KLR Business Blog - Providence, Rhode Island, Newport, Boston, Massachusetts

By Paul Oliveira, CPA

The treatment of success-based fees has been the subject of much controversy between IRS and taxpayers for some time. The argument over whether a portion of such fees can be deducted, or at least amortized, centers on the type and extent of documentation that is required to establish an allocation of the fees to activities that do not facilitate the transaction. Some new developments in 2011 that have not gotten a lot of attention may offer taxpayers a bit more flexibility on the question.

First let’s understand what types of fees are at issue here. Success-based fees are amounts that are considered contingent on the successful completion of a transaction. Usually, that would encompass the investment banker or other financial advisory fee that is only payable after a successful closing. These fees are generally presumed to be facilitative to the completion of the transaction, and thus capitalizable, unless it can be documented that the fee encompassed other activities during the course of the engagement that turned out to be non-facilitative. Amounts paid for non-facilitative activities are generally deductible (or amortizable in a start up situation).

On April 8, 2011, IRS issued guidance in Revenue Procedure 2011-29 which permits taxpayers to elect to treat 70% of success-based fees as non-facilitative. Taxpayers would then have to capitalize the remaining 30% as an amount that facilitates the transaction. This revenue procedure is effective for all success-based fees paid or incurred in tax years ending after April 7, 2011. The election is made by attaching a statement to the return and, once made, is irrevocable.

In addition to the revenue procedure, the IRS also issued a recent directive to its Large Business and International (LB&I) examiners not to challenge the treatment of success-based fees incurred or paid in tax years ending before April 8, 2011, as long as the taxpayer capitalized at least 30% of the total success-based fees incurred on the transaction on its originally filed return.

The net result from these new developments is an opportunity for affected taxpayers to take a very practical, and less time-consuming, approach to determining the deductibility to these types of fees. For some taxpayers, a 70-30% allocation is a better result than they may be able to support through documentation. For others, a 70-30% split may not be the optimum answer that a taxpayer could achieve if they had the opportunity to develop the documentation necessary to support a more aggressive allocation. Nonetheless, this latter group of taxpayers should weigh the additional time and cost necessary to develop the documentation, as well as the potential increased audit risk.

The directive to LB&I field examiners may also present an opportunity for companies to reassess their previous measurement of uncertain tax positions relating to success-based fees for financial reporting purposes.

If you have any questions, don’t hesitate to contact me or anyone directly involved on your engagement.

KLR is one of the largest CPA firms in Boston, and offers assistance to venture capital firms. These include internal audit assessments as well as international tax services and specialized tax services such as cost segregation, research and development and energy studies. Due diligence for buyers and preparedness for sellers can also be provided during the acquisition process.

By John E. Surrette, Jr., CPA, CFE

As we meet with prospects in the Private Equity/Venture Capital world, many times the conversation turns to what makes dealing with a regional firm different than a national or international firm.  With that in mind, I’ve developed a list of reasons why there should be no choice (in no particular order).

1. Low turnover rate - our employee turnover rate is lower than industry averages, meaning that the engagement team that works on your account this year will handle your work next year, and the year after that, and ….
2. No re-training of our staff - since our turnover rate is lower, you’ll spend less time training our staff and more time dealing with the needs of your company.
3. More competitive fees - lower firm overhead = lower fees.
4. Our clients are your targets - since we deal with middle market clients, our client base is most likely your target market, and may even include some of your portfolio companies.  This offers the opportunity for proprietary deal flow.
5. Worldwide reach - many regional firms are part of national and international networks, which gives you the same access to services in markets outside of the country that larger firms offer.
6. Local decision-making - complex issues and technical questions can get resolved much quicker since the ultimate decision is made locally, not by a central office somewhere else in the country.
7. Client service is our priority - we pride ourselves in client service – not just talking about it, but delivering it.
8. Understanding your business – we deal with pre-revenue start-ups to multi-billion dollar enterprises.  We have the resources to deliver solutions to all of your challenges.
9. Our people - we know that our people are our most valuable assets – once they are introduced to your account, they will become yours, too!
10. Growth - our firm doesn’t grow if yours doesn’t.  We are prepared to grow with your business, so we can meet your needs now and in the future.

Hopefully this gives you some insight as to what it’s like to use a regional accounting firm.  Please contact me directly at JSurrette@KahnLitwin.com or call 888-KLR-8557 to learn more about how we can help.

By Henry A. Silva, CPA, CFF, MBA, Director of Retirement Plan Services

On October 19, 2011, the IRS published the 2012 retirement plan limits.  The increases were greater than in the previous two years, when inflation was lower.  In fact, many of the limits will increase for the first time in 4 years.  Most of the limits are adjusted based on cost-of-living increases.  But with the economic slowdown over the last few years, the limits remained flat from 2009 through 2011.

The new limits are as follows:

Annual Salary:  Increases from $245,000 to $250,000
Social Security Wage Base:  Increases from $106,800 to $110,100
HCE Determination:  Compensation increases from $110,000 to $115,000
Key Employee:  Officer compensation increases from $160,000 to $165,000

Elective Deferrals

• 401(k)/403(b)/457:  Increases from $16,500 to $17,000
• Simple IRA:  No change from $11,500

Catch-Up Contributions

• 401(k)/403(b)/457:  No change from $5,500
• Simple IRA:  No change from $2,500

Annual Additions Limit

• Defined Benefit Plan:  Increases from $195,000 to $200,000
• Defined Contribution Plan:  Increases from $49,000 to $50,000

Please let us know if we can answer any questions about how these new limits may impact your plans for 2012.

By Richard LaCross, Director, KLR Wealth Management

Most consumers haven’t noticed yet but confusion again has a foothold in the financial marketplace. I’m not referring to a new insurance product. I’m referring to the true meaning of wealth management. It seems everywhere you turn these days; the wealth management label is showing up all over the various media outlets.

I conducted an unscientific poll this past month asking colleagues, friends, and other professionals what comes to mind when you (they) hear the words wealth management. Most people said investment management. It appears that the companies known for investment advisory services are now incorporating wealth management into their marketing campaigns further confusing the general public with these inter changeable disciplines.

Wealth management is much more than investment management services. A wealth manager is focused on the client, to ensure that all aspects of the client’s financial affairs are being managed appropriately and in accordance with their life goals. A wealth manager must extract important information through a discovery process and listen attentively when the client speaks of goals and dreams. The wealth manager’s goal is to uncover a client’s key financial needs, their worries, concerns and how they want to be remembered, and to whom.

It is the wealth manager’s job to take this information and assist the client in developing a customized financial plan (also referred to as a financial road map) and help with the plan implementation. This advanced planning involves cash flowing planning, tax mitigation, asset protection, and asset transfer. The wealth manager coordinates with other advisors, such as insurance brokers, estate attorneys, and tax professionals to assist with the plan implementation. The wealth manager’s job does not end here.

Monitoring the investment, financial, and estate plan is crucial. It is important that clients understand that financial planning is not a one time event, it’s an ongoing process. The wealth manager meets with the client on a regular basis (at least once a year) to evaluate investment performance and to review the financial plan and update it accordingly for any changes that have taken place. It is important that the investment and financial plan are in sync. For example, there may come a time that the financial plan indicates that a predetermined goal can be achieved with less risk. At a minimum a discussion should take place in this case to determine if the investment portfolio should be adjusted to take on less risk. Financial plans need to be kept current and in focus because of an ever changing investment, tax and legal landscape.

Finally, we in wealth management are constantly collaborating with the advisors who are part of the financial team. As a team, we are apprised of the alternatives and based on thorough current information, we either make changes or roll over to the next year. By having these collaborations, wealth managers stay contemporary because of a cross planning understanding and collaboration. We find the best results in this process.

There is a lot more that can be written on this topic and my objective was to give you, the reader, a better sense of the basic framework of the wealth management process. This is the frame work that my colleagues and I use at KLR Wealth Management. If you have any questions, feel free to contact me at any time.

By John E. Surrette, CPA, Senior Audit Manager

We spend a lot of time talking about the obvious when it comes to fraud; how the fraudster is trying to misappropriate corporate assets for personal or professional gain, how personal greed outweighs the moral and ethical principles that the majority of us abide by, what we need to do to protect ourselves from these threats. While it is critical that we make sure these concerns are addressed, there are other threats that may be present but are not as evident due to their nature and therefore are disregarded during an organization’s risk assessment.

Let’s think for a minute what we, as a society, have been surrounded by for the past several years. It started with reality television, expanded with the advent of texting, and now includes the ever present forces of Facebook, Twitter, and LinkedIn. There is a whole generation of people in the workforce today who think that everyone in the world is concerned with their every move, whether it be heading to lunch, going on vacation, or laying down for a nap. Now I know you might be thinking that I’m starting to drift away from my point (or any point for that matter), but bear with me.

My concern is this – with this generation (which is not necessarily defined by age but rather the need to tell everyone everything about themselves) so concerned about telling the world what they are doing, what might they tell the world about your organization? There are a lot of things happening in your organization on a daily basis, and I know that there are a lot of those things that you may not want to see posted on the front page of the paper for the world to see. Although it may seem like common sense, some of your employees might not think twice about throwing up a post on Facebook about the proposal they are working on, talking about confidential information, or the fact that they are completely unsatisfied with their working conditions and are looking for another job.

So, I ask, what are you doing to make sure your employees aren’t out there virtually airing your dirty laundry to the world? If you said nothing, you are not alone, as this threat hasn’t been around for that long and chances are it hasn’t been an issue for you yet. My question is, why wait?

If you don’t already have one in place, now is the time to get a social media policy implemented in your organization. This will help lay the groundwork for the acceptable use of social media in your organization and makes it very clear that there will be consequences if your employees do not follow the policy. If you are not sure as to what to include in such a policy, here are some tips:

•Ensure your employees know that the use of your corporate computer system is a privilege and not a right, and must always be used in a manner to further the objectives of the organization.
•Hold employees personally accountable for anything they post on blogs, message boards, etc., that relate directly to your business.
•Make sure your employees understand that there is NO PRIVACY on the web. Anything posted on the web can be retrieved for YEARS after it is posted.
•Make sure your company’s intellectual property is treated as confidential in all settings (virtual and physical), and ensure employees understand the sensitive nature of that property and how important it is to your organization.
•Encourage the positive uses of such mediums including what is considered acceptable content and what is not acceptable.
•Have your employees sign the policy asserting that they have read and understand it.

There are numerous other items you can include in your social media policy, but the key thing is to make sure it is tailored to your organization and effectively communicated to your employees. In addition, by implementing such a policy, you are showing them that you are aware of the positive impact that these tools can have on your organization and that you not adverse to using new technologies to promote your business. Please let me know if you would like help in getting such a policy instituted in your organization.

By John E. Surrette, CPA, Senior Audit Manager

It seems like every day there is an event, whether domestically or internationally, that has an impact on the world economy. Whether it’s earthquakes in Japan, uprisings in the Middle East, or floods in the heartland of the country, there always seems to be something happening that potentially will have an impact on your business. Knowing what’s coming next is certainly not something you have the ability to predict, but having a plan in place BEFORE it happens will make responding to it a lot less painful.

In recent years, larger organizations have been shifting the responsibility of managing a company’s risk to a Chief Risk Officer. The evolution of the global marketplace has forced these companies to shift from analyzing risk on a periodic basis to a daily routine, always being prepared in the event the unexpected were to occur. That’s all well and good if your company is of the size that would allow for such a position to be warranted, but, for most of you, that probably isn’t the case. Therefore, what are you supposed to do?

You can look back to my previous posts to see how to protect yourself from internal fraud, which is obviously a big risk that a company can easily analyze and implement measures to prevent and detect. But that is only one area where your company is exposed. By adopting a policy to perform a complete risk assessment analysis on at least an annual basis, and periodically reviewing that analysis to ensure that all of your bases continued to be covered, you will be prepared react should the unexpected happen.

If you haven’t gone through such an exercise in the past, this may be a time consuming and potentially frustrating process. You will need to breakdown all of the “mission critical” aspects of your business and analyze them both individually and in the aggregate to make sure you are evaluating all aspects of exposure. This process will obviously be different depending on the type of business, and may require you to look to your consultants for assistance (including your insurance advisors, attorneys, accountants, or others). It is critical that this is an “all in” effort by all involved, and could potentially include employees from all levels within your organization.

By formalizing the process, you will not only have all of the information in one place, but you will be able to effectively manage, and delegate management of, these risks appropriately.

Stay tuned for my next post “Top 10 Areas to Evaluate in Your Risk Assessment”. If you need any help with this process, please contact me 401-274-2001.

By

On June 8th I was part of a panel discussion regarding various topics in Business Valuation. Unfortunately we were unable to cover one section of particular interest which discussed the common mistakes in business valuation. Here’s a list of some issues we’ve seen that can raise a red flag about a practitioner’s qualifications:

1. Failure to specify what is being valued
   a. Stock?
   b. Assets?
   c. Controlling position?
2. Confusing equity discount rates with invested capital discount rates
3. Failure to properly understand how certain industry data is constructed and then improperly applying it in the valuation
4. Poor selection of comparable data
5. Using growth rates inconsistent with industry expectations
6. Failure to read company operating agreements/shareholder agreements etc.
7. Improperly normalizing financial statements
8. Confusing earnings with cash flow
9. Using data from a date later than the valuation date
10. Not performing a reality check of the final result

With many moving parts, the process of valuing a company has numerous opportunities for error. If you’re planning to conduct a valuation, always check with a qualified valuation professional to be sure you’re not missing anything. Our valuation professionals frequently help guide owners through the valuation process free of charge so feel free to reach out!

By Robert D'Andrea, CPA/MST, Principal

In 2010, former Red Sox pitcher Curt Schilling moved his 38 Studios to Rhode Island from Massachusetts. Losing the video game production company to its neighbor to the south was considered a “Strike Out” by the Commonwealth state. The company plans on bringing hundreds of jobs to Rhode Island by the end of 2012. Ouch! It was a high profile economic loss for Massachusetts.

One of several economic incentives that brought 38 Studios to Rhode Island was the RI Film Credit. Unlike the MA Film Credit law, RI law allows video game developers to qualify for the film credit. The Rhode Island Film and TV Credit is an incentive which allows for a transferable credit of 25% of qualifying costs incurred by a developer in Rhode Island. Massachusetts has a similar incentive; but as currently written, the law does not include costs to develop video games as qualifying costs for their Film Credit.

Backers of a proposal to change the current Massachusetts law to allow video game developers to qualify for the MA Film Credit argue it will bring needed jobs to the state. Those opposing say the state needs all the tax revenue it can get. They also argue the state should not be in the business of picking “winners and losers” within various industries.
Stay tuned!

By Henry Silva

In the course of providing professional services to over 185 not-for-profit organizations I see a number of employer sponsored pension plans. Almost all of these are the defined-contribution type of plan where an annual contribution is made into the plan and the employee ends up with whatever that amount has accumulated to when they retire and leave the company. Most employers have also established a plan where the employee can save some of their own salary toward their retirement nest egg.

Employers generally provide a retirement benefit as one of the fringe benefits aimed at encouraging employee loyalty and longevity. Employers, especially my not-for-profit boards, also believe that helping an employee live in retirement is the right thing to do. The purpose of this Blog entry is to discuss how some pension plans are better than others at “helping an employee.”

First let’s review some generally held beliefs. The quality of one’s retirement will be inadequate if all they have to live on is Social Security benefits provided by the Federal government. Therefore, this benefit must be supplemented by some other retirement nest egg. In addition to Social Security it is generally held (by financial planners) that one should save approximately 11% of their annual salary in a tax-deferred retirement savings vehicle. Tax-deferred retirement plans provide for maximum savings percentages that are far in excess of this 11% because the government realizes that most people do not start saving for retirement with their first job. Thus, a person who starts saving for retirement at age 30 should be saving more than 11% of their annual salary in order to adequately provide for their retirement.

Some organizations have a pension plan where the employer contributes a certain percentage of the employees’ pay into the plan. Usually this is 6% or less due to the financial realities at not-for-profit organizations. Most allow for employees to supplement this with salary withholdings.

Some organizations provide a smaller employer percentage for every employee but then provide an employer match of a certain percentage of employee withholdings. A typical plan of this nature might contribute 2% of employee salaries into the plan and then a 50% match of employee contributions up to 6% of employee pay. So an employee who contributes 7% of their own pay will have a total pension contribution of 12% (7% of their own money, 3% of the 50% employer match of the employee’s first 6% plus the 2% that every employee received). The maximum total employer cost is 5% in this example.

I believe that if an employer truly wants to benefit an employee, they should structure their pension plan so that it is entirely an employee match type of plan. In such a plan, the employer match serves to encourage the employee to save their own money for their own retirement. Since most organizations do not have sufficient resources to provide an adequate retirement savings plan for employees with no employee participation, the goal should be to create a plan which achieves the intended result of the adequate retirement nest egg. Since that can only be achieved with employee participation, all available employer resources should be directed toward incentivizing the employee to make a large contribution toward their own retirement.

In the example above, the 2% that the employer was providing to all employees accomplishes very little. It is insufficient to provide an adequate employee retirement nest egg. And, an employee who knows they are part of a pension plan, but who has not studied the issue to know the amounts needed for an adequate retirement, may falsely believe that their employer has generously taken care of their retirement.

It is much better if the employer were to take all of their available retirement resources and craft a plan whose aim is to encourage employees to save the appropriate amount for retirement. An employer who takes steps to encourage their employees to save appropriately for retirement is being more beneficial to that employee than the employer who funds an inadequate amount on behalf of the employee.

So, for example, a pension plan whereby the employer provides a 50% match for the first 9% of an employee’s elective pension contribution will be paying maximum pension costs equal to 4.5% of employee wages (but since it will only incur a cost for those employees who contribute toward their pensions, the total cost will likely be less – perhaps allowing the organization to increase the match amount).

In this example, an employee who contributed 9% of their pay would end up with a total contribution equal to 13.5% of salary – certainly an amount that is more likely to result in an adequate retirement nest egg. The fact that the employee saves $1 and immediately has $1.50 in their retirement plan is easily understood by all employees and usually results in a very high percentage of employee participation. Isn’t this what the employer wants? Isn’t this the true objective of sponsoring a retirement plan?

Such a program results in a retirement plan in which the employee is invested – literally and figuratively. The employee values the plan and the employer’s objectives of fairness to the employee, plus increased employee loyalty and longevity are more likely achieved.

By John E. Surrette, Jr., CPA, Senior Audit Manager

In my last post, I highlighted some of the different areas that are susceptible to fraud within an organization. By no means was that list meant to be all inclusive, as there are numerous other exposure areas that your organization needs to be aware of. Given the broad nature of these posts, I don’t want to dive too deep into any one particular industry, but if there is something in particular you would like to learn more about, please leave a comment on this post and I will address it in a future post. For now, we’ll concentrate on the different types of cash theft opportunities.

One of the biggest opportunities in this area is a lack of segregation of duties. This occurs when one person performs too many interrelated tasks (such as having access to cash as well as having the ability to record and make adjustments in the accounting system). This creates an opportunity for someone to steal from the organization and make appropriate adjustments in the system to conceal the theft. Even if you have a one person accounting department, you can utilize an administrative assistant to open the mail and make a list of checks before it is given to the accountant for recording. Once the deposit is made, compare the list prepared by the assistant to the bank deposit to make sure the amounts agree. There are plenty of other ways to add segregation of duties into your organization, and sometimes it just requires some creativity.

An offshoot to this is having too many people as authorized signers on your bank accounts (this can also include having a “signature stamp” that is not adequately safeguarded). I know some of this may seem like common sense, but I have personally seen accounting clerks in organizations that have over $100 million in revenue have access to signature stamps. If I were the owner in that situation, I would be quite concerned. Along those same lines, if you are still using stock checks, be sure they are kept secured at all times.

All major financial institutions offer online banking and a majority of them offer Positive Pay services for their clients, yet there are still a lot of organizations not utilizing these services. Positive Pay, and the more advanced Payee Positive Pay, is a great control that helps ensure that the checks written by your organization are not being manipulated. (If you are not aware, Positive Pay allows the bank to match the check number and amount to the listing you provide them on the day of the check run, Payee Positive Pay goes one step further and verifies the payee as well). I’ve personally seen these systems help organizations save time and money when checks were “lost” in the mail and made their way into the hands of criminals. In one instance I’ve seen one client prevent a six figure check from fraudulently being disbursed from their account due to the use of payee positive pay. Need I say more?

The final area I want to cover with this post is the lack of timely preparation of the bank reconciliation and the related review of the reconciliation by someone independent of that function. Too many times have I seen organizations be months behind in their reconciliations, and this is very concerning. If there is fraudulent activity occurring, this may be detected through the preparation of the reconciliation and related review of the bank statements. Along those same lines, in conjunction with this review, the manual adjustments that are being made to the cash and related accounts also need to be reviewed, as all but the simplest frauds will require some sort of manipulation to the accounting records.

Hopefully the above has given you some good insight into some of the different opportunities related to cash theft schemes. In my next post we’ll start to explore the different opportunities related to accounts receivable. As I mentioned at the beginning of my post, if there is something you want me go into greater detail on, please leave me a comment. If you’d like to discuss any of these topics further, please give me a call.