Spring 2012 issue of Horizons

Spring | 2012

certified public accountants business consultants

horizons Navigating the Changing Regulatory Environment HowOrganizationsareAdapting A Publication of RubinBrown LLP

Is your organization successfully preventing fraud? How efficient and effective administrative processes add to your bottom line How specific industries manage the regulatory landscape

Table Of Contents

horizons A publication of RubinBrown LLP Spring | 2012

Features 2

Welcome From RubinBrown’s Managing Partner

3

RubinBrown News

7

Chairman’s Corner

Chairman James G. Castellano, CPA Managing Partner John F. Herber, Jr., CPA

9

Is Your Organization Successfully Preventing Fraud?

13

How Efficient and Effective Administrative Processes Add To Your Bottom Line

Denver Office Managing Partner

58

Timely Reminders

Gregory P. Osborn, CPA Kansas City Office Managing Partner Todd R. Pleimann, CPA Editor Dawn M. Martin Art Director Joe Ebeler

Industry-Specific Articles 17 Media & Entertainment Focusing The Lens On Film Tax Credits 19 Automotive Beyond Skin Deep: The Effect of Facility Image Programs 23 Home Builders Profitability Is In Sight; A Blessing For Weary Eyes 25 Hospitality & Gaming

Horizons, a publication of RubinBrown LLP, is designed to provide general information regarding the subject matters covered. Although prepared by professionals, its contents should not be construed as the rendering of advice regarding specific situations. If accounting, legal or other expert assistance is needed, consult with your professional business advisor. Please call RubinBrown with any questions (contact information is located on the back cover).

The Best of Both Worlds: Maximizing the Benefits of Licensing Relationships While Managing Risk Colleges & Universities Federal Funding of Higher Education

29

32

Life Sciences Entity Considerations for The Life Science Start-Up Public Sector How Regulatory Changes Will Affect Your Entity’s Audit

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40

Construction Inching Toward A Recovery

43

Not-For-Profit Staying Afloat Among Changing Regulations

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Manufacturing & Distribution Considerations During International Expansion of Your Business Real Estate President’s Budget Proposal Includes Tax Credit Implications Professional Services Managing a Medical Practice in Today’s Regulatory Environment

51

certified public accountants business consultants

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Raise Your Expectations

1

There’s no doubt that the most sweeping regulatory changes within the accounting profession came in the early 2000s with the introduction of the Sarbanes-Oxley Act and its related trickle-down effect on all organizations. Over the past 10+ years, our profession has continued to experience regulatory change and, even more significantly, increasing complexity of rules and standards. The CEO of Financial Executives International reported earlier this year that the top challenges for financial executives include: • Tax reform • Healthcare uncertainty • Dodd-Frank Act implementation and revision • XBRL • Convergence of U.S. GAAP and IFRS • Private company accounting While all of these are considerable, RubinBrown recently reported in our monthly electronic newsletter, “ RubinBrown Accounting & Auditing Alert, ” that the private company accounting debate continues. RubinBrown has and continues to support the Blue Ribbon Panel’s recommendation for a separate, authoritative standard-setting body, under the Financial Accounting Foundation for the promulgation of accounting and financial reporting standards for private companies. On behalf of our clients, RubinBrown remains committed to supporting a solution for relevant, decision-useful accounting and financial reporting standards for private companies. Please review all of our recommendations and guidance on private company financial reporting by reviewing past issues of the RubinBrown Accounting & Auditing Alert . It can be found on the left-hand side of our website at www.rubinbrown.com . As always, I personally welcome your feedback on this issue of Horizons and, overall, on your business views. Please email me directly at john.herber@rubinbrown.com . Welcome FromRubinBrown’s Managing Partner

John F. Herber, Jr., CPA Managing Partner

Pleasant reading,

www.rubinbrown.com

2

News

RubinBrown Around Town

When three young accountants formed Rubin, Brown, Gornstein & Co. in St. Louis in 1952, they only dreamed that their enterprise would evolve into a national leader in the accounting and business consulting profession. Today, RubinBrown LLP, with more than 400 team members working out of offices in St. Louis, Kansas City and Denver, is the largest accounting and business consulting firm in St. Louis, among the largest firms in both Kansas City and Denver, and is ranked 46th in the nation by Inside Public Accounting . This year serves as RubinBrown’s 60th anniversary. Jim Castellano, chairman, cites RubinBrown’s founders’ high professional standards, a dedication to client satisfaction and an exceptional team for the firm’s growth and success. “We wouldn’t be where we are today without the support of our clients and the exceptional work of our partners, managers and other team members,” observed Castellano. “Mahlon Rubin, Harvey Brown, and Sidney Gornstein set very high values for all of us. We feel privileged to follow in their footsteps.”

RubinBrown Sign Debuts On St. Louis Office

The One North Brentwood Building in St. Louis now proudly displays the RubinBrown logo illuminated in full color. The new sign debuted in early 2012 to help commemorate RubinBrown’s 60th Anniversary.

Raise Your Expectations

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Denver Offices Have Combined & Moved RubinBrown has consolidated two Denver area offices and expanded into 26,440 square feet of new space in the 1900 Sixteenth Street building in the LoDo district of downtown Denver. More than 60 accounting, tax and business professionals now occupy the new third-floor suite, which includes the RubinBrown Center, a state-of-the-art conference facility with videoconferencing capabilities used for client seminars and training sessions.

RubinBrown Sponsors RCGA Greater St. Louis Top 50 Awards RubinBrown is proud to serve as the presenting sponsor of The Greater St. Louis Top 50 Awards, presented annually by the St. Louis Regional Chamber & Growth Association. This event recognizes 50 of the most significant companies for their positive effects on the future of St. Louis’ business community.

RubinBrown Chairman Jim Castellano presents the Spirit of St. Louis

Technology Award to AT & T’s John Sondag

Above: RubinBrown Managing Partner John Herber welcomes the 700+ guests at the RCGA Top 50 Awards dinner.

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News – continued

RubinBrown Awarded Ronald McDonald Award The Ronald McDonald House of Charities of Metro St. Louis recently honored RubinBrown with its 2011 Heart and Sole Award. The award recognizes one area company for its long-term commitment and generosity to the non-profit organization.

RubinBrown Staff Member Scores Top 10 On CPA Exam

RubinBrown is proud to have one of the highest scorers of the CPA exam in the U.S. on its team. Chris Tkach, assurance staff member, was one of the winners of the American Institute of Certified Public Accountants 2011 Elijah Watts Sells Award. The award is presented annually to candidates who have obtained the 10 highest cumulative scores on all four sections of the computerized Uniform CPA Examination. These candidates must have completed testing during the previous calendar year and passed each exam section on their first attempt. More than 93,000 individuals sat for the Exam in 2011.

RubinBrown Partners (left to right) Jim Mather, Felicia Malter, and Steve Hays accept the Ronald McDonald Heart & Sole Award, along with Managing Partner John Herber and Chairman Jim Castellano.

RubinBrown Chairman and Managing Partner Named Most Influential The St. Louis Business Journal recently named RubinBrown’s Chairman Jim Castellano and Managing Partner John Herber to its list of Most Influential St. Louisians.

RubinBrown Awards & Recognitions RubinBrown Partner Named to St. Louis 40 Under 40 RubinBrown Partner Chelle Adams has been named one of the 2012 St. Louis Business Journal 40 Under 40 winners. RubinBrown Named in Regional Leader List

Castellano and Herber were featured among top area business leaders and decision makers in the Feb. 17, 2012 issue of the St. Louis Business Journal. This year’s list of honorees included health-care administrators, energy executives, life-science pioneers, politicians, civic leaders and real estate developers.

RubinBrown is proud to have been named the “fastest growing firm in the Midwest” by Accounting Today . The publication stated that the Midwest lagged the rest of the regions, and even managed to grow less in 2011 than it did in 2010. It further stated, “Growth rates at most firms were fairly meager -- St. Louis’ RubinBrown broke the trend, but some of that is no doubt due to its aggressive expansion in Colorado.”

Raise Your Expectations

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RubinBrown New Hires

New Partner

New Managers - continued

Henry Rzonca, CPA , has joined RubinBrown as a partner in the St. Louis Office’s Federal Tax Services Group. Rzonca, who also serves as partner in the Manufacturing and Distribution Services Group, specializes in “C” corporation taxation as well as privately held business and individual tax planning and compliance. Firm Management Rich Bradt recently joined the RubinBrown team as director of internal technology. Bradt oversees the technology planning and operations of all RubinBrown offices. Bradt worked previously as director of information technology at the Home Depot. New Managers manager in the St. Louis office in its Federal Tax Services Group. Bettorf provides tax consulting and planning and tax return preparation services for clients primarily in the manufacturing and distribution industry. RubinBrown added Thomas Brecks, CISA as a manager in its Business Advisory Services Group in St. Louis. Brecks provides enterprise resource planning, IT internal audit and compliance services to clients primarily in the public sector, not-for profit and manufacturing and distribution industries. Kristin Bettorf, CPA , has re-joined RubinBrown as a

Dave Collet, CPA has returned as a manager in RubinBrown’s Assurance Services and Manufacturing and Distribution Services Groups in the St. Louis office. His previous experience and specialties include several large multinational audits acting as a member of the lead engagement team, audits of internal control over financial reporting, income taxes, revenue recognition, and much more. Eric Garrett, CPA recently joined RubinBrown’s Denver office as a manager in the firm’s Assurance Services Group. In addition, Garrett serves clients in the not-for-profit, public sector and manufacturing and distribution industries, specializing in audits, internal accounting controls, and SEC registrations and filings. Mary Jo Larsen, CPA , joined the Denver office as a manager in its Tax Consulting Services Group. Larsen provides tax consulting, preparation and planning services to a variety of clients, including high-net worth individuals, estates and trusts, real estate and other professional practices.

www.rubinbrown.com

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Chairman’s Corner

The Continued Strength and Reach of the Baker Tilly International Network By Jim Castellano, CPA

To better serve our clients with international operations, RubinBrown proudly serves as an independent member of Baker Tilly International. Baker Tilly International is one of the world’s leading networks of independently owned and managed audit, accounting and business advisory firms. Every day, 24,000 professionals in 125 countries worldwide help privately held businesses and public interest entities meet challenges, proactively respond to opportunities and stay competitive. International capability and global consistency of service are central to the way RubinBrown operates. Baker Tilly International just released its financial results for the 2011 fiscal year through publication of its Global Annual Review 2011. The results are impressive. Combined revenues of Baker Tilly International’s member firms rose, year-on-year, 5 percent to $3.2 billion and, overall, Baker Tilly International maintained its position as the world’s 8th largest network. These results reflect a two-tier economic recovery. Combined revenues of Baker Tilly International member firms in Asia Pacific leapt 40 percent as economic recovery across the region forged ahead, closely followed by 24 percent combined growth from member firms in Latin America. In the U.S. and across Europe, Middle East and Africa progress was more sedate, reflecting the uncertain economic environments. Overall, this growth demonstrates our commitment to building a network capable of competing effectively in the global marketplace.

Jim Castellano, CPA Chairman

2012 Baker Tilly Statistics At A Glance Combined revenues ............. US$3.2bn Member firms..................................149 Countries ........................................125 People........................................24,000 Partners .................................... 2,500+ Offices ............................................642

Raise Your Expectations

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Baker Tilly Secondment Program

The Baker Tilly Secondment Program has been designed to provide a unique working experience for staff of its member firms, as well as give the opportunity to learn the cultures of another country. A Secondment Program provides the opportunity to work from another office for a set amount of time, typically 3 or 6 months. Team members who participate in secondments are quickly immersed in client engagements and given authentic work assignments to complete. The goal of the program is to be able to share knowledge with your home office upon returning and to better understand the regulations and challenges each independent firm faces. RubinBrown has been an active participant of the Baker Tilly International Secondment Program over a number of years. It has been advantageous for the firm because it focuses on building talented professionals in a growing global economy. RubinBrown was proud to host two secondees from Staples Rodway in Auckland, New Zealand this winter—Katherine Morgan and Julia Cameron. “My secondment at RubinBrown has been very beneficial as I have widened my knowledge, having now been exposed to several different service lines within the accountancy profession,” states Katherine Morgan. Her fellow teammate, Julia Cameron, agrees and notes that while a majority of the audit work in the U.S. is similar, there are some notable differences. “Most transactions in the U.S. are paid with checks. In New Zealand, very few companies use checks as the majority of payments are electronic payments.”

RubinBrown’s Casey Pohl provides insights to Secondee Julia Cameron.

Throughout this spring and summer, RubinBrown team members Hannah Castellano (far left) and Eric Bouselli (left) will be traveling to New Zealand and will be hosted by Staples Rodway for their secondment assignments.

Katherine Morgan (right) from Auckland New Zealand worked closely with RubinBrown’s Elise Sambol during her time in the U.S.

www.rubinbrown.com

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Features

Is Your Organization Successfully Preventing Fraud? By Dan McCabe, CPA, CFE

Raise Your Expectations

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A

• Is there an anonymous fraud reporting channel available to employees, such as a third-party hotline? • Do employees trust that they can report suspicious activity anonymously and/or confidentially and without fear of reprisal? • Has it been made clear to employees that reports of suspicious activity will be promptly and thoroughly evaluated by management or internal audit? To increase employees’ perception of detection, are the following proactive measures taken and publicized to employees? • Is possible fraudulent conduct addressed proactively rather than reactively? • Are surprise fraud audits performed in addition to regularly scheduled fraud audits? Does top management stress honesty and integrity? • Are employees surveyed to determine the extent to which they believe management and the board acts with honesty and integrity? • Are performance goals and budgets realistic? • Have fraud prevention goals been incorporated into the performance measures against which managers are evaluated and which are used to determine performance-related compensation?

typical U.S. organization loses 7% of its annual revenue to fraud. As if this statistic, provided by the Association of Certified Fraud Examiners

(ACFE), isn’t staggering enough, the organization also reports that in 63% of the cases, the losses were at least $100,000. In 25% of the cases, the losses were $1 million or more. While preventing and detecting fraud has its challenges, organizations that employ clear, and sometimes even simple, strategies can mitigate their risk dramatically. The ACFE reports that the single biggest method of fraud detection in a company is a system of tips or complaints. While no fraud prevention system can completely prevent all fraud from occurring, a strong system can significantly reduce an organization’s fraud risk. To assist our clients with fraud prevention strategies, RubinBrown has developed the following checklist. RubinBrown’s Fraud Prevention Checklist Is ongoing anti-fraud training provided to all employees of the organization? • Do employees have an understanding of what constitutes fraud? • Have the costs of fraud to the company and everyone in it — including items such as lost profits, adverse publicity (including loss of customers), job loss and decreased morale and productivity — been made clear to all employees? • Do employees know when and where to seek advice when faced with uncertain ethical decisions? • Do employees believe that they can speak freely? • Has a policy of zero-tolerance for fraud been communicated to employees through words and actions? Does the company have an effective fraud reporting mechanism in place?

• Have employees been taught how to communicate concerns about known or suspected wrongdoing?

www.rubinbrown.com

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Features – continued

Do the HR and hiring policies include the following (where permitted by law)? • Past employment verification • Criminal and civil background checks • Credit checks • Drug screening • Education verification • Reference checks Are employee support programs in place to assist employees struggling with addictions, mental/ emotional health, family or financial problems? Are employees aware of the existence of support programs? Is an open-door policy in place that allows employees to speak freely about pressures? Is it done in a timely manner enabling management the opportunity to alleviate such pressures before they become acute?

• Has the organization established, implemented and tested a process for oversight of fraud risks by the board of directors or others charged with governance (e.g., the audit committee)? Are fraud risk assessments performed regularly to proactively indentify and reduce the company’s vulnerabilities to internal and external fraud? Are strong anti-fraud controls in place and operating effectively, including the following? • Proper segregation of duties

• Use of authorizations such as passwords • Restriction of data to a need to use basis

• Periodic job rotations • Mandatory vacations

Does the internal audit department have sufficient resources and authority to operate effectively and without excessive influence from senior management?

Are anonymous surveys conducted to assess employee morale and awareness of potential fraud?

RubinBrown’s Assurance Services Group Your company will benefit from our highly trained professionals with experience in many industries. We utilize our renowned Business Performance Analysis (BPA) to bring value-added ideas and feedback while performing attest services.

Fred Kostecki, CPA - St. Louis Partner-In-Charge Assurance Services Group fred.kostecki@rubinbrown.com 314.290.3398

Todd Pleimann, CPA - Kansas City

Managing Partner, Kansas City Office todd.pleimann@rubinbrown.com 913.499.4411

Bert R. Bondi, CPA - Denver Partner Assurance Services Group bert.bondi@rubinbrown.com 303.952.1213

Tom Zetlmeisl, CPA, CPE, CFF - St. Louis Partner Business Advisory Services Group tom.zetlmeisl@rubinbrown.com 314.290.3395

Raise Your Expectations

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ABACUS Recruiting’s reputation for quality service stems from our industry knowledge, commitment to personalized service, confidentiality and dedication to maintaining the most ethical standards in the recruiting industry. Having successfully placed financial and business professionals in positions at Fortune 1000 companies, regional businesses and entrepreneurial firms, ABACUS Recruiting has become one of the most respected names in our industry. Whether you are a company in search of high caliber professionals or a candidate searching for a job change, ABACUS Recruiting is uniquely qualified to assist you. Contact us today!

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ABACUS Recruiting is an affiliate of RubinBrown LLP

Features

How Efficient and Effective Administrative Processes Add To Your Bottom Line

By Maureen Runge, CPA

E nsuring company processes are functioning efficiently and effectively will not only aid in compliance, but just as importantly, it will reduce costs to your organization and boost the bottom line. Often, management may find that processes that were productive in the past are now unsuccessful because the processes have not adapted to changes in the organization. The question remains…what should be done when a good process has gone awry? Breakdowns in a process can occur for a multitude of reasons. They can be a result of centralization of back-office functions, changes in employee job responsibilities, an acquisition event, or new system implementation, to name a few.

When a process becomes inefficient or ineffective due to changes, negative consequences can occur such as resource constraint, inaccuracy, unnecessary fines, and a decline in reputation. For example, an inefficient accounts payable process that causes payments to be paid late may lead to costly late fees, the risk of paying an invoice twice, employees losing benefits because of late payment, and damage to the company’s reputation. To identify the root cause of the issues and mitigate the negative consequences of an inefficient process, management must take a step back and review the entire process from start to finish. To accomplish this, management needs a team that can objectively execute the process, follow a methodology to identify inefficiencies and improve the effectiveness of the process.

Raise Your Expectations

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The SIPOC Process While various methodologies are available, RubinBrown recommends a tool that can assist you. A SIPOC diagram outlines the Suppliers, Inputs, Process, Outputs, and Customers in a process. This tool can help management quickly outline each step of the process and determine where problems may exist. The elements of the SIPOC diagram should be discussed by all personnel involved in the process to ensure that all areas of the process are covered. A designated employee should be assigned as the SIPOC lead to ensure that the group stays on task when discussing these elements and that all discussions are recorded in meeting notes.

Once each of the SIPOC elements has been discussed and evaluated, possible issues and inefficient or ineffective procedures will begin to appear. These items, identified through the use of a SIPOC diagram need to be further evaluated to determine if they are truly an issue or simply a false negative. For example, a possible issue identified in the SIPOC discussion could be that payroll information is entered into the payroll system late due to company departments submitting in time sheets after the prescribed deadline. To confirm or disprove this theory, a report could be run from the system to determine when the payroll information was entered and compared to emails from department managers containing the time sheets.

SIPOC Diagram

Using the Automotive Industry as the subject, below is an example of a SIPOC Diagram. While in this example, ‘Suppliers’ and ‘Customers’ are third-party organizations, if the diagram is created for an internal administrative process, the suppliers and customers may be third-party organizations or internal personnel (such as the Marketing Department or the Controller).

Suppliers

Inputs

Process

Output

Customers

• Paint Wholesaler • Local Metal Suppliers • Glass Distributor • Wiring Distributor

• Paint • Metal • Glass • Wiring • Tires

• Vehicle

• Car Dealerships • Consumer • Rental Car Chains

Weld Body of Vehicle

Attach Doors, Hood, Trunk, Windows, Tires

Create Doors, Hood, and Trunk

Connect Wiring

Paint Vehicle

Inspect Vehicle

Create Windows

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Features – continued

The new process could be that the purchasing card statement is reviewed and approved by the person’s manager to ensure all purchases are valid and within company policy. To change a process, the right stakeholders need to be involved and must agree that the change is needed. Stakeholder understanding and agreement is a crucial step in the process as it ensures that there will not be barriers to resolving the issue. Case Study Below is a real-life example of how a well-thought out plan can help an organization run efficiently, meet its goals, and save the company from paying unnecessary costs: Company XYZ reorganized its four administrative offices into one centralized administrative office. The centralized accounts payable department was now processing four times the number of invoices and disbursements than they had processed in the past. Shortly after the centralization occurred, however, the AP process began to fail and invoices were regularly paid late. These late payments resulted in late fees and vendors calling periodically in an effort to collect funds. If the company continued on the road it was on, it could easily be paying $50,000 and $70,000 each year in late fees plus suffer immeasurable damage to the company’s reputation. Company XYZ decided that the process had to be re-engineered and an outside consultant was brought in to assess the process. The first step performed by the consultant was to hold SIPOC meetings to determine where the process was breaking down. The SIPOC meetings led to many preliminary findings: • Invoices were still being sent to branch locations • Those invoices were not being sent timely to the centralized office

Obtaining measurable support for why the issue is problematic is key in this process. This data driven approach will help you obtain buy-in from your employees and management, so that all involved understand the problem and start formulating ideas to address the issue. Once problem areas within the process have been identified and confirmed, your team should map out the process. This will help everyone visualize at what stage in the process an issue occurs. The process should then be re-mapped (or re-engineered) to resolve the issue. For example, if the current purchasing card policy— which requires purchasing card expenses to be approved by the person who made the purchases—is not effective in monitoring purchases, then the team should brainstorm and map a new process that would ensure adequate control of the purchasing cards.

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The new process was communicated to the controller and the AP staff to ensure they understood the new process and were on board with the implementation of the new process. After a month of following the new process, the outstanding invoices began to decrease to a manageable level. Like this example, it is possible your company can decrease costs, and utilize employees to their full capacity by assessing the administrative processes that are the backbone of your business.

• Invoices were not being entered into accounts payable until the invoice was coded • Unorganized flow of information to the centralized office • Invoices were handled multiple times before entry into accounts payable Once these issues were identified, the consultant measured the days between the invoice date, the date received at the centralized office, the date of entry into the system and the payment date. This analysis helped confirm that each of the above issues was causing a delay in payment. Next, the consultant re-mapped the process to: 1. Eliminate wasteful activities that required the AP department to handle invoices multiple times 2. Ensure invoices were sent directly to the centralized branch and 3. Create a procedure for entering uncoded invoices into accounts payable if certain conditions were met

RubinBrown’s Business Advisory Services Group Your company can improve your processes, comply with regulations, embed risk management programs, and strengthen information technology support through RubinBrown’s advisory services.

Michael T. Lewis, CFA - St. Louis Partner-In-Charge Business Advisory Services Group michael.lewis@rubinbrown.com 314.290.3397

Todd Pleimann, CPA - St. Louis Managing Partner Kansas City Office todd.pleimann@rubinbrown.com 913.499.4411

Mike Ramirez, CPA Director

Matt Wester, CPA, CFE - Denver Partner Business Advisory Services Group matt.wester@rubinbrown.com 303.951.1277

Business Advisory Services Group mike.ramirez@rubinbrown.com 314.290-3455

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Media & Entertainment

Focusing the Lens on Film Tax Credits By Leah McCormick The idea behind film tax credits is growth—to encourage film production in the state issuing the credit, which in turn creates jobs and revenue within that state. While most states have participated in the film tax credit program at one time, only 35 currently have programs available. Some states offer an actual tax credit, while others offer a rebate program. Most states will offer other incentives such as waiving the hotel occupancy tax for production employees if their stay exceeds a certain number of days (usually 30 days). Film tax credits have been in a constant state of change. When financing a film, it is important to be knowledgeable about the differences in the various state options to determine where to produce a film project. This is especially important in the current state of our economy as financing is difficult to obtain without these incentives. Some states require an audit to be completed by a CPA as part of obtaining film credits. More and more states are also requiring training for audit firms that perform audits of film tax credits. Below is an overview of film credit programs in the states where RubinBrown has offices, but we are qualified to perform these audits and assist in planning in many other states as well. Colorado Colorado currently offers a rebate program in lieu of film tax credits. It offers a 10% rebate for productions that spend at least $100,000 in qualified local expenditures or qualified payroll. In order to qualify, the production must originate in Colorado. For productions that do not originate in Colorado, a 10% rebate is available for productions

that spend at least $250,000 on qualified local expenditures or qualified payroll. Origination of the production is based upon the company’s headquarters and principal place of business. The application process must be started prior to any production activities beginning in Colorado. Colorado also offers a waiver of hotel occupancy tax for stays over 30 days. Kansas Kansas currently offers a non-transferable, non- refundable credit. This makes usage of the tax credit difficult because the film investors must have an actual Kansas tax liability in order to use the Kansas tax credit. The tax credit is 30% of direct production expenditures, meaning any expenditure incurred in the state of Kansas that directly relates to the production. The budget of the film must be at least $50,000 if less than 30 minutes in length and $100,000 if over 30 minutes in length. The credit is currently limited to productions filming during 2011 - 2013 and are limited to $2 million per year. Kansas also offers a waiver of hotel occupancy tax for stays over 28 days.

Missouri Although The Missouri Film Commission is no longer being funded, the film tax credit law still exists.

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Other State Facts States like North Carolina have seen an increase in revenue directly related to film productions. In 2011, the NC film office reported $220 million in production spending. Some governors are attempting to use censorship when issuing the tax credits. For example, the Governor of New Jersey requested a stop payment on the rebate check issued to the producers of “Jersey Shore.” The Governor does not think that taxpayer money should be used for films of this content. States that either do not have film tax credit programs or have ended their programs include: Arizona, Idaho, Iowa, Indiana, Nebraska, Nevada, New Hampshire, North Dakota, South Dakota, and Washington.

It consists of a 35% transferrable tax credit of qualified expenditures. The tax credit has an annual cap of $4.5 million, none of which is currently funded. The Missouri Department of Economic Development is now handling the film tax credits. Similar to the Kansas film tax credit, the film budget must be at least $50,000 for films that are less than 30 minutes and $100,000 for films that are longer than 30 minutes. Missouri film tax credits may be carried forward 5 years and are transferrable and sellable. The key part of the program is that the department will give approval based on whether or not they think the film will be a good fit and provide a positive economic impact. Senate Bill 1209 has been introduced to eliminate the film tax credit program effective December 31, 2012. Even though this is just the first step in the legislative process, this Bill has a good chance of passing and being signed into law by mid-May 2012. Missouri has all but abandoned attempts to attract film ventures into its state any more.

RubinBrown’s Media & Entertainment Services Group We serve individuals and organizations of all sizes throughout the broadcast, cable, publishing and entertainment industries.

Larry Rubin, CPA - St. Louis Partner-In-Charge Media & Entertainment Services Group larry.rubin@rubinbrown.com 314.290.3338

Greg Osborn, CPA - Denver Managing Partner, Denver Office greg.osborn@rubinbrown.com 303.952.1250

Todd Pleimann, CPA - Kansas City Managing Partner, Kansas City Office todd.pleimann@rubinbrown.com 913.499.4411

Jessica Sackman, CPA - St. Louis Manager Media & Entertainment Services Group jessica.sackman@rubinbrown.com 314.290.3308

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Automotive

Beyond Skin Deep: The Effect of Facility Image Programs By Mark Conrad, CPA

1. Expansion: Focused on correctly sizing dealership sales, storage and service areas to meet current and projected demand 2. Modernization: Bring the inside and outside facilities to contemporary standards 3. Standardization: Ensure that every dealership carrying a given brand looks more or less alike Generally, all parties involved in the American auto industry agree that dealers, original equipment manufacturers (OEMs) and consumers alike are justified in expecting that new cars be sold from well- maintained, clean, and modernized facilities.

During the recent 2012 National Automotive Dealers Association (NADA) convention in Las Vegas, facility image programs remained a hot topic and a significant concern for dealers across the country. As a result of the continued improvements in the U.S. economy and the significant increase in new vehicle sales from 2010 to 2011, manufacturers continue to increase their pressure on dealers to renovate facilities. The facility image programs are different for each car brand; however they all contain the same three basic attributes:

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Tax Impact of Factory Image Upgrades Funded by the Manufacturer Over the past several years, manufacturers have developed certain programs to help soften the amount of financial burden placed on dealers for these factory image upgrades. Under these programs, manufacturers will absorb certain costs associated with the upgrades to encourage dealers to construct new dealership properties or to upgrade their current facilities. Typically, manufacturers will agree to pay a specific amount to dealerships based on: • Completion of facility construction and satisfaction of program requirements • Number of vehicles sold for a given period of time upon completion of construction and satisfaction of program requirements • Number of vehicles sold for a given period of time based on meeting certain facility milestones and possibly additional requirements The programs vary by manufacturer, but all programs generally provide payments to dealers related to facilities’ upgrades. Over the past few years, these payments made by manufacturers for dealership upgrades have caused some tax debate. Some in the auto industry maintain that all imaging payments must be reported in income. Others claim that the payments should be excluded from income and reduce the basis of the property being renovated and or constructed. In response to this tax debate, the IRS issued an IRS Automotive Alert in January 2012 regarding the dealerships’ tax treatment of factory upgrades. In general, each program must be evaluated individually by the dealership with the help of its tax advisor and treatment of the manufacturer payments should be determined based on the facts and circumstances of that particular program.

However, dealers have expressed concern about these requirements for the past several years and still remain concerned that some of the facility standards are both unreasonable and unnecessary, and will ultimately place significant financial burden on the dealers. They also continue to argue that certain costly upgrades will not lead to a return on their investment. In some cases, the lack of available financing and unwillingness of dealers to infuse significant amounts of capital into their businesses for these upgrade requirements have forced dealers to make the critical decision to cash out and exit the auto industry. Some of the perceived unreasonable and unnecessary facility standards include specifications about towel bars in restrooms, tile color used on the sales floor, picture frames and computer accessories on salesperson desks, and the height of salespersons’ cubicle walls. In response to numerous expressions of concern by dealers across the country, NADA launched a Factory Image Program Study in August 2011. According to Glen Mercer of NADA, the ultimate goal of this study “was to open up a dialog in which all parties could discuss facility requirements on a more rational, informed and fact driven footing.” The results of this study were released on February 4, 2012 at the NADA/ATD convention in Las Vegas. As a result of the project, NADA was able to identify common issues for each attribute of facility image programs and was also able to pinpoint issues that cut across all three attributes of a typical program. Overall, the study found that the best approach for a dealer facing facility upgrade pressure is to engage the manufacturer in a timely business discussion around the cost-benefit analysis of the demands in hopes of coming to a reasonable solution for both parties. A full download of the study, as well as an executive summary of the study, can be found at http://www.nada.org .

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Automotive – continued

A Look At Trucking: How Local and State Taxes Make for a Bumpy Road

Mobile property (trucks and trailers) and payroll to the drivers are included in the in-state’s numerator of this calculation based on the ratio of mobile property miles in the state to total mobile property miles. A mobile property mile is defined as the movement of a unit of mobile property a distance of one mile, whether loaded or unloaded.

The tax code has become more complex over the years, and state taxes are no exception. As companies grow and expand into new states, they often overlook the impact on their state taxes. In some cases, companies may just believe the state tax laws are similar and attempt to operate under a similar structure as their home state. By doing so, companies leave themselves open to potential tax liability. This article will provide an overview of the special income tax apportionment rules used by transportation companies and also discuss the issues associated with multistate businesses that operate transportation companies in addition to other lines of businesses, including apportionment rules and filing income tax returns on a unitary basis. Most states have enacted laws, which provide for unique, special apportionment formulas for trucking companies to report income among the various states in which they conduct business. Under these laws, the standard three- factor (property, payroll and sales apportionment) formula is modified by basing the computation on the numerator of the ratio of the truck miles in a state to the total trucking miles in all states. Some states have adopted formulas based on revenue miles. In general, the property and payroll factors are the ratios of property and payroll used in the state to all the property and payroll used by the trucking company in its trade or business. A special sourcing rule applies to trucking companies.

With regard to the sales factor, the

numerator is generally the trucking company’s total revenue in a given state as it relates

personal property sales or by using cost-of-performance or market-based sourcing for service income.) Complications arise when the trucking company is operating as part of an integrated group of affiliated multistate businesses. Depending on individual state requirements, companies will have to file on a consolidated basis, separate company basis or unitary basis. Limitations are set by each state regarding which way a company may file. For example, a few states will not allow taxpayers to file as a group unless all members use the same apportionment methodology. All of this could affect the tax liability of your company. States also have increased their discovery activites in identifying companies that have sufficient activity

to all revenue derived from transactions and activities in the regular course of the trucking company’s trade or business. The trucking company’s in-state revenue from hauling includes the entire amount of the receipts from intrastate shipments (i.e., the shipment both originates and terminates within the state) and a pro-rata portion of the receipts from interstate shipments (i.e., shipments passing through, into, or out of the state), determined by the ratio of the mobile property miles traveled by the shipments in the state to the total mobile property miles traveled by the shipments from its point of origin to its destination. The in-state portion of any non-hauling revenues is determined under standard rules used for sourcing sales (i.e., to destination or dock state for tangible

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the losses cannot be used to offset the income.

The concepts above are not mutually exclusive. A filing requirement by one business entity can affect all companies within the entity. For example, if Illinois were to claim nexus was created by one of the operating entities of a business, then all activities would be subject to Illinois filing requirements under their unitary approach. Thus, all companies under the entity structure have nexus and are subject to Illinois income tax. Where this filing requirement creates a liability or a tax advantage depends on the state. The trucking company, which maintains a fleet in Illinois, is operating at a profit (“income”), while other members of the unitary group are not. The income of the organization would be netted, allowing the losses to offset the income. In states, like Wisconsin, where separate returns must be filed,

in a state to require filing a return. This concept of sufficient activity is known as “Nexus,” meaning a physical or, in some cases, an economic presence in a given state. The states use a variety of criteria in determining whether a multistate trucking company’s activities have sufficient nexus to file an income tax return. Most states assert that nexus is created by trucks passing through the state on a regular basis. Several determine nexus is created based on one of the following: • The driver’s residence • Only if the driver uses a vehicle owned by the taxpayer • Only if the driver back-hauls goods originating in the state • Only if the driver makes a delivery or pickup in the state

Multistate businesses face many hurdles, especially from those states with unique filing requirements. These requirements can be complex. You should take time to visit with your tax advisor and discuss the changes in the states in which your company operates.

RubinBrown’s Automotive Services Group RubinBrown assists the automotive industry through accounting, income tax, retirement, estate and fringe benefit planning.

John Butler, CPA - St. Louis Partner-In-Charge Automotive Services Group john.butler@rubinbrown.com 314.290.3333

Mary Ramm, CPA - Kansas City Partner Automotive Services Group mary.ramm@rubinbrown.com 913.499.4406

Russ White, CPA, MBA - Denver Partner Automotive Services Group russ.white@rubinbrown.com 303.952.1247

Mark Conrad, CPA - St. Louis Manager Automotive Services Group mark.conrad@rubinbrown.com 314.290.3425

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Home Builders

Profitability Is In Sight; A Blessing For Weary Eyes By Steve Hays, CPA

a. Limit the number of lots sold under pre- construction pricing 5. Reduce the number of plans available

At the National Home Builders Association Annual Convention in February, attendees were greeted with, and at times overwhelmed by, something they have not seen in nearly half a decade—optimism! The mood of this national gathering was generally upbeat as evidenced by a crowded exhibitor floor and educational seminars that were largely standing- room only. Despite ongoing concerns expressed by Federal Chairman Bernanke that there is no “silver bullet” for housing and economists predicting gradual recovery starting now and escalating into 2013, it appears a better day is now in sight. As the industry returns to profitability, the importance of managing the components of gross profit percent, including sales price, developed lot cost, direct construction costs and indirect construction costs remains key. RubinBrown experts have compiled 30 ideas for home builders to improve their gross profit: Selling and Pricing 1. Review your pricing weekly or periodically 2. Maximize your premium lots – charge premiums as the market will vary a. Market your “less desirable” lots at the beginning of the project 3. Sell and maximize the options on which you make money a. Group high margin options with low margin items 4. Don’t allow presales to get too far ahead of production

Developed Lot Costs 6. Location, location, location is even more

important today with an even more careful buyer 7. Prepare budgets for land and development costs and update periodically 8. Understand all hidden costs for each lot 9. All costs to “exit” a project should be included in your original land and development budget

Direct Construction Costs 10. Utilize a purchase order system 11. New models should be designed to

attain a predetermined direct construction cost percentage a. Use anticipated sales price and expected profit to determine house to build – Rule of 80% is minimum to achieve which is the combined developed cost and direct construction percentage of sale price 12. Job cost budgets should be prepared to include all options and upgrades 13. Never start a house without a budget for every item in the house 14. Don’t price by the square foot 15. Build specs “wisely,” meaning produce those that are known winners 16. Re-estimate continuously 17. Have detailed direct construction budgets on display homes 18. Use periodic walkthroughs to control costs

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19. Develop relationships with subcontractors and suppliers and be proactive in scheduling as they can save you money with efficiency and also serve as your eyes and ears on the job 20. Actively solicit all available supplier rebates 21. Change orders should be documented to avoid any misunderstandings Indirect Construction Costs 22. Maintain relationships of productivity. How many people do you need for volume of production? 23. Charge and account for all costs to specific units whenever possible 24. Budget warranty costs and monitor costs incurred on units closed in prior years 25. Enforce controls on automobile and phone expenses by field personnel 26. Don’t purchase field equipment you don’t need 27. Make sure architectural costs are in your budgets

Other 28. Perform an “autopsy” of each house upon closing 29. Demand internal financial and job cost reporting be done by a predetermined time each month 30. Reconcile everything, every time These components of gross profit will have the greatest impact on improving the bottom line of a company’s performance.

RubinBrown’s Home Builders Services Group As a recognized leader in the home building industry, we serve home builders across the country.

Steve Hays, CPA - St. Louis Partner-In-Charge Home Builders Services Group steve.hays@rubinbrown.com 314.290.3336

Glenn Henderson, CPA, CFP - Kansas City Partner Home Builders Services Group glenn.henderson@rubinbrown.com 913.499.4429

Jim Massaro, CPA - Denver Partner Home Builders Services Group jim.massaro@rubinbrown.com 303.952.1211

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