In This Issue

Business Briefs

Cost Segregation Can Save Big Money When Purchasing Commercial Facilities

If you're planning to purchase, remodel or build commercial facilities, or if you have done so in the last few years, you should be aware of a tax strategy that could save your company considerable money.

The strategy is known as cost segregation. The idea is to separate the individual assets within a facility and reclassify some of them as land improvements and tangible personal property, which can be depreciated much faster than real property. Some of these assets (unlike real property) may then qualify for Section 179 expensing (see below for more details on Section 179 expensing).

Non-residential income (or real) property must be depreciated on a straight-line basis over 39 years (27 1/2 years for residential rental property). Tangible personal property, however, can be depreciated over either five or seven years (using 200 percent, or double declining balance), and land improvements may be depreciated over 15 years (using 150 percent declining balance).

The costs of plumbing and electrical improvements are two good examples of items that should be separated. Typically, their costs would be lumped into the facility's overall cost as real property, but a portion of them may qualify as tangible personal property. Other costs that may qualify as tangible personal property include computer equipment, window treatments, awnings and canopies, storage tanks, carpeting, furniture and fixtures, and telecommunications systems.

The faster depreciation write-off achieved by cost segregation can result in larger tax deductions in the earlier years, accelerating the after-tax return on capital by freeing up cash flow during the early years of the facility's life. It may also reduce real estate and sales taxes, helping further boost cash flow.

Increased Section 179 Expensing Limit Extended Two More Years

There's some good news on the tax front for business owners: The increased annual Section 179 expensing limit of $105,000 for qualifying equipment purchases, which was originally set to expire at the end of 2005, has been extended until December 31, 2007.

The increased expensing limit was originally part of the Jobs and Growth Tax Relief Reconciliation Act of 2003. The amount is indexed annually for inflation, with a limit of $108,000 for 2006.

The Domestic Production Deduction

If yours is a manufacturing company, there's another recent tax development you should be aware of. As part of the American Jobs Creation Act of 2004, Congress created the Domestic Production Deduction.

This deduction is available to all U.S. companies that derive income from qualified domestic production. This definition includes companies that manufacture products for sale, perform construction in the U.S., or perform engineering and architectural services in the U.S. for U.S. projects.

The deduction is phased in for tax years beginning in 2005, with three percent of qualified production activities income eligible to be deducted in 2005 and 2006, six percent in the years 2007 through 2009 and nine percent thereafter. BMF&C

About Our Staff

In order to support continued growth in our practice, the Partners of Bober, Markey, Fedorovich & Company are pleased to announce the following additions to our professional staff:

Michelle DeGordon was appointed as Treasurer for Trinity United Methodist Church in Massillon.

On February 28, 2006 Mark Bober served as a guest lecturer at Miami University, on the topic of mergers and acquisitions. On March 9, 2006 Mark also served in that capacity for The University of Akron's Law and Business Schools.

Jim Merklin has been named Chairman of the National Employee Benefit Plans Task Force for PKF North American Network. Jim also served as a guest lecturer on March 2, 2006 at The University of Akron's College of Business Administration on the topic of the practical implications to public and private businesses of the Sarbanes-Oxley Act.

Dale Ruther presented "Trends and Dead Ends" to the Construction Financial Management Association on March 15, 2006. BMF&C

Spring 2006

INFOLETTER

Read and print the Spring 2006 InfoLetter in Adobe PDF format. Requires the free Adobe Reader.

Partner's Perspective

Plan Now for a Family-Friendly Takeover
By Dale A. Ruther, CPA, CIT

As every parent knows, there comes a time to "let go" - to step out of the way and see what a child can do on his or her own. The same is true with a closely held company. It's hard to imagine the company running - let alone thriving - without its founder, owner and chief decision-maker. But that day will come, and now is the time to prepare for it.

The Right Time

Some say that before you launch a business, you should think about an exit strategy. While that is probably not a common practice, the point is clear - getting out is as important as getting in. So when is the right time to start thinking and talking about succession? Obviously, it's never too early. But there are a few signs that it's getting too late:

Aging leadership - When the business leader reaches his or her late 50s or early 60s, succession plans should already be in place. Sometimes it's difficult to get leaders to face the succession issue, either because their identities are so closely tied to the company or because succession reminds them of their own mortality. But if you are the leader of a company, you know you won't be there forever. Long before you retire, you must begin to develop interests and a support network outside the company. You'll be glad you did.

Discontented children - If the next generation is frustrated with an unclear succession plan, they'll leave for greener pastures. If they feel that they're never going to get a chance to lead, they'll find another opportunity to let their skills and talents shine. Don't wait until the next generation of leaders is unhappy and unmotivated. Share plans for the future so that everyone is aware of next steps.

Lack of modernization - If your company has become slack in product or infrastructure, it's probably time for some new faces on the leadership team. Lack of modernization leaves the door open to competitors and can quickly undermine corporate value. Be sure you leave the company in prime condition for your successors.

No Surprises, No Strife

A succession plan should meet both the company's needs and the family's needs. Look for talent in the next generation. Be aware of strengths and weaknesses. Pay attention to those who express interest and desire to stay involved and grow with the company. Most important, give the next generation chances to lead - and chances to fail.

When it's time to create a plan, seek guidance from professionals. Of course, your CPA can play an important role in designing a plan that will protect both your assets and the company's future. Plus, he or she can share wisdom gleaned from other clients who have successfully implemented family succession plans. A counselor or executive coach can also be invaluable in terms of working with the emotional issues of "letting go" and moving on to the next phase of life. Put together a team of experts to help you with an exit strategy that's painless and practical.

Succession doesn't have to be a crisis. With rigorous planning, the transition to the next generation can be seamless and easy for everyone involved.

We would be glad to help you think through your company's succession plan. Please call or email me at dale@bobermarkey.com, or your partner/manager at the firm, if you would like some assistance. BMF&C
 

Tips for Signing a Commercial Lease
By Lori A. Sheets, CPA

For many business owners, signing a commercial lease is something they're glad they only have to do once every year or two. Owners often feel overwhelmed by the complexity, details and language of a commercial lease.

Following are a few guidelines to help you sign a lease with the most favorable terms for your business. And of course, don't forget to review the legal documents with your favorite attorney.

Don't fall in love with the place. If you're looking for new space (as opposed to renewing an existing lease), keep your options open. You want to be able to walk away from any deal that's not at least fair, if not to your advantage. This is the first rule of any negotiation.

Make sure it's clear who's responsible for what. Get as much of this down in writing as possible so there are no questions who's responsible for roof leaks, furnace and air conditioner breakdowns, common area maintenance, etc.

With regard to property improvements, there can be tax benefits to tenants if leasehold improvements are added to the lease payments.

Understand the price. Most commercial property is priced per square foot (e.g., $18 per square foot). To get a total price, simply multiply the square-foot price by the total square footage of the property. Make sure the square footage being quoted is for usable inside square footage, not outside square footage. You might even measure the space yourself.

Know what kind of lease you're signing. There are many different types of commercial leases. With a full service lease, the landlord pays all expenses and the tenant pays a fixed rent amount, while with a triple net lease, the tenant pays for everything (including maintenance, utilities, taxes and insurance) directly. There are many variations on these and other types of leases.

Negotiate as much flexibility as you can. Things like options in your lease term, right of first refusal to lease additional space for growth, and cost-of-living rent increases at various intervals are usually negotiable. Get as many concessions from the landlord as you can.

Talk with prospective neighbors. This is the best way to get the inside scoop on the general area and/or the property itself. Ask about safety issues, traffic, the tenant mix and the landlord's responsiveness in handling other tenants' problems and requests.

For assistance in negotiating a commercial lease, please call or email me at loris@bobermarkey.com. BMF&C
 

SOX and Private Companies: What Is the Impact?
By Michael J. Moldvay, CPA, Senior Manager and Danielle J. Kimmell, CPA, Senior Manager

In July, 2002, Congress passed the Sarbanes-Oxley Act (SOX), which brought about the most sweeping changes and redesign of federal securities law since the 1930s. The Act was passed in response to the well-publicized corporate scandals and accounting irregularities at Enron, Worldcom and others.

While the provisions of SOX apply only to public companies, many private firms are considering the potential benefits of voluntarily complying with some of the Act's provisions - especially those that relate to establishing sound internal controls. CPA firms nationwide notice that more private clients are asking them to come in and perform SOX-like procedures for them.

Some companies are adopting these measures to send a message to their customers, vendors, creditors and others of increased financial transparency. In addition, some private companies' directors also sit on the boards of public companies and are suggesting that the private firms implement SOX-like internal control structures.

Adequate Internal Controls

Starting this year, Section 404 of SOX holds executives legally responsible for maintaining an "adequate internal control structure" and procedures for financial reporting. Public companies' auditors must attest to management's assessment of these controls and disclose any material weaknesses.

Proper documentation and testing of internal controls, therefore, is one of the first SOX-like procedures that private companies should consider. Essentially, internal controls are checks and balances that help prevent fraud, limit financial losses and reduce errors or oversights by employees.

The most basic internal control concept is one that's referred to as "segregation of duties." It requires that different employees handle different financial and accounting tasks, thus limiting the potential for loss due to fraud or human error. Consider the following suggestions for segregating financial duties and strengthening your internal controls:

• Sign your own checks. Anyone who gets their hands on a signature stamp can use it to write and cash fraudulent checks. Before signing each check, review the invoice, delivery receipt and purchase order.
   
• Keep an eye out for slowdowns in accounts receivable processing and posting of customer payments. These may be indications of a fraud scheme known as "lapping of receivables" in which an employee pockets customer payments instead of depositing them.
   
• Talk to your bank about Positive Pay services. This is an account reconciliation service that allows you to pay only those checks that are authorized, and it's one of the best ways to combat check fraud.
   
• Have one person open the mail and list all the checks on the deposit slip while another enters cash receipts in your financial records.
   
• Put someone who does not handle the checkbook or purchasing in charge of payments to suppliers or vendors.
   
• Have your bank reconciliation done by someone who does not have access to daily checkbook transactions.
   
• Take responsibility for approving all vendors yourself, and make sure there are procedures in place for counting all goods received and checking all orders to make sure they are accurate and of the quantity intended.

Companies serious about documenting and testing their internal control procedures will hire an outside accounting firm to evaluate their system of internal controls and support the certification and assertion requirements of Sarbanes-Oxley. Such a review typically includes these steps:

• Documenting and assessing the effectiveness of the internal controls environment.
   
• Identifying potential control gaps and making recommendations for improvement.
   
• Documenting and tracking changes to key processes and controls.
   
• Coordinating these efforts in a timely and effective manner with external auditors.

Limitations of Performing SOX-Like Procedures

While there can be concrete benefits to documentation and testing of internal controls, not all provisions of Sarbanes-Oxley will be practical for private companies. For example, if owners of private companies have to separate accounting and tax preparation duties, this may add to their cost of services without providing any benefit.

In the end, whether or not to perform SOX-like procedures comes down to cost vs. benefits. Clearly, there can be some value to a 404 type of audit for a private company, but the benefits must justify the additional cost.

Regardless of how many private firms voluntarily comply with some of the SOX provisions, the attention Sarbanes-Oxley has focused on the importance of internal controls can only help privately held companies. It's clear that post-Sarbanes-Oxley, more owners and CFOs of private companies are sitting down with their accounting professionals and learning about how to improve their internal controls.

To discuss your company's internal controls or whether an audit of your internal control systems is appropriate, please call or email either of us at mikem@bobermarkey.com or danielle@bobermarkey.com, or your partner/manager contact at the firm. BMF&C
 

Profiles

In this feature of InfoLetter, each quarter we provide a profile of one of our professionals who is available to work with our clients and friends. Richard C. Fedorovich, CPA Managing Partner

Rick focuses on serving privately held middle market and high growth clients in a variety of industries. He has extensive experience in working with not-for-profits and closely and family held businesses on issues including succession planning, merger and acquisition transactions, tax planning, employee stock ownership plans, estate planning, and business valuations.

A 1974 graduate of The University of Akron, Rick was with KPMG Peat Marwick from 1974 - 1980. He joined the firm in 1980, was elected a Partner in 1982, and was elected Managing Partner in 1996.

Rick's record of community service is notably extensive and includes positions as Chairman or President of the Akron General Medical Center Board, the Greater Akron Chamber, Leadership Akron, Leadership Akron Alumni Association, the Akron General Development Foundation, Visiting Nurse Service and Hospice Development Foundation, United Way of Summit County campaign, Metropolitan Akron Residential Services for the Developmentally Disabled, and Archbishop Hoban High School. Rick has previously been awarded the Pillar Award for outstanding community service, the Justin T. Rogers Spirit of Hospice Award, and the Public Service Award, granted for statewide recognition by the Ohio Society of CPAs, along with numerous other awards for recognition of community service.

Rick is a frequent speaker on various business topics. He has also authored a number of articles on topics which have appeared in Crain's Cleveland Business, Plain Dealer, and Smart Business.

"Excellence in community service is a hallmark of Bober, Markey, Fedorovich & Company. It is not enough for our professionals to do outstanding work for our firm's clients; we have a responsibility to give back to our community and we are committed to doing so." BMF&C

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