Audit Ahead road sign isolated on blue sky

Are you ready for audit season?

It’s almost audit season for calendar-year entities. A little preparation can go a long way toward facilitating the external audit process, minimizing audit adjustments and surprises, lowering your audit fees in the future and getting more value out of the audit process. Here are some ways to plan ahead.

The mindset

Before fieldwork begins, meet with your office team to explain the purpose and benefits of financial statement audits. Novice staff members may confuse financial audits with IRS audits, which can sometimes become contentious and stressful. Also designate a liaison in the accounting department who will answer inquiries and prepare document requests for auditors.

Reconciliation
Enter all transactions into the accounting system before the auditors arrive, and prepare a schedule that reconciles each account balance. Be ready to discuss any estimates that underlie account balances, such as allowances for uncollectible accounts, warranty reserves or percentage of completion.

Check the schedules to reveal discrepancies from what’s expected based on the company’s budget or prior year’s balance. Also review last year’s adjusting journal entries to see if they’ll be needed again this year. An internal review is one of the most effective ways to minimize errors and adjusting journal entries during a financial statement audit.

Work papers
Auditors are grateful when clients prepare work papers to reconcile account balances and transactions in advance. Auditors also will ask for original source documents to verify what’s reported on the financial statements, such as bank statements, sales contracts, leases and loan agreements.

Compile these documents before your audit team arrives. They may also inquire about changes to contractual agreements, regulatory or legal developments, additions to the chart of accounts and major complex transactions that occurred in 2016.
Internal controls

Evaluate internal controls before your auditor arrives. Correct any “deficiencies” or “weaknesses” in internal control policies, such as a lack of segregation of duties, managerial review or physical safeguards. Then the auditor will have fewer recommendations to report when he or she delivers the financial statements.

Value-added
Financial statement audits should be seen as a learning opportunity. Preparing for your auditor’s arrival not only facilitates the process and promotes timeliness, but also engenders a sense of teamwork between your office staff and external accountants.

© 2016

Tax time

Tax Return Due Dates Change in 2017

by Nicole Oeltjen

Tax Senior at Atchley & Associates, LLP

Federal due dates for the 2016 tax returns are changing for the 2017 filing season. Don’t worry, your individual income tax return is still due April 15th and the extended due date is still on October 15th. Changes were made to business returns and other tax forms.

The new due dates apply to tax years beginning after December 31, 2015. This also applies to a business that that may have a short year return during 2016. For business that have a fiscal year end other than a calendar year end the due dates may differ slightly.

New federal due dates for a calendar year taxpayer are below:

Form                             Type                                                Due Date             Extended Due Date


1065                                 Partnership                                    March 15               September 15

1120S                               S corporation                                March 15               September 15

1040                                 Individual                                        April 15                  October 15

1041                                 Trust & Estate                                 April 15                 September 30

1120                                 C corporation                                April 15                 September 15

FinCEN Form 114        Foreign Accounts                         April 15                  October 15

990 & 990T                    Tax Exempt                                     May 15                  November 15

5500                                 Employee Benefit Plans             July 31                   October 15

 

States that have income filing requirements will be working to enact legislation to change their due dates to coincide with the federal deadlines for 2017.

 

Why the change?

Over the years more and more businesses were formed as a flow through entity-such as a partnership or S corporation-rather than a C corporation due to the tax implications. As tax law and the complexities of a partnership structure increased, additional time was needed in order for information to be gathered, prepared, and properly reviewed before filing a business tax return. Individual taxpayers were finding it difficult to file on time due to receiving a late Schedule K-1. A Schedule K-1 is the form one receives as being a partner or shareholder of a business structured as a flow through entity. The AICPA, tax professionals and business owners voiced their concerns and opinions and advocated for a change in the federal due dates. Congress passed the new legislation in 2015 to take effect for the 2017 filing season.

Female warehouse employee scans informations from boxes loaded on pallets stored in pallet racks in the warehouse.

Tips for efficient year-end physical inventory counts

The basics

Inventory includes raw materials, work-in-progress and finished goods. Your physical inventory count also may include parts and supplies inventory. Under U.S. Generally Accepted Accounting Principles (GAAP), inventory is recorded at the lower of cost or market value.

Estimating the value of inventory may involve subjective judgment calls, especially if your company converts raw materials into finished goods available for sale. For example, the value of work-in-progress inventory includes overhead allocations and, in some cases, may require percentage-of-completion assessments.

A moving target

The inventory count gives a snapshot of how much inventory is on hand at year end. The value of inventory is always in flux, as work is performed and items are delivered or shipped. To capture a static value, it’s essential that business operations “freeze” while the count takes place.

Usually, it makes sense to count inventory during off-hours to minimize the disruption to business operations. Larger organizations with multiple locations may be unable to count everything at once. So, larger companies often break down their counts by physical location.

Proactive planning

Planning is the key to minimizing disruptions. Before counting starts, management can:.

  • Order (or create) prenumbered inventory tags,
  • Conduct a dry run to identify roadblocks and schedule workers,
  • Assign workers to count inventory using two-person teams to prevent fraud,
  • Write off any unsalable items, and
  • Precount and bag slow-moving items.

If your company issues audited financial statements, your audit team will be present during the physical inventory count. They aren’t there to help count inventory. Instead, they’ll observe the procedures, review written inventory processes and cutoffs, evaluate internal controls over inventory, and perform independent counts to compare to your inventory listing and counts made by your employees.

Beyond the count

When the inventory count is complete, it’s critical to investigate discrepancies between your computerized accounting records and physical inventory counts. We can use this information to help you evaluate how to stock items more efficiently and safeguard against future write-offs due to fraud, damage or obsolescence.

© 2016

depreciationsavings2016brief

Depreciation-related breaks offer 2016 tax savings on business real estate

Commercial buildings and improvements generally are depreciated over 39 years, which essentially means you can deduct a portion of the cost every year over the depreciation period. (Land isn’t depreciable.) But enhanced tax breaks that allow deductions to be taken more quickly are available for certain real estate investments:

1. 50% bonus depreciation. This additional first-year depreciation allowance is available for qualified improvement property. The break expired December 31, 2014, but has been extended through 2019. However, it will drop to 40% for 2018 and 30% for 2019. On the plus side, beginning in 2016, the qualified improvement property doesn’t have to be leased.

2. Section 179 expensing. This election to deduct under Sec. 179 (rather than depreciate over a number of years) qualified leasehold-improvement, restaurant and retail-improvement property expired December 31, 2014, but has been made permanent.

Beginning in 2016, the full Sec. 179 expensing limit of $500,000 can be applied to these investments. (Before 2016, only $250,000 of the expensing election limit, which also is available for tangible personal property and certain other assets, could be applied to leasehold-improvement, restaurant and retail-improvement property.)

The expensing limit is subject to a dollar-for-dollar phaseout if your qualified asset purchases for 2016 exceed $2,010,000. In other words, if, say, your qualified asset purchases for the year are $2,110,000, your expensing limit would be reduced by $100,000 (to $400,000).

Both the expensing limit and the purchase limit are now adjusted annually for inflation.

3. Accelerated depreciation. This break allows a shortened recovery period of 15 years for qualified leasehold-improvement, restaurant and retail-improvement property. It expired December 31, 2014, but has been made permanent.

Although these enhanced depreciation-related breaks may offer substantial savings on your 2016 tax bill, it’s possible they won’t prove beneficial over the long term. Taking these deductions now means forgoing deductions that could otherwise be taken later, over a period of years under normal depreciation schedules. In some situations — such as if in the future your business could be in a higher tax bracket or tax rates go up — the normal depreciation deductions could be more valuable.

For more information on these breaks or advice on whether you should take advantage of them, please contact us.

© 2016

installmentsplusminusatchley

Installment sales offer both tax pluses and tax minuses

Whether you’re selling your business or acquiring another company, the tax consequences can have a major impact on the transaction’s success or failure.

Consider installment sales, for example. The sale of a business might be structured as an installment sale if the buyer lacks sufficient cash or pays a contingent amount based on the business’s performance. And it sometimes — but not always — can offer the seller tax advantages.

Pluses

An installment sale may make sense if the seller wishes to spread the gain over a number of years. This could be especially beneficial if it would allow the seller to stay under the thresholds for triggering the 3.8% net investment income tax (NIIT) or the 20% long-term capital gains rate.

For 2016, taxpayers with modified adjusted gross income (MAGI) over $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately) will owe NIIT on some or all of their investment income. And the 20% long-term capital gains rate kicks in when 2016 taxable income exceeds $415,050 for singles, $441,000 for heads of households and $466,950 for joint filers (half that for separate filers).

Minuses

But an installment sale can backfire on the seller. For example:

  • Depreciation recapture must be reported as gain in the year of sale, no matter how much cash the seller receives.
  • If tax rates increase, the overall tax could wind up being more.

Please let us know if you’d like more information on installment sales — or other aspects of tax planning in mergers and acquisitions. Of course, tax consequences are only one of many important considerations.

© 2016

now or later concept handwritten on chalkboard with vintage precise stopwatch used instead of O

Are you ready for the new revenue recognition rules?

A landmark financial reporting update is replacing about 180 pieces of industry-specific revenue accounting guidance with a single, principles-based approach. In May 2014, the Financial Accounting Standards Board (FASB) unveiled Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. In 2015, the FASB postponed the effective date for the new revenue guidance by one year. Here’s why companies that report comparative results can’t delay any longer — and how to start the implementation process.

No time to waste

The updated revenue recognition guidance takes effect for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. The update permits early adoption, but no earlier than the original effective date of December 15, 2016. Private companies have an extra year to implement the changes.

That may seem like a long time away, but many companies voluntarily provide comparative results. For example, the presentation of two prior years of results isn’t required under GAAP, but it helps investors, lenders and other stakeholders assess long-term performance.

Calendar-year public companies that provide two prior years of results will need to collect revenue data under one of the retrospective transition methods for 2016 and 2017 in order to issue comparative statements by 2018. Private companies would have to follow suit a year later.

A new mindset

The primary change under the updated guidance is the requirement to identify separate performance obligations — promises to transfer goods or services — in a contract. A company should treat each promised good or service (or bundle of goods or services) as a performance obligation to the extent it’s “distinct,” meaning:

  1. The customer can benefit from it (either on its own or together with other readily available resources), and
  2. It’s separately identifiable in the contract.

Then, a company must determine whether these obligations are satisfied over time or at a point in time, and recognize revenue accordingly. The shift to a principles-based approach will require greater judgment on the part of management.

Call for help

Need assistance complying with the new guidance? We can help assess how — and when — you should report revenue, explain the disclosure requirements, and evaluate the impact on customer relationships and other aspects of your business, including tax planning strategies and debt covenants.

© 2016

Estate tax return

9 Things to Know When Settling a Loved One’s Estate

by Joe Ben Combs, CPA

Tax Supervisor @ Atchley & Associates, LLP

 

Handling the estate of a family member or friend who has passed away can be one of the most difficult things you may be asked to do, both emotionally and logistically. You have to navigate a complex tax system, a treacherous legal system and a bureaucratic financial system all while managing relationships with beneficiaries eager for their inheritance, not to mention the task of dealing with your own personal loss.

Our team has walked many people through this process and we thought it would be helpful to share a few items that our clients often need to be reminded of.

  1. Notifications. There are a number of individuals, businesses and institutions that are impacted when someone passes away and will need to be notified. Depending on the situation, these can include the Social Security Administration, heirs, beneficiaries, creditors, financial institutions, insurance companies, and utilities providers, among others.
  2. Obtain an EIN. The employer identification number is the tax ID used by an estate or trust. This will be required to open an estate or trust bank account as well as for any tax filings.
  3. Change of address. The United States Postal Service allows you to request a change of address online at usps.com. This is important in order to avoid a pile of mail in the decedent’s mailbox which can pose a security risk but it also allows you as the person responsible for the estate to stay on top of bills and identify businesses or financial institutions with which the decedent may have had accounts.
  4. Taxes. As the personal representative, you may be responsible for filing a number of tax returns for the decedent. These might include an estate tax return (form 706) an income tax return for the estate (form 1041) and the individual’s final income tax return (form 1040) or gift tax return (form 709) as well as unfiled returns from prior years. With all of these come a host of possible tax elections and post-mortem planning opportunities that should be discussed with a tax professional. And while Texas does not have any corresponding state returns for these federal filings, many decedents will have filing obligations in other states.
  5. Search for unclaimed property. One of the primary responsibilities of the executor, administrator or trustee handling an estate is to identify, collect, value, manage, and dispose of or distribute the decedent’s assets. An often overlooked source of assets is the state itself. In Texas, the Comptroller provides a website (https://mycpa.cpa.state.tx.us/up/Search.jsp) where individuals and business can search for unclaimed property by name.
  6. Value all assets. This was alluded to above but it is worth repeating. Even if the value of a decedent’s estate is below the threshold to generate any estate tax, obtaining date-of-death values (or values as of the alternate valuation date if applicable) is crucial to ensure correct income tax reporting when that property is subsequently disposed of. This is because the basis (tax-speak for the starting point in a gain or loss calculation) of an asset gets stepped up to the date of death value and is often difficult to track down later on when the asset is sold.
  7. Disclaiming an inheritance. Many beneficiaries find it advantageous for various reasons to allow assets that they would have otherwise inherited to pass to someone else. This can be an effective post-mortem planning technique. Keep in mind however that the assets must then be distributed as if the beneficiary had predeceased the decedent. In order to be effective for tax purposes a disclaimer generally must be made within 9 months of the date of death and the original beneficiary must not have received any benefit from the disclaimed assets.
  8. IRAs. Decedents’ assets at death will often include retirement accounts, particularly IRAs. The full range of options available for handling IRAs is beyond the scope of this piece and it is often not the executor’s decision what happens to these accounts but simply keep in mind that withdrawing the funds immediately is often the least advantageous option. Consulting a CPA or financial advisor is highly recommended when making these decisions.
  9. Hire professionals. At the risk of sounding self-serving, we could not in good conscience omit this simple piece of advice. There are simply too many moving pieces and too much at stake to not at least consult with a CPA and/or attorney who is experienced in dealing with estates.
retirement plan documents and pen

Looking for a retirement plan for your business? Here’s one SIMPLE option

Has your small business procrastinated in setting up a retirement plan? You might want to take a look at a SIMPLE IRA. SIMPLE stands for “savings incentive match plan for employees.” If you decide you’re interested in a SIMPLE IRA, you must establish it by no later than October 1 of the year for which you want to make your initial deductible contribution. (If you’re a new employer and come into existence after October 1, you can establish the SIMPLE IRA as soon as administratively feasible.)

Pros and cons

Here are some of the basics of SIMPLEs:

  • They’re available to businesses with 100 or fewer employees.
  • They offer greater income deferral opportunities than individual retirement accounts (IRAs). However, other plans, such as SEPs and 401(k)s, may permit larger annual deductible contributions.
  • Participant loans aren’t allowed (unlike 401(k) and other plans that can offer loans).
  • As the name implies, it’s simple to set up and administer these plans. You aren’t required to file annual financial returns.
  • If your business has other employees, you may have to make SIMPLE IRA employer “matching” contributions.

Contribution amounts

Any employee who has compensation of at least $5,000 in any prior two years, and is reasonably expected to earn $5,000 in the current year, can elect to have a percentage of compensation put into a SIMPLE. An employee may defer up to $12,500 in 2016. This amount is indexed for inflation each year. Employees age 50 or older can make a catch-up contribution of up to $3,000 in 2016.

If your business has other employees, you may have to make SIMPLE IRA employer “matching” contributions.

Consider your choices

A SIMPLE IRA might be a good choice for your small business but it isn’t the only choice. You might also be interested in setting up a simplified employee pension plan, a 401(k) or other plan. Contact us to learn more about a SIMPLE IRA or to hear about other retirement alternatives for your business.

© 2016

Senior man looking at an abacus seated at table isolated on white background

Overview of inventory reporting methods

It’s critical to report inventory using the optimal method. There are several legitimate options for reporting inventory — but take heed: The method you choose ultimately affects how much inventory and profit you’ll show and how much tax you’ll owe.

The basics

Inventory is generally recorded when it’s received and title transfers to the company. Then, it moves to cost of goods sold when the product ships and title transfers to the customer. But you can apply different inventory methods that will affect the value of inventory on your company’s balance sheet.

FIFO vs. LIFO

Under the first-in, first-out (FIFO) method, the first units entered into inventory are the first ones presumed sold. Conversely, under the last-in, first-out (LIFO) method, the last units entered are the first presumed sold.

In an inflationary environment, companies that report inventory using FIFO report higher inventory values, lower cost of sales and higher pretax earnings than otherwise identical companies that use LIFO. So, in an increasing-cost market, companies that use FIFO appear stronger — on the surface.

But LIFO can be an effective way to defer taxes and, therefore, improve cash flow. Using LIFO causes the low-cost items to remain in inventory. Higher cost of sales generates lower pretax earnings as long as inventory keeps growing. To keep inventory growing and avoid expensing old cost layers, however, some companies may feel compelled to produce or purchase excessive amounts of inventory. This can be an inefficient use of resources.

Specific identification

When a company’s inventory is one of a kind, such as artwork or custom jewelry, it may be appropriate to use the specific-identification method. Here, each item is reported at historic cost and that amount is generally carried on the books until the specific item is sold. But a write-off may be required if an item’s market value falls below its carrying value.

Weighing your options

Each inventory reporting method has pros and cons — and what worked when you started your business may not be the right choice today. As you prepare for year end, consider whether your method is still optimal, given your current size and business operations, expected market conditions, and today’s tax laws and accounting rules. Not sure what’s right? We can help you evaluate the options.

© 2016

travelexpensesbrief

Combining business and vacation travel: What can you deduct?

If you go on a business trip within the United States and tack on some vacation days, you can deduct some of your expenses. But exactly what can you write off?

Transportation expenses

Transportation costs to and from the location of your business activity are 100% deductible as long as the primary reason for the trip is business rather than pleasure. On the other hand, if vacation is the primary reason for your travel, then generally none of your transportation expenses are deductible.

What costs can be included? Travel to and from your departure airport, airfare, baggage fees, tips, cabs, and so forth. Costs for rail travel or driving your personal car are also eligible.

Business days vs. pleasure days

The number of days spent on business vs. pleasure is the key factor in determining if the primary reason for domestic travel is business. Your travel days count as business days, as do weekends and holidays if they fall between days devoted to business, and it would be impractical to return home.

Standby days (days when your physical presence is required) also count as business days, even if you aren’t called upon to work those days. Any other day principally devoted to business activities during normal business hours also counts as a business day, and so are days when you intended to work, but couldn’t due to reasons beyond your control (such as local transportation difficulties).

You should be able to claim business was the primary reason for a domestic trip if business days exceed personal days. Be sure to accumulate proof and keep it with your tax records. For example, if your trip is made to attend client meetings, log everything on your daily planner and copy the pages for your tax file. If you attend a convention or training seminar, keep the program and take notes to show you attended the sessions.

Once at the destination, your out-of-pocket expenses for business days are fully deductible. These expenses include lodging, hotel tips, meals (subject to the 50% disallowance rule), seminar and convention fees, and cab fare. Expenses for personal days are nondeductible.

We can help

Questions? Contact us if you want more information about business travel deductions.

© 2016