11/01/2012

 

Currency Translation Adjustments.

http://www.journalofaccountancy.com/Issues/2008/Jul/CurrencyTranslationAdjustments.htmCurrency Translation Adjustments

 

By Susan M. Sorensen and Donald L. Kyle
july 2008


EXECUTIVE SUMMARY
Accounting for currency translation risks can be very complex. This article addresses only the basics and provides some tools to help the reader understand the issues and find resources.
Globalization has changed the old accounting rule that debits equal credits. Net income became just one part of comprehensive income, and the equity part of the accounting equation became: Equity = Stock + Other Comprehensive Income + Retained Earnings. Other comprehensive income contains items that do not flow through the income statement. The currency translation adjustment in other comprehensive income is taken into income when a disposition occurs.
Accounting risk may be hedged. One way that companies may hedge their net investment in a subsidiary is to take out a loan denominated in the foreign currency. Some firms experience natural hedging because of the distribution of their foreign currency denominated assets and liabilities. It is possible for parent companies to hedge with intercompany debt as long as the debt qualifies under the hedging rules. Others choose to enter into instruments such as foreign exchange forward contracts, foreign exchange option contracts and foreign exchange swaps. Unfortunately, FX rate changes cannot always be anticipated and hedging has risks and costs.
Susan M. Sorensen, CPA, Ph.D., has 30 years of public accounting experience and is an assistant professor of accounting, and Donald L. Kyle , CPA, Ph.D., is a professor of accounting, both at the University of Houston–Clear Lake. Their e-mail addresses are sorensen@uhcl.edu and kyle@uhcl.edu, respectively.
When corporate earnings growth was in the double digits in 2006, favorable foreign currency translation was only a small part of the earnings story. But now, in a season of lower earnings coupled with volatility in currency exchange rates, currency translation gains represent a far greater portion of the total.
Using the concept that a picture is worth a thousand words—and a worksheet even more—this article uses Excel and real-world examples to explain why multinational companies are increasingly experiencing and managing what is often referred to as accounting risk caused by foreign currency exchange rate (FX) fluctuations. The article is designed to help the reader create the worksheet shown in Exhibit 3, and then use it to see firsthand how FX fluctuations affect both the balance sheet and income statement, and how currency translation adjustments (CTAs) may be hedged.
Accounting for translation risks can be very complex. This article addresses only the basics and provides some tools to help the reader understand the issues and find additional resources.
THE BALANCE SHEET PLUG
Today “managing the balance sheet” goes far beyond watching the current asset–to–liability ratio. FX rate fluctuations may have a significant effect on assets, liabilities and equity beyond the effects that flow through the income statement. Globalization has changed the old accounting rule that debits equal credits (no plugging is permitted). Years ago, net income became just one part of comprehensive income (CI), and the equity part of the accounting equation became: Equity = Stock + Other Comprehensive Income + Retained Earnings. Other comprehensive income (OCI) contains items that do not flow through the income statement. The currency translation adjustment in other comprehensive income is taken into income when a disposition occurs.
The financial statements of many companies now contain this balance sheet plug. As shown in Exhibit 1, eBay’s currency translation adjustments (CTA) accounted for 34% of its comprehensive income booked to equity for 2006. General Electric’s CTA was a negative $4.3 billion in 2005 and a positive $3.6 billion in 2006. The CTA detail may appear as a separate line item in the equity section of the balance sheet, in the statement of shareholders’ equity or in the statement of comprehensive income.
Keeping accounting records in multiple currencies has made it more difficult to understand and interpret the financial statements. For example, an increase in property, plant and equipment (PP&E) may mean that the company invested in more PP&E or it may mean that the company has a foreign subsidiary whose functional currency strengthened against the reporting currency. This may not seem like a significant issue, but goodwill arising from the acquisition of a foreign subsidiary may be a multibillion-dollar asset that will be translated at the end-of-period FX rate.

Currency Translation Exhibit 1
TRANSACTION RISK VS. TRANSLATION RISK
Because the terms for these two types of risk are similar, it is important to understand the difference and have a general idea of the effect that FX fluctuations have on these risks. In very simplified terms, these risks can be thought of as follows:
Currency transaction risk. Currency transaction risk occurs because the company has transactions denominated in a foreign currency and these transactions must be restated into U.S. dollar equivalents before they can be recorded. Gains or losses are recognized when a payment is made or at any intervening balance sheet date.
Currency translation risk. Currency translation risk occurs because the company has net assets, including equity investments, and liabilities “denominated” in a foreign currency.
Exhibit 2 provides a quick guide to the transaction and translation gain or loss effects of the U.S. dollar strengthening or weakening. GE explains its fluctuating pattern of currency translation adjustments in Note 23 of its 2006 financial statements by addressing the relative strength of the U.S. dollar against the euro, the pound sterling and the Japanese yen.
Translation risk is often referred to as “accounting risk.” This risk occurs because each “business unit” is required under FASB Statement no. 52, Foreign Currency Translation, to keep its accounting records in its functional currency and that currency may be different from the reporting currency. A business unit may be a subsidiary, but the definition does not require that a business unit be a separate legal entity. The definition includes branches and equity investments.
Functional currency is defined in Statement no. 52 as the currency of the primary economic environment in which the entity operates, which is normally the currency in which an entity primarily generates and expends cash. It is commonly the local currency of the country in which the foreign entity operates. It may, however, be the parent’s currency if the foreign operation is an integral component of the parent’s operations, or it may be another currency.
Currency Translation Exhibit2
BASIC CONSOLIDATION WORKSHEET
CPAs can use Excel to create a basic consolidation worksheet like the one in Exhibit 3 that demonstrates the source of currency translation adjustments and the effects of hedging (download these worksheets here). As this worksheet is created, the equations will produce the amounts shown in Exhibit 4. The worksheet includes lines used later, as shown in Exhibit 5, to demonstrate how a parent company can hedge translation risk by taking out a loan denominated in the functional currency of the subsidiary. The cells are color coded. Titles and general information are in yellow. Hypothetical amounts for the two trial balances and the currency exchange rates are shown in green. Equations are shown in blue.
This worksheet is based on a simple situation where a U.S. parent company acquired a foreign subsidiary for book value at the beginning of the year and used the cost method to record its investment. Advanced and international accounting textbooks contain more detailed examples. The subsidiary’s trial balance is to the left of the parent to highlight the fact that the subsidiary’s trial balance must be translated before the companies can be consolidated. The number of accounts has been kept to a minimum. Additional accounts may be added, but any change to the lines or columns will require that the equations be altered accordingly. Although the worksheets use the current rate method, they can be adapted to another translation method.
There are two steps to getting a foreign subsidiary’s trial balance ready to consolidate.
Step 1. Convert the accounting records from foreign GAAP to U.S. GAAP.
Step 2  Translate the trial balance into U.S. dollars.
Convergence with IFRS will reduce the need for Step 1. The worksheets assume Step 1 has already been completed. The current rate method can be summarized as follows:
Net assets (assets minus liabilities) are at the exchange rates in effect on the balance sheet date.
Income statement items are at the weighted average rate in effect for the year except for material items that must be translated at the transaction date.
Stock accounts are at the historical rate.
Retained earnings and other equity items are at historical rates accumulated over time. This includes the payment of dividends.
The CTA in OCI is a plug figure to make the translated debits equal credits.
LOCATING EXCHANGE RATES
This worksheet is designed so that the reader can simulate “what if” scenarios with amounts and FX rates. FX quotes are available as both direct and indirect rates. The direct rate is the cost in U.S. dollars to buy one unit of the foreign currency. The indirect rate is the number of units of the foreign currency that can be purchased for one U.S. dollar. Current and historical FX rate information s available from Web sites such as OANDA at www.oanda.com, the Federal Reserve at www.federalreserve.gov/releases/H10/hist , or the Federal Reserve Bank of St. Louis at www.stls.frb.org/fred.
The worksheets use FX rates roughly based upon the Japanese yen-U.S. dollar relationship. The relationship between the current and historical exchange rates in Exhibits 3 and 4 indicates that the yen has strengthened against the dollar. Exhibit 4 shows a gain (credit) of $63,550 in the OCICTA account because net assets are being translated at a rate higher than the rates being used for the common stock, beginning retained earnings, and the net income from operations. The item “net income from operations” is used to draw the reader’s attention to the fact that the weighted average rate cannot be used in all situations.
If the exchange rates had not changed during the year, the net assets would have translated to only $550,000 instead of $618,750—an increase of $68,750. The net income of the foreign subsidiary would have been only $57,200 (6,500,000 * 0.0088). Reported translated net income was $5,200 higher than it would have been if FX rates had stayed at 0.0088 versus the weighted average of 0.0096. The change in the FX rates increased the subsidiary’s net income by 9%.
The CTA of $63,550 in this simplified example can be broken down into two pieces:
Net assets at BOY *(FX at EOY – FX at BOY) = 56,000,000FC * (0.0099 – 0.0088) = $61,600
Net income * (FX at EOY – FX at w/AVG) = 6,500,000FC *(0.0099 – 0.0096) = $1,950
The specific effects of translation are often addressed in the Management section of the Annual Report or in the notes to the financial statements.
CURRENCY TRANSLATION HEDGING
Accounting risks may be hedged. One way that companies may hedge their net investment in a subsidiary is to take out a loan denominated in the foreign currency. If companies choose to hedge this type of risk, the change in the value of the hedge is reported along with the CTA in OCI. Exhibit 5 demonstrates the situation where the parent company took out a foreign currency denominated loan at the date of acquisition in an amount equal to its original investment in the subsidiary. The loan amount is converted into U.S. dollars at the date of the transaction, and it is then adjusted under FASB Statement no. 133, Accounting for Derivative Instruments and Hedging Activities, on the parent’s books at the ending balance sheet rate.
Since the U.S. dollar has strengthened, the amount of U.S. dollars required to pay off the debt has decreased by $61,600. This decrease does not offset all of the CTA since there is an effect on CTA since net income is translated at the weighted average exchange rate.
Hedging is a complex topic, and only one basic way to hedge is demonstrated. Some firms experience natural hedging because of the distribution of their foreign currency denominated assets and liabilities. It is possible for parent companies to hedge with intercompany debt as long as the debt qualifies under the hedging rules. Others choose to enter into instruments such as the following:

Foreign exchange forward contracts
Foreign exchange option contracts
Foreign exchange swaps
Unfortunately, FX rate changes cannot always be anticipated and hedging has risks and costs. One of the risks can be observed by typing in 56,000,000 in the loan payable cell (H19) in Exhibit 4 and changing the Date of Loan FX rate (B23) to 0.0088 to match the historical FX rate at the date of the loan. Since the U.S. dollar weakened, the company’s CTA gain of $63,550 is reduced by $61,600, and the company must use more U.S. dollars to repay the foreign currency denominated loan. This can be contrasted with the Exhibit 5 example, where the company benefited from the reduced cost in U.S. dollars to repay the loan as well as recognizing the hedge in OCI that helped offset the CTA loss. 
AICPA RESOURCES
JofA article
“Found in Translation,” Feb 07, page 38
Publications
Foreign Currency Accounting and Financial Statement Presentation for Investment Companies—SOP 93-4 [Download] (#014874PDF)
Corporate Cash Management Handbook (#TRCCMGMTP0100D)
For more information or to place an order, visit www.cpa2biz.com or call the Institute at 888-777-7077.
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9/12/2011

U.S. Tax Form 1120-F or 1120

Source Link: http://www.rpifs.com/AICPA/form1120f.htm

Who Must Use This Form?
This form is to be used by a foreign corporation that has income that is "effectively connected" with a U.S. trade or business. Generally, that means any foreign corporation that has an employee, office, warehouse or production facility in the U.S.. 
What Information Is Required?
The information required is substantially similar to that required on a domestic corporation income tax return (Form 1120), except that allocations may be required of U.S. source and foreign source income and any related expenses or taxes. 
When Is It Due?
For a foreign corporation with an office or place of business in the U.S., the filing date is the 15th of March. A six month automatic extension of time to file the return (but not to pay any tax due) may be requested on Form 7004. For a foreign corporation that does not have an office or fixed place of business in the U.S., the form must be filed by 15th of June, but a six month extension of time to file may be requested with Form 7004. 
Where Should It Be Filed?
File with the Internal Revenue Service Center, Philadelphia, PA 19255
How Long Does It Take To Prepare?
The IRS instructions state that the average time to prepare this form is 77.5 hours. That doesn't include the time required to learn about the law or to accumulate the required records. In most respects, it's the same as the preparation of a domestic corporation income tax return on Form 1120, except that allocations may be required between U.S. source income and expenses and foreign source. 
Why Comply ? (Penalties)
The penalties are the same as for a failure to file a U.S. corporation tax return.
Comments
A foreign corporation that does not have an office or place of business in the U.S. but which does have some U.S. source income should seek assistance from a U.S. tax preparer who is familiar with the rules for this form. 
The form is not required if the corporation did not engage in any trade or business within the US and if all of its US source income was subject to withholding at the source. 
It does not matter if the foreign corporation is owned by non US persons or by US persons or some combination. If the corporation is domiciled in a country other than the US, it will be a foreign corporation. It may be possible for a foreign person to own a corporation that is domiciled in the US -- in which case the foreign owner would be required to file a Form 5472 .
If a foreign corporation is controlled by U.S. shareholders, those shareholders may be required to file a Form 5471 .
For a copy of the Form and Instructions see http://www.irs.gov/formspubs/index.html
 
Index to Tax Forms
 

Sponsored by Offshore Press, Inc . Copyright, 2007, All rights reserved. Offshore Press, Inc., Box 8194, Prairie Village, KS 66208. (913) 362-9667. Email to Offshore Press .  Vernon K. Jacobs, Webauthor . 
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3/09/2011

Restricted Stock Units (RSU) Sales and Tax Reporting

 Article Source: http://thefinancebuff.com/restricted-stock-units-rsu-sales-and.html

By TFB

RSU stands for Restricted Stock Units. It’s the new form of stock-based compensation that has gained popularity after the employers are required to expense employee stock options. The biggest difference between RSUs and employee stock options is that RSUs are taxed at the time of vesting while stock options are usually taxed at the time of option exercise. The employer is required to withhold taxes as soon as the RSUs become vested.
In a previous post, Restricted Stock Units (RSU) Tax Withholding Choices, I wrote about what I chose among the three tax withholding choices — same day sale, sell to cover, and cash transfer — and why. This time I’m writing about how to account for taxes on the tax return, especially if you use tax software like TurboTax or H&R Block At Home.
I’m going to use this simple example:
Suppose you had 100 RSUs vested on October 31. The closing price of the stock on that day is $50, and the tax withholding rate is 40%.
Regardless of which choice you made for tax withholding — some employers don’t give you a choice  — your employer will include on your W-2 as wages the total value of the vested RSUs. In our example, it’s $50 * 100 = $5,000. They will also withhold the same amount of taxes regardless of your choice. In this example it’s $5,000 * 40% = $2,000. They will also include the taxes withheld on your W-2. How you account for taxes on your tax return for the rest will depend on your tax withholding choice.
1. Net Issuance. In net issuance, you don’t have a choice about tax withholding. The employer will deduct a number of shares from your vested shares and give you the rest. You do not receive a 1099-B from a broker for the shares you didn’t receive. In our example, although your employer says you have 100 shares vested, you actually only receive 60 shares.
You don’t have to report anything for the vesting event. Use the numbers on your W-2 as-is.
Make a note of the closing price on the vesting date. You have to remember the date and this number until you sell the remaining shares. In our example, that’s $50 per share. If you sell the 60 shares for more than $50 per  share, you will have a capital gain. If you sell them for less, you will have a capital loss. You report the capital gain or loss in the year you sell the remaining shares.
2. Same Day Sale. If you make this choice, you sell everything. Let’s say on the day after the vesting date the shares are sold for a total of $4,989. The employer withholds $2,000. You are left with $2,989. At tax time, you will receive a 1099-B from your broker listing the stock sale proceed of $4,989. You enter in TurboTax or H&R Block At Home, or on Schedule D of Form 1040:
Description: 100 shares XYZ, Inc.
Net Proceeds: 4,989
Date of Sale: 11/01/20xx
Cost Basis: 5,000
Date Acquired: 10/31/20xx
Your cost basis is the amount your employer included on your W-2, which is the closing price on the vesting date times the number of shares vested. In this example, you will show a short-term loss of $11 on your tax return because of the brokerage commission and the SEC fee. The income and the associated tax withholdings are already included on your W-2. Use those numbers as-is.
3. Sell to Cover. [Update on April 9, 2008: I wrote a follow-up post RSU Sell To Cover Deconstructed to clarify this option. Jump ahead to that post if you'd like.] If you make this choice, or if you don’t have a choice, your employer sells just enough shares to cover the tax withholding. The key difference between Sell to Cover and Net Issuance is that the employer uses a broker in Sell to Cover but doesn’t use a broker in Net Issuance. Suppose 41 shares are sold for $2,030. The employer takes away $2,000 for tax withholding. You are left with $30 in cash and the remaining 59 shares. At tax time, you will receive a 1099-B from your broker listing the stock sale proceed of $2,030. You enter in TurboTax, H&R Block At Home, or on Schedule D of Form 1040:
Description: 41 shares XYZ, Inc.
Net Proceeds: 2,030
Date of Sale: 11/01/20xx
Cost Basis: 2,050
Date Acquired: 10/31/20xx
Once again, your cost basis for the shares you sold is the amount your employer included on your W-2 for those shares, which is the closing price on the vesting date times the number of shares you sold for tax withholding ($50 * 41 = $2,050). After the sale, you show a short-term loss of $2,050 – $2,030 = $20 because of the brokerage commission and the SEC fee. Again, the income and the associated tax withholdings are already included on your W-2; you just use those numbers as-is.
For the remaining 59 shares, you keep a cost basis of $50 per share ($50 * 59 = $2,950). You have to remember the date and this number until you sell the remaining shares. Whenever you sell them, you enter in TurboTax, H&R Block At Home, or on Schedule D of Form 1040:
Description: 59 shares XYZ, Inc.
Net Proceeds: whatever you sell them for, copy from 1099-B
Date of Sale: your date of sale
Cost Basis: 2,950
Date Acquired: 10/31/20xx
You will show a short-term or long-term gain or loss for these remaining shares depending on your date of sale and the sale price.
4. Cash Transfer. If you make this choice, you give your employer cash for the tax withholding. They don’t sell any of your shares. You can sell the shares either immediately or keep them for however long you like. The tax accounting is the same as if you bought the shares at the closing price on the vesting date. Whenever you sell them, you enter in TurboTax, H&R Block At Home, or on Schedule D of Form 1040:
Description: 100 shares XYZ, Inc.
Net Proceeds: whatever you sell them for, copy from 1099-B
Date of Sale: your date of sale
Cost Basis: 5,000
Date Acquired: 10/31/20xx
You will show a short-term or long-term gain or loss for these shares depending on your date of sale and the sale price. The income from RSU vesting and the associated tax withholdings are already included on your W-2, and you just use those numbers as-is.
That’s all. Hope this is helpful to someone looking for info on the tax treatment and implications of RSU sales.
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12/27/2010

Income Tax Changes 2010

Source: http://www.money-zine.com/Financial-Planning/Tax-Shelter/Income-Tax-Changes-2010/

What better way to start the New Year then with a review of the income tax changes for 2010?  Due to the economic recession, there were not a lot of changes to the tax provisions in 2010.  That being said, we will outline changes to Social Security, standard deductions, exemptions, mileage rate deductions, earned income credits, Hope and Lifetime Learning tax credits, as well as changes to retirement savings accounts such as 401k plans, IRAs, and Roth plans.

Federal Income Tax Filing Deadline

The tax filing deadline for the tax year 2009 is April 15, 2010 - which falls on a Thursday.  In the remainder of this publication, we're going to be discussing the changes that became effective in the tax year 2010, which will become part of your income tax filing in 2011.

Social Security and Medicare

For 2010, the Medicare tax will remain at 1.45% while Social Security remains at 6.20%.  The wage limit, or Social Security maximum, remains at $106,800 - the same value as was in place during 2009.  The Cost of Living Adjustment (COLA) was 0.0% - a direct reflection of the slow growth we're experiencing in the U.S. economy.

Standard Deductions in 2010

According to the IRS, around two out of every three taxpayers claim the standard deduction on their income tax returns.  In 2010, there was only one change to the standard deductions - the head of household standard deduction went up by $50.  The deduction for all other taxpayers remained the same.  The standard deductions that apply in 2010 include:
  • Single - $5,700
  • Married filing separately - $5,700
  • Head of household - $8,400
  • Married taxpayers filing jointly / qualifying widow(er)s  - $11,400

Exemption Values

The amount you can deduct for each exemption you claim on your federal income taxes in 2010 did not increase from 2009.  The 2010 value of $3,650 is the same value of an exemption in 2009.  Here again, we saw no increase in 2010 and only a $250 increase over the last three years.

Mileage Deduction Rates

Studies funded by the IRS demonstrate that it's less expensive to drive a car in 2010.  And that means the standard mileage deduction rates are decreasing.  The following table outlines the mileage deduction rates for the tax year 2010:

Mileage Deduction Rates 2010

Category Rate
Business Miles 50.0 cents per mile
Charitable Services 14.0 cents per mile
Medical Travel 16.5 cents per mile

2010 Increase to Earned Income Credit

The earned income credit applies to working taxpayers that have earned income that falls below certain thresholds.  The qualification threshold depends on the number of persons in each family.  The thresholds in 2010 to qualify for this credit include:
  • No Children - earnings must be less than $13,460 or $18,470 if married filing jointly.
  • One Child - earnings must be less than $35,535 or $40,545 if married filing jointly.
  • Two Children - earnings must be less than $40,363 or $45,373 if married filing jointly.
  • Three or More Children - earnings must be less than $43,352 or $48,362 if married filing jointly.
The credits themselves have also increase in 2010, with the maximum credits that can be received as indicated below:
  • No Children - $457
  • One Child - $3,050
  • Two Children - $5,036
  • Three or More Children - $5,666

Lifetime Learning and Hope Credits

In 2010, tax law changes also apply to the Hope Credit.  The maximum Hope Credit, available for the first two years of post-secondary education, has increased to $2,500.  This includes 100% of qualifying tuition and related expense not in excess of $2,000 plus 25% of those expenses that do not exceed $4,000.
 In 2010, the taxpayer's modified adjusted gross income will be used to determine the reduction in the amount of the Hope Scholarship and Lifetime Learning Credits.  Credit reductions start for taxpayers with an AGI in excess of $80,000, or $160,000 for those filing joint returns for the Hope Credit.  The threshold for the Lifetime Learning Credit remains at $50,000, or $100,000 for those filing joint returns in 2010.

Contributions to Retirement Accounts

There was not a lot of good news in 2010 for those individuals looking to increase the rate of savings into their retirement accounts.  Contribution limits for 401k as well as 403b plans remained the same in 2010 at $16,500.  Catch up contributions also remained at $5,500 in 2010.  Contribution limits to SIMPLE retirement plans also remained at $11,500, as did the catch up contribution limit of $2,500.
The income limits for those willing to contribute to traditional IRAs as well as Roth IRA plans increased modestly in 2010.  The income phase-out threshold for Roth IRAs now starts at $167,000 for those filing joint returns - an increase of $1,000.  There was no change for taxpayers filing as head of household or single.
Finally, if you're covered by a retirement plan at work and you are considering contributing to a tax-deductible traditional IRA, then the 2010 income phase-out limits start at $89,000 for joint filers (same as 2009), and increases to $56,000 for those with a filing status of single or head of household.
About the Author - Income Tax Changes 2010
Copyright © 2009 Money-Zine.com

 

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10/29/2010

When are services subject to California sales tax?

 Source: http://www.calcpa.org/Content/25604.aspx

Q: I’m a tailor based in California. Since I provide a service, do I have to charge sales tax?

Because of your particular situation, there is no easy answer to this question. You may sometimes have to charge sales tax, while at other times you should not.
California law restricts the application of sales or use tax to transfers or consumption of tangible personal property or physical property other than real estate. Unlike many other states, California does not tax services unless they are an integral part of a taxable transfer of property. The law does not specifically name most services as exempt, but such activities are automatically excluded from the tax base because they are outside the definition of tangible personal property.
Two types of service activities still may be swept into the tax base, however. The first is any service that is so tied to the sale of property that it is considered a part of that sale and, thus, inseparable from the measure of the tax. Example: a taxable sale of machinery that the seller must calibrate as a condition of the sale. The calibration fee will be taxable even if the seller separates the charge.
The second taxable service is fabrication. Fabrication (manufacturing) is the labor involved in creating tangible personal property that is different in form or function from its component parts. This type of labor includes something as simple as drilling holes in a metal strap and bending the strap to make a bracket. The charge for drilling and bending would be taxable unless some other exemption applied.
The line between taxable fabrication and nontaxable repair labor can be hard to discern. For example, the alteration of new garments is taxable but the alteration of used clothing is exempt. Thus, if a person buys new clothing and takes it to a tailor to be altered, the tailor must charge sales tax on both the labor and the price of any materials provided. Reason: the alteration is regarded as a step in the creation of a new item, which is taxable fabrication. (See California Sales and Use Tax Regulation 1524(b)(1)(A).)
Conversely, if the same person buys the clothing, wears it, and then brings it to the same tailor for the same alteration, the tailor’s services will be regarded as exempt repair or restoration labor. The tax will only apply to the sale of any accompanying materials and supplies, and then only if either the retail value of the materials and supplies is separately stated on the bill or the value exceeds 10 percent of the tailor’s total charge. (California Sales and Use Tax Regulation 1524(b)(1)(B).)
Sales and use tax law is often assumed to be relatively simple and straightforward.
As you can see, that assumption may be hazardous to your financial health.


Dan Davis, CPA, CFE, is a partner with Associated Sales Tax Consultants in Sacramento. You can reach him at 888-369-1202 or ddavis@astc.com.
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6/29/2010

What can I deduct as an independent contractor?

 Article Source: http://locumlife.modernmedicine.com/locumlife/article/articleDetail.jsp?id=176558&sk=&date=&pageID=1

 Aug 1, 2005By: Dan Kobaly, EALocumLife

This month, we will look at some of the different categories of tax deductions available to independent contractors. Even though each entity—sole proprietor, C-corporation, S-corporation, and Limited Liability Company (LLC)—is required to file a specific tax form, and there are some differences (especially at the state level), the rules for deductions are predominantly similar, particularly for a single-member or "closely held" entity.
GENERAL RULES
First, according to Internal Revenue Service (IRS) Publication 535, Business Expenses, "in order to be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary." Because of the broad scope of this definition, in audit, IRS generally only denies the most flagrant expenses—and more often attempts to differentiate and deny non-deductible personal expenses. However, even the business use percentage of an otherwise personal expense is also deductible (such as the portion of a vacation spent conducting business.)

Also, IRS always looks at the individual "facts and circumstances" of a claimed business deduction to determine if there is a "preponderance of evidence" to support the use of the expense to reduce income. As a result, a given expense may be deductible for one business, but not another. IRS also requires documentary evidence of any expense over $75, such as receipts, bills, or cancelled checks. A diary or log is sufficient evidence for mileage deductions. Most independent contractor business deductions reduce net self-employment income—which reduces self-employment tax (15.2%), as well as federal tax (up to 35%) and state taxes. The few allowable personal deductions (1040 Schedule A) and employee unreimbursed employee expenses (1040 form 2106) only reduce federal and state taxes.
TRAVEL EXPENSES
If you maintain a permanent "tax home" that you return to on a regular basis to live and work, then you may deduct travel expenses between temporary assignments (less than 12 months). Any additional costs for your family would not be deductible. If you do not maintain a permanent home, then you are considered an "itinerant worker"— wherever you work is considered your tax home, and the travel expenses between assignments are not deductible. If your assignment is, or becomes permanent, then you may deduct some costs as personal moving expenses (on 1040 form 3903), but not as business expenses.
Should your agency not provide reimbursement for travel (typically airline fares), hotel, rental car, or gas, you may deduct these out-of-pocket travel expenses. Additional items that can be deducted include fees for U-Hauls, packing supplies, storage, tolls, parking, and vehicle expenses such as mileage.
VEHICLE EXPENSES
These types of costs are deductible when traveling between temporary assignments (less than 12 months) and while on temporary assignment. They are not deductible for personal use, including commuting to and from a permanent job.
There are two ways to deduct vehicle expenses—using either the business-use percentage of actual expenses or using the current federal mileage rate. Actual expenses include gas, maintenance, repairs, insurance, license, lease payments, and/or depreciation. The mileage rate for 2005 is 40.5 cents per mile; up from 37.5 cents for 2004, and includes all vehicle expenses except tolls and parking.
TEMPORARY LIVING EXPENSES
Generally, the largest deduction for locum tenens physicians with a permanent home is temporary living expenses while working away from their residences. If you maintain a permanent home, and return there on a regular basis to live and work, then you may deduct all duplicated out-of-pocket expenses while on temporary assignment—including housing, utilities, and half of your meals. As an alternative, you may use a daily meal per diem rate from IRS publication 1542, without receipts. However, keep in mind that you may not deduct the lodging per diem found in this publication, which is for employers to use for reimbursements. 
Any deductions taken should be offset by reimbursements, stipends, or allowances. Reimbursements received on a dollar-for-dollar accounting program are not included as income to you and not deductible. In addition, any stipends or in-kind benefits you may receive on temporary assignment (such as a lodging stipend or apartment), that you would have been able to deduct had you paid for them, are tax-free to you.
PROFESSIONAL EXPENSES
All licensure expenses are deductible—including state license fees, DEA license fees, drug testing, and fingerprinting; as well as continuing education expenses and seminars. Also, any contractor paid liability insurance is deductible—such as malpractice insurance—if you purchase your own policy.
Special-use clothing and equipment, such as scrubs, shoes, lab coats, and stethoscope, may be deducted, as well. Care and maintenance—from laundering to cleaning—also falls into this category, whether on temporary assignment or at home. Professional journals, subscriptions, and reference books are also deductible. The business-use percentage of Internet expenses and cost of any on-line research can be deducted, too.
TELEPHONE EXPENSES
You cannot deduct any charges for basic local telephone service for the first telephone line to your home, even if used for business, or required for on-call. However, you can deduct business long distance, any additional business line, and extra features for business use, such as call waiting. Additionally, answering service expenses are deductible. For cell phones, the cost of all billable business calls can be deducted. It also seems appropriate, though not audit-tested, to take a percentage of initial so-called "free" air minutes based on the business-use percentage of total minutes, as well as the cost of the phone if it—and its charges—are not covered by your staffing company.
CAPITAL EQUIPMENT
The purchase cost of business-use equipment with a useful life of more than one year ("capital equipment"), such as vehicles, computers, PDAs, furniture, cell phones, and office equipment is supposed to be spread over the life of the equipment (depreciation). However, the business owner may, under tax code section 179, elect to accelerate some portion of the depreciation into the year of purchase. This is available for up to $100,000 of capital equipment for 2005 through 2008; but is scheduled to drop back to the old limit of $25,000 for 2008. Depreciation has many pitfalls, especially since not all states follow federal guidelines, and should probably be left to a professional.
HOME OFFICE
Taking "home office" expenses for business conducted at home is risky due to the restrictions of defining such an entity and the red flag nature of deducting it. Fortunately, home office deductions at temporary assignments for locum tenens physicians is inconsistent with the deduction of temporary living expenses—since the entire cost of temporary lodging is already deductible.
INSURANCE
In addition to malpractice insurance and vehicle insurance (if using the actual expense method), independent contractors who are self-employed may currently deduct 100% of health insurance premiums paid on behalf of the owner, as well as his/her spouse and dependents. However, while the deduction reduces federal and state income taxes, it does not lower self-employment tax. Life insurance premiums, on the other hand, are a personal, non-deductible expense.
NON-DEDUCTIBLES
Other non-business expenses include personal income taxes (federal, state, and local—although state and local taxes may be taken as a personal deduction on 1040 schedule A), charitable contributions, and political contributions.
The last word. While this discussion could not cover all possible deductible or non-deductible business expenses, any omissions hold little if any significance. For more information, explore http://www.irs.gov/.
REFERENCES
Internal Revenue Service. (2005, May). Per diem rates [IRS Publication 1542]. Washington, DC: Author.


Internal Revenue Service. (2004). Business expenses [IRS Publication 535]. Washington, DC: Author.
Internal Revenue Service. (2004). Tax guide for small businesses [IRS Publication 334]. Washington, DC: Author.
Internal Revenue Service. (2004). Travel, entertainment, gift, and car expenses [IRS Publication 463]. Washington, DC: Author.
Internal Revenue Service. (2004). Your federal income tax [IRS Publication 17]. Washington, DC: Author. Internal Revenue Service. (2004, December 6). Optional standard mileage rates, Rev. Proc. 2004–64, Internal Revenue Bulletin 2004-49 [p. 898].
The preceding discussion is general in nature, and should not be considered advice for any individual tax situation. You should consult with your personal tax planning professional for specific guidance relating to your unique circumstances.
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6/15/2010

Accounting 101 - Deferred Rent 78

 Article resource: http://hubpages.com/hub/Accounting-101-Deferred-Rent

Accounting for Deferred Rent

Note:  The following is from a series of accounting reference articles found on Big4Guru.com.
Deferred Rent
What is it?
The simplest way to understand deferred rent is to think of an example.  Let’s say you started a business and the first thing you did was sign a five-year lease for office space.  In an effort to sign you as a tenant, the landlord (aka “lessor”) offers you lower rent payments in the first year that “escalate” (i.e. go up) as the years progress.  To keep it simple, let’s say the rent schedule is this:
Year 1:   $1,000 / month = $12,000 / year
Year 2:   $1,250 / month = $15,000 / year
Year 3:   $1,500 / month = $18,000 / year
Year 4:   $1,750 / month = $21,000 / year
Year 5:   $2,000 / month = $24,000 / year
These amounts represent the actual cash that you will be paying each month.  When booking the journal entries for this, this will be the credit (either to cash or a payable).  The question is what is the debit?
ASC section 840-20-25-1 states the following:
Rent shall be charged to expense by lessees (reported as income by lessors) over the lease term as it becomes payable (receivable). If rental payments are not made on a straight-line basis, rental expense nevertheless shall be recognized on a straight-line basis unless another systematic and rational basis is more representative of the time pattern in which use benefit is derived from the leased property, in which case that basis shall be used.
You see, the FASB requires that rental expense be “recognized on a straight-line basis.”  This means that the same amount of expense must be recognized each month, regardless of the actual rent payment during the month.  Let’s calculate our monthly rent expense.
From the table above, we can easily compute that the total rent paid over the course of the lease is $90,000.  ($12k +$15k + $18k + $21k + $24k).  This figure, divided by the total months in the lease (60), gives us out straight-line rent expense:
Total Rent / Total Periods = Straight-Line Rent Expense per period
$90,000 / 60 months = $1,500 / month = $18,000 per year. 
We now have the debit in our journal entry.
With a debit to expense for one amount and a credit to cash for another amount, the plug goes to deferred rent.  Depending on the payment schedule, deferred rent can either be an asset or a liability.
In the case of a lease with increasing payments each year, as in our example, deferred rent is a liability.  The liability balance builds through the first two years when the expense exceeds the cash payments, levels off during year 3 when these amounts are equal, and then drops down to zero over the course of the final two years when rent expense is less than the rent payments.  The journal entries for each year are as follows:
Journal Entries – Year 1
Dr. Rent expense        1,500
       Cr. Deferred rent                         500
       Cr. Cash                                       1,000
Journal Entries – Year 2
Dr. Rent expense        1,500
       Cr. Deferred rent                         250
       Cr. Cash                                       1,250
Journal Entries – Year 3
Dr. Rent expense        1,500
       Cr. Cash                                       1,500
Journal Entries – Year 4
Dr. Rent expense        1,500
Dr. Deferred rent            250
       Cr. Cash                                       1,750
Journal Entries – Year 5
Dr. Rent expense        1,500
Dr. Deferred rent            500
       Cr. Cash                                       1,750
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