DSCC's Delaware Business Features Cover & Rossiter

Delaware State Chamber of Commerce featured the winners of the "Superstars in Business" award in their bi-monthly magazine Delaware Business. We were not only featured on the cover page of the magazine, but a very nice write-up of our company was published as well. Below is an excerpt from the article but you can view it in full here. "AS ONE OF DELAWARE’S OLDEST and most respected certified public accounting firms, Cover & Rossiter, P.A. boasts an ability to serve a unique cross-section of Delaware businesses, organizations, families, and individuals, as it has for more than 70 years. The firm’s dedication makes it a true Superstar in Business. Employees at Cover & Rossiter provide clients with a full range of financial services, including accounting, auditing, taxes and financial planning, among many others. The company’s commitment to minimizing tax burdens and providing valuable business advice has kept its many clients—which include the Blood Bank of Delmarva, Longwood Gardens, University of Delaware Research Foundation and Read-Aloud Delaware, to name a few—happy and coming back each year."

This article can be found on our website here.

December Edition of Tradition

Our December edition of Tradition was released today. You can view it here.

Lynn Ritter, CPA Becomes Principal at Cover & Rossiter

We are excited to welcome Lynn Ritter, CPA, as our newest Principal at Cover & Rossiter. Lynn comes to us with over 25 years of experience as a certified public accountant. She is now the head of our Middletown office, where she will serve business and individual clients with tax planning and compliance, specializing in estate and trust services.

Learn more about Lynn and the role she will be playing at Cover & Rossiter here: http://www.coverrossiter.com/about-us/team/#ritter

Bernard Madoff - Four Years Later

“GetInvolved Nonprofit Guide” Article for November 2012 from Cover & Rossiter, P.A.

By Pete Kennedy, CPA, CVA - Director at Cover & Rossiter, P.A.

 

It’s hard to believe that only four years ago, few people outside of Wall Street insiders would have known of Bernard Madoff.  Today the Madoff name has entered the lexicon as being synonymous with fraud and greed in the same way Hitler is synonymous with evil.  The announcement of the massive fraud scheme in mid-December 2008 sent many endowment holders racing to their phones with the burning question, “Did we own any Madoff investments?”  So what has happened in the ensuing four years?  What are the lessons that can be learned from this debacle?

 

What really happened?

 

The question in the immediate aftermath of the discovery was, “where did all the money go?”  The total of all Madoff accounts was listed at $65 billion, but in reality the bulk of it was never there to begin with.  The total on a “cash in / cash out” basis has been estimated at $17.3 billion.  While Madoff assuredly took some of that for personal use, as is the case with all Ponzi schemes, the vast majority of the money was used to payout earlier investors.  As Warren Buffett famously noted, “You can’t tell who’s not wearing a swimsuit until the tide goes out.”  When the housing bubble began to deflate earlier in 2008, Madoff account holders began redeeming their shares until there was nothing left to pay them with.

 

Once the scheme was discovered, an army of lawyers began sorting through the records to try to determine what money or assets remained, how they should be apportioned, and if funds could or should be recovered (“clawed back”) from those who redeemed more cash than originally invested.

 

The Madoff investors received a major windfall when the estate of Jeffry Picower acceded to the demands of the bankruptcy trustee and signed over $7.2 billion, which make up the bulk of the amounts recovered to date.  Mr. Picower had reportedly invested $700 million and withdrawn more than $7 billion over the years. 

 

Through other legal action and recoveries from Madoff’s assets, the trustee has amassed $9.2 billion and has begun making distributions to investors who invested more than they withdrew.  While the jury is still out on the final recovery, it is likely that between SIPC claims, clawback recoveries and other lawsuit proceeds, those who were cash negative on their Madoff investments will recoup $0.70 on the dollar.  Facebook IPO investors are jealous.

 

Lessons Learned

 

If something sounds too good to be true …yeah, yeah, yeah, we’ve all heard that before.  Beyond the obvious, there have been some other tidbits.

 

There is an interesting dichotomy between folks who invested directly with Madoff and those who invested in one of the so called “feeder funds.” These were offshore funds that did nothing but funnel massive amounts of money to Madoff.  The total of these funds was (on paper) roughly $10 billion of the (paper) $65 billion.  In spite of that, there are more than 4 claimants through the feeder funds for every direct claimant.  While the loss is no less real for the feeder fund investors, the outlook for recovery is considerably poorer.

 

From the US Madoff Trustee’s perspective, the feeder funds are each an investor in and of themselves and so the net loss (cash in / cash out) is a small fraction of the $10 billion.  The signed agreements between the US Trustee and the Feeder Fund Trustee basically left the feeder funds on their own to pursue legal action against its investors who were cash positive and other service providers. The feeder fund investors will not benefit significantly from the Picower and other settlements in the US.  Further, the feeder fund litigation is not going well. In a marked departure from the US legal action, the British Virgin Islands courts have held that the feeder funds may not pursue clawbacks against its investors (being appealed).  I guess that would be good news for those that stood to be “clawees,” but not so good for those who were cash negative. Also, numerous lawsuits by individual investors against the auditors of the funds (PricewaterhouseCoopers’ Canadian and Netherlands offices) have been unsuccessful in recovering any substantial amounts. I’m glad I don’t have to argue for PwC that the audits were adequate or that no investors should have been relying on them (I’m certain that many were) – PwC must have some pretty sharp lawyers.  The feeder fund lawsuits against PwC with similar claims are now winding their way through the BVI court system with the investors hoping for a different outcome.

 

In the end, if the purpose for moving a fund to an offshore domicile is to avoid the “red tape” (read controls) of the US regulatory system, it should come as no surprise that the rules are different there when “the tide goes out.”

 

Another one of the big losers in the Madoff scandal was Yeshiva University.  The university’s Chairman of the Investment Committee was J. Ezra Merkin, a buddy of Madoff’s and a noted hedge fund manager who had full authority to make investment decisions – and his decisions were often to steer the university’s endowment monies to his own hedge funds. Sadly, Merkin’s three hedge funds were nothing more than Madoff feeder funds with the main difference being that Merkin was taking a 1.5% fee off the top.  The paper value of $112 million evaporated overnight.  It is estimated that Merkin had paid himself over $10 million based on these investments.  The conflicts of interest here are numerous and blatant.  Sad to say, the university had no conflict of interest policy in place – their 6/30/2011 Form 990 indicates that they have one now.

 

If your organization has questions regarding conflict of interest policies or controls, please contact Pete Kennedy, or any other member of our Nonprofit Practice team, at Cover & Rossiter at (302) 656-6632.

 

Cover & Rossiter, P.A. is one of the most respected and experienced CPA firms serving the accounting, tax and audit needs of the nonprofit community in Delaware. 

 

Cover & Rossiter Receives DE State Chamber's Superstar in Business Award

We had a great time at the Delaware State Chamber's 14th Annual Superstars in Business Luncheon! We’re very honored to be one of this year’s award recipients. The video below was played at the Delaware State Chamber Luncheon yesterday. It is such a wonderful representation of Cover & Rossiter. You can view it on YouTube here: http://goo.gl/RQbns  

The Future of the Charitable Deduction

By Pete Kennedy, CPA, CVA

GetInvolved Nonprofit Guide Article published in the September 2012 News Journal

No matter who wins the election in November, tax reform will be at the top of the agenda.  If there’s one thing both sides can agree on (quite possibly the only thing they can agree on), it’s that the tax code needs to be fixed.  The broad outline of the Democrats plan is the “Buffet Rule,” where those making large amounts of money should pay a higher percentage in tax.  For the Republicans, it’s “broaden the tax base, reduce the rates.”  As with most things, the devil is in the details.  Every detail in the tax code is there for a reason – the loopholes that exist are not accidents.  If either side was to provide details of a tax plan, it would assuredly cost them votes so they will remain vague for as long as possible.
The charitable deduction stands as one of the best examples of social engineering through the tax code.  By encouraging charitable giving through tax benefits, the tax code has at least in part helped to create a network of organizations that provide for society’s needs in areas of housing, education, healthcare, historic preservation, religion, etc. That said, the same deduction is routinely listed as one of the IRS’s “Dirty Dozen” tax scams.  While it can’t be denied that abuse occurs, it is my belief that it happens primarily at the individual level or at “charitable” organizations no one has ever heard of – which should never have been granted exempt status in the first place.  The notion that a true publicly supported charity would risk its very existence by abetting a tax scam makes little sense.  Cheaters will cheat, and if the charitable deduction is closed off as an avenue to cheat another will be found.  Be that as it may, for economic reasons, the subsidy represented by the charitable deduction is on the block along with everything else.
Regardless of who wins the election, the “Fiscal Cliff” looms in January 2013. The Fiscal Cliff is a self-imposed set of spending cuts and tax increases that were designed to be so dire and onerous they would force the Congress into bi-lateral action.  It was originally intended to be enforced in 2011, but was delayed until after the 2012 election cycle. The Simpson–Bowles plan was intended as a bi-partisan blueprint for deficit reduction to be enacted as an alternative to the “Cliff.”  Republican nominee Romney states in his campaign literature that the Simpson-Bowles report will be used as a starting point (and VP Nominee Ryan was on the Committee itself).  While Democrats are even less forthcoming as to their plans, many believe that given the small time window between the election and the “Cliff,” Simpson-Bowles (or a plan derived from it) is the only realistic option.
As John Aloysius Farrell and Nancy Cook of the National Journal wrote in an August 17, 2012 article entitled The Legend of Simpson-Bowles, “There is a reason that so few of the commission’s 70-odd recommendations – and none of its major planks – have made it past the hypothetical. Simpson-Bowles hurts.”  As one of its guiding principles, the Simpson-Bowles report states that “America’s tax system is broken and must be reformed.”

So what would Simpson-Bowles mean for the charitable deduction?  Would nonprofits escape the pain?  First, a little bit of good news …Under the Simpson-Bowles illustrative plan, there is no longer a decision point between itemizing and using the standard deduction, meaning that a taxpayer would no longer need to eclipse the standard deduction level in itemized deductions before benefiting from their contributions. Okay, that’s a very little bit of good news, especially considering the bad news …The concept of itemized charitable deductions is eliminated under the illustrated plan and replaced with a 12% nonrefundable credit coupled with a 2% AGI floor.  That’s a mouthful, but here’s a simple example to demonstrate the difference:
Let’s assume that a taxpayer, who would itemize deductions anyway, currently has $100,000 in taxable income and is in the 28% tax bracket. If he/she contributes $5,000, they would receive $1,400 in benefit ($5,000 x 28%).
Under the Simpson-Bowles plan, however, the same taxpayer would receive only $360 in benefit ($5,000 minus $2,000, representing the 2% floor, x 12%) – a reduction of $1,040, or 74%.
We are obviously still in the hypothetical stage at this point.  After the election cycle, however, the changes will come fast and furious. Or the “Cliff” may be pushed out once again.  While Congress may not be able to move mountains, they have proven they can move cliffs.
At the end of the day, people make charitable contributions for different reasons.  With the possible exception of those donating their old clothes (they were brand new, still had the tags on them – honest!), no one can be singularly motivated by the tax benefit to make a charitable donation – if they were, why not just keep the $$ and pay the tax?  The extent to which a reduction in the tax benefits of charitable contributions such as the one discussed above would impact giving overall is an open question – only time will tell.
If your organization has questions regarding the charitable deductions, please contact Pete Kennedy, or any other member of our Nonprofit Practice team, at Cover & Rossiter at (302) 656-6632.
Cover & Rossiter, P.A. (www.CoverRossiter.com) is one of the most respected and experienced CPA firms serving the accounting, tax and audit needs of the nonprofit community in Delaware. 

This article originally appeared on our website. You can see it here along with other articles we have authored.

Itemized Deductions and Personal Exemptions

Over the past several weeks Cover & Rossiter has been alerting clients of the myriad of tax law changes set to take place in January 2013. This week's tax planning tips will focus on changes that are scheduled to occur for itemized deductions and personal exemptions as well as some proposed changes that are being debated. Some upcoming changes are as follows:

• There will be a return to the "phase-out" of itemized deductions to the extent your AGI (adjusted gross income) exceeds a certain threshold. Therefore, 3% of the amount that exceeds this threshold will reduce your allowable itemized deductions.
• The "phase-out" of personal exemptions will be reinstated as well. Personal exemptions would be reduced 2% for each $2,500 by which the taxpayer’s AGI exceeds a certain threshold amount. The deduction for the personal exemption would be completely eliminated at approximately $175,000 for single taxpayers and $260,000 for married couples filing a joint return.
• Mortgage insurance premiums will no longer be deductible. (There presently is legislation pending which would extend the ability to deduct this expense).
• Medical expenses will be deductible as an itemized deduction to the extent those expenses exceed 7.5% of a taxpayers' AGI. Starting in 2012 the threshold increases to 10% of AGI. However, taxpayers who are 65 or older before January 1, 2013 will continue to be able to deduct their medical expenses to the extent the expenses exceed 7.5% for the taxable years 2013 through 2016.

Proposals for tax changes:

• There have been discussions by both political parties in favor of eliminating the mortgage interest deduction on homes that are not the primary residence of a taxpayer. Presently, there is no actual bill, but since there seems to be bipartisan support C&R wants to inform you of this possibility. Taxpayers who are considering purchasing a vacation home, and are counting on a taxable mortgage interest deduction should factor in to their decision making process that the deduction may not be available long term.
• There have been discussions regarding the limitation of the charitable deduction for upper income taxpayers. The Obama proposal would limit the value of the itemized deduction to 28% for couples with incomes greater than $250,000 and individuals with incomes greater than $200,000. Although this has been proposed previously C&R does not believe that there is a high likelihood of legislation passing Congress due to large opposition by non-profit organizations.

Higher income taxpayers should consider pre-paying any itemized deductions such as mortgage interest, real estate taxes and charitable contributions in 2012 to take advantage of the opportunity to obtain a full taxable deduction for those expenses. These decisions can be complicated so please contact us so that we can advise you appropriately on what strategy works best for your situation. Please feel free to contact Marie Holliday at (302) 691-2211 or Jeff Willis at (302) 691-2218 if you have any additional questions.

Cover & Rossiter will be holding seminars at both our Wilmington and Middletown offices to discuss these changes and offer strategies for being proactive in 2012. The dates of these seminars are as follows:

Wilmington office: September 25th 8:00 AM

October 23rd 5:30 PM

Middletown office: October 2nd 5:30 PM

To register for a seminar click here or call 302.691.2224.

Health Care Coverage Requirements and Reporting

The Supreme Court recently upheld the provisions of the 2010 Patient Protection & Affordable Care Act. As a result it will become mandatory for many employers to provide medical coverage to their employees in 2014. Outlined below are some of the rules:

• Companies with 50 or more full-time employees must provide health insurance for all workers by 2014 or penalties could be imposed
• The individual mandate states that everyone must purchase some sort of health insurance by 2014. That means at companies with fewer than 50 employees the responsibility will be on the employee to obtain medical coverage if the employer does not provide it.
• Sole proprietors will also be required to buy health insurance for themselves in 2014 or pay a fine
• The plan must cover 60% of health care expenses
• The employee's share of the insurance costs must be less than 9.5% of the family's salary
• Stiff penalties will apply for those who don't comply with the mandate, including: o Individuals without health coverage will be fined a minimum of $95 or 1% of their income starting in 2014 and the penalties increase each year after. o Employers who don’t meet health insurance coverage requirements could face a minimum penalty of $40,000

In addition, employers are now subject to additional reporting requirements for employer-sponsored health coverage. The Act requires employers to report to their employees on Form W-2 the cost of employer-provided health insurance. Listed below are some guidelines:

• This reporting requirement is optional for small-employers filing less than 250 Forms W-2 in 2012
• In 2013 it will be mandatory for all employers to report the cost of health care premiums to employees.
• The aggregate cost of employer-sponsored health coverage is reported on Box 12 using code DD on Form W-2.
• Please be aware that if you have a payroll agent preparing Forms W-2 for your business you will need to provide the amount of employer-sponsored health coverage for each employee to the payroll agent in order for the correct costs to be included on the employee's Form W-2.

If you have any questions or would like more information, please contact Rachael Leberstien at 302.691.2237 or by email. Visit our website for more information about our firm and the services we provide.

Cover & Rossiter will be holding seminars at both our Wilmington and Middletown offices to discuss these changes and offer strategies for being proactive in 2012. The dates of these seminars are as follows:

Wilmington office: September 25th 8:00 AMOctober 23rd 5:30 PM Middletown office: October 2nd 5:30 PM

To register for a seminar click here or call 302.691.2224.

Individual Tax Rates Will Increase As "Bush tax cuts" Expire

Unless legislation is passed within the next few months, the "Bush tax cuts" will expire at the end of 2012, and the individual tax rates will increase across the board for 2013 as follows:As you can observe from the table above, all taxpayers will experience an increase in their effective federal tax rates, not just higher income individuals.

• Lower income taxpayers’ ordinary federal rates will increase 50% from 10% to 15%, and those in the highest tax bracket could see an ordinary tax rate increase from 35% to 39.6%.
• Taxpayers in the lower income tax brackets have not paid taxes on their long term capital gains over the past several years, but starting in 2013 their rates will increase to either 10 or 20%. Taxpayers in the remaining tax brackets will see a 33.3% increase in their long term capital gains tax rates starting in 2013.
• Qualified dividends will no longer receive a preferential reduced tax rate and will be taxed at ordinary income tax rates.

Many of the higher income taxpayers will also be subject to the additional Medicare surtax of 3.8% on their investment income (capital gains, dividends, and other investment related income types) effectively increasing their ordinary income tax rate to 43.4% and long term capital gain rate to 23.8%. The tax experts at Cover & Rossiter expect that legislation will be enacted to prevent or diminish the impact of these changes; however, we do not expect such legislation to be passed until after the elections. In addition, the proposals currently being presented may only diminish the impact for taxpayers whose income is less than $250,000. If you have any questions or would like more information, please contact Diane Burke at (302) 656-6632.

Cover & Rossiter will be holding seminars at both our Wilmington and Middletown offices to discuss these changes and offer strategies for being proactive in 2012. The dates of these seminars are as follows:

Wilmington office: September 25th 8:00 AM

October 23rd 5:30 PM

Middletown office: October 2nd 5:30 PM

To register for a seminar click here or call 302.691.2224.

Health Care Tax Act and Its Impact on Taxpayers

The Patient Protection & Affordable Care Act, which is referred to as "Obama Care", was signed into law by Barack Obama on March 23, 2010. This Act was designed to overhaul the U.S. healthcare system by providing affordable health care coverage to all Americans. Since its passage there has been significant opposition to the Act but just recently, the Supreme Court upheld the constitutionality of the legislation. Funding for this Act will come mainly in the form of Medicare surtax on upper income taxpayers as follows:

• Beginning in 2013, there is an additional .9% Medicare tax for high income earners. The self employment or wages of single taxpayers in excess of $200,000 and married taxpayers (filing jointly) in excess of $250,000 will be subject to the additional tax.
• Beginning in 2013, there is an additional 3.8% Medicare tax on unearned income such as interest, dividends, capital gains, annuities, royalties, and rent. Single taxpayers with earnings over $200,000 and married taxpayers with earnings over $250,000 will be subject to the additional tax. This provision is significant since it is the first time that the federal government has assessed Medicare tax on unearned income. Tax exempt interest and income from retirement accounts are exempt from this surtax.

Additional other taxes and limitations on deductions will apply as well. Some of these changes are listed below:

• Beginning in 2013, all flexible spending account contributions are reduced to a $2,500 maximum limit.
• Beginning in 2013, all qualified out of pocket medical expenses must exceed 10% of an individual's adjusted gross income in order to receive a deduction on their tax return (presently the threshold is 7.5%). Taxpayers over 65 years old are subject to the 7.5% limit through 2016.
• Penalties will increase to 20% for any non-medical distributions from a Health Savings Account.

These tax law changes can have a significant impact on the amount of tax each individual will owe in the 2013 tax year. If you have any questions or are interested in learning how these changes will affect your 2013 tax liability, please contact Jennifer Pacilli at 302.691.2204 or by email. In addition, Cover & Rossiter will be holding seminars at both our Wilmington and Middletown offices to explain in more detail these changes and answer questions you may have. The dates of these seminars are as follows:

Wilmington office: September 25th 8:00 AM

October 23rd 5:30 PM

Middletown office: October 2nd 5:30 PM

To register for a seminar click here or call 302.691.2224.

This is originally posted on our website here.

Stay informed of the tax law changes approaching

The .9% Medicare surtax on individuals earning wages more than $200,000 per year ($250,000 for married couples).

The 3.8% Medicare surtax on net investment income for individuals with adjusted gross income greater than $200,000 ($250,000 for married couples).

Reversion back to the "pre- Bush" individual tax rate brackets of 15, 28, 31, 36 and 39.6 percent tax brackets (currently the tax brackets are 10, 15, 25, 28, 33 and 35 percent).

Expiration of the "Bush tax cuts" on dividend and capital gain income. Presently, the rates on qualified dividends and long term capital gains are 15%. If legislation is not passed these rates will jump as high as 39.6% for dividends and 20% for long-term capital gains. Adding on the Medicare surtax for investment income, the amounts could be as high as 43.4% and 23.8%, respectively.

Reduction in the amounts allowed for medical flexible spending accounts to a $2,500 annual cap.

Requirement for many businesses to report on an employee’s W-2 the cost of employer-sponsored health care coverage.

Expiration/reduction in bonus and Section 179 depreciation as well as pending legislation to reinstate those provisions for 2013.

Increased FUTA tax rates in certain states due to the depletion of state unemployment coffers which resulted in loans from the federal government. Employers in states that have not repaid those loans will incur higher FUTA taxes.

In addition, Cover & Rossiter will be holding seminars at both our Wilmington and Middletown offices to explain in more detail these changes and answer questions you may have. The dates of these seminars are as follows:

Wilmington office: September 25th 8:00 AM

October 23rd 5:30 PM

Middletown office: October 2nd 5:30 PM

Please feel free to contact Marie Holliday at (302) 691-2211 if you have any additional questions. To register for a seminar click here or call 302.691.2224.

This is originally posted on our website here.

Important Tax Tips

Hopefully you are enjoying your summer, and are relieved that your 2011 tax returns have been filed. Planning for your 2012 taxes probably seems like the least of your concerns right now. Normally, you do not begin that planning process until closer to year end. That may have been an acceptable approach in prior years; however, this year looming on the horizon are significant changes in tax law as well as pending tax law changes that could have an impact on your tax liabilities. These changes are among the most comprehensive changes that U.S. taxpayers have seen in a long time. Cover & Rossiter wants to keep you informed of these changes and assist you in determining any potential effect these changes will have on your tax situations.

• Stay informed of the tax law changes approaching

• Health Care Tax Act and Its Impact on Taxpayers

• Individual Tax Rates Will Increase As "Bush tax cuts" Expire

• Health Care Coverage Requirements and Reporting

• Itemized Deductions and Personal Exemptions

Stay informed of the tax law changes approaching.

Over the next several weeks we will be providing our clients with weekly emails outlining some of the pending and recently enacted tax law changes, such as:

• The .9% Medicare surtax on individuals earning wages more than $200,000 per year ($250,000 for married couples).
• The 3.8% Medicare surtax on net investment income for individuals with adjusted gross income greater than $200,000 ($250,000 for married couples).
• Reversion back to the "pre- Bush" individual tax rate brackets of 15, 28, 31, 36 and 39.6 percent tax brackets (currently the tax brackets are 10, 15, 25, 28, 33 and 35 percent).
• Expiration of the "Bush tax cuts" on dividend and capital gain income. Presently, the rates on qualified dividends and long term capital gains are 15%. If legislation is not passed these rates will jump as high as 39.6% for dividends and 20% for long-term capital gains. Adding on the Medicare surtax for investment income, the amounts could be as high as 43.4% and 23.8%, respectively.
• Reduction in the amounts allowed for medical flexible spending accounts to a $2,500 annual cap.
• Requirement for many businesses to report on an employee’s W-2 the cost of employer-sponsored health care coverage.
• Expiration/reduction in bonus and Section 179 depreciation as well as pending legislation to reinstate those provisions for 2013.
• Increased FUTA tax rates in certain states due to the depletion of state unemployment coffers which resulted in loans from the federal government. Employers in states that have not repaid those loans will incur higher FUTA taxes.

In addition, Cover & Rossiter will be holding seminars at both our Wilmington and Middletown offices to explain in more detail these changes and answer questions you may have. The dates of these seminars are as follows:

Wilmington office: September 25th 8:00 AM

October 23rd 5:30 PM

Middletown office: October 2nd 5:30 PM

Please feel free to contact Marie Holliday at (302) 691-2211 if you have any additional questions. To register for a seminar click here or call 302.691.2224.

Health Care Tax Act and Its Impact on Taxpayers

The Patient Protection & Affordable Care Act, which is referred to as "Obama Care", was signed into law by Barack Obama on March 23, 2010. This Act was designed to overhaul the U.S. healthcare system by providing affordable health care coverage to all Americans. Since its passage there has been significant opposition to the Act but just recently, the Supreme Court upheld the constitutionality of the legislation. Funding for this Act will come mainly in the form of Medicare surtax on upper income taxpayers as follows:

• Beginning in 2013, there is an additional .9% Medicare tax for high income earners. The self employment or wages of single taxpayers in excess of $200,000 and married taxpayers (filing jointly) in excess of $250,000 will be subject to the additional tax.
• Beginning in 2013, there is an additional 3.8% Medicare tax on unearned income such as interest, dividends, capital gains, annuities, royalties, and rent. Single taxpayers with earnings over $200,000 and married taxpayers with earnings over $250,000 will be subject to the additional tax. This provision is significant since it is the first time that the federal government has assessed Medicare tax on unearned income. Tax exempt interest and income from retirement accounts are exempt from this surtax.

Additional other taxes and limitations on deductions will apply as well. Some of these changes are listed below:

• Beginning in 2013, all flexible spending account contributions are reduced to a $2,500 maximum limit.
• Beginning in 2013, all qualified out of pocket medical expenses must exceed 10% of an individual's adjusted gross income in order to receive a deduction on their tax return (presently the threshold is 7.5%). Taxpayers over 65 years old are subject to the 7.5% limit through 2016.
• Penalties will increase to 20% for any non-medical distributions from a Health Savings Account.

These tax law changes can have a significant impact on the amount of tax each individual will owe in the 2013 tax year. If you have any questions or are interested in learning how these changes will affect your 2013 tax liability, please contact Jennifer Pacilli at 302.691.2204 or by email. In addition, Cover & Rossiter will be holding seminars at both our Wilmington and Middletown offices to explain in more detail these changes and answer questions you may have. The dates of these seminars are as follows:

Wilmington office: September 25th 8:00 AM

October 23rd 5:30 PM

Middletown office: October 2nd 5:30 PM

To register for a seminar click here or call 302.691.2224.

Individual Tax Rates Will Increase As "Bush tax cuts" Expire

Unless legislation is passed within the next few months, the "Bush tax cuts" will expire at the end of 2012, and the individual tax rates will increase across the board for 2013 as follows: As you can observe from the table above, all taxpayers will experience an increase in their effective federal tax rates, not just higher income individuals.

• Lower income taxpayers’ ordinary federal rates will increase 50% from 10% to 15%, and those in the highest tax bracket could see an ordinary tax rate increase from 35% to 39.6%.
• Taxpayers in the lower income tax brackets have not paid taxes on their long term capital gains over the past several years, but starting in 2013 their rates will increase to either 10 or 20%. Taxpayers in the remaining tax brackets will see a 33.3% increase in their long term capital gains tax rates starting in 2013.
• Qualified dividends will no longer receive a preferential reduced tax rate and will be taxed at ordinary income tax rates.

Many of the higher income taxpayers will also be subject to the additional Medicare surtax of 3.8% on their investment income (capital gains, dividends, and other investment related income types) effectively increasing their ordinary income tax rate to 43.4% and long term capital gain rate to 23.8%. The tax experts at Cover & Rossiter expect that legislation will be enacted to prevent or diminish the impact of these changes; however, we do not expect such legislation to be passed until after the elections. In addition, the proposals currently being presented may only diminish the impact for taxpayers whose income is less than $250,000. If you have any questions or would like more information, please contact Diane Burke at (302) 656-6632. Cover & Rossiter will be holding seminars at both our Wilmington and Middletown offices to discuss these changes and offer strategies for being proactive in 2012. The dates of these seminars are as follows:

Wilmington office: September 25th 8:00 AM

October 23rd 5:30 PM

Middletown office: October 2nd 5:30 PM

To register for a seminar click here or call 302.691.2224.

Health Care Coverage Requirements and Reporting

The Supreme Court recently upheld the provisions of the 2010 Patient Protection & Affordable Care Act. As a result it will become mandatory for many employers to provide medical coverage to their employees in 2014. Outlined below are some of the rules:

• Companies with 50 or more full-time employees must provide health insurance for all workers by 2014 or penalties could be imposed
• The individual mandate states that everyone must purchase some sort of health insurance by 2014. That means at companies with fewer than 50 employees the responsibility will be on the employee to obtain medical coverage if the employer does not provide it.
• Sole proprietors will also be required to buy health insurance for themselves in 2014 or pay a fine
• The plan must cover 60% of health care expenses
• The employee's share of the insurance costs must be less than 9.5% of the family's salary
• Stiff penalties will apply for those who don't comply with the mandate, including: o Individuals without health coverage will be fined a minimum of $95 or 1% of their income starting in 2014 and the penalties increase each year after. o Employers who don’t meet health insurance coverage requirements could face a minimum penalty of $40,000

In addition, employers are now subject to additional reporting requirements for employer-sponsored health coverage. The Act requires employers to report to their employees on Form W-2 the cost of employer-provided health insurance. Listed below are some guidelines:

• This reporting requirement is optional for small-employers filing less than 250 Forms W-2 in 2012
• In 2013 it will be mandatory for all employers to report the cost of health care premiums to employees.
• The aggregate cost of employer-sponsored health coverage is reported on Box 12 using code DD on Form W-2.
• Please be aware that if you have a payroll agent preparing Forms W-2 for your business you will need to provide the amount of employer-sponsored health coverage for each employee to the payroll agent in order for the correct costs to be included on the employee's Form W-2.

If you have any questions or would like more information, please contact Rachael Leberstien at 302.691.2237 or by email. Visit our website for more information about our firm and the services we provide. Cover & Rossiter will be holding seminars at both our Wilmington and Middletown offices to discuss these changes and offer strategies for being proactive in 2012. The dates of these seminars are as follows:

Wilmington office: September 25th 8:00 AM October 23rd 5:30 PM Middletown office: October 2nd 5:30 PM

To register for a seminar click here or call 302.691.2224.

Itemized Deductions and Personal Exemptions

Over the past several weeks Cover & Rossiter has been alerting clients of the myriad of tax law changes set to take place in January 2013. This week's tax planning tips will focus on changes that are scheduled to occur for itemized deductions and personal exemptions as well as some proposed changes that are being debated. Some upcoming changes are as follows:

• There will be a return to the "phase-out" of itemized deductions to the extent your AGI (adjusted gross income) exceeds a certain threshold. Therefore, 3% of the amount that exceeds this threshold will reduce your allowable itemized deductions.
• The "phase-out" of personal exemptions will be reinstated as well. Personal exemptions would be reduced 2% for each $2,500 by which the taxpayer’s AGI exceeds a certain threshold amount. The deduction for the personal exemption would be completely eliminated at approximately $175,000 for single taxpayers and $260,000 for married couples filing a joint return.
• Mortgage insurance premiums will no longer be deductible. (There presently is legislation pending which would extend the ability to deduct this expense).
• Medical expenses will be deductible as an itemized deduction to the extent those expenses exceed 7.5% of a taxpayers' AGI. Starting in 2012 the threshold increases to 10% of AGI. However, taxpayers who are 65 or older before January 1, 2013 will continue to be able to deduct their medical expenses to the extent the expenses exceed 7.5% for the taxable years 2013 through 2016.

Proposals for tax changes:

• There have been discussions by both political parties in favor of eliminating the mortgage interest deduction on homes that are not the primary residence of a taxpayer. Presently, there is no actual bill, but since there seems to be bipartisan support C&R wants to inform you of this possibility. Taxpayers who are considering purchasing a vacation home, and are counting on a taxable mortgage interest deduction should factor in to their decision making process that the deduction may not be available long term.
• There have been discussions regarding the limitation of the charitable deduction for upper income taxpayers. The Obama proposal would limit the value of the itemized deduction to 28% for couples with incomes greater than $250,000 and individuals with incomes greater than $200,000. Although this has been proposed previously C&R does not believe that there is a high likelihood of legislation passing Congress due to large opposition by non-profit organizations.

Higher income taxpayers should consider pre-paying any itemized deductions such as mortgage interest, real estate taxes and charitable contributions in 2012 to take advantage of the opportunity to obtain a full taxable deduction for those expenses. These decisions can be complicated so please contact us so that we can advise you appropriately on what strategy works best for your situation. Please feel free to contact Marie Holliday at (302) 691-2211 or Jeff Willis at (302) 691-2218 if you have any additional questions. Cover & Rossiter will be holding seminars at both our Wilmington and Middletown offices to discuss these changes and offer strategies for being proactive in 2012. The dates of these seminars are as follows:

Wilmington office: September 25th 8:00 AM

October 23rd 5:30 PM

Middletown office: October 2nd 5:30 PM

To register for a seminar click here or call 302.691.2224.

To RFP, or not to RFP: that is the question

“GetInvolved Nonprofit Guide” Article for July 2012 from Cover & Rossiter, P.A.

By Pete Kennedy, CPA, CVA - Director at Cover & Rossiter, P.A. I attended the recent Delaware Association of Nonprofit Agencies (DANA) Annual Meeting and Conference – it was great to see the renewed energy at DANA and the enthusiasm of the Board and the attendees.  The guest speaker (Vicki Clark – a renowned author and consultant from BoardSource) had many good points in her presentation.  She did make a comment near the end, however, that caused me some concern – that nonprofits should “re-evaluate their relationships with auditors” (among others) “every three years.”

I am often asked about my views on requiring auditor rotation as a matter of policy.  My semi-facetious, one-line response is that it depends if the person asking is a current client of mine or not.   If re-evaluating means a complete request for proposal (RFP) process every three years – regardless of your satisfaction with your current relationship – then I’d like to offer a different perspective.

Auditor Rotation in the News

Auditor rotation has become a major bone of contention between Congress and the Securities and Exchange Commission (SEC).  The “pro mandatory rotation” thought process is that a new audit firm will provide a “fresh look” at the entity’s finances and systems and will be more likely to provide a truly independent perspective than a firm that has been involved for many years.  It is possible to read these stories and attempt to draw the comparison between publicly traded corporations and nonprofits, but that comparison is imperfect.  There are fundamental differences in the auditor / client relationship between most SEC filers and nonprofits that make mandatory rotation somewhat more desirable for large companies.  A 2003 study found that the average tenure of auditors at Fortune 1000 companies was 22 years.  Ten percent had been with the same audit firm for 50 years or more!  These stats are all the more remarkable given that roughly 20% had been forced to rotate the previous year with the demise of the giant CPA firm Arthur Andersen (Enron’s auditor).  At SEC filers – particularly those with long stints with the same audit firms – many senior members of the accounting staffs are alumni of the audit firm.  In those cases, there is an obvious potential for pressure if, for example, the senior executive at the client and the partner at the audit firm came up through the ranks together.  Also, the auditors might view the audit as an extended job interview and be hesitant to take a hard line on issues.

Costs vs. Benefits of Mandatory Rotation

A provision of the Sarbanes-Oxley Act of 2002 (the response to Enron and WorldCom meltdowns) required the Government Accountability Office (GAO) to conduct a study of the potential impact of requiring mandatory rotation of audit firms. The GAO released its 98-page study the following year. To be fair, the study relies heavily on the responses of public accounting firms and their clients (among others) in formulating its findings. With that in mind, the study predicted that audit fees would rise by 20% as firms struggled to deal with the increased up-front cost of assimilating new clients more frequently.  The study also predicted that the potential for “audit failure” (the failure of the audit to identify material misstatements of the audited financial statements) would increase as the familiarity with the client decreased due to mandatory audit rotation.  The study concluded that it would be more efficient and effective to ensure that the audit committee of the corporation had sufficient resources to carry out its increased oversight responsibilities under Sarbanes-Oxley.

2002 presented a golden opportunity to study the “fresh look” impact of mandatory audit firm rotation.  As discussed earlier, with Arthur Andersen’s sudden departure, approximately 200 of the Fortune 1000 were required to find new audit firms.  A study was conducted which measured the number of restatements of previously issued financial statements of those 200 vs. the rest of the population.  A restatement would indicate that the previously issued financial statements were wrong, but would not necessarily identify the cause or how that was uncovered.  The result was that re-statements were more common in the 200 – by a margin of 2.7% (1.2% for the general population vs. 3.9% in the 200).  Yes, a difference, but not a large one, and the root causes were not clearly identified.

The Business Side

It absolutely makes sense to shop commodity-type services.  With copier leases, office supplies, computers, etc., there can be very little differentiation in the product so price becomes the focus of the decision.  The same is not true for lawyers, doctors, investment advisors and other service providers – when you find a good one you stick with them.

We have always advocated our belief that an audit is not a commodity and that all audits are not alike.  Yes, you get those pretty bound financial statements, but your auditors should also be helping to guide your organization through changes, acting as a resource to your accounting staff for questions that arise during the year and discussing upcoming changes in the accounting and tax environment that may affect your organization.  In my experience, the value added from those services will increase over time as the auditor becomes more familiar with your organization and systems and as your staff is more comfortable coming to them with questions.

There is an inherent conflict of interest in every audit – auditors are paid by the people we are auditing and at the end of the day, public accounting is a business.  This conflict exists whether the auditor has been engaged for one year or fifty.  It takes a serious effort to maintain objectivity in any audit, whether the relationship is new or longstanding.  We have been “fired” as auditors several times for sticking to our guns on issues, and in the short-term that is a painful experience.

If, according to Ms. Clark,  “re-evaluating the relationship” means questioning the auditors and challenging them on procedures performed, the reasonableness of their fee, the findings (or lack thereof) and the value added by their services, then I would say that should be done every year, not every three.  If you are dissatisfied with the services provided by your auditor, there is no valid reason to wait three years to make a switch.  But mandatory rotation (changing for the sake of change) will not ensure the development of the most efficient and effective audit relationship for your organization.

If your organization has questions regarding auditor rotation, please contact Pete Kennedy, or any other member of our Nonprofit Practice team, at Cover & Rossiter at (302) 656-6632. Cover & Rossiter, P.A. (www.CoverRossiter.com) is one of the most respected and experienced CPA firms serving the accounting, tax and audit needs of the nonprofit community in Delaware.

You can download the PDF of this article here.

Business Vehicle Expenses – Standard Mileage Rate vs. Actual Cost

By Luci Roseman

Taxpayers using their vehicle for business purposes can choose to use the standard mileage rate or deduct the actual costs of using the vehicle.

The standard mileage rate is the simpler method and requires less recordkeeping. The taxpayer must keep a mileage log outlining the date, miles, destination and business purpose of each trip, and total miles driven during the year. The taxpayer should also keep any receipts for business related parking and tolls as these are deductible when using the standard mileage method. In 2012 the standard mileage rate for business miles will remain at 55.5 cents per mile. If the vehicle is owned by the taxpayer and the standard mileage method is chosen, the actual cost method can be chosen in a later year. If the vehicle is leased and the standard mileage method is chosen, the taxpayer must stick with that method for the life of the vehicle.

The actual cost method allows the taxpayer to deduct the actual expenses of owning and operating the vehicle including gasoline, oil, repairs, maintenance, lease payments, insurance, registration fees and depreciation. The percentage of these costs that are deductible is determined by the percentage of business miles to total miles driven. A mileage log and the receipts for any expenses that are to be deducted should be kept for back-up purposes. As with the standard mileage rate method, the taxpayer should also keep any receipts for business related parking and tolls as these are fully deductible. If the actual cost method is chosen it cannot be changed; the taxpayer cannot switch to the standard mileage method in another year.

As mentioned in the previous blog titled "Business Vehicle Expenses - Depreciation Allowed," depreciation always reduces the basis in the vehicle, so when the vehicle is sold, the calculation of the gain or loss will be affected by the amount of deprecation taken or allowed to be taken. If you use the standard mileage method for vehicle expenses, the vehicle's basis is reduced by a certain amount per business mile which represents the portion of the standard mileage rate treated as depreciation, but not below zero.

If you have any questions or would like more information, please contact Mary Knigge at (302) 656-6632. Visit our website for more information about our firm and the services we provide - www.coverrossiter.com.

Business Vehicle Expenses - Depreciation Allowed

By Luci Roseman
Taxpayers are able to depreciate their vehicle if it is used for business purposes. Generally the 200% Declining Balance Method is used over a five year life. This method results in greater deprecation at the beginning of the five-year period and less at the end. Taxpayers may also elect to use the Straight Line or 150% Declining Balance Methods over a five-year life. Assuming the business use percentage remains constant, choosing the Straight Line Method will result in even depreciation over the 5 year life.

Taxpayers may also be allowed Section 179 and/or bonus depreciation deductions. In order to qualify for these deductions, the vehicle must be purchased and placed into service in the same year the deduction is to be claimed, and greater than 50% of the miles driven must be business miles. The Section 179 deduction can be taken on new or used equipment and is limited to $139,000 in 2012. This deduction is reduced dollar for dollar if you place more than $560,000 worth of equipment in service during the tax year. In other words, if you place $699,000 worth of assets into service during 2012, your Section 179 deduction will be zero; if you place $600,000 worth of assets into service during 2012, your total Section 179 deduction will be limited to $99,000. Besides the limitation just mentioned, the business also must have income in the tax year for this deduction to be claimed or it is carried forward. The bonus depreciation deduction is to be used on new equipment only and allows up to 50% of the purchase cost to be deducted in 2012.

The above deductions are limited based on the type of vehicle and its gross vehicle weight (GVW). For example, in 2012 a car with GVW of 6,000 pounds or less will be limited to $11,160 of total depreciation if bonus or Section 179 depreciation is utilized or $3,160 regular depreciation if neither of these special depreciation options is elected or the taxpayer does not qualify for them. For trucks and vans with loaded GVW of 6,000 pounds or less, the 2012 total depreciation limits utilizing special depreciation and regular depreciation are $11,360 and $3,360, respectively. The depreciation amounts are also limited by the percentage of business miles versus total miles driven during the year. For example, if based on 100% business use the depreciation allowed is calculated to be $1,000 and the taxpayer drove 4,000 business miles and 10,000 total miles. The depreciation deduction would be 40% or $400.

As always, depreciation reduces the basis in the vehicle, so if the vehicle is sold, the calculation of the gain or loss will be affected by the amount of depreciation taken.

If you have any questions or would like more information, please contact Mary Knigge at (302) 656-6632.

College Saving with 529 Plans

For most parents, the rising cost of college education is always on their minds. Finding a way to help your children save for their education early is a key step in being prepared. Section 529 Plans or Qualified Tuition Plans, may be a way to do so.

There are two types of Section 529 plans, which are sponsored by states and educational institutions. Pre-Paid tuition plans enable taxpayers to purchase shares at colleges for future tuition. These shares are worth units, or percentages, of future tuition costs. The second type of 529 plan is a college savings plan. These plans are more like traditional investments and allow taxpayers to put money aside for a beneficiary and choose an investment option that fits their needs best.

Both types of plans have advantages and disadvantages. One undeniable advantage to a Pre-Paid tuition plan is that investors can lock in today's tuition rates for future education. Some investors may be leery of investing in a Pre-Paid Tuition plan because their children may decide to go to a different college or university. If the student selects an in-state public college, this plan would cover the tuition and required fees associated. If the student chooses to attend an out-of-state or private school, the plans usually will pay the average in-state college tuition.

College savings plans, unlike the Pre-Paid tuition plan, do not lock in today's rates for tomorrow. Most, like any investment, are subject to market risk. An advantage however is that withdrawals can be used at any college or university. Also, withdrawals can be used not only for tuition and mandatory fees (like Pre-Paid tuition plans) but they can also be used for room & board, books and required computers (which only some Pre-Paid tuition plans cover).

529 Plan earnings are not subject to federal income tax as long as the withdrawals are used for eligible college expenses. If these withdrawals are not used for college expenses, the earnings will be taxed and an additional 10% penalty will be added to the earnings.

As with any investment, be mindful of the fees that will be charged for your investment. Pre-paid tuition plans often charge participants enrollment and administrative fees while college savings plans can charge enrollment, maintenance, and asset management fees, among others. If you have found a plan that may be right for you, review its offering circular for more detailed information.

If you have any questions or would like more information, please contact: Susan Marley, CPA (302) 656-6632 SMarley@coverrossiter.com This post was originally posted on our website here.

Charitable Travel - How Giving Back Can Reward you at Tax Time

Giving back by volunteering or serving on a non-profit board is a reward in itself. What makes it even better is that the government wants to give you a little break at tax time for your service as well.

Taxpayers are able to deduct reasonable expenses for travel, meals, and entertainment when travelling to perform charitable services. In order for expenses to be deductible, there cannot be a significant amount of personal recreation or vacation, the travel cannot be related to influencing legislation on behalf of a tax exempt organization, and the taxpayer's service must require them to be away from their permanent residence overnight.

For individuals who travel by car to perform charitable services, there is a standard mileage rate that the government allows. For the 2011 and 2012 tax years, taxpayers are able to deduct 14 cents per mile as well as tolls and parking costs incurred.

Keep written records of your travel and save all receipts related to the deductions you will be claiming. As always, use good judgment when considering the deductibility of expenses. The IRS does consider how necessary the travel was in order to perform the charitable services.

If you have any questions, or require additional information, please contact:

Susan K. Marley, CPA
302-656-6632
SMarley@CoverRossiter.com

This article can also be found on our website at http://bit.ly/VolunteerRewards.

FASB Project on Accounting for Leases

The rules on lease accounting have remained substantially unchanged since the 1970’s.  For the most part, lease payments are expensed as paid over the course of the lease.  Leases where the threshold for ownership transfer is met as defined by a narrow series of accounting parameters (capital leases) are accounted for as though the ownership had in fact changed hands with the net present value of lease payments being treated as a debt to be paid.

The Financial Accounting Standards Board (FASB) released an initial exposure draft on lease accounting rules in 2011, which, if implemented, would result in major changes to the manner in which leases are recorded by both lessors and lessees.  Based on the feedback received from industry professionals, the FASB decided to revise this exposure draft and FASB expects to issue a revised exposure draft by mid 2012.
Based on the current exposure draft, all organizations would require the recording of “right of use” assets (or liability) for all leases based upon the net present value of the contractual and probable lease payments discounted based on the incremental borrowing rate of the lessee.

If you have any questions or would like more information, please contact:

Eric Williams, CPA 302-656-6632 ewilliams@coverrossiter.com

E-Mail Schemes Using the IRS Name

In a world where technology has brought so many advances, it is unfortunate that it has also brought many financial risks.  All of us are aware that identity theft exists.  This theft can occur when someone uses your personal information to empty your bank accounts, apply for new credit cards or loans, or charge up existing credit cards.  There are many ways that criminals can obtain this information.  Unfortunately, many criminals are impersonating the IRS in order to gain trust and trick unsuspecting taxpayers.

According to the IRS website, the IRS does not initiate contact with taxpayers by e-mail to request personal or financial information.  They will never send communications requesting PIN numbers, passwords, or bank account and credit card information via e-mail.  Criminals are sending e-mails from false IRS e-mail addresses showing convincing IRS logos with many different scams.  For example, fraudulent e-mails in the past have told victims that they are eligible to receive a tax refund, they can take a paid survey about their dealings with the IRS, they have been suspected of fraud and need to complete an "investigation form", or that their recent payment to the IRS has been canceled.  Victims are asked to click on a link to complete the necessary information, which usually includes valuable personal information and detailed bank account information as well.

The IRS website, IRS.gov, has specific instructions for those that receive these e-mails.  If you ever receive an e-mail from someone claiming to be the IRS, do not reply to the e-mail.  Be sure never to open any attachments or click on any links within the e-mail.  Forward the e-mail, exactly as it was received, to phishing@irs.gov.  Once forwarded to the IRS, delete the e-mail permanently from your computer.  As always, if you have any question regarding the validity of an e-mail from the IRS, contact your accountant or tax advisor for guidance.  For more information on identity theft and protecting yourself, visit the IRS website, where they added a new section devoted to tips, guidance and even YouTube videos about identity theft.

If you have any questions, or require any additional information, please contact:
Susan K. Marley, CPA (302) 656-6632 SMarley@CoverRossiter.com

Two Cover & Rossiter Partners Recognized for Professional Achievements

Peter S. Kennedy, CPA, Director of Cover & Rossiter’s Audit Practice, was recently selected to sit on a national advisory committee for the Financial Accounting Standards Board (FASB).
Mr. Kennedy was selected to be one of 15-20 individuals nationally to serve as a member of the FASB’s new Not-for-Profit Financial Statements Resource Group.  This group will advise the FASB in future Generally Accepted Accounting Principles (GAAP) changes for nonprofits.  The Resource Group will provide the FASB’s Board and Staff with an important discussion forum and advice on critical issues in the Board’s efforts to improve the presentation of information in financial statements of not-for-profit organizations.  Resource Group members will also provide a key vehicle for hearing perspectives from the not-for-profit sector.  In addition, they help the Board and staff in communicating to the sector about those issues, the tentative decisions reached, and proposed changes to existing guidance.
“Cover & Rossiter is honored to have Pete leading our Audit Team and thrilled to announce that he has been chosen to participate in the Resource Group. Pete’s selection recognizes his tremendous knowledge and experience in the nonprofit sector” Geoff Langdon, Managing Director
Diane Burke, CPA, AEP, Director of Cover & Rossiter’s Personal Tax Practice, was honored on January 20, 2012 at the Middletown Area Chamber of Commerce (MACC) Annual Dinner at the Chesapeake Inn.  Ms. Burke was recognized for her outstanding accomplishments and dedication to the MACC.  She received the MACC Will Kirkwood President’s Award, which is given to the Chamber Board Member who has done the most work to benefit the chamber the previous year.
“We are proud to have Diane as the driving force behind our Middletown presence, we are fortunate to have her on our team and excited that she was recognized for all of her hard work at the Middletown Chamber” Geoff Langdon, Managing Director.
Pete Kennedy joined Cover & Rossiter in 1999 and was named Director in 2005.  Pete is an expert in nonprofit accounting and auditing issues and has been privileged to work with many of the region’s leading nonprofit institutions.  Mr. Kennedy is responsible for the firm’s quality control policies and procedures; ensuring Cover & Rossiter meets or exceeds all professional standards. He is a graduate of Clarkson University with a Bachelors degree in Accounting.  Mr. Kennedy retired from the Navy Reserve after twenty-two years of service (six years active duty and sixteen as a Reservist).  Pete enjoys spending time with his family and volunteers as a cash counter at his church and with the Delaware Community Foundation’s Audit Committee.
Ms. Burke joined Cover & Rossiter in 1996, who was named a Director in 2003, leads the Personal Tax Practice. A specialist in trust and estate tax matters, she also has expertise in estate and trust tax filings, estate administration, and preparation of formal fiduciary accountings. She holds a BS in Finance, Summa Cum Laude from New York University, She subsequently earned an MBA in Accounting, with distinction, from the New York University Graduate School of Business. Diane resides in Wilmington with her husband and has three sons.
About Cover & Rossiter – Cover & Rossiter is one of Delaware’s oldest and most respected certified public accounting and advisory firms. Since 1939, Cover & Rossiter has established and maintained longstanding relationships with many of the region’s most prominent businesses, individuals, non-profit organizations and foundations. With offices in Wilmington and Middletown, Cover & Rossiter provides a full range of tax, accounting and audit services with a reputation for unsurpassed client service.
For more information, please contact Lindsay Wheeler, LWheeler@CoverRossiter.com or (302) 656-6632.



This information is originally posted on our website and can be found here.

Taxes and Fees in Delaware for Captive Insurance Companies

There are two different types of fees for Delaware captive insurance companies. The first is a one-time application fee of $200 and an application processing fee of $3,000.  Both of these fees are due upon the submission of the application to the Delaware Commissioner of Insurance.  The second type is an annual license renewal fee of $300 which is due annually on March 1st along with the filing of the annual Premium Tax and Fees Report.

A captive insurance company does not pay income taxes in the State of Delaware.   They do, however, pay premium taxes, which are due annually on March 1st along with the filing of the Annual Premium Tax and Fees Report.   Premium taxes are calculated on gross written premiums during the calendar year less any dividends returned to policyholders.  The direct premium tax is based on 2/10 of 1% and the assumed reinsurance premium tax is based on 1/10 of 1% of the total taxable premiums.   The minimum annual premium tax is $5,000 and the maximum is $200,000 per captive insurance company.

In addition to the taxes and fees noted here, all Delaware corporations must file an annual Franchise Tax Report.    For captive insurance companies, there is no franchise tax due, but there is a $50 filing fee for the filing of the annual Franchise Tax Report.

For more information concerning the calculation of the premium tax or regarding the filing of any of the reports noted here, you can visit the State of Delaware’s Captive Insurance home page or you can contact Jan Snow at jsnow@coverrossiter.com.

What is Next for the Payroll Tax Cut?

At the last minute in 2011, Congress passed a 2-month extension of the payroll tax cut, which reduces the American worker’s social security tax to 4.2% from 6.2%.  Less publicized, the extension also extended federal unemployment benefits for the long-term unemployed AND temporarily forestalled a deep cut in doctors’ Medicare fees that would make it harder for the elderly to find doctors who would treat them.  The cost of the 2-month extension will be paid for by increasing the fees charged to mortgage lenders by Government Sponsored Entities like Fannie Mae and Freddie Mac.  Thus, the same middle income families who are helped by the payroll tax cut will pay for the cut in increased mortgage fees.

Now, the two sides need to figure out how to extend all three measures through the end of 2012 at a $160 billion cost.  How quickly will an extension be reached, if at all?  We predict the law will be extended, but probably not until just before the February 29 expiration date.  Why?  The Democrats believe that, if the talks take a long time, this will damage the Republicans, who have already been criticized for wanting to increase taxes on 160 million workers while standing firm on not increasing taxes on the wealthiest of taxpayers.  Meanwhile the Republicans insist that the cost of the extension be covered by revenue increases; however, they object to the Democratic proposal to cover the cost with a millionaire surtax or a limit on tax deductions for the very wealthy.

On February 3, Democratic leaders announced they have a backup plan to cover the cost of the continuation of the payroll tax cut and the related provisions.  No details have been revealed, however.

What does this mean for the average taxpayer? The payroll tax cut lowers the amount of social security funds available for the checks paid out to the nation’s seniors.  Monies coming in from social security taxes generally go right out in payments to retirees.  So, let’s look at strategies to alleviate dependence on social security:

• Use your employer 401(k) or retirement plan matching – a $150 monthly contribution can be a $300 contribution with the employer match
• Have your HR department deposit a small, say 5%, percentage of your paycheck into a savings account that charges no fees
• Fund an IRA before 4/15/12 – you can contribute up to $5,000 and potentially reduce your taxes too!

Call Diane Burke at Cover & Rossiter at (302) 656 – 6632 for the latest information on tax changes and how you can respond in ways that secure your financial future.

Changes in the 2011 Tax Year

Filing your taxes can be a stressful thing; especially with all of the provisions that change from year-to-year. Today’s economy causes people to feel extra pressure to have their taxes filed properly and without any mistakes. That’s where the expertise at Cover & Rossiter comes in. You can rely on our team to help you stay updated on the tax provisions from one year to the next.

Below we have summarized the provisions that were extended for one year through 2011 and the provisions that became effective in 2011. We hope it will serve as a guide for you. They were compiled by Diane Burke, a very knowledgeable CPA and Director at Cover & Rossiter. For details on any of the provisions, you should speak with Diane, or one of the many CPAs at Cover & Rossiter, to gain a full understanding about the affects they could have on you.  Diane can be reached at dburke@coverrossiter.com. All of the facts are supported by the IRS code section.

The following provisions were extended for one year through 2011:

• The treatment of mortgage insurance premiums as deductible (Sec. 408 (d) (8))
• The deduction for tuition and related expenses (Sec. 222)
• The state and local sales tax deduction (Sec. 164)
• The deduction for elementary and secondary school teachers (Sec. 62(a) (2) (D))

The following provisions became effective in 2011:

• Employees of employers with more than 250 employees may see some new information on their Forms W-2 for 2011:  The value of the employee’s health insurance coverage sponsored by the employer. This reporting is strictly informational the amount reported will not affect the individual’s tax liability.
• Over the counter medications are no longer reimbursable from health savings accounts (HSAs) Archer medical savings accounts (MSAs), health FSAs or health reimbursement arrangements.
• The additional tax on distributions from an HAS or an Archer MSA that were not used for qualified medical expenses was increased to 20% of the disbursed amount, effective for disbursements made during the tax years starting after Dec. 31, 2010 (Under prior law, the tax was 10% of the disbursed amount for HSAs and 15% for Archer MSAs.
• Property acquired and placed in service between Sept. 9, 2010, and Dec. 31, 2011 may be eligible for 100% depreciation.
• Form 1099 B has been expanded to include the cost or other basis of stock and mutual fund shares sold or exchanged during the year.

Please do not hesitative to give the Cover & Rossiter team a call with any questions about the 2011 Tax season. We are happy to assist you. www.coverrossiter.com/

Important Deadlines of 2012 for Captive Insurance Companies in Delaware

So, you just formed a new captive in Delaware.   Now what?  

If you are like the numerous other companies who set up a new captive in 2011 in the State of Delaware, you are likely not aware of all of the filing requirements for your captive insurance company.
The first deadline you need to be concerned with is the Delaware Annual Statement, which is a form required by all State Insurance Departments as regulated by the NAIC (National Association of Insurance Commissioners).   This form is the equivalent of an insurance company financial statement with disclosures.    It is due March 1, 2012 for all calendar year entities.

Premium taxes and license fees are also due on March 1, 2012.    There is only one form that needs to be completed to report and pay both of these fees (Premium Tax and Fees Report). 

The Department of Insurance also requires each captive to obtain an outside audit opinion on the financial statements and an outside actuarial opinion on the reserves.    Both of these reports are due on or before June 30, 2012 for a calendar year entity.

For more information including access to the forms, you can visit the State of Delaware’s Captive Insurance home page.

For specific questions about the forms or the requirements, please contact Joanne Shaver at JShaver@coverrossiter.com.     Joanne oversees the captive insurance services group at Cover & Rossiter.   Cover & Rossiter is a CPA firm providing audit and tax services to captive insurance companies operating in Delaware, Kentucky, Utah and the District of Columbia.

The Wonders of Modern Technology

By Pete Kennedy, CPA, CVA - Director at Cover & Rossiter, P.A.

I recently attended a seminar that focused on popular types of fraud schemes.  One area that was addressed was the many ways modern technology can be used to either commit or conceal fraudulent activity.  Quite an eye-opener!  I poked around on the Internet to see what is out there and even with my limited imagination I found a few examples.

If you’ve used the company credit card for personal reasons and need a fake receipt to cover it up, just type “fake receipts” into Google.  There are literally dozens of websites that promise to provide an authentic-looking receipt that will make that on-line poker tournament registration look like a four-course business meal.

Next, let’s say the bookkeeper needs to get the boss’s password for on-line account access so he / she can make that pesky personal car payment.  No problem – using Google again look for “password hacking software” and again there is a choice of many that promise to do the trick – some are advertised as being free.

OK, now let’s say you need to fake a signature to authorize a bogus expenditure.  It’s YouTube to the rescue!  All you need is a copy of the legitimate signature and there are helpful videos of a variety of methods from rudimentary tracing to sophisticated Photoshop transfers.  One of the contributions was from a person whose moniker was “Worksuxs” so I have a feeling some of the methods have been tried and passed muster in a work environment.   

Alright, now the bookkeeper needs some quick cash.  A fake check would do the trick!  Those are too easy, but now how to cover it up?  Once again, just Google “fake bank statement” and a laundry list of providers will appear.  Interestingly, they are not advertised as a way to perpetrate fraud, but as a great way to get better organized or to “pick up chicks” (just when you thought this couldn’t get any weirder….).  Now I’ve been married for 15 years so I’ve been out of the dating game for a while, but I can’t recall being asked to bring a bank statement to a date – possibly the dating scene has changed radically.   By the way, the same site advertises fake referrals and fake UCC statements.  

It is important to know that just about any document can now be easily faked.  In 2004, the management at Parmalat dummied up a letter verifying a $5 billion cash account to fool their auditors, reportedly running it through a fax machine several times so it would appear authentic.  The phony cash was needed to balance out nonexistent sales that had been reported to meet revenue targets.   In the 8 years since 2004, advances in computer software have made “running it through the fax machine” unnecessary. 

The possibilities to circumvent password controls and cover up fraud with phony documentation are seemingly limitless.  Are organizations at the mercy of computer-savvy fraudsters?   Not necessarily.  Let’s go back to a few basics with internal controls that have nothing to do with documentation.

The “control environment” is the first line of defense against fraud in any organization.  In a nutshell, this refers to the tone at the top, the ethical expectations of all involved and how those expectations are communicated to employees.  An organization with a lax control environment is much more fertile ground for a fraud to sprout.  Where management cuts corners even in small and seemingly insignificant ways, it sends a message to the rank and file.  Are senior management and board members meticulous at following controls themselves?  Are controls strictly enforced across the board?  Are the ramifications of failing to adhere to control processes clearly communicated? 


In a 2010 study of reported fraud cases, a fraud at a nonprofit organization was almost 7 times more likely to be reported by a tip (43.2%) than by the examination of documents (6.5%).  The overwhelming majority of those tips came from rank and file employees reporting suspicious behavior or circumvention of controls on the part of their peers or managers.  An established fraud hotline or formalized anonymous reporting procedure made a pronounced difference in reporting rates.  Organizations with such a mechanism were even more likely to have it reported via the hotline (47.1% vs. 33.9% without).  At organizations with hotlines, the frauds were detected sooner and with a lower average loss.    

An organization’s system of controls should not begin and end with documents.  A strong control environment and a formal mechanism for voluntary anonymous reporting of suspicions can make a huge difference in the susceptibility of your organization to fraud. 

For help setting up a fraud reporting hotline, please contact Pete Kennedy or any other member of our Nonprofit Practice team at Cover & Rossiter at (302) 656-6632.

Cover & Rossiter, P.A. is one of the most respected and experienced CPA firms serving the accounting, tax and audit needs of the nonprofit community in Delaware. 

This article can also be found in “GetInvolved Nonprofit Guide” January 2012 from Cover & Rossiter, P.A.