Taxing Overseas Firms for SOX Compliance

by: Neil More

The Sarbanes-Oxley Act, also called the Public Company Accounting Reform and Investor Protection Act of 2002 was signed into law on July 30, 2002 by President Bush. In the aftermath of Enron, Arthur Andersen, Global Crossing, and WorldCom, SOX promises greater corporate accountability and transparency. Named after Senator Paul Sarbanes and Representative Michael G. Oxley, SOX focuses on the importance of ethical behavior in corporate governance-across the United States and now…overseas.

All countries have government-required laws like Sarbanes Oxley. In the UK, it’s the "Combined Code on Corporate Governance," in The Netherlands it’s the "Code Tabaksblatt," Germany has a "Bilanz Reform" and a "Bilanz Kontroll Gesetz." But then, why do we need SOX overseas since we already have the required laws? It’s because companies with U.S. headquarters must ensure that all foreign outposts meet federal standards. This is the major cause of concern in the management and accounting circles. According to some experts, the Sarbanes Oxley Act might have dictated convoluted rules and regulations on the U.S. businesses. While the rules are concrete ideologies that prevent accounting scandals, the constant flux in the policies confuses businesses around the globe.

SOX compliance by vendors and business partners outside the U.S. is a frightening task. The risks and complications involved in enforcing the regulations for multiple firms around the world are enormous. The U.S. firms should keep themselves abreast of the data operations and data management followed by overseas vendors. This complicates the case further as the data should be integrated in financials or entered in balance sheets. Cumbersome processing of data would step up IT-related expenses.

The global impact of SOX is tremendous. At the moment, the UK Big Four firms are feeling SOX repercussions in their consulting sectors. http://www.big4.com -a website for global Big4 alumni - receives periodic updates on the latest news and trends at the Big Four firms. The Big Four in UK reportedly lost GBP250 million in consulting fees since 2002-a direct outcome of Sarbanes-Oxley Act. Among the Big Four firms, PricewaterhouseCoopers faced a huge decline in their consulting fees. Causes for this decline can be attributed to:
·The increased cost of compliance that usurped consulting budgets.
·Independence restrictions in Sarbanes-Oxley have restrained companies from utilizing their auditors for many consulting services.

There is an apparent role reversal in consulting fees and audit services. If consulting fees have declined, audit fees have considerably increased. A whopping 30% increase in Big Four audit fees has been observed over a period of two years. This spike does not compensate for the revenues lost for consulting. Consulting was the major strength of the Big Four in the UK. But, in the present conditions, the significant decline in consulting fees clearly demarcates the performance of the Big Four in the UK.

According to a survey by an European firm, many overseas firms with their shares listed in the U.S. were not ready to meet the deadlines of Sarbanes-Oxley. Since European firms already have specific regulations, SOX compliance is extremely difficult. Some overseas firms have been attempting to get delisted from the U.S. stock markets since SOX’s inception. Foreign firms about to get listed on overseas exchanges are also resisting to get listed in the U.S. These problems would take toll on the U.S. market performance and economy. But, the exit of foreign firms from the U.S. exchanges is not that easy. As per SEC guidelines, foreign firms holding 300 or more shareholders in the U.S. cannot delist from the U.S. exchange where they trade.

In the light of these problems, the Securities and Exchange Commission-in its bid to offer sustained flexibility-started modifying rules for overseas firms listed in the U.S. The SEC would facilitate foreign firms to delist their securities that are traded on the U.S. exchanges. Modifying SEC rules to accommodate European firms would create a state of unrest among the American managements.

The SOX compliance should be an “all-encompassing” formula-that which enables governments and managements worldwide to function efficiently and in rhythm. A level headed approach to weed out this disconcert would improve the situation.


About the author:
Neil More webmaster@big4.com is an Alumni Member and Staff Writer with Big4. He writes articles on issues pertaining to the
global Big4 firms - Deloitte, Ernst & Young, KPMG, PricewaterhouseCoopers.

Neil's articles focus on latest news and happenings in Big4 Accounting, Big4 Management Consulting, Big4 Information
Technology, Big4 Tax and Big4 Legal domains.

Top 7 Strategies for Writing Accounting Procedures

by: Chris Anderson

You have permission to publish this article free of charge, as long as the resource box is included with the article. If you do run my article, a courtesy reply to sean@bizmanualz.com would be greatly appreciated. This article is 909 words long including the resource box. Thanks for your interest. Part Two of Cash to Cash Cycle Series Part One: http://www.bizmanualz.com/articles/01-05-05_inventory_procedures.html/?ART78 Next Week: Sales We’ve already found $250,000…so let’s find another $250,000… Laying the Foundation Last week, we raised the question: what would your business do with $1,000,000? To lay the foundation we introduced inventory as the first of four areas that will lead toward our million dollar goal. And you saw exactly how to achieve the first $250,000 in cash savings by avoiding delays with an increase in velocity, as well as an increase in discipline and competency. But how exactly? With time – as you saw with inventory and as you’ll see this week. Tackling Accounting Procedures Let’s continue that crucial theme of time with another major source on your balance sheet – specifically, accounts receivable (A/R). If you have $500,000 or more in accounts receivable then STOP! We have found it again. Reducing Average Days Collection Why? Because if we focus on reducing your average days collection by 50%, then your accounts receivable balance will fall to $250,000 and the result will be an extra $250,000 in your bank account. And just like that, we’re halfway to our $1,000,000 goal. So now, let’s see how this actually works in a real-life business scenario. Accounting Procedures Service Business Example A service organization with $700,000 in average A/R balances needed assistance. So we examined their A/R function to understand and quantify the workflow and workload issues. Then we designed and implemented a process to improve the A/R performance. The metrics we developed reduced their “over 60” accounts receivables by 85% and their overall A/R balance by 50% within 90 days of implementing the new procedures. With these new processes and reports, the company now tracks Average Days Collection and past due rather than just Days Sales Outstanding (DSO) as the measure of their collection effectiveness. The result: an extra $350,000 in cash. And, again, we explicitly see the crucial role of time and how an increase in velocity and discipline directly yields an increase in efficiency and cash savings. So how can you use time to your advantage? Methods to Design the New Accounting Process Decrease collection cycle. Examine customer accounts that go beyond your terms. Do not wait until twice the net terms to take action. Tighten credit policy. Examine credit process for slippage. Do you have a credit approval process? Do you perform credit checks? What standards are used to extend credit? Reduce credit terms. Change the credit terms you offer your customers. If you offer terms of net 45, reduce it to net 30. You might offer a discount of 1% if paid within 10 days else net due in 30 days. This is equivalent to 18 % annual interest and most businesses will take those terms. Shorten the invoice process. Bill your customers immediately. This is a big one. Many service organizations wait until the end of the month to tally billable hours and determine customer charges. Do not wait until the end of the month. This could reduce your day’s receivable by as much as 15 days right there. Email or fax your invoices to save another day or two (e.g. QuickBooks accounting software contains this feature). Reduce billing errors. Most customers delay payments because of invoice errors. Customers won’t recognize the invoice until it is corrected and may not even notify you, the vendor, of the error until you call for collection. Again, avoiding this delay in error and time will amount to cash savings. Train Accounts Receivables personnel. Make sure that all personnel involved are training to understand the performance metrics for their jobs. For example, a company will manage $500,000 in monthly A/R balances (that’s $6 Million a year!) using an A/R clerk who makes $30,000. But then the supervisor uses nothing more than On-The-Job (OJT) training for the clerk. Then the CFO thinks that he or she (the CFO) is really managing the money. But, in reality, that’s not the case; the clerk is managing the money day-to-day. So shouldn’t the A/R clerk receive enough training to manage such a significant amount? After all, it only takes a 6% change in A/R in one month to equal the A/R clerk’s entire annual salary. Isn’t the A/R savings worth a little extra time in training? Maximize the Accounting Process. With the Accounts Receivable department you should use each element of the process to gain the most benefit for your business. And with time-saving procedures set in place, you will let your efficiency work for you. Grabbing Your Policy Goal With well-defined processes and procedures in place, you will increase efficiency by reducing your Average Days Collection. And of course a reduction in Average Days Collection means your Accounts Receivable balance will also fall, creating more cash in cash on hand. And just like that we’re halfway to our $1,000,000 goal. All you have to do is grab it. Next week, we will look at finding still another $250,000 in the Sales function – which will give us $750,000 toward our goal of 1 Million in cash savings. So, again, not only do you aim to reap the rewards of extra savings to your bottom line, but also see more cash in the bank - $1,000,000 cash to be exact. About the author: Chris Anderson is currently the managing director of Bizmanualz, Inc. and co-author of policies and procedures manuals, producing the layout, process design and implementation to increase performance. To learn how to increase your business performance, visit: http://www.bizmanualz.com?src=ART79

mmaterial Values in Business Management

by: Stephan Szugat

Article Title: I Author: Stephan Szugat

Word Count: 915

mmaterial Values in Business Management

Maybe you have already heard that in some ways immaterial values are important for business management. But you might not found how to bring them into your management processes or into your reporting packages. However, first of all we should be clear, what immaterial values are? Well, this includes the balance sheet information about intangible assets, but is going far behind it. As we all know, decisions are mostly based on feelings or emotions, than on logical judgement. A feeling is an energy. Energy is not material, it is immaterial. The overall emotions or motivation of employees in a business is a immaterial value, it could have positive and negative impact on the business development. Does sound very esoterical for you? Might be, but today we know that our emotions drive a lot of our life. Not only the feelings of the emplyoees have an impact on the business development, also the feelings of potenial customers have it. These customer feelings could be measured as customer satisfaction, as how customers see the company or it’s products and services and so on. There is more energy, which is immaterial, included in our business life as we are aware of. Until today we might know about these energies or have read that businesses have to be more aware of them. But to find Solutions which are able to measure these energies are not very common and hard to find. Business Management still uses hard figures such as ratios based on financial values and just forgets that there has been more than only the numbers from the accounting and the money in the pocket. If you only look to the accounting figures of a business, you only look to this company as if you were looking at an iceberg. You only see a fraction of the iceberg, only what is above the surface. Everything below the surface is out of your view. While the iceberg is melting away, it still brings up new parts of it self. But you only see this new parts, when the iceberg is melting. It’s just the same with the accounting figures as soon as you see them they are gone. That means they are old, it’s nice to knew them, but they relate to business already accomplished. The accounting figures are just like to iceberg when it comes above the surface while it is melting away. Now, wouldn’t it be great to see the whole iceberg, even if a big part is below the surface? Yes, it would be great. The immaterial values of your business are just below surface. If you bring them up, you could see the whole picture of your business. Running a business only focusing on profit could lead to running into a collapse. It might take time, but soon customers and employees will find out that just the profit counts to a specific company. Well, it’s correct, no business could survive without profit, but first of all every business has to make profit on immaterial items, such as image, motivation of employees and customers faith. One day from these immaterial profits the financial profit arises. That’s the theory. Propably you already read about this, but have you found a way to measure immaterial values of your business? It’s not that difficult, but it needs some thoughts. First of all it is important to make a list of immaterial values which have the most impact on the business development. When this has been finished, methods to measure and valuate the immaterial values have to be found. And at last, the values for all the selected immaterial items have to be analysed regularly. Setting up such a Reporting System for immaterial values could be a long lasting task. You might try to do it with a spreadsheet program or with a database, but either way will take it’s time. Using ready made Standard Software might be another option, but there are not much choices. In case you use the Balance Scorecard, you might think having all the data mentioned above and you might think having a good solution for analysation. The Balance Scorecard has it’s advantages, but for a short, fast and regular analysis of immaterial values it is far to complex and much to slow. There is just the need to measure, store and analyse some data. About 30 items will be enough to have an overview of immaterial values and some material values as well. Most of the necessary data are usually already stored in every business. They only need to be concentrated into one table and have to be analysed. Are immaterial values important for every business? Yes. This includes big businesses as well as the one-man-business, retail stores, mechanics, freelancer and so on. You may find more information on immaterial values in business management, when searching for Early-Warning-System, Early-Recognition-Sytems and something similar. You are able to find one or the other immaterial value included in Management Methods, Ratio Systems and Financial Analysis. But still, most Reports and Measurement System are based on financial data. A Solution which every business, no matter of size, could use, is the abenetis ERS (Early-Recognition-System). It is called Early-Recognition-System, because with the used immaterial values every business could be aware of tendencies in it’s business development soon. At the moment the abenetis ERS is available only as Online-Service, but could soon be delivered as Intranet-Version, too. More details are available at our ERS-Subscription Page.

About the author:Stephan Szugat is founder of abenetis a web-based service about Business Management Solutions focusing on the core needs of business management. This includes operational and strategic analysis especially Early-Recognition-Systems, Knowledge-Management and other Services for small and mid-sized businesses. He has approx. 15 years experience in the Finance and Accounting Area from companies of different size and from various industries. http://www.abenetis.com

HOW TO STAY FOCUSSED AND BUILD YOUR BUSINESS

by: Matt Bacak

You have a detailed business plan, which showed the overall intent of your company. You presented the business plan to your bank before start-up and they submitted funding in the amount that you both deemed acceptable. The original business plan contained the basis of the procedures that will help you stay focussed while the company grows. Let's examine some of these processes that you will use to give your business the focus it needs to grow and succeed. 1. A marketing plan. If sales are a part of your operation (and it seems that some form of selling is always a big part of every company), then, you will need to have your sales group focussed on a marketing plan. Short term and longer-term analysis should be a part of this planning and will likely contain an analysis of your competition, market potential and sales projections. Be careful not to fall into the trap of letting “the business take care of itself”, stay focussed at all times and be sure your managers are tuned into this market monitoring regularly, nothing is more defeating to the general manager/owner than to be told by a sales manager…I didn't see that coming! YIKES! 2. Accounting procedures. If sales are important, then the need to stay focussed on receiving the proceeds from sales is equally important. Accounts payable, expenses and accounts receivable need to have fixed procedures in place to allow money to flow freely through the company coffers. Focussing on these procedures at regular weekly and monthly meetings will put the accounting and marketing groups on the same path. A rift between marketing and accounting is a common bureaucratic occurrence; so don't be surprised if one point you hear from someone from sales state, “We make the money here, how come I have to live by their rules?” Getting these two operations to stay focussed on a bottom line results oriented approach is a regular part of an owner's job description. 3. Human resources. If you have ever worked for a manager, who considered his employees as expenses rather than assets, then you will be familiar with the need for managers to stay focussed on human resources within the company. A manager who is fixated on staff reduction regardless of their accomplishments will create an atmosphere of fear. Certainly, no one wants to be grossly over-staffed, but a good owner/manager will focus on keeping adequate employee base numbers, and ensure continuing training, safety programs and top of the line employee benefits. It's your campground, why not have “happy campers?” 4. Selling your business. This does not mean selling in the true literal sense. It means focusing on being sure your company image is one that is the envy of your competitors and is known in the business world as a first class operation. You can do this by having key managers attending industry conferences. Be clear and tell them that their focus at these seminars is to network, thoroughly gathering as much new information that they can. They should also 'sell' other attendees on the importance and efficiency of their company in the industry. Upon their return, have follow-up meetings with these managers where they will report in detail on what they have learned. Managers attending conventions and seminars should take opportunities to enjoy themselves, nevertheless, they will be the “face” of your company, it's wise be sure that they focus on making them business meetings, and not all “playtime.” If planning, organizing, staffing, direction and control are five major factors in managing a company, staying focussed throughout the process, is paramount!

About the author:Matt Bacak became "##1 Best Selling Author" in just a few short hours. Recent Entrepreneur Magazine’s e-Biz radio show host is turning Authors, Speakers, and Experts into Overnight Success Stories. Discover The Secrets http://promotingtips.com

Outside The Box

by: Phillip A. Ross

Thinking "outside the box" or as it is sometimes called, "coloring outside the lines" is a popular idea in the business world today. People and organizations are told to think outside the box or color outside the lines as a way to stimulate creativity when they need to solve problems like streamlining production, establishing a new product, or developing a new process. And it's true that creativity and innovation often arise from unexpected and unconventional thinking.

But there is a serious problem with trying to apply such thinking too broadly.

For instance, creativity is valued in art and advertising, but not in banking and accounting. An accounting firm recently ran an ad suggesting that it could think "outside the box." Do you really want your business to be associated with creative accounting? Aren't accountants supposed to put the numbers in the right box? Wasn't creative accounting a serious problem for Enron?

In reality, clear thinking and the creativity that it produces are rarely a matter of thinking outside the box. And coloring outside the lines is for the most part just sloppy workmanship. The art of clear thinking is a matter of putting thoughts in to the right boxes or categories. Clear thinking is a matter of mental organization. Conversely, sloppy thinking involves the confusion of categories, of putting ideas into the wrong boxes or not putting them in order at all. Is a child who will not straighten his or her room creative or just sloppy? There is a significant difference. While creativity sometimes looks sloppy to an outside observer, it does not issue from sloppiness.

Picasso was a creative artist.

But his creativity was not a matter of the art he produced. In reality his abstract work is technically sloppy. It looks like the work of a child. Picasso could sell his abstract art only because he had previously established himself as an artist who could color inside the lines very well. Had he not first proven his artistic talent in the traditional way, his abstract art would have been worth much less. He used his reputation as a traditional artist to establish a new direction in art. He didn't so much color outside the box, as he expanded the boundaries and definition of the box. But the point is that his abstract creations were valuable only because of his proven abilities in the traditional arts.

Contrast my own efforts to establish myself as an abstract artist. My art has gone unnoticed because I have not been able to prove myself as a traditional artist. Not that I actually tried to do so, but I am using myself as an example to make the point. The creativity of a novel idea requires the discipline of order and structure to be valuable. Picasso's art is valuable because he was an accomplished painter who intentionally colored outside the lines. My art is not valuable because I am not an accomplished painter and I accidentally color outside the lines. While the two products may look similar, the difference is critical.

Creativity is more than breaking the rules.

Similarly, Joseph Heller was able to break the rules of English grammar in his book, Something Happened (Scribner, 1974), only because he was intimately familiar with them. Having taught English at the University of South Carolina, he was a master of grammar. And only out of his expertise could he creatively exploit, expand and redefine the boundaries of grammar. And so it is with regard to thinking outside the box.

Thinking outside the box apart from being able to think inside the box is worthless.

Such thought is just plain sloppy. Thus, the suggestion that creativity lies in the ability to think outside the box is mostly nonsense. Creativity issues from talent, ability and discipline. Talent must be forged and shaped on the anvil of discipline in order to develop ability. Great ability is always the result of study, discipline and practice.

Creativity is more a matter of seeing that the boxes themselves are inadequate and suggesting a better arrangement or a better definition. Creativity doesn't simply discard the boxes, it redefines and/or rearranges them after becoming intimately familiar with them. Real creativity is always the fruit of discipline and order. Creativity, in order to be genuinely creative and not simply sloppy disorganization, must emerge out of discipline and order as an intentional effort.

While a creative idea often comes unbidden out of unexpected places, it requires discipline, study and order to make something of it. Apart from discipline and order, what passes for creativity is nonsense, and to suggest otherwise actually undermines and/or weakens the creative process.

What does this mean for our industry? Distributors and suppliers should apply themselves to mastering the basics before attempting to break the rules in the name of creativity. Don't start outside the box. First, establish your ability to think within the box. Master the rules before you suggest breaking them. For example, before a distributorship presents a wild, innovative concept to a client for a campaign, it should first establish its expertise with campaigns and/or ideas that have a track record of yielding good ROI. Designers, artists, and copy writers should establish their mastery of basics before experimenting outside the box. For the most part the important stuff is inside the box.

©2002 Phillip A. Ross

3 Essential Tools for Starting and Maintaining a Small Business

by: Ryan Hough

We believe that there are 3 factors that drive the success of small businesses. 1) Acquiring start-up capital 2) Finding customers 3) Accounting for, budgeting and controlling sales and expenses The following resources will help your small business achieve these success factors. Acquiring Start-Up Capital An adequate supply of capital is essential as many profitable businesses fail because they don’t have enough cash to pay their employees and suppliers. But what is an adequate supply of capital? The only way to tell is by doing a significant amount of research on your potential market and formally documenting this in a business plan. I’m sure you know that a business plan is a very important document that is crucial to convincing your banker to lend you money. There are two ways to obtain a business plan. 1) Do it yourself by amending a business plan template, or 2) Hire a professional to do it for you. Obviously obtain 1) will be a great deal cheaper. Our research led to a website that has over 60 high quality and free business plan templates. We also found a directory that you can use to easily find a business plan writer in your city – where ever you live in the world. Finding Customers Finding customers is a difficult and expensive task for service business owners such as accountants, lawyers and plumbers. We believe that a cost effective marketing strategy for service business owners is to simply give all their personal contacts a few business cards. Our research led to a few websites that have pre-designed business card templates. We felt that the diversity and quality of these designs was outstanding. In addition, we found that you can obtain a significant saving by finding a printing service on the Internet. We found that you could get 2,000 full color business cards for as little as US $150. Accounting For, Budgeting and Controlling Revenue and Expenses Accurate accounting is very important for small business owners. It’s essential that you have timely access to information that could make or break your business. If stocks are running low – you need to know about it. If a large proportion of your debtors haven’t paid – you need to know about it. If you do not react to these situations quickly you may have a situation where you don’t have enough money to pay your employees – or worse still someone is stealing cash out the till. Our research led to a website that compares and reviews top accounting software for small businesses. The cheapest software cost US $89.99 and the most expensive software cost US $1,499. It was interesting to note that the top 3 ranked websites were not the most expensive and cost between US $250 - US $300. Hopefully you now have an idea of some of the tools that you can use to grow and maintain your small business. If you would like to benefit from our research please visit our website. We do not charge for this research and offer the content freely on our website.

About the author:http://www.best-quality-small-business-resources.com/Ryan Hough is the webmaster of best quality small business resources.com, who's aim is to help you save time and money by finding reviews and case studies that will enable you to choose the best resources at the right price.

Understanding Depreciation: It May Be More Simple Than You Think

by: John Day

Depreciation is defined as a portion of the cost that reflects the use of a fixed asset during an accounting period. A fixed asset is an item that has a useful life of over one year. An accounting period is usually a month, quarter, six months or one year. Let’s say you bought a desk for your office on January 1, for $1000 and it was determined that the desk had a useful life of seven years. Using a one year accounting period and the “straight-line” method of depreciation, the portion of the cost to be depreciated would be one-seventh of $1000, or $142.86. Most non-accountants roll their eyes and shudder when the topic of “depreciation” comes up. This is where the line in the sand is drawn. Depreciation is far too complicated to try and figure out, or so it seems to many. But is it really? Surely the definition of depreciation mentioned above is not that difficult to comprehend. If you look closely you will see that there are five pieces of information you must have in order to determine the amount of depreciation you can deduct in one year. They are: -The nature of the item purchased (the desk). -The date the item was placed in service (Jan 1). -The cost of the item ($1000). -The useful life of the item (seven years). -The method of depreciation to be used (straight-line) The first three are easy to figure out, the second two are also easy but require a little research. How do you figure out the useful life of an item? Let me regress for a moment. There is “book depreciation” which is based on the real useful life of an item, and there is the IRS version of what constitutes the useful life of an item. A business that is concerned with accurately allocating its costs so that it can get a true picture of net profit will use book depreciation on its financial statements. However, for tax purposes the business is required to use the IRS method. The IRS may have shorter or longer useful lives for fixed assets causing a higher or lower depreciation write-off. The higher the write-off, the less tax a business pays. The long and short of it is that you end up having to create a book financial statement and a tax financial statement. So, most small businesses that aren’t concerned with a precise measurement of their net profit use the IRS method on their books. This means that all you have to do is look in IRS Publication 946 to find the useful life of a particular item. The last piece of information you need is found by determining the method of depreciation to use. Most often it will be one of two methods: the “straight-line” method or an accelerated method called the “double-declining balance” method. Let’s briefly discuss these two methods: Straight-line This is the simple method mentioned in the definition above. Just take the cost of the item, divide it by the useful life and you’ve got the answer. Yes, you will have to adjust the depreciation for the first year you placed the item in service and for the last year when you removed the item from service. For instance, if your depreciation for one year was $150 and you placed the item in service on April 1 then divide $150 by 12 (months) and multiply $12.50 by 9 (months) to get $112.50. If you removed the item on February 28 then your deduction will only be $25.00 (2 x $12.50). Double-declining balance The idea behind this method is that when an item is purchased new, you will use up more of it in the earlier years of its life, therefore, justifying a higher depreciation deduction in the earlier years. With this method, simply divide the cost of the item by the useful life years as in the straight-line method. Then, multiply that result by 2 (double) in the first year. The second year, take the cost of the item and subtract the accumulated depreciation. Next, divide that result by the useful life and multiply that result by 2, and so on for each remaining year. But, wait! You don’t have to do this. The IRS provides tables that have the percentages worked out for each year of the two different methods. Not only that, they have set up special first year “conventions” that assume you purchased your depreciable fixed assets on June 30. This is called the one-half year convention. The idea behind this is that you may have bought some items earlier than June 30 and some after that date. So, to make it easy to figure out, they assume the higher and lower depreciation amounts will all average out. Actually, the IRS doesn’t even call it depreciation anymore. They call it “cost recovery”. Let’s face it. This is a political tool. Congress giveth and taketh away. They have been playing with this system for years. If they want to stimulate growth in business they will shorten the useful life of assets so businesses can attain a higher write-off. If they are not in the mood, they will extend the useful life of an item. A good example is the 39 years set for the useful life of commercial property. This means that if you lease a building for your business and make improvements, those improvements have to be depreciated over 39 years. Now congress is working on a bill to drop that down to 15 years for leasehold improvements. Before December 31, 1986 we had ACRS or Accelerated Cost Recovery System. Currently, we have MACRS or Modified Accelerated Cost Recovery System. Every time congress tweaks the rules they give it a different name. Keep in mind there are different schedules for different properties. For instance, residential real property is depreciated over twenty-seven and one-half years and non-residential real property is depreciated over thirty-nine years. In addition, if more than forty percent of your total fixed asset purchases occurred in the last quarter of the year, then, you must use a mid-quarter convention. This convention assumes that your purchases made in the last quarter of the year were made on November 15. This prevents you from buying a big expensive piece of equipment on December 31 and treating it as though it were purchased on June 30 and gaining a larger depreciation expense. Understanding how basic depreciation works can be valuable to the small business owner because it helps to know the tax implications when planning for capital equipment purchases.

About the author:John W. Day, MBA is the author of two courses in accounting basics for non-accountants. Visit his website at http://www.reallifeaccounting.comto download for FREE his 3 e-books pertaining to small business accounting and his monthly newsletter on accounting issues. Ask John questions directly on his Accounting for Non-Accountants blog .