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2005 Articles 2005 Practice Innovation Awards FairTax has mixed support among Ga. Businesses S Corporations Are a Better-Than-Ever Tax Shelter Plenty of Accountants in Bartlett's Family Tree? Trust restored? Smaller firms soaking up bigger clients Sound Off- Ruth Bartlett |
2005 Practice Innovation Awards by Jeff Stimpson Practical Accountant's Practice Innovation Awards annually recognize accounting firms that are taking the lead in developing new or improved services, and promoting efficiency in the practice of public accounting. Advertisement This is the sixth year of the award, and it's interesting to note that many of this year's winners won in previous years. Three of the firms (J.H. Cohn, Barnes Dennig, and PKF) won in five of the six years. A remarkable achievement, and it shows that innovative firms are never satisfied with the status quo and always look for new opportunities and ways to improve themselves. We, the editorial staff of Practical Accountant, proudly recognize this year's winning firms, and we'd like to thank the many firms that submitted entries. Here are the accomplishments of this year's winners. Fazier & Deeter knows as well as the next major regional firm the challenge of recruiting and retaining top talent, and has adopted programs and added numerous benefits to attract and retain talent. The campaign is driven by understanding "generational motivations" and the complexity of marketplace competition. Various teams have been established to champion programs within the firm, the result being one collective set of benefits that aligns with the firm's strategic values. Advertisement The firm has introduced a number of commonsense tactics to retain staff, including 100 percent healthcare paid by the firm, a third of the female staff in partner positions, and the ability to roll over unused vacation/sick days to the next year. Among F&D's other initiatives: an in-house counselor is available to work outside of health insurance, without cost to employees; an annual after-busy-season bonus for staff not eligible for overtime; child-care agreement with local facilities; a firm match for outside individual coaching; a Frazier & Deeter Foundation that "puts stewardship into employee hands"; an internal employee recognition program; paid paternity leave for full-time employees; reduced life insurance and mortgage service fees for employees; up to $2,000 in paid training for employees. The firm also has a vacation policy allotment that's the same for first-day employees as long-time staffers. The firm has experienced little turnover firm-wide, has acquired entry- through equity-level members at levels commensurate with the firm's growth, and has more than doubled in size and revenue over the past years. In a survey conducted by an independent source to gauge how the team is doing, 98 percent of F&D staffers believe their team is "committed to producing top-quality work, and consistently goes the extra mile to achieve great results." FRAZIER & DEETER, LLC [to view this article as a PDF, click here.] FairTax has mixed support among Ga. Businesses By Justin Rubner Atlanta Business Chronicle featured an article concerning the FairTax, a movement advocated by Georgia congressmen John Linder and Saxby Chambliss to replace the national income tax with federal sales tax. The article reports the FairTax has mixed support in Georgia 's business community. A representative from the Georgia Restaurant Association believes FairTax will have a favorable impact on the restaurant industry. Likewise, Richard Rainwater, the CEO of the Georgia Independent Automobile Dealers Association says that the FairTax will “bring down costs of a new car, I believe. When you have taxes embedded in manufacturing, it's already passed on to the consumer. The FairTax would replace that." Impact on accountantsRoger Lusby of Atlanta-based Frazier & Deeter LLC , said he is strongly against the FairTax but not only because accountants would conceivably have less work. He said the FairTax would be regressive, meaning the proportion of a poor person's salary versus a rich person's salary spent on goods would be disproportional. He also pointed out that if states don't eliminate income taxes, then little would be accomplished. "Taxpayers would still need to prepare state income tax returns, most of which use the current federal income tax return as a starting point in determining state income taxes," Lusby said. "Unless this is also changed, the FairTax does not reduce the compliance effort for most taxpayers." S Corporations Are a Better-Than-Ever Tax Shelter By Roger W. Lusby III, CPA, CMA, AEP For years, S Corporation status has been an effective tax structure. If you run your company as an S corporation, you avoid the “double taxation”—first to the corporation and then as dividends—that applies to regular (C) corporations and their shareholders. As S corporation shareholders, you'll have any income or loss incurred by the company passed through and taxed or deducted on your personal tax return. Also, you do not have to worry about certain other problems faced by C corporations, namely, unreasonable compensation issues and the excess accumulated earnings tax. To enjoy such tax benefits, S corporations must comply with various rules. Fortunately, some of the restrictions were eased in the American Jobs Creation Act of 2004 . Result: The tax advantages of electing S corporation status have increased as of 2005. More Shareholders Example: You are the founder of an S corporation. You have three children, all married, and six grandchildren. You, your spouse, your children, their spouses, and your grandchildren (14 individuals in all) own shares of your S corporation. This group will count as one shareholder in determining the 100-shareholder limit. Generally, the election to combine family members may be made by any member of the group. This election is effective until terminated. Key: Increasing the shareholders limit and allowing family members to be combined will make S corporations more flexible. As a result, you could distribute shares to more employees to enhance their loyalty. Trust Tactics Example: You create an ESBT to hold some of your company's shares. Your three children and six grandchildren are named as beneficiaries. Under the new law, all nine of them may be grouped as one shareholder, along with you and your spouse. Exception: Each person entitled to receive distributions from an ESBT is treated as a shareholder during the period in which distributions are received. However, the new law clarifies that unexercised powers of appointment will be disregarded in determining potential current beneficiaries of an ESBT. Example: You create an ESBT, naming an unrelated trustee. The trustee has the right (but not the obligation) to distribute current income among your three children, who are trust beneficiaries. In this situation, your three children can be combined with other family members and be treated as one shareholder. However, if the trustee must distribute to your three children, each one of them will be treated as one of 100 permissible shareholders. Extra time: The new law also extends the time in which an ESBT can dispose of S corporation stock after an ineligible shareholder becomes a potential current beneficiary. The limit is now one year, up from 60 days. Example: A foreign taxpayer is named as a current beneficiary of an ESBT. Although the trust may continue to exist, it must dispose of its S corporation stock because foreigners cannot be S corporation shareholders. Under the new law, the ESBT can take a year to dispose of the stock. Key: The new rules increase the appeal of ESBTs, which provide much greater estate planning opportunities, compared with other types of trusts eligible to hold S corporation shares. However, all income in an ESBT is taxed at 35%. Loss Leaders Example: You are the 75% owner of an S corporation that reports a $100,000 loss this year. Therefore, up to $75,000 may be deducted on your personal tax return. However, you basis in the company (amount of cash contributed plus shareholder loans) is only $50,000. Thus, you can take a $50,000 current deduction and carry the $25,000 excess loss forward to future years. Old law: Such losses must be used by you, the shareholder who incurred the loss. New law: In the case of transfers to a spouse, or to a former spouse as a result of divorce, any suspended losses will automatically shift to the recipient of the shares. Key: This rule may make a suspended S corporation loss more valuable in divorce proceedings, strengthening your negotiating position. Another new rule regarding suspended losses involves QSSTs. (In a QSST, the income beneficiary is treated as the owner of the portion of the trust that consists of the S corporation stock.) A QSST owes tax on the disposition of its S corporation stock. New law: Now, any suspended losses may be deducted when a QSST disposes of S corporation stock. Key: This provision makes owning S corporation stock via a QSST more appealing because suspended losses can be deducted, providing more flexibility for S corporation owners. Passive Income New law: If a bank or another financial company requires an S corporation to hold certain assets, perhaps as a condition for a loan, income produced by those assets won't be subject to the S corporation passive investment rules. Inadvertent Expirations Loophole: In some cases, waivers have been granted, allowing S corporation status to remain in effect. Example: XYZ, an S corporation, transferred some shares to a shareholder's IRA, not realizing an IRA is an ineligible shareholder. As soon as XYZ realized the error, the shares were repurchased from the IRA. No tax avoidance was intended, so a waiver was granted, allowing XYZ's S corporation status to be maintained. New law: Rules regarding such waivers have been extended to “QSubs”—domestic corporations that are 100% owned by an S corporation parent, which elects to treat the subsidiary as a QSub to reduce the parent company's administrative burdens. Result: It has Plenty of Accountants in Bartlett's Family Tree? By Karen Dean Atlanta Business Chronicle featured Ruth Bartlet t in an article about how accounting isn't just a job, it's almost become a family tradition. A partner at Frazier & Deeter LLC, she has a family filled with skilled number crunchers. According to Atlanta Business Chronicle, Frazier & Deeter is the last stop in a career that included early years a two Big Four Accoutning Companies. With 15 years at Frazier & Deeter , she plans to work “until I drop.” As manager of the firm's assurance services section, Bartlett focuses on accounting and auditing. Her clients cover a wide range of industries, and she specializes in the hospitality and real estate industries. Bartlett shares that she has also been very active in the Georgia Society of CPAs, and in 1993 had the distinction of being elected the organization's first woman president. That same year, she was also named the first woman partner at Frazier & Deeter . With the increase of women in the profession, Bartlett has seen a definite shift in attitude toward female employees. “Women have been recognized as valuable assets, “ she said. “Firms finally realized the need to be more flexible on things like alternative work schedules, or part-time work. There's now more of a change toward accommodating a work/life balance. Trust restored? By Tom Barry Atlanta Business Chronicle reports in an article that after the accounting scandals of several years ago, a Big Four accounting firm created a chief ethics officer position, set up an ethics hotline and mandated ethics training for its 120,000 employees worldwide. Reacting to public outrage, Congress in 2002 passed the Sarbanes-Oxley Act, which set strict disclosure requirements for publicly traded companies, created a powerful oversight board to discourage irregularities, made key executives vouch for financial statements and established criminal penalties for wrongdoing. It also prohibited accounting firms from providing specified consulting services to companies they audit. Meanwhile, accounting firms made a considerable effort to regain public trust. "Certainly people are talking a different line, and actually I think things are changing, with the real driver being the oversight board," said the University of Georgia 's Michael Bamber, referring to the Public Company Accounting Oversight Board (PCAOB) birthed by Sarbanes-Oxley. Bamber, who holds the Heckman Chair of Public Accounting in UGA's Terry College of Business , noted in the article that legislation requiring publicly traded companies to have audited financial statements was passed by Congress in the 1930s. But over time, especially in the 1990s, auditors increasingly sold consulting services to the same firms they audited, creating major conflicts of interest. "The big firms sort of lost track of their central auditing function," Bamber said. "They called themselves professional service firms, and their Web sites didn't much mention auditing. But that's come back a lot now." The article points out one legacy of the scandals being that smaller auditing firms have landed business they didn't get before. "Our firm grew 26 percent this (past) year," said David Deeter , managing partner of Frazier & Deeter LLC , a 90-employee CPA firm in Atlanta . "The Big Four firms are so focused on doing a good job with public companies that they just don't have the time for privately held ones. It's ended up helping us a lot." Smaller firms soaking up bigger clients By Steven Sloan Atlanta Business Chronicle published an article about how the collapse of accounting giant Arthur Andersen LLP has created a flood of big-name clients flowing into small and midsized accounting firms. Many midsized firms are taking on larger clients that had been handled by the Arthur Andersen-level firms for decades. These firms, in turn, have had to let go of some of their smaller clients to make room for the larger accounts. David Deeter , managing partner at Frazier & Deeter LLC , stated "This is absolutely great for us. There's no doubt that Arthur Andersen was a big part of this trend." In this restructuring, it seems as if many of the firms have won something, as indicated by the Atlanta Business Chronicle. Guy Budinscak, managing partner at one of the Big Four accounting firms in Atlanta , said losing the smaller clients has helped the firm become more efficient. Budinscak added that increased regulation of public companies means accounting firms now spend more time on fewer clients. "To audit a public company today, which is subject to Section 404 of Sarbanes-Oxley, is more intensive than ever before. It requires a higher leverage and drives the cost of auditing up," he said. Some of the smaller clients of the larger firms realize they don't need that specialized service and move on to a smaller firm, Budinscak said. Deeter employs 90 people at his firm and said he has been taking on clients from all sectors, including private equity and manufacturing companies. In fact, the firm's workload has gotten so heavy that 30 new employees were hired in 2004 to help manage it. In the past several years, Budinscak remarked they have lost fewer than 50 clients to smaller firms. As those in the accounting industry prepare for the future, it seems many small-firm accountants are not concerned that the clients they gained from the larger firms will go away any time soon. "We think we'll keep all of them," Deeter said. Sound Off- Ruth Bartlett Atlanta Business Chronicle asked prominent accountants about changes in their field. Affiliation/Title: Frazier & Deeter LLC, head of assurance services (1.)What changes will occur in 2005 as the accounting profession continues to respond to Sarbanes-Oxley? Changes will occur as the marketplace reacts to the failure of some public companies to comply with the requirements of Sarbanes (2.) To what do you attribute the recent upsurge in undergraduate accounting majors? The accounting industry is “hot” right now. (3.) Has the outsourcing of accounting services to foreign countries impacted the Atlanta accounting community? Not to a large extent. ( 4.) What will be the most prosperous sectors of the accounting field in 2005? Overwhelmingly, assurance services are where the most growth is occurring. Auditing, Sarbanes-Oxley compliance |
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