Newsletters for July 2011

Fixed Assets and Depreciation

Friday, July 1, 2011

By: Dave Thomsen, Partner email

Over the past few years or so, issues have arisen in our world of accounting for cooperatives that have brought the way we historically looked at property, plant and equipment, and the depreciation of those assets, under question.  The first issue came about a few years ago when the loan commitments required to finance cooperative operations became so large that your lender saw it necessary to share some of the risk involved in certain loan packages. Thus, fixed asset appraisals became the norm in many cases.  A second issue has occurred with new accounting standards related to mergers and the requirement to recognize business combinations at fair value.

Textbook Depreciation:  Most accountants were taught in school to compute depreciation in the following manner: “Asset Cost” less “Salvage Value” divided by the “Useful Life of the Asset.”  For example, a steel grain bin built for a cost of $500,000 with a scrap value of $25,000 that will be used for 25 years would have an annual depreciation expense of $19,000 and would have at least some book value for 25 years.  However, in most cases today, salvage value is routinely ignored and the estimated useful life is based more on acceptable IRS tables than on the actual life the asset is used to produce income.

Actual Practice:  Most of our cooperative audit clients take a “conservative” approach to depreciating their fixed assets.  In the example above, the salvage value would be ignored and the $500,000 bin would depreciated over 10 years based on the IRS class life tables amounting to annual depreciation of $50,000.  The asset is fully depreciated after 10 years and for book purposes has no value for more than half of its actual useful life.

Why do we do this?  The accelerated depreciation expense lowers the bottom line thereby reducing income and income available for patronage dividend allocations, saving the cooperative cash.  However, this conservative approach may be distorting the real value of the balance sheet by recognizing no or less than actual value of assets the company owns.  Depending on the circumstances, appraisals may be necessary to give companies credit for the unrecognized value of those assets, or major adjustments will be required under the new fair value requirements in accounting for future mergers.

Maybe its time to re-think this process as we look at ways to further strengthen balance sheets and search for the right mix of allocated and unallocated members’ equity.  We can still use these conservative ideas for tax purposes, but we must also consider alternatives to bring book balance sheets more in line with actual values.  We are available if you would like to discuss this issue further and will be encouraging this debate as we begin our upcoming audit engagements.

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By: Chris Coldiron, CPA, Tax Manageremail

Recent surveys indicate that individuals and businesses purchasing goods over the internet are not properly remitting sales or use tax, many times in violation of state law (the estimated non-compliance rate in California was greater than 98%).  With states becoming more desperate for revenue sources to offset record deficits, this area becomes an easy target for state auditors.  If you are unsure of your state’s laws regarding the payment of sales or use tax for internet purchases, please contact us so that we may research the matter and advise you accordingly.

State auditors are also on the lookout for businesses that might have a filing requirement in their state that is not being met.  If your business engages in transactions outside your home state and you are unsure if this activity generates additional filing requirements, please contact us so that we may help you make that determination.

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1099 Reporting Changes, Again

Friday, July 1, 2011

By: Chris Coldiron, CPA, Tax Manageremail

As you may have heard, H.R. 4, the “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011” repealed all new 1099 reporting requirements that were set to take effect January 1, 2012.  The Act was signed into law by President Obama on April 15th.  Basically, 1099 reporting requirements will continue to be the same as they’ve always been.  This change will significantly decrease the compliance burden small businesses were anticipating.  However, this recent change does not do away with the requirement that payers obtain and retain a form W-9, Request for Taxpayer Identification Number and Certification, for all payees.  This requirement applies even to governmental agencies and corporations, although these entities are typically exempt from the 1099 reporting requirement.  Absent obtaining a W-9 that either documents an exemption to the 1099 reporting requirement or provides the necessary information for that reporting, backup withholding at a rate of 28% is mandatory.

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Section 199 Amended Returns

Friday, July 1, 2011

By: Chris Coldiron, CPA, Tax Manageremail

The case for Section 199 amended returns continues!  The first pre-settlement appeals conference with the IRS Appeals Office is scheduled for August 8th and 9th.  Please be aware that if you filed an amended return to claim an enhanced Section 199 deduction and have not heard from the IRS, please contact us so that we may follow up on and track the status of your amended return. 

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By: Chris Coldiron, CPA, Tax Manageremail

To help offset the bite of rising gas prices, the IRS announced on June 23rd that the standard business mileage rate will increase for the second half of 2011 (beginning July 1st) to 55.5 cents per mile, up from 51 cents per mile for the first half of 2011.  The mileage rate used in computing deductible moving expenses and medical transportation costs also increased by 4.5 cents per mile to 23.5 cents per mile with the same effective date.  The rate used to compute mileage for charitable driving did not change and remains at 14 cents per mile for all of 2011. 

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