CPAs face a constantly changing accounting and taxation landscape that is poised for some major upheavals. Several local CPAs, all of them active members and leaders of the Washington Society of CPA’s Southwest Regional Chapter, weighed in on what they consider the primary issues facing the accounting industry – and the business clients they serve.
Barrett & Co. PLLC, a Vancouver-based accounting firm, specializes in accounting for construction and manufacturing firms.
“Our clients deal a lot with banks. Financial statements are really important to them,” said Lance Barrett, managing member.
Therefore, proposed modifications to accounting practices, which Barrett called “the most significant changes in accounting in the last 20 years,” could have a profound effect on Barrett & Co.’s clients.
The Financial Standards Accounting Board (FSAB) is considering a new set of rules surrounding revenue recognition, to better align with the International Financial Reporting Standards (IFRS). Although there is no scheduled date for these changes to go into effect, Barrett said the new rules would “totally change the calculation” for contractor clients, who currently recognize revenue according to the “percentage of completion” method. Barrett said that bonding companies, banks and other finance-related companies are concerned about complexity of the new rules and the resulting additional cost to the companies who are paying the accountants.
“They’re talking about us continuing to use the old method and not recognize the new methods,” said Barrett, who added that this approach would simply require a disclaimer in financial reports.
Another area of concern to Barrett & Co.’s clients are pending changes to lease reporting that could significantly alter companies’ capitalization and liability reporting. Currently, explained Barrett, leased assets, such as office space or construction equipment, are expensed in a “pay as you go” manner. Again in an attempt to align with IFRS, the FSAB is proposing that leases be considered purchased assets.
By capitalizing lease payments, they would appear as a liability on the balance sheet, which could “dramatically change how banks and bonding companies assess the financial stability of a company,” according to Barrett.
Barrett called considering office space as an asset that a company doesn’t even own “silly,” and said that it could “potentially negatively affect companies’ ability to get credit, which is already difficult.”
A third area of change relates to generally accepted accounting principles (GAAP). The Private Company Council (PCC), part of the FSAB, is considering creating a different set of reporting rules for small companies, claiming that since small companies are simpler, the rules should be simpler. However, said Barrett, “I’m afraid the FSAB is becoming more like the IRS, in that the more they try to simplify things, the more complicated they get.”
Aaron Dawson, shareholder at Opsahl Dawson, a CPA firm with offices in Longview and Vancouver, identified several taxation issues that will affect a great number of business owners, especially those who own partnerships, S corporations, and LLCs. Dawson’s top concerns are “high tax rates and no decent way to depreciate equipment.”
From 2013 forward, said Dawson, the top income tax rate (applicable to incomes of $450,000 filed jointly or $400,000 filed singly) leaps from 35 percent to 39.6 percent. In addition, he said, this tax bracket is subject to a 3.8 percent surcharge tax (Medicare tax) on investment income – which includes interest, dividends, capital gains and rents.
However, perhaps more troubling than the tax rates is the sun-setting of accelerated depreciation. As Dawson explained, through 2013 companies can write off up to $500,000 spent on capital equipment and assets (IRS code section 179) and for brand new assets, “bonus depreciation” allows companies to write off 50 percent of asset value in the first year. For example, Dawson said one of his clients recently bought a new commercial printer, and was able to write off $2.5 million of the purchase.
But in 2014, the bonus depreciation disappears, and the section 179 write-off limit drops to $25,000.
“If I was a company and was going to lay out $500,000 for equipment, how am I going to find the cash to pay my tax bill?” queried Dawson. “This could slow down the economic recovery, with people slower to spend money.”
Dawson said there is speculation that the IRS is going to prevent the sun-setting of these depreciation rules, but nothing has been done yet.
“That’s the trouble with tax planning – uncertainty,” said Dawson.
J. Newton Rumble, a CPA with Vancouver accounting firm Peterson & Associates P.S., added a few other tax-related concerns that are relevant to business owners. These include the phase-out of itemized deductions, new rules on a safe harbor for home office business deductions, more stringent rules on charitable contribution record keeping, inconsistencies in IRS tax positions within regions of the US on identical issues, and “changes in tax law that can raise the marginal tax rate on some planning decisions to levels above the highest stated rates, on particular items.”
Rumble also said that increasing complexity in the tax law, combined with reduced face-to-face audits, have increased the cost of representation for taxpayers, caused more audits to be appealed and increased the time it takes to resolve audits.
Communication is key
With all these changes and proposed changes, all of which can affect a business’ bottom line, keeping an open channel of communication between accountant and business owner is paramount. The CPA can act as a sounding board for day-to-day decisions, and can serve as a resource when a client is seeking financing.
“We have gone through many changes in the past, and it’s part of the business,” said Drew Barrett, business development manager at Barrett & Co. “We want constant client communication back and forth – it’s essential to serving them.”