerage houses:  deeply rooted within the plan are tax provisions that will affect a large number of taxpayers.

One such provision is Alternative Minimum Tax (AMT) relief, which increases the exemption amounts to $69,950 for married filing jointly, and $46,200 for individuals (pre-EESA, the amounts were $45,000 and $33,750, respectively). The provision will also allow for personal credits against AMT. The cost of this provision is estimated at approximately $62B over ten years.

Also included are extensions expiring after December 31, 2007. For individual income tax some of the popular incentives include:

1.  the deduction for state and local sales taxes for those who elect to deduct sales tax in lieu of the state income tax deduction,

2.  deduction for qualified tuition expenses for higher education (subject to adjusted gross income limitations,

3.  teacher’s education expense deduction of $250,

4.  additional standard deduction for real property taxes for nonitemizers, and

5.  tax free contributions of IRA plans to qualified charitable organizations.

Extensions for some of the popular business tax incentives include:

1.  extension of the Research and Development Credit,

2.  15 year straight line depreciation for qualified leasehold, restaurant and retail improvements,

3.  section 199 deduction for Domestic Production Activity in Puerto Rico, and

4.  extension of Work Opportunity Tax Credits for Hurricane Katrina Employees.

The Bailout  also includes a number of renewable energy incentives enacted to encourage investment in this area, as well as  some revenue generating provisions. One provision that will affect many taxpayers is the new mandatory requirement for brokers to furnish basis information to the IRS relating to sales of publicly traded stock. In prior years, brokers were only required to report gross proceeds and it was up to the taxpayer to report the appropriate cost basis. It will be extremely important that taxpayers confirm that their broker has the correct basis on their portfolio, especially if funds were transferred to a new broker. This provision is expected to raise close to $6.7B in revenue over the next 10 years.

There is no question that the bailout, from a macro level, will ultimately cost Americans as Wall Street is slated for the bulk of the economic attention. Some studies have estimated the cost at around $5,000 per working American. However, the tax incentives included within the plan allow some relief for taxpayers and businesses.

Is the bailout plan perfect? This will likely be debated for some time, but one thing that is for certain is that the tax incentives were a necessary addition to the overall plan.

A recent article in Accounting Today investigates a study on reporting practices by multinational companies, and seems to question the intentions of these filers.  Specifically, the report (conducted by the Government Accountability Office) concludes that current rules “influence company decision about how many workers to employ and how much to invest in particular activities and locations.”

One noteworthy comment from the article comes from GAO Chairman Max Baucus (D-Mont.):

I’ve said before that we will tackle tax reform in 2009 and this report underscores the need to review business taxes as part of our tax reform efforts in the next Congress. Simply put, I do not intend to allow U.S. multinationals to sidestep their fair share of taxes by moving income offshore.

This viewpoint may be grounded in sound information from the report, but reform is not necessarily the answer — the best recourse may simply be to clarify and better enforce the rules that exist.

Currently, the US has one of the highest corporate tax rates of any developed country in the world.  As a result, corporations looking to cut costs often determine where to set up business operations by looking to income tax rates as well as payroll and other costs associated with various jurisdictions.

But taking that measure does not exploit a loophole.  The Internal Revenue Code currently has significant rules that are specifically enacted to reduce the possibility of US taxpayers shifting income to foreign jurisdictions.  These include, but are not limited to, Subpart F rules, Transfer Pricing Rules and IRC Section 367, which governs transfers of property from the US to other countries.  Despite Senator Baucus’s quote, these rules make it very difficult for corporations to merely “sidestep their fair share of taxes by moving income offshore.”

That said, the rules are so complex that they are most likely applied differently by different corporations, depending upon how they interpret the rules relevant to their own particular fact pattern.

Back to the solution, then.  One thing the IRS could do is to provide better guidance as to how the rules should be applied.  A second thing would be to step up enforcement of reporting requirements currently in effect.  Proper reporting would provide the IRS with better information as to whether the rules were being applied properly.

Within the past month, the IRS has indicated they will start penalizing corporations for failure to file the necessary information returns.  Penalties have been applicable for many years, but have rarely been assessed.  Better enforcement could be the best way to help prevent any tax avoidance and clear up misunderstandings as to whether taxpayers are shifting income offshore to avoid taxes.

New M&A guidelines under FAS141R are taking effect in 2009, and there’s been some talk about how it might impact the deal process. In fact, this Accounting Today article cites a study by Deloitte that concludes “out of more than 1,850 executives, 40 percent said the revised standard would cause them to rethink deal strategy or have an impact on their planned deal activity.”

This doesn’t surprise me, as some of the pending changes will have a destabilizing effect on post-merger balance sheets. However, I also feel strongly that accounting challenges should never hold back a strategically sound deal. The accounting, valuation and auditing experts simply need to adjust to the new guidelines and structure deals accordingly – not forego or delay them.

Here are some of the significant changes headed our way:

1. Timing of deals and reporting

FAS141R provides a more stringent timeline for reporting business combinations, and if deadlines are missed then provisional amounts must be reported for incomplete terms. That means not having the most qualified information, which can lead to more serious issues down the road. Expanded disclosure requirements will make the deadlines even more difficult to meet and could force companies to speed through the process, so prioritize the planning process and have the right team in place early to avoid sacrificing quality and accuracy for speed.

2. Contingent consideration

The purchase price of a business combination now includes the fair value of contingent considerations. This change could significantly increase the upfront purchase price recorded on deal transactions, as well as increase the volatility of subsequent accounting. Given the major uncertainties as to future amounts and timing of payments of the contingent payment, the fair value of this liability may materially fluctuate over time as more information is obtained.

3. In-process R&D

Under previous regulations, companies could record the fair value of IPR&D as a period cost of a transaction. FAS141R, however, requires that it be recorded as an intangible asset on the balance sheet. If the IPR&D does not come to fruition, it will subsequently need to be written down to its fair value, potentially zero, resulting in an impairment charge to the income statement.

These changes and others will bring us closer to international standards, and they will in the end make for a clearer picture of deals. We’ll take a more in-depth look at FAS141R in an upcoming MFA Perspectives article, and we encourage you to check it out when it’s posted on our Thought Leadership page.

Well, it looks like we may be on our way.  After years of false starts and conjecture about U.S. adoption of - or complete convergence with - International Financial Reporting Standards (IFRS), the SEC issued a press release on August 27th entitled “SEC Proposes Roadmap Toward Global Accounting Standards to Help Investors Compare Financial Information More Easily“.  Despite this press release, a final decision as to whether the adoption of IFRS is in the best interest of the public is not expected until 2011, and U.S. issuers would not begin using IFRS before 2014.

While this development is significant in that it is the first time the SEC has publicly announced a roadmap for the use of IFRS, it doesn’t change my position on what should be done now. I’ve been reading a lot from the press and other news sources about the impending effect of IFRS on U.S. GAAP, and I’m not convinced that IFRS will be a reality any time soon in the U.S.  Call me a cynic, but the SEC gives itself a lot of wiggle room to delay (indefinitely, if it wishes to), and Chairman Cox doesn’t help the cause by using words like “cautious and careful plan”.

And remember folks…the SEC’s announcement will likely have an impact on private companies as well.  The chairman of the FASB, Robert Herz, has gone on record a number of times regarding the push to international standards, and the SEC’s actions will simply add fuel to that fire.  But similarly, the FASB is unlikely to allow the adoption of IFRS prior to the SEC, and thus any delays by the SEC will likely be reflected in actions by the FASB too.

Being the cautious and conservative CPA that I am, I continue to strongly advocate advanced education on the topic of IFRS and I still contend that companies do not want to, nor should they be, taken by surprise if/when IFRS becomes a reality here in the United States.  But I remain less convinced that this change will come about in the United States as “quickly” as outlined in the SEC’s proposed roadmap.

Time will tell, but as far as I’m concerned, the sky is not yet falling.

UPDATE 10/7/08:  OK, I’m generally not one to say “I’m right”, but slippage is already occuring.  Here’s a link to a brief article on CFO.com that discusses what’s happening (or NOT happening) as of late. 

I’ve heard some describe the Sarbanes-Oxley Act as the accountant’s version of the full employment act. If that’s true, what does it say about the current state of revenue recognition guidance the in U.S.? Recognition of revenue was once a simple concept - did you ship product or provide a service? If so, you likely recorded revenue in connection with such a transaction. Over the decades, however, business has become complex (or did we complicate it for ourselves?), and the complexity of revenue recognition has evolved as well.

We have seen the SEC, FASB, AICPA and other standard setting bodies develop reams of pronouncements and discussion on the subject of revenue recognition. Recognition of revenue has become so complex that it is among the top five reasons SEC registrants file restatements of previously reported financial results.

The topic of revenue recognition is also among the most concerning of issues that auditors contend with when planning and performing an audit. The rules can vary markedly depending on whether you’re a manufacturer, distributor, contractor, software vendor, service provider, financial institution, airline, broker-dealer, etc., etc., and can vary further if you have contracts with multiple elements, return or refund privileges, stipulated shipping terms, etc. For instance, there are currently at least 25 different industry-specific revenue recognition rules contained within U.S. accounting literature, including separate guidance for airlines, casinos, the film business, mortgage banks, hospitals, and software companies. Needless to say, we accountants have our hands full when it comes to this subject.

Given all this, it was intriguing to me when I heard that the Financial Accounting Standards Board (”FASB”) has agreed to issue a discussion paper [PDF] later this year with an eye toward boiling down the myriad industry-specific rules into a single general standard. This would mean that the airline industry would recognize revenue in a manner similar to the software industry.

Does such a conceptual framework make sense? Perhaps it can, but I will be watching closely for the FASB’s discussion paper this October/November. Despite the volume of existing revenue recognition literature and despite it’s occasional imperfections, it is a body of knowledge that has carried the U.S. far. As my dad used to say, “don’t fix it if it ain’t broke”. Let’s make sure we’re focused on the necessary fixes and not implementing change for the sake of change.

New guidelines on fraud prevention tactics were issued this summer in a joint effort by the Association of Certified Fraud Examiners, the AICPA, and the Institute of Internal Auditors. You can check out a summary press release here; the general theme they convey is that companies need to do more to prevent fraud along a number of fronts:

Five key principles within the guidance address governance, risk assessment, fraud prevention and detection, investigation, and corrective action. Following the guidance will help ensure that there is suitable oversight of fraud risk management, that fraud exposures are identified and evaluated, that appropriate processes and procedures are in place to manage those exposures, and that fraud allegations are addressed in a timely manner.

The risk of fraud is substantial and the median loss amounts have been increasing steadily over the years. For that reason I certainly share the desire to alert company leaders to the risk, especially in the current economic climate. The pressures of fraud are increasing on individuals as consumerism meets a downturning economic environment. The credit crunch, falling housing prices and the pressures of a consumption lifestyle will turn the unlikeliest individuals to acts of misappropriation (more on that in this MFA audiocast).

Though trust and delegation of authority are integral parts of enabling an organization’s members to achieve truly remarkable levels of performance, the lack of oversight can also open up gaps that enable fraud. They can be closed, however, through sound management principles that create oversight mechanisms that will monitor activity, promote transparency, and ensure that the collective assets of the organization are protected from malfeasance.

Despite suffering loss, organizations still have the onus of proving it and recovering lost property, often without the active involvement of law enforcement. Public agencies have limited resources and are often diverted by other causes — and no preventive regulations will ever match the safeguards provided by sound management and a well laid out process.

Local PD’s don’t have the resources to conduct forensic audits, and state and federal agencies only commit to glamour cases. These glamour cases are often restricted to publicly traded companies, identity theft, defrauding investors and other public related matters…there are many gems in this area, but a regional standout was the TJX case that surfaced last year. Internal breaches of fiduciary responsibility, especially when they involve businesses, are often low on the law enforcement totem pole.

The most important starting point in fraud prevention is realizing that the responsibility rests squarely on management’s shoulders to minimize opportunities for a potential fraudster. These newly issued guidelines cite practical approaches to prompt responsible managers to institute appropriate control mechanisms into their organizations. Applying such principles of effective oversight can promote efficiency, create transparency and effectively mitigate an organization’s risks of fraud.

This summer marked the passage of some noteworthy tax reform in Massachusetts that will be on our minds as year-end strategies start to take shape. Specifically, Governor Patrick signed an Act Relative to Tax Fairness and Business Competitiveness that his office says will close some corporate loopholes while reducing income tax obligations.

Key components of the Act include a combined reporting element that goes into effect next year and will have a significant impact on multi-state operations accustomed to filing separate returns; Massachusetts conformity with federal business entity classification; and reduction in overall corporate tax rates beginning in 2010.

While the tax reform generates additional income for the state — up to $482 million, according to the Massachusetts Business Roundtable — the changes create an interesting balancing act for companies. Depending on the extent of local operations, they may need to look at how much their in-state infrastructure will affect their tax payments.

We will take a more indepth look at the reforms for our annual tax seminar in the Fall, and in the meantime will continue to monitor major developments that take effect in 2009.

My inaugural blog for MFA has me thinking about transparency in business. After all, what is a corporate blog if not the embodiment of a transparent means of communication with one’s clients, colleagues, and interested stakeholders. Transparency has been, in part, facilitated by technology, and hence the birth of tools such as this blog. My goal each week is to use this tool, like so many of the technological tools before it, to deepen our relationship with MFA’s core constituencies and encourage open dialogues on a varying degree of subjects over time.

Like business in general, change is ever-present in public accounting. We must remain expert on technical financial reporting pronouncements that are continually evolving; we must continually demonstrate our expertise of complex federal, state and international tax laws; and we must have a solid understanding of the economic environment in which we all live and operate our businesses. One need look no further than to recent FASB actions to understand how the theme of transparency continues to pervade business. More and more, FASB projects are actively addressing the questions of fair value accounting, convergence of US accounting standards with international accounting standards, and simplification of the existing bodies of accounting knowledge – all great examples of how transparency in business and reporting continues to pervade every facet of what we do.

Having grown up in the 80s, my first introduction to the use of technology to speed up business was in the form of fax machines and so-called portable computers that probably weighed fifteen pounds without a modem or network access. Many enterprises did not have local area networks, the internet was barely known to most and the World Wide Web had yet to come into existence – I lived online in the limited world of AOL and couldn’t email someone unless they, too, were an AOL member.

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The world of e-commerce sales tax has been active of late, complete with high profile legislation that could in the end impact the way sales tax is applied to online retailers across the country. MFA has been vocal about the complex landscape, including a recent MFA article (just click the picture at right to read Four Questions Online Sellers Need to Ask About E-Commerce Sales Tax) and an audio interview with Rosanna DiFilippo, MFA Partner, Keeping Up With Online Sales Tax.

Well, the situation continues to evolve. On May 8, 2008, The New York Department of Taxation and Finance issued TSB-M-08(3)S, which further explains the legislation enacted effective April 23, 2008, which provides a presumption that certain sellers of taxable tangible personal property or services are sales tax vendors and are required to register and collect sales tax.

The new law amends the definition of vendor and provides that a seller is presumed to be a vendor if the seller enters into agreements with New York residents to refer customers to the seller. Specifically, a vendor includes persons who solicit business within New York through employees, independent contractors, agents or other representatives and as a result of, makes sales of tangible personal property or services to New York residents, which are taxable.

A New York State resident for sales tax purposes includes any individual who maintains a permanent place of abode in New York State; any corporation incorporated in New York; and any corporation, association, partnership, or other entity doing business or maintaining a place of business in New York State.

The Department explained that a seller of tangible personal property or services is presumed to be a vendor when two conditions are met. First, the seller enters into an agreement with a New York resident and for a commission or other consideration, the resident representative directly or indirectly refers customers to the seller, whether by link on a web site or by some other means. Second, the cumulative gross receipts from sales to New York customers as a result of referrals by all of the seller’s resident representatives total more than $10,000 during the preceding four quarterly sales tax periods. (more…)