And here’s some help on the Sprint/Nextel equipment exchange with broadcasters, unclaimed property, charitable contributions, compensation and benefits, changes in accounting methods, e-filing and your own individual returns.
Regardless of whether Punxsutawney Phil sees his shadow today [Editor’s note: He did so spring comes early], the odds are good that you won’t see much of your tax departments for the next six weeks. I was reminded of this by two recent activities at BCFM that underscored the point that there’s no EZ tax method for media companies.
The first was the publication of the January/February issue of our member magazine, The Financial Manager, which featured articles on tax implications of the Sprint/Nextel equipment exchange with broadcasters, unclaimed property, charitable organizations and contributions and property valuations.
The second was our late January Distance Learning Seminar, which provided updates on tax treatment for compensation and benefits (including the hot topic of stock options), e-filing requirements, accounting method elections and, because even accountants need help, individual returns. The seminar was led by Carolyn Brown, a director at BDO Seidman, the firm’s experts in these areas.
Let’s start with some of the issues addressed in the seminar.
Compensation and benefits
A term you’ll be hearing in the hallways this year is “FAS 123R.” It refers to the Financial Accounting Standard (FAS) concerning deferred compensation. While, thanks to some high-profile investigations, we’re learning about the impact it’s having on the timing and pricing of stock options, our tax teams are learning how it applies to the tax treatment of options.
We can thank section 409A of the American Jobs Creation Act for changes to tax treatments of distributions from nonqualified deferred compensation plans. Although companies have until this December to bring their compensation plans into alignment with 409A, the new rules apply to 2006 tax filings. Bottom line for taxpayers: steep penalties for improperly treating these areas.
Improving cash flow through changes in methods of accounting
Of particular interest to BCFM members are changes in accounting methods that can favorably affect cash flow through deferred tax savings. One example with particular relevance to ad-supported businesses is the treatment of revenues received in one year for services that will be provided the following year. With these changes, a business can explore deferring the portion of the taxable income into the year that the service will be provided.
Another change in accounting that could apply to advertisers involve make goods. A change in accounting methods allows companies to deduct the liability in the year that it becomes fixed by an executed contract.
In addition, multi-year service contracts represent an opportunity to deduct the prepayment expense in the year of payment rather than amortizing them over the length of the contract.
Another example concerns the method of accounting for bad debt expense. Companies can improve their cash flow by charging off the receivables or setting up special reserve accounts. Of course, we’d all be better off if there simply were no bad debts in the first place.
For 2006, businesses with assets of $10 million or more are required to e-file using one of the 1120 forms. Partnerships with more than 100 partners must also e-file this year, using Form 1065. Among the groups that cannot e-file their 2006 taxes are foreign corporations.
If this is the first year for your company to e-file, it may be helpful to use your 2005 filing as a way to test your e-file software. Companies that develop their own e-file software will also need to have it authorized by the IRS before using it to file their 2006 taxes.
With history as the best teacher, the seminar materials included a great list of rejected filings to serve as guideposts for helping to ensure that our companies’ e-filings are successful.
Individual tax filings—plan your 2007 and 2008 taxes now
The year is nearly a third over by April 15, and there are things we can do now in order to improve your individual 2007 tax situation. The process begins with estimating our 2007 and 2008 adjustable gross incomes. From there, we can determine the advantages or disadvantages of accelerating income and/or accelerating common deductions such as medical expenses, retirement plan contributions and investment interest expenses.
Whether it’s for 2006 or 2007, there are always tax benefits from better record keeping. Mileage allowances are increasing this year, with different allowances for drives to the doctor’s office and for charitable purposes as well as an increase in work-related driving that qualifies for deductions. Of course, there’s still time to make a retirement fund contribution for 2006. If you are considering doing this and are looking for some information, BDO Seidman’s Web site includes a great section on things to keep in mind when evaluating IRAs and includes other tax planning and filing tips as well.
Now, let’s look inside the pages of The Financial Manager.
Of particular interest to television stations are the tax implications for their relocation of BAS spectrum as part of the industry’s agreement with Sprint/Nextel. As Rich Wireman, director of corporate taxation for Meredith Corp. explains, there are a number of tax issues surrounding the exchange of used broadcasting equipment in return for newly installed and tested gear from Sprint/Nextel. With September as the deadline for completing the transition, Rich reminds us that “a tremendous effort is necessary by all broadcasters and Sprint/Nextel as the looming FCC deadline quickly approaches.”
Unclaimed property taxes
Jim Kutz, senior manager of sales and use taxes for Clear Channel, points out that a big topic for industry tax departments this year is the impact of unclaimed property laws. The laws are intended to reunite individuals with property that’s owed to them, such as an unclaimed savings account, but these escheat laws also supplement tax revenues. In fact, states are holding an estimated $35 billion worth of property and can use portions of it to offset annual budget deficits.
Jim notes that the escheat laws can affect how companies treat miscellaneous income. For example, a traditional practice may have been to take uncashed payroll and accounts payable checks back into income. This is unacceptable under all state laws. Ad-supported companies will also want to examine their treatment of adjustments to their accounts receivables to confirm that they are in sync with the state’s escheat laws.
“As with state tax compliance, unclaimed property compliance must be a part of each company’s policies and procedures as states seek to enforce unclaimed property laws more stringently than ever,” Jim concludes.
Establishing a charitable organization
While most companies partner with existing charities, Zack Fortsch at RSM McGladrey in Chicago says that some of us will find that creating a nonprofit can become one of the ways that we give something of ourselves back to our communities. One of the greatest requirements for chartable causes is the management experience of business professionals. This experience can help charities find ways to accomplish more with their limited resources. This is also the type of experience that organizations hope to draw upon when setting up a charitable subsidiary.
Zack provides a step-by-step process for establishing a nonprofit, beginning with determining whether a private or public nonprofit is the way to go. While the natural tendency may be to incorporate in your home state, Zack encourages readers to also look at states like Delaware, which may have an easier process. As Zack points out, there’s a separate process for obtaining tax-exempt status in the state where you will be providing service and soliciting funds.
Bringing us back to our day-jobs, Zack also reviews the tax treatment for tickets to a charity gala and for items that are donated or purchased at silent auctions. Reading Zack’s summary of the nonprofit’s responsibility in advising donors of the values of dinners and auction items was a nice reminder that, although we may have tax departments or specialists at our companies, it’s a taxing time for all of us.
Accurate property valuation
While it’s not really a tax issue, this may be the time to also look at the property value estimates you are using for insurance purposes. Thomas Wing, vice president of Chubb and Son and broadcast segment manager for Chubb’s Commercial Insurance unit, reminds that we are vulnerable to immense devastation by events like Hurricane Katrina as well as more commonly experience setbacks like losing a tower in a windstorm. For the companies involved, these events can serve as painful reminder of the importance of accurate property valuations as well as disaster recovery plans.
If you haven’t looked at the property value estimates in your property and business-insurance policies for a while, Tom shares some helpful data concerning replacement costs. “The numbers are startling,” he reports. In addition to the rising costs for labor, especially for rush jobs, the cost of lumber has risen 21%, drywall 29%, copper pipe 27%, structural steel 53% and steel studs 78%. That’s just over the past two years.”
Tom also passes along a reminder that there can be a significant difference between book value, market value and replacement value. It may cost more to replace a studio than either the current market value for a comparable one or the studio’s book value, which is a depreciated number. And keep in mind, he says, that the value of media assets in your library is a lot more than the cost of the tape or digital file. Looking at these values now, while taxing, can save you when the unexpected occurs.
Now, having worked with a number of accounting firms and tax professionals over the past several years, I know that I need to end this column with the following caveat: Any U.S. tax advice contained in the body of this article was not intended or written to be used, and cannot be used, by the reader for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.
Mary Collins in the president of the Broadcast Cable Financial Management Association, a professional society for financial, MIS and HR executives in the electronic media. Her column appears here every other Friday. She can be contacted at [email protected] or 847-716-7000.