How Do I Know if a 529 Plan is Right for Me?

DeAnna Cassat, Tax Associate

It’s never too early to begin thinking about ways to save for your children’s college education. One of many plans available that you may not be aware of is a 529 plan. The 529 is an education savings plan operated by a state or educational institution designed to encourage savings for future college costs. Like all things, it has its advantages and disadvantages. This plan may be beneficial to you for the following reasons: 

• Regardless of age, anyone who plans to attend an eligible postsecondary education institution can be a beneficiary
• A state income tax deduction may be taken for the funding of the 529 plan
• A qualified distribution can be taken without federal income tax or penalty for qualified education expenditures
• Assets grow tax free 

The following are potential downsides to the plan: 

• A change to the investment option is only available one time per year
• These plans are subject stock market volatility
• May decrease your child’s eligibility in need-based financial aid 

While a 529 plan can be an advantageous way to save for college, make sure you know the potential risks before you create a fund. See the following article for more information:  http://www.latimes.com/business/la-fi-college-529-20111218,0,485132,full.story 

If you have questions or need assistance in determining if the 529 plan is right for you, please contact AMD or your tax advisor.

Sunsets on Horizon for Missouri Tax Credits

Jane Groeteka, Tax Associate

While there has been a lot of hype over the Missouri Tax Credit Reform during Governor Nixon’s most recent special session, many Missourians are left wondering how this will affect them. 

Missouri tax credits began in 1973 with the Senior Citizen Property Tax Credits.  These credits gave relief to senior citizens, disabled, and widowed individuals by reducing their state tax liability through credits for the property taxes they had paid.  Today, there are 61 Missouri state tax credit programs that have been enacted to decrease the unemployment rate, boost development across the state, and to build strong communities. 

With the current economy being stale, the state of Missouri along with many other states is looking to cut costs and reform budgets.  In doing so, Governor Nixon implemented the Missouri Tax Credit Review Commission in July 2010.  The review commission is made up of 27 business, community, and legislative leaders that will review the current tax credit programs to insure the state of Missouri is receiving the maximum return on its investment in the programs.

Upon review, the tax credit commission recommended the General Assembly impose sunset provisions on any remaining tax credit programs based on 2, 4, or 6 year sunsets. The proposed recommendation came out almost one year ago and there is still debating going on within the General Assembly.  However, whether sunsets mean programs will go away is an open question. The way credits have been grouped around sunsets means the beneficiaries will forge alliances to save all the credits expiring at the same time.

The social welfare credits program has already began forging an alliance to protect the credits which include help for food pantries, domestic violence shelters and others. In all, 15 credits, many with limits of about $2 million a year, would expire in 2015 under the bill. The benefit for the taxpayer contributing to one of these programs is receiving Missouri Tax Credits equal to 50 percent of the contribution.

In essence, I think it is safe to say that while sunsets are on the horizon, Missouri Tax Credits are here to stay.  There may be changes to ensure taxpayer dollars are being appropriated for the best return on investment, but the tax benefit from purchasing Missouri Tax Credits will still be available.  If you would like to take advantage of available credits while there is still time, contact AMD to see if purchasing tax credits makes sense for you.

Is Your Business Short on Cash in This Economy?

Kevin M. Bolin, CPA, Audit Senior

In a world where inventory prices are increasing and accounts receivable tend to drag on just a little too long, what is a business to do?  Look at your inventory. 

When I ask a business owner “What is the value of your inventory?”  I almost always hear the cost of the product.  When I then ask, “How many weeks of supply is that?”  I most often hear silence.  These are often the same businesses with cash flow problems. 

In order to effectively manage your inventory, you need to know what you expect to sell.  Then, based on your sales forecasts, you plan to have ample inventory on hand to cover the expected sales until the next shipment arrives, plus a safety stock to cover any unexpected increase in sales.  Buying inventory in excess of this creates a cash gap problem. 

The cash gap problem occurs because you pay for the inventory before you sell it.  Then the time the inventory is sitting in the warehouse, it is being financed on a line of credit.  Even if favorable pricing was obtained on a large order, the additional finance costs and possible write-offs of obsolete items tend to offset any savings on the purchase price.

So what can you do?

• Don’t buy excess inventory; forecast your needs appropriately
• Return excess inventory
• Sell slow moving items by running promotions
• Minimize the use of inventory on consignment with customers

For more information on this topic, please feel free to email me at kbolin@amdcpa.com.

Employer Disclosures for Multi-employer Pension Plans Approved by FASB

Rick Krieger, CPA/CFF, CFE, CIA, Audit Senior Manager

The Financial Accounting Standards Board (FASB) recently approved a revised accounting standard intended to provide more information about an employer’s financial obligations to multiemployer pension plans. The revised standard, which the FASB expects to finalize in September 2011, will require enhanced disclosures by employers participating in multiemployer pension plans.

As a result of comments received on the initial proposal issued in September 2010, the FASB deleted the requirement for employers to disclose their withdrawal liability to all plans in which they participate, or provide a “point-in-time” estimate of their obligations with respect to the underfunded status of individual plans.  Prior to the current action by the FASB, employers were required to disclose only their total contributions to all multiemployer plans in which they participate. 

The new disclosures will include the following:

• The amount of employer contributions made to each significant plan and to all plans in the aggregate.
• An indication of whether the employer’s contributions represent more than 5 percent of total contributions to the plan.
• An indication of which plans, if any, are subject to a funding improvement plan.
• The expiration dates of collective bargaining agreements and any minimum funding arrangements.
• The most recent certified funded status of the plan, as determined by the plan’s so-called “zone status,” which is required by the Pension Protection Act of 2006.  If the zone status is not available, an employer will be required to disclose whether the plans is:
  • Less than 65 percent funded
  • Between 65 percent and 80 percent funded
  • Greater than 80 percent funded

A description of the nature and effect of any changes affecting comparability for each period in which a statement of income is presented.

Additional narrative disclosures will be required, as well as certain disclosures for employers with individually material plans that do not have plan level information that is publicly available.

For public entities, the enhanced disclosures will be required in fiscal years ending after December 15, 2011.  For nonpublic entities, the enhanced disclosures will be required in fiscal years ending after December 15, 2012.

FASB Approves EITF-100H as Final Standard

Jon Waitukaitis, CPA, Audit Manager

The Financial Accounting Standards Board (“FASB”) has approved EITF-100H, Other Expenses (Topic 720):  Fees Paid to the Federal Government by Health Insurers as a final standard.  

When Will This Apply?

The changes to Other Expenses (Topic 720) are effective for calendar years beginning after December 31, 2013 (the fees become effective beginning in 2014). 

What Changes Will Be Required?

The amendments specify that the liability for the fees mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act (the “Acts”) should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable.

Why the Changes?

The FASB believed it was unclear how existing GAAP would be applied to the fee that is the subject of the amendment to Other Expenses (Topic 720).  As a result, the amendment is simply a clarification of the application of existing GAAP to a specific situation.

FASB Approves EITF090H2 as Final Standard

Jon Waitukaitis, CPA, Audit Manager

The Financial Accounting Standards Board (“FASB”) has approved EITF090H2, Health Care Entities (Topic 954):  Presentation and Disclosure of Net Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts, as a final standard.  

When Will These Apply?

Private companies won’t have to apply the changes to Health Care Entities (Topic 954) until 2013, although earlier adoption is permitted.

What Changes Will Be Required?

The amendments to Health Care Entities (Topic 954) would require a health care entity to change the presentation of its statement of operations by reclassifying the provision for bad debts from an operating expense to a reduction from revenue (net of contractual allowances and discounts).  Additionally, a health care entity would be required to provide enhanced disclosures about how it considers collectibility in determining the amount and timing of revenue and bad-debt expense.  The amendments also would require disclosures of revenue (net of contractual allowances and discounts) as well as a reconciliation of the activity in the allowance for doubtful accounts by major payor type.

Why the Changes?

The amendments change the presentation of the statement of operations and add new disclosures that are not required under current GAAP. FASB believes the change in the presentation of the statement of operations would be an improvement from current GAAP because it would result in the presentation of an amount of net revenue (after any provision for bad debts) that is closer to the amount that the health care entity ultimately expects to collect.  The provision for bad debts still would be required to be disclosed on a separate line as a reduction from revenue (net of contractual allowances and discounts) in the statement of operations.  The new disclosures would assist users of financial statements to better understand how a health care entity has considered collectibility and customer credit risk in applying its revenue recognition policies.

FASB/IASB to Re-expose Lease Accounting Proposal

Lesley Larsen, CPA, Audit Senior

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) announced they will re-expose the revised proposal on lease accounting.  The boards have made substantial changes to the original exposure draft released in August 2010 after receiving extensive feedback on the lease proposal.  The boards plan to finish their deliberations during the third quarter of this year and re-expose the revised proposal soon after.

Leslie F Seidman, Chairman of the FASB, said: “During our discussions of the extensive comments we received on the exposure draft, the boards have reaffirmed the major change to lease accounting, which is to report lease obligations and the related right-to-use on the balance sheet.  However, the boards decided to make many other changes to address the comments made by stakeholders. The boards decided that, while we still have other matters to discuss, stakeholders would appreciate the opportunity to comment on the revised package of conclusions.” 

Tentative decisions reached at the meetings on July 20 and 21 included changes in reporting by lessors.  The original exposure draft offered two types of reporting for lessors, the performance obligation approach and the derecognition approach.  The boards tentatively decided lessors should use one type of accounting approach, the “receivable and residual” approach.  It was also tentatively decided that leases of investment property measured at fair value and short-term leases (less than 12 months) would be excluded from the “receivable and residual” accounting approach.

The proposed accounting approach would allow lessors to recognize revenue at the beginning of the contract if it is reasonable that the lease will be profitable, otherwise revenue would be recognized over the lease term. 

Stay tuned to Gray Matter for updates on the lease project when the proposal is re-exposed later this year.

For more information on the status of the project, please read the following:       

FASB Press Release

FASB Technical Plan and Project Updates

Deficit Deal: What Should Investors Do?

Marty Brown, Investment Advisor, AMD Financial Services LLC

President Barack Obama and congressional leaders announced late Sunday that the framework of an historic deficit deal had been reached to raise the U.S. borrowing limit and avert a debt default. Is this good or bad news? It’s good news for those who did not want to see the U.S. government default on its debts. It’s bad news for those who did not want the U.S government to raise the debt ceiling (concerns still linger whether or not the U.S. will lose its triple-A credit rating.)

Personal opinions aside, this most recent crisis reaffirmed the following fundamental principles practiced by prudent investors:

1. Have a well thought out investment plan
   Work with an investment fiduciary to create and adhere to an investment plan that considers your ability, willingness and need to take risk. Events such as the debt ceiling crisis are built into well-reasoned investment plans. As Napoleon Bonaparte stated, “Most battles are won or lost (in the preparation stage) long before the first shot is fired.
2.  Focus on your long-term investment plan, not short-term events
   The impact of the debt ceiling crisis is unknown. History shows that, in the long run, such events are blips on the historic timeline. In 1976, investors obsessed over fear of inflation and a dysfunctional economy (sound familiar?) The Dow Jones Industrial Average traded between 800 and 1000 and many financial gurus declared the “death of equities.” Today, despite the events of 1976 and many other “crises” along the way, the Dow trades around 12,000.
3.  The media wants you to worry
   Always remember that the media’s job is not to provide sound investment advice. Their job is to make people tune in to watch their TV show or buy their magazine. They accomplish this by playing on individual’s emotions and instilling fear that you must take action or else. Its one thing to watch the news to stay informed and another to let it change your long term plans.

If you find yourself worrying about how this most recent crisis will affect your portfolio, you likely do not have a well thought out plan or you were overconfident about your ability to deal with bad news. If the former is the case, then you should develop a plan. If the latter is the case, you should revisit your plan. More specifically your ability, willingness and need to take risk because this likely won’t be the last crisis you (and your portfolio) will have to deal with.

FASB/IASB to Re-expose Revenue Recognition Proposal

Richard D. Krieger, CPA/CFF, CFE, CIA, Audit Senior Manager

On June 15, 2011, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) announced plans to re-expose their revised revenue recognition proposal during the third quarter.  The new standard was originally planned to be issued by the end of June 2011.  However, the boards had received nearly 1,000 comment letters to the initial exposure draft issued in June 2010 and have tentatively decided to significantly change certain provisions of the exposure draft, refine others and continue deliberating still other provisions.

The goal of the proposal is to create a single revenue recognition standard for both U.S. GAAP and International Financial Reporting Standards (IFRS) which can be applied consistently across various industries and transactions.  For more information on the status of this project, please read the following:

 FASB Project Status

AICPA Brief on the Revenue Recognition Accounting Project

Does your Organization have a Disaster Recovery Plan? Better yet, do you know what it is?

Jon K. Waitukaitis, CPA, Audit Manager 

Chances are your organization has a Disaster Recovery Plan. At some point, someone in your organization designed and developed a Plan.  The question is do you know what the Plan is?   Do you know how to implement it?  When was the last time you looked at it? 

Many companies that have bothered to go through the time and effort to develop a Plan end up with only a nice, big, thick binder that sits on the shelf collecting dust.  Once it’s been developed, little or no attention is paid to it.  But what happens when two to three years go by and a disaster strikes?  Would you feel confident, in that time of crisis, that your old dusty Plan is still applicable?  Considering the ever-changing dynamics of the electronic office (software upgrades, hardware upgrades, and new compliance requirements) the Plan you developed just a few years ago is probably woefully out of date. 

The solution is routine, and sometimes non-routine, testing of the Plan.  Testing the Plan through orchestrated drills is the only way to be sure the Plan will be a success.   

The Plan should be an ever-changing document that is reviewed, tested, and updated. It’s best to institute a formal maintenance structure for keeping the Plan up-to-date.  At the very least, a semi-annual review of all the procedures, documentation, and assumptions is appropriate.  An event-based approach to updating the Plan is a good method and ensures disaster planning is woven into all aspects of the organization.  For instance, when: 

• Personnel or structure changes are made, a review of the Plan is triggered
• The organization plans to add space or a new facility, a review of the Plan is triggered 
• A new system or technology is introduced, a review of the Plan is triggered 
• Compliance regulations are changed, a review of Plan is triggered 

Don’t let your once well prepared Plan sit on that shelf collecting dust.  The time commitment going forward to keep the Plan up to date should be minimal compared to the amount of time it took to initially develop and implement it.  Don’t let it be just one more useless binder.