SOX 404 DELAYED AGAIN
FOR NON-ACCELERATED FILERS
DAVID M. CAPODANNO CPA
SENIOR MANAGER
Public companies that are nonaccelerated
filers felt some breathing
room when the Securities and
Exchange Commission (SEC) voted to delay,
for an additional year, the compliance date
for Section 404 of Sarbanes–Oxley at its
September 21 meeting. The delay includes
foreign private issuers that are not
accelerated.
As stated in the SEC Advisory Committee
resolution, this third delay was issued for a
number of reasons, including the overall cost
of compliance, complexity of the process,
and new guidance. The Public Company
Accounting Oversight Board (PCAOB) and
SEC’s releases guide companies through the
Section 404 process based on the first year
process and the Committee of Sponsoring
Organizations of the Treadway Commission
is expected to release additional guidance in
the future.
During May 2005, the PCAOB issued a
Policy Statement and Staff Questions and
Answers, discussing some of the issues raised
during the first year of auditor’s
implementation of PCAOB’s Auditing
Standard No. 2. Many of the issues
addressed were raised at the SEC’s
Roundtable on Implementation of Internal
Control Reporting Provisions, held during
April 2005.
The Policy Statement considered the auditing
practices used in the first year of
implementation that may be ineffective or
inefficient in meeting the objectives of
Auditing Standard No. 2 and issued guidance
to make audits of internal controls more
effective and cost-efficient through
inspections of registered public accounting
firms. At the Roundtable, investors
expressed strong support for Section 404
goals but companies found the requirements
costly and demanding. They also questioned
if the benefits are worth the cost. At the
conclusion, the PCAOB board decided to
issue additional staff questions and answers
to clarify provisions in the standard to reduce
costs. Specifically, auditors should:
- integrate their audits;
- exercise judgment to tailor audit plans to
the risks facing individual audit clients;
- use a top-down approach;
- use the work of others;
- engage in direct and timely
communication with audit clients.
According to the PCAOB, using these approaches should provide for improvements
in the process and cost reductions in the future. The Q&A portion, issued
separately, provides the staff’s opinions on the related implementation
issues discussed in the Policy Statement. The PCAOB Policy Statement
and Q&A can be found at www.pcaobus.org.
The SEC guidance is from the Division of
Corporate Finance and is a staff statement
on management’s report on internal control
over financial reporting. The statement is
the staff’s views on issues raised in the
implementation of Section 404, which was
discussed during the Roundtable
discussions. The statement addresses the
following areas:
- the purpose of internal control over
financial reporting;
- reasonable assurance, risk-based
approach, and scope of testing and
assessment;
- evaluating internal control deficiencies;
- disclosures about material weaknesses;
- information technology issues;
- communications with auditors;
- issues related to small business and
foreign private issuers.
The SEC makes it clear that the principle of the guidance is the responsibility
of management to determine the scope and assessment and to test accordingly.
The full document use to be found at the following site: http://sec.gov/info/accountants/stafficreproting.htm
COSO is continuing to develop an internal
control framework for smaller companies.
A new framework initially scheduled for
release and comments in August, was first
delayed until September, but is now
delayed until further notice.
Many non-accelerated filers, at a minimum, began the process of assessing
internal controls before the delay. For companies that haven’t started
implementation, begin the process soon. Developing a long-term plan
with a top-down risk-based approach will limit the number of controls
tested minimizing the cost. For success, the two most critical factors
of the project are that senior management, specifically the CEO, is
involved and sets the proper tone at the top, and that the company
designates, trains and commits qualified resources. The struggle in
the first year will be compliance, understanding the requirements,
and committing the resources necessary to get the job done. |
WEIGHING YOUR ENTITY OPTIONS
 JOSEPH
G. GRILLO, CPA
MANAGER, TAX DEPARTMENT
One of the most important decisions a new business owner will make
is under what form of legal entity their business will be conducted.
The term “Choice of Entity” is what a lawyer refers to when deciding
on the legal form of a new business. Most new business owners are
aware of corporations (C-corporations) and partnerships as the two
most traditional legal entities. However, over the years, the list
has grown longer to include limited partnerships, limited liability
companies and Subchapter-S corporations.
With the exception of a regular (or general) partnership, all of
the mentioned entity choices share a common goal: to help the owner
limit personal liability exposure. Why is this so important?….because,
depending on the choice of entity, an owner can be liable for tortious
(think slip and fall) injuries caused by the business. Keep in mind
that no type of liability-limiting entity can protect an owner’s
personal assets from liabilities related to his or her own professional
errors and omissions or tortious acts.
In addition to liability issues, business owners want to minimize
their taxes. The differences among the entities can yield significantly
different tax results. This article will deal with some of the more
significant considerations in choosing the type of entity in which
to conduct one’s business.
C-Corporation
A C-corporation is an independent legal entity, existing apart from
its shareholders, officers and directors. With a C-corporation,
you do not get the “flow-through" tax benefits that all other small
business entities enjoy. What this means is that the profits and
losses of the company are taxed at the entity level, not at the
shareholder’s level. The C-corporation will have to file a tax return
and pay taxes on the income it receives. Then, if there are any
dividends to be paid to the owners, those owners will have to pay
taxes again on the money received as dividends. This is the double
taxation of corporations that so many shareholders grumble about.
There are ways, however, for small corporations to avoid the double
taxation of income. Often, a small corporation will pay its owners
salaries rather than pay dividends, so the corporation gets a deduction
for the amount paid to shareholders. But the IRS watches such salary
payments very closely and considers unreasonable compensation as
nondeductible dividends. Not surprisingly, startup businesses rarely
adopt the traditional corporate format.
S-Corporation
An S-corporation is a hybrid between partnerships and C-corporations.
S-corps are formed exactly like a C-corp and have a very similar
structure. There are shareholders, bylaws, articles, stock, etc.,
just like a C-corp. But the tax treatment of the S-corp is markedly
different from that of the C-corp. Unlike a C-corp, income and losses
of an S-Corp are generally attributed pro rata to the owners. This
means that there is no “double taxation" of corporate income like
there is with a C-corp. Another advantage to an S-corp is the lower
tax rates. That is, when an S-corp's income is distributed, it will
be taxed at the rate of the individual owners, rather than the higher
rate applicable to C-corps.
General & Limited Partnerships
Partnerships consist of two or more partners. Each partner in a
general partnership carries unlimited personal liability for the
obligations of the partnership. Each partner has complete and equal
managerial control over partnership affairs unless there is a partnership
agreement stating otherwise. Partnerships are often cheaper to maintain
than corporations. Partnerships do not have to take minutes detailing
their actions like corporations, nor do partnerships pay taxes (the
partners pay taxes individually on the income they receive from
the partnership). There are no directors, officers, etc., just the
partners. That’s the good news. The bad news---each general partner
in a general partnership has personal liability for all of the partnership
debts. In addition, general partners are jointly and severally liable
for the tortious acts of co-partners who are acting within the scope
of the partnership business.
A special type of partnership is the limited partnership. Limited
partnerships have one very large advantage over the general partnership:
limited partners do not take on personal liability for the obligations
of the partnerships; they are only liable to the extent of the money
contributed to the partnerships. The general partner in the limited
partnership, however, retains all of the personal liability for
partnership debts that one finds in the general partnership entity.
Why use it? The limited liability partnership is often attractive
to entrepreneurs because they can retain control of the business
by acting as the general partner, while still being able to offer
limited partner investors the tax benefits of a tax flow-through
entity. But with Limited Liability Companies offering the same benefits
without requiring a general partner, limited partnerships are becoming
less common.
LLC
The main advantages of Limited Liability Companies (“LLC”) are the
protection the LLC owners receive from business creditors and the
fact that, unlike a limited partnership, the owners (referred to
as members) can still participate in the management of the business.
The LLC has one very large advantage over the general partnership:
members of an LLC do not take on any personal liability for the
obligations of the LLC and they are only liable for debts of the
LLC to the extent of their investment in the LLC. Additionally,
there is no requirement that there be a general partner who retains
personal liability for the LLC debts that one finds in limited partnership
entities.
The LLC enjoys the same “flow-through” tax treatment that partnerships
and S-corporations do. The rules concerning capital accounts, contributions
and other basic partnership taxation principles apply to LLCs as
well. In short, this means that although LLCs (other than single
member LLCs) must file a tax return, the LLC owners report income
and pay the taxes owed on such income using their personal tax rates.
A downside is that, unlike a C-corporation, an LLC (like partnerships
and S-corps) cannot retain earnings without the owners of the business
having to pay income taxes on those earnings.
State Taxes
You should also be aware that some states impose a tax and/or fees
on each of the above types of entities. You should check with your
tax advisor to make sure you minimize your company’s overall tax
liabilities.
Summary
This general information just scratches the surface regarding this
topic. It is important to coordinate these matters with your accountant
and attorney when deciding your business entity type. Have your
professional team compare each entity form’s pluses and minuses,
paying special attention to different industries, which may also
affect the choice. Doing a careful “choice of entity” analysis and
taking the appropriate steps at the outset will help avoid costly
problems later. Many factors influence these decisions including
both federal and state tax considerations.
|
PLANNING & FINANCIAL CONCERNS
OF DIVORCING COUPLES
 MARC
L. SCUDILLO MS, MBA, CPA, CFP
MANAGING PARTNERS
AMPER FINANCIAL SERVICES
Why is it important for you to
understand the basics of
divorce law?
While divorce is certainly a time of
emotional turmoil, it's a time of financial
upheaval as well. The financial change
brought about by divorce can be particularly
devastating to families with children and to
older couples who have assigned the career
duties to one spouse and the homemaking
duties to the other.
When seeking a divorce, you should become
familiar with the major topics: marital
property versus separate property, alimony,
investments, debt, retirement plans, property
settlement, taxation, budgeting, legal fees,
and, if you have children, child custody and
child support. You should also consider risk
management, and, if you're older, Social
Security.
By becoming knowledgeable about these
areas, you can provide your attorney (if any)
with a complete and accurate outline of your
wishes regarding the divorce settlement, and
you will be able to make an informed
decision before signing your divorce
agreement.
How is property
classified for divorce
purposes?
Assets are divided in
accordance with state law,
so it makes a difference
whether you live in a
community property state
or an equitable division
state. Within these two
categories of states,
property may be classified as either separate
property or marital property, but again, these
definitions will vary depending on your state.
Therefore, it's important for you to know
how your state classifies property. For
example, one state may mandate that
separate property consist of gifts,
inheritances, and property owned prior to the
marriage, and that such items will not be
divided between the spouses in the event of a
divorce. Another state may proclaim that all
property owned by the couple is marital
property, subject to division at divorce--it
doesn't matter who inherited what.
What should you know about child
custody, child support, and alimony?
When parents separate and divorce, one of
the most emotionally charged issues involves
the decision regarding who will live with the
children. Determining the extent of child
support, and possibly the necessity for
enforcement of child support payments, is
also cause for stress.
Child custody is based on a number of
factors. Most judges place primary
importance on the best interests of the
children. Custody may be classified as
physical or legal, and can be awarded to one
or both parents.
Most states have child support guidelines for
determining the amount of child support to be
paid. Child support orders can be modified
when there's a substantial change in
circumstances, and most states provide a
number of methods for collecting unpaid
support.
Alimony is also an important topic. Alimony
is based on one party's need and the other's
ability to pay. Deciding whether a spouse
should receive alimony (and, if so, how
much) is based on certain criteria, which can
vary from state to state.
What should you know about property
division?
Property division is a complex area,
encompassing such subtopics as the marital
residence, debt, and retirement plans and
Qualified Domestic Relations Orders
(QDROs.)
It also involves a number of other areas as
well, including: classification and valuation
of property, hidden assets, family businesses,
and structuring property settlements. The
Property Settlement at the conclusion of the
divorce will dictate how the assets and
liabilities will be divided.
What should you know about taxation?
If you're legally separated or divorced, it's
important to become familiar with the
applicable tax rules regarding filing status,
dependent children, alimony, and property
disposition. Indeed, understanding the tax
implications of your initial preferences
regarding child custody and property
settlement may alter or influence your final
decisions.
What should you know about
budgeting and finances?
During the divorce process, both spouses
must determine and disclose their monthly
income and expense needs. Claims for
support (based on need and an evaluation of
the other party's ability to pay) often
originate from this financial disclosure.
It's not uncommon in a marriage for one
spouse to assume primary responsibility for
the family budget. For some couples, bills
are paid when due, but neither party tries to
stick to a budget. When two households are
created incident to a divorce, cash becomes
tighter and it becomes necessary to develop
a budget. A number of tools can be used for
this purpose.
We have also found it important to assist one
or both spouses in creating a new financial
planning framework to make important
financial decisions easier after the divorce.
Again, it is not uncommon that one spouse
to assume primary responsibility for the
investment decisions for the family. Given
the new situation after the divorce, it is
advisable for both spouses to seek the
guidance of experienced professional
financial advisors.
What do you need to know about legal
fees & professional services?
When seeking a divorce, you'll want to
always consider hiring an attorney.
Depending on the complexity, you may want
to also consider whether an accountant
should be hired. If you wish to hire an
attorney, you should note that divorce
attorneys typically charge hourly rates and
require you to submit retainers (lump sums)
up front. These fees can be less expensive
or more expensive, depending on the
complexity of the case, the reputation and
experience of the divorce attorney, and the
geographic location.
If you're a financially dependent spouse
(such as a homemaker), it's possible for a
court to award sufficient legal/accounting
fees and costs to enable you to retain
competent counsel. Upon your submission
of an appropriate motion to the court, a
judge could order your spouse to subsidize
your legal fees for the divorce.
You should also consider the deductibility of
divorce expenses. In general, most
legal/accounting fees and court costs for
obtaining a divorce are considered personal
expenses and aren't deductible for income
tax purposes. However, you may deduct as a
miscellaneous deduction on IRS Schedule A,
subject to the 2 percent floor, any money
paid for advice related to the tax
consequences of your divorce or securing
income. Specifically, deductible items
include fees for advice on securing and
collecting alimony and the tax consequences
of property and payments received. On your
legal bill, your attorney should make a
reasonable allocation of the legal expenses
between tax-related (deductible) and nontax-
related (nondeductible) advice.
Do you need to know about risk
management and Social Security?
Risk management should certainly be
considered when a divorce seems likely. The
selection of beneficiaries for your life
insurance policy will probably be revised,
and, in some cases, your health insurance
coverage may terminate. Often, for example,
one spouse participates in a group health
insurance plan at work that provides
coverage for both spouses. When a divorce
occurs, coverage for the non-employee
spouse may end. You need to know what
your health insurance options are and how
life, disability, and property insurance should
factor into your divorce agreement.
Social Security may be an issue if you're an
older individual seeking a divorce after a
long-term marriage. Be aware that, if you've
been married to your spouse for at least 10
years, you may (in certain cases) be able to
qualify as a dependent for Social Security
purposes. Thus, you might be entitled to
benefits, even if you never worked.
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TAX NOW OR LATER:
Is the Roth 401(K) right for you?
MARC O. SAVAGE, CPA
SUPERVISOR, TAX DEPARTMENT
The humorist Gene Perret once said,
“Retirement is wonderful. It’s
doing nothing without worrying
about being caught while doing so.” If that is
the case, why is it that so many people
choose to put off saving for this blissful,
Utopian stage of their lives?
The thought of saving for retirement can be
daunting, but for most it is inevitable.
Experts unanimously agree that retirement
should become a primary consideration
immediately, given that nearly one-third of
all employees feel they will need to
accumulate at least $500,000 in order to live
comfortably throughout their retirement. The
question that then presents itself is, what
vehicle should I invest in in order to offer me
the greatest benefit given my particular
situation? The answer could lie in the new
Roth 401(k) being introduced
January 1, 2006.
First, a little background on the subject. The
Taxpayer Relief Act of 1997 created the
original Roth IRA account. The Roth IRA
allows investors to contribute after-tax dollars
to the account and allows them to withdraw
those funds, tax-free, at retirement.
However, the annual contribution limits of
the Roth IRA in 2005 are $4,000 and $4,500
(the latter for those
over 50) and the
full benefits of this
type of after-tax
retirement account
are only available
to single-filers
making up to
$95,000 and
married couples
making a combined
maximum of $150,000 annually. Alternatively, the 401(k)
retirement account was created by Congress
in 1981 and gets its name from, you guessed
it, the investment vehicle’s corresponding
section in the Internal Revenue Code … who
said accountants weren’t creative?
The 401(k) has long-been hailed as the best
retirement strategy because it offers the most
beneficial tax advantages. This accolade is
due to the fact that employees can contribute
to this plan through pre-tax dollars, allow
their dividends, interest and capital gains to
compound throughout their working career,
and then pay tax on the full amount at the
time of retirement. For better or worse, some
intuitive thinking will allow you to see that
many people will find themselves in a much
higher tax bracket at age 65, as opposed to
age 30 or 40, and therefore will be forced to
hand over a hefty percentage to Uncle Sam at
retirement. Although both investment
accounts are prudent and advantageous, they
also have their own pros and cons.
In 2006, Congress will implement the new
Roth 401(k) provision enacted by the
Economic Growth and Tax Relief
Reconciliation Act of 2001 (EGTRRA). This
plan is formulated to combine the advantages
of both aforementioned accounts in order to
provide employees with another option. Put
most simply, the Roth 401(k) will basically
be a traditional 401(k) account that is not
bound by income thresholds (as is a Roth
IRA), allows for greater annual contributions
(also known as “elective deferrals”), and is
supplemented with the Roth IRA benefits of
tax-free growth and withdrawals. However,
this plan will only be available for a limited
time; tentatively, the provisions are designed
to “sunset” in 2010. This means that your
previous Roth 401(k) contributions can
remain in the plan, but no further after-tax
Roth 401(k) contributions could be made
after that time. Roth IRA’s are not affected
by the EGTRRA “sunset rule.” Of course, as
is the case with many new provisions,
Congress could extend this plan at some time
in the future if it becomes increasingly
popular among individuals and corporations.
The Roth 401(k) is open to all employees
who qualify for a traditional 401(k), which is
a windfall for highly compensated
individuals who would otherwise be
excluded from holding a Roth IRA account
due to income limitations. The maximum
aggregate elective deferrals allowed in 2006
will be $15,000 ($20,000 for employees age
50 or older). Aggregate elective deferrals
include contributions to both traditional
401(k) and Roth 401(k) plans. Money can
be withdrawn tax and penalty-free as long as
the holder is at least 59 ½ and has held the
account for five years.
It is difficult to gauge whether the new Roth
401(k) will catch on among employers. As
it stands, employees who work for
companies that offer Roth 401(k)’s will have
the option of contributing to traditional
and/or Roth 401(k)’s, and they will decide
what percentage of their total contribution
goes into each account. Employers may
offer matching contributions in traditional
and/or Roth 401(k) plans, but these
contributions will continue to be treated as
pre-tax contributions subject to taxation
when distributed. Many employers have
already expressed hesitation about amending
their current plans to provide for the new
Roth plan due to the perceived headache the
additional accounting will cause. Despite
the additional costs, if the right marketing
campaign was implemented, employees
would be persuaded to increase demand for
the Roth 401(k) and employers and plan
sponsors will undoubtedly feel the pressure
to adopt the provision.
So is the Roth 401(k) right for you? It
depends. Do you want to pay taxes now or
later? The traditional and Roth 401(k)
accounts have the ability to yield the same
amount at retirement as long as your tax
bracket stays the same; however, the Roth
option yields a higher return if your tax rate
rises throughout your working career, while
the traditional accounts will have a better pay
off if your tax rate declines. Regardless of
whether you view having money as more
important now or later in life, it is crucial not
to underestimate your future needs due to
neglect or shortsightedness. Taking a hard
look at your retirement planning options is a
necessity.
|
NEW PARTNERS
Amper,
Politziner &
Mattia is
pleased to
announce
new Partners,
Neal Godt
and Ed Phillips
to the firm.
 |
Neal K. Godt CPA Neal K. Godt CPA is a Partner in the Public Companies Group in the New York office of
Amper. Neal has over 20 years of experience in public accounting. He has assisted publicly-held
clients with all aspects of SEC reporting, compliance and filings. He has also assisted clients
with transactions such as private placements, debt financings and 144A debt offerings. Among
the industry sectors Neal has served are fabricated manufacturing, distribution, chemicals, oil &
gas, textiles, consumer products, retail, for-profit trade schools, automotive supply and
professional services firms. He also has significant experience with US multi-national companies,
as well as those based in Sweden, Italy, UK, Japan, Hong Kong, Austria and Switzerland. Neal
received his BA in Economics and Accounting from the University of Michigan. |
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Edward A. Phillips CPA, CIRA, CFE Edward A. Phillips CPA, CIRA, CFE is a Partner in the Insolvency and Asset Recovery Group
with over 17 years of professional experience. He provides a wide array of financial advisory and
forensic accounting services to clients with a focus on bankruptcy, financial restructurings and
liquidations, both in and out of court. Mr. Phillips has represented debtors, creditors’ committees,
secured lenders and trustees. Additionally, he has acted as a liquidating trustee and a receiver. He
is a Certified Public Accountant, Certified Insolvency and Restructuring Advisor and a Certified
Fraud Examiner. He is a member of the American Bankruptcy Institute, the Turnaround
Management Association, the Association of Insolvency and Restructuring Advisors and the
American and Pennsylvania Institute of Certified Public Accountants. |
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