The Sharblog

All Good Things Must End

In the words of Chaucer – “All good things must come to an end.” That’s a reflection on life and it also applies to me as TSCPA CEO and this blog. When I started writing this blog seven years ago, it was an attempt to be part of the larger “social media” world that had developed. I didn’t know where it was going to lead me or what I was going to say. While I hope some others have enjoyed my musings, this blog actually became cathartic for me. So if no one else enjoyed reading it, at least I enjoyed writing it.

Writing a blog is a challenge. First, you have to develop a thought, idea or topic about which to write. Then you have to actually write something to expand on that topic or thought. And you have to get to the point in around 500 words more or less. So writing a blog on a regular basis is not easy. And like most things not easy, it can provide a lot of pleasure and pride when you do it well. I am sure I did not achieve that goal on every blog out of the more than 150 I wrote, but hopefully I hit the target on a couple.

In a few days, I will be wrapping up my role as CEO for TSCPA. My successor, Jodi Ann Ray, will be taking over on January 1. So with a new year, we will have a new CEO to lead TSCPA into the future. For those who have not yet met Jodi Ann, I know you will find her to be very smart and personable. She has some great ideas about moving TSCPA forward and brings with her a solid background of experience from working at several other membership organizations. I know she will do a great job for TSCPA.

As for me, while I am ending my role as CEO, I will still be on the TSCPA team for a little while serving as managing director of governmental affairs during the upcoming Texas legislative session in Austin. My focus will now narrow to that functional area and my hope is that I can be half as good as Bob Owen who I will be replacing.

As this day has been approaching, I have been reflecting on the past 17 years serving as TSCPA CEO. My main thought has been about how lucky I have been. Lucky to have gotten the position 17 years ago. Lucky to have worked with so many outstanding volunteer leaders at TSCPA over that time period. Lucky to have had such a great staff at TSCPA. And most importantly, lucky to have such a wonderful wife and family to support me in my role.

Yes, all good things must come to an end. But I wouldn’t have wanted it to end any other way or with any other people. Thanks for the memories. It’s been a blast! Godspeed to TSCPA and to all Texas CPAs.

 

 

 

 

 

Continuing Saga of Overtime Rules

I have written in the past about the Department of Labor’s (DOL) efforts to change the rules related to overtime pay and the efforts of TSCPA and many other business groups and associations to have the DOL make changes to those proposed rules. See my blog on this subject back in August here:

http://sharblog.typepad.com/blog/2016/08/working-overtime-on-overtime.html

Well now there is a new chapter in this long and ever-changing story. The rules proposed by the DOL were slated to go into effect on December 1, but dozens of business groups and 21 state attorneys general (including Texas) challenged the overtime rule in federal court. On Nov. 22, 2016, in a 20-page order, Texas U.S. District Judge Amos Mazzant issued a temporary injunction halting the rule nationwide.

In issuing his order, the judge, who was nominated to the bench by President Obama, stated: “Due to the approaching effective date of the Final Rule, the Court’s ability to render a meaningful decision on the merits is in jeopardy. A preliminary injunction preserves the status quo while the Court determines the department’s authority to make the Final Rule as well as the Final Rule’s validity.”

The judge rejected the government's plea to hold off on an injunction, saying the states would suffer immediate harm as they were forced between raising the salaries of thousands of managerial employees or cutting back on services and work hours. The rule can await a trial on the merits, he said.

On the other hand, the judge rejected the states' argument that overtime rules don't apply to them at all. The U.S. Supreme Court has ruled that labor laws do apply to the states, and while that decision is in dispute and has been hemmed in a bit by subsequent rulings, it is still the law, he wrote.

As expected, the Obama Administration appealed the decision of the court and on December 8, the U.S. Court of Appeals for the Fifth Circuit granted the DOL’s request for an expedited hearing of its overtime rule appeal.

It’s unclear at this point what impact an expedited appeal will have on the rule’s prospects. Even with the expedited hearing, oral arguments in the appellate court will not take place until February or even March, long after a new administration is in office.

During the campaign, President-elect Donald Trump said he favored an exemption from the overtime rule for small businesses. It remains to be seen whether he and his new Labor Secretary will simply drop the appeal after he takes office on January 20 or pursue some other litigation strategy.

In the meantime, it appears a lot of businesses may move forward in implementing the new rules anyway. According to a new survey recently conducted by the small-business network Manta, a whopping 84 percent of small businesses say they still plan to implement their overtime changes. What’s more, nearly two-thirds of the poll respondents said they were indifferent to the proposed overtime changes. So while there is currently no regulatory requirement to make the changes, and they may be dropped under the new Trump Administration, many businesses may make the moves to implement the new rules anyway.

Stay tuned to see how this saga all plays out over the upcoming months.

 

 

 

 

Taxing Tyranny

One issue that TSCPA and AICPA are currently focusing our advocacy efforts on is the possibility that Congress may enact tax reform legislation that would include a provision to mandate certain service-based businesses with $10 million or more of revenue to convert to an accrual basis of accounting and prohibit them from using the cash basis of accounting. This would have a significant effect on many CPA firms, as well as many other organizations that perform services in fields such as law, engineering, health care, architecture, farming and other areas. 

Now we didn’t just wake up one day and assume this might be a problem. Our concerns were raised because a few years ago, this concept got imbedded into a tax reform proposal that ended up going nowhere. But the marker on this particular issue had been played at that point and like many things in Washington, DC, we now must be ever vigilant about it raising its head again. And that probability is not insignificant because if enacted, this particular proposal would raise an estimated $26 billion for the government’s coffers.

The idea to mandate the accrual method of accounting for certain pass through entities and personal service corporations isn’t based on any kind of sound tax policy. Pure and simple, it was viewed as a one-time revenue generator to help pay for other tax changes. Congress has to develop a favorable revenue score on any proposed legislation so it will work under the CBO budget model. 

There was no in-depth thought about what effect mandating the accrual method of accounting might actually have on the businesses involved. Again, a typical scenario as the members of Congress and their staffs craft these kinds of bills. Rob Peter to pay Paul. Make the numbers work. Who cares about the real people who may be affected?

Such a proposal would have real-life consequences for the owners of these types of businesses. In many cases, they would end up paying taxes for services for which they have not been paid and/or may never be paid. It could also result in the only reason an owner is subject to a higher individual income tax rate for federal, state or both purposes. The increase in tax liability could have a significant impact on a new owner’s ability to finance the business and possibly result in the need to take out a personal bank loan for the sole purpose of paying their increased tax liability. And finally, these businesses will have to spend significant resources to convert their accounting systems in order to comply.

There is an old saying that you don’t want to see how sausage or our laws are made. This particular issue of eliminating the cash basis of accounting for service entities is a prime example of what they meant. We will continue our efforts with our members of Congress from Texas to fight this proposal from being implemented. We encourage our members to help communicate that message to their Congressional representatives.

 

 

 

 

Pension Problems

I keep hoping that the current presidential race might actually focus on some of the growing problems that are facing our country and that we would hear the candidates discuss how they might go about solving them.  I know, I must be crazy.  Who has ever heard of political candidates having a serious discussion of pressing issues?

For instance, we are hearing little from the candidates about the growing problems of our social security system. In the not too distant future, it is highly likely that it will eventually run out of funding. At some point we will be faced with tough choices such as cutting benefits for future retirees, implementing large tax increases, raising the current caps on paying the tax or some combination of those options.

But at least that issue has had a mention. 

That’s better than what we are hearing about the growing public pension crisis in this country and around the globe, which is zero.  And like the social security mess, this is an issue that is lurking and continuing to grow worse every day. 

There was a recent front page article in my local newspaper about the credit score for the city of Dallas being lowered by Fitch because of concerns about the failing police and fire pension fund.  Fitch downgraded the city’s outstanding debt to AA from AA+ and changed the outlook to negative from stable.

This move could end up costing the taxpayers in Dallas dearly. And Dallas is not alone.

There are many cities and states across our country that are also experiencing severe problems with their public pension plans.  Weak investment performance and insufficient contributions will cause total unfunded liabilities for U.S. state public pensions to balloon by 40 percent to $1.75 trillion through fiscal 2017, Moody's Investors Service reported earlier this week. It has been a tough year for the funds, which earned a median 0.52 percent on investments in fiscal 2016 versus their average assumed return rate of 7.5 percent, Moody's said.

The nation's 100 largest public pensions were funded just below 70 percent as of June 30, according to a separate study this week by consulting firm Milliman. The study found investment returns to be 1.31 percent and a funding deficit of $1.38 trillion.

And this crisis is not restricted to the U.S.

In a report issued by Citi – “The Coming Pension Crisis” – they estimate that the total value of unfunded or underfunded government pension liabilities for 20 OECD countries is a staggering $78 trillion, or almost double the $44 trillion published national debt number. 

The bottom line is that many public pensions will be running out of money in the not too distant future. When that happens millions of people will be screwed — either retirees who won’t be paid what they thought, or government entities will see their budgets drown in pension obligations, necessitating deep and unpopular cuts elsewhere. 

One would think that is an issue worth talking about, but apparently our current political candidates do not think so.

All Talk, No Action

If we could develop a productivity meter for the U.S. Congress, the needle would not move very high on the scale. Our elected representatives bring a whole new meaning to the term “slackers.” Our lawmakers returned to Washington, D.C., this week after taking a seven-week recess. Can you think of anyone else who gets a seven-week recess? And that’s just part of it.

 

The House will now be in session until September 30. Wow, nearly a whole month! Then they will adjourn until November 14, after the elections. Senators are scheduled to be in session during the fall a wee bit longer than the House, with the Senate's target pre-election adjournment date set for October 7. Senators will also return November 14 after the elections. For the entire year, the House is scheduled to be in session for a whopping 111 days. And while the Senate will be in session a little longer, the chamber is on pace to work the fewest number of days in 60 years.

 

Now don’t expect much to happen while our elected officials are actually in session. One big item on the agenda is the funding of the federal government. Remember this movie? Yes, the remake is back. If Congress doesn’t pass a stopgap funding bill, then we run out of money to operate the government come the end of September. You would think that would create a sense of urgency to get something done on that issue. Think again.

 

Senate Democratic Leader Harry Reid made clear last week that his party would not accept a continuing resolution to fund the government past 2016. That would force Congress to re-address the issue in a lame-duck session after the election and would shield the next president from having to negotiate funding the government early in his or her administration. That’s the same strategy Congress has taken the last two years: short-term funding to finish out the year, then a major omnibus bill in December to fund the government through the following September.

 

Other items you will hear Congress talking about in the remaining few weeks will include things like additional funding for fighting the Zika virus, gun control/safety (depending on your side of the issue) and criminal justice reform. Some of those issues actually have some bipartisan support. However, there will also be confrontational issues like the nomination of a Supreme Court justice, inquiries or hearings into Hillary Clinton’s emails and the connection between the State Department and the Clinton Foundation, the payment of $400 million cash to Iran and the possible impeachment of the IRS commissioner.

 

Both parties will be trying to make political hay on various issues as we head into the final weeks before the national election. This is a time that seems to bring out the worst in our politicians and you will be hearing a lot of disparaging comments flying both ways as we head to November. But don’t bet on seeing a lot of legislation passed in the next few months. The phrase “all talk, no action” seems to fit our Congress to a tee.

 

 

 

 

 

 

Working Overtime on Overtime

In May, the White House announced the publication of its final overtime rule, which the administration says will extend overtime eligibility to more than four million additional workers within the first year of implementation.

The rule, which will be effective December 1, significantly increases the minimum salary level for “white collar” employees to qualify as exempt from overtime pay requirements. Under the new rule, no employee who has a guaranteed salary of less than $47,476 will qualify as exempt under the executive, administrative or professional exemptions. That’s more than double the current minimum salary level of $23,660 and only slightly lower than the Department of Labor’s (DOL’s) originally proposed $50,440. The rule will not affect hourly or other nonexempt workers, who are already eligible for overtime pay.

Additionally, the final rule includes a mechanism for automatically updating the salary threshold every three years (a change from the proposal of yearly adjustments). The next automatic update to the salary threshold will be on Jan. 1, 2020, and the new salary level will be announced 150 days before it takes effect. The minimum salary level is set based on the 40th percentile of wages of full-time salaried employees in the lowest-wage census region (currently, the South).

During the rulemaking process, TSCPA urged the DOL to modify its proposal to account for regional and local differences in pay and to accommodate the current use of technology and flexible work schedules. You can see the letter TSCPA sent to the DOL last September here:

https://www.tscpa.org/eweb/pdf/General/2015/TSCPAltrWhiteCollarExempt.pdf

Unfortunately, the administration did not make those accommodations to its final rule.

TSCPA continues to believe that the new rule will adversely affect many CPAs, small businesses, nonprofit organizations and other employers with limited revenues. We continue to stress that the salary threshold is set too high, that the minimum salary level for exempt employees should instead be keyed to government data on regional cost-of-living differences, that the timing of the automatic increases fails to provide enough time for small business employers to plan for personnel costs in their budgets and that the administration should take into account the limitations of many small businesses in setting the minimum salary threshold.

A bill introduced July 17 by Rep. Kurt Schrader (D-OR) would incrementally phase in the new salary threshold over the next three years to give businesses adequate time to adjust to the new standard while ensuring workers are fairly compensated. The bill would also eliminate the provision that allows for automatic updates to the salary threshold every three years.

This bill is widely viewed as a reasonable compromise that can win bipartisan support and TSCPA is advocating that Congress pass it. We recently sent a letter of support to all the Texas House members encouraging their support. You can see the letter here:

https://www.tscpa.org/eweb/pdf/GovtAffairs/2016/GohmertLetter.pdf

We encourage TSCPA members to convey their own feelings on this matter to their elected representatives in Congress. We will continue to monitor this issue closely for our members. Hopefully, we will see some action on this bill when Congress returns after the summer recess.

 

 

 

 

 

Growth and Challenges for Texas

At the recent TSCPA Annual Meeting in Galveston, we were fortunate to have as one of our speakers Lloyd Potter, Ph.D., the Texas state demographer. If you missed the Annual Meeting, you can see the slide presentation Dr. Potter made here: https://www.tscpa.org/eweb/pdf/About/Leadership/2016AnnualMeeting/2016TexasDemographics.pdf.

Dr. Potter described the phenomenal growth in population Texas has experienced over the past few decades. Our state’s population was over 27 million in 2015. We ranked second behind California with over 39 million. 

While growth over the last five years has slowed, it still grew around 9 percent, going from 25.15 million in 2010 to 27.47 million in 2015. We saw a 32 percent increase in population over the past 15 years. And if you go back to 1990, we experienced a 62 percent growth rate over the past 25 years. There is no indication that the population growth in Texas will slow dramatically in coming years as people continue to move here for the jobs that are available and the reasonable cost of living.

When we look at the geographic distribution of the population of Texas over time, we see continually increasing population in the counties along the I-35 corridor, the Houston area and the lower Rio Grande Valley. Approximately 86 percent of the population of Texas is along I-35 and east. This area with the three major metropolitan areas at the points is often described as the Texas “population triangle.” Overall, 155 counties gained population from 2010 to 2015, while 99 mostly rural counties (39 percent) lost population over that period.

We have also seen a change in the racial and ethnic makeup of our population as it has changed over time. In 2000, 52 percent of our population was White, 32 percent Hispanic, 11 percent Black and 5 percent Other. By 2014, that breakdown had changed to 43 percent White, 39 percent Hispanic, 12 percent Black and 6 percent Other. So during the past decade, Texas became a “majority minority” state.

Population increases happen because of two main factors: a natural increase due to births and migration from outside the state. From 2000-2010, the change in population in Texas was driven by 53.7 percent natural increase and 46.3 percent migration. More recently, in 2013-14, that flipped to 53.4 percent migration and 46.5 percent natural increase.

Our migration gain is divided between domestic migration (people moving in from other states) and international migration (people moving in from other countries). For the 2013-14 time period, the gain for Texas was 65 percent domestic migration and 35 percent international migration. Our biggest domestic migration gain was from California. Over 62,000 Californians moved to Texas versus around 31,500 Texans going the other way. Second on the list was Illinois. 

We have also seen a change in the composition of the international migration for Texas. In 2005, 69.4 percent of international immigrants came from Latin American countries and 17.3 percent from Asia. In 2013, that had changed to 42.9 percent Latin America and 40.4 percent Asia.

So our population keeps on growing and changing in its makeup. While it is always better to have a growing population than a declining one, this growth also brings challenges. As we continue to grow, we will have to deal with the need for adequate infrastructure to support all the people; roads, schools, water supplies, etc. We will also have to make sure we have an educated labor force to fill the jobs for employers. Is Texas up to the challenge? I certainly hope so, because there is no sign this growing population is going to slow down any time soon.

 

 

 

 

A Vote for the Future

In an earlier blog post, I detailed how AICPA and CIMA (The Chartered Institute of Management Accountants) were seeking to enhance the joint venture they created around five years ago to better integrate their operations, strategy and management by forming a new “overarching association” that would serve the members of each organization while continuing their independent operation as well. To accomplish this, both AICPA and CIMA had to have a vote of their respective members to accept the proposal and the changes to their organization’s bylaws that would enable this new enhanced joint venture operation. 

Those membership votes recently were concluded and the results are in. Both AICPA and CIMA members voted overwhelmingly to approve the proposal and create a new, international accounting association that will integrate the operations of both organizations, while preserving their existing professional membership bodies.

In the case of AICPA members, the ballot initiative was approved by 86.5 percent of the members voting. A two-thirds vote was required for passage under the AICPA bylaws and that standard was easily met. On the CIMA side, CIMA members endorsed the proposal by a positive vote of 89.7 percent of the members voting.

This new association will represent a combined membership of more than 600,000 current and future accounting professionals and will raise the profile of both public and management accounting in the U.S. and globally. It will enhance resources and provide a stronger advocacy voice for U.S. CPAs in the global accounting community. This new venture will also help CPAs and members of AICPA and state CPA societies assist their members who are dealing with many real challenges driven by technological changes and a move to a global business environment.

Fifty-two state CPA societies (including TSCPA) passed resolutions in support of the member ballot proposal. Their leadership saw the benefits this newly combined association will provide for CPAs and for accountants (including CPAs) who work in business and industry, a major segment of the CPA population for both AICPA and TSCPA. 

The new association will be launched by AICPA and CIMA in 2017. AICPA will be working with state CPA societies as it implements the new joint venture and there will be an opportunity to jointly recruit new members to both AICPA and TSCPA as the initiative is carried out over the upcoming years. We look forward to working with AICPA for the benefit of our combined members.

No one can accurately predict the future. But as Abraham Lincoln said, “The best way to predict your future is to create it.” Those who plan for the future are generally better positioned to be successful than those who just wait and react to change as it happens. That is what is at the core of this new initiative by AICPA and CIMA. And I believe that is why it was supported by a wide margin of the members who recently voted to approve it. Will it be successful? Only time will tell. But at least the profession now has a plan to chart its course. Let the journey begin.

IRS of the Future

In the event you missed it, the IRS is doing some future planning and has developed a vision to better serve taxpayers. They are calling it “IRS Future State.” You can read more about it on the IRS website here.

Now some might think the IRS should spend more time focusing on the present and improving its service today rather than worrying about the future. I could certainly understand those feelings. The percentage of callers seeking and getting live assistance from the Internal Revenue Service has plummeted in the past five years to only 38 percent in 2015, while the average wait time in minutes has tripled to over half an hour. The IRS answered 18.2 million calls in 2015 while the number of calls that were abandoned, disconnected by the IRS, or met with a busy signal was 56.2 million.

One of the central components of the “IRS Future State” is the development of online taxpayer accounts.  The IRS says that taxpayers want and are used to operating online for other kinds of services and that online accounts will provide greater efficiencies and effectiveness.  But I think a major driver is the cost savings a move to online would afford the IRS.  According to testimony before Congress by IRS Commissioner John Koskinen, it costs between $40 and $60 per transaction for the IRS to interact with a taxpayer in-person or on the phone.  The IRS estimates that an online interaction will only cost $1.

However, that cost savings to the IRS will come at a price says National Taxpayer Advocate Nina Olson. In her 2015 Report to Congress, Olson stated that the “IRS Future State” plan could produce a major service gap as the IRS receives more than 100 million taxpayer calls and five million in-person visits per year, so a significant reduction in these services will leave taxpayer needs unmet.  As a result, the confidence in the fairness of the tax system may erode and, overtime, taxpayer frustrations may lead to a lower rate of voluntary compliance, the cornerstone of our tax system.

The TSCPA Federal Tax Policy Committee also communicated similar concerns to the IRS about this future vision, noting that it would lead to a loss of in-person communications and have a significant impact on lower income taxpayers who do not have access to the internet.  The committee also raised concerns about security and privacy of taxpayer information.  You can see the committee’s letter here.

The National Taxpayer Advocate has been holding forums around the country to obtain input from taxpayers and tax preparers on this issue.  It is anticipated a forum will be held in Texas later in the summer and our Federal Tax Policy Committee will plan to be there to speak out for TSCPA members and the public.  If you have any thoughts or concerns please share them with our committee or directly with the National Taxpayer Advocate.  The time to speak out is now before the IRS finalizes this project.

On the Grow

The joke in the DFW area is that the new state bird of Texas is the “building crane.” If you drive up the North Dallas Tollway, you will see incredible construction taking place as office campus projects are underway for the new Toyota executive offices moving from Los Angeles, as well as office complexes for FedEx, Liberty Mutual, JP Morgan Chase and others. There is also the new Dallas Cowboys practice facility (The Star) in Frisco. This stretch of highway is now commonly referred to as the “billion dollar mile.” If you have not been in the area for the past few years, the changes that are taking place will boggle your mind. It’s like buildings are growing up overnight.

The Dallas Morning News recently reported that more than 200 people a day are moving to the DFW area. In the last year, the area has added around 117,000 jobs, which is more than any other major metro area except New York City and Los Angeles, both cities with significantly larger populations than DFW.

The growth, however, is not limited to the DFW area. According to James Gaines, chief economist of the Real Estate Center at Texas A&M University, the four Texas metro areas (Austin, Houston, San Antonio and DFW) added more people than any other state in the country last year.

That’s not to say that everything in Texas has been great of late, as the drop in oil and gas prices have certainly taken their toll on the state’s overall economy and especially in communities that are more dependent on that industry. But according to Ray Perryman, Ph.D., noted economist and CEO of the Perryman Group, the major economic indicators for the future show that Texas is still outpacing the rest of the country in spite of what is taking place in the energy sector. If you missed Perryman’s article in Today’s CPA, I encourage you to read it. It’s called “The Texas Economy: Past Performance and Future Expectations.” If you lost your copy of our magazine, you can find it here:

https://www.tscpa.org/eweb/pdf/TodaysCPA/2016/TexEconMarApr16.pdf

Perryman’s forecast shows that Texas is well positioned for future growth and that even without the oil surge, it is likely to exceed growth rates for many other parts of the U.S. Our population is also going to continue to grow. Perryman projects that Texas will grow by almost 2.2 million people during the next five years, reaching a population of 29.2 million. So don’t count on the building cranes disappearing anytime soon. 

Of course while growth is good, it also brings challenges and Perryman notes that Texas will face workforce preparedness/education issues. We will also have to deal with things like providing adequate water supplies for a growing population, and adding roads and other necessary infrastructure to serve our citizenry. These will all be issues on the agenda for the Texas Legislature when it shows up for work early next year and they will challenge local governments, as well. Texas will continue to be “on the grow” for the foreseeable future.