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Last December, the 4.2% social security tax rate that workers pay on wages was extended through February 29, 2012.

Now a Congressional conference is being held to find a way to extend the lower tax rate through the end of 2012. The sticking point is lack of agreement between Republicans and Democrats on how to pay for the extension, estimated to cost $100 billion.

House Democrats have expressed the hope that the conference will be completed by the Presidents’ Day recess scheduled for the week of February 20. The legislation would extend the current 4.2% payroll tax rate through December 31, extend unemployment insurance benefits, and prevent cuts in reimbursements to Medicare providers.

Several legislators want to include tax extenders in the payroll tax cut legislation. These “extenders” include such provisions as the research and development credit for businesses, the optional deduction for state and local sales taxes, and the $250 deduction for school supplies purchased by teachers. Though these tax breaks appear to be universally popular, finding a way to pay for them remains the big issue.

 As you do your 2012 tax planning, keep the uncertain legislative picture in mind.

Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

Individual Income Tax:

Tax Rates

• 10% Rate extended through 2012
• 15% No change
• 25%, 28%, 33% and 35% Rates extended through 2012
• For taxpayers in the 25% or higher tax brackets the capital gains and dividend rates of 15% is extended through 2012.

Deductions

• Personal Exemptions Phase-out repealed through 2012.
• Itemized Deduction Limitation repealed for 2010 through 2012.  Taxpayers are no longer subject to an itemized deduction limitation if AGI exceeds a certain level.
• Tax credit for qualified adoption expenses increased from $5,000 to $10,000 and also provides a $10,000 income exclusion for employer provided assistance programs. These benefits are extended through 2012 as refundable credits.
• Contributions to Coverdell Education Savings Accounts are increased from $500 to $2,000 and extended through 2012.
• Employees that receive Employer provided educational assistance may exclude from income $5,250 for undergraduate AND graduate education expenses through 2012.
• $250 Deduction for elementary and secondary school teachers extended through 2012.
• Qualified tuition and related expenses extended through 2012.
• State and Local Sales tax deduction extended through 2012.
• Taxpayers age 70 ½ may make tax free distributions from an IRA to a qualified charity up to $100,000 per taxpayer, per tax year. Transfers that occurred in January of 2011 may be treated as having been made in 2010.
• Self Employed Individuals can deduct SE Health Insurance Premiums paid to reduce their social security self employment tax in addition to their income tax liability.

Two-Year AMT Patch

Business Income Tax:

Depreciation:

• Beginning in 2010 or 2011 Business can expense up to $500,000 of the first $2,000,000 worth of qualified investment property placed into service under Code Section 179.
• Also in 2010 and 2011 up to $250,000 of qualified real property (qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property) can be expense under Code Section 179. 
• 50 % Bonus Depreciation on assets placed in service before September 8, 2010
• 100% Bonus Depreciation on assets placed in service after September 8, 2010 through December 31, 2011.
• 50% Bonus Depreciation on all assets placed in service after December 31, 2011 through December 31, 2012.

In the current financial crisis, economic worries are impacting businesses across the country. From customer cutbacks and lower demand for products and services to increased costs of business, many organizations are suffering from the downfall of the market. At the same time, individuals are also impacted as they grapple with layoffs, foreclosures and rising expenses.

Also, consider the latest statistics. According to the Association of Certified Fraud Examiners’ 2008 Report to the Nation, U.S. organizations lose 7% of their annual revenues to fraud. This is an increase of two percent from their 2006 reported figure. Furthermore, the median loss caused by the occupational frauds in the study was $175,000. This study was done before the current economic downturn, and therefore these numbers are expected to steadily increase.

What business owners do not realize is that as their employees’ financial pressures increase, so do the chances that their employees will steal from them. The reason for this has to do with what fraud examiners refer to as the “fraud triangle.” Donald Cressey, a researcher from Indiana University, did extensive research on the subject of embezzlement and the culprits whom he referred to as “trust violators.” Cressey’s research is still used as the classic model of occupational fraud. His conclusions have become known as the “fraud triangle”.

According to Cressey, employee theft or embezzlement begins when the person is faced with some type of pressure. This could be a financial predicament, such as threat of foreclosure, or others that require funding such as a medical issue, drug or alcohol use, gambling, shopping addictions and even extramarital affairs. When faced with this pressure, an otherwise trustworthy employee will take note of perceived opportunities within the company to embezzle money. Once this happens, the third component of the triangle – rationalization — takes place. The employee may convince himself or herself that he or she is only “borrowing” the money and will pay it back. Of course in most fraud cases, this doesn’t happen.

In today’s economic situation, management may not know that the company’s trusted bookkeeper is facing foreclosure or that the accounts receivable clerk’s husband lost his job last month and that they can’t make ends meet. And while management may be unaware of their vulnerability to embezzlement – the accounting staff are aware, and they will take advantage of the weaknesses if they can rationalize it and get away with it.

Fraud and embezzlement can occur in many ways. Aside from outright theft of cash, checks, inventory, tools and supplies, embezzlement can occur through creative methods such as paying expenses to shell companies maintained by the perpetrator, paying personal expenses with company funds, paying the same invoice twice and then accepting vendor kickbacks or pocketing the refund, paying non-existent employees and keeping the check, and offering unauthorized customer concessions or credits, just to name a few examples. In addition, managers may falsify reports or purposely not pay expenses in order to boost the perceived profitability of the business if they are compensated based on company performance.

There are many ways to prevent fraud from happening in your business. The following are some ways in which you can reduce your risk of employee theft. These tips will help in any business.

Identify where you are vulnerable

The key to preventing fraud is identifying the weaknesses in your business structure that lend themselves to this type of activity. By closing fraud opportunities within your business you can keep honest employees honest and at the same time, discourage dishonest ones from stealing. Take advantage of seminars on this topic and become educated about fraud. In addition, a qualified fraud examiner can conduct a study of your business operations and will be invaluable in determining where your weaknesses are.

Examine your business culture

Although management assumes this, it should be communicated that fraudulent activities will not be tolerated. Business owners should not create an atmosphere of permissiveness. Employees should be encouraged to report any infraction, and disciplinary action should be taken when improprieties do take place. Allowing infractions to go unpunished gives a message to all employees that the behavior is acceptable and they will not blow the whistle on future crimes.

Be careful who you hire

An important safeguard in any business is screening prospective employees. It is important to conduct background checks on all prospective employees. However this only gives limited assurance and is not an end to fraud prevention. While in some embezzlement cases it was discovered that the culprit had a history of such crimes, for many convicted fraudsters, the theft was their first offense. Still, the small investment before hiring can help to save much heartache down the road.

Segregation of duties

The most important deterrent to fraud and embezzlement is maintaining appropriate checks and balances referred to as segregation of duties. This means that one person should not be given too much control over cash and reporting functions.

In segregating duties, business owners must make sure that employees with recordkeeping duties do not also handle cash and invoicing. In weak companies, for example, one person is given the task of endorsing checks, filling out the deposit slips, taking the deposit to the bank and posting the receipts to the accounting system. The existence of one person performing all these functions makes the company susceptible to fraudulent activity by whoever handles these functions – no matter how trustworthy.  In this example, the performer of these functions could take incoming cash and checks, deposit them into an account that he or she opened and then manipulate the respective customers’ accounts to show that they had paid.

Watching the ship

While delegation is essential, do not leave complete responsibility of watching the ship to others. The business owner should be the first one to open the monthly bank statements. Preferably, the statements should be mailed directly to the owner’s home address. Look at the cancelled checks, and question those that are unfamiliar. Be known for your inquisitiveness. Additionally, review management reports and financial statements closely and look for inconsistencies as well as unusual or missing expenses. If this is difficult, it should be considered necessary to retain an outside professional to periodically review these reports.

By watching your business closely and putting safeguards in place, you will go a long way in saving your hard-earned revenue and your bottom line.

David Landman is a CPA and Certified Fraud Examiner for Gorfine, Schiller & Gardyn, P.A. in Owings Mills, Maryland. As senior manager, he specializes in assisting attorneys in litigation and business owners in fraud prevention . He also gives fraud presentations to all types of businesses. He may be reached at 410-581-6823 or [email protected].

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Local fire departments often deliberately burn existing structures as a training exercise. New fire fighters can practice their skills and techniques, knowing in advance that the structure is uninhabited. Often individuals will donate an old property, possibly even a former residence, to the local fire department. Obviously, where possible, taxpayers would like to take a charitable contribution deduction for their donation.

The first and most important point to note is that there is a significant difference between donating the house itself to the fire department and giving the fire department the right to use the house for training purposes. In the latter case, Sec. 170(f)(3)(A) specifically states that “a contribution by a taxpayer of the right to use property shall be treated as a contribution of less than the taxpayer’s entire interest in such property”. As a result, no charitable contribution is allowed. (See also Regs. Sec. 1.170A-7(a)(1).)

To get a charitable contribution deduction for the fair market value of the property, the taxpayer must contribute the house itself to the fire department. (This item does not discuss the substantiation and documentation rules required by Sec. 170(f)(11).) In most situations taxpayers want to contribute only the property and not the underlying land. They are also concerned about deeding the property to the fire department and the related costs of doing so.

The regulations and IRS Pub. 526, Charitable Contributions, contain no requirement for an actual transfer of a deed. In fact, a Tax Court decision supports this position: Scharf, T.C. Memo, 1973-265, concerned tax years 1968 and 1969, and although it predates Sec. 170(f)(3) (which was added to the Code by the Tax Reform Act of 1969, P.L. 91-72, effective for contributions after July 31, 1969), in the right circumstances it is still good law.

The case dealt with a “building…given by the [taxpayer] to the fire department partly for the purpose of having it burned down. The transfer was not evidenced by any deed or other formal conveyance.” The underlying land was not contributed.

The Tax Court agreed with the IRS that after the house was contributed and burned down, the taxpayer ended up with a more valuable tract of clear land than he had before the donation. The court nevertheless concluded that the benefit the taxpayer received was far less than the benefit the fire department received. As a result, the taxpayer was allowed a charitable contribution deduction equal to the house’s fair market value.

Conclusion:

Taxpayers can obtain a charitable contribution deduction for the fair market value of property (i.e., land improvements) donated to a fire department to be burned down. The deduction is allowed even when there is no formal deed recording the transfer and even when the underlying land is not transferred. The taxpayer needs to properly structure the transaction so that the property, and not just the right to use the property, is being donated.

From Bernard Leibtag, CPA, MBA

Gorfine, Schiller & Gardyn, P.A.

Owings Mills, MD

Stories about fraud and embezzlement are common in the media, but most business owners believe it will never happen to them. They think they hire good people who would never, ever be dishonest or steal, especially from their employer.

However, consider these statistics from the Association of Certified Fraud Examiners 2006 Report to the Nation:

• A typical U.S. organization loses 5 percent of its annual revenue to fraud.
• A disproportionate percentage of fraud reported between 2004 and 2006 was committed against small businesses with fewer than 100 employees.
• The median loss experienced by small businesses in the study was $190,000.
• Only 8 percent of the fraud perpetrators had a previous conviction.

The last item is especially troubling because it indicates that while criminal background checks will weed out some problems, most frauds are committed by employees with no criminal record. Also, if your business is a typical organization, you should consider what a loss of 5 percent of your annual revenue can do to your bottom line.

Are You Vulnerable?

Three factors must be present in order for fraud to occur: pressures, opportunity and rationalization. Pressures are outside factors that convince fraudsters of the need to steal. These can be financial or medical issues, addictions (like gambling or substance abuse) or even extramarital affairs.

If pressure is present, the fraudster needs to have an opportunity to commit fraud. This can happen when there are weak internal controls and little or no management oversight. Once these two factors are present, all the fraudster needs to do is rationalize the behavior. Some typical rationalizations include “the company treats me unfairly”, “I deserve a raise”, “I am only borrowing the money”, “It’s for a good cause”, or “It’s only temporary”.

As a business owner, you obviously have no control over the outside pressures facing your employees that give rise to their perceived need to steal from you, or their ability to rationalize theft. What you can control, however, are the opportunities your employees have to commit fraud.

How It Happens

Fraud schemes can continue for years before they are detected, and they tend to get bigger as the fraudster gets greedy or pressures increase. There are two main ways employers give fraudsters opportunities to steal:

1. Lack of management oversight While some delegation is essential, too many business owners and managers leave the complete responsibility of managing the finances to others. If the boss is not watching, the trusted bookkeeper, who may be experiencing serious financial pressures, may be tempted to take advantage of this opportunity to embezzle. The next thing you know, the business owner discovers that hard-earned money has disappeared out the back door.To avoid presenting this opportunity for fraud, owners should pay careful attention to their business finances. Just taking the time to look at bank statements and financial reports will go a long way in helping close this opportunity loop.
2. No segregation of duties The biggest opportunity for fraud occurs when there is little or no segregation of financial duties. This means that the accounting functions (i.e., data input and export) should be separated from the administrative functions, like invoicing and cash handling. Or in other words, there should be appropriate financial checks and balances in your business.Too often, companies give one person multiple and conflicting tasks, which enables this person to steal and then cover it up. For example, one person might be given the tasks of endorsing checks, filling out deposit slips, taking deposits to the bank and posting customer payments to their accounts. In one, a trusted bookkeeper of many years and close friend of the owner stole incoming checks and then manipulated customers’ accounts to make it appear that they had paid their invoices or were issued credits.In another, a trusted bookkeeper was given the task of writing checks and posting payments to the accounting system. She wrote the checks, had her boss sign them and then erased the payee name and inserted her own. Then she posted the payments to the accounting system under the original payee name, and when the bank statement arrived at the business (to her attention), she promptly disposed of the canceled checks bearing her name. The opportunity was there and she took advantage of it.

   These two bookkeepers could never have pulled off their heists if different people were in charge of posting payments and reconciling the bank accounts.

Implement Safeguards Now

It’s important to note that most small businesses have some segregation conflicts and don’t even realize it. Even if your CPA does a full-blown audit, these weaknesses will not always be detected. Therefore, it may be worthwhile to have a professional fraud expert conduct an in-depth study of your company to determine how vulnerable you might be to fraud. This professional can show you how to implement safeguards to help protect your business.

In the end, no one can guarantee that fraud won’t happen. But by watching the financial side of your business closely and putting some simple safeguards in place, you’ll go a long way toward discouraging fraud and protecting your hard-earned revenue.

David A. Landman, CPA, CFE

Senior Manager

Gorfine, Schiller & Gardyn, P.A.

As commercial developers look for sources of financing, studies seem to indicate that less than 50% of business owners are aware of the significant tax savings that can be utilized from their building or remolding projects. If you are a developer looking to build or improve, or you have already built or improved, read on because the tax laws can help you finance your dream project or recoup some of its previous costs.

For commercial developers, the tax laws that affect commercial building center around the depreciation rules.. As a quick background, as most business people know, the cost of property, namely, buildings, improvements, furniture, equipment and automobiles, are not permitted by law, to be deducted in its entirety in the year in which the expenses occurred. Instead, the expense must be depreciated over IRS pre-determined years based on the type of asset. Buildings and improvements are required to be depreciated over 39 years if it is a nonresidential property, and 27½ years if it is residential (i.e. apartment buildings.) Other depreciable assets are expensed over years ranging from five to fifteen, but the majority are depreciated over five or seven years.

Starting in 2003, for most tangible business property besides buildings, improvements and automobiles, the new law allows for a $100,000 special write-off known in tax jargon as “Section 179”, if the asset is placed in the service during the year, as long as it does not create a net loss for the company. In addition, aside from this special write-off, the 2003 tax act allows businesses to take a 50% bonus write-off of the cost of commercial leasehold improvements (restrictions apply) or whenever the asset is required to be depreciated 20 years or less. With the latter, this is allowed by itself or after the $100,000 special write-off. Therefore, for example, if one were to purchase a $150,000 machine, one would be allowed to write off up to $130,000 of this, or 87% of the cost. If the company would be in the 35% tax bracket, it just saved itself $45,500 in taxes which could be used to finance the cost of the machine.

You are probably wondering how this makes commercial construction easier for builders and their customers? The answer to this question lies in a concept that has become more popular recently, which unfortunately many CPAs and tax practitioners are not aware of. This involves a term called “cost segregation.” Up until a few years ago, when it came to depreciating buildings, the IRS considered all fixtures (i.e. wiring, plumbing) as part of the building itself requiring the longer depreciation period of 39 or 27½ years. In 1997 there was a tax case involving Hospital Corporation of America, in which the U.S. Tax Court decided that any components of a building that relate to tangible property, can be considered tangible property instead of part of the building. The outcome of this is that these components would be eligible for faster depreciation over a shorter period of seven to fifteen years which translates to tax savings. Typically, the more specialized the building, the more components there would be that would relate to tangible property. Therefore, specialized wiring for telephones, plumbing used for equipment, or air conditioning used for computers may be classified as tangible property.

While the IRS in the above-mentioned court case had acquiesced to the tax court’s decision in 1997, it was not always beneficial to recoup previous building costs since the implementation of cost segregation had some complications. Recently, however, implementation has become much more favorable, and with the new, generous tax breaks, cost segregation is becoming more popular.

But, be warned. The IRS is still closely scrutinizing these cost segregations. Consequently, the IRS contends that “cost segregations may not be based on taxpayers’ estimates or assumptions that have no supporting records.” Basically, the IRS is looking for significant basis in which to deem it a qualifying segregation. Typically, this means statements from builders, engineers or architects.

And this is where the builder could have an edge on the competition. As I mentioned, studies indicate that less than 50% of business are aware such a concept exists. A builder, when bidding on jobs, can have a marketing edge on its competition by offering itemized bills that break down the various components of the building into tangible versus building properties. This would be of no cost to the builder, yet for the customer, it gives them the added advantage of tax savings by writing off the components faster. Furthermore, because of the tax savings, customers would be able to help finance part of the cost of the project, thereby reducing some of the need for outside financing. When marketed properly, this benefit could help get a bid accepted. Builders can get guidance from knowledgeable tax professionals.

For those who are planning to construct a building or to do renovation work, it would be to your benefit to request that the construction company provide a breakdown of such costs so that you may take advantage of the tax savings and help finance the project. Illustration one shows the difference in savings between doing cost segregation and not doing it.

For those companies who have already constructed a building or have done renovation work, do not be dismayed. While the builder may not have offered to break down these costs, and even if your tax consultant did not suggest it, it is not tot late. There are some CPA firms, which, together with trained engineers and builders do cost segregation studies in which they examine the structure, and review the blueprints and plans of the building or improvements. Based on this analysis, they will make a professional determination as to the portion, if any, that relates to tangible property. Many companies have recouped large amounts of money due to these studies, and the savings were far more than the cost of the studies themselves. When done properly, cost segregations could boost your bottom line whether you are the builder or the customer. Now you can take advantage of the law.

David A. Landman, CPA, CFE

Senior Manager

Gorfine, Schiller & Gardyn, P.A.