Public vs. Private Companies: When Should Different Accounting Rules Apply?

April 17 2018

Small private companies often criticize the Financial Accounting Standards Board (FASB) for writing overly complex standards that focus on the needs of stakeholders in large public companies rather than “Main Street” businesses. Here’s how the FASB has addressed these criticisms in recent years.

A shifting mindset

In 2012, the FASB formed the Private Company Council (PCC). This panel of private company accountants, auditors and analysts of private company financial statements advises the FASB about the financial reporting needs of private companies.

Thanks to recommendations from the PCC, the FASB has reduced certain disclosure requirements for private companies and often gives them extra time to comply with new accounting standards.

Limited exceptions

The FASB has been less open to allowing differences in the recognition and measurement of a transaction, asset, liability or instrument. In general, the FASB prefers having one set of rules that all businesses can apply to help stakeholders compare financial statements from various organizations.

However, the FASB has made some concessions over the years, including these four alternative reporting options:

1. Accounting Standards Update (ASU) No. 2014-02, Intangibles — Goodwill and Other (Topic 350): Accounting for Goodwill. Private companies can elect to amortize goodwill over a period not to exceed 10 years, rather than test it annually for impairment.

2. ASU No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps — Simplified Hedge Accounting Approach. Nonfinancial institution private companies can elect an easier form of hedge accounting when they use simple interest rate swaps to secure fixed-rate loans.

3. ASU No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. This option simplifies the consolidation reporting requirements of lessors in certain private company leasing transactions.

4. ASU No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination. Private companies are exempt from recognizing certain hard-to-value intangible assets — such as noncompetes and certain customer-related intangibles — when they buy or merge with another company.

In June 2017, the FASB issued Proposed ASU No. 2017-240, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. This alternative would expand ASU 2014-07 by allowing private companies to avoid the consolidated reporting requirements for a wider range of transactions. The FASB is currently redeliberating this proposal, and no effective date has yet been announced.

Work in progress

The FASB plans to continue considering whether privately held businesses need simpler accounting standards compared to public companies. Contact us at (818) 789 1179 for the latest developments on the consolidation proposal and other financial reporting alternatives that could simplify financial reporting for your private business.

© 2018
 

Haven’t Filed Your 2017 Income Tax Return Yet? Beware Of These Pitfalls

April 16 2018

The federal income tax filing deadline is slightly later than usual this year — April 17 — but it’s now nearly upon us. So, if you haven’t filed your individual return yet, you may be thinking about an extension. Or you may just be concerned about meeting the deadline in the eyes of the IRS. Whatever you do, don’t get tripped up by one of these potential pitfalls.

Filing for an extension

Filing for an extension allows you to delay filing your return until the applicable extension deadline, which for 2017 individual tax returns is October 15, 2018.

While filing for an extension can provide relief from April 17 deadline stress and avoid failure-to-file penalties, there are some possible pitfalls:

  • If you expect to owe tax, to avoid potential interest and penalties you still must (with a few exceptions) pay any tax due by April 17.
  • If you expect a refund, remember that you’re simply extending the amount of time your money is in the government’s pockets rather than your own. (If you’re owed a refund and file late, you won’t be charged a failure-to-file penalty. However, filing for an extension may still be a good idea.)

Meeting the April 17 deadline

The IRS considers a paper return that’s due April 17 to be timely filed if it’s postmarked by midnight. Sounds straightforward, but here’s a potential pitfall: Let’s say you mail your return with a payment on April 17, but the envelope gets lost. You don’t figure this out until a couple of months later when you notice that the check still hasn’t cleared. You then refile and send a new check. Despite your efforts to timely file and pay, you can still be hit with both failure-to-file and failure-to-pay penalties.

To avoid this risk, use certified or registered mail or one of the private delivery services designated by the IRS to comply with the timely filing rule, such as:

  • DHL Express 9:00, Express 10:30, Express 12:00 or Express Envelope
  • FedEx First Overnight, Priority Overnight, Standard Overnight or 2Day, or
  • UPS Next Day Air Early A.M., Next Day Air, Next Day Air Saver, 2nd Day Air A.M. or 2nd Day Air.

Beware: If you use an unauthorized delivery service, your return isn’t “filed” until the IRS receives it. See IRS.gov for a complete list of authorized services.

Avoiding interest and penalties

Despite the potential pitfalls, filing for an extension can be tax-smart if you’re missing critical documents or you face unexpected life events that prevent you from devoting sufficient time to your return right now. We can help you estimate whether you owe tax and how much you should pay by April 17. Please contact us at (818) 789 1179 if you need help or have questions about avoiding interest and penalties.

© 2018

 

Mary O. Akpovi Wins Lifetime Achievement Award

April 13 2018

Congratulations to Mary O. Akpovi who has won the San Fernando Valley Business Journal’s Lifetime Achievement award. The awards honor the Valley’s most successful and accomplished women who have had a positive impact on the community. Mary is pictured holding her award with partners (from left to right) Chris Passmore (Managing Partner), Tes Macaraya (Head of Tax) and Kevin Holmes (Head of Audit and Assurance).

Below is an excerpt of the article which appeared in the San Fernando Valley Business Journal.

Mary O. Akpovi is a highly regarded CPA and business advisor and is known for her ability to handle complex financial, tax and compliance matters for individuals, businesses, estates and trusts. She earned four degrees, including a Ph.D. Mary and her partners launched their firm in 1991. Today, Martini, Iosue & Akpovi of Encino has 46 employees with two offices and serves clients not only in the United States but all over the world. She has been an active volunteer, serving organizations helping those with disabilities and the homeless, among others. She helped establish a vocational training center in Sierra Leone, and she helps support an orphanage and medical facility in Uganda.

 

A Net Operating Loss On Your 2017 Tax Return Isn’t All Bad News

April 12 2018

When a company’s deductible expenses exceed its income, generally a net operating loss (NOL) occurs. If when filing your 2017 income tax return you found that your business had an NOL, there is an upside: tax benefits. But beware — the Tax Cuts and Jobs Act (TCJA) makes some significant changes to the tax treatment of NOLs.

Pre-TCJA law

Under pre-TCJA law, when a business incurs an NOL, the loss can be carried back up to two years, and then any remaining amount can be carried forward up to 20 years. The carryback can generate an immediate tax refund, boosting cash flow.

The business can, however, elect instead to carry the entire loss forward. If cash flow is strong, this 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.

But the TCJA has established a flat 21% tax rate for C corporation taxpayers beginning with the 2018 tax year, and the rate has no expiration date. So C corporations don’t have to worry about being pushed into a higher tax bracket unless Congress changes the corporate rates again.

Also keep in mind that the rules are more complex for pass-through entities, such as partnerships, S corporations and limited liability companies (if they elected partnership tax treatment). Each owner’s allocable share of the entity’s loss is passed through to the owners and reported on their personal returns. The tax benefit depends on each owner’s particular tax situation.

The TCJA changes

The changes the TCJA made to the tax treatment of NOLs generally aren’t favorable to taxpayers:

* For NOLs arising in tax years ending after December 31, 2017, a qualifying NOL can’t be carried back at all. This may be especially detrimental to start-up businesses, which tend to generate NOLs in their early years and can greatly benefit from the cash-flow boost of a carried-back NOL. (On the plus side, the TCJA allows NOLs to be carried forward indefinitely, as opposed to the previous 20-year limit.)

* For NOLs arising in tax years beginning after December 31, 2017, an NOL carryforward generally can’t be used to shelter more than 80% of taxable income in the carryforward year. (Under prior law, generally up to 100% could be sheltered.)

The differences between the effective dates for these changes may have been a mistake, and a technical correction might be made by Congress. Also be aware that, in the case of pass-through entities, owners’ tax benefits from the entity’s net loss might be further limited under the TCJA’s new “excess business loss” rules.

Complicated rules get more complicated

NOLs can provide valuable tax benefits. The rules, however, have always been complicated, and the TCJA has complicated them further. Please contact us at (818) 789 1179 if you’d like more information on the NOL rules and how you can maximize the tax benefit of an NOL.

© 2018

 

You Still Have Time To Make 2017 IRA Contributions

April 11 2018

Tax-advantaged retirement plans like IRAs allow your money to grow tax-deferred — or, in the case of Roth accounts, tax-free. The deadline for 2017 contributions is April 17, 2018. Deductible contributions will lower your 2017 tax bill, but even nondeductible contributions can be beneficial.

Don’t lose the opportunity

The 2017 limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2017). But any unused limit can’t be carried forward to make larger contributions in future years.

This means that, once the contribution deadline has passed, the tax-advantaged savings opportunity is lost forever. So to maximize your potential for tax-deferred or tax-free savings, it’s a good idea to use up as much of your annual limit as possible.

3 types of contributions

If you haven’t already maxed out your 2017 IRA contribution limit, consider making one of these types of contributions by April 17:

1. Deductible traditional. With traditional IRAs, account growth is tax-deferred and distributions are subject to income tax. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k), the contribution is fully deductible on your 2017 tax return. If you or your spouse does participate in an employer-sponsored plan, your deduction is subject to a modified adjusted gross income (MAGI) phaseout:

  • For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:                                                                                                                                          – – For a spouse who participates: $99,000–$119,000.                                                               – – For a spouse who doesn’t participate: $186,000–$196,000.
  • For single and head-of-household taxpayers participating in an employer-sponsored plan: $62,000–$72,000.

Taxpayers with MAGIs within the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

2. Roth. With Roth IRAs, contributions aren’t deductible, but qualified distributions — including growth — are tax-free. Your ability to contribute, however, is subject to a MAGI-based phaseout:

  • For married taxpayers filing jointly: $186,000–$196,000.
  • For single and head-of-household taxpayers: $118,000–$133,000.

You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

3. Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions you’ll be taxed only on the growth.

Alternatively, shortly after contributing, you may be able to convert the account to a Roth IRA with minimal tax liability.

Maximize your tax-advantaged savings

Traditional and Roth IRAs provide a powerful way to save for retirement on a tax-advantaged basis. Contact us at (818) 789 1179 to learn more about making 2017 contributions and making the most of IRAs in 2018 and beyond.

© 2018

 

3 Ways To Supercharge Your Supervisors

April 10 2018

The attitudes and behaviors of your people managers play a critical role in your company’s success. When your managers are putting forth their best effort, the more likely it is that you’ll, in turn, get the best performances out of the rest of your employees. Here are three ways to supercharge your supervisors:

1. Transform them into teachers. Today’s people managers must be more than team leaders — they must also be teachers. Attentive managers look for situations that will help subordinates learn how to work smarter and more efficiently.

Typically, learning occurs most readily when rewards are applied as close to the intended behavior’s occurrence as possible. Thus, train managers to look for moments when employees are being successful and to immediately recognize those efforts. Managers should praise them in the presence of others and regularly. Low-cost rewards such as the occasional free lunch or gift card can also be highly motivational.

2. Turbo-boost their reaction times. Be sure people managers address problems right away. The operative word there is “address,” and its meaning may vary depending on the nature of the trouble.

For minor difficulties, just leaving a friendly voice mail or carefully worded email may do the trick. But for more serious conflicts or dilemmas, a thorough investigation is important, followed by face-to-face meetings documented in writing. In either case, it’s imperative not to let problems fester.

3. Turn off their micromanagement switch. While people managers need to keep an eye out for good and bad behavior, they shouldn’t micromanage. Those who perch atop employees’ shoulders, checking every detail of their work, are as bad for a business as rude customer service or defective products.

Why? Because the more people managers micromanage, the more they communicate the wrong message — that they don’t believe employees can get the job done. Micromanaging not only lowers morale, but also hinders efficiency, as the manager is basically spending valuable time doing the employee’s job rather than his or her own.

In the day-to-day grind of keeping a business running, people managers can understandably get worn down. If yours need a lift, consider reinforcing the points above in training sessions or during performance evaluations. For further information and other ideas, contact us at (818) 789 1179.

© 2018

 

Mary O. Akpovi MBA, MBT, PhD, CPA Nominated For Lifetime Achievement Award

April 9 2018

Mary Akpovi, one of the firm’s founding partners, has been nominated for the San Fernando Valley Business Journal’s Lifetime Achievement award. The Women in Business awards, which are in their 17th year, honor women who make a positive impact on the business community. Congratulations Mary!

 

Internal Control Testing: What Role Does Sampling Play?

April 9 2018

Auditors must test the effectiveness of internal controls before signing off on your financial statements. But it’s impossible to analyze every transaction that’s posted to the general ledger, due to time and budget constraints. Instead, auditors select and analyze a representative sample of transactions to make assertions about the entire population. Here’s more on how sampling works — along with the pros and cons of using it during internal control testing.

Picking a sample

Auditors may use statistical techniques to develop a sample of transactions to test. For example, an auditor might select enough transactions to represent a specific percentage of 1) the total transactions in an account, or 2) the company’s total assets or revenue. Alternatively, a sample of transactions may be pulled randomly using statistical sampling software.

Auditors also can use nonstatistical sampling techniques based on a dollar threshold or professional judgment. These techniques tend to be more effective when the CPA has many years of audit experience to ensure that the sample chosen is representative of the population of transactions.

Unexpected outcomes

Before analyzing a sample, your auditor has expectations about the number of “exceptions” (such as errors and omissions) that will appear in the sample. If the actual exceptions exceed the auditor’s expectation, he or she may need to perform additional procedures. For instance, your auditor might expand the sample and conduct more testing to assess the degree of noncompliance.

Ultimately, your auditor might conclude that your internal controls are ineffective. If so, he or she will perform more work to estimate the magnitude of the control failure.

Pros vs. cons

Sampling helps keep audit costs down by streamlining the internal control testing process. It also reduces disruptions to business operations during audit fieldwork. When applied correctly, the results of sampling are theoretically as accurate as if the audit team had analyzed every transaction posted to the general ledger. But, in practice, sampling can sometimes cause problems during internal controls testing.

For example, sampling presumes that controls function consistently across the whole population of transactions. If an exception doesn’t appear in the sample — because the sample was too small or otherwise unrepresentative of the entire population — your audit team could reach the wrong conclusion about the effectiveness of your internal controls.

There’s also a risk that your audit team could rely too heavily on nonstatistical sampling. Relying more on judgment than statistical methods could result in errors, especially if an auditor lacks professional experience.

A collaborative process

You can help maximize the benefits of sampling by providing the audit team with document requests in a timely manner and following up on your auditor’s management points at the end of each year’s audit. It’s frustrating to both auditors and business owners when internal control weaknesses recur year after year. Our auditors have extensive experience testing internal controls, and we’d be happy to answer any questions you have on testing and sampling techniques. Contact us at (818) 789 1179 for more information.

© 2018

 

Bartering Is Big Business

April 6 2018

Bartering is as popular as ever, but be careful when it comes to taxes.

 Contact us at (818) 789 1179 for more information.

 

 

Should You File Form SS-8 To Ask The IRS To Determine A Worker’s Status?

April 5 2018

Classifying workers as independent contractors — rather than employees — can save businesses money and provide other benefits. But the IRS is on the lookout for businesses that do this improperly to avoid taxes and employee benefit obligations.

To find out how the IRS will classify a particular worker, businesses can file optional IRS Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” However, the IRS has a history of reflexively classifying workers as employees, and filing this form may alert the IRS that your business has classification issues — and even inadvertently trigger an employment tax audit.

Contractor vs. employee status

A business enjoys several advantages when it classifies a worker as an independent contractor rather than as an employee. For example, it isn’t required to pay payroll taxes, withhold taxes, pay benefits or comply with most wage and hour laws.

On the downside, if the IRS determines that you’ve improperly classified employees as independent contractors, you can be subject to significant back taxes, interest and penalties. That’s why filing IRS Form SS-8 for an up-front determination may sound appealing.

But because of the risks involved, instead of filing the form, it can be better to simply properly treat independent contractors so they meet the tax code rules. Among other things, this generally includes not controlling how the worker performs his or her duties, ensuring you’re not the worker’s only client, providing Form 1099 and, overall, not treating the worker like an employee.

Be prepared for workers filing the form

Workers seeking determination of their status can also file Form SS-8. Disgruntled independent contractors may do so because they feel entitled to health, retirement and other employee benefits and want to eliminate self-employment tax liabilities.

After a worker files Form SS-8, the IRS sends a letter to the business. It identifies the worker and includes a blank Form SS-8. The business is asked to complete and return it to the IRS, which will render a classification decision. But the Form SS-8 determination process doesn’t constitute an official IRS audit.

Passing IRS muster

If your business properly classifies workers as independent contractors, don’t panic if a worker files a Form SS-8. Contact us at (818) 789 1179 before replying to the IRS. With a proper response, you may be able to continue to classify the worker as a contractor. We also can assist you in setting up independent contractor relationships that can pass muster with the IRS.

© 2018

 

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