Today's CPA Sept/Oct 2013 by The Warren Group

Today’sCPA SEPT/OCT 2013

T E X AS S O C IET Y OF

C ERT I F I ED P U BL IC AC C OU N TANT S

TSCPA’s

2013 RISING STARS Buy-Sell Agreements Avoiding the 10 Percent Penalty on Early Retirement Distributions The Financial Reporting Framework for Small and Medium-Sized Entities Minimizing Tax Liability Using the Tax Benefit Rule

Also: TSCPA Annual Meeting of Members

GR WTH It’s what CGMA stands for. Officially, of course, it’s Chartered Global Management Accountant. A new designation representing accomplished professionals that drive and deliver business success, worldwide.

Find out more at cgma.org

Contents

CHAIRMAN

SEPTEMBER/OCTOBER 2013

VOLUME 41, NUMBER 2

William Hornberger, CPA

EXECUTIVE DIRECTOR/CEO John Sharbaugh, CAE

EDITORIAL BOARD CHAIRMAN Winford Paschall, CPA

Staff MANAGING EDITOR DeLynn Deakins ddeakins@tscpa.net 972-687-8550 800-428-0272, ext. 250

TECHNICAL EDITOR C. William Thomas, CPA, Ph.D. Bill_Thomas@baylor.edu

COLUMN EDITORS Greta P. Hicks, CPA Mano Mahadeva, CPA, MBA James F. Reeves, CPA C. William (Bill) Thomas, CPA, Ph.D.

WEB EDITOR Wayne Hardin whardin@tscpa.net

CONTRIBUTORS Ali Allie, Melinda Bentley; Rosa Castillo; Jerry Cross, CPA; Anne Davis, ABC; Donna Fritz; Wayne Hardin; Chrissy Jones, AICPA; Rhonda Ledbetter; Craig Nauta; Kim Newlin; Catherine Raffetto; Katey Selph; Patty Wyatt

DIRECTOR, MARKETING & COMMUNICATIONS Janet Overton Design/Production/Advertising The Warren Group thewarrengroup.com custompubs@thewarrengroup.com

CLASSIFIED Donna Fritz Texas Society of CPAs 14651 Dallas Parkway, Suite 700 Dallas, Texas 75254-7408 972-687-8501 dfritz@tscpa.net

Editorial Board Arthur Agulnek, CPA-Dallas; Kristan Allen, CPA-Houston; James Danford, CPAFort Worth; Greta Hicks, CPA-Houston; Baria Jaroudi, CPA-Houston; Tony Katz, CPA-Dallas; Jeffrey Liggitt, CPA-Dallas; Mano Mahadeva, CPA-Dallas; Alyssa Martin; CPA-Dallas; Dawne Meijer, CPA-Houston; Winford Paschall, CPA-Fort Worth; Marshall Pitman, CPA-San Antonio; Mattie Porter, CPA-Houston; Kamala Raghavan, CPA-Houston; James Reeves, CPA-Fort Worth; Barbara Scofield, CPA-Permian Basin; Brinn Serbanic, CPA-Central Texas. © 2013, Texas Society of CPAs. The opinions expressed herein are those of the authors and are not necessarily those of the Texas Society of CPAs. Today’s CPA (ISSN 00889-4337) is published bimonthly by the Texas Society of Certified Public Accountants; 14651 Dallas Parkway, Suite 700; Dallas, TX 75254-7408. Member subscription rate is $3 per year (included in membership dues); nonmember subscription rate is $28 per year. Single issue rate is $5. Periodical POSTAGE PAID at Dallas, TX and additional mailing offices. POSTMASTER: Send address changes to: Today’s CPA; 14651 Dallas Parkway, Suite 700; Dallas, TX 75254-7408.

Today’sCPA

| SEPTEMBER/OCTOBER 2013

14 32

cover story

columns

26 Introducing TSCPA’s 2013 Rising Stars Honorees

5 Chairman’s and Executive Director’s Message

society features 14 Spotlight on CPAs

Full Circle

16 Make Sure Your Buy-Sell Agreement Fits 24 Capitol Interest

Campaigns Already?

technical articles 32 How to Avoid the 10 Percent Penalty on Early Retirement Distributions 36 The Financial Reporting Framework for Small and Medium-Sized Entities

Responsibility of Individuals – Your ROI

6 Tax Topics

The 3.8% Tax on Net Investment Income

7 Business Perspectives

Fast, Focused and Flexible

8 Accounting and Auditing

FASB Offers New Guidance for Liquidations

10 Emerging Issues Moneyball for Government

12 Chapters

2012-2013 Outstanding Chapter Awards

departments 19 Take Note 44 Classifieds

Today’sCPA SEPT/OCT 2013

46 CPE Calendar

40 A Tale of Two Taxes

OF TEX AS SO CIET Y

AC C OUNTANT S CERTIFIED PUBLIC

TSCPA’s

2013 RISING STARS Buy-Sell Agreements Penalty on Avoiding the 10 Percent s Early Retirement Distribution Framework for The Financial Reporting d Entities Small and Medium-Size Minimizing Tax Liability Rule Using the Tax Benefit

See the digital version of Today’s

CPA online at tscpa.org.

Also: Midyear Board of Directors

Meeting

What Can You ExpECt

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Questions? Contact the Member Benefits Administrator at 1-800-428-0272 ext. 216 or craffetto@tscpa.net. 4

Today’sCPA

| SEPTEMBER/OCTOBER 2013

Chairman’s and Executive Director’s Message By William H. Hornberger, CPA | TSCPA Chairman & John Sharbaugh, CAE | TSCPA Executive Director/CEO

Responsibility of Individuals – Your ROI In this issue of Today’s CPA, we would like to tell you more about TSCPA’s new recruitment and retention campaign, the Responsibility of Individuals (ROI). TSCPA debuted the campaign at the Annual Meeting of Members this summer. The campaign promotes members as being responsible for their profession and its values, and it was developed to remind Texas CPAs of the significance of belonging to their professional community. TSCPA knows the importance of your CPA license. You represent all that the license stands for, and you work daily to be an example of honesty, integrity, and the high ethical standards CPAs are expected to uphold. You could say CPAs are responsible. That is, responsible to your clients, employer, family, community, profession, and yourself. The responsibility of individuals – or your ROI – is maximized when combined through membership in, and with support of, your professional association. TSCPA offers benefits, programs and services to help you maximize your ROI. For the new ROI campaign, TSCPA identified five areas of responsibility and how the benefits, programs and services assist members in meeting these responsibilities. The areas include the responsibility to: be competent; exercise due care; be leaders; secure your profession; and leave a legacy for the future. Following are brief descriptions of these areas. Responsibility to be Competent in the services you provide. CPAs are expected to be a source for expertise in individual and business financial matters. TSCPA members ensure their competence through use of custom-tailored TSCPA programs and services. Examples include continuing

professional education offered on hundreds of topics, specialized communications and online member communities to help you stay informed on professional developments, service opportunities through committees, discounts for individuals pursuing the Chartered Global Management Accountant (CGMA) designation, and more. Responsibility to exercise Due Care through all professional activities. Since CPAs have an obligation to act with diligence and integrity, the Society has programs to support members in meeting this expectation. They include TSCPA’s Professional Ethics Committee, the Peer Review program and the Accountants Confidential Assistance Network (ACAN). In addition, TSCPA’s ValueYourMoney.org website offers simple, easy-to-access resources to assist CPAs in providing financial guidance to the public and enhancing the level of financial literacy within their communities. Responsibility to take Leadership in your actions and your work. CPAs have a commitment to service and take leadership roles in their communities, other organizations, and within their professional association. The Society can assist members as they prepare for leadership positions. There are opportunities through chapter activities, as well as volunteer service on state and chapter committees and projects. TSCPA’s Leadership Development Institute, and similar programs offered by some of the chapters, gives guidance and direction to those interested in stepping into leadership roles. Members can also access TSCPA’s Speakers Bureau for prepared speeches and presentations on financial topics to take into other organizations. Responsibility to Secure your profession. One of the most extensive areas of focus for TSCPA is in the area of regulatory and political advocacy. CPAs work hard to earn and keep their CPA license, and it needs to be protected. TSCPA dedicates itself

to monitoring legislation during every Texas legislative session for its impact on the profession. Through the Key Persons Program, the CPA point of view is shared with legislators at the state and federal levels. The Society creates opportunities for communication between CPAs and accounting standards-setting bodies through the Professional Standards Committee, Federal Tax Policy Committee and Relations with the IRS Committee; these committees provide feedback to regulators on a regular basis. TSCPA also maintains a good working relationship with the Texas State Board of Public Accountancy. Responsibility to leave a Legacy for the future of the accounting profession in Texas. To help ensure that the future of the accounting profession remains bright, TSCPA created several programs geared towards students, future CPAs, and educators. The Accounting Education Foundation awards scholarships to Texas students. With the Accounting Career Education (ACE) program, the Society sends CPAs into classrooms to talk about the benefits of an accounting education and the variety of career choices available. The Relations with Educational Institutions Committee strengthens TSCPA’s connections with accounting educators and keeps members informed about what future CPAs desire in the workplace. PROTECTING YOUR INVESTMENT TSCPA exists for you, the CPA. We are here to protect the CPA license, help you uphold your many professional responsibilities, assist future Texas CPAs, and more. For additional information on all the ways your investment as a member supports you as a Texas CPA and defends all that you’ve worked hard to attain, please visit the ROI website at www.tscparoi.org and TSCPA’s website at www.tscpa.org. ■

Willie Hornberger can be contacted at whornberger@jw.com. John Sharbaugh can be contacted at jsharbaugh@tscpa.net.

Today’sCPA

| SEPTEMBER/OCTOBER 2013

Tax Topics By Greta Hicks, CPA | Column Editor

The 3.8% Tax on Net Investment Income The Health Care and Education Reconciliation Act of 2010, P.L. 111-152, includes Internal Revenue Code (IRC) Sec. 1411, Unearned Income Medicare Contribution, which places an additional 3.8 percent tax on individuals, estates and trusts net investment income. Nonresident aliens are not subject to this new tax. The new “Medicare” tax is equal to 3.8 percent applied to the lesser of net investment income or the amount by which modified adjusted gross income (MAGI) exceeds the threshold. The MAGI thresholds are: Filing Status Single Taxpayers Married Filing Jointly Married Filing Separately

MAGI in Excess of $200,000 $250,000 $125,000

MAGI is adjusted gross income (AGI) with the foreign earned income exclusion or foreign housing exclusion added back in. HOW IS NET INVESTMENT INCOME DETERMINED? Net investment income includes: • Interest, dividends, annuities, royalties and rents, other than such income that is derived in the ordinary course of a trade or business, less allocable deductions. • Interest earned from idle cash-producing investment income. • Net income from a passive activity, whether it be rental or passive trade or business income. (A passive investor in a trade or business housed within a sole proprietorship, limited liability company (LLC), partnership or S corporation would be subject to this tax.) • Pass-through income from a passive business such as S corporations and partnerships. In addition, rents, after related deductions, are subject to the tax unless the rent is derived in the ordinary course of a trade or business. Net gain attributable to the disposition of property not held in an active trade or business is subject to the tax as is the net gain indirectly derived from disposition of S corporation stock or a partnership interest. Gains on the sale of a second home, vacation home and similar assets are taxed at 3.8 percent, as well as the taxable gain on the sale of a personal residence in excess of the Sec. 121 exclusion, currently $250K/$500K. Other examples include: • Income from nonqualified annuities. (See annuities below.) • Gains from trading in financial instruments or commodities. • Net income from a trade or business of trading in financial instruments or commodities. (Reg 1.1275-6(b)

(3), defining financial instruments as “a spot, forward, or future contract, an option, a notional principal contract, a debt instrument, or a similar instrument, or combination or series of financial instruments.” Code Section 731(c)(2) (C) defines the term more broadly as including stocks and other equity investments and evidences of indebtedness.) • Any income, gain or loss attributable to an investment of working capital will be treated as not derived in the ordinary course of a trade or business. • All the above items that flow through a pass-through active trade or business. Net investment income does not include distributions from qualified pensions; profit-sharing and stock bonus plans; qualified annuity plans; annuities purchased by Sec. 501(c)(3) organizations or public schools; individual retirement accounts; or Roth individual retirement accounts. In addition, net investment income does not apply to: • Eligible deferred compensation plans; • Tax-exempt interest; • Inside buildup of life insurance cash surrender value; • Life insurance proceeds; • Nontaxable veteran’s benefits; • Nontaxable portion of Section 1031 exchanges; or • Active business ownership within a sole proprietorship, LLC, partnership or S corporation. ITEMS OF IMPORTANCE The “Medicare” tax is not deductible and the MAGI is not adjusted for inflation. This tax is subject to the individual estimated tax provisions. An individual, estate or trust with active business ownership within a sole proprietorship, LLC, partnership or S corporation would not be subject to this tax. A passive investor in a trade or business housed within one of these flow-through entities is subject to Section 1411. The 3.8 percent Unearned Income Medicare Contribution Tax is effective for the 2013 tax year. There is little time left to make effective 2013 tax planning decisions, but investment changes made in 2013 could generate a tax reduction for 2014 and subsequent years. Use the examples above, such as tax exempt interests, as a jumping off place for discussions with clients. Also re-think past passive activity decisions and determine if actively participating would produce a lower overall effective tax rate. ■

Greta Hicks, CPA, is a consultant on IRS problems, seminar discussion leader, author of continuing education courses and web content provider. She can be reached at gretahickscpa@yahoo.com or www.gretahicks.com.

Today’sCPA

| SEPTEMBER/OCTOBER 2013

Business Perspectives By Mano Mahadeva, CPA, MBA | Column Editor

Fast, Focused and Flexible “Scott Mitchell hands off the ball to Barry Sanders … Sanders looks up field, takes three steps forward, cuts right … he gets past the defensive end … he stops, pivots, turns direction and runs to the left … he sidesteps the safety … leaps over the cornerback … he sees nothing but green grass ahead as he runs toward the end zone, with tacklers in pursuit … Wow!! What a run!” Executives agree that agility is critical to business success, an ability to respond fast with focus in an ever-changing world. Yet few are satisfied with the speed of execution within their organizations. After its first quarter earnings this year, International Business Machines Corp. Chief Executive Officer Virginia Rometty said that her company needed to move faster and respond quickly to customers. Similarly, during a City Swing Dallas trip a few months ago, Jeffrey Immelt, CEO of General Electric, told his customers that he was not happy with his company’s market speed. Companies are trying to make fundamental changes in the way they operate to keep up with a host of rapidly shifting forces. Volatility, ambiguity, and complexity show no signs of slowing down. Across the globe, newer technologies, market structures, demographics and consumer buying habits continue to disrupt old business models. Competitive pressures continue to heighten, and the pace of change in our economy is accelerating. It is clear that the new business climate will favor those companies that are agile and have the ability to recognize and respond quickly to any strategic opportunities available. Consider managing a portfolio. We set long-term objectives in light of the portfolio’s constraints and market expectations. When market conditions change, we make tactical changes to the portfolio to take advantage of market inefficiencies. However, the long-term focus and objectives remain the same. Business agility is the same – having the knowledge, skill, ability and flexibility to strike when appropriate, to seize an opportunity and

maintain focus, and the same long-term objectives. Easy as it may sound, agility is difficult to achieve. Efforts to do so come apart due to organizational inefficiencies, such as bureaucracy, bloating, inertia, complacency, lack of authority to make decisions, fear to make decisions, egos, arrogance, organizational drift, hierarchical misalignment, confusion over vision, lack of communication, empire building, the lack of resources, disconnected culture, the lack of training, and a multitude of other causes. Leaders have to make the right moves so that their companies of the future remain agile in uncertain times. Setting the tone at the top is a key attribute, as Southwest Airlines’ founder Herb Kelleher did at his company. Kelleher built a company with a strategy of respecting and rewarding its employees. The plan was to empower employees, who would treat customers well, who would then come back often, which in turn made shareholders happy. He hired people for attitude, trained them for skill, looking across all for potential leadership capabilities. Other attributes of agility include patience, courage and the ability to make a strategic strike when an opportunity arises. Take the example of Jon Daniels, General Manager of the Texas Rangers baseball team. While rivals spent millions of dollars on free agent acquisitions during the pre-season, the Rangers stayed put. In mid-season, Daniels made two strategic moves, by trading for one of baseball’s best pitchers and also picking up a best allaround player, which has changed baseball’s competitive landscape nationally.

Building teams for results is another attribute critical to business agility. David Novak, CEO of Yum Brands, is all for developing effective leaders and building teams for results. Yum Brand’s Dynasty Model starts with their employees, as these employees are recognized as the reason for the company’s success. Yum Brand corporate values – called the “How We Win Together” principles – are built around a “People Capability First” philosophy and lay the groundwork for the way their people team up together every day. And leaders of agile businesses understand that the success of their organizations depends on agile employees. If circumstances call for a change, and they usually do, the organization will sink or swim depending on employee ability to answer the call. Howard Shultz, CEO of Starbucks, understood that employees “are the business” in a real sense. The message being, a business that invests in its employees and treats them well will see them become enthusiastic ambassadors. Change in the marketplace is not something to fear. It does create an opportunity to shuffle the deck and replay the game. It means we are willing to give up activities which make us successful today, but which will not be appropriate tomorrow. Those who have the ability to move faster, better and with a sense of urgency to match the pace and complexity of the environment will continue to improve their competitive advantage. What business leaders need to do is to make their companies be Barry Sanders like – prepared to be fast, agile and able to change course with minimum disruption to succeed. ■

Mano Mahadeva, CPA, is Chief Financial Officer with Solis Health in Addison, Texas. He serves on both the Editorial Board and the Business and Industry Issues Committee for TSCPA. Mahadeva can be reached at mmahadeva@solishealth.com.

Today’sCPA

| SEPTEMBER/OCTOBER 2013

Accounting and Auditing By C. William (Bill) Thomas, CPA, Ph.D. | Column Editor

FASB Offers New Guidance for Liquidations One of the assumptions upon which Generally Accepted Accounting Principles (GAAP) is based is continuity or going concern – the assumption that an entity will eventually realize its assets and meet its obligations in the ordinary course of business. The going concern assumption is critical to financial reporting, because it establishes the fundamental basis for measuring and classifying assets and liabilities. For years, the Financial Accounting Standards Board (FASB) has been relatively silent regarding going concern, as well as measures management should take to re-value assets and liabilities when the entity fails to meet this assumption, thus leaving the responsibility for standards in this area to auditors.1 Entities lacking continuity are assumed to use liquidating values rather than historical cost, but beyond that, FASB has offered little guidance. On April 22, 2013, FASB issued accounting standards update (ASU) 2013-7 Presentation of Financial Statements, which under ASC 205, prescribes the requirements for recognition and measurement of assets and liabilities that an entity must follow when applying the liquidation basis of accounting. This standard pertains to all entities that conform to U.S. GAAP, excluding investment companies. The primary goal of this update is to increase uniformity among the financial reports of liquidating entities. This update is considered the conclusion of Phase 1 of the FASB project over the liquidation basis of accounting and going concern. “… FASB initially established its project on the liquidation basis of accounting in conjunction with its going-concern project; however, the Board ultimately decided to consider the two topics separately.”2 A FEW MORE DETAILS An entity must prepare its financial statements according to the liquidation basis of accounting when liquidation is considered imminent. Imminent liquidation arises when an entity has reason to believe that it will not emerge from liquidation and either of the following has occurred: (a) a plan for liquidation is supported by those with the proper authority and those plans will probably not be obstructed by other parties; or (b) a forced liquidation plan is obliged by outside parties. If an entity outlines a plan for liquidation in its governing documents, the liquidation basis of accounting should only be employed when that plan has changed from what was specified when the entity was formed. Other entities that should adopt the liquidation basis of accounting include those that file for bankruptcy and plan to liquidate, as well as benefit plans that are terminated by plan sponsors.

Financial statements must value assets consistent with the amount that the entity expects to receive in cash for those assets upon liquidation. Any assets that were not previously identified according to U.S. GAAP standards must be presented in the financial statements if the entity expects to sell those assets in liquidation or use them to cover liabilities. Fair value can be used to approximate the amount that an entity expects to receive from those assets, but an entity should not expect liquidating values to exactly match fair values in every situation. Liabilities should be presented at their planned settlement amounts. An entity should not expect to be lawfully discharged from any liabilities when liquidation occurs. In addition, an entity must accrue and disclose any expenses and/or income it expects to encounter during the liquidation process, as well as dates it expects to earn that income and pay those costs. An entity must also disclose any costs incurred as a result of the sale of assets during liquidation. These costs must be reported separately from the proceeds of assets sold. At a minimum, a liquidating entity must report a statement of net assets in liquidation and a statement of changes in net assets in liquidation. The changes in net assets should only include those changes that occurred after liquidation became imminent. An entity must also disclose that the financial statements are prepared in accordance with the liquidation basis of accounting, as well as the rationale behind implementation. Other disclosure requirements include the entity’s plan for liquidation, which should include how it will dispose of assets and reconcile liabilities and dates when the entity expects to conclude the liquidation. The entity must also disclose how it measured assets and liabilities, and any assumptions used in those measurements. ASU 2013-7 will go into effect Dec. 15, 2013, with optional early adoption being allowed. Adoption of this standard will allow investors and other claimants to estimate more precisely how much they can reasonably expect to recover during an entity’s liquidation. ■ FOOTNOTES 1. See AICPA Codification of Statements on Auditing Standards, Sec. AU-C 570, 2013. 2. Introduction to ASU 2013-7.

C. William Thomas, CPA, Ph.D., is the KPMG/Thomas L. Holton Chair and the J.E. Bush Professor of Accounting in the Hankamer School of Business at Baylor University in Waco. Thomas can be reached at Bill_Thomas@baylor.edu.

Today’sCPA

| SEPTEMBER/OCTOBER 2013

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| SEPTEMBER/OCTOBER 2013

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Emerging Issues By James F. Reeves, CPA | Column Editor

Moneyball for Government “Big Data,” which often has been called Moneyball for business, refers to the unprecedented volume of information, or data, being generated by organizations, and by extension, to a new genre of software designed to capture the value from the data, taking data analysis to a whole new level of organizational insights, predictive analytics, and real-time visibility into customer behavior.

The theory goes something like this: the overall volume of data is growing at an exponential rate, reportedly 50 percent per year, and will continue to do so. According to IBM’s website, 90 percent of the world’s data has been created in the past two years alone. Data is constantly flowing into an organization at a very high rate of speed, including data from sensors, clickstreams, emails, phone records, social media, images, audio, videos, GPS signals, transaction records, etc. Established companies like IBM and Oracle, as well as startups like Splunk, are building platforms to collect, organize, and analyze this torrent of data, both structured and unstructured, across an enterprise, enabling organizations to spot patterns, extract insights, make sense of complexities, inform decision-making, and predict future outcomes in ways not previously possible. Not surprisingly, the initial success stories surrounding Big Data are centered around business or commercial applications. Airlines, for example, integrate data from weather reports, flight schedules and history, and satellites that track the locations of aircraft in the vicinity of an airport to predict precisely when each plane will reach the gate. Retailers are adjusting inventory and pricing at thousands of stores in real time based on things like the types of cars driven by people in the area. Others have been able to identify patterns of customers’ purchasing seemingly unrelated items to predict their needs and future buying habits. GOVERNMENTS JUMP ON THE BANDWAGON While the National Security Agency’s phone data program has been around for a while, it wasn’t until the Edward Snowden story broke that widespread media attention began to focus on the use of Big Data by governments. And while the more

sensational stories seem to spotlight the potential dark side of Big Data, a lot of positive uses go unreported. At the federal level, agencies are able to analyze massive amounts of data, often unstructured and increasingly in real time, to connect the dots and prevent threats, predict the weather, provide entrepreneurs, drug companies, and health-care providers access to the treasure trove of medical and scientific research (e.g., at data.gov), and enable social service agencies to spot waste, fraud, and abuse. At the local level, Big Data is being employed by law enforcement to anticipate and pre-empt criminal activity (i.e., predictive policing), and to understand mobility patterns to manage transportation. CLOSER TO HOME Closer to home for CPAs is the expanded use of Big Data by the Internal Revenue Service (IRS) and the Securities and Exchange Commission (SEC), both of which are embracing new data mining tools, social media, and digital analytics in their enforcement activities. Each agency now maintains a centralized data warehouse – the SEC’s has access to 21.5 million company filings, which enables it to reduce the time it takes to analyze a potential accounting fraud or insider trading case from months to minutes; and the IRS’ Compliance Data Warehouse, the largest database in the U.S., that has grown over 1,000 percent in terms of data and storage in the last eight years, enabling the IRS to reduce the time it takes to load a full year’s worth of tax return data from over four months to 10 hours, according to an IRS director of research databases. In this new environment, the IRS is able to analyze data from dozens of sources, including tax returns, customer accounts, case management systems, and third parties (now including debit and credit card providers) to identify failure to file or remit payment, abusive tax shelters, identity theft, return preparer non-compliance, misreporting of income and deductions, refund fraud, and off-shore transactions. Former Commissioner Doug Schulman created a new group at the IRS, the Office of Compliance Analytics (OCA), to improve compliance with tax laws and make data analytics a key part of IRS decision making. Reporting directly to the commissioner, OCA Director Dean Silverman says the group has been charged with building a robust culture of analytic problem solving. Silverman has been widely quoted as boasting that private industry would be envious of the IRS’ data mining capabilities.

James F. Reeves, CPA, is Senior Vice President, New Product Development at the Tax and Accounting business of Thomson Reuters. Contact him at jim.reeves@thomson.com, or visit his blog at http://jamesfreeves.blogspot.com.

Today’sCPA

| SEPTEMBER/OCTOBER 2013

One of the early “wins” of OCA was a pilot program in which the IRS used a scoring system to link suspicious returns to their preparers and identify about 1,500 preparers who filed erroneous claims for refundable tax credits, ultimately resulting in a savings of around $200 million. U.S. News ran a four-part series on the IRS’ use of sophisticated online tools earlier this year, describing the high volume of personal information the IRS is accumulating from taxpayers’ digital activities. According to these articles, the IRS is now capturing data from eBay, Facebook, individual Internet addresses and emailing patterns, and is using sophisticated digital tracking capabilities (cookies), leveraged by the personal information it already captures, to analyze taxpayer filings and select returns for examination. The message to clients needs to be that once you are selected for an audit, your entire digital footprint can be used against you. And while much of the IRS’ focus up to this point has been on things like fraudulent Earned Income Tax Credit claims, its increasingly more sophisticated data matching and pattern recognition technology, largely developed by IBM, will enable it to move up the income ladder to focus on more middle income and small business taxpayers. Of course, it’s possible that the U.S. News and other media reports are overstating the extent of the IRS’ prowess in the data analytics space and that budget cuts, fallout from the scandal involving its targeting of 501(c)(4) organizations, and the growing drumbeat of privacy advocates collectively serve to put the brakes on the OCA and further adoption of Big Data at the IRS, at least until Congress holds public hearings and published safeguards are put in place.

HERE COMES THE HUB Meanwhile, the IRS and Department of Health and Human Services (HHS) are collaborating to build a new “system of records” that will be integral to the implementation of the Affordable Care Act, specifically the operation of the health insurance exchanges. The Federal Data Services Hub will share and transmit personal health information, tax and financial information, criminal background and immigration status, and various other personal information between agencies, including the IRS, HHS, Departments of Justice, Homeland Security, Veterans Affairs, Defense, and the Social Security Administration, state governments, as well as state and federal exchanges. We’ve never seen an IT project on this order of magnitude, and the administration has not yet issued rules about who will have access to what information and what safeguards, accountability, and oversight measures will be put in place. NEW OPPORTUNITIES All of this sounds a little big brother-ish, and it’s not hard to see the potential dark side of Big Data. I’m not sure whether to believe all the hype, but there is a flood of investment capital flowing into this space, and I sure wouldn’t bet against it at this point. CPAs have long toiled deeply in their clients’ and employers’ data. It’s what we do. One has to wonder how the advent of Big Data, should it live up to its billing, will extend CPAs’ analytical capabilities, reset expectations, and create opportunities not previously considered. ■

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Today’sCPA

| SEPTEMBER/OCTOBER 2013

Chapters By Rhonda Ledbetter | TSCPA Chapter Relations Representative

2012-2013 Outstanding Chapter Awards To inspire chapters in their continuing effort to better serve members, TSCPA bestows Outstanding Chapter Awards to the small- and medium-sized chapters. Selection is made by a group of past presidents from chapters of all sizes, who understand the work involved in successfully leading volunteers. Following is information about the chapters honored for the 2012-2013 year. OUTSTANDING SMALL CHAPTER: BRAZOS VALLEY President: Rodney J. Horrell, CPA

The chapter’s extensive membership outreach program during the year was initiated as a more direct approach to fight an unfavorable historical trend of membership decline. It included the development of talking points about the benefits of membership, which were used when making phone calls to 100 percent of their non-renewing members. The result was that they were one of the few chapters to achieve net growth.

There were several new projects. One was development of committee-level goals, key for a volunteer-driven organization. To increase CPA-PAC participation, a donor recognition program was implemented at the chapter’s annual meeting. Volunteers sorted food donations at a local TV station’s food drive in December. The amount of scholarship money awarded was increased by 43 percent. The annual baseball game scholarship fundraiser event was revamped, resulting in a 363 percent increase in funds generated. The venue was moved to a Texas A&M Aggies baseball game, and a tailgate party was added; attendance increased 350 percent. In an improvement to the other existing event, ticket sales at the second annual Scholarship Luncheon were increased by 43 percent.

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OUTSTANDING MEDIUM-SIZED CHAPTER: EL PASO President: Tony Benitez, CPA

Several projects involved Young CPAs. One was development of the chapter’s first 5K run/1 mile walk, titled “Run From Your Taxes.” More than 175 people were there, many from the general public, raising awareness of the chapter and the CPA profession. The event netted $5,800 for the chapter’s scholarship fund. Another new young CPAs event was the Young Professionals Mixer, planned with the El Paso Young Lawyers Association, the El Paso Bar Association, the local National Association of Insurance and Financial Advisors chapter and their Young Financial Advisors Team, and the University of Texas at El Paso’s Chapter of the Society of Human Resource Management. More than 80 members of the organizations attended.

To educate members, five state representatives were speakers at a chapter meeting where CPA-PAC donations were encouraged. Chapter leaders at the meeting also educated the legislators about issues important to CPAs. The next generation of CPAs was reached through 23 ACE presentations in classrooms, career fairs and new student orientations. Also, in a pilot program with an area foundation, nine CPA firms hosted high school accounting students for a semester-long job shadow experience. ■ HELP MAKE YOUR CHAPTER AWARD-WINNING Members are the key to – and the reason for – chapter success. Contact your local president or executive director and find out how you can get involved in making yours an award-winning chapter! You can get contact information through the TSCPA website at tscpa.org.

Rhonda Ledbetter is the TSCPA chapter relations representative. Contact her at 972-687-8508 or at rledbetter@tscpa.net.

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Spotlight on CPAs By Anne McDonald Davis, ABC

Full Circle

New AEF Board Trustee Looks Back on her Journey

Charlotte Jungen, CPA-Southeast Texas, is a recent addition to the TSCPA Accounting Education Foundation’s Board of Trustees. Like all the other board members, Jungen keenly feels the responsibility and honor they exercise in rewarding scholarships to worthy accounting students; but for Jungen, there’s an additional thrill having been a past recipient. “There were nine kids in my family,” she explains, adding that she was born in South Korea and adopted by the Jungens as a baby. “Growing up in a big family, you knew that you were doing college on your own, so I worked hard to get good grades and get scholarships. That was the only way I was going.” By the time Jungen was in junior high, she knew she had an aptitude for math and was headed for a related career. Her senior year accounting class and participation in a University Interscholastic League accounting contest cinched the deal. She recalls: “I loved it. Once I decided, I decided. I started college knowing what I wanted to do.” And a full scholarship from hometown Lamar University together with 14

the TSCPA scholarship allowed her to realize that dream. Jungen says that from the beginning she knew she was blessed to be able to focus solely on school during the week and only work on weekends for spending money; however, the ensuing years reinforced that realization with additional insights. “I didn’t have the burden of a mountain of student loan debt to pay off when I graduated,” Jungen says. “And, when I started working full time after college, I realized how lucky I was to already be out of college. I saw how hard other people my age were having to struggle to finish their education. They could only go to school part time since they were funding it by working full time.” When Jungen was a junior in college, she landed an internship at a local public accounting firm and remained for two years post-graduation “doing a little bit of everything.” Then while interviewing with her current firm (at press time) – Edgar, Kiker & Cross – she was presented with the emerging financial services side of the practice and asked about becoming a certified financial planner (CFP®).

Jungen laughs: “And I thought, ‘Why not?’ I also got my securities licenses and insurance license. It took several years to transition completely into financial services.” Today, she provides financial planning assistance to businesses, their owners and individuals in areas such as cash management and budgeting, insurance planning, estate and tax planning, wealth accumulation, investments and retirement planning. This fall, she plans to join Goodman Financial in Houston, a fee-only investment management firm. Jungen reflects that she employs a “holistic” approach to financial planning. “It’s not just about picking the right investments. It’s about looking at how it affects a client’s taxes and their retirement goals. It’s about helping them develop a game plan to accomplish whatever financial goals they may have. I really like those days when you feel like you set someone on the right path.” GIVING BACK Jungen acknowledges: “I will always be aware that I am where I am because of what others have done. And getting an education is such a key part of someone having a better life. It can make so much of a difference.” Accordingly, she takes her work with the AEF to heart: “I feel like we’re having an impact. As a recipient, getting the scholarship was so important to me and now being able to play a role in making that difference in someone else’s life … even if it’s just a small part, makes me feel like I’m giving back some of what I got.” Jungen says she advises students entering the accounting profession to get their license. “It opens so many doors; don’t stop with your accounting degree. Those three letters stand for competence and integrity and give you instant credibility. It will further your career. And Today’sCPA

| SEPTEMBER/OCTOBER 2013

remember that preserving the values we hold as CPAs are good values to hold overall in your life!” In addition to many volunteer contributions with TSCPA, Jungen has remained involved with her alma mater and works with Lamar’s alumni board and accounting advisory board. A member of Rotary and an organist for her church, she has “given back” to her community as well. In fact, in the wake of Hurricane Ike, she

volunteered countless hours assisting those affected in Bridge City, even providing dry shelter in her Beaumont home to those who needed it. She remains close to her family, which is ever expanding. She jokes that big families seem to be a calling with the Jungens. Her oldest sister has six children and there are 11 grandkids in all with two more on the way. “It can get a little loud at family gatherings,” she smiles.

While remaining single, she does have a little time left over to enjoy cooking and traveling. Still, she seems to focus much of her life on “making a difference,” which she identifies as her philosophy of life. “It doesn’t have to be in a big way; I just want to help,” she says. ■

TSCPA’s Accounting Education Foundation For more than 50 years, Texas CPAs have generously contributed to the Accounting Education Foundation (AEF). The mission of the AEF is to promote and reward educational excellence. The AEF accomplishes its goals by awarding scholarships to Texas accounting students. During the 2012-13 year, the AEF was able to grant $140,500 in scholarships to deserving students. Members who would like to contribute may contact TSCPA’s Stephanie King at sking@ tscpa.net or 800-428-0272, ext. 233 (972-687-8533); or send contributions to the Accounting Education Foundation at 14651 Dallas Parkway, Suite 700, Dallas, TX 75254. Your tax deductible donation will provide the funding that supports top students. Help deserving accounting students on the road to becoming CPAs, and show your support and investment in the future of your profession by contributing today. To learn more about the AEF, visit TSCPA’s website at tscpa.org.

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Feature By Dom Cingoranelli, CPA, CGMA, CMC® and Bill Reeb, CPA, CITP, CGMA

Make Sure Your Buy-Sell Agreement Fits Your Business Model With each passing year, more CPAs in public practice will be searching for an acceptable exit strategy. Most CPAs practicing in public accounting are in smaller firms and that segment of the profession is facing a myriad of succession planning problems. One major challenge facing many of these smaller firms is that of using the appropriate buy-sell or retirement agreement for the firm, based on the firm’s business model. Some firms are trying to use retirement agreements that simply do not and cannot work properly because of the firm’s business model. Although every firm’s retirement policy, and related buy-sell agreements are likely to have some unique qualities, there are some practices that are more commonly associated with different business models in use throughout the profession. We categorize the two predominant business models in use among CPA firms as either the “Eat What You Kill,” or “silo” model, and the “Building a Village,” or “one-firm concept” model. The “Eat What You Kill” model focuses on a partner’s production, book, chargeability, and realization as if the partner was running his/her own practice within a practice. The “Building a Village” model focuses on the firm’s strategy and aligning all of the partners to not only achieve the strategy, but to also develop and leverage their people, follow firm policy, and be paid for performance that aligns with what is best for the firm. As a result of the differences in these business models, it is logical that retirement policies would be radically different in their design. THE EAT WHAT YOU KILL (EWYK) BUSINESS MODEL Under the EWYK business model, the focus is on each partner’s production – his/her clients, his/her book, new business generated, and the like. This model allows the most autonomy for partners because they are often free to conduct their practice as they please, perhaps within some very broad parameters. Thus, one of the advantages of this model is that a partner has a great deal of freedom in client and project selection, billing and collections, developing and delivering service offerings, and the degree of leverage used to perform the services (leverage is defined as the ratio of “all partner billed time to total billed time on a partner’s book” of client relationships). Under this model, partners’ common defenses as to why firm policies needed to be violated are embodied in rationalizations like: 16

• “Following the policy was not in the best interests of my client.” • “The client wasn’t willing to go along with our policy.” • “My clients are unwilling to pay in 60 days so I allow them 90 before I contact them for payment.”

In this model’s hierarchy of importance, taking care of a client or satisfying a partner’s whim has a higher priority than taking care of the firm. Although in the typical EWYK firm, it’s about “my” clients, my book, my processes, my policies, and so on, at some larger and more sophisticated firms using the EWYK model it may appear in some respects that they are operating under a Building a Village (BAV) or one-firm model. They have firm-wide mission, values and vision statements that present a unified image for the firm. They also likely utilize firm-wide hiring and other human resources practices. They may even have some firmwide policies and procedures to which they attempt to hold all partners accountable. However, while many peripheral aspects of a firm’s operation appear to be aligned with the BAV model, when you look under the hood, it is not uncommon to find that their real values and beliefs, embodied in their partner compensation system, are clearly focused on individual partner production. Along with that, a partner’s personal influence and persuasive power in this type of firm rest in the size of the client book he/she manages. So, when we talk about business models, we are not referring to the model that it appears a firm is following, but rather, the model actually embraced by the partner compensation framework. THE BUILDING A VILLAGE (BAV) BUSINESS MODEL With the BAV business model, the focus is on the firm as a whole, and therefore on the partners’ roles requiring them to fulfill the firm’s strategy and support the firm’s overall success. In other words, it’s no longer about “my” clients, but about the firm’s clients (and even who the firm wants as a client). Today’sCPA

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Therefore, the term shifts from “my book” to “managed book” with the key differential in this terminology being that the firm can shift clients to any partner, anytime, anywhere. This model provides the infrastructure, governance, decision-making and accountability processes necessary to hold each partner individually accountable for his/her part in the firm’s overall success. Under a true BAV business model, the firm has a clear institutional identity; the partner group (or elected board if the firm is large enough to warrant one) determines the firm’s overall direction and strategy, and charges the managing partner or CEO with achievement of the strategy. The CEO, in turn, holds each partner individually accountable for achieving specific performance metrics, which are aligned with the tactics and strategies within the overall firm plan. Thus, while managed book size, business development and individual partner production are still important considerations in a BAV firm, other individual performance targets, driven by the firm strategy, also play a big role. As well, in the BAV model, leverage becomes a much more important driver, which allows substantial growth in the average book managed by a partner. Under the BAV system, closing competency gaps at all employee levels within the firm, passing down work, managing the work rather than doing it, and freeing up partners’ time to fulfill their “real” partner roles (regularly getting in front of “A” clients, managing client relationships, following firm policy and achieving strategy) are paramount. BUYOUT, RETIREMENT AND BUSINESS MODEL So why does all of this matter? Quite simply, it makes a big difference in what a retiring partner is selling and what the remaining partners are buying. In the succession management survey we created with Private Companies Practice Section (PCPS) in 2012, we found that multi-owner CPA firms are using three main methods to calculate a partner’s deferred compensation or retirement benefit:

• partner’s book; • partner’s share of equity multiplied by firm’s average net annual revenues; • multiple of partner’s salary.

If your firm is functioning as an EWYK firm, using partner’s book of business to set a partner’s retirement in most instances would be appropriate for you. For those operating in the BAV model, either the partner’s share of equity times revenues or the multiple of salary would likely be the most appropriate. However, we see the greatest conflicts and disconnects in situations where a partner wants the privilege of using a retirement benefit formula inconsistent with the business model actually in place. For example, it is common for us to see a partner operating in an EWYK environment who wants to use the benefit model as if they were working under a one-firm or BAV model. Common signs that you are operating in an EWYK environment are when partners individually decide:

• which firm policies they will follow and which policies they will ignore; • which clients and what types of work they’ll take on; • how much to bill clients and when to collect once (and if) the work is billed;

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• whether or not they’ll develop anyone else in the firm; • what services they will perform regardless of whether the services are of strategic value to the firm; • what services will be offered, or not offered, to each client; • if and how they will transition client relationships upon retirement; • when they want to retire, often with no fixed dates for sale of interest and no requirement to provide notice in advance to the firm when they do decide to leave; • to what degree they will allow themselves to be held accountable to some overall firm direction, governance and management.

We often find that these same partners who want to run their own silo’d business within their firm also feel entitled to fixed, agreed-upon retirement benefits payable to them, regardless of the fact that: • they are leaving a book of work that perhaps no one else either wants to do, knows how to do, or has the time and capacity to devote to it; • they have not built any bench strength in the people below them (in their opinion, it’s the firm’s fault for not having hired “experienced” people); • they’ve not adequately leveraged their book through the use of effective delegation to others; • many of their clients will be up for grabs when they depart, leaving the firm without a significant amount of annuity relationships from which to pay the retirement benefit.

THE CASE OF HOPALONG, CASSIDY AND SUNDANCE, CPAS Let’s take an example compiled from many real-life situations to help further paint the picture here. Assume that Hopalong, Cassidy and Sundance are equal partners in their firm. They’ve been in business together for decades. Following are some key statistics on each of them.

Partner

Age

Book

Hopalong Cassidy Sundance

66 60 51

$700,000 $600,000 $750,000

Total Hours Worked Per Year 2,600 2,600 2,900

The partners have been able to achieve some degree of specialization in their work together. Hopalong is the tax partner of the firm, and while he oversees some accounting engagements, he gets Cassidy involved for quality control on them. Cassidy does mostly audit work, and most of her audit work is done for small governmental agencies and some nonprofit organizations. Hopalong can help with the tax returns for the nonprofits, but tells people proudly that he hasn’t created an audit workpaper in years. Meanwhile, the youngest of the three partners, Sundance, can perform both tax and audit work, although he readily admits he’s not very strong in the audit side of the house. continued on next page

Buy-Sell Agreement continued from page 17

Although they’ve worked hard at building a strong firm, they’ve had trouble hanging on to good staff over the years, so they’re a little short when it comes to managers and supervisors. They do have some lower level people, and some good seniors. They manage to keep them all pretty busy with the work they have on hand. You can see from their book size and total hours worked (of which very little time is devoted to, or recorded for, nonchargeable activities), that they don’t use a lot of leverage in their work. So what’s going to happen if and when Hopalong finally decides he wants to retire? Sure, they have an agreement in place that says he’s entitled to about $600,000 paid out over 10 years based on his current book, but who will take on the clients he’s arguably leaving behind? One of the two remaining partners doesn’t really do much tax work, and neither of the remaining partners has the capacity (let alone enough unencumbered hours in the day) to take on Hopalong’s book, even if they wanted it. And what about Cassidy? Although Cassidy may decide to retire before Hopalong, who within the firm is going to take over the work she’s been doing? With the firm being short on qualified people who could be developed quickly for a transition, it doesn’t appear that the firm could actually retain the books on which Hopalong’s or Cassidy’s deferred compensation is based. It should be obvious that a common fixed buy-sell and/or deferred compensation arrangement makes no sense in this situation. What this firm should have is not a BAV buy-sell and deferred compensation arrangement, but rather a right of first refusal. Under this type of arrangement, the firm and its remaining owners are not required to buy out the retiring partner. The partner is free to sell his/her book under whatever terms can be negotiated with the other owners within the firm. And we would recommend that this kind of purchase be based on client retention, not a fixed price paid up front. Should the departing partner not find the offers of his/her partners to be SUCCESSION PLANNING RESOURCE FOR TSCPA MEMBERS TSCPA offers members a place to go that is focused on firm management and practice management issues. The Practice Management Institute was developed in partnership with the Succession Institute, LLC. This resource provides free material and content on succession planning. There are also CPE self-study course offerings available at a discounted rate for those who would like to receive CPE credit. To learn more and utilize this membersonly resource, please go to the CPE section of the TSCPA website at tscpa.org, scroll down and select Practice Management under Tools and Information.

sufficient, he/she can look outside the firm for buyers, and the firm and remaining partners will have a first right of refusal after the partner obtains a bona fide offer from an outsider. This represents the best option for both the buyers and the seller. The buyers get to negotiate which clients they wish to take on, at what price, and the seller has the freedom to manage his/her practice in any reasonable manner, toward whatever consequences come with those business decisions when it’s time to pull the trigger on an exit strategy. In other words, since the other owners had little say about the services the retired partner offered, what clients were in his book, what pricing and other arrangements he worked out, how he did his work (through developing people and leverage), and no stick to require the appropriate transition of clients, then why would the remaining owners have any responsibility to take on the departing partner’s book and carry the debt burden for it? So only the “purchased book option based on retention” makes much sense for the firms that are still very heavily EWYK-oriented. And to be fair, if the firm has been operating in a fashion similar to our case study above, then the retiring partner should have the option to sell his/ her book outside the firm because being paid based on retention when the other partners don’t have the requisite skills, capacity or support infrastructure would likely be a financial disaster for the retiring partner. Of course, if your firm is operating under a true BAV model, then coming up with a fixed formula, often based on the two methods introduced above (partner’s share of equity times revenues, or some multiple of salary) makes a lot more sense, because the investments and structure have been put in place to force the partner to build and manage a book consistent with the firm’s strategy and to build the capacity to work the book. OPTIONS AVAILABLE Until now, much has been said in the profession about succession planning and helping smaller firms through the succession management maze. Unfortunately, in most cases, more has been said than has been done. And just as unfortunate, too many of those discussions include senior partners demanding retirement benefits they are not entitled to, given the business model they are operating under. But the good news is that there are plenty of fair options available to firms of every size. If you choose the EWYK business model, then set up your governance, processes and retirement agreements to align with that. If you choose the BAV model, then make sure your processes and agreements fit that model. And if your firm has one foot in the EWYK model, and the other in the BAV model, then decide which you want to follow and make the necessary changes so that you will be fully operating in one or the other. By doing so, you will be able to better align partner expectations, accountability and benefits fairly and consistently. You will also be positioned to sustain a successful, profitable firm long into the future. ■

Bill Reeb, CPA, CITP, CGMA and Dom Cingoranelli, CPA, CGMA, CMC™ are co-founders of Succession Institute, LLC, a management consulting firm that specializes in helping CPA firms determine strategy, manage succession, create accountability, and more. Their books, articles, video webcasts, learning management system (online TSCPA Practice Management Institute), competency model, and draft partner agreements represent leading edge tools and intellectual property they have created to support best practice changes CPA firms desire to implement.

Today’sCPA

| SEPTEMBER/OCTOBER 2013

Take Note

Tools for Management Accounting Members The Chartered Global Management Accountant (CGMA) designation was created by AICPA and the Chartered Institute of Management Accountants (CIMA). The CGMA is a global designation that recognizes U.S. CPAs and CIMA members who work in a range of management accounting roles in businesses, industries and governments. The website at www.cgma.org offers access to a global online community of peers, research information, thought leadership papers, career and business tools, CGMA Magazine and Newsletter, and other resources to help you stay current on important professional issues. The CGMA designation is available to qualifying AICPA members, and TSCPA members who are also AICPA members receive a discount. For additional information, please visit their website at cgma.org.

What’s New On the TSCPA Website Go to tscpa.org to learn more about …

Renewing Your Membership If you haven’t already renewed your TSCPA membership for 2013-2014, be sure to renew now! Dues renewal notices were sent out and paper statements were sent to members who had not yet renewed their dues. You can access and update your records and pay your dues online at tscpa.org. Don’t forget to consider our affiliate contributions, if applicable. Questions about your member dues can be answered by contacting TSCPA Member Services at 800-428-0272, Ext. 260.

TSCPA ROI Campaign: Responsibility of Individuals

TSCPA’s new recruitment and retention campaign, the Responsibility of Individuals (ROI), was developed in an effort to remind Texas CPAs of the value of belonging to their professional community, and also promotes members as being responsible for their profession. For more information, please see the Chairman’s and Executive Director’s Message in this Today’s CPA issue and go to www.tscparoi.org to see the ways your investment as a TSCPA member supports you and protects all that you’ve worked hard to attain in your career.

AICPA Video: What’s at Stake? The CPA Profession on Federal Fiscal Responsibility

AICPA’s video offers guidance on how the U.S. government’s financial statements can be used for greater understanding of the nation’s fiscal health. With its What’s at Stake initiative, AICPA is looking to bring attention to how and why the financial sustainability of the U.S. is at stake. The CPA profession calls on policymakers and the public to engage in a national dialogue to improve our country’s fiscal health. Go to the home page at tscpa.org for a link to the video.

Disciplinary Action Thomas Howard Bauer of Katy, Texas In lieu of an investigation of alleged violations of the Code of Professional Conduct of AICPA and the Texas Society of CPAs, Bauer entered into a settlement agreement under the Joint Ethics Enforcement Program. Without admitting or denying any wrongdoing, Bauer, formerly of the firm Arthur Andersen LLP, was admonished by AICPA and the Texas Society of CPAs, effective July 3, 2013, as a result of his consent to the Securities and Exchange Commission (SEC) entering its January 28, 2008 Order Instituting Public Administrative Proceedings Pursuant to Rule 102(e) of the SEC’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions in connection with Bauer’s conduct on the audits of an SEC registrant for the years ending December 31, 1997 through 2001. Without admitting or denying the SEC’s findings, Bauer consented to his suspension from appearing or practicing before the SEC as an accountant with the right to request reinstatement after three years. The admonishment has no effect on Bauer’s CPA license or his ability to practice public accounting. Today’sCPA

| SEPTEMBER/OCTOBER 2013

Accountants Confidential Assistance Network Seeks Volunteers The Accountants Confidential Assistance Network (ACAN) is a peer assistance program that supports Texas CPAs, CPA candidates and/or accounting students who are addressing alcohol, chemical dependency and/ or mental health issues. ACAN is comprised of volunteer CPAs from across the state who have been successful in their recovery, and who regularly meet to assist fellow CPAs and accounting students. Can you help? Please contact Craig Nauta at 800-4280272, ext. 238; 972-687-8538 in Dallas; or at cnauta@tscpa.net.

Disciplinary Action As a result of a decision by a hearing panel of the Joint Trial Board, the following member had his TSCPA membership: Expelled – • Donald W. Davis of Grapevine was found guilty of violating TSCPA Bylaws Article III, Section (8)(d) for failure to cooperate with the Professional Ethics Committee in an investigation. The expulsion is effective June 14, 2013.

Take Note

By Rhonda Ledbetter | TSCPA Chapter Relations Representative

TSCPA Annual Meeting of Members TSCPA members, families and colleagues gathered in Las Vegas, Nevada, for the 2013 Annual Meeting of Members and Board of Directors Meeting. Participants enjoyed a variety of activities at the meeting site, Caesars Palace, and the many attractions in the area. YEAR IN REVIEW

Immediate Past Chairman Fred Timmons, CPA-San Antonio, shared highlights of achievements during the year that resulted from following the Strategic Plan. They are organized by the four focus areas.

TSCPA’s 2013-2014 Chairman Willie Hornberger, CPA-Dallas.

Sam Cheng, CPA-Dallas, and Sharon Lukich, CPA-Dallas.

Ben Pena, CPA-Rio Grande Valley, and Carol Collinsworth, CPA-Rio Grande Valley.

Professional Competency • The CPE Foundation offered a fourhour seminar addressing the new Patient Protection and Affordable Care Act. There is an increase in onsite sales due to more interest in this type of education delivery; a variety of other formats and delivery methods are offered to meet members’ needs. • There is a continued focus on business and industry members. A LinkedIn connection campaign was created and promoted. A video focusing on the value of TSCPA membership for B&I members was produced and included in an e-blast to B&I members encouraging dues renewal. Advocacy • Since June 2012, the Professional Standards Committee has responded to seven exposure drafts issued by FASB and GASB, and by the AICPA Professional Ethics Executive Committee and its Accounting and Review Services Committee. The Federal Tax Policy Committee has sent 11 letters to appropriate policy makers during that time.

Operational Excellence • TSCPA hosted a two-and-a-half-day Leadership Development Institute, with 22 participants from 15 chapters. In the second annual Rising Stars program, 18 were selected; recognition included presentations at the Annual Meeting Awards luncheon; please see the cover story in this issue of Today’s CPA for information about the recipients. Recruitment and Retention • With a focus on prospects who have been licensed in the last three years, a three-phase campaign was held and 1,500 members were added. • To recruit the next generation of CPAs into the profession, TSCPA hosted a program for high school teachers where a nationally recognized expert provided free accounting curriculum and indepth training. National Meet the Firms Weeks were sponsored to help firms and college-level accounting students connect. For details about these and a wealth of other projects, please refer to the “Year in Review” article in the May/June issue of Today’s CPA.

AICPA American Institute of CPAs Vice Chairman Bill Balhoff, CPA, discussed issues and initiatives the Institute is dealing with at the national level. Several trends are facing the profession. On the international level, a weak global economy and the ripple effect of markets’

Rhonda Ledbetter is the TSCPA chapter relations representative. Contact her at 972-687-8508 or at rledbetter@tscpa.net.

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interconnectivity have an effect. In the area of technology issues such as security and privacy, it’s more important than ever that CPAs serve as trusted advisors. Human capital is a trend in motion, with changing demographics and generational work styles, as well as the need to use talent to the fullest. With regard to regulatory issues at the state level, CPA mobility is one of the most dramatic regulatory successes in recent years. The Institute collaborated with the National Association of State Boards of Accountancy on the Uniform Accountancy Act, which has been used as a model by many states. They are now working together on updating the definition of “attest.” The intent is to protect members of the public, who assume that non-CPA firms and unlicensed CPAs offering attest services under AICPA standards are subject to the same rigorous requirements as CPAs. There is increased emphasis upon supporting management accountants, through the creation of the Chartered Global Management Accountant credential – and the marketplace is seeing the value. CGMAs are present in almost 90 percent of Fortune 100 companies. CPAs in public practice also receive support. AICPA works to raise awareness of the need for a formal firm succession plan. It’s also educating partners about the necessity of working now to develop leadership skills among staff members – as important as developing clients. The firm’s future leaders must be pushed to develop critical thinking and skills outside their comfort zone, such as making presentations. “We want them to be better than we were,” Balhoff said. Moving into a discussion of technology, he stated that CPAs are well positioned for Big Data and that CPAs – and those they serve – can capitalize on the advantages of cloud computing. He touched upon a list of cybersecurity issues. He spotlighted CPAs’ public service through national-debt-awareness projects, such as What’s At Stake and publications like Save Wisely, Spend Happily, a consumer education book.

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TSCPA Executive Director/CEO John Sharbaugh, CAE; AICPA Vice Chairman Bill Balhoff, CPA; and TSCPA’s 2012-2013 Chairman Fred Timmons, CPA-San Antonio.

Balhoff provided statistics demonstrating that it’s a great time to be a CPA, both in terms of employment rates and demand, as well as job satisfaction. He referenced the Pathways Report and the value of charting a strategy for the next generation of accountants. To develop the number of people who will be needed, the profession will have to continue reaching out to a diverse world of students. It will also have to adapt to the work needs and habits of young hires, which are radically different from older generations. He closed by touching on Horizon 2025, the project to plan now for what is to come. “The journey to constantly transform the profession and remain relevant is by innovating in incremental steps driven by a vision of what is possible.”

REGULATORY AND LEGISLATIVE Education about how laws are made in Texas and a look at the 83rd Texas Legislature were provided by TSCPA Managing Director for Regulation and Legislation, Bob Owen, CPA-Dallas. He explained that TSCPA plays a role in the legislative process thanks to volunteers’ tireless dedication to many tasks before, during and after each session. They are deserving of all CPAs’ appreciation.

EXECUTIVE BOARD 2013-2014 Willie Hornberger, CPA-Dallas Chairman Mark Lee, CPA-Houston Chairman-elect Jeannette Smith, CPA-Rio Grande Valley Treasurer Jim Oliver, CPA-San Antonio Treasurer-elect Susan Roberts, CPA-Fort Worth Secretary Ryan Bartholomee, CPA-Permian Basin Michael Brown, CPA-Central Texas Jesse Dominguez, CPA-Austin Kirby Jackson, CPA-Dallas Kathy Kapka, CPA-East Texas Christi Mondrik, CPA-Austin Joan Schwartz, CPA-San Angelo Jerry Spence, CPA-Corpus Christi Lei Testa, CPA-Fort Worth Fred Timmons, CPA-San Antonio Immediate Past Chairman John Sharbaugh, CAE Executive Director/CEO

Take Note TSCPA worked to propose a few changes to the Public Accountancy Act, which were signed into law by Gov. Perry in May. A key concern addressed was protection of confidentiality in the complaint process against CPAs and how the Open Meetings Act applies to Texas State Board of Public Accountancy enforcement committees. The next sunset consideration of the CPA certificate in Texas was postponed to 2019, giving TSCPA and its volunteers additional time to prepare. Please see the Capitol Interest article in the July/August issue of this publication for details. You can also stay current on important developments affecting CPAs by reading the Governmental Affairs blog at tscpa.typepad.com.

ACCOUNTING EDUCATION FOUNDATION The President of the Accounting Education Foundation (AEF) Board of Trustees, John Misitigh, CPA-Houston, presented an update on the work of the AEF to provide financial assistance to students. During the 2012-13 fiscal year, the AEF granted more than $150,000 in awards. There was a mix of $2,500 scholarships, which is now the standard amount, and the last batch of $1,500 renewals to those eligible from the previous year. For a second year, $10,000 was given to the AICPA Minority Scholarship Program, which funded nine Texas university students. The Kenneth W. Hurst Fellows Award is presented to those who have given at least $5,000 to the AEF during the most recent five years or have contributed outstanding service to the AEF. Presentations were made to Jama Lopez, CPA-San Antonio, and to Pat Winters and Stan Winters, CPA-Fort Worth.

BUSINESS MATTERS

2012-2013 Treasurer Stephen Parker, CPA-Houston, provided the year-end financial report, which can be viewed at tscpa.org. 2013-2014 Treasurer Jeannette Smith, CPA-Rio Grande Valley, presented the new fiscal year budget, which was approved.

2013 TAX PRACTITIONER WORKSHOPS October, November and December General Income Tax (2 days - $285)

Advanced Income Tax (2 days - $285)

Fiduciary Income Tax (1 day - $225)

Texas State Tax Issues (1 day - $225)

Partnership Tax Issues (2 days - $415)

Ethics for CPAs (4 hours - $110)

Agricultural Tax Issues (1 day - $225) 16 Hrs CPE, 13.5 MCLE credit for 2-day workshop 8 Hrs CPE, 6.75 MCLE credit for 1-day workshop IRS approved CE Provider #NXR57

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for dates, times, and online registration

Sponsored by the Texas Extension Education Foundation, Inc.

Business conducted for other TSCPA entities included: • election of directors of the Accountancy Museum of the Texas Society of CPAs, Inc., • the annual meeting of the TSCPA CPE Foundation; and • the annual meeting of the Peer Assistance Foundation.

PLANNING FOR THE NEW YEAR

2013-2014 Chairman Willie Hornberger, CPA-Dallas, shared extensive information about the energy boom fueling the Texas economy and the historic opportunity it brings. He shared his passion for energizing young people to build their future. He explained that TSCPA is well positioned to play a powerful role at the national level because of its strong connections with AICPA and Washington, D.C. “The eyes of the nation are on us right now,” he said. In showing that TSCPA has long roots in Texas, he talked about chapters and their decades of involvement at the local and state levels. After sharing his own story of growing up in a multicultural family, he proclaimed that “We are united by our CPA license and rich in our diversity.” He then told about his early influences who encouraged him to achieve, as well as to take responsibility for serving others above self. This has led to his motto for the year: “Serve well, lead well.” Complementing that philosophy is the Society’s new Responsibility of Individuals (ROI) campaign. It reminds CPAs of their duty to ensure that their organization continues to be able to help them uphold their responsibilities, through active participation with 28,000 other members. You can read more about this in the Chairman’s and Executive Director’s Message in this magazine.

STRATEGIC PLANNING THROUGH 2016-2017 The process of developing the next TSCPA Strategic Plan has begun. At the meeting, Mike Young, CPA-Panhandle, explained the authorization and system for the three-year plan. The first step is gathering input from volunteers and staff. After discussing with each other a document with four open-ended questions, participants provided individual written responses, which will be transcribed. That information, along with survey responses and other feedback, will be presented at a professionally facilitated strategic planning retreat. After several additional steps, the resulting plan will be presented to the Board of Directors at the Annual Meeting in June 2014.

OUTSTANDING CHAPTER AWARDS, SPEAKERS’ PRESENTATIONS AND FUTURE SITES Please see the Chapters column in this issue for information about the recipients of the Outstanding Chapter Awards, which were presented at the meeting. You can view speakers’ PowerPoint presentations through the TSCPA website at tscpa.org. Santa Fe, New Mexico is the site for the 2014 Annual Meeting of Members and Board of Directors Meeting, June 29-30. The 2015 event celebrating TSCPA’s centennial will be held in Dallas.

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TSCPA 2012-13 AWARD RECIPIENTS

Jim Smith, CPA-Dallas, was recognized for Meritorious Service to the Accounting Profession in Texas. This award is regarded as the highest honor bestowed by TSCPA, given for leadership and service. Smith has been a TSCPA member since 1973 and has served the Society and his chapter in a variety of roles. They include service on more than 25 TSCPA committees, the Executive Board and Board of Directors, a year as chapter president, and as chairman of TSCPA in 2007-08. He has also given his time as a member of the AICPA Council and various AICPA committees. Ed Polansky, CPA-San Antonio, was given the Distinguished Public Service award. The recipient for this recognition is selected based on outstanding charitable, community and/or civic activities and other public service unrelated to the regular duties performed as a TSCPA member. He has held several positions in TSCPA and his chapter, including serving as chairman of the Society in 2004-05 and as chapter president. Beyond his work for the profession, Polansky has served on the boards of Randolph-Brooks Federal Credit Union, San Antonio Area Foundation, Alamo Public Telecommunications Council, and other charitable and civic organizations. Larry Edgerton, CPA-Permian Basin, D. D. Holmes, CPA-Fort Worth and Ken Horwitz, CPA-Dallas, were elected as Honorary Fellows. Included in the criteria to be considered is leadership in TSCPA on a consistent basis for a number of years. Each has served on various Society committees and councils, and many years on the Board of Directors. Edgerton has served TSCPA by volunteering in several roles, including a term as chapter president, one as TSCPA chairman, and on at least 25 committees, the Executive Board and the Board of Directors. He has also served on the AICPA Council. Holmes has served through various Society and chapter committees, as well as a term as chapter president. She is a published author on various professional topics. Horwitz has given his time to both TSCPA and chapter boards of directors and in a variety of volunteer committee roles. He has authored articles and given lectures on accounting and tax issues. Michael L. Brown, CPA-Central Texas, and Neely Duncan, CPA-Dallas, were named Young CPA of the Year. This award recognizes CPAs who are age 39 or under, and who have made significant contributions to the accounting profession and the community. Brown’s volunteer service to the Society and his chapter includes a term as chapter president while also serving a three-year term on the Executive Board of TSCPA. He has participated on several committees, including a term as chairman of the Young CPAs and Emerging Professionals Committee. Duncan has served on the TSCPA Board of Directors, the TSCPA Nonprofit Organizations CPE Conference Committee, including a term as chairman, and as chairman of the Dallas Chapter’s leadership development program. She has also participated on various other state and chapter committees, and has published several articles and spoken at educational events. Carol Cantrell, CPA-Houston, received the award for Outstanding Committee Chair. She has served on the Federal Tax Policy Committee since its creation in 2008 and as chair since 2011. Under her dedicated direction, the committee has issued comment letters to the IRS and legislative letters to congressional bodies, assisted Senator John Cornyn and his legal counsel in drafting The Small Business Taxpayer Bill of Rights Act of 2011, and issued a position paper on economic concerns.

SPECIAL RECOGNITION AWARDS

The Special Recognition Award is presented by the TSCPA chairman to honor TSCPA members and other individuals who have performed an extraordinary service to the Society in a given year. Allyson Baumeister, CPA-Fort Worth Michael L. Brown, CPA-Central Texas Tracy Stewart, CPA-Brazos Valley Jim O’Guinn, TSCPA Staff ■

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Capitol Interest By Bob Owen, CPA | TSCPA Managing Director, Regulation and Legislation

Campaigns Already? Texas voters demand adequate schools, fewer potholes and less congested roadways; ready access to sufficient water and power; and they want all of this without paying any more taxes. In fact, they think they already pay too much in taxes, despite the fact that the population’s growth and demand for services are by far outstripping available resources. The Tea Party voters, who vote abundantly in primary elections, don’t even want to spend the money we have on any of the above needs. If you think you can solve this dilemma, you should run for office. And if you don’t, there are plenty of people who will. It’s after Labor Day, and that means it’s campaign season! The first day candidates can file for election or reelection is Nov. 9, 2013, but campaigns don’t wait for that technicality. The primary elections will happen (absent court intervention) on March 4, 2014 (early voting will begin Feb. 28, 2014), followed by any necessary run-offs before the Nov. 4, 2014, general election date. For statewide elections in Texas, the winners of the Republican primary usually waltz to victory in November, so they have about five months to get their message out to the roughly 1.5 million people who will vote in the Republican primary. That’s not very many voters out of the approximately 14 million registered voters in Texas, but all of us, whether we vote or not, will get to hear the campaign rhetoric. The primary elections are also very important for state legislative races, as the primary election usually determines the ultimate winner. Most of the legislative districts have been drawn to guarantee a Democratic or Republican victory. In Texas, there are more Republican districts than Democratic and there are a few toss-up districts. The next few months will be critical for most candidates. 2014 will be a year of substantial campaigning for statewide candidates. Gov. Rick Perry’s decision not to run for reelection opened the flood gates of pent-up desires of politicians who want to seek higher office. State Comptroller Susan Combs is also stepping down, giving more wannabes a chance to compete. Here’s a quick look at potential statewide races. GOVERNOR Attorney General Gregg Abbott is off and running and considered the odds-on favorite to be our next governor. Abbott has a substantial war chest of over $18 million with good name identification and is a favorite of the most conservative Republicans; a hard combination to beat for the Republican nomination. The only serious Republican competition at this writing is former Texas Workforce Commission Chairman Tom Pauken, who some might argue is more conservative than Abbott, but that’s probably a distinction without a difference. Miriam Martinez, who is from the Rio Grande Valley, was born in Mexico, became a U.S. citizen in 2010, and unsuccessfully ran for the state Legislature in 2012, has also announced her candidacy for the Republican nomination. Although Democrats had yet to advance a candidate in early August, Sen. Wendy Davis (D-Fort Worth) is under immense pressure from Democrats to run, and she said she would either run for governor or 24

for reelection to her Senate seat. She may have decided by the time you read this article. Davis now has strong statewide name identification among Democrats since she filibustered the abortion bill at the end of the first special session, effectively forcing the second special session. LIEUTENANT GOVERNOR The race for lieutenant governor may be the most competitive and interesting Republican primary race. Incumbent David Dewhurst is standing for reelection, but he has three opponents who have some name identification, substantial funds already in the bank and fundraising ability. None of the three can match Dewhurst’s financial resources, but Sen. Dan Patrick (R-Houston), Agriculture Commissioner Cecil Staples and Land Commissioner Jerry Patterson all want the job. The challengers believe incumbent Dewhurst is vulnerable since his U.S. Senate race loss to now Sen. Ted Cruz. Cruz challenged Dewhurst saying he was not “conservative enough.” While Dewhurst has tried to shore up his conservative credentials since then, pundits say his management of the Senate during the special sessions might have increased his vulnerability. This will be a hard fought race with a runoff very likely. ATTORNEY GENERAL With Abbott running for governor, the race for attorney general is wide open. The three announced candidates so far are Rep. Dan Branch (R-Dallas), Sen. Ken Paxton (R-McKinney) and Railroad Commission Chairman Barry Smitherman, also a Republican. With both Branch and Paxton from north Texas and Smitherman from Houston, a runoff is possible. Watch as all three of these candidates try to prove their conservatism. Branch has the most money to start. Paxton challenged Speaker Joe Straus (R-San Antonio) in 2011 without much success, but that helped establish his conservative credentials. Branch has been a close confidante of Straus. Smitherman was a Perry appointee to the Railroad Commission and won subsequent election to the post. STATE COMPTROLLER Susan Combs’ decision to not seek future public office was one of the most surprising announcements of the spring. She had a lot of money in the bank and appeared to be poised for a run for higher office. Sen. Glenn Hegar (R-Katy) and Rep. Harvey Hilderbran (R-Kerrville) have both announced plans to seek the office. All during Today’sCPA

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the legislative session, both Hegar and Hilderbran made no secret of their interest in the comptroller’s job with Hilderbran going so far as to announce he would not run for reelection to the House during the second special session. Hilderbran has chaired the House Ways and Means Committee for the last four years. Sen. Tommy Williams, CPA, (R-The Woodlands) considered a run, but announced he would stay in the state Senate. Former State Rep. Raul Torres, CPA, from Corpus Christi expressed an interest in running early on, but nothing has been heard since then about his intentions. Torres was redistricted out of his House seat and then lost a state Senate run against Sen. Juan “Chuy” Hinojosa in 2012. Debra Medina, who ran as a Tea Party candidate against Perry in the 2010 Republican primary, is also raising money for the race. AGRICULTURE COMMISSIONER With Staples running for lieutenant governor, the Agriculture Commissioner spot is open. The announced candidates at deadline were Eric Opiela, an active Republican from Karnes City, and Rep. Brandon Creighton (R-Longview). Opiela was already running campaign ads during the summer and has endorsements from 18 of the 62 members of the State Republican Executive Committee. Other individuals rumored to be considering a run include former Rep. Tommy Merritt (R-Longview) and current Rep. Tim Kleinschmidt (R-Lexington). LAND COMMISSIONER Incumbent Land Commissioner Patterson is also running for lieutenant governor and so far, David Watts and George P. Bush are the announced Republican candidates. Watts is a self-described technology consultant while Bush, in addition to being President George W. Bush’s nephew and former Florida Gov. Jeb Bush’s son, is an attorney and investment consultant. Former El Paso Mayor John Cook has announced for the Democrats. RAILROAD COMMISSIONER Commissioner Smitherman is running for attorney general and there are already four announced candidates to replace him. State Rep. Stefani Carter (R-Dallas) announced early and is the early favorite. The other four candidates, all Republicans, are Becky Berger, an oil geologist from Schulenburg; Malachi Boyuls, a venture capitalist and attorney from Dallas; Joe Pool, Jr., an attorney and energy company executive from Dripping Springs; and former state Representative Ray Keller. Keller served in the Texas House more than 25 years ago. LEGISLATIVE RACES You can tell from the above that there will be a number of vacant legislative seats in 2014 since several are attempting to move upstream. A few other legislators have announced that they are not running for reelection. It’s a little early to get a feel for how many seats will be open, but at least three state senators are running for higher office. TURNOVER COMPLICATES ELECTIONS When current elected officials try to move upstream, it always complicates the elections for their constituents. Supporters find that people they have backed in the past are now running against one another. The complications are compounded for political action committees, such as TSCPA’s CPA-PAC. Upstream moves undoubtedly lead to more PAC funds needed to support both statewide candidates Today’sCPA

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and the legislative candidates who replace them. The elections are more competitive, and more funds are needed by candidates for primary elections and the inevitable runoffs, with the general election yet to come. On the other hand, elections offer opportunities for CPAs to develop or enhance relationships with candidates. Providing personal support in a campaign, whether it’s holding fundraisers, putting up signs, making calls for the campaign or, especially for CPAs, serving as a campaign treasurer forges a strong relationship with the candidate that will not be forgotten after the election. It’s expensive to run for any legislative or statewide office, and very few candidates have the financial resources to self-fund a campaign. While neither candidates nor constituents like it, political fundraising is a necessity. That’s why TSCPA has established a bi-partisan political action committee, the TSCPA CPA-PAC. When campaign contributions are made from the CPA-PAC, it helps establish the organization’s relationship with candidates. Individual CPAs deliver these CPA-PAC checks, giving us both organizational and personal recognition. The law does not allow TSCPA dues to be used for political campaigns. The CPA-PAC is the only source of funds available for this important TSCPA advocacy activity. Contributions to the CPAPAC are allocated 75 percent to local legislative candidates, and each TSCPA Chapter PAC Committee determines which candidates will be supported. The remaining funds are dedicated to statewide races, and those decisions are made by the statewide PAC steering committee, currently chaired by Brad Brown, CPA-Southeast Texas. It is important for CPAs and TSCPA to have established relationships with legislators and statewide officials. The CPA designation is established by the state Legislature and they pass the laws that regulate the profession. They also regulate other professions and are the arbitrators between professions, such as lawyers and accountants, when both are doing tax work and it’s not clear where the practice of accounting stops and the practice of law starts. This requires constant vigilance. Every 12 years, the Legislature must renew the CPA authorizing legislation or it goes away. Political relationships allow us to present our perspective on these issues. Accounting and auditing standards are established by a timehonored due process, but legislators have the power to override that process and sometimes they try to do so. How would you feel about each state Legislature setting accounting or auditing standards? Political relationships allow us to explain to legislators why this is a bad idea. Legislators are always looking for new ways to raise revenue. They sometimes look at professional services as a viable new tax base. Political relationships allow us to explain the false economy of sales taxes on professional services. The Texas Accountancy Act and the regulation of CPAs are administered by the Texas State Board of Public Accountancy. The State Board members are appointed by the governor and confirmed by the Senate. Political relationships allow us to have input into this process. That’s the short version of why we need to be active in the political process. Here’s the short version of how you can help. Make a contribution to the TSCPA CPA-PAC. Members who contribute $100 or more receive a weekly newsletter during the legislative session with the latest news important to CPAs. You can make a contribution online at www.txcpapac.org. ■ 25

COVER STORY

TSCPA’S 2013 RISING STARS By DeLynn Deakins | Today’s CPA Managing Editor

TSCPA’s Rising Stars Program recognizes CPA members 40 years old and younger who have demonstrated exemplary leadership skills and active involvement in TSCPA, the accounting profession and/or their communities. People from around Texas nominate colleagues or friends to be recognized. A task force of TSCPA Executive Board members serves as the selection committee. For 2013, after receiving over 40 nominations, the task force selected the following 18 up and comers, based on their contributions to the accounting profession and their communities. We now introduce you to the CPAs, in alphabetical order, who are the 2013 Rising Stars honorees.

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Mark Collado, CPA-Houston Experienced Tax Associate, PricewaterhouseCoopers, LLP; Houston

In his work at PricewaterhouseCoopers, Mark Collado assists in the audit of income tax provisions for mid-size and large public companies under ASC 740 guidance, and he prepares federal and state returns for corporate clients. Collado has contributed greatly to the Houston CPA Society. He serves as the co-vice chair of the Houston CPA Society’s Public Relations Committee, volunteers with the Houston Food Bank, and is an active member of the Chapter’s Young Professionals Committee. While serving as the co-vice chair of

the Public Relations Committee, he has worked on developing a more consistent branding initiative for the Houston CPA Society and designed promotional materials for the advertising campaigns, including advertising for the Scholarship Extravaganza and Tax Expo. In the community, he has served with Skills 4 Living as a Game of Real Life Auditor and is an instructor for Junior Achievement teaching children about entrepreneurship and business. He is an outstanding example of the young, talented CPAs who are members of TSCPA.

Julie Dale, CPA-Austin Vice President, Michele M. Heyman, PLLC; Austin

Julie Dale oversees the tax practice and is involved in all aspects of firm management at her CPA firm in Austin. In her practice of accounting, she specializes in taxation. It is very fulfilling for her to help clients reach their financial goals through tax planning. Since 2006, she has served in various roles for TSCPA’s Austin Chapter and was elected to serve on the chapter’s Executive Board as manager of member services this fiscal year. When entering the profession, she set a goal

to become a public accounting firm partner by age 35 and is on track to achieve this goal according to her firm’s current plans. She believes that taking the leap to partner has been made easier through the leadership experience she gained at her chapter. The service to the local community includes volunteering for the Settlement Home and Capital Area Food Bank. She has always enjoyed helping others and feels she is able to do this every day for her clients and/or colleagues.

Guadalupe (Lupe) R. Garcia, CPA-Houston Manager, Assurance & Advisory Services, Whitley Penn, LLP; Dallas, Fort Worth, Houston

In his position at Whitley Penn LLP, Lupe Garcia manages the financial statement and compliance audit/assurance process for various not-for-profit and governmental entities, including counties, cities, school districts, and other special-purpose governments. He is responsible for all aspects of the audit/assurance process and is an active participant in leading continuing professional education sessions, both inhouse and for outside organizations. Garcia has served on the Houston CPA Society’s Young Professionals and Public Relations Committees, and is chairing

the Public Relations Committee for the 2013-2014 year. He is involved with several local community service organizations, such as Skills 4 Living, Junior Achievement and the University of Houston’s Bauer College Alumni Association. In addition, he is a recent graduate of the Fort Bend County Chamber of Commerce-Leadership Forum, Class of 2013. Garcia is described by his peers as a great leader and representative of the CPA profession. He assists others through many roles focused on serving and promoting the profession and giving back to the community.

Melanie Geist, CPA-San Antonio, LREB Partner, Porter & Geist, LP; San Antonio

As a partner at her firm, Melanie Geist manages the operations of the practice. She joined Steve Porter P.C. CPA as a tax accountant in 2001 and in 2005, became a partner in Porter & Geist, L.P. She is an active member in TSCPA and the San Antonio Chapter, currently serving as chapter president and as a member of TSCPA’s Board of Directors. Geist was a volunteer for the Peace Corps and spent more than two years in Cuidad Antigua, Nueva Segovia, Nicaragua. She

worked as a small business volunteer with a local credit union, providing technical assistance for rebuilding efforts after a devastating hurricane. She has also taught English as a second language, led a Junior Achievement course, worked to raise funds for cultural exchange, and directed a field day for local children. In her work and volunteer endeavors, Geist has shown her commitment to the accounting profession and her community.

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COVER STORY

Ryan Gibson, CPA-Abilene, CIA, CFSA Audit Manager, Condley and Company, L.L.P.; Abilene

Ryan Gibson joined Abilene’s Condley and Company, L.L.P. in 2006. As audit manager, he is responsible for scheduling and supervision of audit teams, implementing new accounting standards, reviewing attest engagements, and technology related to those engagements. Gibson is involved with several professional organizations, including TSCPA’s Abilene Chapter and TSCPA’s Financial Institutions Conference Committee. He is a member of different boards of civic and community service groups,

as well. Through his association with Leadership Abilene, he was connected with Day Nursery of Abilene, a non-profit day care center operating three centers and attending to more than 450 children each day. He was elected as their treasurer and to serve as an executive committee member. Gibson is also active in his church and the city’s Chamber of Commerce. He is a successful CPA who looks forward to taking on new jobs and challenges for his employer and his local area.

Christopher (Chris) Gummer, CPA-Dallas, CGMA Managing Member, The Gummer Group, LLC; Dallas

As managing member of The Gummer Group, Chris Gummer manages the firm’s day-to-day operations and long-term strategy. Gummer had a vision to create a boutique public accounting firm that provided more than tax preparation to small business owners. His goal was to help small business owners deal with other issues, such as taxes, financial statements, regulatory issues, and more. He was able to make his vision a reality through the successful integration of two mergers and full software

conversion. Gummer is an active member of the Dallas CPA Society. He is also a mentor for students in SMU’s Business Associates Program and UNT’s Professional Leadership Program, volunteers to coach SMU students in other career areas, and is a speaker for TSCPA to explain to college students the different career options available within the accounting profession. He has been described as an inspiring leader and great role model for students and other accounting professionals.

Kara Hamann, CPA-Austin, CGMA, CMA Director of Finance, Texas Tribune, Inc.; Austin

Kara Hamann is director of finance at Texas Tribune, Inc. In this position, she works with department heads to manage the budget and profitability, creates and implements finance and human resources policies and internal controls, and oversees the work of the staff accountant. Hamann has taken on many and varied responsibilities at TSCPA’s Austin Chapter. She chaired the chapter’s Jr. Duel in the Capital City program in its inaugural

year. She has served as the chapter’s manager of education and leadership, as well as on the TSCPA CPE Advisory Board. She is also a regular volunteer for community service projects with the Austin Chapter and other organizations, and is a continuing education instructor at Austin Community College. In her job and volunteer efforts, Hamann strives to represent the CPA profession well and inspire those who are interested in accounting work.

William (Billy) Kelley Jr., CPA-Permian Basin Manager, Weaver, LLP; Midland

Billy Kelley has worked in a variety of accounting areas in his CPA career. Prior to joining Weaver LLP in Midland, he worked as a sole practitioner, in industry and at a large public accounting firm. He is very active in the Permian Basin Chapter, most recently as chapter president in the 2012-2013 year. His other service with TSCPA includes being a director-at-large and serving on TSCPA’s Young CPAs and Emerging Professionals Task Force prior to it becoming a TSCPA

committee. He mentors other professionals and uses his creativity to develop ways to enhance the image of west Texas CPAs. He also volunteers his time to assist other community organizations, including the Royal Ambassadors, Little League Baseball, the West Texas Food Bank, the Midland and Odessa Chamber of Commerce, and more. Kelley believes it’s important to lead through service and empathy, and to help others grow through leadership opportunities.

Today’sCPA

| SEPTEMBER/OCTOBER 2013

Lucas LaChance, CPA-Dallas, CIA Audit Manager, Lane Gorman Trubitt, PLLC; Dallas

Lucas LaChance is an audit manager specializing in not-for-profit organizations with an emphasis on the cultural arts and social service organizations. He is responsible for all aspects of field work, including preparation of audits in conformity with GAAS and GAAP, as well as training, mentoring, developing, and guiding the staff. He led the inaugural steering committee for his firm’s young professional’s group, which was selected as the Outstanding Young Professionals organization for the Leading Edge Alliance, a worldwide association of accounting firms. He is also a frequent speaker at local, state,

and national conferences on a variety of not-forprofit topics. Outside the office, he is frequently involved with philanthropic organizations, including volunteering with the North Texas Food Bank, American Lung Association, and the Leukemia and Lymphoma Society. He is also involved with a number of professional associations, including the Dallas CPA Society, TSCPA’s Nonprofit Organizations Conference Committee, and the finance committee of the Dallas Institute for Humanities and Culture. Those who know him believe that he demonstrates a true commitment to the public accounting profession.

C. Aaron LeMay, JD, CPA-Houston Controller, Sam Houston State University; Huntsville

C. Aaron LeMay manages the offices of general accounting, financial reporting, disbursements and travel services, payroll, research administration, and bursar at Sam Houston State University. Since joining the staff, he has established himself as a key player and accomplished several major initiatives with the university’s new ERP system, both directly related to his department and campus-wide. LeMay is considered a leader who gets involved on campus and with internal and external organizations,

including a number of professional associations. He loves to learn and enjoys working in a university setting. He invests in individual students he meets by answering their questions and helping them navigate through college. He has participated with TSCPA through his service as a member of the Society’s Relations with Educational Institutions Committee. He has been described as creative, dedicated, energetic, smart, and much deserving of recognition as a TSCPA Rising Star.

Kimberly (Kim) Lyons, CPA-Dallas Tax Manager, Huselton, Morgan, & Maultsby PC; Dallas

As a tax manager, Kim Lyons performs a wide variety of diversified and complex tax-related tasks, including research, tax preparation, analysis and response to her clients’ IRS notices, and preparation of tax projections. She also assists clients with comprehensive planning and supervises tax department personnel. Her involvement in community service organizations includes being programs director for the Dallas Chapter of the American Society of Women Accountants, as well as

working on fundraising and the review of applications for scholarships at the chapter. She has been a volunteer with the YW (YWCA) and taught financial literacy sessions. For the Dallas CPA Society, Lyons coordinated a coat drive at Huselton, Morgan, & Maultsby to benefit Love for Kids, Inc. She is recognized at her firm as a CPA who takes on new challenges, participates in extra assignments and has impressive knowledge of accounting. She is a respected leader at her firm.

Cynthia Morales, CPA-Dallas and El Paso Assurance Services, Ernst & Young; Dallas

Cynthia Morales recently joined the Dallas office of Ernst & Young in the Assurance Services department. She previously worked at White + Samaniego + Campbell, LLP located in El Paso, TX, where she was a supervisor and also represented the firm at various civic groups. She is active with TSCPA, the El Paso Chapter and she just joined the Dallas Chapter. For the El Paso Chapter, she served as the chairman of the Young CPAs Committee and

Today’sCPA

| SEPTEMBER/OCTOBER 2013

on the CPE Committee. She has been a member of TSCPA’s Young CPAs and Emerging Professionals Committee. In the El Paso community, she was on the Board of Directors for the El Paso Diabetes Association and made presentations to the Greater El Paso Chamber of Commerce and the El Paso Hispanic Chamber of Commerce. Morales is also currently active as part of the UTEP’s Accounting Department Advisory Board.

COVER STORY

Brian Mueller, MAcc, EA, CPA-Austin Tax Compliance & Advisory Services Manager + Tax Litigation & Controversies Manager, Five Stone Tax Advisers, LLC; Austin

Brian Mueller manages the Tax Compliance & Advisory Services practice, as well as the Tax Litigation & Controversies department. He prepares complex tax returns, reviews all returns prepared by the firm, performs tax planning, research and compliance work, manages departmental output and revenue, and represents clients before the IRS, in all 50 states and numerous countries around the world. He was born in Buenos Aires, Argentina to a family of Eastern European immigrants from Poland, Ukraine, and Russia. He immigrated to

the United States on his own at the age of 18. He lived in Florida and then moved to Austin where he studied accounting while working full time. In 2010, he graduated with a Master of Accounting degree and passed the CPA exam in 2011. Mueller is a member of TSCPA and AICPA, and credits TSCPA’s Austin Chapter for playing a key role in his decision to become a CPA. He also volunteers for several community organizations. He has been described as a professional who is smart, dedicated and has the best interest of his clients in mind.

Clayton Ripley, CPA-Austin Managing Director, Town Lake Capital Management; Austin

Clayton Ripley is the founder and managing director of Town Lake Capital Management, an investment firm that focuses on providing financial guidance to small foundations and endowments. He has led the firm through rapid growth since it was founded. He is active in TSCPA’s Austin Chapter and served as the chairman of the chapter’s Financial Literacy Task Force. He has taught undergraduates at the University of Texas at Austin as a guest lecturer on accounting and financial literacy. Ripley also

devotes his time to community service in central Texas. His roles have ranged from acting as treasurer of the Texas Land Trust Council to participating in the Greenlights 501 Council, which raises funds to provide grants to local nonprofit organizations. He is also a board member of the Texas Health Institute. For his church, he mentors and teaches a group of young men on a weekly basis at his home. He has excelled professionally and seeks ways to serve his local community.

Marc Sewell, CPA-San Antonio Senior Audit Manager, Padgett Stratemann & Co. LLP; San Antonio

As a senior audit manager, Marc Sewell manages multiple audits and other projects to ensure timely delivery of a quality product. His duties include presentation of audit results, business development and proposal writing, speaking at training seminars, and acting as a technical resource for the firm in the governmental, not-for-profit, and A-133 compliance audits industries. He is a member of TSCPA and AICPA, and since he cares deeply about education, he lends his talents to the San Antonio community

through involvement in Communities in Schools and Alamo Area Academics, Inc. He has also mentored several team members at his firm. Sewell’s leadership skills, work ethic, and commitment to his profession and the local community earned him a place in the selective and highly regarded Leadership San Antonio program class 37. His leadership skills have helped further his firm’s success and he has an ability to inspire others to be their very best.

Shelly Spinks, CPA-Central Texas Tax Manager, Pattillo, Brown & Hill, LLP; Waco

Shelly Spinks is responsible for preparing and reviewing all types of tax returns, and she oversees the preparation of trust tax returns. She helps organize and develop the training for new and current tax department employees at Pattillo, Brown & Hill. Spinks is active in TSCPA and the Central Texas Chapter, having served as chapter vice president and chair of the chapter’s Young CPA Committee. She has participated on TSCPA’s Young CPAs and Emerging Professionals Committee and completed the Society’s

Leadership Development Institute. In addition, she completed Leadership Waco Class XXV and two years of the Texas Bankers Association Trust School. Her involvement in the community encompasses working with the Advisory Board of Providence Healthcare Network and Providence Foundation Forum. She believes that with determination and hard work, goals can be accomplished. She is considered a tremendous leader in her firm, community and the accounting profession.

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| SEPTEMBER/OCTOBER 2013

Amy Twardowski, CPA-Corpus Christi, Tax Manager, Buckley & Associates, PC; Corpus Christi

As a tax manager at Buckley & Associates, Amy Twardowski provides tax and audit services for all types of businesses and individuals. She organized a presentation and tour of her firm’s offices for Texas A&M University-Corpus Christi accounting students to help them learn more about the CPA profession. Twardowski is an active member in TSCPA and the Corpus Christi Chapter. She has served as a chapter board member, vice president, and is now chapter president-elect. She was also selected as the

chapter’s Young CPA of the Year for 2011-2012. She is a member of TSCPA’s Young CPAs and Emerging Professionals Committee. Her community service involvement includes working with the Rotary Club of Corpus Christi through various committees including RYLA, Mentoring, and Membership. She has proven herself to be a true asset to her firm. She truly believes that leaders create more leaders and hopes that others would see her as an example of this in the future.

Adria Palacios Vasquez, CPA-Corpus Christi CPA-Partner/Lecturer-Accounting, Palacios & Palacios, P.C./Texas A&M University-Kingsville; Corpus Christi/Kingsville

Adria Palacios Vasquez is a partner in Palacios & Palacios, P.C. where her work includes preparing tax returns, tax consulting and financial statement preparation. She also teaches full time at Texas A&M University-Kingsville and has assisted students in their accounting careers. In her participation with TSCPA and the Corpus Christi Chapter, she has served as a chapter board member and on the TSCPA Relations with Educational Institutions Committee. She has been a panelist for TSCPA’s

a winning gameplan for over 50 years.

Meet the CPAs event for local college students and served as an expert for a radio segment on KEDT and a phone bank panelist for a Channel 3 segment. Vasquez is involved in community activities, such as the Volunteer Income Tax Assistance (VITA) program and the Diocese of Corpus Christi. Her ability to teach, run an accounting practice, assist in the community, and further the CPA profession makes her deserving of recognition as a TSCPA Rising Star. ■

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Today’sCPA

| SEPTEMBER/OCTOBER 2013

Feature By George Frankel, MBA, JD, LL.M., CPA

How to Avoid the 10 Percent Penalty on Early Retirement Distributions Taking Equal Periodic Payments

The recession has been harsh for older employees. Job losses, pay cuts, rising health care costs and reduced benefits have taken their toll. Many Americans have turned to their retirement accounts to help sustain them in difficult times. Dipping into their retirement accounts prematurely, however, may mean that taxpayers will not have the funds they need in their later years.

Withdrawing funds before retirement can be costly: The Code imposes a 10 percent penalty tax on early withdrawals from a qualified retirement plan unless a statutory exception applies. For this purpose, the term “qualified retirement plan” covers conventional employer qualified plans, tax-sheltered annuities, IRAs, and individual retirement annuities.1 The term does not include elective, non-funded compensation deferral plans covering state and local government employees.2 The early distributions tax is an additional income tax equal to 10 percent of the portion of the distribution that is included in income. The tax is not imposed on non-deductible distributions.3 A taxpayer who does not qualify for an exception will pay both the early distributions tax and the ordinary tax on the distribution. Furthermore, the distribution can push the taxpayer into a higher bracket. An early withdrawal occurs before an individual attains age 59½ unless the distribution satisfies a specific exception. One 32

way to avoid the penalty tax is to take a distribution that is part of a series of substantially equal periodic payments (SEPP). These distributions are commonly referred to by financial advisors as “72(t) distributions” or “72(t) withdrawals.” While a taxpayer can avoid the penalty by taking SEPPs, he/she should be cautious about using the exception for only a temporary financial need: the need for funds might be temporary, but the distributions must continue annually for a minimum of five years or until age 59½, whichever is longer.4 For example, a taxpayer age 50 would be required to withdraw SEPPs until age 59½ even though he/she recovers from a temporary financial situation before then. The SEPP exception is more beneficial to a taxpayer who retires early and is not depleting his/ her retirement funds prematurely. For qualified plans other than IRAs, the taxpayer must separate from service prior to receiving distributions.5 The distributions can be made more frequently than annually, such as monthly.6 Today’sCPA

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Whether a tax form must be filed depends on which box is checked on the 1099-R form. If box 7 is coded with a “2” (“early distribution”), it is not necessary to file a form. However, if box 7 is coded with a “1” (“early distribution, no known exception”) or with a “7” (“normal distribution”), then Form 5329 must be filed to claim an exemption to the early distributions tax.

If the taxpayer dies after he/she has begun receiving payments, the recapture tax does not apply.12 The taxpayer’s beneficiary receives the assets of the retirement account without penalty and is not required to continue with the distribution plan. The early distributions tax also does not apply if the taxpayer becomes permanently disabled before satisfying the plan requirements.13

MODIFICATIONS TO SEPP PLAN ARE SUBJECT TO RECAPTURE TAX If a modification is made to the SEPP plan after distributions have commenced, a recapture tax will apply, unless certain exceptions are met. The recapture tax is the amount that would have been imposed had the SEPP exception not applied. The tax is imposed in the first year the modification is made. It applies to all current distributions and retroactively to all previous distributions. However, the recapture tax does not apply to amounts distributed after the taxpayer reaches age 59½.7 The taxpayer must also pay interest on the tax beginning with the year the penalty would have been payable and ending with the tax year the modification is made.8 Since SEPP distributions occur over a number of years, inadvertent errors are possible. The plans should be monitored carefully for compliance. The taxpayer should document: a) the method; (b) the interest rate; (c) the life expectancy table used in the calculation; (d) the payment amount; (e) the date of commencement and the frequency of payments; and (f) the actual distributions received. All account statements and 1099-R forms should be retained for the period of distributions. Once distributions have begun, any addition, transfer or rollover into the account will be treated as a modification. If any modification is made, the taxpayer must file IRS Form 5329. The recapture tax as well as penalties and interest will apply. If the modification is not disclosed, the taxpayer may also owe the substantial underpayment penalty or the fraudulent return penalty.

SAFE HARBOR RULES FOR SEPP EXCEPTION Under safe harbor rules, the Service permits the taxpayer to use three methods to determine the substantially equal periodic payments. The three methods are: (1) the required minimum distribution (RMD) method; (2) the fixed amortization (Amortization) method; and (3) the fixed annuitization (Annuitization) method. In addition to these methods, the Service also permits the taxpayer to use any reasonable method to determine the SEPPs.14 Even though the taxpayer is permitted to use other reasonable methods, it would be wise for him/her to use one of the safe harbor rules or to seek a private letter ruling in order to not risk a challenge from the Service.

MODIFICATIONS ARE PERMITTED IN CERTAIN CIRCUMSTANCES The taxpayer is permitted to modify or terminate the plan without penalty after the later of: 1) the date the individual turns age 59½, or (2) the close of the five-year period beginning with the date of the first distribution.9 If distributions are stopped after the time period permitted under this exception, they must begin again once the taxpayer reaches age 70½ under the minimum distribution rules. Example 1: Horace, an employee, begins receiving distributions in a series of substantially equal payments at age 56. At age 60, he modifies the method of distribution to one that does not qualify for the SEPP exception. Since Horace modifies the method of distribution earlier than five years after the first distribution, the 10 percent recapture tax would apply to all amounts distributed to him before age 59½.10 Example 2: Horace begins receiving payments at age 50 in a series of substantially equal payments over his life expectancy. He decides to receive a lump sum distribution of his remaining benefits at age 58. Since Horace modifies the distribution method prior to age 59½, the recapture tax applies to the lump sum and all prior distributions made beginning with the first distribution at age 50.11 Today’sCPA

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THE TAXPAYER HAS A CHOICE OF LIFE EXPECTANCY TABLES For the RMD and Amortization methods, the taxpayer must choose between three different life expectancy tables. To determine the distribution period, the taxpayer can select the single life expectancy table15, the joint and survivor life expectancy table16 , or the uniform lifetime table.17 The life expectancies listed in all three tables are not based on gender. The single life expectancy table does not take into consideration the age of a beneficiary. The joint life expectancy table is based on the age of the taxpayer and of the named beneficiary. The uniform lifetime table was devised by the Service to simplify the SEPP calculation. While the life expectancies in the uniform lifetime table are based on joint survivorship, the age of any particular beneficiary is not used in the calculation. If the taxpayer wants the highest distribution, he/she should choose the single life expectancy table. If he/she wants a lower payment and to extend the payment period, he/she should name a beneficiary and choose the joint life expectancy table. The younger the beneficiary the taxpayer selects, the lower the amount of the distributions. THE REQUIRED MINIMUM DISTRIBUTION (RMD) METHOD The RMD method yields the lowest payment, but fluctuates with the value of the account. Under the RMD method, annual payments are determined by dividing the account balance for the year by a factor from the life expectancy table that the taxpayer selects. Once chosen, the same table must be used each year thereafter. The amount of the distribution is recalculated each year based on the account balance for the preceding year and the taxpayer’s current life expectancy. Even though the amount of the annual payment is recalculated annually, the redetermination is not considered a modification subject to the penalty tax.18 The account balance that is used must be determined in a reasonable manner. For example, if the first distribution is made on July 15, 2010, the Service considers it reasonable to determine continued on next page

Early Retirement Distributions continued from page 33

the account balance based on the value of the account on any date between Dec. 31, 2009, and July 15, 2010. For subsequent years, it is reasonable to use the value either on the Dec. 31 of the prior year or on a date within a reasonable period before that year’s distribution.19 There are various online calculators that are useful to determine the correct distribution amounts under the three methods. One of those calculators is at www.72t.net. The taxpayer should verify that the amounts determined by the online calculators are accurate. The RMD method is the simplest of the three methods. The taxpayer will not risk depleting the account since the remaining account balance will be amortized over his/her life expectancy (or the joint life expectancies of the taxpayer and a named beneficiary). Example 3: Horace, age 50, has an IRA account at State Bank with a balance of $100,000 on Dec. 31, 2009. His nephew Wayne, age 35, is the designated beneficiary of his IRA. Horace begins receiving a series of periodic payments in 2010. Horace chooses the RMD method and the single life expectancy table to compute the annual distributions. The distribution for 2010 is $2,924 (calculated by dividing the account balance of $100,000 by 34.2 years, the life expectancy factor for an individual age 50). Since Horace complies with the safe harbor provisions, he will not owe the tax on early distributions. Once Horace has chosen the RMD method and single life expectancy table, he must continue using the same method for each succeeding year. He recalculates the amount of the distribution annually. Assume the account balance of the IRA on Dec. 31, 2010, is $110,000 (after the annual distribution of $2,924 and investment gains). Horace’s distribution for 2011 would be $3,003 ($110,000 divided by 33.3, the factor from the single life expectancy table for an individual age 51). Horace could have chosen the uniform life table or the joint and last survivor table. If Horace had chosen the uniform life table, his distribution for 2010 would have been $2,151 ($100,000 divided by 46.5, the factor for an individual age). If Horace had instead chosen the joint and last survivor table, the distribution for 2010 would have been $1,984 ($100,000 divided by 50.4 the factor from the joint and last survivor table for individuals ages 50 and 35). 34

CALCULATING THE SEPP UNDER THE AMORTIZATION AND ANNUITIZATION METHODS The second method permitted by the safe harbor rules is the Amortization method. Under this method, the amount to be distributed annually is determined by amortizing the account balance over the taxpayer’s single life expectancy or the joint life expectancy of the taxpayer and the taxpayer’s named beneficiary. The taxpayer can choose from the same three life expectancy tables as under the RMD. Unlike the RMD method, however, once the annual payment is determined in the first year of distribution, it cannot be recalculated in future years without penalty.20 The taxpayer cannot inflate the amount of the distributions by choosing just any interest rate. The interest rate used in the calculation must be reasonable. The Service defines a reasonable interest rate as not more than 120 percent of the federal midterm rate for either of the two months immediately preceding the month in which the distribution begins.21 The third method permitted by the safe harbor rules is the Annuitization method. Under this method, the annual payment is calculated by dividing the account balance by an annuity factor. The annuity factor is based on the mortality table in Appendix B of Rev. Rul. 2002-62. The annuity factor is the present value of a $1 annuity beginning with the taxpayer’s age and continuing for the life of the taxpayer (or the joint life expectancy of the taxpayer and his/her beneficiary). The annuity factor may also be derived from the remainder tables in Reg. § 20.2031-7T(d)(7). The maximum interest rate that can be used is the same as that used for the fixed amortization method. The taxpayer should generally choose the Amortization method over the Annuitization method. The amount of the distribution determined by the Amortization method is always slightly higher than that determined by the Annuitization method. However, if the taxpayer wants to decrease the amount of the distribution calculated under the Amortization method, he/she can use a lower interest rate, or roll over a portion of the account into a separate IRA account from which he/she will not currently take distributions. A ONE-TIME CHANGE TO THE RMD METHOD IS PERMITTED Taxpayers may have set up SEPP accounts at a time when they expected their account balances to appreciate only to Today’sCPA

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find that their accounts have instead been depleted by recent stock market turbulence. Once a distribution method and an expectancy table have been chosen, a change cannot be made during the course of the distributions. Fortunately, the Service permits a one-time change from the Amortization or the Annuitization method to the RMD method without penalty.22 The RMD method results in the lowest distributions of the three methods. If the taxpayer has been using the Amortization or Annuitization method and the account balance has been reduced significantly by investment losses, the taxpayer should consider changing the method of calculation to the RMD method. This will ensure that the account balance will not be depleted before the taxpayer dies. The change applies to the distribution in the year of the change and later years. Once the taxpayer has made a change to the RMD method, any subsequent increase in the value of the account might result in higher payments than would have been received under the other methods. However, a change back to the Amortization or the Annuitization method would be treated as a modification and subject to the penalty tax.23 Distributions that began prior to 2003 can be changed at any time to the RMD method and to the use of a different life expectancy table.24 Example 4: Assume the same facts as in Example 3 above, except Horace chooses the Amortization method and the single life expectancy table to calculate his distributions. A reasonable interest rate based on 120 percent of the highest federal mid-term rate is 3.8 percent. The annuity factor for an individual with a life expectancy of 34.2 years is determined from Table B of IRS Pub. 1457. The amount of the distribution can also be determined by using the Microsoft Excel spreadsheet and inputting the formula “= PMT (.038, 34.2, 100,000)”. Horace’s distribution will be $5,273 for 2010 and each year of the payout period, thereafter. The amount of $5,273 is determined by amortizing $100,000 over 34.2 years at 3.8 percent interest rate. Horace can change to the RMD method at the beginning of any year. If Horace wants to receive less than $5,273 per year, he can use a lower interest rate in his calculations. However, if he wanted a higher amount, he could not use a higher interest rate. Example 5: Assume the same facts as above except Horace chooses the fixed Annuitization method. The annuity factor for an individual age 50 is 19.087. Horace would receive a distribution of $5,239 ($100,000/19.087). CREATING SEPARATE IRAS TO AVOID EARLY WITHDRAWAL PENALTY The taxpayer is not required to aggregate the balances of all of his/her retirement accounts to compute the SEPP. The taxpayer may choose one or a combination of accounts to calculate the payments. However, after the calculation is made, the distribution can be made solely from one of the accounts or from any combination of the accounts.25 Payments are not required from the accounts that are not included in the calculation of the SEPP distribution.26 The taxpayer can establish more than one plan by treating each account separately. However, he/she should make sure

that the appropriate payment comes from the appropriate plan. The distributions must take into account the entire account balance. A portion of one or more of the accounts cannot be excluded in making the calculation.27 A taxpayer who has only one IRA and does not want to receive payments on the entire account balance should roll over a portion of the funds into a new account. A trusteeto-trustee transfer should be used to avoid the 20 percent mandatory withholding tax for rollover distributions from qualified plans paid directly to plan participants.28 Example 6: Charles owns an IRA with a balance of $600,000 on Dec. 31, 2009. He is 50 years old and wants to use only $250,000 of the $600,000 account balance to compute the SEPP exception. Charles should first roll over $250,000 into a new IRA account in a trustee-to-trustee transfer. Charles can then use the $250,000 balance in his new account to calculate the amount of the distributions. He must receive the distributions only out of this account. If he needs larger distributions, they can be made from the other account. TAILORED TO THE TAXPAYER’S NEED Taxpayers are given a great deal of latitude in creating a plan for SEPP distributions. They can tailor the SEPPs to their needs by choosing among life expectancy tables, varying the method chosen or choosing a beneficiary based age. They can also use only part of the balance in an IRA account by creating a new IRA account by means of a trustee-to-trustee rollover. FOOTNOTES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28.

I.R.C. § 72(t)(4). I.R.C. § 72(t)(9). I.R.C. § 72(t)(1). I.R.C. § 72(t)(4)(A)(ii), Arnold v. Comm., 111 TC No. 12 (1998). I.R.C. § 72(t)(3)(B). P.L.R. 8919072, P.L.R. 9050030, P.L.R. 200105066. I.R.C. § 72(t)(4)(A)(ii)(II). I.R.C. § 72(t)(4)(B). I.R.C. § 72(t)(4)(A)(ii), Arnold v. Comm., 111 TC No. 12 (1998). I.R.C. 72 (t)(2)(A)ii and iii. Id. I.R.C. § 72(t)(A)2(ii) and (iii). Id. Notice 89-25, 1989-1, C.B. 662, Q&A-12; P.L.R. 9008073; P.L.R. 9615042. Reg. § 1.401(a)(9)-9, Q&A-1. Reg. § 1.401(a)(9)-9, Q&A-3. Rev. Rul. 2002-62, Appendix A, I.R.B. 710. Id. § 2.01(a). Id. § 2.02(d). Id. § 2.01(b). Id. § 2.02(c). Id. § 2.03(b). Id. Rev. Rul. 2002-62, § 3, 2002-42 IRB 710. P.L.R. 8946045, P.L.R. 970533 P.L.R. 9050030, P.L.R. 9525062. P.L.R. 9705033. I.R.C. § 3405(C)(1)(B).

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George Frankel, MBA, JD, LL.M., CPA, is a professor of Taxation at San Francisco State University, College of Business.

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Feature By C. William (Bill) Thomas, CPA, Ph.D.

The Financial Reporting Framework for Small and Medium-Sized Entities: A Closer Look For the past few years, the Financial Accounting Standards Board (FASB) and the American Institute of CPAs (AICPA) have been placing a great deal of emphasis on accounting for private companies. To this end, the two groups have developed and implemented two distinctly different plans. The Financial Accounting Foundation (FAF), parent of FASB, has appointed the Private Company Council (PCC) to study U.S. Generally Accepted Accounting Principles (GAAP) and propose exemptions and changes specifically geared for the needs of private companies. Almost simultaneously, AICPA has developed a new non-GAAP Financial Reporting Framework for Small- to Medium-Sized Entities (FRF-SME). This article gives a brief history of the development and implementation of these plans, and then contrasts them on several different dimensions, focusing primarily on providing the reader with an objective understanding of the FRF-SME – what it is and what it is not. BACKGROUND Historically, U.S. GAAP has been regarded as the “gold standard” for measurement and reporting of financial information throughout the world. During the past two decades, the business affairs of public companies, and the transactions that define them, have become more complex and global in focus, introducing the need to converge U.S. GAAP with International Financial Reporting Standards (IFRS) and to measure and report such complex things as derivative financial instruments, fair values and variable interest entities. FASB has responded to this need by continuing to develop new pronouncements to meet the financial reporting needs of an increasingly complex global financial reporting community. Unlike some other industrialized nations, the United States government does not prescribe accounting standards or require that all entities follow them. While the Securities and Exchange Commission (SEC) requires all public companies to issue financial statements based on GAAP, many smaller non-public entities are not so restricted. The advantages of using GAAPbased financial statements are many – uniformity, transparency, completeness and prestige being among the most prominent. C. William Thomas, CPA, Ph.D., is the KPMG/Thomas L. Holton Chair and the J.E. Bush Professor of Accounting in the Hankamer

School of Business at Baylor University in Waco. Thomas can be reached at Bill_Thomas@baylor.edu.

Today’sCPA

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However, from a cost-benefit standpoint, it has become increasingly difficult for small entities to fully comply with GAAP because, until recently, the only standards developed by FASB were “one size fits all,” applicable to all entities, regardless of size or complexity. In 2012, FAF created the Private Company Council (PCC), designated as the official body to identify and propose exceptions and modifications to U.S. GAAP for private companies. FASB has agreed to review the PCC proposals for modifications to GAAP and to issue “endorsements” when merited, following a due process that includes written notice of the reasons. In late June 2013, FASB endorsed the first three PCC proposals, setting the stage for the evolution of “private company GAAP” in the United States for the foreseeable future. Although GAAP reporting affords many advantages, some small- to medium-sized entities and those that use their financial statements simply do not feel the need or have the capability of producing all of the information that is fully compliant with GAAP on a timely and cost-effective basis. These companies traditionally have either used the cash method of accounting or the same basis of accounting they use for income tax reporting. For many years, AICPA professional standards have allowed the preparation and usage of financial statements under these rather loosely defined “other comprehensive basis of accounting” (OCBOA). Generally accepted auditing standards (AU) Section 623 defines the term “financial statement” as follows: “a presentation of financial data, including accompanying notes, derived from the accounting records and intended to communicate an entity’s economic resources or obligations at a point in time or the changes therein for a period of time in conformity with a comprehensive basis of accounting.”1 To be acceptable, a “comprehensive basis of accounting” must be based on a logical framework, using a definite set of reasonable criteria applied to all material items in the financial statements. The FRF-SME, released in June 2013, is intended to be the “next generation of OCBOA.” 2 It is intended for use by ownermanaged non-public entities that are not required, and do not intend, to issue financial statements in accordance with GAAP. Yet, the FRF-SME is much more formal, and much more comprehensive, than the cash method or income tax methods that have traditionally been identified with OCBOA. The framework is contained in a 206-page document, developed around a principles-based conceptual framework. Such formal frameworks for the cash method and income tax methods of accounting are nonexistent. The FRF-SME contains formal rules, based on the accrual method, for measurement and reporting of many asset, liability, equity, revenue and expense accounts. It “borrows” terminology from GAAP, but differs sufficiently to be classified as non-GAAP. The FRF-SME has been developed to serve the substantial marketplace where traditional OCBOA (cash method or income tax method) financial statements Today’sCPA

| SEPTEMBER/OCTOBER 2013

have heretofore been insufficient and yet where GAAP-based financial statements are considered unnecessary. SOME COMPARISONS Figure 1 presents, in comparative format, the attributes of three financial frameworks: (1) GAAP; (2) Private Company Council (PCC) Modified GAAP; and (3) FRF-SME based on 12 dimensions. The brief discussion below compares the three frameworks based on: (1) general attributes; (2) specific attributes; and (3) scope of services available for financial statements prepared under each framework. GENERAL ATTRIBUTES The FRF-SME is applicable to small or medium-sized entities, which is intended to be a different set of financial statement preparers than those who might adopt GAAP for financial reporting purposes. AICPA has purposely not specifically defined “small or medium-sized” as yet, which, at first glance, appears problematic. How can one discern between entities to which PCC GAAP applies and those to which FRF-SME applies, or do the two groups overlap? The initial answer appears to be that the two groups may overlap, but the reporting requirements under PCC GAAP are more extensive. Beyond that, AICPA has specified that the preparer set contemplated with the FRF-SME is intended to be for-profit, owner managed businesses that have no intention of going public, while PCC GAAP may apply to both for-profit entities that may be reserving the option of going public, and to not-for-profit entities as well. Whereas GAAP and PCC GAAP are both considered authoritative, the FRF-SME is not, because it has been issued by AICPA, which is not a recognized authoritative group to promulgate accounting standards. GAAP must undergo a formal due process for both initial adoption and updating changes, whereas FRF-SME is not supported by such a formal process. AICPA describes FRF-SME as a “stable platform,” but this does not necessarily mean that the framework is static. While AICPA has established no formal process for updating, it has plans to review the FRF-SME every three-four years, and to make necessary changes to keep the framework relevant to the needs of financial statement preparers and users. The fact that FRF-SME is not considered authoritative makes it subject to questionable enforcement in the future. Moreover, one might easily ask whether the non-authoritative and therefore nonenforceable nature of FRF-SME may make use of the framework and its underlying guidelines subject to potential future legal challenges should it be improperly applied. GAAP, which includes PCC GAAP, follows the joint conceptual framework adopted by FASB and IASB in 2012. Thus, its framework embraces the following main qualitative characteristics for accounting information: (1) relevance; and (2) faithful representation. Supporting characteristics include: (1) comparability; (2) verifiability; (3) timeliness; and (4) understandability. The FRF-SME embraces different 37

The Financial Reporting Framework Continued from page 37

qualitative characteristics: (1) objectivity; (2) measurability; (3) completeness; and (4) relevance. Conceptual differences in qualitative characteristics have the potential of eventually creating some major differences in measurement and reporting methods between GAAP and FRF-SME. This fact also raises an additional issue for potential adopters of FRF-SME: as a company increases in size and, potentially, in complexity, is there a pathway for an adopter of FRFSME to “upgrade” its financial reporting practices to fully comply with GAAP (or PCC GAAP)? While the eventual answer might be “yes,” it would not be likely that an adopter of FRF-SME would (or could) change its financial reporting framework without major restatement of its financial statements, and without incurring substantial additional costs associated with the time and effort to do so. Consideration of these facts leads to the conclusion that the proper circumstances for application of the FRF-SME vs. PCC GAAP might need some further clarification, which is precisely what is in the works. On Jan. 13, 2013, the National Association of State Boards of Accountancy (NASBA) issued a formal resolution expressing opposition to AICPA’s development and promotion of FRF-SME in its present form, stating that it was unclear, appeared to overlap too much with PCC GAAP, and that it would “confuse the profession, the public, and regulators.”3 AICPA leadership was quick to respond and, in July 2013, agreed to issue a decision-making tool and illustrative financial statements to help preparers determine which of the two frameworks to use. The issuance of these materials is forthcoming. In the meantime, the two groups have agreed to resolve their differences, and now “share a common belief that current GAAP may not always meet the needs of small private businesses and the users of their financial statements.”4 This has provided a major step toward giving the FRF-SME the credibility it needs and therefore making its successful implementation a reality. SPECIFIC ATTRIBUTES Like GAAP, the FRF-SME provides formal guidelines for measurement and disclosure of many asset, liability and equity accounts. A review of the framework’s table of contents reveals that it addresses many specific types of business transactions, including, but not limited to, transfers of financial assets, accounting for foreign currencies, accounting changes, contingencies, acquisition of shares, post-employment benefits, business combinations, joint ventures, leases, and related parties. However, unlike GAAP, the FRF-SME limits measurement and disclosures to financial statement matters typically addressed by SMEs. It omits detailed discussion of transactions that typically characterize larger and more complex entities, such as variable interest entities. Preparers have the option of presenting parent-only financial statements. Derivative financial instruments may be referenced by footnote only. In these areas, it provides basic guidelines for measurement and disclosure. In other 38

areas, it provides little or no guidance. Where such guidance is not provided, proper measurement and disclosure is left to the judgment of the preparer. Unlike GAAP, which greatly utilizes fair values to measure assets and liabilities, the FRFSME utilizes historical cost as the predominant valuation method. Whereas the application of GAAP can be quite complex, the application of the FRF-SME is expected to be more straightforward. Although cost is considered a limiting constraint for measurement and reporting under GAAP, it is not a primary factor. In contrast, lack of complexity and low cost are two primary factors to consider in the decision to use the FRF-SME. Financial statements typically produced by the FRFSME consist of: (1) statement of financial position; (2) statement of operations; (3) statement of changes in equity; and (4) statement of cash flows. The statement of other comprehensive income is omitted. SCOPE OF SERVICES As is the case with financial statements based on GAAP, as well as those based on other types of OCBOA, the CPA in public practice may compile, review, audit or perform other attestation services on financial statements issued under the FRF-SME and issue an appropriate report under appropriate AICPA standards. As with other types of special reports on financial statements based on OCBOA, management is expected to include a footnote in the financial statements that describes the basis of accounting used, and the accountant’s report will be expected to include a separate paragraph referencing that note. The CPA should take precautions to insure that readers are not misled to think that FRF-SME based financial statements are equivalent to those prepared under GAAP. KNOW THE ADVANTAGES AND LIMITATIONS The FRF-SME provides a new, different and cost-effective alternative for small and medium-sized, owner-managed, for-profit entities to communicate financial information to external parties for use in credit and investing decisions. However, before using the FRF-SME as an alternative to either GAAP or other OCBOA methods, financial management of companies, as well as their CPAs, should become familiar with the framework, including both its advantages and limitations. FOOTNOTES 1. AICPA Professional Standards Section 623.02. 2. Remarks of Barry Melancon, president/CEO of AICPA, communication to state CPA societies in response to NASBA press release dated January 28, 2013, voicing concerns about FRF-SME. 3. National Association of State Boards of Accountancy (NASBA), January 28, 2013. 4. “NASBA and AICPA Pledge Cooperation on Private Company Financial Reporting Frameworks.” Joint NASBA-AICPA statement. PRWeb, July 15, 2013. ■

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Figure 1 Comparison of Reporting Frameworks Dimension for Comparison

GAAP

PCC GAAP

FRF-SMEs

To which entities is framework applicable?

All U.S. entities, including public (SEC traded) and non-public entities, both for-profit and notfor-profit

All non-public U.S. entities, both for-profit and not-for-profit; may or may not intend to go public in the future

Small, medium-sized, usually owner managed for-profit entities that have no intention of going public AICPA will develop decisionmaking tool to clarify applicability

Authoritative?

Yes (FASB)

Same as GAAP

No. Considered OCBOA

Based on formal, principles-based conceptual framework?

Yes

Is framework based on a formal due process?

Yes

Qualitative characteristics of information

Relevance Faithful representation Comparability Verifiability Timeliness Understandability

Same as GAAP

Objectivity Measurability Completeness Relevance

Is framework generally accepted Yes by financial reporting community?

Yes

Pending. Initial concerns by NASBA are being addressed by AICPA

Are standards subject to regulation and enforcement?

Yes (FASB and SEC, as well as for public companies)

Yes (FASB and PCC)

Questionable

Are standards subject to regular updates based on due process?

Yes, by FASB

Yes, by FASB and PCC

No formal process for updating, but reviewed every 3-4 years

As companies increase in size and complexity of operations, is there an available “upgrade” to full GAAP?

N/A

Yes; varying degrees of restatement Not anticipated. Substantial may be required restatement may be required

General attributes:

Specific attributes: Do formal guidelines for Yes. Outlined in Accounting measurement and reporting Standards Codification (ASC) (disclosure) of specific items exist?

Same as GAAP, with approved exceptions for private companies

Disclosures reduced to financial statement matters typically addressed by SMEs

What accounting methods are used for valuation?

Fair values, historical costs

Same as GAAP, with approved exemptions and exceptions

Blend of traditional and income tax accounting methods. Historical cost emphasized over fair values.

What financial statements typically result?

Balance Sheet Income Statement Statement of Other Comprehensive Income Statement of Owners’ (Stockholders’) Equity Statement of Cash Flows

Same as GAAP, modified for exceptions for private companies; with required disclosure of differences

Statement of Financial Position Statement of Operations Statement of Changes in Equity Statement of Cash Flows Some terms “borrowed” from GAAP

What level of complexity do standards deal with?

Can be very complex

Decreased complexity from GAAP, but more complex than FRF-SME

Least complex. Omits many complex types of disclosures

Is cost a primary constraint?

Yes. Decreased cost from GAAP, but Yes. Least costly more costly than FRF-SME

Compilation Review Audit Attestation

Association available: What scope of services may an independent CPA perform on financial statements?

Today’sCPA

| SEPTEMBER/OCTOBER 2013

OCBOA (Special Report with required disclosure that basis of accounting is not GAAP) Compilation Review Audit Other attestation services

CPE Article By Terry Bechtel, Ph.D., CPA; Randy M. Reed, DBA; and Joan Brumm, Ph.D., CPA

AofTALE TWO TAXES Minimizing Tax Liability Using the Tax Benefit Rule

During these economic times, taxpayers must examine all options to reduce their tax liability by any eligible means. This article examines a little-used option that tax preparers can use in optimizing their choice of election for deducting sales and local taxes.

Curriculum: Consulting services, tax Level: Intermediate Designed For: Public practice and tax practitioners Objectives: To help taxpayers reduce their tax liability by utilizing a little-used option that optimizes their choice of election for deducting sales and local taxes Key Topics: State and local sales taxes, state and local income taxes Prerequisites: General understanding of Schedule A preparation Advanced Preparation: None

Most individual taxpayers use a calendar year and the cash basis of accounting in preparing their annual federal income tax return. These taxpayers must, as part of the determination of their tax liability, calculate both their standard deduction, as well as the amount of their itemized deductions.1 To minimize their tax liability, the larger of the two values is then used in the calculation of the tax liability. The Internal Revenue Code (IRC) allows, as one of the itemized deductions, state and local income taxes paid by the taxpayer during the tax year.2 The amount that the taxpayer may include as a current year deduction is not only the amounts withheld by the taxpayerâ&#x20AC;&#x2122;s employers, but also any other state or local income taxes paid during the year, even if those amounts pertained to preceding or subsequent tax years.3 Therefore, estimated tax payments or an additional amount of tax due from a prior tax year would also be included Todayâ&#x20AC;&#x2122;sCPA

| SEPTEMBER/OCTOBER 2013

in the income tax deduction of the current year. For tax years beginning after Dec. 31, 2003, the IRC was changed to allow the taxpayer to deduct state and local income taxes or state and local general sales taxes, but not both.4 This choice is available to the taxpayer through the end of the 2013 calendar tax year5 under current law. The determination of the amount of deductible taxes, after this change in the tax law, now requires the taxpayer to calculate both amounts. Taxpayers may determine their state and local general sales taxes in one of two ways. The actual state and local general sales taxes may be used. This approach is, of course, the most accurate. However, for most taxpayers accumulating receipts for an entire year and recording the sales taxes from those receipts could prove unduly burdensome. A second approach allows the taxpayer to use estimated sales taxes calculated by the Internal Revenue Service (IRS) and presented in a tabular format.6 This table is based on the taxpayer’s locality, income and number of exemptions. The use of the IRS table relieves the taxpayer of the recordkeeping requirement noted above. To the amount of general sales taxes determined from the IRS table, the taxpayer would add state and local general sales taxes paid on large purchases that are not included in the generalized calculations of the table. Examples of such purchases would be items such as automobiles, motor homes, boats, or significant home improvement costs. The decision rule that most taxpayers will follow, in determining whether to use state and local income taxes or state and local general sales taxes as one of their itemized deductions, will be to use the larger of the two values. This rubric yields the proper outcome in all cases where the deductible amount of the sales taxes exceeds the deductible amount of the income taxes. This is especially true in states that impose a general sales tax but no state or local income tax. However, the application of this rule may not be optimal in all cases where the state and local income taxes exceeds the state and local general sales taxes. This unexpected outcome is true because of the operation of the tax benefit rule.7 In essence, this rule requires a taxpayer who deducted an amount in a previous tax year, and received a reduction in that year’s tax liability (i.e., a tax benefit) from the deduction, to record income in a subsequent year if that deduction is later reduced by a recovery. For example, consider a taxpayer who itemized their deductions in a recently ended calendar tax year. Included in the total amount deducted on the taxpayer’s federal income tax return was state and local income taxes of $8,000, which were withheld by the taxpayer’s employer. After filing the federal income Today’sCPA

| SEPTEMBER/OCTOBER 2013

tax return, the taxpayer’s state income tax return would then be completed. Assume that the state tax return indicated that a refund of state income taxes of $3,000 was due. The actual filing of both the federal and state returns would usually take place sometime during the next several months following the end of the calendar tax year in question. The refund would also be received by the taxpayer in the following tax year. Since the taxpayer claimed a deduction of $8,000 when the ultimate state tax liability was only $5,000, the taxpayer may have received a tax benefit to the extent of the additional $3,000 deduction. Therefore, in the following tax year where the $3,000 refund was received, it will be included in income on the taxpayer’s federal income tax return to the extent that it generated a reduction in the taxpayer’s federal tax liability in the previous year. Thus, when both years are considered together, we have a deduction of $8,000 in the first year and income of up to $3,000 in the second year, for a net deduction of $5,000 when the two years are considered cumulatively. A simple example will illustrate how this might cause a taxpayer to make a suboptimal decision. Assume that a taxpayer, who will itemize because of significant total itemized deductions, has deductible state and local income taxes of $6,000 and deductible state and local general sales taxes of $4,000. Further assume that the taxpayer’s current and future marginal tax rate is 25 percent and that upon completion of the state income tax return, a refund of $3,500 was indicated. The result of applying the seemingly rational decision rule and choosing the income tax deduction over the sales tax may be calculated as follows: Income tax deduction

$6,000

Sales tax deduction

4,000

Incremental deduction

$2,000

Marginal tax rate

25%

Incremental tax saving in the current tax year Additional income in the next year due to the tax benefit rule Marginal tax rate

$500 $3,500 25%

Incremental tax cost in the following tax year

$(875)

Net Tax Cost

$(375)

The taxpayer’s optimal decision rule in all cases is to choose the option that yields the greater after tax savings. In the simplest case of a constant marginal tax rate, we may make the proper choice by considering the following where: MTR = The marginal tax rate ST = The state and local general sales tax deduction IT = The state and local income tax deduction continued on next page

CPE Article continued from page 41

Ref = The state tax refund includable in income the following year The tax savings in the current year from deducting the sales tax is: MTR (ST) The tax savings in the current year from deducting the income tax is: MTR (IT) The tax cost incurred the following year is: MTR (Ref) The net tax savings from deducting the income tax is: MTR (IT) – MTR (Ref) Our point of indifference can be described as: MTR (IT) – MTR (Ref) = MTR (ST) Solving and rearranging terms we obtain: IT – ST = Ref Therefore, in circumstances where the taxpayer’s marginal tax rate is constant between the two tax years in question, the state and local income tax should be deducted only in those instances where it exceeds the state and local general sales tax by more than the amount of the taxable refund in the following year. The following year’s tax refund can only be determined by completing the state income tax return. Many states begin the state tax calculation by using the adjusted gross income (AGI) from the federal income tax return, essentially “piggy-backing” the federal return. This fact would require an iterative approach on the part of the return preparer to obtain the required data to make the correct decision. In the more complex case where the marginal tax rate changes between the two tax years, the analysis may be completed by considering the following where: MTRc = The marginal tax rate in the current tax year MTRs = The marginal tax rate in the subsequent tax year The tax savings from deducting the sales tax is: MTRc (ST) The tax savings from deducting the income tax is: MTRc (IT)

The tax cost incurred the following year is: MTRs (Ref) The net tax savings from deducting the income tax is: MTRc (IT) – MTRs (Ref) Our point of indifference can be described as: MTRc (IT) – MTRs (Ref) = MTRc (ST) Rearranging terms we obtain: MTRc (IT) – MTRc (ST) = MTRs (Ref) At the end of the current tax year, the values for MTRc, IT and ST will likely be known. However, the values for MTRs and Ref. will not be known with certainty. Therefore, this equation can only be solved for one unknown in terms of the other. On the other hand, it would seem that an experienced taxpayer or tax preparer, after considering any significant changes for the subsequent year, should be able to estimate MTRs. If this is true, the above equation may be solved as follows: MTRc (IT) – MTRc (ST) = (Ref) MTRs This will allow the taxpayer, or tax preparer, to estimate the amount of refund that would cause the choice of one deduction to be superior to the other. In conclusion, the tax benefit rule must be taken into consideration by the taxpayer in making the optimum choice when attempting to determine whether to deduct the allowable state and local income tax or the state and local general sales tax. To paraphrase Charles Dickens, “Please, sir – less taxes.” FOOTNOTES 1. Internal Revenue Code (IRC) Sections 63(a) and 63(b) 2. IRC Section 164(a)(3) 3. Revenue Rule (Rev. Rul.) 71-190, 1971-1 CB 70 4. IRC Section 164(b)(5) added by Public Law (PL) 108-357 5. IRC Section 164(b)(5)(I) 6. IRC Section 164(b)(5)(H) 7. IRC Section 111

ENDNOTES: Internal Revenue Code Public Law 108-357, The American Jobs Creation Act of 2004

■

Terry Bechtel, Ph.D., CPA, is a professor of Accounting in the College of Business at Texas A&M University-Texarkana. He may be reached at terry.bechtel@tamut.edu. Randy M. Reed, DBA, is an assistant professor of Accounting in the College of Business Administration at the University of Central Oklahoma. He may be reached at rreedm@hotmail.com. Joan Brumm,

Ph.D., CPA, is a professor of Accounting in the College of Business at Texas A&M University-Texarkana. She may be reached at joan.brumm@tamut.edu.

Today’sCPA

| SEPTEMBER/OCTOBER 2013

CPE Quiz Today’s CPA offers the self-study exam below for readers to earn one hour of continuing professional education credit. The questions are based on technical information from the preceding article. Mail the completed test by October 31, 2013, to TSCPA for grading. If you score 70 or better, you will receive a certificate verifying you have earned one hour of CPE credit – granted as of the date the test arrived in the TSCPA office – in accordance with the rules of the Texas State Board of Public Accountancy (TSBPA). If you score below 70, you will receive a letter with your grade. The answers for this exam will be posted in the next issue of Today’s CPA. PARTICIPATION EVALUATION (Please check one.) 5=excellent 4=good 3=average 2=below average 1=poor 1. The authors’ knowledge of the subject is: 5__ 4__ 3__ 2__ 1__. 2. The comprehensiveness of the article is: 5__ 4__ 3__ 2__ 1__. 3. The article and exam were well suited to my background, education and experience: 5__ 4__ 3__ 2__ 1__. 4. My overall rating of this self-study exam is: 5__ 4__ 3__ 2__ 1__. 5. It took me___hours and___minutes to study the article and take the exam. Name _______________________________ Company/Firm________________________ Address (Where certificate should be mailed) ___________________________________ City/State/ZIP_________________________ Enclosed is my check for: ___ $10 (TSCPA member) ___ $20 (non-member) Please make checks payable to The Texas Society of CPAs. Signature____________________________ TSCPA Membership No._______________ After completing the exam, please mail this page (photocopies accepted) along with your check to: Today’s CPA; Self-Study Exam: TSCPA CPE Foundation Inc.; 14651 Dallas Parkway, Suite 700; Dallas, Texas 75254-7408. TSBPA Registered Sponsor #260.

A TALE OF TWO TAXES

Minimizing Tax Liability Using the Tax Benefit Rule BY TERRY BECHTEL, PH.D., CPA, RANDY M. REED, DBA, AND JOAN BRUMM, PH.D., CPA

1 Which of the following is NOT deductible as an itemized deduction if state income tax is deducted? A. medical expenses B. real property taxes

C. state and local general sales tax D. none of the above

The Tax Code allows taxpayers to deduct:

A. B. C. D.

state and local general sales tax on large purchase items only. actual state and local general sales tax only. estimated state and local general sales tax only. actual state and local general sales tax or estimated sales taxes plus sales tax on large purchase items.

3 The rule that requires a taxpayer who deducted an amount in a previous year, and received a reduction in that year’s tax liability from taking the deduction, to record income in the subsequent year if that deduction is later reduced by recovery is called the: A. tax recovery rule. B. tax benefit rule.

C. deductibility rule. D. tax return rule.

The sometimes suboptimal decision rule that most taxpayers will follow is to deduct:

A. state and local general sales tax. B. the larger of the two taxes.

C. state and local income taxes. D. both state and local general sales taxes and state income tax.

The optimal decision rule in all cases is to:

A. B. C. D.

choose the option that yields the greatest after tax savings. choose the option with the greatest tax deduction in the current year. choose state and local income taxes when the marginal tax rate is less than the sales tax rate. none of the above.

Which of the following statements is true?

a. The net tax savings from deducting the income tax = (marginal tax rate x the state and local income tax deduction) + (marginal tax rate x state tax refund includable in income the following year). b. The state tax refund includable in income the following year = marginal tax rate x the state and local income tax deduction in the current year. c. The tax savings in the current year from deducting the sales tax = marginal tax rate x the state and local income tax deduction. d. The tax savings in the current year from deducting the state and local income tax is = marginal tax rate x the state and local income tax deduction.

7 A taxpayer has deductible state and local income taxes of $6,000; deductible state, local general sales taxes of $2,500; a marginal tax rate of 30 percent; and a refund of $1,500 indicated on the State Income Tax Return. What is the Net Tax Benefit/(Cost) of deducting the state and local income tax versus deducting state and local general sales tax? A. 1,050 B. 1,350

C. (750) D. 600

8 Which of the following is NOT included by the IRS in calculating the state and local sales tax tables? A. Income C. Taxpayer’s locality B. Number of exemptions D. State and local general sales taxes paid on large purchases 9 When marginal tax rates change between tax years, which one of the following variables will be unknown in determining which tax deduction is superior in the estimation of refund? A. Current year marginal tax rate C. The state and local income tax deduction B. The state and local general sales tax deduction D. The state tax refund includable in income the following year

10 Which of the following methods of determining state and local general sales taxes produces the most accurate calculation? A. B. C. D.

Using the IRS tax tables Using the IRS tax tables and adding state and local general sales taxes paid on large purchases Using the actual state and local general sales taxes paid Using a percentage of income based on the IRS statistics table

Answers to last issue’s self-study exam: 1. b. 2. b. 3. d. 4. b. 5. d. 6. a. 7. d. 8. a. 9. c. 10. d. Today’sCPA

| SEPTEMBER/OCTOBER 2013

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$130,000 gross. East TX/Palestine Area. Well-established CPA practice with quality client base. Highly profitable with cash flow of 60%. TXN1328 $46,000 gross. East Dallas Area. Quality CPA Practice with almost 80% of revenues derived from bookkeeping, payroll and consulting svcs. TXN1327 $123,000 gross. Waxahachie. Steadily growing CPA practice with quality client base that consists of 77% tax work and 23% acctng svcs. TXN1323 $185,000 gross. Northern Collin County. Quality CPA practice with strong fee structure and good cash flow to owner of nearly 60% of gross. TXN1321 $167,000 gross. East Texas. Profitable practice with year-round income and strong cash flow to owner. TXN1231 $530,000 gross. East Texas. Well established practice with great cash flow to owner. Turnkey opportunity with tenured staff in place. TXN1249 $326,000 gross. HEB Area. Reputable CPA practice specializing in one niche industry with loyal, high-quality base of business clients. TXN1326 $90,000 gross. Garland. Well-established practice with revenues consisting of desirable, year-round bkkpg/acctng svcs. TXN1325

$165,000. Arlington. Composed of 75% tax and 25% acctng svcs. Good fee structure and strong cash flow to owner of nearly 60% of gross. TXN1319

$135,000 gross. Northeast Dallas. Highly profitable CPA Practice with strong fee structure and good cash flow of nearly 90% of gross. TXN1324

$790,000. North Dallas Suburb. SEC Audit Practice with first-rate client base. Highly profitable, year-round cash flow to owner of 50%. TXN1320

$132,500 gross. Mt Pleasant/Sulphur Springs Area. Quality CPA practice with 50% tax and 50% accounting. TXN1277

$464,000 gross. Tyler/Longview Area. Well-established, rapidly growing CPA firm with loyal client base. Caters to govt. audit clients. TXN1305 $131,000 gross. Decatur Area. Tax and Accounting. Solid fee structure and strong cash flow to owner of more than 50% of gross. TXN1329

$525,000 gross. Wichita Falls. Highly profitable, well-established CPA practice with a quality client base and balanced service mixture. TXN1315 $820,000 gross. Arlington. Well-established, profitable CPA practice with balanced revenues, acctng/bkkpg (41%) and tax prep (30%). TXN1316

Todayâ&#x20AC;&#x2122;sCPA

| SEPTEMBER/OCTOBER 2013

$233,488 gross. TX Panhandle/OK. Strong cash-flow. Large number of business clients. Building also available. TXW1004 $74,500 gross. Columbus, Schulenburg, LaGrange. High concentration of tax work (92%) with balance being accounting work (8%). TXS1129 $183,500 gross. Northwest Houston. Acctng (40%), tax (29%), payroll (21%), and other svcs (10%). Consistent growth and year-round revenue. TXS1132 $820,000 gross. Southwest of Houston. Year-round income, tax (64%), acctng (31%) and other (5%) svcs. Strong fee structure and cash flow. TXS1133 $138,000 gross. Houston Hobby Airport Area. Turn-key tax practice comprised of about 265 individual returns and 10 business returns. TXS1126 $800,000 gross. Beaumont Area. CPA firm with 53% tax and 47% accounting. Good fee structure and strong cash flow. TXS1109 ACCOUNTING PRACTICE SALES North America’s Leader in Practice Sales Toll Free 1-800-397-0249 See full listing details and inquire/register for free at www.accountingpracticesales.com

Practices Sought CPA firm looking to purchase an Audit, Tax and Accounting practice in El Paso. Please reply to File Box #5203, Texas Society of CPAs, 14651 Dallas Parkway, Suite 700 Dallas, TX 75254. Accounting Broker Acquisition Group “Maximize Value When You Sell Your Firm”

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TSCPA offers opportunities for members and non-members to advertise in the Classifieds section of Today’s CPA magazine. To request a classified ad, contact Donna Fritz at dfritz@tscpa.net or 800-428-0272, ext. 201 or in Dallas at 972-687-8501; fax 972-687-8601. Or write to: TSCPA Today’s CPA Classified Ads 14651 Dallas Pkwy, Suite 700 Dallas, TX 75254-7408 All classified ads must be paid in advance. MasterCard, Visa, American Express, personal and business checks are accepted. Please contact Donna Fritz for rates and more information. Today’sCPA

| SEPTEMBER/OCTOBER 2013

BUYING OR SELLING? First talk with Texas CPAs who have the experience and knowledge to help with this big step. We know your concerns and what you are looking for. We can help with negotiations, details, financing, etc. Know your options. Visit www. accountingpracticesales.com for more information and current listings. Or call toll-free 800-397-0249. Confidential, no-obligation. We aren’t just a listing service. We work hard for you to obtain a professional and fair deal. ACCOUNTING PRACTICE SALES, INC. North America’s Leader in Practice Sales

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Today ’sCPA SEPT/O

CT 201 3

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TSCPA’s

201 RISI3NG STARS

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Buy-Sell Agreem ents Avoiding Early Re the 10 Perce nt Pena tiremen lty t Distr ibutions on The Fin an Small an cial Reporting d Mediu Fra m-Sized mework fo r Entities Minim izing Ta x Lia Using th e Tax Be bility nefit Ru le

Also: Mid

year Bo ard of Directo rs

Meeti

TSCPA Continuing Professional Education Programs OCTOBER MONDAY

TUESDAY

WEDNESDAY

FRIDAY

SATURDAY

1 Common Frauds and Internal Controls for Revenue Purchasing and Cash Receipts Dallas CPE Credits: 8

17 The Bankruptcy Process: What Every CPA Must Know Dallas CPE Credits: 8

Audit Workshop: Best Practices in Planning and Designing a High Quality and Profitable Audit Fort Worth CPE Credits: 8

OCBOA: Preparing and Reporting on Cash, Modified Cash and Tax Basis Financial Statements Dallas CPE Credits: 8

18 Audit Workshop: Best Practices in Planning and Designing a High Quality and Profitable Audit Dallas CPE Credits: 8

Accounting and Auditing Conference Addison CPE Credits: 8

21 OCBOA Financial Statements – Preparation and Reporting San Antonio CPE Credits: 8

22 OCBOA Financial StatementsPreparation and Reporting Houston CPE Credits: 8

Identifying Fraudulent Financial Transactions Houston CPE Credits: 8

Identifying Fraudulent Financial Transactions Dallas CPE Credits: 8

Revenue Recognition: Getting the New Standard Right Dallas CPE Credits: 8

Revenue Recognition: Getting the New Standard Right Fort Worth CPE Credits: 8

Streamlined Tax Staff TrainingLevel 1 Individual Houston CPE Credits: 8

Streamlined Tax Staff TrainingLevel 2 Business Houston CPE Credits: 8

28 Business Valuation, Forensic and Litigation Services Conference Houston CPE Credits: 9

Financial Reporting Framework for Small and Medium-Sized Entities Houston CPE Credits: 8

Construction Contractors: Critical Accounting, Auditing and Tax Issues in Today’s Environment Dallas CPE Credits: 8 Federal Tax Update Individual, Business & Corporate San Antonio CPE Credits: 8 Personal and Professional Ethics for Texas CPAs Houston CPE Credits: 4 Revenue Recognition: Getting the New Standard Right Austin CPE Credits: 8

THURSDAY

Federal Tax Update Individual, Business & Corporate Houston CPE Credits: 8 Occupational Fraud: The Top 50 Tips on How to Prevent Executives, Managers and Employees from Stealing and Not Get Caught Dallas CPE Credits: 8 Personal and Professional Ethics for Texas CPAs Dallas CPE Credits: 4 Revenue Recognition: Getting the New Standard Right San Antonio CPE Credits: 8

The Bankruptcy Process: What Every CPA Must Know Houston CPE Credits: 8

Financial Reporting Framework for Small and Medium-Sized Entities Dallas CPE Credits: 8

Financial Reporting Framework for Small and Medium-Sized Entities Fort Worth CPE Credits: 8

Navigating the LLC and Partnership Allocations and Basis Minefield San Antonio CPE Credits: 8

MBA in a Day! Austin CPE Credits: 8

OMB Circulars A-133, A-87 and The Compliance Supplement Dallas CPE Credits: 8

Not-for-Profit Accounting and Auditing Update and Reporting Issues Dallas CPE Credits: 8

Exploring the Updated Internal Control Framework: Critical Concepts Austin CPE Credits: 8

30 Federal Tax Update Individual, Business & Corporate Dallas CPE Credits: 8

Accounting Education Conference Austin, CPE Credits: 14

31 Advanced Compilation and Review Issues Houston CPE Credits: 4 Compilation and Review Update Houston CPE Credits: 4

CPE Customer Service CPE InfoLine: 800-428-0272 or 972-687-8500 in Dallas (Select Option 1). The CPE InfoLine is answered Monday through Friday from 8 a.m. to 5 p.m. Our customer services team can assist you with all CPE questions, including course prices, dates, times, locations, formats, cancellations, space availability, self-study programs and corporate sales.

Today’sCPA

| SEPTEMBER/OCTOBER 2013

NOVEMBER MONDAY

TUESDAY

WEDNESDAY

THURSDAY

FRIDAY

1 Advanced Compilation and Review Issues Dallas CPE Credits: 4 Compilation and Review Update Dallas CPE Credits: 4 Navigating the LLC and Partnership Allocations and Basis Minefield Dallas CPE Credits: 8 4

LLCs and Partnerships for the Sophisticated Practitioner San Antonio CPE Credits: 8

6 LLCs and Partnerships for the Sophisticated Practitioner Fort Worth CPE Credits: 8

12 Excel Best Practices Fort Worth CPE Credits: 8

Form 990: Answer to Unlocking the Tax Complexities Austin CPE Credits: 8

Form 990: Answer to Unlocking the Tax Complexities Dallas CPE Credits: 8

Income Tax, Estate Tax, and Financial Planning Ideas of 2013 San Antonio CPE Credits: 8

From Hiring to Firing and Everything In Between: Legal, Tax and Health Care Issues San Antonio CPE Credits: 8

Personal and Professional Ethics for Texas CPAs Houston CPE Credits: 4

Real World Fraud: War Stories From the Front Lines Houston CPE Credits: 8

GROUP WEBCAST: Basic Tax Considerations for Individuals Various CPE Credits: 8

Compilation and Review Annual Update: A Seminar Designed for Smaller Firms Dallas CPE Credits: 8

Mastering the Fundamentals of Estate and Gift Tax Planning Houston CPE Credits: 8

Social Security, Medicare and Prescription Drug Retirement Benefits: What Every Baby Boomer Needs to Know Now Dallas CPE Credits: 8 14

Business Law Essentials for Accountants Houston CPE Credits: 8 Closely Held Business Taxation Dallas CPE Credits: 8

Excel Best Practices Dallas CPE Credits: 8

8 What You Need to do Now in Estate Planning Under the New Tax Law Houston CPE Credits: 8

Excel Best Practices Houston CPE Credits: 8

Real World Fraud: War Stories From the Front Lines Dallas CPE Credits: 8

7 Fiduciary Income Tax Returns-Form 1041 Workshop Dallas CPE Credits: 8

15 Annual Update for Accountants and Auditors San Antonio CPE Credits: 8 Business Law Essentials for Accountants Dallas CPE Credits: 8

Annual Update for Accountants and Auditors Austin CPE Credits: 8

Closely Held Business Taxation Houston CPE Credits: 8 Navigating the LLC and Partnership Allocations and Basis Minefield Austin CPE Credits: 8

Annual Yellow Book Update and Review: A Realistic Approach Dallas CPE Credits: 8

Annual Yellow Book Update and Review: A Realistic Approach Houston CPE Credits: 8

20 What You Need to do Now in Estate Planning Under the New Tax Law Fort Worth CPE Credits: 8

The Complete Guide to Payroll Taxes and 1099 Issues Houston CPE Credits: 8

The Complete Guide to Payroll Taxes and 1099 Issues Dallas CPE Credits: 8

Personal and Professional Ethics for Texas CPAs Dallas CPE Credits: 4

Texas CPA Tax Institute Dallas, CPE Credits: 18 Texas CPA Tax Institute San Antonio, CPE Credits: 18 Annual Update for Accountants and Auditors Houston CPE Credits: 8

Annual Update for Accountants and Auditors Dallas CPE Credits: 8

Mastering the Fundamentals of Estate and Gift Tax Planning Fort Worth CPE Credits: 8 25 Determining How Much Money You Need to Retire and Tax Ideas and Money Management in Retirement Dallas CPE Credits: 8

Todayâ&#x20AC;&#x2122;sCPA

26 New Critical Decisions in Selecting the Best Retirement Plan for Small Businesses in 2013 Dallas CPE Credits: 8

| SEPTEMBER/OCTOBER 2013

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