New COSO Internal Control Framework Issued

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The Committee of Sponsoring Organizations of the Threadway Commission (COSO) has introduced 17 new principles across the five components critical to internal control as part of its Internal Control-Integrated Framework released on May 14, 2013.

According to COSO, the updates are designed to help organizations design and implement internal control in light of changes in the business landscape since the framework’s original release in 1992 and last updated in 2009.

Also released were two illustrative documents to help organizations assess internal control according to the new framework:

  • Tools for Assessing Effectiveness of a System of Internal Control
  • Internal Control over External Financial Reporting (ICEFR): A Compendium of Approaches and Examples

These documents along with the framework are available for purchase at www.coso.org through Dec. 31, 2013. Free tools available for download include:

The updated framework will supersede the original framework on Dec. 15, 2014.

For assistance navigating the framework, contact our internal auditors in Michigan, Houston or Ft. Lauderdale.

How to Use Your 2012 Tax Return for Future Planning

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Did you owe tax on your 2012 tax return? Did you receive a sizeable refund? Or, conversely, did you receive a smaller refund than you expected? Taking another look at your tax return from this past year and making a few changes could put more money in your pocket in the short term. And by examining your investments as they are reported on your tax return, you may be able to strategize for the long-term. Start by looking at six key elements:

1. Federal Withholding

If you received a large tax refund, it might be time to adjust the amount of tax the federal government withholds from your paycheck. Although next year your refund check may not be as large, you will have the advantage of seeing a larger sum deposited directly into your pocket every month. To adjust your withholding, fill out and sign a Form W-4, and submit it to your employer. Do this in cases where your adjustments to income, exemptions and deductions remain relatively steady from year-to-year, and where the government consistently is required to give you a large refund.

2. State Withholding

Some people are entirely exempt from state tax, but it is withheld from their paychecks nevertheless. At the end of each year, they may include the amount of their state taxes in their itemized deductions, but then receive a refund they have to declare as income in the next year. This problem particularly applies to active duty military families, many of whom are posted in states other than their state of residency. Military families can check with their state income tax authority to see if there is an appropriate form that can be completed and filed to exempt them from withholding. A higher adjusted gross income (AGI), even if it is subsequently reduced by itemized deductions, can erode other adjustments to income, such as a deduction for student loans, IRA contributions, higher education expenses and more because of certain AGI caps on these benefits.

3. Tax Rates and Adjusted Gross Income

As you may have heard, Congress allowed the Bush-era tax cuts to expire for higher-income earners. That means joint filers with more than $450,000 of adjusted gross income ($400,000 for single individuals) are now in the 39.6 percent tax bracket. Taxpayers at this level of income or above are also subject to a higher long-term capital gains tax rate: 20 percent, up from 15 percent paid by other taxpayers.

In addition, for tax years beginning in 2013, the 33 percent tax bracket for individual taxpayers ends at $398,350 for married individuals filing joint returns, heads of households and single individuals. If you were hovering near the bottom of the 35 percent bracket for the 2012 tax year, then you might want to see if you can readjust your income so that you fall within the 33 percent category.

Higher-income taxpayers also have two new taxes to worry about for 2013 and beyond. Joint-filing taxpayers with modified adjusted gross income of $250,000 ($200,000 for single filers) are also subject to the 3.8 percent surtax on net investment income and a .9 percent additional Medicare tax. Does your adjusted gross income for last year approach these figures? Is it on the edge of the income brackets? Will stock market increases this year put you over the top of those income thresholds? If so, it may be time to find ways to reduce your income for 2013.

4. Investments

At some point in your efforts over the years to accumulate a savings nest egg, you will need to consider diversification, the process of putting your money in the right kind of investment vehicles to satisfy your personal risk strategy and achieve your goals. Looking at your tax return will help you decide whether the investments you now have are the right ones for you. For example, if you are in a high tax bracket and need to diversify away from common stocks, investing in tax-exempt bonds might help, especially if you have state income taxes to worry about, too.

5. Medical Costs

Should you be taking advantage of the medical expense deduction? Many people assume that with the 10 percent adjusted gross income floor on medical expenses now imposed for tax years starting in 2013 (7.5 percent for seniors) that it doesn’t pay for them to keep track of expenses to test whether they are entitled to itemize. But with the premiums for certain long-term care insurance contracts now counted as a medical expense, some individuals are discovering that along with other health insurance premiums, deductibles and timing of elective treatments, the medical tax deduction may be theirs for the taking.

6. Retirement Planning

Don’t forget to protect for eventualities. Are you maximizing the amount that Uncle Sam allows you to save tax-free for retirement? A look at your W-2 for the year, and at the retirement contribution deductions allowed in determining adjusted gross income, should tell you a lot. Should your spouse set up his or her own retirement fund, too? Are you over-invested in tax-deferred retirement plans? If so, you may lose a significant amount of your nest egg to tax after retirement.

Look to our dedicated Tax Group to help you plan properly for maximizing future tax savings. For more information, contact our Michigan CPAs, Houston CPAs or Ft. Lauderdale CPAs.

IC-DISC Tax Benefits for Exporters: Could You Qualify?

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Did you know that owner-managed exporting businesses can take advantage of significant tax savings by creating an interest charge-domestic international sales corporation (IC-DISC)? The incentive is broader than you might think – for example, tires manufactured in the United States may qualify if they are installed on a vehicle that is later exported overseas.

Although the most recent tax changes have decreased the savings associated with this benefit, it is still a viable savings strategy, producing a typical savings of 11.2 percent on export income.
Below are some of our clients’ most frequently asked questions about this tax planning tool.

How does the IC-DISC tax planning tool work

A U.S. exporter can set up a separate legal entity, known as an IC-DISC. The exporting company then pays a commission to the IC-DISC: The greater of 4 percent of its export sales, or 50 percent of the combined taxable income from export sales. The IC-DISC does not pay income tax on the commission income from the export sales. Instead, it takes the profits and pays a dividend to the owners of the IC-DISC.

Why should I consider an IC-DISC?

There are several benefits to consider, including:

  • Permanent tax savings on your global sales – 23.8 percent tax rate (which includes the Medicare tax on net investment income) versus 35 percent corporate tax rate on 4 percent of export sales
  • One-time tax deferral opportunity
  • Ability to leverage cost of capital
  • Means to facilitate your succession or estate planning

Consider this sample savings scenario:

ABC Company has $10 million in export revenues and pays $400,000 in commissions to the IC-DISC, which reduces taxable income by $400,000 (commission paid to the IC-DISC). The $400,000 is distributed to owners as a dividend—taxed at only 23.8 percent as opposed to the regular tax rate of 35 percent. The owners pay $95,200 in taxes instead of $140,000 – a savings of $44,800.

How do I qualify?

For an IC-DISC tax savings program to work, your export profits must be earned on items manufactured in the United States and shipped out of the country. Goods sold and shipped to a reseller, and then shipped out of the country (within one year) are also covered as export sales.

Some services also qualify as export profits; however any engineering or construction services related to mineral exploration are excluded. Imported items that are modified in the United States, then exported, as well as items manufactured and sold overseas, also do not qualify.

To explore whether you may qualify for IC-DISC tax savings, contact Doeren Mayhew’s dedicated Tax Incentives Group, with CPAs in Michigan, Houston and Ft. Lauderdale.

Is Your Institution Prepared for New Escrow Requirements for Higher-Priced Mortgages?

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Beginning June 1, 2013, financial institutions originating higher-priced mortgage loans (HPMLs) on residential structures will have to extend escrow account durations for consumers under a final rule issued by the Consumer Financial Protection Bureau (CFPB).

Driven by the CFPB’s mission to strengthen consumer protection, the new rules are designed to help:

  • Prevent consumers from purchasing homes they can’t afford due to taxes and insurance not being taken into account at the time of purchase
  • Avoid unexpected cost shock for consumers by spreading tax and insurance costs over a year instead of a burdensome lump sum
  • Minimizing foreclosure rates for first-lien, higher-priced mortgages

What Are the New Rule Changes?

The final rule, resulting from amendments to the Truth in Lending Act (Regulation Z) established by the Dodd-Frank Act, lengthens the time frame for which an escrow account should be maintained for HPMLs. It will now be extended to a minimum of five years, up from the current requirement of one year. Consumers will have the opportunity to remove the escrow after this five-year time allotment if they have not been delinquent in payments and the loan value is less than 80 percent of the original property value.

Be aware that having additional years of the escrow account will impact the costs associated to extending maintenance.

Although the new rule will apply to many, not every creditor and transaction will be impacted by the escrow account modifications. The rule defines and expands upon several exemptions, including:

Transaction Exemptions – The following transactions are exempt from obliging to the statute’s escrow requirements:

  • Loans on cooperative properties
  • Construction loans that do not include permanent financing
  • Temporary or bridge loans with terms less than 12 months
  • Reverse mortgages
  • Subordinate liens
  • Open-end credit (home equity lines of credit)
  • Insurance premiums purchased by the consumer, but not required by the creditor

Creditor Exemptions – Creditors who operate in predominantly rural or underserved areas are exempt if they:

  • Made more than 50 percent of first-lien covered transactions in rural or underserved counties
  • Combined with affiliates, completed less than 500 first-lien loans in the preceding calendar year
  • Have total assets fewer than $2 billion, adjusted annually for inflation
  • Generally do not escrow for mortgage obligations they or their affiliates currently service
  • Hold the consumer’s loan in their portfolio

Existing Exemption Expansion – Expanding on existing exemptions related to escrowing insurance premiums for condominium units, the new rule includes an exemption for instances where an individual’s policy is covered by a master insurance policy.

How to Prepare for the Changes

With any regulatory change come adjustments. To avoid penalties and potential punitive damage claims by consumers related to ineffectively implementing the regulation, be proactive in accommodating the change at your financial institution by:

  • Developing and implementing systematic changes and business practices to ensure escrow accounts for HPMLs are not waived in the first five years
  • Training impacted departments and staff on the new requirements and related new procedures
  • Evaluating the need to outsource escrowing to a third-party servicing firm to help minimize internal resources’ time and related cost

Even if your institution is exempt from this rule, but still escrows for higher-priced mortgages today, you may need to rethink your current escrow program to accommodate applications received on or after June 1, 2013, to remain exempt.

To learn more about what you can do to prepare for the regulatory change, contact our dedicated Financial Institutions Group, with regulatory compliance specialists in Michigan, Houston and Ft. Lauderdale.