Tax Help for All Businesses Great and Small

In February the normal two year carryback period for Net Operating Losses (NOL’s) was extended to 3, 4 or 5 years for electing small businesses. Earlier this month, the 3, 4 or 5 year NOL carryback election was extended to all business (except taxpayers receiving help from the Federal government under the Emergency Economic Stabilization Act). The carryback is valid for any years ending after December 31, 2007 and commencing before January 1, 2010 – you can even make the election if you previously elected to forego the 2 year carryback period.

What’s the catch? Well, you can only make the election once (qualifying small businesses who were previously eligible now get to make the election twice). Also, if you elect the 5 year carryback, you can only offset 50% of that year’s income with the NOL. Other guidelines, including details for how to elect the carryback were issued by the IRS last week.

Extended carryback periods have been used by the IRS before, and should help many businesses who were profitable by expediting the tax benefit from recent losses. We certainly hope it helps more businesses to keep going during tough economic times, and keep more people employed.

SFAS 157 – How ‘Fair is Fair’ Value?

No matter if you believe that “fair value” drives unnecessary market instability or that it provides enhanced transparency of financial information, the question remains unchanged. What is a supportable fair market value that reflects an orderly transaction between two or more willing market participants?

The SEC’s recently issued “Report and Recommendations Pursuant to Section 133 of the Emergency Economic Stabilization Act of 2008: Study on Mark-To-Market Accounting” concludes, amongst other things, that “..additional measures should be taken to improve the application and practice related to existing fair value requirements – particularly as they relate to both Level 2 and Level 3 estimates”. In the report, the SEC’s Committee on Improvements to Financial Reporting (CIFiR) further recommended the SEC issue a statement of policy articulating how it evaluates the reasonableness of accounting judgments and include factors that it considers when making this evaluation, as well as that the PCAOB should also adopt a similar approach with respect to auditing judgments.

In light of these conclusions, and unlikely forthcoming judgment “guidance” for valuing financial instruments with primarily Level 2 and 3 inputs, it is important to gather all pertinent information and variables potentially used in building a valuation model. There are several keys to doing this including:

• Monitor your investments and those similar throughout the reporting period, not just at the reporting date.
• Stay in touch with general economic indicators.
• Consider your true plans of instrument liquidation and whether the Company has the ability to wait out the market.
• Get your non-accounting finance and analyst types involved as they are generally more comfortable with assumptions and judgment than most accounting types.
• Provide your assumption documentation to your auditor as soon as possible – it is generally not difficult to audit the fair value model itself, however, getting reasonable documentation related to assumptions is where the time is spent, particularly when there is a difference in opinion as to what constitutes reasonable.
• Try to keep it simple concise and as straightforward as possible. Tying certain assumptions to the lining up of the planets will likely not pass your auditor’s smell test.

By the way, the SEC’s Report concluded that the fair value accounting standards did not cause the bank failures of 2008.