Fast Fifty Again!

I am pleased to let you know that Strothman & Company was named a "Fast Fifty company by Business First for the second year in a row. The Fast Fifty represents the 50 fastest growing private businesses in the Louisville area. We are the only CPA firm that has ever made the list. Thanks to our great clients and staff for allowing this to happen.

U.S. Auto Industry Bailout?

It is interesting that the current Business First poll has almost 80% of the respondents saying that the government should not bail out the U.S. auto industry. An article in Today's New York Times by former presidential contender Mitt Romney makes that case. I've had several clients who wanted to chit-chat about the issue, so I though I would pass on some information.

p.s. It probably wasn't too smart for them to fly to Washington in their private jets. See the article.

Financial Accounting Standards Board Codification

One of the most difficult things about accounting is getting one's hands around the various accounting rules. There has never been a good "one stop" place to get all of the answers about generally accepted accounting principles ("GAAP"). The Financial Accounting Standards Board ("FASB", pronounced "fas-bee") is trying to rectify this by creating the Accounting Standards Codification. The first draft of the Codification has been completed and is available free here. Just click on "Registration".

Purchase Accounting Changes Are Coming

This was a fascinating article about the upcoming changes to purchase accounting. Click here. The changes will be effective for calendar 2009 and after. One interesting change is that acquisition costs will be written off. Also, acquirers may be able to recognize a gain from a "bargain" purchase of another company.

So, How Was The Wynn Hotel?

In my last post, I said we stayed at The Wynn Hotel in Las Vegas, So, how was it? For a hotel with over 2,700 rooms, they did a pretty good job. The decor and standards of the place are pretty comparable with the Bellagio. We had a room on the 39th floor overlooking the Strip. I would definitely ask for this view if you stay there. The service was a tad inconsistent, but nothing more than I would expect with such a large hotel. We went to see the show, Le Reve, which was fantastic. We got our tickets at the Half Price Ticket place in the Fashion Show Mall across the street (up next to the food court). We paid about $75 each for third row tickets that retail for $140 each. We had dinner one night at the Daniel Boulud Restaurant. Get the Caesar Salad and the Short Ribs. It's expensive, but I promise you won't be sorry.

Increase the Value of Your Business By Demonstrating Growth

This June, I attended the annual conference of the National Association of Certified Valuation Analysts at The Wynn in Las Vegas. See www.nacva.com for their web site. I attended a variety of classes on various business valuation subjects. One of the most interesting was a presentation by an investment banker. While many of the classes at the conference were theoretical, the investment banker talked about the subject from a practical standpoint.

He basically said he would almost always buy solid businesses at five times earnings (which equates to a discount rate and a capitalization rate of 20%). However, if he were to go beyond five times earnings, the seller would have to prove to him that the business had an opportunity to grow. If the business had growth potential, the multiple paid could be increased. The chart below illustrates this. For example, an expected long-term sustainable growth rate of 5.7% means that a cap rate of 14.3% results when using a discount rate of 20%. The 14.3% cap rate equates to a multiple of 7.

I hope I've explained this in a way that makes sense. If not, please e-mail me. The bottom line is this. If you are looking to sell your business, and you want a value more than a multiple of five, you better be able to demonstrate to a buyer that the business has long-term, sustainable growth potential.

	Capitalization Rate
		Less
Discount		Growth	Cap
Rate		Rate	Rate			Multiple
20.0%		0.0%	20.0%			5
20.0%		3.3%	16.7%			6
20.0%		5.7%	14.3%			7
20.0%		7.5%	12.5%			8
20.0%		8.9%	11.1%			9
20.0%		10.0%	10.0%			10

Extended Partnership and Trust Due Dates Shortened

The tax returns for partnerships (including limited liability companies) and trusts are due on April 15th. Right now, they may be extended six months until October 15th. That's going to change in 2009 and beyond. The new extended due date is September 15th.

IRS Increases Mileage Rate

The current IRS mileage rate will increase from 50.5 cents per mile to 58.5 cents per mile effective July 1, 2008.

Young and Old Without Distinction Leave This World; Therefore Fail Not To Secure the Next

Becky and I went to Nassau, Bahamas in April 2008. We found Christ Church Cathedral, an Anglican church founded in 1670. The church had a number of plaques on the inside wall dedicated to loved ones who had died. I was particularly drawn to the plaque for Emma Blatch. It read as follows:

"In memory of Emma Clementina Blatch, whom it pleased the Almighty to visit suddenly in the bloom of life with a severe fever, of which she died, October 16th, 1825, aged 19. Her earthly remains are deposited in Potters Field. Her spirit is with God.

Reader! Whoever thou art, let the sight of this monument imprint on thy mind, that young and old without distinction leave this world; therefore fail not to secure the next."

To me, this was a striking reminder that our primary goal in this life is to "secure the next".

Inc.credible!!!

Strothman & Company won the 2008 Inc.credible Award from Greater Louisville, Inc. in May in the 50 to 99 employee category (click here). The firm was up against strong competition against companies in a variety of different industries. We are the first Louisville CPA firm to win this award, and are incredibly grateful to our staff and clients who made it possible for us to receive this recognition.

Full Payroll Tax Penaties Assessed To Unsuspecting Company

One of my partners pointed out the following court case to me. In this case, the company was assessed full penalties for failure to deposit employment tax withholdings, even though the owner/officers were completely unaware it was occurring. The owner apparently had no earthly idea his in-house personnel were failing to perform their payroll tax responsibilities. Only a portion of the withholdings were not properly paid the Treasury, so even a close review of the financial statements might not have triggered a question. A recommendation would be that someone, not in the line of responsibility, occasionally review the payroll deposit and reporting compliance. This case may be the most compelling argument for a company to use a third party payroll service. We’re an accounting firm, and we outsource our payroll!

Don Johnson Motors, Inc. v. U.S.,

DC TX, 101 AFTR 2d 2008-370 , Civil Action No. B-06-047, 12/21/07

A district court has ruled that employment tax penalties and interest for the 1999-2002 tax years could not be abated due to reasonable cause, even though the taxpayer was unaware that its in-house accountant and its office manager had failed to perform their payroll tax duties. However, the court said that there may be reasonable cause to abate an employment tax assessment for the 2003-2004 tax years because of a bank error.

Employee error. From 1999 to 2002, Don Johnson Motors, Inc. delegated its payroll tax functions to an in-house accountant, Michael Ezequiel, who performed his role under the supervision of the company's office manager. Ezequiel prepared the company's employment tax returns and was also in charge of monitoring the payroll accounts and the information included on Forms 940 and 941. At some point in 1999, for reasons not explained, Ezequiel stopped paying portions of the company's payroll taxes. As a result, Don Johnson Motors made incomplete deposits to the IRS from 1999-2002. The executives of Don Johnson Motors were unaware of this problem until December 2002. Shortly thereafter, the IRS assessed penalties against the company for failure to file employment tax returns and to timely pay taxes.

Exception to penalty. Code Sec. 6651(a) allows an employer to avoid penalties for noncompliance if it can show that its failure to file, pay, or deposit taxes was due to “reasonable cause” and not willful neglect. Don Johnson Motors requested an abatement of the aforementioned penalties based on Code Sec. 6651(a).

Ruling on employee error. The district court denied the taxpayer's abatement request. In issuing its ruling, it noted that other federal courts have consistently held that the failure of a taxpayer's employee to file or pay taxes does not establish reasonable cause. The district court also distinguished the current ruling from the case of American Biomaterials Corporation, 69 AFTR 2d 92-611 (1992). In American Biomaterials, the Court of Appeals for the Third Circuit ruled that there may be reasonable cause to abate employment tax penalties when corporate officers commit criminal acts (e.g., embezzlement) against the corporation. The district court distinguished the Don Johnson Motors case from that one by pointing out that Don Johnson Motors had never presented any evidence that its in-house accountant and its office manager had engaged in any criminal action. The district court said that the employment tax deficiencies incurred by Don Johnson Motors simply resulted from having “lax internal controls or failing to secure competent external auditors that even the court in American Biomaterials stated was insufficient to establish reasonable cause.” The district court also rejected the taxpayer's argument that there was reasonable cause to abate the penalties because of the lack of notification from IRS that the company was falling behind in its tax obligations. The court cited Code Sec. 6151 and said that IRS was under no obligation to provide taxpayers with notice that they failed to file their returns or pay their taxes.

Watch Out for Scams Using the IRS Name

Caution! Several of my clients have received a very official looking e-mail from the IRS that says a refund is due them. It asks for personal data in order to process the refund. The trouble is, the e-mail is not from the IRS. The IRS never sends e-mails to anyone. Please click here to see an IRS release about e-mail and phone scams currently going on using the IRS name.

Strothman & Company 25th Anniversary

I am pleased to let you know that Strothman & Company's 25th anniversary is on February 1, 2008. The firm began on February 1, 1983 with just Ray Strothman, a card table and a calculator (as the story goes). It has been a significant achievement for Ray to grow the firm into one that now employs over 50 people. We are now the 8th largest firm in Louisville (total professionals per 2007 Business First survey). Congratulations to Ray and all of the people who helped build the firm.