How to position your dealership for the future. Find out in the Fall 2021 edition of Auto Focus.
In this issue of Auto Focus: How COVID-19 is affecting auditing and financial reporting. Read More…
The US Treasury has announced that all tax returns and income tax payments due on April 15, 2020 are now due on July 15, 2020 without incurring any interest or penalties. This deferral includes any income tax due with the 2019 tax return and the 2020 first-quarter estimate up to an aggregate amount of $1 Million dollars for individuals and $10 Million for C Corporations. The 2020 second-quarter estimate is still currently due on June 15, 2020.
Most states have not yet issued any 2019 tax relief provisions in relation to COVID-19. We will provide additional updates as new information from the states becomes available.
For the health and safety of our clients and employees, we are asking that all tax information be sent to us electronically, via one of our secure online file exchanges, or through the mail. All completed tax returns will be delivered either electronically or through the mail. We are currently not offering in-person pick up of any tax returns.
Our online tax organizer allows you to answer the questions in the tax organizer and upload your paperwork. If you have not already requested an online organizer, please email the request to firstname.lastname@example.org.
We frequently use SafeSend to send tax returns securely to our clients. Step by step instructions will be sent prior to us sending your return. If you have not yet opted to use SafeSend, please email us at email@example.com.
If you need technical assistance with either program, please email firstname.lastname@example.org or call our office at 603.653.0044.
If it is essential to come to our office, we respectfully ask that you deposit your paperwork into the bin provided in the front lobby.
If you are feeling under the weather, we ask that you refrain from coming into the office.
Thank you, we appreciate your patience during this time.
In this issue of Auto Focus: Develop a formal business plan with sharp direction.
In the simplest of worlds, an employee effectively performs a set of tasks on an agreed-upon schedule and you pay him or her a fair wage. End of story. But, in the real world, employers need to craft a compensation philosophy: a formal statement outlining their belief system and approach to all the different ways they compensate employees. Here are four compensation philosophy questions to ponder:
1. Do small annual raises for everyone really make sense? Many employers have dropped the practice of spreading around modest (for example, 2% or 3%) raises broadly, because it limits funds available to give substantial pay raises to top performers. Often these raises are referred to as “cost of living adjustments,” but the value of a job doesn’t necessarily move in lockstep with inflation (even when inflation is low).
2. Are you using the right benchmarks? Although salary surveys can tell you average pay levels for jobs in your labor market, they can be misleading. This is because, in your own organization, an employee whose job pays, for instance, $50,000 on average in your community might be worth much more — or less — to you because of factors distinctive to your organization. An employee who understands his or her value to you — particularly when it’s high — probably won’t be content with pay that simply matches a market average.
3. What employee behaviors are you rewarding? It’s important to establish a clear link between the activities you’re rewarding and your strategic goals. For example, if your goal is to raise employee skill levels to equip them to assume greater responsibility, are they rewarded for acquiring those skills, or simply for performing well at their existing jobs?
4. Is your incentive system overly complicated? It may be tempting to devise a bonus system that touches on every possible metric of employee performance. But employees aren’t finely tuned machines that can calibrate their efforts precisely in response to a multitude of incentives. If they feel as though they’re being pulled in too many directions, or don’t really understand the formula, the bonus will lose potency.
After you’ve created, or perhaps revised, your compensation philosophy, communicating it to employees is critical. Craft a carefully written description in your employee handbook. But don’t stop there — train your managers to explain your philosophy clearly while onboarding new hires and when discussing compensation during performance reviews. For more information, please contact us.
Restricted gifts — or donations with conditions attached — can be difficult for not-for-profits to manage. Unlike unrestricted gifts, these donations can’t be poured into your general operating fund and be used where they’re most needed. Instead, restricted gifts generally are designated to fund a specific program or initiative, such as a building or scholarship fund.
It’s not only unethical, but dangerous, not to comply with a donor’s restrictions. If donors learn you’ve ignored their wishes, they can demand the money back and sue your organization. And your reputation will almost certainly take a hit. Rather than take that risk, try to encourage your donors to give with no strings attached.
Some donors simply don’t realize how restricted gifts can prevent their favorite charity from achieving its objectives. So when speaking with potential donors about their giving plans, praise the benefits of unrestricted gifts. Explain how donations are used at your organization, offering hard numbers and examples where needed. Be as upfront as possible and give them as much information as you can about your organization.
To make unrestricted giving as easy as possible, give donors (and their advisors) sample bequest clauses that refer to the general mission and purpose of your organization. Also encourage them to include wording that shows “suggestions” or “preferences” for their donations, as opposed to binding restrictions. Prepare documents that give wording samples for these cases.
Words of intent
Unless you’re holding a fundraiser to benefit a specific program, include general giving statements in your fundraising materials. For example, you might say: “All gifts will be used to further the organization’s general charitable purposes,” or “Your donations to this year’s fundraiser will be used toward the continued goal of fulfilling our organization’s mission.”
Reinforce this message in your donor thank-you letters. They should state your nonprofit’s understanding of how the gift is intended to be used. For example, if a donor stipulated no restrictions, explain that the money will be used for general operating purposes.
Obviously, you’ll need to be respectful if a donor is determined to attach strings to a gift. (Before accepting it, just make certain you’ll be able to carry out the donor’s wishes.) But if you can persuade contributors that their gifts will be used in a responsible and mission-enhancing way, many are likely to remove restrictions.
Contact us for more information on using restricted and unrestricted funds.
When you file your 2018 income tax return, you’ll likely find that some big tax law changes affect you — besides the much-discussed tax rate cuts and reduced itemized deductions. For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) makes significant changes to personal exemptions, standard deductions, and the child credit. The degree to which these changes will affect you depends on whether you have dependents and, if so, how many. It also depends on whether you typically itemize deductions.
1. No more personal exemptions
For 2017, taxpayers could claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. For families with children and/or other dependents, such as elderly parents, these exemptions could really add up.
For 2018 through 2025, the TCJA suspends personal exemptions. This will substantially increase taxable income for large families. However, enhancements to the standard deduction and child credit, combined with lower tax rates and other changes, might mitigate this increase.
2. Nearly doubled standard deduction
Taxpayers can choose to itemize certain deductions or take the standard deduction based on their filing status. Itemizing deductions when the total will be larger than the standard deduction saves tax, but it makes filing more complicated.
For 2017, the standard deductions were $6,350 for singles and separate filers, $9,350 for head of household filers, and $12,700 for married couples filing jointly.
The TCJA nearly doubles the standard deductions for 2018 to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. For 2019, they’re $12,200, $18,350 and $24,400, respectively. (These amounts will continue to be adjusted for inflation annually through 2025.)
For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps provide some additional tax savings. But for those with many dependents or who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from enhancements to the child credit.
3. Enhanced child credit
Credits can be more powerful than exemptions and deductions because they reduce taxes dollar-for-dollar, rather than just reducing the amount of income subject to tax. For 2018 through 2025, the TCJA doubles the child credit to $2,000 per child under age 17.
The TCJA also makes the child credit available to more families. For 2018 through 2025, the credit doesn’t begin to phase out until adjusted gross income exceeds $400,000 for joint filers or $200,000 for all other filers, compared with the 2017 phaseout thresholds of $110,000 and $75,000, respectively.
The TCJA also includes, for 2018 through 2025, a $500 credit for qualifying dependents other than qualifying children.
Maximize your tax savings
These are just some of the TCJA changes that may affect you when you file your 2018 tax return and for the next several years. We can help ensure you claim all of the breaks available to you on your 2018 return and implement TCJA-smart tax-saving strategies for 2019.
Limited liability company (LLC) members commonly claim that their distributive shares of LLC income — after deducting compensation for services in the form of guaranteed payments — aren’t subject to self-employment (SE) tax. The IRS, however, has been cracking down on LLC members it claims have underreported SE income, with some success in court.
SE tax background
Self-employment income is subject to a 12.4% Social Security tax (up to the wage base) and a 2.9% Medicare tax. Generally, if you’re a member of a partnership — including an LLC taxed as a partnership — that conducts a trade or business, you’re considered self-employed.
General partners pay SE tax on all their business income from the partnership, whether it’s distributed or not. Limited partners, however, are subject to SE tax only on any guaranteed payments for services they provide to the partnership. The rationale is that limited partners, who have no management authority, are more akin to passive investors.
(Please note that “service partners” in service partnerships, such as law firms, medical practices, and architecture and engineering firms, generally may not claim limited partner status regardless of their level of participation.)
Over the years, many LLC members have taken the position that they’re equivalent to limited partners and, therefore, exempt from SE tax (except on guaranteed payments for services). But there’s a big difference between limited partners and LLC members. Both enjoy limited personal liability, but, unlike limited partners, LLC members can actively participate in management without jeopardizing their liability protection.
Arguably, LLC members who are active in management or perform substantial services related to the LLC’s business are subject to SE tax, while those who more closely resemble passive investors should be treated like limited partners. The IRS issued proposed regulations to that effect in 1997, but hasn’t finalized them — although it follows them as a matter of internal policy.
Some LLC members have argued that the IRS’s failure to finalize the regulations supports the claim that their distributive shares aren’t subject to SE tax. But the IRS routinely rejects this argument and has successfully litigated its position. The courts generally have imposed SE tax on LLC members unless, like traditional limited partners, they lack management authority and don’t provide significant services to the business.
Review your situation
The law in this area remains uncertain, particularly with regard to capital-intensive businesses, but given the IRS’s aggressiveness in collecting SE taxes from LLCs, LLC members should assess whether the IRS might claim that they’ve underpaid SE taxes.
Those who wish to avoid or reduce these taxes in the future may have some options, including converting to an S corporation or limited partnership, or restructuring their ownership interests. When evaluating these strategies, there are issues to consider beyond taxes. Contact us to discuss your specific situation.
Companies will be able to capitalize, or spread out the costs of, setting up pricey business systems that operate on cloud technology under an update to U.S. Generally Accepted Accounting Principles (GAAP). Here are the details.
FASB responds to business complaints
Over the last three years, businesses have complained to the Financial Accounting Standards Board (FASB) about the different accounting treatment for cloud-based services vs. those operated on physical servers onsite. Businesses told the FASB that the economics of these arrangements are virtually the same.
As more businesses moved to cloud-based business applications, those complaints grew louder. So, in August, the FASB published Accounting Standards Update (ASU) No. 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
Existing GAAP “resulted in unnecessary complexity and needed to be updated to reflect emerging transactions in cloud computing arrangements that are service contracts,” FASB Chairman Russell Golden said in a statement. “To address this diversity in practice, this standard aligns the accounting for implementation costs of hosting arrangements — regardless of whether they convey a license to the hosted software.”
Old rules, new rules
Under existing GAAP, the accounting for services managed in the cloud differs depending on the type of contract a business has with a software provider. When a cloud computing (or hosting) arrangement doesn’t include a software license, the arrangement must be accounted for as a service contract. This means businesses must expense the costs as incurred.
Under the updated guidance, businesses will be able to treat the expenses of reconfiguring their systems and setting up cloud-managed business services as long-term assets and amortize them over the life of the arrangement.
The update also will align the accounting for implementation costs for cloud-managed systems with the accounting for costs associated with developing or obtaining internal-use software. Businesses will have to record the expense related to the capitalized implementation costs in the same line item in the income statement as the expense for the fees for the hosting arrangement.
The update is effective for public businesses for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. (This means 2020 for calendar-year companies.) For all other entities, the update is effective for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption is also permitted.
Private companies that follow U.S. Generally Accepted Accounting Principles (GAAP) must comply with the landmark new revenue recognition standard in 2019. Many private company CFOs and controllers report that they still have significant work to do to meet the demands of the sweeping rules. If you haven’t started the implementation process, it’s time to get the ball rolling.
Lessons from public company peers
Affected private companies must start following Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification Topic 606), the first time they issue financial statements in 2019. For private companies with a fiscal year end or issuing quarterly statements under U.S. GAAP, that could be within the next few months. Other private companies have until the end of the year or even early 2020. No matter what, it’s crunch time.
Public companies, which had to begin following the standard in 2018, reported that, even if the new accounting didn’t radically change the number they reported in the top line of their income statements, it changed the method by which they had to calculate it. They had to comb through contracts and offer paper trails to back up their estimates to auditors. Public companies largely reported that the standard was more work than they anticipated. Private companies can expect the same challenges.
The revenue recognition standard erases reams of industry-specific revenue guidance in U.S. GAAP and attempts to come up with the following five-step revenue recognition model for most businesses worldwide:
1. Identify the contracts with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognize revenue as the entity satisfies a performance obligation.
In many cases, the total revenue a company reports under the new guidance won’t differ much from what it reported under old rules, however, the timing of when a company can record revenues may be affected, particularly for long-term, multi-part arrangements.
Companies also must assess:
- The extent by which payments could vary due to such terms as bonuses, discounts, rebates and refunds,
- The extent that collected payments from customers is “probable” and won’t result in a significant reversal in the future, and
- The time value of money to determine the transaction price.
The result is a process that offers fewer bright-line rules and more judgment calls compared to old U.S. GAAP.
We can help
Our accounting experts can help you avoid a “fire drill” right before your implementation deadline and employ best practices learned from public companies that made the switch in 2018. Contact us for help getting your revenue reporting systems, processes, and policies up to speed.
Tyler, Simms & St. Sauveur, CPAs, P.C.
Phone: +1 (603) 653-0044