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The Manufacturing Advisor: Amortization of Goodwill Is Back on the Table

Posted 1:26 PM by

Manufacturing and distribution companies are continuing to look for opportunities for growth, which in many cases may come through an acquisition. Upon completing an acquisition, any unallocated acquisition price is presented on the balance sheet as “goodwill.”

What do you think of when you hear goodwill? If your company is subject to a financial statement audit or review, your first thought may be, “Time and money!” While accounting considerations surrounding your most significant accounts – accounts receivable and inventory, for example – can be burdensome enough, goodwill has only added another layer of complexity in recent years. ASU 2014-02, Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill may provide some relief if elected by your company.

Prior to ASU 2014-02, amortization of goodwill was not permitted. Any goodwill resulting from an acquisition was tested for impairment at least annually. In the event the fair value of an entity (or reporting unit) was deemed to be below its carrying amount, a second step was required to determine the amount of goodwill impairment loss. This second step in many cases can be costly not only in terms of dollars spent to assess and support fair value, but also in terms of time spent by your accounting personnel that could otherwise be spent with opportunities to add greater value to your company.

ASU 2014-02 allows a privately held company to amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates another useful life is more appropriate. A company electing this accounting alternative is required to make an accounting policy election to test goodwill for impairment at the entity level or the reporting unit level.

Under this alternative, goodwill should be tested for impairment when an event or changes in circumstances occur (a triggering event) that indicates the fair value of the entity (or reporting unit) may be below its carrying amount. Upon such an event or changes in circumstances, a company may assess qualitative factors to determine whether it is more likely than not that the fair value is less than the carrying amount. Further testing is unnecessary when the qualitative assessment indicates it is not more likely than not that goodwill is impaired. Otherwise, a quantitative assessment is required. A company may elect to skip the qualitative assessment and perform the quantitative calculation. A goodwill impairment loss, if any, is recognized for the amount that the carrying amount of the entity (or reporting unit) exceeds the fair value.

By allowing for the amortization of goodwill, ASU 2014-02 is expected to reduce the likelihood of impairments. Additionally, the expectation is that privately held companies will have to test goodwill for impairment less frequently, saving both time and money. While the alternative is expected to be a popular election by many companies, careful consideration should be given to the impact of the financial statements and the users of the financial statements. For example, while a lender may typically ignore any value in goodwill as an intangible, the election to amortize goodwill could have a significant impact of financial statements covenants and the general “feel” of the financial statements.

ASU 2014-02 applies to all privately held companies, as defined, and is effective for annual periods beginning after Dec. 15, 2014, with early adoption permitted. If elected, the accounting alternative should be applied prospectively to goodwill existing as of the beginning of the year of adoption, and any new goodwill recognized in periods beginning after Dec. 15, 2014.

About the Author
Jason Patch is a partner in Katz, Sapper & Miller’s Audit and Assurance Services Group and leads the firm’s Manufacturing and Distribution Services Group. Jason works with clients to ensure accurate financial reporting, keeping an eye on their bottom line, helping them avoid risk, and maximizing efficiencies. Connect with him on LinkedIn.

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The Advisor - Issue 1, 2014

Posted 1:43 PM by

In This Issue:

Understanding the Responsibilities and Risks of Serving as a Trustee of a Trust
Being asked to serve as a trustee of a trust may be flattering; however, many factors should be considered in deciding whether to serve as a trustee of a trust. Mistakes can be costly, and trustees can be held liable for breach of fiduciary duty. By Jay Benjamin, CPA, JD

Don’t Bet Your Bottom Dollar
On Jan. 29, 2014, proposed regulations under Internal Revenue Code Section 752 were issued by the U.S. Treasury Department and the Internal Revenue Service, which would preclude partners of partnerships (and members of limited liability companies) from utilizing customary guarantees of partnership debt to bolster the tax basis of partnership interestsBy John Estridge, CPA

Preventing Identity Fraud
In February 2014, the Internal Revenue Service (IRS) ranked identity theft as #1 on its list of “Dirty Dozen” tax scams. From 2008 through May 2012, more than 550,000 taxpayers have been victims of Stolen Identity Refund Fraud (SIRF)By Aaron Brezko, CPA/CFF, CFE

Cost Reduction Strategies: What About Utilities?
In today’s challenging economic times, all businesses and organizations are looking for opportunities to reduce costs. As companies review expenditures, they should not overlook their utilities expense. By Scott Grotjan

 

Katz, Sapper & Miller’s The Advisor is a bi-annual newsletter that focuses on business and tax solutions for today's entrepreneur.

 

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The Affordable Care Act and Passive Income

Posted 2:55 AM by

With the implementation of the Affordable Care Act, a new focus has been placed on passive and non-passive business activity for income tax purposes. Due to the additional 3.8% tax on investments that resulted from this legislation, it is in the taxpayer’s best interest to take a fresh look at the reporting of business and investment income on tax returns.

If you have a business structure where you own multiple entities, you should review with your CPA what your role is with all the entities you own and what their current classification is on your 1040.  There are a few options available to re-classify a taxpayer as being non-passive (not subject to the 3.8% tax) in an entity, if they qualify. You can make an election to group certain business activities together based on their activity, function, location, etc. 

For example, you own a construction business in an S corporation and you rent all your equipment from a separate LLC that you own. Since you’re not spending much time with the LLC, you have treated it as a passive activity in the past. It wasn’t an issue in the past if you had passive income, but with the new law you could now be paying an additional 3.8% in federal tax if you continue treating the rental activity as passive. You have the option to group this rental activity with your construction company as non-passive as they are essentially all part of the same business.

Another example would be if you are involved in real estate development and/or rental property along with your construction business. The option of making the election to be treated as a real estate professional may exist depending on the amount of time you spend in real estate activities. If you qualify for this treatment, although it is difficult to meet the criteria, then all your real estate rental and development activities qualify to be treated as non-passive and not subject to the additional tax.

There are also other advantages to evaluating the status of all of your business entities such as not creating suspended passive losses and not paying the additional investment tax if you sell the entity.  Be sure to discuss passive income with your tax advisor; you may be pleasantly surprised at the potential tax savings!

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Change to Sales Tax Collection on Sales of Motor Vehicles

Posted 9:00 PM by

The Indiana General Assembly recently enacted a change to the taxability of motor vehicles sold by Indiana dealers to residents of other states. This change became effective on July 1, 2014.

Out-of-state purchasers should now be charged a sales tax rate that is the lesser of their home state’s sales tax rate or the Indiana rate of 7%. Information Bulletin #84 published by the Indiana Department of Revenue discusses the change in detail.

There may be some confusion or practical challenges in the overall implementation of the change including issues involving the monthly sales tax reporting going forward. Members of our Dealership Services Group would be happy to discuss these issues with you and provide assistance as you develop your internal compliance standards.

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Profitable Solutions for Nonprofits

Posted 6:50 PM by

In This Issue:

Is It Time to Form a Strategic Alliance with Another Nonprofit?
Why consider partnering with another organization? Is there a need to save money by sharing operating expenses? Would the union provide the opportunity to take on a project or expand the organization’s reach in a way that would not otherwise be possible? By Scott A. Schuster, CPA

Prepare Now for ACA Play-or-Pay Compliance
The Affordable Care Act’s (ACA) shared-responsibility provisions, commonly referred to as “play or pay,” have been delayed until 2015. Some “transitional relief” also will be available, but that does not mean your nonprofit can afford to sit back on its heels. By William Graff, JD, LL.M

UBIT Can Take a Bite Out of Alternative Investments
The uncertain economy and tempestuous financial markets of recent years have led some nonprofit organizations to turn to alternative investments. While these investments may hold the potential of higher returns, they also come with the risk of unrelated business income tax (UBIT). By Casse Tate, CPA, MS

Newsbits
The U.S. Department of the Treasury and the Internal Revenue Service (IRS) have issued initial proposed guidance on how applicants qualify for tax-exempt status as a social welfare organization under Section 501(c) (4) of the Internal Revenue Code.

 

Katz, Sapper & Miller’s Profitable Solutions for Nonprofits is a quarterly newsletter that focuses on tax and accounting issues for the not-for-profit industry.

 


 

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Litigation Services Bulletin - Spring 2014

Posted 2:08 PM by

In This Issue:

Apple v. Samsung: A Battle Ends, but the War Is Likely Far from Over
Between Apple and Samsung, more than half of all smartphones purchased worldwide are sold by either of the two mobile device manufacturers. As a result of this fierce competition, Apple and Samsung have been embroiled in more than 50 lawsuits around the world in what has become known as the “smartphone patent wars.”
By Jay R. Cunningham, CPA

In Daubert Attack, Valuation Expert Portrayed as Mere Mouthpiece
Valuation experts often build on someone else’s assumptions to make reliable calculations. But can an expert simply evaluate and validate information from others without testing the underlying assumptions or conducting an independent analysis? A recent lost profits case illustrates.

Reliable or Obsolete? Delaware Chancery Scrutinizes Precrisis Projections
Five years after the 2008 economic meltdown, observers look back with a good deal of hindsight. But when the Delaware Court of Chancery recently assessed the reliability of pre-recession management projections for its discounted cash flow analysis (DCF), hindsight is precisely what it wanted to avoid.

Never Assume Royalty Base Analysis Ends with Finding Smallest Salable Unit, Court Cautions
Being a plaintiff’s damages expert in the intellectual property arena may be one of the hardest jobs in valuation these days. That was one of the messages that resonated from the American Institute of Certified Public Accountants (AICPA) Forensic & Valuation Services Conference 2013 in Las Vegas.

Harsh Words from the Court for Underperforming Experts
Valuation experts who take on an engagement for which they lack the qualifications or the time risk a tongue-lashing in court, as a recent bankruptcy case demonstrates.

Daubert Tolerates Impeachable Aspects of Expert Testimony
In appealing a $16 million jury award to Alaska Rent-A-Car for the breach of a settlement agreement, Avis claimed the plaintiff’s expert made unsupportable assumptions and comparisons regarding the market and other car rental companies that compromised his calculations.

 

 

Katz, Sapper & Miller’s Litigation Services Bulletin is a quarterly newsletter that focuses on the latest developments in litigation services and financial damages expert consulting. 

 

 


 

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State & Local Tax Update - 5/27/14

Posted 4:48 PM by

2014 Trending for Indiana Real Property Taxes

Indiana has achieved on-time property tax billing with all 92 counties having printed and mailed their tax bills for 2014. The spring 2014 tax bill was due Monday, May 12. The 2014 tax bill was calculated based upon the March 1, 2013, assessed value.

This is a perfect opportunity for property owners to review their assessed value and tax bill for accuracy. The assessed value should be representative of market value. One way to determine if your assessed value is accurate is to ask yourself, “Could I sell my property for the assessed amount?” If the answer is no, then there is still an opportunity to appeal your assessed value in many counties.

We would be happy to review the assessed value of your commercial property to help you consider whether an appeal should be filed. For assistance, contact your KSM advisor or KSM property tax leader Chad Miller as soon as possible. Or, use KSM's property tax savings calculator to calculate your potential savings.

 

Idaho - Clarifies Taxability of Software:  Recently passed legislation provides and clarifies that the definition of taxable tangible personal property does not include custom computer programs, computer software that is delivered electronically, remotely accessed computer software, and computer software that is delivered by the load and leave method where the vendor or its agent loads the software at the user's location but does not transfer any tangible personal property containing the software to the user.  In this context, the term "remotely accessed computer software" means computer software that a user accesses over the Internet, over private or public networks, or through wireless media, where the user has only the right use or access the software by means of a license, lease, subscription, service or other agreement.  This law also provides and clarifies that taxable tangible personal property includes computer software that constitutes digital music, digital books, digital videos and digital games, regardless of the method by which the title, possession, or right to use such software is transferred to the user.  (For more information, see H598, effective 07/01/2014.)

Illinois - New Class of Motor Vehicles Subject to Rental Tax:  The Automobile Renting Occupation and Use Tax Act now includes rentals of any second division motor vehicle with a gross vehicle weight rating of 8,000 lbs.or less.  Effective January 1, 2014, Illinois automobile rental companies must collect automobile renting occupation and use tax on this class of vehicle, which includes pickup trucks and sport utility vehicles.  The Department clarifies that if taxpayers paid sales and use tax on a second division vehicle, no credit will be received because the tax paid was lawfully owed at the time of purchase.  (For more information, see Informational Bulletin FY 2014-09.)

Kentucky - Unclaimed Property Dormancy Period Changes:  Effective April 10, 2014, KRS 393.068 has been updated to provide that all tangible personal property, including choses in action in amounts certain, and all debts owed or entrusted funds or other property held by the federal government is presumed abandoned if after three years (previously five years) from its acquisition, it remains unclaimed.  (For more information, see KY HB445.)

Minnesota - Guidance Provided on Sales Tax Exemption for Isolated/Occasional Sales: The Minnesota Department of Revenue has revised a release that explains the exemption from sales and use tax for certain isolated and occasional sales.  This exemption applies only in specified circumstances and does not apply to: sales of inventory; sales that happen in the normal course of a taxpayer's business; sales of goods and equipment that are primarily used in the taxpayer's trade or business; and leases of tangible personal property. Sales of substantially all of the assets of a trade or business qualify if certain conditions are met.  (For more information, see Minnesota Sales Tax Fact Sheet 132, 04/01/2014.)

Ohio - Annual CAT Filing Deadline Reminder:  The first quarter 2014 CAT return is due May 12, 2014.  For all annual CAT taxpayers, the 2013 annual is also due on May 12, 2014. Taxpayers may file and pay electronically through the Ohio Business Gateway; annual filers may also use TeleFile.  As a reminder, for tax periods beginning on January 1, 2014 and thereafter, the annual minimum tax (AMT) will become a tiered structure and taxpayers will pay an amount that corresponds with their overall commercial activity.  Taxpayers should use the prior calendar year's taxable gross receipts to determine the current year's AMT.

Texas - Claification of COGS Deduction in Combined Group:  A taxpayer filing a combined return was granted a franchise tax refund based on a correctly calculated cost-of-goods-sold (COGS) deduction for the combined groups.  Based on several statutory provisions relating to the determination of taxable margin, on combined reporting, and COGS calculation, it was apparent that the franchise tax is intended to apply to all members of a combined group as if they were a single taxpayer.  Therefore, in determining the COGS, each member of a combined group's business is considered as a whole so that a member that does not sell any goods itself may nevertheless deduct as COGS those expenses it incurs to sell goods owned by another member of the combined groups.  (For more information, see Combs et al. v. Newpark Resources, Inc., Tex. Ct. App., 3d Dist., Dkt No. 03-12-00515-CV, 12/31/2013.)

Utah - Misinformation Provided by State: Tax Upheld:  The State Tax Commission denied a taxpayer's request for a waiver of the tax assessed that resulted from the disallowance of a health benefit plan credit.  The taxpayer relied on information provided by the Commission to prepare the originally filed return, but was denied credit upon audit. Prior to preparing her return, the taxpayer's paid preparer attended two Utah State Tax Commission training sessions, consulted the Commission's website, and reviewed the 2009 TC-40 instructions, all of which showed that the taxpayer qualified for the credit.  The Commission explained that it noticed the misinformation, but it was not corrected until the end of the 2009 filing season.  Therefore, the misinformation caused the taxpayer to incorrectly file for the credit for 2009.  Thus, the taxpayer showed reasonable cause, and a waiver of interest was granted.  However, the taxpayer could not receive a waiver of the correctly assessed audit tax based on misinformation, as there is no section in the Utah Code authorizing a waiver based on misinformation from the Tax Commission.  (For more information, see Appeal No. 12-1866, 05/28/2013 (released April 2014).) 

 

About the Author
Donna Niesen is a partner in Katz, Sapper & Miller’s State and Local Tax Practice. Donna provides a wide variety of tax consulting services in the areas of multistate sales and income taxes, business incentives, controversy services, and other state taxes.

 

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