SolutionsNewsletter - Fourth Quarter 2013

2013: Is it the End for Certain Tax Laws? page 2Qualifying for a Small Plan Audit Waiver page 3Opportunities for Final Repair Regulations page 4The Cost-Effective Solution for Non-GAAP Users page 5Increasing Your Exclusion on Estate Taxes page 6Cost of Living Adjustments for 2014 page 6Smart and Safe Electronic Recycling page 7Windes Volunteers at the Long Beach Marathon page 8Windes Leadership page 8

Inside

www.windes.com

Windes Unveils New Brand IndentityDear Clients and Friends,

We are pleased to inform you that we have launched our new brand identity. Windes & McClaughry Accountancy Corporation is now Windes, Inc. In addition to our name change, we have a new logo and branding elements that better align with our future direction. Our approach is to proactively ensure that our clients are positioned to take advantage of developing markets and opportunities to maximize their business potential. We recognize that the business environment will continue to become more complex. Our clients are increasingly turning to us not only for traditional audit, tax, and plan administration services, but also for analysis and advice. This step forward enables us to evolve with our clients’ needs and positions us to continue our legacy of exceeding expectations, while providing sound, expert advice that delivers solid, reliable results.

Our new look communicates a strong foundation that is straightforward, collaborative, and progressive. It embraces our strong legacy, emphasizes progressive thinking and a desire to continually improve, while extending our reputation as trusted advisors. We truly appreciate your business and the support you have given us over the years. We are excited about sharing our new brand identity and look forward to continuing our relationship with you.

Sincerely,

John L. Di CarloManaging Partner

Windes celebrates the firm’s new identity at a brand launch event on December 4.

Page 2

2013: Is it the End for Certain Tax Laws?There are numerous tax provisions affecting both individuals and businesses that are set to expire at the end of this year. A budget conference is ongoing between the House and Senate, but there is no way to know if any agreement from the continuing negotiations will extend the expiring tax provisions. Some of the most popular tax provisions that are set to expire at the end of the year are as follows:

Individual

• Election to claim sale and use taxes as an itemized deduction instead of state income taxes.

• Above-the-line deduction for certain higher education expenses (the maximum deduction is $4,000 for taxpayers with modified adjusted gross income (AGI) of not more than $65,000 single or $130,000 for joint filers and $2,000 for taxpayers with modified AGI that is equal to or more than the above amount but not more than $80,000 single or $160,000 for joint filers).

• Ability for individual taxpayers who are at least 70-½ years old to contribute to charities directly from their IRAs without having the amount of their contribution included in their gross income.

• Tax credits available for nonbusiness energy property (e.g. energy efficient windows, insulation, etc.).

• Above-the-line deduction for certain expenses of teachers, which is currently limited to $250.

• Deduction for mortgage insurance premiums deductible as qualified interest.

• Exclusion of discharge of principal residence indebtedness from gross income, which was generally excludable up to $2 million of mortgage debt relief on a principal residence.

Businesses

• First-year 50% bonus depreciation on most new fixed assets (except for certain specialized property). Note that the new fixed assets must be placed into service by December 31, 2013 to be eligible for the deduction.

• For tax years beginning in 2014, the Section 179 expensing limitation will decrease from the current $500,000 to $25,000, and the purchase limit will drop from the current amount of $2,000,000 to $200,000. Note that this change is effective for tax years beginning in 2014 and, therefore, only expires on December 31, 2013 for calendar year entities. For example, a fiscal year C corporation with a year-end of June 30 would still be allowed to use the $500,000 expensing limitation for its 2013 tax return for the fiscal period ending June 30, 2014.

• Federal research and development tax credit.

• Work opportunity credit.

• Reduction in S corporation recognition period for built-in gains tax, which is currently at five years, is scheduled to revert back to a 10-year period.

• 15-year straight-line cost recovery for qualified leasehold, restaurant, and retail improvements.

If you have questions or would like more information about the tax provisions affecting both individuals and businesses that are set to expire at the end of the year, please contact Scott Moir at smoir@windes.com or 562.435.1191.

Scott Moir, CPA, MSManager Tax and Accounting Services

Page 3

Qualifying for a Small Plan Audit WaiverQualified retirement plans that cover employees are subject to bonding requirements under the Employee Retirement Income Security Act of 1974 (ERISA). We have recently seen an increase of investigations by the Department of Labor for plans that are not in compliance with the Small Plan Audit Waiver regulation. It is important for fiduciaries to understand the requirements for the amount of bonding and the exemption from the Small Plan Audit since both items are disclosed on the annual Form 5500 report.

In general, fiduciaries of qualified retirement plans are required to be covered by a surety bond in an amount equal to 10% of the assets of the plan, up to a maximum of $500,000. Small plans with assets not held at a financial institution may need to increase their bonding amounts to avoid a CPA audit.

All plans with less than 100 participants must attach an audit by a CPA to its annual Form 5500, unless they qualify for the waiver. The waiver has three requirements:

• First, as of the last day of the preceding plan year, at least 95% of a small pension plan’s assets must be “qualifying plan assets” or, if less than 95% are qualifying plan assets, then the person who handles assets of a plan that do not constitute “qualifying plan assets” must be bonded in an amount that is at least equal to the fair market value of the “non-qualifying plan assets” being handled.

• Second, the plan must include certain information in the Summary Annual Report (SAR) furnished to participants and beneficiaries in addition to the information ordinarily required.

• Third, in response to a request from any participant or beneficiary, the plan administrator must furnish, without charge, copies of statements the plan receives from the regulated financial institutions holding or issuing the plan’s “qualifying plan assets” and evidence of any required fidelity bond.

Qualifying plans assets are:

• Any assets held by any of the following financial institutions:

o A bank or similar financial institution

o An insurance company qualified to do business under the laws of a state

o An organization registered as a broker-dealer under the Security Exchange Act of 1934

• Participant Loans

• Qualifying Employer Securities

• Shares issued by an investment company registered under the Investment Company Act of 1940

• Investment and annuity contracts issued by an insurance company

Any assets not falling into the categories above, such as partnerships, property or commodities, are considered non-qualifying plan assets and a bond must be obtained equal to their value, if over 5% of total plan assets. The bond must cover the entire value of the non-qualifying assets, even if in excess of the $500,000 maximum for the general bonding requirements described above. The listing of approved surety companies can be found at: www.fms.treas.gov/c570/c570.html.

An independent CPA audit is a costly attachment to a small retirement plan. A CPA is required by professional standards to perform an extensive review of the plan assets and operations. By reviewing their assets and obtaining adequate surety bonding, plan fiduciaries can avoid this cost by meeting the requirements for the small plan audit waiver.

If you have questions regarding this article or would like more information, please contact Therese Cheevers at tcheevers@windes.com or 949.271.2600.

Therese Cheevers, APASenior ManagerEmployee Benefit Services

Page 4

Opportunities for Final Repair RegulationsThe Internal Revenue Service (IRS) has issued final regulations dealing with repair and capitalization under Internal Revenue Code (IRC) Sections 162(a) and 263(a). The final regulations contain standards for determining whether and when a taxpayer must capitalize costs incurred in acquiring, maintaining, or improving tangible property. Issued along with the final regulations were proposed regulations that revise the rules for dispositions of tangible property. The final regulations are effective for tax years starting on or after January 1, 2014. This means that taxpayers need to start implementing these regulations to see how they affect their day-to-day business.

One area that should be addressed soon is the allowance for partial disposal of assets.

Partial Disposals

As part of the new regulations, the IRS came out with proposed regulations dealing with partial disposal of assets. These proposed repair regulations, issued in 2011, allowed taxpayers to take a partial disposal of a structural asset when it is removed from service. Example: If a taxpayer replaces a roof of a building; a write-off of the original roof is allowed when the new roof is capitalized.

Under the proposed repair regulations, this required an automatic change in accounting method. This election under the proposed regulations needs to be taken with a timely filed return, including extension, in the year the asset was removed from service. If there are no changes to the proposed regulations, it will limit the ability to take these deductions on a retroactive basis through a change in accounting method.

The proposed regulations are expected to take effect for tax years starting on or after January 1, 2014. Taxpayers can still file a Form 3115 to take past-year partial disposals on the 2013 tax return. This gives taxpayers time to resolve these issues prior to the regulations becoming permanent.

Potential Permanent Tax Savings

In addition to a current-year deduction on a partial retirement of an asset, converting ordinary recapture tax into capital gains tax could yield future tax savings.

If a taxpayer incorrectly continues to depreciate IRC Sections 1245 and 1250 property that was removed from a building, recapture tax is due upon sale. Retirements or partial disposals can create a permanent tax savings. For example:

• $5 million building with $470,000 of retirements.

• If the $470,000 is depreciated by the taxpayer, taxpayer recaptures all of it upon sale

o If $370,000 is 39-year and $100,000 is 7-year property

o Recapture Tax = $127,500 ($370,000 x 25% + $100,000 x 35%)

• If taxpayer takes a partial disposal

o Recapture tax on the $470,000 = 0

o Capital gain tax = $94,000 ($470,000 x 20%)

• Permanent tax savings of $33,500 upon sale

Taxpayers should look into this to possibly avoid losing this benefit.

If you have questions or would like more information about repair and capitalization, please contact Jimmie Montgomery at jmontgomery@windes.com or 562.435.1191.

Jimmie Montgomery, EAManager Tax and Accounting Services

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The Cost-Effective Solution for Non-GAAP UsersThis year, the American Institute of Certified Public Accountants (AICPA) released its Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs) for privately held owner-managed businesses that are not required to use Accounting Principles Generally Accepted in the United States of America (GAAP). The FRF for SMEs is intended to be a cost-beneficial solution when GAAP is not required by entities whose lenders base their decisions mainly on reliable operations and cash flows. It is a 188-page, non-authoritative, self-contained financial reporting framework also known as an other comprehensive basis of accounting (OCBOA) or special purpose framework. Other OCBOAs and special purpose frameworks include cash basis, modified cash basis, tax basis, regulatory basis, contractual basis, and other non-GAAP bases of accounting.

The FRF for SMEs has no effective date and was available for use upon its release in June 2013. It uses a blend of traditional accounting principles and accrual income tax methods, with historical cost as its primary measurement basis. There are options when selecting accounting policies based on specific needs of financial statement users, which could result in a lack of comparability among companies using the framework. Disclosures are intended to be comprehensive, but targeted and informative. The framework was developed to address typical transactions of private, for-profit, small-, and medium-sized entities and has no industry restrictions.

Determining Whether the FRF for SMEs is an Appropriate Framework to Adopt

In the United States, there is no standard definition for small- and medium-sized entities. The AICPA intentionally excluded any quantified criteria, stating that developing quantified size tests is not feasible and instead focusing on characteristics of typical entities that may utilize the framework. The preface and the first chapter describe certain characteristics of typical entities that may utilize the framework, which are summarized below. (Note: This is not an all-inclusive list or a list of required characteristics in order to utilize the framework.)

• No regulatory reporting requirement for GAAP-based financial statements

• Owner-managed, closely held entity

• No intention to take the entity public

• Management and owners need financial statements focused on assessment of performance, cash flows, and what is owned and owed

• Not in an industry with transactions requiring highly specialized accounting guidance, such as financial institutions or governmental entities

• Financial statement users have direct access to management

• Financial statement users have greater interest in cash flows, liquidity, interest coverage, and strength of financial position

• Lending decisions are not only solely based on the financial statements but also on available collateral or other evaluation mechanisms not directly related to the financial statements

The AICPA has released a decision tool for private companies to determine whether the FRF for SME’s would be an appropriate financial reporting framework at www.aicpa.org. The AICPA is actively marketing the framework to financial institutions and trying to raise awareness. Time will tell whether this framework will be widely adopted.

If you have questions regarding this article or would like more information, please contact Jeff Parsell at jparsell@windes.com or 949.271.2600.

Jeff Parsell, CPASenior ManagerAudit and Assurance Services

Page 6

Increasing Your Exclusion on Estate TaxesIf your spouse passed away recently, there is an important new provision in the law that many people are not aware of that may save you or your family from paying significant gift and estate taxes in the future. To take advantage of this change, you must file an estate tax return for your spouse, even though one is not otherwise required to be filed.

Each individual has a basic exclusion amount, which is the amount that can be transferred free of federal gift and estate taxes. The basic exclusion amount was $5 million in 2011, and, with the adjustment for inflation, the 2013 basic exclusion amount is $5,250,000. Under the new law, starting with 2011 decedents, the remaining amount from the deceased spouse’s unused exclusion amount (DSUEA) can be added to the surviving spouse’s own exclusion amount, to be used at a later date when making gifts and upon death.

The ability to transfer the DSUEA to the surviving spouse is referred to as “portability.” Here is an example of how portability might benefit a surviving spouse: Assume that Husband dies in 2011, having made no taxable gifts and having a $3 million taxable estate. The Husband’s estate files the estate tax return, which permits Wife to use Husband’s DSUEA. As of Husband’s death, Wife has made no taxable gifts. Thereafter, Wife does not have to pay taxes on the first $7 million of her assets (her $5 million basic exclusion amount plus $2 million DSUEA from Husband), which she may use for lifetime gifts or for transfers at death.

The portability election must be made by timely filing an estate tax return in order for the decedent’s surviving spouse to take advantage of this provision. The estate tax return must be filed to make the election, even if the estate would not otherwise be required to file a return. The estate tax return is due nine months after date of death, and the due date may be extended for six months.

There is no easy way to determine whether the DSUEA election should be made. Considerations include:

• Age of the surviving spouse. If the surviving spouse is young, there is more time for the survivor’s estate to grow.

• Size of the survivor’s estate and potential for growth.

• Potential of survivor’s estate to increase because of gifts, inheritance, and unexpected events, such as winning the lottery.

• Fees required to be paid for the preparation of the estate tax return, which is not otherwise required to be filed.

If you have a recently deceased spouse, we recommend that you file the estate tax return. Without it, this election cannot be made, and the election may eliminate or reduce your future gift and estate taxes.

If you have questions or would like more information, please contact Donita Joseph at djoseph@windes.com or 562.435.1191.

Donita Joseph, CPA, MBTPartner Tax and Accounting Services

2013 2014

Maximum Compensation $ 255,000 $ 260,000

Maximum Contribution Limit $ 51,000 $ 52,000

401(k) Annual Limit $ 17,500 $ 17,500

SIMPLE Retirement Accounts $ 12,000 $ 12,000

457/403(b) Plans $ 17,500 $ 17,500

2013 2014

Defined Benefit Annual Limit $ 205,000 $ 210,000

Covered Compensation Limits-Social $ 113,700 $ 117,000 Security

Catch-up Contributions $ 5,500 $ 5,500

Catch-up Contributions to Simple 401(k) $ 2,500 $ 2,500

Highly Compensated Employee $ 115,000 $ 115,000

Cost of Living Adjustments for 2014

Page 7

Smart and Safe Electronic Recycling We are on a treadmill of electronics replacements, continuously upgrading computers, smartphones, and monitors to the latest and greatest models. As we do, the stack of discarded equipment grows in our offices and garages. Is disposal of this old gear as simple as tossing it in the trash? No, environmental concerns lead us to a better answer: Proper disposal of old electronics through a state-managed Electronic Disposal program, also known as ewaste recycling.

Why use ewaste recycling? Electronics contain hazardous materials that damage our environment and cause significant health risks to humans and wildlife. Ewaste recycling provides for safe processing of these harmful materials, keeping them out of water supplies and our breathable air. Ewaste recycling also allows for recovery of certain materials, which are often rare and expensive to produce.

Ewaste recycling is also financially rewarding. Many states collect recycling deposits on electronic items, just as recycling deposits are collected on aluminum cans and glass. Community service organizations have found a lucrative method of fundraising via ewaste: old electronics are gathered, then redeemed at authorized ewaste centers. Deposits are paid out based on the types of electronics or the value of recyclable material contained. In addition to preventing toxic materials from entering our environment, ewaste drives can help community organizations raise much-needed funds.

Commercial ewaste services are available as well. These are generally operated “for-profit” and offer services geared towards fulfilling the equipment disposal needs of most businesses. Free item pick-up is often available. For a small charge, certified data destruction is offered by many of these services.

Batteries, chargers, printers, even computer cables all are worthy ewaste items because they contain environmentally hazardous materials best left to professional ewaste handlers.

Preparing electronics for disposal

Before disposing of any device that might contain sensitive data, steps should be taken to prevent that data from leaking into the hands of cyber-criminals. Old laptops, desktops, or even flash drives might contain confidential information such as financial records, social security numbers, and PDF files of tax returns.

This process, often called “sanitizing” or “data-wiping,” will vary among different types of devices. For example, hard drives of computers should be “wiped” using specialized data destruction software. For extra security, some organizations require physical destruction of hard drives, a separate service offered by many ewaste centers. Drives are crushed using hydraulic presses, or shredded into tiny bits of metallic debris. If you prefer, onsite services are available to physically destroy hard drives. The remaining mass should be ewasted as normal.

Special care should be taken with smartphones. They often contain contacts, emails, and photographs that could be used in unscrupulous ways. Apps might store passwords or other confidential information. Be sure to follow the manufacturer’s recommendation to perform a full “hard reset” before turning the device over to an ewaste collector.

Ewaste recycling is widely available and provides many community service organizations a good means of fund-raising. Sanitize old electronics of data and confidential information before donations are made. The most important idea is that ewaste recycling is the best alternative to simply tossing items in the trash.

If you have questions regarding electronic recycling or would like more information, please contact Norm Dubow at ndubow@windes.com or 562.435.1191.

Norm DuBowDirector Information Technology Services

Partner Peter Lee appointed to (PCPS) Technical Issues Committee

Audit and Assurance Partner Peter Lee has been appointed as a member of the American Institute of Certified Public Accountants’ (AICPA) Private Companies Practice Section (PCPS) Technical Issues Committee. His service for the 2013-2014 volunteer year began this past October.

The AICPA is a national professional organization with more than 394,000 members. The PCPS of the AICPA was established in 1977 in response to government’s call for increased regulation of the accounting profession. The PCPS Technical Issues Committee practitioner volunteers contribute their time and talents working to represent the views of local firms and their clients in the standards-setting process that could have a significant effect on CPAs with small private company, not-for-profit, and

governmental clients. When appropriate, the committee submits comments and recommendations to the standard setters as the collective voice of small and medium-sized firms and clients they serve.

The PCPS Technical Issues Committee is comprised of 14 practitioners from CPA firms nationwide. Membership is by appointment only and members for all of the AICPA’s committees and Boards are appointed based on stated criteria and are subject to an approval process. Most of the committee members are partners in their firms and, at a minimum, are expected to be experts in accounting, auditing, compilation and review, and ethics standards.

SOLUTIONS is published quarterly for the clients, business associates, and friends of Windes. The information presented in this newsletter is intended as general information and may not apply in every case. Please contact Windes, Inc. for specific advice about your particular situation. Comments Email: solutions@windes.com

Member of:

American Institute of Certified Public Accountants (AICPA)

AICPA Employee Benefit Plan Audit Quality Center

American Society of Pension Professionals and Actuaries (ASPPA)

California Society of Certified Public Accountants (CalCPA)

Center for Public Company Audit Firms of the AICPA

National Institute of Pension Administrators (NIPA)

Public Company Accounting Oversight Board (PCAOB) Registered

Editor

Ronald C. Kulek, CPA

Editorial Board

Carolyn K. De Baca

Dolores M. Hernandez

Keith K. Higgins

Craig M. Ima

Suzy B. Meyer

Bella P. Wang, CPA

Headquarters

Landmark Square

111 West Ocean Boulevard

Twenty-Second Floor

Long Beach, CA 90802

Post Office Box 87

Long Beach, CA 90801

562.435.1191

Irvine Office

18201 Von Karman Avenue

Suite 1060

Irvine, CA 92612

949.271.2600

Los Angeles Office

601 South Figueroa Street

Suite 4950

Los Angeles, CA 90017

213.239.9745www.windes.com©2013 Windes, Inc. All rights reserved.

Windes Volunteers at the Long Beach MarathonThe Long Beach Marathon – which began 30 years ago - started as a grassroots event that was organized exclusively by a group of volunteers armed with just enough charitable donations and enthusiasm to launch a promising race. Since then, the marathon has become an international event attended by thousands of athletes and supported by numerous charitable organizations. Windes is proud to be a part of this long-time tradition, with our group of firm volunteers continuing to grow each year. The Windes “Race Team” braved the early morning hours to set up and run one of the much needed water stations in the Long Beach Marathon. Our volunteers cheered on participants as they passed the 13th mile of the race. This is the eighth consecutive year that our team of volunteers has donated its time to service the marathon, which continues to be a highly visible platform for nonprofit organizations to support their various charitable and community visions.

Windes Leadership

Volunteers (L-R back row): Michael Stone, Pete Stone, Dylan Stone, Matt Pietrangelo, Tim Suarez, Mary Kay Stephens, Ron Stephens, Nanette Suarez, Guy Nicio, Robbie Young, and Jim Cordova. (L-R front row): Katherine Stephens, Audrey Yabko, Megan Aguilar, Jimmie Montgomery, Randi Stone, Carolyn De Baca, and Veronica Stephens.