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Work load compression relief.

The AICPA Tax Division has been working diligently to reform the fiscal year election rules under Sec. 444 this year, and there is a good chance fiscal year reform will be enacted (possibly as this issue goes to press}. If so, CPAs can benefit their firms by quickly taking advantage of the new rules. Action this year can create work now, ease work load compression this winter and stabilize both work force and cash flow. The new rules will be complicated but manageable, and the benefits could be tremendous.

As of this writing, Congress is considering HR 11 (passed by the House of Representatives on July 2, 1992), which contains language modifying Sees. 444, 7519 and 280H. In addition, the same language was included in HR 421 O, a bill passed by Congress and vetoed by the President in March. Eventually there will be a tax bill the President will sign, and fiscal year reform will most likely be a part of it. While the House-passed version of the Sec. 444 revision is effective for years beginning in 1993, now is the time to start considering its application to clients.

When the AICPA approached Congress about allowing fiscal year-ends once again for partnerships, S corporations and personal service corporations (affected entities), the Tax Division was told that any changes had to be revenue neutral. The cash-basis Government's revenue neutrality has little to do with the true generation of revenues, and much to do with the timing of receipts. When the U.S. Treasury collects an additional dollar in this fiscal year instead of next year, its revenues have increased, despite the fact that no new revenue has actually been created. This rationale was the basis for the required-year provisions originally enacted in 1986. Because affected entities could postpone reporting income until subsequent years through the use of fiscal year-ends, elimination of fiscal years would create current year accelerated collections. While this may seem like using next year's receipts to pay this year's bills, such is the environment in which the AICPA had to present its proposal.

The Tax Division was faced with a challenging assignment. Constraints imposed by revenue neutrality, no tax increase and easy-to-understand rules heightened this challenge. The refundable "required payment" was developed as the only logical system for allowing fiscal years for affected entities. Currently, a required payment system with an "enhanced" or "additional" payment for the first two years after changing the year-end is the solution that has made its way into tax legislative proposals.

CPAs in public practice have experienced changes in their businesses as a result of required years for affected entities. The changes have adversely increased their work load during the period from January to April, and have created lower levels of work for the rest of the year. To take advantage of the proposed changes in the rules, CPAs must be prepared themselves and must also prepare their clients.

The CPA firm should have a game plan. A well thought out plan allows the firm the advance preparation and foresight needed to best handle each client. A plan will also make the new rules less intimidating both to the firm and to the client. One possible approach is to identify one or two clients for change. Moving a key client from December to June may be enough to keep the firm busy throughout the summer. Look for a client that is busy during the winter months and slow in the summer, That client may welcome a change that would keep the auditors out of the office during the busiest part of the year. The client in such a move should be one that is (or has the potential to be) one of the firm's "better" clients,

A second possible approach is to set a goal as to the number of clients (or the total dollars in billings) and do a selective or mass mailing soliciting volunteers for change, This mailing should be personalized; extol the benefits the clients may reap; point out that while the change is beneficial for the CPA as the work load is spread more efficiently, the client's work is done under less pressure and with more opportunity for thoughtful planning, and follow up with a personal contact to discuss the matter.

A third alternative may be to use the new rules only for future or start-up clients. New businesses have no required payments the first year and therefore little or no additional out-of-pocket expenses for adopting a fiscal year. The firm policy should be one of encouraging adoption of fiscal years, but not requiring other than calendar years for new clients.

Only one person in the firm needs to be a Sec. 444 "mechanics expert." The calculations, once learned, are essentially the same for all affected entities. The rules of required payments are such that a payment due May 15 can be calculated well in advance of the due date, as long as the tax return for the prior year is completed.

Everyone in the firm should be a fiscal year salesperson. The firm should buy into the idea that clients with different year-ends are good for business, morale and cash flow. Employees with client contact responsibility should be encouraged to suggest a Sec. 444 election whenever the opportunity presents itself, especially when the client expresses some frustration over the current situation.

Practitioners should not be intimidated by complexity in the new rules. A few hours with a tax technician is all it should take to feel comfortable with the mechanics of the election and required payment. The AICPA Tax Division will issue a comprehensive practice guide on the new rules shortly after a law is enacted. The IRS will most likely issue guidance on how to comply with the specifics of the new rules. The CPA firm needs to take the guidance provided, combine it with its own know-how and develop its own in-house procedures. The law may be complex, but CPAs can handle it.

In addition to preparing himself, the CPA can also begin to plant the seeds of change with his clients. If the client sees this change in year-end as being in its best interest, the election will likely be made.

One point to make with clients is the increased personalized service available. While clients probably feel that they have not seen the client partner in the winter as much as is desirable, a fiscal yearend client will see this partner in June. While a CPA never provides inferior service to a client, accounting services can only expand and improve for those clients whose year-end does not compete with many other businesses.

The client may realize a benefit of reduced expenses by moving to a fiscal year. For example, taking inventory during the busiest time of the year for retailers is quite expensive. Many businesses loathe the year-end process, especially during a busy part of the business cycle. The client may welcome a change to the low point in the business cycle, when employees and owners are less harried and are able to spend more time with the CPA. A change in year-end may also give the client time and opportunity to discuss and implement recommendations contained in the CPA management letter.

The client should understand that the change in fiscal year-end will have little effect on cash flow. The required payment is designed to replace what would have been paid if the client remained on a calendar year-end. The CPA can demonstrate that the interaction of the business and the owner's tax payments creates an almost break-even scenario.

Let the client know that the current slow economy presents an excellent opportunity to switch to a fiscal year. Clients with a loss in the prior year may not be obligated to make a required payment in the first year. Clients with relatively low income may find that the required payment is very reasonable. These clients should take advantage of the downturn in business to be ahead of the curve when the economy picks up again.

Fiscal year reform presents CPAs with the opportunity to return to some sensible spread of work throughout the year. Preparation of the CPA firm and the client now will benefit both in later years.
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Title Annotation:election rules for fiscal years
Author:Schneid, Joseph W.
Publication:The Tax Adviser
Date:Aug 1, 1992
Previous Article:Indirect methods of income reconstruction.
Next Article:Revisiting "Avoiding Shareholder Gain When Reduced-Basis Loan Is Repaid." (response to The Tax Advisor, p. 322, May 1992)

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