2011 Federal Tax Credits for Consumer Energy Efficiency

In December 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This law extended the tax credits for energy efficiency into 2011. For 2011, the tax credit available represents 10% of the cost of the improvement, up to $500, with a $200 max for windows, and several other set maximums. The maximum tax credit available is $1,500. In addition, there are no upper or lower limits on income to receive the tax credit. Thus, making the credit virtually available to anyone who files a federal tax return. The tax credit must be claimed on 2011 IRS Form 5695 and submitted with you 2011 taxes to be filed by April 15, 2012. In 2010, the tax credit represented 30% of eligible purchase up to a maximum credit of $1,500. In order to qualify for the 2010 tax credit the 2010 IRS Form 5695 should have been filed with your 2010 taxes prior to April 18, 2011. However, if you failed to file for this credit all is not lost. If you think the credit is significant enough it might be worth filing an amendment to your tax return.

For additional information see the Energy Star website or contact us for your specific item.

dbbmckennon Sponsor's The Elite OC Charity Golf Tournament

With our commitment to the betterment of the Southern California communities, dbbmckennon was elated to help sponsor the first annual The Elite OC Charity Golf Tournament held at the Aliso Viejo Country Club on April 25, 2011.   The Elite OC was able to bring together the some of the best and brightest professionals from our community to raise thousands of dollars for the Never Forgotten Foundation.   We were also glad to place two of our own team members in the tournament to further help the cause.  We look forward to our continued partnership with The Elite OC and assisting them in their future endeavors. 

 

1099 Requirements Repealed and Explained

It’s no surprise that so many people were confused about the proposed changes to 1099 reporting requirements.   Prior to the Healthcare Reform bill being passed in 2010, businesses had to issue 1099’s to any non-corporations for services provided over $600.  Upon the Healthcare Reform bill being passed, new regulations required that businesses issue 1099’s to ANY person OR corporation that provided ANY good or service individually or in aggregate over $600.  As you can imagine, the new regulations created quite a stir with the additional work that would be required.  These changes were to go into effect at the start of 2012. In April 2011, the new requirements were repealed; much to the pleasure of many small businesses that were deterred by the now former increased reporting measures.   So as we stride ahead in 2011 and march toward 2012, fear not, as the infamous 1099 requirement will not be looming and the old requirements are new again.

XBRL for Small Businesses is Coming!!

XBRL (Extensive Business Reporting Language) has been around for quite a few years but is just now hitting the forefront for small businesses. Effective for periods ending after June 15, 2011, all small business filers will be required to file, commonly referred to as tagging, the basic financial statements (balance sheet, statement of operations, cash flows and equity statement) using XBRL. After the first year, small business filers will be required to tag the details of disclosures within the footnotes which can be a bigger challenge than the basic financial statements. For more information regarding XBRL view this video titled XBRL Explained

The deadline for XBRL is approaching fast and thus small business filers should be preparing now. Feel free to give dbbmckennon a call or email to discuss your current situation.

The 1099 drama to continue?

As previously discussed there are some big changes scheduled to take effect in January 2012 related to Form 1099 reporting. However, based on the Presidents State of the Union address on January 25, 2010, it appears the President has indicated the willingness to potentially repeal the additional Form 1099 reporting requirements. “Now, I've heard rumors that a few of you have some concerns about the new health care law,” stated the President. “So let me be the first to say that anything can be improved. If you have ideas about how to improve this law by making care better or more affordable, I am eager to work with you. We can start right now by correcting a flaw in the legislation that has placed an unnecessary bookkeeping burden on small businesses.”

Based on recent legislation introduced by the Senate Finance Committee Chairmand Max Baucus and the Senate Majority Leader Harry Reid, the new legislation would repeal the requirement for all goods and services to be reported by small businesses on Form 1099 beginning in January 2012. As of right now, the reporting requirement still stands so stay tuned.

Additional Amnesty for Offshore Accounts?

Based on the IRS' announcement on Monday, it appears that there is a 2nd amnesty program in the works for undisclosed offshore bank accounts. The previous amnesty program, which ended on October 15, 2009, was established to encourage individuals/entities in which held offshore bank accounts to come forward and disclose the account. The previous program reduced the penalty for non-disclosure of the bank account. In addition, the tax payer was only charged the penalty for one year. The penalty for non-disclosure can be 20% for each of the six years preceding the account being discovered. Thus, penalties at times can be in excess of the value of the account. See our initial comments on the program here. The IRS requires any U.S. citizen or resident who owns a foreign financial account with a fair market value in excess of $10,000 to be reported annually on Form TDF 90-22.1. If you find that you have a foreign bank account in which has not been reported please contact us so that we may discuss the options in which you have. Over the past couple of years, dbbmckennon has represented various individuals in declaring foreign investment accounts and assisted in the preparation of the required forms.

New IRS Reporting Requirements for Brokers and Transfer Agents

Effective January 1, 2011, brokers and transfer agents will be required to report the costs basis of a security in which was sold during the reporting year on Form 1099-B. Previously, only the sales proceeds received in connection with the sale of a security was included on Form 1099-B. The new requirement is intended to ease the burden on the investor and result in more accurate reporting to the IRS. However, the potential for confusion exists. For instance, assume an individual receives a compensatory grant of stock from an employer. On the date of issuance, the fair market value of the stock is $100 resulting in taxable income to the employee of the same amount. Assuming the individual sells the stock for $200, the broker or transfer agent would most likely report the transaction at a sales price of $200 and a $0 basis. The broker or transfer agent did not take into account the taxable income of $100 already recognized by the individual. Thus, individuals will have to critically review their copy of the 1099-B to ensure completeness.

The IRS has the opinion that the institutions tracking this information are more sophisticated than most investors and thus, the reporting should be more accurate. The IRS has noted in the past, since the investor was responsible for the reporting, there was room for error and interpretation. Accordingly, the IRS believes that they lose out on billions in tax revenue annually due to misreporting.

dbbmckennon's PCAOB Report

On December 23, 2010, dbbmckennon received its Public Company Accounting Oversight Board's (PCAOB) inspection report. “We are proud to announce that the PCAOB’s report did not cite any audit or internal control deficiency comments in connection with our audits of public-company clients”, said Michael McKennon, “audit deficiencies are fairly common, and if serious, may result in sanctions by the PCAOB and/or SEC. There have been recent sanctions to Orange County firms in connection with audit failures. We will continue to strive for the highest level of audit quality to serve the public’s interest.” A copy of the PCAOB inspection report can be found here: dbbmckennon's PCAOB Inspection Report

How the 2010 tax law affects your taxes

With all the uncertainty in Washington, you may have wondering and/or worrying what is going on with taxes in the next few years. Now that the 2010 tax relief act has been passed the picture is a bit clearer. Here are a few highlights of the extension:

1. The current income tax rates in which start at 10 percent and top out at 35 percent will be in place for two more years. The rates were previously schedule to rise in 2011.

2. The rate for which an employee pays into social security has been reduced from 6.2% to 4.2%. This basically means for ever $1,000 of earnings; an individual will take home an additional $20. This is only for 2011 and the employer still pays the full 6.2% employer portion.

3. Patches for Alternative Minimum Tax (“AMT”) were included for 2010 and 2011. In 2010 AMT exemptions will be $47,450 for unmarried individuals and $72,450 for married individuals filing jointly. In 2011, these amounts are set to be $48,450 and $74,450, respectively.

4. Extension of 100% bonus depreciation for business property acquired between September 8, 2010 and January 1, 2012, subject with certain limitations.

5. Important to the elderly, temporary reinstatement of the estate tax of 35% with $5 million exemption.

6. Certain credits and deduction extensions including but not limited to: increased standard deductions for those married and filing jointly, child tax credits, earned income credits, and child dependency credits.

Although there is approximately only one week until the end of the year, there is still plenty of time to make some tax saving moves prior to then. To determine how the new tax law affects your particular situation, contact dbbmckennon today.

Five Tips for Year-End Close

Many small businesses lack formal procedures to properly close their books. Here are five tips that can help streamline the process this year. 1. Make a list and check it twice – The most effective way to close a period correctly and accurately is to make sure everything is complete. Before the year-end, make a checklist of accounts to close, schedules to prepare, tasks to complete, and timeline for each. Keep track of what has been done, and what needs to be done. Identify who needs to prepare the work and who will review it. Then have each of those individuals sign-off on the checklist along the way. Preparing ahead of time and using a checklist will ensure completeness and timeliness.

2. Know your entries – Along with the checklist you make above, create a list of standard journal entries that are required to be made monthly, quarterly, and annually. Compare the list to your current close to make sure everything is properly booked.

3. Use Technology – Along with a listing of standard journal entries, try to use the power of your accounting system (i.e. QuickBooks, PeachTree, etc). Whatever entries can be automated should be set up to do so (i.e. monthly fixed asset depreciation, etc). Also try to use Excel to create dynamic workpapers that create journal entries for you each period to better automate the process. A little work ahead of time will save you time down the road.

4. Analyze variances – Compare each account in your current trial balance against the prior year(s). Set expectations of what you should see based on known activities, economic factors, and recent transactions. Look for accounts that vary outside of those expectations. This simple task will help you determine if something is misstated.

5. Have a tax plan – Develop a plan with your CPA regarding taxes and tax payments. Pro-active planning will help minimize tax burdens, increase cash management effectiveness, and ease your worries about the unknown.

Don’t hesitate to give dbbmckennon a call or email today, to ask us about how these tips can be integrated to your specific situation. We would be happy to help answer your questions or assist you in compliance in order to put your company on a path to success.

What to do if you receive a tax audit notice.

If you have received a letter from the Internal Revenue Service (“IRS”), Franchise Tax Board, or other tax agency, informing you that your tax return is subject to audit, don’t panic. Having a tax return audited does not always suggest that the taxpayer has made an error or has been dishonest. In fact, some audits result in a refund to the taxpayer or acceptance of the return without change. Even if you have made a mistake, the key is understanding how the IRS works and what you can expect from the audit process. The number one rule is not to ignore the IRS! The following are a few tips to guide you through the audit process.

• Hire professional help. Your best bet if you're audited is to retain the services of a qualified and experienced tax accountant who can argue your case without passion or prejudice. These professionals already know the most effective ways to help you quickly resolve a conflict with the taxing agency. In addition, the tax code has become so complicated that you're unlikely to know the law as it applies to your tax return and your rights as a taxpayer.

• Respond to the notice. You generally will have 10 days to respond to the initial notice requesting a meeting. You will normally have 30 days to obtain all the information requested by the agent. The audit notice will give you information as to what items are being examined. Knowing what's being scrutinized will help you determine what you need to bring to the audit, so you can substantiate the items in question. Be aware that the agent upon setting the initial meeting will send a more comprehensive list of items to be audited.

• Get your records organized and complete. Make the auditor's job easier by having organized and complete records. Organized records generally indicate to the auditor that that all of your items are documented and justified. Group each of the items in question, or attach an adding-machine tape that matches the tax return, and any other organization methods that will make it easily identifiable by the auditor for quick review of the important issues. You cannot simply throw your records in a bag, drop it on the auditor's desk, and think that they will figure it out. It is the tax payer’s legal obligation to be able to support all items on their tax return.

• Provide only records that are requested. Leave at home any additional records and items not requested in the original audit notice. Also do not bring original documents to the audit. If you do bring originals, have the agent copy immediately and return the original. There is a high probability that the documents could get lost. The taxing agency isn't responsible for documents lost in its possession.

In recent years, certain tax agencies have been increasing the amount of audits. If you get a notice from a tax agency notifying you that you have been selected for audit, your best bet is to seek out a qualified tax professional. Don’t hesitate to give dbbmckennon a call or email today. We have a significant amount of experience in handling IRS, Franchise Tax Board, State Board of Equalization (sales taxes), etc. We would be happy to help answer your questions or assist you with your needs.

Is your Business Protected Against Bank Cybertheft?

In the past few years, we have become increasingly aware of the potential threat in cyberspace that that our personal banking information could be obtained by so called “cybercriminals.” Most likely, if it has happened to you or someone you know, they were reimbursed for the fraudulent transaction from their bank as consumers. However, unlike consumers, business under the Uniform Commercial Code (UCC) could make it difficult to recover funds stolen from bank accounts leaving the victim (the business) to suffer the loss. One of the largest areas of concern, for businesses is the threat of a fraudulent electronic funds transfer (EFT). These thieves are mainly targeting small to medium sized business because of the ease of accessibility due to weak or non-existent controls. On August 26, 2009, the Federal Deposit Insurance Corporation (FDIC) issued an alert warning (FDIC SA-147-2009) that there has been an increase in reports of fraudulent EFT transactions resulting from compromised login credentials. The statement issued by FDIC specified how the cyber thieves maybe able to access accounts.

“Web-based commercial EFT origination applications are being targeted by malicious software, including Trojan horse programs, key loggers and other spoofing techniques, designed to circumvent online authentication methods. Illicitly obtained credentials can be used to initiate fraudulent ACH transactions and wire transfers, and take over commercial accounts. These types of malicious code, or "crimeware," can infect business customers' computers when the customer is visiting a Web site or opening an e-mail attachment. Some types of crimeware are difficult to detect because of how they are installed and because they can lie dormant until the targeted online banking session login is initiated. These attacks could result in monetary losses to financial institutions and their business customers if not detected quickly.” FDIC SA-147-2009

Generally, a business must notify the bank within two days of a fraudulent ACH transaction or the business may be liable for the loss. Identifying risks are key to understanding how vulnerable your business is to EFT fraud. Once the risks are accessed, the business can determine the appropriate steps (implementation of controls) to limit the risk.

Assessing your Business’ Risk for ETF Fraud?

Here are a few key items to consider when evaluating general fraud prevention: 1. Is your business in compliance with the bank’s recommended security procedures to facilitate a recovery of funds in the event of a fraudulent transaction? 2. What is the maximum dollar amount the entity could lose in a wire transfer, and does the business have insurance to cover that amount for fraud? 3. Has the business given proper education and/or training to key employees with online access so they understand the risks, how the fraud is perpetrated and the precautions they should take? 4. Does the business have security settings on computers to prevent malicious code (malware) from being installed into its systems?

Establishing Controls to Mitigate the ETF Fraud

Once you have determined the Company’s risks, a system of controls needs to be developed in order to limit that risk. The following is a list of potential controls in which might limit the risk: 1. Dedicate a computer or system for online banking, especially for EFT. If significant risk, use a computer that is not used for e-mail, web browsing, or other high-risk online activities associated with contracting malware infections. 2. Use an authentication with independent mechanism. For example, require login credentials and a temporary PIN sent to a pre-determined cell phone or a security code device (provided by the bank). This method makes attack more difficult because the authentication factor is not communicated through the compromised computer. 3. Segregate EFT controls so that one person performs online EFT functions, and a second person approves the transfer or verifies/reconciles that transaction. 4. Review bank accounts on a daily basis in order to detect unauthorized transactions timely. 5. Dedicate clearing accounts using “just-in-time” deposits. For instance, make deposits into a separate designated “EFT transfer” account from a different computer into that account just before a wire transfer. 6. Use “run as needed” bootable CD (such as the Ubuntu operating system) that cannot be contaminated by a virus or malware for the computer accessing online EFT. This is an FDIC recommendation.

There are many prevention and detection controls in which a business can implement into its day-to–day operations to protect from EFT fraud. However, selection of such controls is a tricky process. Too many controls can cause inefficiencies and have a negative impact on the business. Don’t hesitate to give dbbmckennon a call or email today, to discuss your particular business’ risks and potential internal controls in which you may implement to mitigate such risks.

Professor Michael McKennon (at least for a day)

On November 4, 2010, Michael McKennon was honored to be able to give back to his Alma Mater, California State University at Fullerton (CSUF), through the "Professor for a Day" program. This was the third consecutive year Michael participated in the program. Michael was allowed to speak with a “Critical Thinking” honors’ class filled with the exceptional freshman students at CSUF. “This was a very insightful and creative group of students I was able to share my time with. I asked each student what they are doing to make a difference in their respective fields to ensure they have opportunities upon graduation. Their answers were surprising; most students were actively involved in some regard, but they admitted that they could do more", said Michael. In addition, Michael communicated the need to make a difference in their respective fields by donating their time in academia and associations which enhance positions in their respective careers. At the end of the instruction, Michael had various individuals thank him for his time and the information provided. Once such individual added the following:

"Dear Mr. Michael McKennon:

Thank you for sharing your experiences today with my Critical Thinking Honors class. I truly appreciate your advise to start networking with teachers, peers, and possibly start looking into internships to get our names out there. You did not simply state that we have to or should network but you also explained why it is important to network. We, students, often hear from other people that we need to start networking since our first year of college to build strong relationships throughout our college years. Some students ignore this because they believe they have time to start in the next few years. Thank you again for taking time out of your busy day to give a truly motivational speech.

Sincerely,

Natassja Romero"

Based on the feedback and appreciation received, Michael is looking forward to next year's opportunity. Upon returning to work that day, Michael expressed the following to the firm personnel: "Sometimes we lose sight of our responsibilities as professionals to make a difference in our communities. I feel great reward in impacting these fine young honor students."

You can view Michael's Certificate here.

What You Need to Know About IRS Communications

Over the last several months, our firm has been receiving a substantial number of calls from clients in a panic because they had received an email notification from the Internal Revenue Service “IRS” stating that their filed tax return will be subject to an audit. The words “IRS” and “audit” are enough to ruin anybody’s day. The IRS will never initiate taxpayer contact via an unsolicited e-mail. All initial contacts are made via US Mail. In addition, the IRS does not use e-mail to discuss cases or to solicit sensitive personal financial information from taxpayers. If this happens to you, the official IRS website (www.irs.gov) has specific instructions on reporting suspicious e-mails or other unsolicited contacts for personal information. The above applies to most government entities including but not limited to the California State Board of Equalization, California Franchise Tax Board, etc.

The IRS website also has some helpful hints on how to spot an e-mail scam. Many e-mail scams are fairly sophisticated and hard to detect. Here are signs from the IRS to watch for if you receive a suspicious e-mail: • Requests detailed or an unusual amount of personal and/or financial information, such as name, SSN, bank or credit card account numbers or security-related information, such as mother’s maiden name, either in the e-mail itself or on another site to which a link in the e-mail sends the recipient. • Dangles bait to get the recipient to respond to the e-mail, such as mentioning a tax refund or offering to pay the recipient to participate in an IRS survey. • Threatens a consequence for not responding to the e-mail, such as additional taxes or blocking access to the recipient’s funds. • Gets the Internal Revenue Service or other federal agency names wrong. • Uses incorrect grammar or odd phrasing (many of the e-mail scams originate overseas and are written by non-native English speakers). • Uses a really long address in any link contained in the e-mail message or one that does not start with the actual IRS Web site address (http://www.irs.gov). The actual link’s address, or url, is revealed by moving the mouse over the link included in the text of the e-mail.

For those who have received a questionable e-mail claiming to come from the IRS you may forward directly to IRS. The information will assist the IRS track the suspicious e-mail to its origins and ultimately help shut down the scam. Please don’t hesitate to give dbbmckennon a call or email, to discuss any of your concerns or if you are actually subject to an IRS, California State Board of Equalization, California Franchise Tax Board, etc. audit.

What is the difference between a Certified Public Accountant (CPA) and Enrolled Agent (EA)?

For you or your business, the difference could be significant or inconsequential depending on the services you require and the experience of the professional. If you look at statistics alone, you will find there are more CPA’s in the United States than EA’s. This may lead you to believe that an EA is the more desired and difficult designation to attain; and therefore, the more valuable designation. In reality, the reason there are more CPA’s is because CPA’s can specialize in different areas (audit, income taxes, consulting, etc.), whereas EA’s only prepare basic income tax returns, primarily for individuals as opposed to corporations, trusts and estates. A CPA has general accounting and business knowledge along with a specific specialization. A CPA that specializes in income taxes will often have expertise in taxation of mergers and acquisitions, complex income tax matters, as well as multi-state tax compliance. To become an EA, you must either take a written exam based on the tax matters or have the required past experience with the IRS. A CPA on the other hand is required to have a minimum of 120-150 credit hours (differs by state) of higher education (university level), work experience in the field, and pass four rigorous exams within 18 months, which cover various subjects including: financial and cost accounting, taxes, regulation, general business, economics, IT in business, and others. Both are required take continuing education to maintain their status, which should keep them up to date on the latest trends and regulations.

But what is the difference to you the individual or small business owner?

If you are starting, or already have, a business and require annual income tax returns, tax planning, and business guidance on matters, then a CPA is likely your best choice. In addition, you may want to consider a CPA that is part of a full-service CPA firm, where there are multiple CPA’s with varying specialties including: income taxes and IRS representation, technical accounting and assurance services and consulting. Choosing a full-service CPA firm, will ensure that all your business needs can be serviced continually one firm. EA’s cannot perform assurance services, such as a compilation, review or audit of your company’s financial statements.

When determining the services you require, consider interviewing the professionals to determine their knowledge and expertise.

The IRS and Offshore Accounts

On July 15, 2010, Switzerland’s Federal Administrative Court issued a ruling rejecting a UBS account holder’s complaint that sought to prevent the release of her account information to the U.S. tax authorities. This ruling signifies the beginning of the end of the era of offshore bank secrecy. The Swiss banking system has long been a thorn in the IRS’s side. The Swiss’s bank secrecy laws provide that all account information is confidential and cannot be turned over to government officials unless a criminal act has been committed. The July 2010 ruling was in response to an agreement struck in August 2009 between the U.S. and Switzerland that sought to put an end to such practices. Under the deal, UBS agreed to provide the IRS with the names and account information of 4,450 Americans who housed as much as $20 billion in offshore accounts. The names were provided to the IRS by UBS in November 2010.

Expiring on October 15, 2009, the IRS offered a limited voluntary disclosure agreement ("VDA") program under which taxpayers were offered reduced penalties and exposure to a criminal indictment, if they came forward and voluntarily disclosed their previously unreported assets and income from foreign accounts. However, any individual included within the list provided by UBS in which had not begun the VDA program faces a high probability of facing significant penalties and potentially a criminal investigation.

This recent win is another notch under the IRS’s belt in its constant battle against tax evaders. The implications of the cooperation by the UBS and the Swiss government are vast. It is highly unlikely that the IRS will stop its crusade there. The IRS has shown time and time again that it is not a force to be reckoned with. As Ben Franklin famously said, “Two things in life are certain: death and taxes.”

The IRS requires any U.S. citizen or resident who owns a foreign financial account with a fair market value in excess of $10,000 to be reported annually on Form TDF 90-22.1. If you find that you have a foreign bank account in which has not been reported please contact us so that we may discuss the options in which you have. Over the past couple of years, dbbmckennon has represented various individuals in declaring foreign investment accounts and assisted in the preparation of the required forms.

Contractor or Employee?

One significant topic that consistently comes up….should an individual be classified as a contractor or an employee? Based on the IRS’ definition, the three aspects in determining whether an individual is a contractor or employee revolve around behavioral control, financial control, and relationship of the worker and firm. The IRS and other tax collecting agencies are auditing these classifications more frequently because the classification as an employee generally results in more income taxes by the employee and employer. The employment taxes, interest and penalties which may be assessed for incorrectly classifying an individual as a contractor will be significant. In addition, the misclassification of workers also opens the door to private causes of action from workers such as back pay, overtime pay, lost benefits and liquidated damages. The following is a brief outline of the factors that make up the three aspects:

Behavioral Control: - Do you train or instruct the worker? - Where does the individual perform services (onsite, offsite, etc)? - Does the individual work a fixed or variable amount of hours? - Can they hire for the company and who pays the hired individuals?

Financial Control: - Who provides equipment needed to perform work? - What expenses are incurred by the worker? - Is the pay fixed or variable based on other factors? - Does the firm carry workers compensation insurance for the individual? - Who has economic or financial risk?

Relationship of the Worker and Firm: - Does the worker receive benefits (i.e. Vacation, 401(K), etc)? - Does the worker provide services for other employers? - How does the firm represent the worker to customers?

There are often no bright lines in making your determination. For more guidance from the IRS, you can review the following link. If you wish to confirm a classification, you may request a free SS-8 determination letter from the IRS. If your company becomes the subject of an IRS audit, please contact us .

SOX 404(b) is Officially Dead for Small Business Filers!

Good news for small public companies, SOX 404(b) is dead! On July 21, 2010, the exemption from SOX 404(b), for public companies with less than $75 million in market capitalization was signed into law by President Obama. Since SOX was introduced in 2002, small public companies have experienced delays in the effective date of SOX 404(b), which requires auditors to attest to the design and operating effectiveness of internal controls. Each year we watched as the deadline for compliance extended for another year. When the House approved a version of its bill earlier this year, which included provisions to reverse 404(b) compliance for smaller reporting companies, we wrote our US Senators Boxer and Feinstein to support such provision to remove compliance with 404(b) for smaller reporting companies. Our position was contrary to our audit and accounting industry, its professionals and partners, as well as its powerful associations. Our position was contrary for various reasons, none of which took any consideration of the lost opportunity fees our industry would have enjoyed had 404(b) for smaller reporting companies not been repealed.

But don’t get too excited, SOX 404(a) is still in effect for all public companies. SOX 404(a) requires management to conduct a review of internal controls over financial reporting and document your processes and findings.

Here is a brief description of what you should consider based on your company size.

Management of public company with less than $75 million in market capitalization: Continue to conduct internal review of controls, as you will need to conclude on the effectiveness of those controls in 10-K’s and 10-Q’s. Be aware of future growth of your company and its stock price through organic growth or M&A activity, and consider the fact that you may have to be compliant with SOX 404(b) at some point. If a material weakness is discovered by the auditor the company will still be required to report the deficiency in its quarterly and/or annual reports and their remediation plan for such.

Management of Public company with over $75 million in market capitalization: Stay tuned to additional changes as studies are being conducted to determine the benefit of SOX 404(b) to companies with market caps between $75 and $250 million. Such studies could result in companies with higher market caps also being exempt.

Private companies looking to go public through mergers, acquisitions, or reverse mergers: Consider what your market capitalization may be based on your IPO, reverse acquisition, etc. If you are planning on selling your company to a public company or taking it public, know that private companies with strong internal control framework are usually more valuable than those without it.

All Companies: As part of an audit, an auditor is REQUIRED to conduct a walkthrough of your internal controls to assess where risks may be and to identify potential weaknesses in controls. If deficiencies are detected they are REQUIRED to inform you. Use this information to strengthen your company.

Don’t hesitate to give dbbmckennon a call or email today, to ask us about how SOX 404(a) and the exemption to 404(b) impacts your company, especially if you are considering a reverse merger, acquisition, or other entity altering transaction. We would be happy to help answer your questions or assist you in compliance in order to put your company on a path to success.

What is an S Corporation?

By Lynne Bolduc of Oswald & YapContact Lynne Here

An S corporation is a form of business classified for federal income tax purposes as a corporation that has elected to be taxed as a pass-through entity, in a manner similar to a partnership or sole proprietor. Unlike a regular corporation, or C corporation, an S corporation (both names derive from sections of the Internal Revenue Code) generally is"not subject to federal income tax. Instead, its income is reported on the tax returns of its shareholders, and they have the responsibility for paying the tax. If there are losses suffered by the corporation, they also pass through and are reported on the shareholders' income tax returns.

Because only the shareholders, and not the corporation, are taxed, S corporations avoid the problem of double taxation associated with C corporations. This is the biggest drawback for creating an S corporation, particularly for closely held corporations.

Shareholders in an S corporation, like shareholders in a C corporation, generally have limited liability arising from corporate matters, even though they pay taxes as if they were partners or sole proprietors. In addition, when the corporation eventually is sold, there can be reduced taxable gains, as compared with the sale of a business operating as a C corporation.

On the downside, the limitation on classes of stock in an S corporation provides less control over the company and the value of its stock. Potential outside investors likely will not be attracted by the pass-through tax characteristics of an S corporation, nor by the limit on the number of shareholders. Although corporate taxes are avoided, there is still a requirement for filing an informational tax return every year for a corporation with more than one owner. Finally, if avoiding formalities is an important consideration, it should be noted that, like any other corporation, an S corporation must follow the requirements for having regular meetings and keeping company minutes. The balancing of the advantages and drawbacks of S corporation status in any given case is sufficiently complex that it is advisable to seek professional advice before making this important choice.

Is a Reverse Acquisition right for you?

One of the more popular ways for a small business to go public is through a reverse acquisition. A reverse acquisition allows private companies to go public without a number of regulatory requirements present in a typical IPO. A typical IPO can take at least six months to complete and require hundreds of thousands of dollars in professional fees due to the comment and review process with the Securities and Exchange Commission. A typical reverse acquisition, involves 100% of the private company’s stock or equivalent being acquired for a large equity stake in the public company, generally over 90% but can be as low as 40%. Generally, the public company is known as a “shell corporation” in which has limited or no operations. The two businesses are then merged using the private company’s products with a public company’s structure.

One of the biggest factors in considering whether or not you have a reverse acquisition is who controls the public company after the transaction. In cases where the private company’s shareholders own less than 50% of the public company, analysis of operational control, board control or other factors impacting control must be conducted. We have experienced reverse acquisitions where private company shareholders control 40% of the public company stock, and the board is controlled or evenly controlled by the private company’s management. Thus, control is maintained by the private company.

A reverse acquisition, with a public company will cause a change in reporting entity which, in effect, causes the financial statements of the public company to be eliminated and replaced with those of the private company for all previously reported periods which are included in future filings with the SEC; no previously filed reports of the public company are required to be amended and re-filed. A change in reporting entity is generally a preferable reporting requirement because the readers of the financial statements can see comparable amounts in the interim and annual reporting by the public company. Alternatively, in a forward acquisition, the private company’s financial statements and results are included only from the date of the acquisition forward.

One of the key requirements to a reverse acquisition is that an 8-K, commonly known as a Super 8-K, needs to be filed within four (4) business days of the acquisition date. The 8-K will include information similar to that of a standard 10-K, including audited and reviewed financial statements of the private company. All future public filings will present the historical financial statements of the private company as if they acquired the public company.

If you are considering a reverse acquisition it is extremely important that you obtain proper guidance from a securities attorney and an experienced auditor. One of the major delays in closing a reverse acquisition is obtaining the required audits and the completed 8-K. At dbbmckennon we have conducted numerous audits in connection with reverse acquisitions. If you are contemplating a reverse acquisition to take your private company public, please contact us to discuss if this is the right method for you.