Nothing Certain but Change: Accountants, Clients Brace for New Rates and Rules, but What Will They Be?

Sometimes accounting is less about numbers and more about letters – FASB, US GAAP, IASB, IFRS, SEC and, of course, IRS. And the entire alphabet seems to be conspiring to change the balance sheet and P&L statement of businesses small and large.

Accounting changes happen all the time. Twelve "pronouncements" by the Financial Accounting Standards Board took effect in 2011 alone. But local CPAs say 2012 is an especially volatile year thanks to the impending expiration of the Bush-era tax cuts, including a dramatic expansion in the number of estates that will be subject to the federal estate tax.

Without agreement from both houses of Congress and the president, a commodity in short supply these days, most Americans will see an increase in their federal tax rates come Jan. 1, some of them dramatic. (See commentary.)

Another part of the federal government, the Securities & Exchange Commission, is mulling whether publicly traded companies in the United States should abandon U.S. Generally Accepted Accounting Principles in favor of International Financial Reporting Standards. As dry as that sounds, it’s a little bit like deciding to give up classical for jazz, and small, privately held companies would eventually have to dance to the same tune. (See sidebar.)

Even without SEC action, the FASB and the International Accounting Standards Board are trying to align their rules where possible, and a change in lease accounting being considered by the FASB could change a company’s balance sheet so radically that it might violate its credit agreements without spending an additional dollar. (See sidebar.)

Tax Planning
"There are a lot of changes taking place," Joseph Dowd, managing partner of Dowd & Co. of Texarkana, said last week. "Clients are unsure about planning for those changes."

At the top of his clients’ list of questions, Dowd said, is the scheduled expiration of the tax cuts adopted by Congress in 2001 and 2003 at the urging of President George W. Bush.

For reasons both practical and political, the tax changes were enacted as temporary legislation that was originally set to expire at the end of 2010. They were extended for two years by Congress and President Barack Obama, who has repeatedly said he will not extend the tax breaks for households making more than $250,000 a year, although he may not be in a position to stop it after Jan. 20, 2013.

Congressional paralysis will also allow the exemption from the estate tax to drop from $5.12 million to $1 million, vastly expanding the number of estates that will be subject to the estate tax – and at a higher tax rate – come Jan. 1.

Dowd said he tells his clients to make the most of tax rates that probably won’t be lowered and may well go up.

"The rates may not last," he said. "They should take advantage of them when they can." Specifically, Dowd said, 2012 is a good time to sell large assets and to distribute dividends.

Ann Dorsey, president of Dorsey & Co. CPAs PLLC in Little Rock, said tax planning over the next six months could be the difference between saving $100,000 in year one and paying $50,000 in income taxes.

"You can choose, but you need to begin working on that choice right now," Dorsey said.
There are options to be considered – funding retirement plans, investing in the business, owning a home or making charitable contributions.

"Invest in you and your employees by selecting the best retirement fund for your business and funding that retirement plan as a key component of your tax planning strategy," Dorsey said.

"Let’s dispel the biggest myth of all: There isn’t enough cash.

"If you can pay the tax, then odds are you can fund the retirement plan instead.
Investing in your business is always a better use of cash flow than paying income taxes."

The bonus depreciation available in recent years is another attractive option, she said. The Section 179 deduction limit for 2012 is $139,000 with a $560,000 limit on purchases.

"Before you start thinking you can’t afford it, think again," Dorsey said. "You could spend $100,000 and get 100 percent of that amount as a tax deduction and create a non-income or loss tax position. You can’t afford not to."

– With reporting by Luke Jones and George Waldon