CPA

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

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

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.

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

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

Will your business have a net operating loss? Make the most of it

When the deductible expenses of a business exceed its income, a net operating loss (NOL) generally occurs. If you’re planning ahead or filing your income tax return after an extension request and you find that your business has a qualifying NOL, there’s some good news: The loss may generate some tax benefits.

Carrying back or forward

The specific rules and exact computations to figure an NOL can be complex. But when a business incurs a qualifying NOL, the loss can be carried back up to two years, and any remaining amount can be carried forward up to 20 years. The carryback can generate an immediate tax refund, boosting cash flow during a time when you need it.

However, there’s an alternative: The business can elect instead to carry the entire loss forward. If cash flow is fairly strong, carrying the loss forward may be more beneficial, such as if the business’s income increases substantially, pushing it into a higher tax bracket — or if tax rates increase. In both scenarios, the carryforward can save more taxes than the carryback because deductions are more powerful when higher tax rates apply.

Your situation is unique

Your business may want to opt for a carryforward if its alternative minimum tax liability in previous years makes the carryback less beneficial. In the case of flow-through entities, owners might be able to reap individual tax benefits from the NOL. Also note that there are different NOL rules for farming businesses.

Please contact us if you’d like more information on the NOL rules and how you can maximize the tax benefits of an NOL.

© 2016

Let’s Celebrate IT!

LianaEllison - Copy.jpg By Liana Ellison, CPA

Tax/Accounting Services Supervisor at Atchley & Associates, LLP

 

What is “IT”, you ask? Well, at Atchley & Associates, LLP, “IT” can be anything, such as a new client, a birthday, a volunteer team or a sponsored event. We love to celebrate. In our business, people mean everything to us including our clients, our community, our employees and our families so any time we can celebrate these folks, we do it. Atchley & Associates, LLP strives to celebrate the wins, the accomplishments and the successes right alongside these people, because when we do, we know it shifts our focus and changes our culture for the better.

I have been with Atchley & Associates, LLP since September of 2015 and in ten short months I have been amazed at the ways we choose to celebrate. We are known for providing outstanding technical services, and I believe that I work among the smartest people in our industry. I especially love that we do so much to honor, recognize, validate and celebrate with our “people”.

Below are some examples of the “IT”s we have celebrated in those ten short months:

Community and Client Celebrations

  • Our Community Task Force volunteers for Umlauf Sculpture Garden, Settlement Home Garage Sale, Safe Place Christmas sponsor and It’s My Park Day
  • We are a sponsor for the Austin Forum on Technology and Society
  • We partnered with Mission Capital Party for Good Sponsor
  • We provided a scholarship to a Lanier High School
  • We were an event sponsor for the Austin Child Guidance Center
  • We were a sponsor and recipient of the Ethics in Business and Community award
  • We were an event sponsor for the Austin CPA Chapter awards banquet
  • At our annual retreat, our entire firm volunteered at Central Texas Food Bank
  • We held a discover session meeting with Digital Union to tie our profits to purpose
  • We celebrated each new client
  • We provided pro-bono work for some smaller non-profits

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Employee Celebrations

  • We give Kudos at monthly staff meetings
  • We have an “Employee Spotlight of the Month”
  • We toasted to an awesome New Year, passing of CPA Exams, birthdays, weddings, and new babies
  • We celebrated the end of tax season with a happy hour, a bowling tournament in the spring and ping pong tournament in the fall
  • We loved dressing up and celebrating Halloween together
  • We celebrated our families and invited them to work for a day for Thanksgiving
  • We celebrated together with a lovely meal for a Holiday luncheon
  • We celebrated Karen Atchley on being a finalist for the 2016 Women’s Way Awards
  • We celebrated the year-over-year growth and milestones at our Annual Retreat
  • We even celebrated National Beer Day!

It’s hard to pinpoint a sole celebration that made the biggest impact on me, but recently we celebrated the fact that we provided a scholarship to a young high school student, who will be the first person in her family (meaning parents, grandparents and anyone else before her) to attend college.  She will attend nursing school this fall at The University of Texas in Austin. I celebrate that this contribution by Atchley & Associates, LLP will pay dividends in her life for years to come.

ScholarshipRecipient.jpg

Celebrating these “ITs” is in our DNA—it is part of our culture and makes us who we are. This commitment to celebrating keeps our employees engaged and proud to be part of a firm that understands the value in celebrating.   You might ask, is it too much? And my response would be an overwhelming “No!”  If you want a successful organization, recognize, reward, honor, value and celebrate with your “people.” Celebrate what you want to see more of.  It will change the way you connect with the people in your life in a positive and meaningful way.

Charitable Contributions

Whether you make your gifts during this season of giving, or spread your charitable giving throughout the year, good record keeping is essential to making sure that you can qualify for the full charitable contribution deduction allowed by IRS.

First, you must be sure that the organization is eligible for a tax-deductible donation. The IRS offers Select Check an online search tool that you can use to verify that you are giving to a qualified organization. Places of worship are also eligible, but not included in this database. Gifts to individuals, political organizations or candidates are not eligible.

You must have documentation for all charitable gifts. See the table below for guidelines according to what type of donation you make.

Charitablecontributions

Vehicle donations require special reporting requirements. Contact your tax professional for details before make your donation.

You need to have all of your acknowledgements in hand before you file your tax return. So now is the time to check your records and contact the recipients if you need statements. Atchley & Associates is happy to answer any questions you have regarding charitable donations deductions and your specific tax situation.

Tax Extenders Bill Approved by the Senate

by Sarah Hubber

Tax Department at Atchley & Associates, LLP

Congress finally made their list, and you should check it twice.

With just two weeks left in the year, the Senate has passed the tax extenders bill, which retroactively extends some tax breaks through the end of 2014, and lets other remain expired. President Obama is expected to sign this bill into law this week.

The provisions that were renewed had originally expired at a the end of 2013, and pertain to many individuals and businesses. Tax breaks like bonus depreciation, increased section 179 expensing limits, and the tuition expense deduction have been renewed through the end of this year, among others. Essentially, most of the tax incentives that were available for the 2013 tax year will now be available for 2014. The criteria for qualifying for these deductions and credits are the same as those for tax year 2013.

Below are some of the provisions that have been extended, as listed on the US Senate website.

Individual Tax Extenders – Renewed through 2014
  • the tax deduction of state and local general sales taxes in lieu of state and local income taxes
  • the tax deduction of qualified tuition and related expenses
  • the tax deduction of expenses of elementary and secondary school teachers
  • the tax deduction of mortgage insurance premiums
  • the tax exemption of distributions from individual retirement accounts for charitable purposes
  • the tax exclusion of imputed income from the discharge of indebtedness for a principal residence
Business Tax Extenders – Renewed through 2014
  • the increased Section 179 expensing allowance ($500,000) for business assets, computer software, and qualified real property (i.e., leasehold improvement, restaurant, and retail improvement property)
  • accelerated depreciation of certain business property (bonus 50% depreciation)
  • the tax credit for increasing research activities
  • the work opportunity tax credit
  • accelerated depreciation of qualified leasehold improvement, restaurant, and retail improvement property, of motorsports entertainment complexes, and of business property on Indian reservations
  • the new markets tax credit
  • tax incentives for investment in empowerment zones
  • the 100% exclusion from gross income of gain from the sale of small business stock
  • the basis adjustment rule for stock of an S corporation making charitable contributions of property
  • the reduction of the recognition period for the built-in gains of S corporations
  • the tax credit differential wage payments to employees who are active duty members of the Uniformed services
  • the special rule allowing tax deduction for charitable contributions of food inventory by taxpayers other than C corporations
  • the low-income housing tax credit rate for newly constructed non-federally subsidized buildings
  • tax rules relating to payments between related foreign corporations and dividends of regulated investment companies
  • the treatment of regulated investment companies as qualified investment entities for purposes of the Foreign Investment in Real Property Tax Act (FIRPTA)
  • the subpart F income exemption for income derived in the active conduct of a banking, financing, or insurance business
  • the tax rule exempting dividends, interest, rents, and royalties received or accrued from certain controlled foreign corporations by a related entity from treatment as foreign holding company income
Energy Tax Extenders – Renewed through 2014
  • the tax credit for residential energy efficiency improvements
  • the tax credit for energy efficient new homes
  • the tax deduction for energy efficient commercial buildings
  • the tax credit for second generation biofuel production
  • the income and excise tax credits for biodiesel and renewable diesel fuel mixtures
  • the tax credit for producing electricity using wind, biomass, geothermal, landfill gas, trash, hydropower, and marine and hydrokinetic renewable energy facilities
  • the special depreciation allowance for second generation biofuel plant property
  • tax deferral rules for sales or dispositions of qualified electric utilities

If you have questions or need advice, please don’t hesitate to contact any of the tax professionals at Atchley & Associates using the contact information below. We would be happy to help.

Happy Holidays,

Sarah Hubber

(512) 346-2086

shubber@atchleycpas.com

www.atchleycpas.com