Cohen & Company Delivers Insights at Fall CPE Day– November 27, 2013

This year’s fall client CPE day was packed full of information for our CFO and controller clients. Roughly 100 people filled the Bertram Inn to hear Cohen & Company as well as external speakers deliver on-target, educated insights into a variety of issues and industries. Below is a synopsis of the day.

Tax Outlook

Tracy Monroe of Cohen & Company provided businesses and individuals with the hot items for year-end tax planning. The American Taxpayer Relief Act passed in January 2013 extended many key tax provisions and gave more certainty than in past years as to year-end planning. Tracy advised to keep in mind opportunities such as 50% bonus depreciation and $500,000 Section 179 expensing through 2013; and research and development credits, both federal credits and those against the Ohio CAT tax. She pointed out that while Bush-era tax cuts were made permanent for most individuals, high-earning taxpayers with taxable income of more than $400,000 per year will now pay 39.6% tax on ordinary income and 20% on capital gains and qualified dividends. The Pease Limit and Personal Exemption Phase-Outs also will add complexity and additional taxes for some. Tracy discussed healthcare reform’s 3.8% and 0.9% new Medicare taxes, noting that the 3.8% tax particularly creates an issue for taxpayers who receive net income from rent payments. She also addressed Ohio’s new budget, which includes a permanent 10% reduction in personal income tax rates phased in over a three-year period and the small business income deduction. Taxpayers also can expect increases in their CAT tax due to a new variable minimum tax structure, and an increase in statewide sales and use tax from 5.5% to 5.75%.

Ohio’s Utica Shale Industry

Vince Bevacqua of ShaleComm gave a unique look at the national and regional state of the Utica Shale industry. Commenting that Shale has been viewed as Northeast Ohio’s “comeback” industry, Vince cited statistics to set the stage of the industry as a whole, pointing to the great potential Shale holds for our national and local economies. He noted experts that predict the U.S. could be energy efficient in 10 years due to Shale, that the 1.2 million jobs that have already been created in the industry are expected to triple by 2020, and that $34 billion in outside investments into Ohio is expected by 2015 in areas such as hospitality and construction. While these numbers are impressive, Vince was clear to state that Ohio in particular is still very much in a testing phase with this industry. The state at this point is focused on building infrastructure and drilling test holes to determine the quantity and quality of our Shale supply. The industry holds much promise yet is still unproven.

IC-DISC Export Incentive

Amit Mathur of WTP Advisors shared his expertise on how IC-DISCs can help closely held companies compete internationally and how those already using an IC-DISC can fully capture all of the available, intended and allowable benefits.

At its core, he explained that an IC-Disc is a mechanism through which to change the character of an operating company’s income from ordinary to qualified dividends, therefore lowering the tax rate. He clarified common misconceptions, stating that the taxpayer does not have to actually manufacture the product being exported, an IC-DISC does not interrupt business operations or create additional administrative burdens, and it is not an aggressive tax tool or “tax shelter.” IC-DISCS can be used in unsuspecting industries, such as software, food growers, equipment leasing and distributors/brokers. Addressing those already using the IC-DISC, Amit stressed that many using the tool don’t maximize its benefits, such as failing to take advantage of ultimate use sales, sales to related parties, simplified calculations, distributor sales, related and subsidiary services (such as architectural and engineering services that are related to proposed or actual foreign construction project).

Amit told the audience to speak with an advisor to ensure the IC-DISC entity is appropriate for the business situation at hand and is established correctly. Once an IC-DISC in place, he also emphasized conducting a detailed analysis of the mechanism to maximize its benefits.

Managing Risk

Michael Cristal of Consolidated Risk Management offered insight into the risk management process, reminding attendees that it’s always more cost-effective to prevent risk than to pay all of the varying costs associated with a loss, e.g., deductibles, higher premiums, negative publicity, etc.

Michael provided the group with common findings in risk assessments, citing there are simple steps business owners can take to transfer risk. He recommended first and foremost having a business continuity plan. Without that, it is hard to survive any significant loss event. But he also suggested taking the necessary steps to safeguard critical business information by moving it offsite; reviewing contracts such as purchase orders with vendors, suppliers, contractors, etc., to include language that releases a business from responsibility for any unexpected occurrences; or taking care of general insurance issues, such as being consistent with named insureds on all policies and inserting language requiring an insurance company to give 90-day notice of cancellation or non-renewal of a policy (most states, and general contracts, only require 30-day notice). Other policies to consider include contingent business interruption insurance, which extends business interruption insurance to key clients and vendors critical to a company, e.g., coverage to protect the business if a fire happens at a vendor site; or blanket property insurance that can cover a business for more, particularly useful for companies with multiple locations. Regardless of the coverage selected, Michael emphasized to have any changes formally written into the policy; documenting the change in an email will not suffice in the event of a loss.

Changes in the Accounting Industry

Unlike in the past few years, Pat Piteo of Cohen & Company reported that 2013 was a “slower year” in the world of accounting changes. Changes that did occur included more disclosures for balance sheet offsetting, more detailed disclosures and presentations of accumulated other comprehensive income, and new rules regarding CPA independence regarding clients’ affiliates, beginning in 2014.

Pat touched on recent initiatives that will help make financial reporting for private companies more meaningful, such as the Financial Accounting Standards Board’s (FASB’s) formation of the Private Company Council (PCC). The PCC is already reviewing accounting for interest rate swaps, goodwill subsequent to a business combination, and VIE guidance to common control leasing arrangements. She also reminded those in attendance that the new Financial Reporting Framework for Small- and Medium-sized Businesses (FRF for SMEs) is an alternative to GAAP reporting. FRF is a more concise, accrual-based method of reporting that is not for everyone but could simplify reporting for 1) those preparing income tax basis financial statements and want more relevant disclosures but don’t want to use GAAP, or 2) for those who believe GAAP does not provide relevant, cost-effective financial information.

On the horizon for the industry are changes to revenue recognition standards due out in final form in Q1 of 2014 with an implementation date of 2018 for private companies. The new rules will encompass a five-step process and have the most significant effects for the construction industry and other companies with multiple deliverables or long-term contracts. Also expected to be implemented in 2018 is a new model for lease accounting that will affect lessees, requiring them to capitalize all leases extending for one year or more.

Pat wrapped up her presentation with best practices and tips for ensuring a smoother audit process. In addition to having financial information ready, she recommended scheduling time to meet with the audit team during the audit, and communicating to ensure deadlines are clear and enough time is allowed for appropriate quality reviews and revisions.

State of the Economy

Tom Haught of Sequoia Financial Group gave his annual global review of the economy and financial markets. Unlike at this time last year, consumers are being more cautious again with their funds, causing spending to trend downward. And while a recession in the near future is less of a concern these days, GDP growth is slow and projected to be at 1.5-2.5% as compared to the ideal 3-4%. Current fiscal policy, e.g. the Sequester, is doing its job to cut government spending and the national deficit; while the Fed’s Quantitative Easing, pumping money into banks to encourage more loans to in turn boost consumer spending, is not yet working.

In the jobs market, while unemployment figures have improved, mainly because labor force participation is down, the issue of chronic long-term unemployment still persists. People are giving up looking for jobs, especially younger individuals. The 65+ demographic is staying in the job market longer. This has been the slowest job recovery we have seen since tracking of these stats began. On the housing front, interest rates are on the rise, making mortgages less affordable than even six months ago. Rental prices are increasing as well, as the supply of rentals has not caught up with the demand, and vacancies are at an all-time low.

Companies continue to lock in interest rates for longer periods, since rates are still relatively low, and are putting more money back into their businesses, buying capital assets and paying more dividends. The global economy is slightly better off than last year, as China’s GDP has stabilized and Europe is emerging from its 18-month recession. European PMI trends are also encouraging, with the Euozone’s and even Greece’s PMI on the rise. Significant unemployment, especially in the young workforce, in the Eurozone still remains cause for concern, however. See important disclosures below.

Healthcare Reform Panel

This year’s CPE event ended with a panel discussion on healthcare reform. We asked Lisa Kimmel from Benesch, Maura Corrigan from Cohen & Company and Norm Riley from Wells Fargo to help private companies understand the impact to their businesses. Moderated by Tracy Monroe, the panel touched on a variety of areas and sparked many questions from the audience. Below are a few of the highlights:

  • Play or Pay. The employer mandate for employers with 50 or more full-time equivalent (FTE) employees to offer health insurance or pay a penalty is more than a numerical calculation. It is ultimately a business decision that will impact recruiting the most highly talented professionals in any field. Norm pointed out that in his opinion employers with more than 130 FTEs are potentially worse off financially by cancelling their health insurance policies. The mandate goes into effect in January 2014 but no penalties will be assessed until 2015. Individuals are mandated to sign up for a healthcare policy, either via their work or state-sponsored health exchanges, by January 2014 or pay a penalty.
  • Employer Notification of Penalties. The IRS will be responsible for sending out notices to employers about Play or Pay penalties. Small employers need to determine with certainty if they have more than 50 FTEs, which is different from calculating the number of full-time employees.
  • How will healthcare reform be paid for? The overall goal of reform is to make people healthier, which will eventually drive down medical care costs. In the interim, reform will be paid for namely by 1) a 0.9% Medicare surtax for individuals earning $200,000 or more in earned income per year; 2) a 3.8% tax on net investment and passive income; and 3) a 2.3% excise tax on medical device sales.
  • Cadillac Tax. The Cadillac tax is an excise tax that also can apply to small employers if an individual plan premium equals more than $10,800 per year. The term “Cadillac plan” does not refer to the benefits offered, only the premiums paid.
  • How can smaller employers offer competitive health insurance? Once operational, Shop exchanges will offer a marketplace for employers with less than 100 employees to select from various plans to offer employees. While it will give smaller employers more options, they may be expensive. Self-insured plans may also be worth considering.
  • What is the future of Health Savings Plans (HSAs)? They are here to stay, and the government is still encouraging their use.
  • How will the Affordable Care Act (ACA) be enforced? The Department of Labor (DOL) is well-staffed and ready to audit! DOL audits are already on the rise, during the course of which they will be looking for ACA compliance. Recent benefits audits have shown approximately one-third of the requests pertain to the ACA.
  • Final Words? Lisa Kimmel recommended that employers think about their companies’ benefits goals as part of the universal HR goals of the company, not just related to healthcare, and to communicate with employees so they can understand and appreciate the benefits offered.

    Norm Riley said to be prepared, analyze information, know the options and look at all the scenarios and their impact. He also went one step further to predict that in the next 7-10 years we may see health plans treated like defined contribution plans, in which an employer gives “x” amount towards a plan and the responsibility of choosing the right plan will fall to plan participants.

    Maura Corrigan advised businesses to be proactive and keep tax advisors in the loop on healthcare decisions so your team can plan for and address any tax impact and opportunities for the company.

We sincerely thank all of our CPE presenters for sharing their knowledge and all of our clients who joined us.

Sequoia Financial Group, LLC Disclosures: Past performance is not indicative of future performance and the value of investments and the income derived from them can go down as well as up. The views expressed in this document are based on current market conditions. They are subject to change without notice. Investment Advisory Services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Certain Third Party Money Management offered through ValMark Advisers, Inc. an SEC Registered Investment Advisor. Securities offered through ValMark Securities, Inc., Member FINRA, SIPC. 121 South Main Street, Suite 300 Akron, Ohio 44308 Phone (330) 375-9480. Certain insurance products offered through Sequoia Financial Insurance Agency, LLC. Sequoia Financial Group, LLC and related entities are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc. This document and the information contained herein is for information purposes only. It is not intended as, and does not constitute, an offer or solicitation for the purchase or sale of any financial instrument.

This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.