Austin

Tax planning critical when buying a business

If you acquire a company, your to-do list will be long, which means you can’t devote all of your time to the deal’s potential tax implications. However, if you neglect tax issues during the negotiation process, the negative consequences can be serious. To improve the odds of a successful acquisition, it’s important to devote resources to tax planning before your deal closes.

Complacency can be costly

During deal negotiations, you and the seller should discuss such issues as whether and how much each party can deduct their transaction costs and how much in local, state and federal tax obligations the parties will owe upon signing the deal. Often, deal structures (such as asset sales) that typically benefit buyers have negative tax consequences for sellers and vice versa. So it’s common for the parties to wrangle over taxes at this stage.

Just because you seem to have successfully resolved tax issues at the negotiation stage doesn’t mean you can become complacent. With adequate planning, you can spare your company from costly tax-related surprises after the transaction closes and you begin to integrate the acquired business. Tax management during integration can also help your company capture synergies more quickly and efficiently.

You may, for example, have based your purchase price on the assumption that you’ll achieve a certain percentage of cost reductions via postmerger synergies. However, if your taxation projections are flawed or you fail to follow through on earlier tax assumptions, you may not realize such synergies.

Merging accounting functions

One of the most important tax-related tasks is the integration of your seller’s and your own company’s accounting departments. There’s no time to waste: You generally must file federal and state income tax returns — either as a combined entity or as two separate sets — after the first full quarter following your transaction’s close. You also must account for any short-term tax obligations arising from your acquisition.

To ensure the two departments integrate quickly and are ready to prepare the required tax documents, decide well in advance of closing which accounting personnel you’ll retain. If you and your seller use different tax processing software or follow different accounting methods, choose between them as soon as feasible. Understand that, if your acquisition has been using a different accounting method, you’ll need to revise the company’s previous tax filings to align them with your own accounting system.

The tax consequences of M&A decisions may be costly and could haunt your company for years. We can help you ensure you plan properly and minimize any potentially negative tax consequences.

© 2017

Grant Funding and the Benefit of Single Audits

by Jeremy Myers, CPA

Audit Senior Manager at Atchley & Associates, LLP

 

Austin has a growing population of non-profit organizations who receive grant funds, which can be federal or state sourced and can come in many different sources: Grants, Loans, usages of land, and food / other commodities.  While the receipt of these funds helps organizations meet the needs of the community and reach their missions/goals, there are a number of other requirements that organizations may face.

Grant Monitoring and Reporting

Once an organization receives grant funds, they are typically subject to monitoring from the grantor.  Most grant contracts include either optional or required monitoring.  This monitoring can be performed by the granting agency or by a third party that the granting agency hires to perform monitoring.  This would be in addition to any reports required by the grantors to fill out.  Grant Reporting can range from monthly reimbursement requests, quarterly or annual performance reporting, or cost reports.

Necessary Non-Grant Funding

Many of the non-profit organizations in Austin have to review the requirements of the grant funds they receive and their own ability to meet those requirements.  These requirements may have limitations on both on a time and financial basis.  While organizations will want to receive grant funding, they have to look at the time required to fill out any reporting, keeping records of how the funds were spent, detailed records of those helped, and any necessary hiring and training of the staff to fulfill the grant’s purpose.  Also many grants do not cover some of these necessary items and the organization may not have the resources on its own to cover the costs of running programs in which the grant does not specifically allow.  Non-profits typically have to depend on public support to fill in the gaps the grants do not cover.

Requirements for Uniform Guidance Audit

If an organization who receives federal or state grant funding and expends $750,000 or more, in one year, of federal or state funding (looking at just federal or just state funds, not combined) is required to have an audit under Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements of Federal Awards, also known as Uniform Guidance.  For example, if an organization receives a $1,000,000 grant from the Department of Health and Human Services and spends $600,000 in year 1 and $400,000 in year 2 – this organization would not be required to have an audit under Uniform Guidance.  But if that same organization spends $800,000 in year 1 and $200,000 in year 2, they would meet the requirements to have an audit performed under Uniform Guidance.  The main trigger is spending the funds, not receiving the funds, which under the accrual method of accounting means that you will need to account for those expense incurred but not reimbursed during the organization’s fiscal year.  If you are unsure if the funds you have received are subject to Uniform Guidance, you should inquire to the granting agency and look for Catalog Of Federal Domestic Assistance (CFDA) numbers associated with the grant you have received.  Each grant should be tracked by their CFDA numbers as that number will be how the grant funds are presented on the Schedule of Expenditures of Federal or State Awards (SEFA or SESA).

Benefits of a Single Audit

If an organization is subject to a Uniform Guidance audit, then it would be required to go under a full financial and Uniform Guidance audit, also known as a Single Audit.  The term “Single Audit” is used to refer to the idea that an organization would only have to go through one audit versus multiple monitoring by different grantors and could meet any requirements from outside lenders.  The benefits of having a Single Audit performed are:

  • Your organization will have met the requirements of receiving federal or state funding
  • Having an objective view of your organization’s internal controls over both financial and grant programs,
  • Your organization will have audited financial statements that they can use to obtain future funding from both public sources and if necessary from financial institutions.
  • Making sure that your organization is using industry best practices across all aspects of the organization, not just grant or financial reporting
  • Grantors may choose to rely on the results of the Single Audit, the organization may save time from going through additional monitoring.
  • Since one firm can perform a Single Audit, it can be performed in conjunction with your financial audit, there is some dual purpose testing that can be performed that would bring efficiency to the entire Single Audit process.
  • Finally, all Single Audits are uploaded to the Federal Audit Clearinghouse (https://harvester.census.gov/facweb/) and organizations fulfill the requirements of making their financial statements available to the public and to their current and future grantors.

 

If you have any additional questions about Single Audits or requirements under Uniform Guidance, please feel free to reach out to Jeremy Myers (JMyers@atchleycpas.com).

Use qualified auditors for your employee benefit plans

Employee benefit plans with 100 or more participants must generally provide an audit report when filing IRS Form 5500 each year. Plan administrators have fiduciary responsibilities to hire independent qualified public accountants to perform quality audits.

Select a qualified auditor

ERISA guidelines require employee benefit plan auditors to be licensed or certified public accountants. They also require auditors to be independent. In other words, they can’t have a financial interest in the plan or the plan sponsor that would bias their opinion about a plan’s financial condition.

But specialization also matters. The more training and experience that an auditor has with plan audits, the more familiar he or she will be with benefit plan practices and operations, as well as the special auditing standards and rules that apply to such plans. Examples of audit areas that are unique to employee benefit plans include contributions, benefit payments, participant data, and party-in-interest and prohibited transactions.

Ask questions

Employee benefit plan audits are a matter of more than just compliance. The auditor’s report highlights any problems unearthed during the audit, which can serve as a springboard for improving plan operations. The conclusion of audit work is a good time to ask such questions as the following:

  • Have plan assets covered by the audit been fairly valued?
  • Are plan obligations properly stated and described?
  • Were contributions to the plan received in a timely manner?
  • Were benefit payments made in accordance with plan terms?
  • Did the auditor identify any issues that may impact the plan’s tax status?
  • Did the auditor identify any transactions that are prohibited under ERISA?

Experienced auditors can also suggest ways to improve your plan’s operations based on their audit findings.

Protect yourself

Employee benefit plan audits offer critical protection to plan administrators and employees. Your company can’t afford to skimp when it comes to hiring an auditor who is unbiased, experienced and reliable. Contact us for more information on hiring a plan auditor.

© 2017

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

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

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