Author: atchleycpasblog

2017 Q3 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

July 31

  • Report income tax withholding and FICA taxes for second quarter 2017 (Form 941), and pay any tax due. (See exception below.)
  • File a 2016 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10

  • Report income tax withholding and FICA taxes for second quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 15

  • If a calendar-year C corporation, pay the third installment of 2017 estimated income taxes.
  • If a calendar-year S corporation or partnership that filed an automatic six-month extension:
    • File a 2016 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
    • Make contributions for 2016 to certain employer-sponsored retirement plans.

© 2017

Accounting Services: Should I consider this service for my business?

by Liana Ellison, CPA

Accounting Services Manager at Atchley & Associates, LLP

 

Atchley & Associates, LLP provides accounting services of various levels to many of our clients. The levels of services vary from consulting with startup companies about their accounting set up all the way to outsourcing their accounting department to us. We are able to provide a custom level of service to meet our client’s needs. Some of the accounting services we provide at Atchley & Associates include:

  • Outsourced payroll, set up, reporting, support and consulting
  • Outsourced bookkeeping, reconciliations of accounts such as bank, credit cards, loans and lines of credit, and preparation of any adjusting journal entries
  • Review of systems utilized and internal processes, and make recommendations of accounting platforms and ancillary applications
  • Customized Financial Statement preparation
  • Preparation or support for various compliance such as personal property renditions, Forms 1099, and Sales Tax
  • Year-end accounting analysis and clean-up in preparation for tax return

In addition, our team can take the pressure off business owners or executive directors that may not have the expertise or time to review and supervise the work performed by their accounting department.  These leaders may not want to deal with having to worry about turnover or fraud in this critical position, and often engage us to support them in this area of their business or organization.

Our services are not specific to any one industry, therefore we are able to support various types of service industries including a number of non-profit clients.

I’ve put together some recent questions that our group has received and compiled them into a True or False Quiz as examples of how we support our client. As in every case, that correct answer is- “it depends”. However, you may find some helpful information for your business or line of work.

  1. A client inquired, I receive a cell phone allowance with my payroll of $50 a month, this taxable compensation to me- true or false?

False- this can be considered non-taxable compensation, as a non-tax fringe benefit IF

– The employer has an accountable plan and

– There is a business connection for the cell phone use and

– The allowance does not exceed the cost of employee’s monthly plan (requires substantiation). Any excess allowance would be considered taxable compensation.

  i. IRS Notice 2011-72

  1. I had the privilege to attend the Rotary scholarship luncheon last month with our partner, Harold Ingersoll, where Rotarians gave out over $43K in scholarships towards recipient’s tuition and higher learning. The Rotary Club of Austin is not required to issue a 1099 to these recipients for the amount received- true or false?

True- the Rotary Club of Austin is not required to issue scholarship recipients a 1099 since these funds were not in connection with any services performed for teaching, research or other services as a condition for receiving the scholarship. It may not prevent the recipient from picking it up as income on their personal return, but nothing is required to be reported to the IRS by the Rotary Club of Austin.

  i. Sec 117(b) and Regulations section 1.6041-3(n), Tax Topic 421

  1. I have an hourly (non-exempt) employee therefore I am only required to pay them at least once a month in the state of Texas- True or False?

False- per Texas Pay Day Law hourly (non-exempt) employees must be paid at least twice a month.

  i. Texas Payday Law section 61.011

  1. I bought a used iPad mini for my business for $199. Since the cost is less than $250, I don’t need to report this property on the Personal Property Rendition for Travis County– true or false?

False- per Travis County Appraisal District, ALL business personal property that is used in business must be rendered on the form, regardless of the amount.

  1. I just started a new business and have chosen QuickBooks Online as the application to provide record keeping for my business because I have heard it’s the best in the market- True or False?

Trick question- You might receive a different answer depending on who you ask. There are several new applications on the market that compare to QuickBooks Online. However, QuickBooks still retains a large portion of the small business market.

  i. Contact us to find out what might be the right fit for your business.

You can leverage our services for more answers to these types of questions in addition to receiving accurate reporting and record keeping.  Contact us for more information on how we can help your business.

 

Business owners: When it comes to IRS audits, be prepared

If you recently filed your 2016 income tax return (rather than filing for an extension) you may now be wondering whether it’s likely that your business could be audited by the IRS based on your filing. Here’s what every business owner should know about the process.

Catching the IRS’s eye

Many business audits occur randomly, but a variety of tax-return-related items are likely to raise red flags with the IRS and may lead to an audit. Here are a few examples:

  • Significant inconsistencies between previous years’ filings and your most current filing,
  • Gross profit margin or expenses markedly different from those of other businesses in your industry, and
  • Miscalculated or unusually high deductions.

An owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can also catch the IRS’s eye, especially if the business is structured as a corporation.

Response measures

If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.

The good news is that many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the most severe version, the field audit, requires meeting with one or more IRS auditors.

More good news: In no instance will the agency demand an immediate response. You’ll be informed of the discrepancies in question and given time to prepare. To do so, you’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.

If the IRS selects you for an audit, our firm can help you:

  • Understand what the IRS is disputing (it’s not always crystal clear),
  • Gather the specific documents and information needed, and
  • Respond to the auditor’s inquiries in the most expedient and effective manner.

Don’t let an IRS audit ruin your year — be it this year, next year or whenever that letter shows up in the mail. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one happens in the first place.

© 2017

Choosing between a calendar tax year and a fiscal tax year

Many business owners use a calendar year as their company’s tax year. It’s intuitive and aligns with most owners’ personal returns, making it about as simple as anything involving taxes can be. But for some businesses, choosing a fiscal tax year can make more sense.

What’s a fiscal tax year?

A fiscal tax year consists of 12 consecutive months that don’t begin on January 1 or end on December 31 — for example, July 1 through June 30 of the following year. The year doesn’t necessarily need to end on the last day of a month. It might end on the same day each year, such as the last Friday in March.

Flow-through entities (partnerships, S corporations and, typically, limited liability companies) using a fiscal tax year must file their return by the 15th day of the third month following the close of their fiscal year. So, if their fiscal year ends on March 31, they would need to file their return by June 15. (Fiscal-year C corporations generally must file their return by the 15th day of the fourth month following the fiscal year close.)

When a fiscal year makes sense

A key factor to consider is that if you adopt a fiscal tax year you must use the same time period in maintaining your books and reporting income and expenses. For many seasonal businesses, a fiscal year can present a more accurate picture of the company’s performance.

For example, a snowplowing business might make the bulk of its revenue between November and March. Splitting the revenue between December and January to adhere to a calendar year end would make obtaining a solid picture of performance over a single season difficult.

In addition, if many businesses within your industry use a fiscal year end and you want to compare your performance to your peers, you’ll probably achieve a more accurate comparison if you’re using the same fiscal year.

Before deciding to change your fiscal year, be aware that the IRS requires businesses that don’t keep books and have no annual accounting period, as well as most sole proprietorships, to use a calendar year.

It can make a difference

If your company decides to change its tax year, you’ll need to obtain permission from the IRS. The change also will likely create a one-time “short tax year” — a tax year that’s less than 12 months. In this case, your income tax typically will be based on annualized income and expenses. But you might be able to use a relief procedure under Section 443(b)(2) of the Internal Revenue Code to reduce your tax bill.

Although choosing a tax year may seem like a minor administrative matter, it can have an impact on how and when a company pays taxes. We can help you determine whether a calendar or fiscal year makes more sense for your business.

© 2017

Measuring “fair value” for financial reporting purposes

The balance sheet usually reflects the historic cost of assets and liabilities. But certain items must be reported at “fair value” under U.S. Generally Accepted Accounting Principles (GAAP). Here’s a closer look at what fair value is and which balance sheet accounts it affects.

Fair value vs. fair market value

Accounting Standards Codification (ASC) Topic 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This definition is similar in many respects to “fair market value,” which is defined in IRS Revenue Ruling 59-60.

The main difference is that fair market value focuses on the universe of hypothetical buyers and sellers. Conversely, FASB uses the term “market participants,” which refers to buyers and sellers in the asset’s or liability’s principal market. The principal market is entity specific and may vary among companies.

Hierarchy of value

Under ASC Topic 820, fair value is most often associated with business combinations and subsequent accounting for goodwill and other intangibles after the deal closes. Other examples of items that are reported at fair value include:

  • Impairment or disposals of long-lived assets,
  • Asset retirement or environmental obligations,
  • Stock compensation, and
  • Certain financial assets and liabilities.

When measuring fair value, the FASB provides a hierarchy of methods that may not necessarily apply to valuations performed for other purposes. GAAP gives top priority to market-based methods, such as quoted prices in active markets for identical assets or liabilities.

When market data isn’t readily available for a specific company, GAAP looks to quoted prices in active markets for similar assets or liabilities — in other words, comparable public stock prices or sales of controlling interests in comparable companies. The least desirable level of inputs under GAAP is unobservable data, such as cash flow or cost estimates prepared by management (which may be used to estimate value under the income or cost approach).

Changes in value

Decreases in the fair value of an asset (or increases in the fair value of a liability) may result from, say, poor company performance, changes in economic conditions and inaccurate estimates made in the past. Companies aren’t allowed to overstate the value of assets (or understate the value of a liability) under GAAP, so changes in fair value may lead to write-offs or restatements.

Outside expertise

Auditors are specifically prohibited from providing valuation services for their public audit clients. Private companies may follow suit to prevent independence issues during audits. So, companies often turn to valuation experts who are independent from their auditors to make fair value estimates — and then their auditors can evaluate whether those estimates appear reasonable. Contact us if you have any questions about fair value, including how it’s estimated or when it applies.

© 2017

3 financial statements you should know

Successful business people have a solid understanding of the three financial statements prepared under U.S. Generally Accepted Accounting Principles (GAAP). A complete set of financial statements helps stakeholders — including managers, investors and lenders — evaluate a company’s financial condition and results. Here’s an overview of each report.

1. Income statement

The income statement (also known as the profit and loss statement) shows sales, expenses and the income earned after expenses over a given period. A common term used when discussing income statements is “gross profit,” or the income earned after subtracting the cost of goods sold from revenue. Cost of goods sold includes the cost of labor, materials and overhead required to make a product.

Another important term is “net income.” This is the income remaining after all expenses (including taxes) have been paid.

2. Balance sheet

This report tallies the company’s assets, liabilities and net worth to create a snapshot of its financial health. Current assets (such as accounts receivable or inventory) are reasonably expected to be converted to cash within a year, while long-term assets (such as plant and equipment) have longer lives. Similarly, current liabilities (such as accounts payable) come due within a year, while long-term liabilities are payment obligations that extend beyond the current year or operating cycle.

Net worth or owners’ equity is the extent to which the book value of assets exceeds liabilities. Because the balance sheet must balance, assets must equal liabilities plus net worth. If the value of your liabilities exceeds the value of the assets, your net worth will be negative.

Public companies may provide the details of shareholders’ equity in a separate statement called the statement of retained earnings. It details sales or repurchases of stock, dividend payments and changes caused by reported profits or losses.

3. Cash flow statement

This statement shows all the cash flowing into and out of your company. For example, your company may have cash inflows from selling products or services, borrowing money and selling stock. Outflows may result from paying expenses, investing in capital equipment and repaying debt.

Although this report may seem similar to an income statement, it focuses solely on cash. It’s possible for an otherwise profitable business to suffer from cash flow shortages, especially if it’s growing quickly.

Typically, cash flows are organized in three categories: operating, investing and financing activities. The bottom of the statement shows the net change in cash during the period. To remain in business, companies must continually generate cash to pay creditors, vendors and employees. So watch your statement of cash flows closely.

Ratios and trends

Are you monitoring ratios and trends from your financial statements? Owners and managers who pay regular attention to these three key reports stand a better chance of catching potential trouble before it gets out of hand and pivoting, when needed, to maximize the company’s value.

© 2017

2017 Q2 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

April 18

  • If a calendar-year C corporation, file a 2016 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.
  • If a calendar-year C corporation, pay the first installment of 2017 estimated income taxes.

May 1

  • Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), and pay any tax due. (See exception below.)

May 10

  • Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.

June 15

  • If a calendar-year C corporation, pay the second installment of 2017 estimated income taxes.

© 2017

FAQs about agreed upon procedures

An agreed upon procedures (AUP) engagement uses procedures similar to an audit, but on a smaller and limited scale. Here’s how a customized AUP engagement differs from an audit and can be used to identify specific problems that require immediate action.

How do AUPs compare to audits?

The American Institute of Certified Public Accountants (AICPA) regulates both audits and AUP engagements. But the natures of these two types of accounting services are quite different. When a CPA firm performs an audit, its client is the company. With an AUP engagement, the client is typically the company’s lender or another third party — a fact that usually alleviates potential conflicts of interest.

Another key difference is that of responsibility. Audits require CPAs to provide a formal opinion on whether the company’s financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP).

On the other hand, CPAs make no formal conclusions when performing AUPs; they simply act as finders of fact. It’s the client’s responsibility to draw conclusions based on the CPA’s findings.

AUP engagements may target specific financial data (such as accounts payable, accounts receivable or related party transactions), nonfinancial information (such as a review of internal controls or compliance with royalty agreements), a specific financial statement (such as the income statement or balance sheet) or even a complete set of financial statements.

When do you need AUPs?

AUPs boast several advantages over audits. They can be performed at any time during the year — not just at year end. And because you have the flexibility to choose only those procedures you feel are necessary, they can be cost-effective.

Lenders may, for example, request an AUP engagement, if they have doubts or questions about a borrower’s financials — or if they want to check on the progress of a distressed company’s turnaround plan. Or a business owner may decide to hire a CPA to perform an AUP engagement, if he or she suspects that the CFO is misrepresenting the company’s financial results or the plant manager is stealing inventory. These engagements can also be useful in mergers and acquisition due diligence.

Who can help?

An AUP engagement can be used to dig deeper into financial results and identify specific problems that require immediate action. We can help you customize an AUP engagement that can identify problems and resolve issues quickly and effectively.

© 2017

Evaluating going concern issues

Financial statements are generally prepared under the assumption that the business will remain a “going concern.” That is, it’s expected to continue to generate a positive return on its assets and meet its obligations in the ordinary course of business. But sometimes conditions put that assumption into question.

Recently, the responsibility for making going concern assessments shifted from auditors to management. So, it’s important for you to identify the red flags that going concern issues exist.

Make the call

Under Accounting Standards Update No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, management is responsible for assessing whether there are conditions or events that raise “substantial doubt” about the company’s ability to continue as a going concern within one year after the date that the financial statements are issued — or available to be issued. (The alternate date prevents financial statements from being held for several months after year end to see if the company survives.)

When going concern issues arise, auditors may adjust balance sheet values to liquidation values, rather than historic costs. Footnotes also may report going concern issues. And the auditor’s opinion letter — which serves as a cover letter to the financial statements — may be downgraded to a qualified or adverse opinion. All of these changes forewarn lenders and investors that the company is experiencing financial distress.

Meet the threshold

When evaluating the going concern assumption, look for signs that your company’s long-term viability may be questionable, such as:

  • Recurring operating losses or working capital deficiencies,
  • Loan defaults and debt restructuring,
  • Denial of credit from suppliers,
  • Dividend arrearages,
  • Disposals of substantial assets,
  • Work stoppages and other labor difficulties,
  • Legal proceedings or legislation that jeopardizes ongoing operations,
  • Loss of a key franchise, license or patent,
  • Loss of a principal customer or supplier, and
  • An uninsured or underinsured catastrophe.

The existence of one or more of these conditions or events doesn’t automatically mean that there’s a going concern issue. Similarly, the absence of these conditions or events isn’t a guarantee that your company will meet its obligations over the next year.

Comply with the new guidance

Compliance with the new accounting standard starts with annual periods ending after December 15, 2016. So, managers of calendar-year entities will need to make the going concern assessment starting with their 2016 year-end financial statements. Contact us for more information about making going concern assessments and how it will affect your financial reporting.

© 2017