MCB Accounting Blog

Despite recent articles in the Washington Post that have offered a rather bleak view of the future of the technology and professional services markets in the Washington, DC, area, the picture is not as bad as it may be being painted.   Post columnist Steve Pearlstein has hypothesized that coming budget reductions will significantly affect the market and the regional economy.  He also has posited that the region's traditional government "technology" community, which is built for and around the government, isn't where the most innovative technology is being developed. This, according to Pearlstein, will make it difficult to maintain the region's technology base without government spending.

Stan Soloway, president and CEO of the Professional Services Council , feels that although Pearlstein's concerns are legitimate, the reality is somewhat different. Despite the looming budget cuts, the government will spend hundreds of billions of dollars on goods and services. There will be individual company winners and losers, but the services and technology industrial base in the region will remain strong and vibrant.

In addition, some areas are less likely to be cut as deeply as others.  Cybersecurity and information protection spending is unlikely to decline and could increase. The new defense strategy's reliance on intelligence and analytics will command large portions of available budgets.

Many civilian agencies, even those facing fiscal problems, will have similar opportunities to benefit from spending in the professional services and technology industries. These include the National Institutes of Health and the Department of Homeland Security.

According to Soloway, there is "too much 'we vs. they' thinking with regard to the inevitable fiscal challenges. Some are arguing to cut contractors and others argue we should slash the federal workforce."  However, as Soloway notes,  both areas will be affected, and a more collaborative process that focuses on mission need, human capital and resources will be mutually beneficial.

Click here for the complete Washington Business Journal article.

MCB has been serving government contractors for over 60 years with their business, tax, accounting and compliance needs. Contact an MCB Tax Adviser for your tax and accounting needs at 703 218.3600 or at info@mcb-cpa.com.

According to General Martin Dempsey, chairman of the Joint Chiefs of Staff, for a trimmed-back Pentagon, resources have become an independent variable.  He meant that, as part of the solution to the nation's fiscal crisis, the Department of Defense must choose its spending priorities carefully and control its costs more precisely.

At the same time, the civilian portion of the government is not exactly doing well either, and it is likely to be even more constrained for 2013.  Sellers in the federal market should not be surprised that their customers are thinking about costs first.  Federal spending on IT, R&D and construction are all flat or down in 2012 relative to 2011.

IT budgets for 2012 are roughly $80 billion.  Although they were not reduced substantially from 2011, the government's emphases are changing.  Agencies want to rebalance spending, with less going to operations and maintenance and more going to solutions for improved mission delivery.

Budgets are down for construction.  The General Services Agency will not start new projects this year.  Although military construction is strong, the actual amount to be spent, $117 billion, is down from the request for $182 billion.  At Housing and Urban Development, grant and contract spending will be cut in half. Construction-related spending for IT, audiovisual and furniture will be down as well.

Policy initiatives from both the Government Accountability Office and the Office of Management and Budget will affect how agencies spend. Efforts will be made to shift risk to the supply chain. For example, the 2012 Defense Authorization Bill requires contractors to track, and take fiscal responsibility for, counterfeit parts that might turn up in equipment.  It leaves in place caps on contractor executive salaries that can be charged back to agencies and extends them to everyone working on a project.

Agencies are also cracking down on poor quality. For example, the Missile Defense Agency recently put out a solicitation for development of ground-based missile development and sustainment that includes a Contractor Accountability for Quality clause that lets the agency cut or totally withhold performance fees for bad parts or failure by a contractor to use best practices.

The Federal Acquisition Regulation Council has written into regulation greater use of firm-fixed-price contracts, which put more risk on the contractor than cost reimbursable and time and materials contracts. It is also supporting a provision in the Duncan Hunter National Defense Authorization Bill of 2009 that requires written determination and justification that use of a chosen interagency contract is the best procurement approach.  It also validated an earlier Office of Management and Budget directive against specifying brand names in solicitations to maintain vendor neutrality.

Click here to view the complete Washington Business Journal article.

MCB has been serving government contractors for over 60 years with their business, tax, accounting and compliance needs. Contact an MCB Tax Adviser for your tax and accounting needs at 703.218.3600 or at info@mcb-cpa.com.

Defense Secretary Leon Panetta has provided contractors with more specifics about the $487 billion in defense cuts announced recently. Specific cuts include the retirement of aging sea and air vehicles and reductions in contract services.

For its fiscal 2013 base budget, the Department of Defense will request $525 billion, which is $6 billion less than fiscal 2012. The goal is to increase the budget to $567 billion by 2017, $55 billion less than previously planned.

Besides a drawdown in forces, Panetta discussed reducing, streamlining and standardizing the air fleet, including the retirement of the C-5A and C-130 military transport aircraft.  Both of these are manufactured by Bethesda-based Lockheed Martin Corp.  It has been reported that Lockheed might offer these aircraft to either allies or commercial freighter companies to keep them in production.

The Navy will retire lower priority cruisers that have not been upgraded with ballistic missile defense capability or that require significant maintenance as well as combat logistics and fleet support ships. DOD will modernize a class of submarines to carry more cruise missiles and to include an undersea conventional prompt strike options.

Its overall strategy, however, includes reducing overhead, eliminating waste and improving business processes. These steps are expected to realize $60 billion in savings.

In addition, the department will focus on aggressive and competitive contracting practices, as well as a reduction in contract services. This will translate to fewer business opportunities and slimmer margins for the contracting industry.

Click here for the complete Washington Business Journal article.

MCB has been serving government contractors for over 60 years with their business, tax, accounting and compliance needs. Contact an MCB Tax Adviser for your tax and accounting needs at 703 218.3600 or at info@mcb-cpa.com.

In December 2011, the SBA unveiled a new $1 billion program to invest in young companies.  The new program, the Early Stage Innovation Fund, is part of the Obama administration's Startup America campaign and is likely to begin in spring 2012.

The new program is similar to existing programs in that it would allow venture funds licensed by the Small Business Administration (SBA), known as small business investment companies (SBICs), to borrow money from the agency to augment the capital they have raised from private investors. A successful fund that borrows money generates higher returns for investors when it sells those stakes since the lenders don't share in the profits.  Companies seeking financing would not contact the SBA directly, but instead--as with any venture financing--would approach the SBIC, which would judge prospects on the strength of their business plan and management.

The new Innovation Fund would fill a gap in the SBA's offerings by channeling funds into growth companies normally overlooked by venture capital funds.  The SBA has not had a way to nurture fast-growing startups since 2004 when an earlier program was eliminated. The earlier program, which essentially allowed SBICs to sell equity stakes in their portfolio companies to the agency, collapsed in the wake of the tech bubble. The program's complex terms helped ensure its failure. In addition, the government saw little of the profits on successful investments.

The new fund is more straightforward and is in fact a variation on a more successful SBA program, in which the SBICs loan the money they have borrowed from the SBA to their portfolio companies. Investment companies have rarely been able to reach the youngest startups because these businesses often lack the cash flow required to make quarterly interest payments. The SBA has tweaked the rules for this program to make it easier for venture funds to use debt to buy equity. In addition, at least half of the investments venture funds participating in this program make must be in companies without positive cash flow from operations.

Currently, nearly three-quarters of venture financing goes to companies in just three states: California, Massachusetts and New York.  The new fund is designed to have a significant impact on seed investment activity in the other 47 states.

The SBA has taken steps to minimize taxpayer risk in the new fund. Leverage is limited to the amount of private capital a fund has raised, up to $50 million. A fund must also raise $20 million privately.

Click here to view the complete New York Times article.

MCB has over 40 years of experience serving Private Equity and Venture Capitalists with accounting, tax, audit, due diligence and consulting services. Contact Matt Dwyer at 703.218.3600 to start building a relationship with a CPA firm who strives to earn your RESPECT and CONFIDENCE as a TRUSTED business adviser.

There are two tax changes for 2012 that broadly affect employers. These include new W-2 reporting of employer-sponsored health care coverage and the Employee Retention Credit. Although the W-2 reporting of health care coverage is optional for Form W-2s issued in 2012 (becoming mandatory in 2013 under the health care reform legislation) some employees may receive 2011 W-2s with the new code DD and an amount supplied.
 
As for the Employee Retention Credit, although it related to 2010 hiring, it required retaining the employee for at least 52 weeks to qualify for the credit, thereby moving eligibility for the credit to 2011 returns. To qualify for the credit, the employer must have paid wages in the last 26 weeks equal to at least 80% of the wages for the first 26 weeks. This credit is claimed on Form 5884-B and is the lesser of $1,000 or 6.2% of the retained worker's wages during the period.

Contact an MCB Tax Adviser for your tax and accounting needs at 703.218.3600 or at info@mcb-cpa.com.

California now has the nation's most punitive laws against misclassifying workers as independent contractors.  Businesses found to have incorrectly classified employees as independent contractors now face civil penalties ranging from $5,000 to $15,000 per employee, and from $10,000 to $25,000 per employee in instances involving "a pattern and practice" of misclassification. 

Businesses found to have misclassified workers may be required to post notices on their web sites detailing the misclassification and directing misclassified workers to California's Labor Workforce Development Agency. Additional penalties, fines and back wages that may be owed for failure to pay wages correctly.

California's new laws undermine a new voluntary self-reporting program instituted by the IRS to help businesses who previously misclassified workers. Under that program, employers who have misclassified workers may significantly limit their exposure to the federal government by, among other things, self-reporting previous misclassifications. Unfortunately, the federal program provides no immunity from penalties that may be imposed under California law, and participation in the IRS program may be used as evidence of liability under California law.

There is no grace period for the new California laws. They became effective on October 8, 2011--the day on which Governor Jerry Brown signed the bill.

Click here to view the complete AccountingToday.com article.

MCB has been serving government contractors for over 60 years with their business, tax, accounting and compliance needs. Contact an MCB Tax Adviser for your tax and accounting needs at 703 218.3600 or at info@mcb-cpa.com.

Employment in the private sector rose by 212,000 jobs in December 2011, reducing the unemployment rate two-tenths of a percentage point to 8.5%, according to the U.S. Bureau of Labor Statistics. This is the lowest unemployment rate since February 2009.  Job gains were mostly in transportation and warehousing, retail, manufacturing, health care and mining.

Employment in professional and business services changed little in December, for the second month in a row. The industry added, on average, 42,000 jobs per month during the first ten months of 2011. Government employment changed little in December, but it was down by 280,000 jobs over the year. Job losses in 2011 occurred in local government; state government, excluding education; and the U.S. Postal Service.

Click here to view the complete AccountingToday.com article.

Contact an MCB Tax Adviser for your tax and accounting needs at 703.218.3600 or at info@mcb-cpa.com.