The Sarbanes-Oxley Act of 2002 (SOX) prohibits auditors from performing the following nonaudit services for their public company audit clients.
* Bookkeeping or other services related to the accounting records or financial statements of the audit client
* Financial information systems design and implementation
* Appraisal or valuation services, fairness opinions or contribution-in-kind reports
* Actuarial services
* Internal audit services
* Management functions or human resources services
* Broker or dealer, investment adviser or investment banking services
* Legal services and expert services unrelated to the audit
In addition, the Public Company Accounting Oversight Board (PCAOB) has the authority to prohibit additional services, such as tax services, if it finds that such prohibitions are in the public interest.
An area of uncertainty exists regarding how to resolve the potential nonaudit/tax services overlap. Some tax-related nonaudit services that are compliance, planning or advisory in nature might arguably be included in one of the prohibited nonaudit services.
Although SOX places no specific restrictions on the performance of tax services for public company audit clients, the following nonaudit services that CPAs customarily provide in their tax practices should be acceptable under the rules.
* Payroll, sales, property, state income, federal income and other tax compliance services
* Traditional tax planning services
* Analysis of client records to determine strategies for minimizing state and local income, sales, property and payroll taxes
* Appraisal services for tax compliance purposes, such as assigning values to intangible assets under IRC Section 197
* Loaning tax staff to an audit client for special projects
* Representing the audit client in IRS and state and local government audits
* Designing or commenting on the tax aspects of a compensation package for management staff of the audit client
Tax services for public company audit clients account for 30 percent to 35 percent of the revenue of large accounting firms. The PCAOB has already indicated that it will not prohibit tax services, despite the fact that many critics of the industry would like to see a ban on all tax services. However, PCAOB officials have at times said negative things about large firms providing aggressive tax shelter consulting for their audit clients. Investors will have to judge for themselves whether tax services impair the independence of the auditors of specific companies.
To enhance audit committee oversight and to ensure that audit committees are cognizant of all services provided by independent auditors and have considered the effect of those services on financial statement audits, SOX requires the audit committee to pre-approve each new nonaudit service provided by the auditors. One effect of this provision is a lessening of the number of nonaudit services provided by company auditors.
In addition, SOX requires disclosure of nonaudit services that are approved by audit committees. The services that are currently being approved are mostly tax services, which are one of the few nonaudit services not prohibited by SOX. Investors who are concerned about the effect of nonaudit services on an auditor's independence and ability to be objective can find the nonaudit services performed by the auditor in the company's proxy statement (SEC Form DEF 14A).
The authors of SOX hope that these changes in the audit industry, plus other SOX changes that directly affect auditors, will result in enhanced independence of auditors, who will then render completely objective opinions on corporate financial statements and better quality audits as a result of auditors refocusing on their core business.
PCAOB has indicated that it will look to see whether large audit firms sufficiently reward technical expertise. Some fear that firms have moved away from emphasizing technical expertise when considering staff compensation and have instead emphasized selling skills.
MARTIN TANENBAUM (email@example.com) serves as tax principal at Tauber & Balser, an Atlanta-based CPA firm specializing in accounting and auditing, SEC reporting, forensic accounting, financial and tax consulting, mergers and acquisition assistance and estate tax planning. He specializes in corporate, personal and partnership income tax research and compliance with special expertise in the retail industry. Reach him at (404) 814-4920.
While the media has focused its attention on the act's dramatic reduction of income tax rates on corporate dividends and long-term capital gains, the law is designed to help small businesses as well, with provisions to provide incentives to buy technology, machinery and equipment, and to expand.
Expensing equipment purchases
Section 179 of the tax code allows business owners to expense immediately -- rather than depreciate over several years -- their purchases of tangible personal property placed in service during the tax year. The Section 179 deduction is limited to the maximum amount allowed by law, as well as to spending and net income limits.
In an effort to encourage capital investment in technology, machinery and other equipment needed to expand, JGTRRA increased the maximum deduction from $25,000 to $100,000 for tax years after 2002 and before 2006. The spending limit was increased from $200,000 to $400,000.
Taxpayers exceeding the spending limit lose the deduction dollar for dollar and lose the entire deduction when spending reaches $500,000. Any Section 179 deduction cannot exceed the taxpayer's taxable income computed without regard to the Section 179 deduction. In other words, Section 179 expenses cannot create or increase a net operating loss. Taxpayers can, however, carry over any unused Section 179 expense to future tax years.
The new act expands the definition of eligible property to include off-the-shelf computer software. Although such software is not usually eligible for this treatment, JGTRRA allows expensing under Section 179 if the taxpayer places it in service in 2003, 2004 or 2005.
This provision is due to expire Dec. 31, 2005.
If you purchase brand new equipment with a recovery period of 20 years or less, or if you make leasehold improvements, JGTRRA allows you to take a 50 percent deduction in the first year for qualified property placed in service after May 5, 2003, and before Jan. 1, 2005. The new law increases the deduction from 30 percent.
This 50 percent bonus depreciation does not apply to property purchased after May 5, 2003, if there was a written, binding contract for its purchase in effect before May 6, 2003.
So if you ordered new equipment in March that wasn't installed and placed in service until June, the old 30 percent bonus depreciation will apply. Taxpayers may take the 50 percent bonus depreciation, elect the 30 percent bonus depreciation or elect out of either bonus.
Unlike the Section 179 provision, there are no spending or income limitations. Therefore, bonus depreciation can be used to create or increase a net operating loss.
Deduct your SUV
JGTRRA makes it possible for businesses to expense up to $100,000 of equipment purchases in the first year of service. Headlines have suggested this is an opportunity to buy and completely deduct the cost of a SUV in a single tax year, and there is truth to these headlines.
Congress passed a law many years ago limiting the deductions a business can take on luxury autos used for business. A luxury auto was defined as an auto costing from $11,250 in 1986 to as little as $15,500 in 2002. To avoid affecting real business vehicles, such as trucks, the law was written so that autos with unloaded gross vehicle weight over 6,000 pounds were exempt from any limits.
If your auto weighs more than 6,000 pounds, it is not subject to the limitations imposed by the luxury vehicle rules. Most SUVs weigh more than 6,000 pounds and, therefore, are not subject to the limitations.
If your SUV weighs 6,000 pounds or less, the maximum first year's deduction is capped at $10,710, assuming it is used 100 percent for business.
The new provisions provide a wealth of opportunities for businesses. As companies plan for the end of the year, consideration should be given to the tax savings best generated by the combination of both the Section 179 and the bonus depreciation provisions.
Keep the following points in mind:
* The amount expensed under Section 179 will decrease the depreciable basis for computing the bonus depreciation.
* Section 179 is subject to limitations and applies to new and used property.
* Bonus depreciation is not subject to restrictions but applies to new property only
* The decision to elect Section 179 expense or opt out of the bonus depreciation does not have to be made before filing a tax return, and the effects of both provisions should be a part of any investment decision.
Martin Tanenbaum serves as tax principal at Tauber & Balser, an Atlanta-based CPA firm specializing in accounting and auditing, SEC reporting, forensic accounting, financial and tax consulting, mergers and acquisition assistance and estate tax planning. He specializes in corporate, personal and partnership income tax research and compliance with special expertise in the retail industry. Reach him at (404) 814-4920 or ( firstname.lastname@example.org).