LETTERS

MORE WAYS IN THE MAZE
I very much enjoyed reading the article, “The Choice-of-Entity Maze” (March 07, page 64). Perhaps we should also consider the difference between the liability protection of a corporation and that of an LLC from lawsuits or other claims directed against owners of these entities.

A corporation generally protects shareholders from lawsuits directed against the corporation; it does not necessarily protect corporate assets from lawsuits directed against the shareholders. On the other hand, in many states, the exclusive remedy available to a creditor against an LLC membership interest involves collecting monies from a debtor-member, without disrupting the LLC business or other solvent members.

Nanda Senathi, CPA, CMA
Hermosa Beach, Calif.

Author’s reply: The letter’s author raises a good point. However, I do not think as accountants we should, or even can, expand the discussion on liability protection other than to recommend that clients consult with an attorney to properly address the nuances of the liability protection offered by a corporation versus an LLC.

Gregory A. Porcaro, CPA
Warwick, R.I.

DOUBLE-CHECK REQUIREMENTS
I was pleased to see an article encouraging CPAs and businesses to pursue government contracts (“Help Clients Get Government Contracts,” March 07, page 32). Overall, the article was excellent. 

However, there was one error in the section devoted to 8(a) Designated Small Businesses. The article stated that 8(a) firms are not required to participate directly in providing the goods or services. I would encourage all businesses and CPA firms to review the FAR clauses closely as some of these clauses do in fact require a certain level of participation by the 8(a) business for particular NAICS codes. The most significant relevant FAR clause is 13 CFR 125.6.

Additionally, I would recommend any CPA firm interested in expanding into this market contact the nearest Defense Contract Audit Agency branch or review the information at the Web site (www.dcaa.mil). DCAA has extensive information for contractors (and CPA firms serving them) that detail reporting requirements. These reports, including accounting surveys, financial capability, incurred cost and others, are a very lucrative and valuable service for a CPA firm to offer. Thanks again for the excellent publication.

Denise Smith, CPA
Athens, Ala.

Author’s reply: Thank you very much for the insightful comment about the DCAA reporting requirements. This is another excellent area for CPAs to provide assistance to small businesses in government contracting that deserved mention in the article.

With respect to 8(a) entities, you are correct that federal regulations encourage 8(a) firms to participate in the performance of contracts awarded under the 8(a) program to the fullest extent possible. However, the standards apply to the joint venture, not the 8(a) entity. The 8(a) joint venture program is designed to help eligible 8(a) businesses build capacity and expertise over an extended period with the goal that they will eventually be able to provide 100% of those products and services in the future. We intended to describe a situation in which a small disadvantaged firm enters into a joint venture with a large firm under SBA’s mentor program. The joint venture, once approved by the SBA, becomes an eligible 8(a) entity for contracting and performance purposes.

Charles Sparks, CPA, Ph.D.
Fairbanks, Alaska

PERHAPS NOT HOME FREE
The first example in “Home Free” (Jan. 07, page 40) might not qualify for section 1031 deferral of capital gain as the article stated.

The IRS has used the “intent” of the taxpayer, predominant use and rental-property rules to determine when a property is held for productive use in a trade or business or for investment. That means that in the two years leading up to sale, if the taxpayer utilizes the property for pleasure more than 14 days each year or more than 10% of the rental period (the greater of the two is permitted), the IRS may take the position that it was predominantly a personal-use asset and deny deferability. 

We generally advise clients to live in the property for two years and then rent it for two years just before sale. The replacement property should be rented for two years, with less than 14 days or 10% usage; then it can be converted to primary use after qualifying for the completion of the 1031.

George M. Christofely, CPA
Ocean City, N.J.