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The Advisor - Issue 2, 2014

Posted 10:50 PM by

In This Issue:

Managing Partner Message
It is always a pleasure to share some of the great happenings taking place at Katz, Sapper & Miller, none of which would be possible without the combination of talented, dedicated employees and wonderful clients. By David Resnick, CPA

Tax-Planning Pitfalls for Developers in Public-Private Partnerships
Public-private partnerships (P3) are a hot topic in real estate development. With many real estate developers and construction companies still experiencing a lack of liquidity coming out of the Great Recession, these cooperative agreements between government and private entities allow the building of many projects that would not happen otherwiseBy Chad Halstead, JD
 

Among economic incentives, tax increment financing (TIF) is a common financial tool of local governments to spur growth. Essentially, TIF provides upfront funding of development efforts, which are repaid by the resulting higher incremental future tax revenues. 

Amortization of Goodwill Is Back on the Table
Companies are finding opportunities for growth through acquisitions. Upon completing an acquisition, any unallocated acquisition price is presented on the balance sheet as “goodwill.” By Jason Patch, CPA

Weighing the Decision to Move to the Cloud
By now, everyone has heard about cloud computing and, likely, has at least considered use of the cloud for professional or personal needs. By Charlie Brandt

 

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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Congress Passes "Tax Extenders" Legislation

Posted 9:21 PM by

Yesterday, the Senate passed the Tax Increase Prevention Act of 2014, also known as the "tax extenders" legislation. This bill now goes to President Obama for signature.

The "tax extenders" legislation extends more than 50 expired tax provisions retroactively to the beginning of 2014. These provisions have only been extended for 2014.

Two of the most significant provisions that were extended are bonus depreciation and Section 179 expensing.

  • Bonus depreciation allows for taxpayers to claim an additional first-year depreciation deduction equal to 50% of the cost of new assets placed in service prior to January 1, 2015. In order to qualify for bonus depreciation, the asset placed in service must be a new piece of tangible property.
  • Section 179 allows for taxpayers to expense up to $500,000 of the cost of qualified assets with an overall investment limitation of $2 million. To qualify for Section 179 treatment the asset must be depreciable tangible property or computer software which was acquired for use in a trade or business. Assets must be placed in service prior to January 1, 2015.

Other key business provisions that have been extended include:

  • The research credit has been extended.
  • The Work Opportunity Credit has been extended for employees who began work for the employer before January 1, 2015.
  • For corporations that converted from C to S status, the built-in gain recognition period is five years.
  • For S corporations making charitable donations of appreciated property, a shareholder's basis is adjusted by the cost basis of the asset instead of the appreciated value.
  • Certain excise tax credits for alternative fuels have been extended.

Key individual provisions that have been extended include:

  • The deduction for state and local income taxes in lieu of deducting state income taxes.
  • The above-the-line deduction for qualifying tuition and fees for post-secondary education.
  • The $250 above-the-line deduction for teachers' classroom expenses.
  • The exclusion from income from cancellation of mortgage debt on a principal residence up to $2 million.
  • The ability to contribute required minimum distributions from IRAs, up to $100,000, directly to charitable organizations. These distributions are not taxable.

If you have any questions concerning how these and other provisions affect your tax situation, please contact your KSM advisor.

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New FATCA Withholding Rules

Posted 2:20 PM by

The Foreign Account Tax Compliance Act (FATCA) imposes a new layer of withholding rules on U.S. persons making payments of U.S. source income to foreign entities. The FATCA withholding rules require a 30% nonrefundable withholding tax on certain payments of U.S. source income to foreign entities that fall within specifically defined categories. Payors of U.S. source income to foreign entities need to obtain the new Form W-8BEN-E from the foreign payee in order to document the payee’s FATCA status and substantiate exemptions from this withholding obligation. 

The requirement to document the status of each payee (U.S. versus foreign) is not a new requirement and was previously satisfied using the Form W-9 (for U.S. individuals and U.S. entities) or Form W-8BEN (for foreign individuals and foreign entities). The documentation procedures for U.S. persons and foreign individuals has not changed, and the Forms W-9 and W-8BEN are still used. However, the Form W-8BEN is no longer used for payments to foreign entities. The FATCA obligations now require U.S. payors to obtain the Form W-8BEN-E (or other W-8 series form if appropriate) from payees that are foreign entities. 

FATCA Categories

All foreign payees will be classified as either a foreign financial institution (FFI) or non-financial foreign entity (NFFE). FFIs include (but are not limited to):  

  • Depository institutions (banks)
  • Custodial institutions (mutual funds)
  • Investment entities (hedge funds or private equity funds)
  • Insurance companies that offer cash value products or annuities (typically life insurance companies)

NFFEs are foreign entities that are not FFIs. 

Once the foreign payee is determined to be either an FFI or NFFE, then the categories within each classification must be determined. A description of the most common types of entities in each category are provided below along with the FATCA withholding obligation associated with each category.

Action Steps

If making payments of U.S. source passive income to foreign entities, the following must be done:

  1. Determine who is being paid (foreign or U.S. person)
  2. Get documentation to support that conclusion (either a W-9 or W-8 form)

- If paying a foreign entity, get an updated W-8BEN-E that confirms the payee’s FATCA status. If the payee is a participating FFI, check the published monthly list of participating FFIs to confirm their status. 

- Determine (based on the FATCA status) if it is necessary to withhold the 30% FATCA obligation. If not, determine if other withholding rules would apply. It is important to note that payments exempt from FATCA withholding are still subject to the long-standing withholding rules under Internal Revenue Code Sections 1441 through 1446.

If you (or a member of your consolidated group) are considered an FFI or NFFE, and such foreign entity is receiving payments of U.S. source income subject to FATCA withholding, the following must be done to ensure that you are registered and in compliance with FATCA: 

  1. FFIs need to register on the FATCA website and sign the FFI agreement. If they are in a Model 1 country, they must do so by 12/31/14. If they are in a Model 2 country or a country with no IGA, they must do so immediately. 
  2. Passive NFFEs (defined below) need to determine which category of NFFE they will be.

    - A passive direct reporting NFFE (defined below) needs to register on the FATCA website and report their substantial direct and indirect U.S. owners on Form 8966 by March 31.
     

    - A passive indirect reporting NFFE (defined below) must list their substantial direct and indirect U.S. owners on the W-8BEN-E they provide to potential withholding agents. 
     
  3. There is no action required with respect to active NFFEs (defined below).

The FATCA registration website can be found at https://sa.www4.irs.gov/fatca-rup/.

The official FFI list can be found at http://www.irs.gov/Businesses/Corporations/FATCA-Foreign-Financial-Institution-List-Search-and-Download-Tool.

Common FATCA Entity Types

  • Foreign Financial Institution (FFI):

    - Exempt FFI: Exempt FFIs include most governmental entities, most non-profit organizations, certain small or local financial institutions, and certain retirement entities. No FATCA withholding is required.

    - Participating FFI: FFIs that have registered with the IRS using the online registration or through filing a Form 8957. They appear on the official FFI list (that is issued monthly) with a valid Global Intermediary Number (GIIN).  Participating FFIs have signed an FFI agreement to provide the IRS with information about U.S. account holders (name, identifying number, address, maximum balance, etc.). FFIs that are in a country that has signed a Model 2 Intergovernmental Agreement (IGA) are also included as a participating FFI. No FATCA withholding is required. 

    - Nonparticipating FFI: FFIs that do not register with the IRS and are subject to a 30% withholding tax on all payments of U.S. sourced income that is fixed or determinable, annual or periodic income (generally passive income such as interest, dividends, rents, royalties, etc.).  

    - Deemed Compliant FFI: Deemed compliant FFIs include certain local banks, qualified collective investment vehicles, restricted funds, retirement plans, FFIs with only low value accounts, and FFIs that are in a country that has signed a Model 1 Intergovernmental Agreement (IGA). No FATCA withholding is required.   
  • Non-Financial Foreign Entity (NFFE):

    - Excepted NFFE: Excepted NFFEs include publicly traded companies and their affiliates, certain entities organized in U.S. territories, and certain non-financial entities (holding companies, treasury centers, etc.). No FATCA withholding is required. 

    - Active NFFE: An Active NFFE is an NFFE where less than 50% of its gross income for the preceding calendar year is passive type income and less than 50% of its assets for the preceding calendar year are assets that generate passive type income. No FATCA withholding is required. 

    - Passive NFFE: A passive NFFE is an NFFE that isn’t excepted or active. It could fall into three different categories: 
  1. Direct Reporting NFFE: A direct reporting NFFE registers with the IRS and gets a GIIN number. It reports its direct or indirect substantial U.S. owners on Form 8966. No FATCA withholding is required.
  2. Passive indirect reporting NFFE: An NFFE that does not directly report its U.S. owners to the IRS, but does report its U.S. owners on the W-8BEN-E. No FATCA withholding is required.
  3. Passive non-reporting NFFE: A passive NFFE that does not report its direct or indirect substantial U.S. owners (directly or indirectly). These NFFEs are subject to a 30% withholding tax on all payments of U.S. source income that is fixed or determinable, annual or periodic income (generally passive income such as interest, dividends, rents, royalties, etc.). 

About the Author
Ryan Miller is a partner in Katz, Sapper & Miller’s Tax Services Group. Ryan provides consulting services on a variety of technical tax matters, with an emphasis on international tax. He also oversees tax compliance and handles tax controversies. 

 

About the Author
Katherine Malarsky is a director in Katz, Sapper & Miller's Tax Services Group. Katherine’s focus includes analytical research and technical review of tax issues. Additionally, she assists companies and individuals in navigating the complexities of doing business abroad. Connect with her 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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PCORI Fee Due July 31

Posted 3:13 PM by

The Affordable Care Act created a fee called the Patient-Centered Outcomes Research Institute (PCORI) fee. This fee is to be used to fund research on medical treatment effectiveness. This fee is to be paid by both fully-insured and self-funded group health plans.

The fee is $2 per person enrolled in the plan. A person enrolled in the plan includes the participating employee, spouses, domestic partners and dependents. COBRA and retiree participants also must be counted. The fee is due based on the year-end of the plan. The filing will be due on or before July 31, 2014. The fee must be reported on IRS Form 720, “Quarterly Federal Excise Tax Return.”

If you are an employer with a fully-insured group health plan, no action is required as your health insurance carrier is required to report and pay this fee. This additional fee is most likely built into the premiums that you currently pay.

If you are an employer with a self-funded plan, you are responsible for calculating the fee, completing the Form 720 and paying the related fee.

The following plans are considered self-funded plans that are subject to the PCORI fee and the Form 720 filing requirement:

  • All self-funded group health plans, including Health Reimbursement Accounts (HRAs)
  • An HRA that is offered as part of a fully-insured group health plan – the fee is paid only on the HRA part of the plan
  • A stand-alone HRA plan
  • On-site medical clinics
  • Retiree-only group health plans
  • Employee Assistance Programs – only if the EAP provides significant medical benefits

The following plans are exempt from the PCORI fee:

  • Employee Assistance Programs – does not provide significant medical benefits
  • Individual Health Savings Accounts
  • Health and Dependent Flexible Spending Accounts
  • Stand-alone dental plans
  • Stand-alone vision plans

Upon determination that you have a self-funded plan, you must complete the IRS Form 720 (revised version dated April 2014). The form may be completed manually and mailed directly to the IRS (not required to be filed electronically). 

The fee is based on the average number of enrollees for the plan year. Most employers should be able to obtain this information directly from their benefit plan service provider(s). If you have to calculate the number of enrollees yourself, there are three methods that you may choose from in determining the average number of enrollees. The methods are as follows:

  1. The Form 5500 Method: If the plan is required to file Form 5500 and your 2013 Form 5500 is filed timely and before July 31, 2014, this method can be used. To use this method, add the number of participants at the beginning of the year (Part II, line 5 of Form 5500) to the total participants at the end of the year (Part II, line 6d) and divide the total by 2.Then multiply this total by $2.
     
  2. The Actual Count Method: This method uses the number of lives covered for each day of the plan year divided by the number of days in the plan year.
     
  3. The Snapshot Method: This method uses the total number of lives covered on a given date in each quarter of the plan year. The sum is then divided by 4.

The following sections of the Form 720 will need to be completed (assuming that the Form 720 is being filed only to report the PCORI fee):

  • Complete the top section of the form. The quarter ending is the second quarter, which is June 2014.
  • Go to Part II, line 133. The Applicable Self-Insured Health Plans line is going to be completed. In column (a), report the average number of lives covered. Multiply the number in column (a) by $2 and enter that amount. This calculated amount will also be entered in the tax column.
  • Go to Part III and enter the total tax on line 3. Show 0 on line 5 as no payments have been made towards this tax. Line 10 will show the amount due with the return.
  • Sign and date the return on the bottom of page 2.

The fee needs to be paid using the Electronic Federal Tax Payment System.

  • Mail the signed and completed Form 720 to:
    • Department of the Treasury
      Internal Revenue Service
      Cincinnati, OH 45999-0009
       
  • If you want to use FedEx, UPS or DHL, the address to send your return to is:
    • IRS Processing Center
      201 W. Rivercenter Blvd.
      Covington, KY 41011

The contents of this message are for informational purposes only. If you have any questions regarding the PCORI fee and filing requirement, please contact your benefit plan service provider or any of the following KSM advisors.

Patrick Brauer, Partner
317.844.4873         

Bernadette Fletcher, Director
317.580.2134

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IRS Notice 2014-21 on Virtual Currencies

Posted 8:33 PM by

The use of virtual currencies, especially Bitcoin, has increased significantly in recent years. This increased use has raised questions regarding the proper tax treatment of these currencies. In an attempt to clarify many of the uncertainties, the IRS has recently released Notice 2014-21, which provides answers for 16 frequently asked questions surrounding virtual currencies.

The IRS defines virtual currencies as digital representations of value that function as a medium for exchange, a unit of account, and/or a store of value. In other words, the virtual currency acts like “real money” even though it is not legal tender in any country or jurisdiction. A virtual currency is considered to be “convertible” if it has an equivalent value with an established currency, or if it can be easily substituted or exchanged for a legal tender. Bitcoin is probably the most well-known and widely used example of a convertible virtual currency today. Bitcoin can be easily traded and exchanged amongst users and can also be bought or sold for various real currencies, such as U.S. dollars and Euros. The IRS notice deals only with convertible virtual currencies and does not address any virtual currency which is not convertible.

In Notice 2014-21, the IRS starts off by stating that virtual currencies like Bitcoin are considered property, not currency, for tax purposes. Since virtual currencies are considered property, accepting virtual currencies in exchange for goods and services requires the recipient to measure their gross income by using the fair market value of the virtual currency in U.S. dollars as of the date payment was received. Additionally, when virtual currency is used to purchase an item, the taxpayer is required to report gain or loss on the disposition of the virtual currency. In order to do this, the taxpayer must first determine the basis of the virtual currency in U.S. dollars at the time of the exchange. The character of the gain or loss will be determined based on whether the virtual currency is held by the taxpayer as a capital asset. Therefore, if the taxpayer holds the virtual currency as an investment asset then it will be taxed as a capital gain or loss on its disposition. However, if the taxpayer holds the virtual currency as inventory then it will be taxed as ordinary income upon its disposition.

Some virtual currencies, such as Bitcoin, allow people to “mine” the currency. This involves users discovering new Bitcoins by solving complex math problems. When a taxpayer successfully mines virtual currency, the fair market value of the mined currency is includable in the taxpayer’s gross income for the taxable year. Furthermore, if the taxpayer is mining the virtual currency as part of a trade or business, the net earnings from the activity is considered self-employment income and is subject to the self-employment tax. Similarly, if a taxpayer is paid in virtual currency for services rendered as an independent contractor, the fair market value of the virtual currency received is subject to self-employment tax. In the case of an employer-employee relationship, the fair market value of the currency paid as wages to the employee is subject to federal income tax withholding, FICA tax and FUTA tax, and is required to be reported on Form W-2.

The IRS went on to state that when certain property payments which require information reporting to the IRS – such as rent, salaries, wages, premiums, annuities and compensation – are subject to the same information reporting standards when virtual currency is used to complete the payment. Furthermore, when a Form 1099-MISC is used to report payments of virtual currency, it should be reported using the fair market value of the virtual currency as of the date of the payment.

Finally, the IRS dictated that taxpayers who have not treated past virtual currency transactions in a manner that is consistent with Notice 2014-21 may be subject to penalties for failure to comply with tax laws. For example, underpayments attributable to virtual currency transactions and failure to report virtual currency transactions in a correct and timely manner may be subject to accuracy-related and information reporting penalties. However, the IRS does note that penalty relief may be available to taxpayers who can show that the underpayment or failure to properly file information on returns is due to reasonable cause. 

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State & Local Tax Update - 2/6/14

Posted 10:32 PM by

Personal Property Tax and 263(a)
For companies taking advantage of the new 263(a) rules for federal tax purposes, it is important to remember that for personal property tax purposes there may not be a de minimis safe harbor application. For income tax purposes it may be acceptable to expense individual fixed assets costing $5,000 or less; for personal property tax returns, these assets may still be considered assessable and taxable. If you choose to take advantage of the new 263(a) rules and expense assets costing $5,000 or less, you may want to consider keeping a second set of records for personal property reporting.

As a reminder, some states exempt personal property; however, many states do impose a personal property tax and due dates are fast approaching. Now is a good time to review your asset listing to ensure all personal property tax filing deadlines are met.
 
Feel free to reach out to your KSM advisor with any questions regarding the effect of Section 263(a) and personal property reporting.
 

Alabama Issues Guidance on Sales Tax Exemption for Government Contractors
A new sales and use tax exemption applies to the purchase of building materials, construction materials and supplies, and other tangible personal property that become part of a structure pursuant to a qualifying contract entered into on or after Jan. 1, 2014. Qualifying projects and contracts are those generally entered into with the following governmental entities: the State of Alabama, a county or incorporated municipality of Alabama, an Alabama public school, or an Alabama industrial or economic development board or authority already exempt from sales and use taxes. The Department cautions that contracts entered into with the federal government and contracts pertaining to highway, road or bridge construction or repair do not qualify for the exemption provided for in the Act. The Act requires the Department to issue a Form STC-1 (Sales and Use Tax Certificate of Exemption for Government Entity Projects) to all contractors and subcontractors working on qualifying governmental entity projects once a completed Form ST: EXC-01 is approved by the Department. Contractors and sub-contractors for qualifying projects will be required to file monthly consumers use tax returns and report all exempt purchases for ongoing projects, as well as all taxable purchases on one return. See Notice, Alabama Department of Revenue, 01/21/2014.

California Reminds of New 1031 Filing Requirements
Effective Jan. 1, 2014, a new annual filing requirement has been created for taxpayers who exchange property located in California for like-kind replacement properties located outside California. The new information return, referred to as a California 1031 Information Return, remains in development, but the Franchise Tax Board (FTB) has indicated that it intends to track the California sourced portion for the taxpayer's previously-deferred gain or loss when the non-California replacement property is ultimately sold, and such California sourced gain or loss that remains to be recognized by such taxpayers.

Some examples of specific information the FTB might request for each property and like-kind replacement property include: address or description of the property; parcel number, VIN, or HIN of the property; contract prices for each property and like-kind replacement property exchanged; California adjusted tax basis for each property; and debt amounts to which the exchanged properties were subject. See California FTB Tax News 12/01/2013.

Kentucky Will Not Allow CPA Representatives Before BTA
The Kentucky Board of Tax Appeals (BTA) recently announced that it will dismiss on its own initiative any petition of appeal filed by a non-lawyer on behalf of a legal entity or individual. Both court decisions and unauthorized practice of law opinions of the Kentucky Bar Association have ruled that non-lawyers may not represent legal entities or individuals in proceedings before administrative tribunals, including the BTA. An individual who is a non-lawyer cannot file a petition of appeal with the BTA on behalf of a legal entity or individual or otherwise represent that entity or individual in proceedings before the BTA. However, an individual may represent himself or herself in proceedings before the BTA concerning his or her own tax liability. See Kentucky Tax Alert 6, 11/01/2013.

Minnesota to Follow Federal Check-the-Box Rules
Effective for taxable years beginning after Dec. 31, 2012, for Minnesota corporate franchise tax purposes, the Minnesota Department of Revenue will follow elections made by eligible domestic and foreign entities pursuant to federal regulations § 301.7701-1 through § 301.7701-3. The Department had previously based its position regarding federal check-the-box classifications on Minnesota Revenue Notice 98-08, 05/26/1998, but a 2013 Minnesota law amendment made the policy statement regarding foreign eligible entities in that Revenue Notice obsolete. See Minnesota Revenue Notice 13-08.

North Carolina Issues Guidance on Taxability of Service Contracts
Effective Jan. 1, 2014, the 4.75% general state and applicable local and transit rates of sales and use tax apply to the sales price of a service contract sold at retail by a retailer, and sourced to North Carolina. "Service contract" means a warranty agreement, a maintenance agreement, a repair contract, or a similar agreement or contract by which the seller agrees to maintain or repair tangible personal property. Further, the sales price of a service contract on or after Jan. 1, 2014, by which the seller agrees to maintain or repair taxable prewritten computer software pursuant to the contract is subject to the 4.75% general state and applicable local and transit rates of sales and use tax. Prior to Jan. 1, 2014, the taxability of the sale of a maintenance agreement for taxable prewritten computer software is determined primarily on whether such software maintenance agreement is mandatory and therefore a part of the sales price of the sale of the computer software, or whether such sale is for an optional maintenance agreement. See North Carolina Directive SD-13-5.

Ohio Updates Individual Nexus Threshold
The Ohio Department of Taxation has modified its information release that describes the standards it will apply to determine whether a nonresident is subject to Ohio's personal income tax. Modifications to "safe harbor" activities include increasing the number of days that a nonresident may be present in the state from seven to 20 days, and increasing gross income earned in the state from $2,500 to $10,000. In such instances, nexus with a nonresident might exist, but the Department will not require the filing of a return and the payment of the personal income tax if a nonresident's only contacts with Ohio are limited to the contacts in the list. The modifications are effective for tax year 2014 and onward. See Ohio Tax Information Release PIT 2014-01.

There are many rules surrounding nonresident withholding and composite returns filed by PTEs. Evaluation of the rules and the overall tax picture of the PTE and its owners is critical to ensure proper compliance and reduce the state tax burden of the PTE owners.

 

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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Standards Updates – 1/28/14

Posted 3:15 PM by

FASB Issues Two Accounting Standards Updates for Private Companies

The Financial Accounting Standards Board (FASB) recently issued two Accounting Standards Updates (ASU) to provide alternatives for private companies on the subsequent accounting for goodwill and interest rate swaps. Both ASUs are consensuses of the Private Company Council and were endorsed by the FASB.

The FASB has defined a private company as the following: “An entity other than a public business entity, a not-for-profit entity, or an employee benefit plan within the scope of Topics 960 through 965 on plan accounting.” They also have defined a public business entity, which includes entities that are required by the SEC to file or furnish financial statements to the SEC and entities that meet various other criteria.

Entities that meet the definition of a private company may elect to adopt the following ASUs. Prior to making the election to adopt, companies should discuss with the users of the financial statements to ensure the users understand any potential impact of each of the ASUs adopted.

The following is a summary of each of the proposed ASUs:

 

ASU 2014-02, Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill

This ASU permits a private 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 the alternative, goodwill should be tested for impairment when an event or changes in circumstances occurs (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.

Under current guidance, all companies are not allowed to amortize goodwill but are required to test for impairment at least annually. In addition under current guidance if it is determined the carry amount is greater than the fair value, a second step must be completed to determine the amount of the goodwill impairment loss. This second step has been eliminated for private companies adopting this ASU.

By allowing for the amortization of goodwill, the ASU is expected to reduce the likelihood of impairments and require private companies to test goodwill for impairment less frequently.

The ASU applies to all private 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.

 

ASU 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach

Under accounting principles generally accepted in the United States, an interest rate swap is a derivative instrument and recognized on the balance sheet as either an asset or a liability at fair value. Companies may elect hedge accounting if certain requirements are met to reduce income statement volatility due to changes in the swap’s fair value.

This ASU provides an additional accounting alternative to private companies, the “simplified hedge accounting approach,” for certain swaps that are used to economically convert a variable-rate borrowing into a fixed-rate borrowing. Under this approach, an entity may assume no ineffectiveness provided that six criteria, which are specified in the ASU, are met. In addition, the ASU provides entities the option to measure the qualifying swap at settlement value instead of fair value.

Finally, private companies with less than $100 million in assets will not be required to include additional disclosures about the fair value of financial instruments not measured at fair value unless other derivatives are present. All other disclosures related to cash flow hedge accounting and fair value measurements still apply.

The ASU applies to all private companies other than financial institutions, as defined in the FASB Codification, and is effective for annual periods beginning after Dec. 15, 2014, with early adoption permitted. Private companies can elect to apply this approach to an existing qualifying swap, as well as swaps entered into after the date of this ASU, on a swap-by-swap basis.

 

Connect with Ron 
Ron Smith is a partner in Katz, Sapper & Miller's Audit and Assurance Services Department. Ron has extensive experience in, and advises clients and firm members on, accounting, financial reporting, auditing, compliance and internal control matters. He also oversees the firm’s quality control system.

 

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Year-End Trust Distribution Planning

Posted 2:21 PM by

Starting in 2013, trusts, like individuals, are subject to the higher tax rates on qualified dividends and long-term capital gains (i.e., 20% instead of 15%), as well as the Medicare surtax (3.8%). However, unlike individuals, trusts are subject to these rates at a much lower income level:

  • Trusts: $11,950 for both the 20% and 3.8% rates
  • Individuals: 400,000 for single filers or $450,000 for joint filers (20% rate), and $200,000 for single filers or $250,000 for joint filers (3.8% rate)

Further, trusts hit the top rate of 39.6% for ordinary income in excess of $11,950; for individuals, it is $400,000 for single filers or $450,000 for joint filers.

In general, if a trust makes a distribution to a beneficiary, then the beneficiary, not the trust, is taxed on the income. Therefore, it might be desirable for trusts to make distributions to beneficiaries so that the trust income will be taxed to the beneficiaries at their rates instead of the potentially higher trust tax rates. However, it is important to consider whether the trust is authorized to make distributions and whether it is wise to make distributions from a non-tax perspective. For purposes of carrying out 2013 trust income to beneficiaries so that the income can be taxed to beneficiaries at their rates instead of trust rates, trusts have until 65 days after year-end (March 6, 2014) to make a distribution and treat it as a distribution for 2013.

As an example, if a trust has long-term capital gain of $50,000 taxed at the trust's 23.8% rate instead of the individual's 15% rate, then the tax savings of passing the long-term capital gain out to the beneficiary is $4,400 (8.8% x $50,000).

In determining whether trusts should make distributions, keep in mind that if a trust is required to make a distribution (for example, trust accounting income), the distribution is deemed made as of 12/31, even if it is not actually made. However, if the goal is to pass out additional income such as capital gains, the accounting income and capital gains must all be distributed by March 6, 2014.

If you have additional questions, please contact your KSM advisor.

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The Advisor - Issue 2, 2013

Posted 10:16 PM by

In This Issue:

Affordable Care Act Tax Implications of Grouping Activities
With the implementation of the Patient Protection and Affordable Care Act of 2010, also known as the Affordable Care Act (the ACA), there are several new tax provisions that went into effect as of Jan. 1, 2013. Two of the new tax provisions are the High Income Medicare Tax and the Unearned Income Medicare Tax. By Douglas N. Rubenstein, CPA

The Individual Mandate and the Health Insurance Marketplace
Healthcare coverage is set to start on Jan. 1, 2014 for those who would have signed up by Dec. 14, 2013. On the same day the coverage is set to start, so does the Individual Mandate. Due to issues within the marketplace rollout, the time to enroll in a health plan has been extended to March 31, 2014, giving individuals a three-month grace period from the Individual Mandate. By Amber Moore, CPA

Tax Reform: What Does It Mean?
Amid all of the political back-and-forth in Washington that included budget debates and a government shutdown, one topic that continually bubbles to the surface during these conversations is the need for comprehensive tax reform. A major overhaul of the Code has not happened since 1986 and there have been thousands of additions and changes since that time. By Aimee Reavling, CPA

Proposed Changes for Private Company Accounting Standards Continue to Progress
There has been an ongoing debate for years on public versus private company accounting standards (often referred to as big-GAAP versus little-GAAP). As a result of this debate, in 2012 the Financial Accounting Foundation’s Board of Trustees approved the establishment of the Private Company Council (PCC). The PCC was established to improve the process of setting accounting standards for private companies. By Ron L. Smith, CPA

Pass-through Entity Owner Compliance Considerations
Tax season is right around the corner, and that means multistate pass-through entities have decisions to make when it comes to filing and paying taxes for their nonresident owners. Many states require pass-through entities to file withholding and/or composite returns on behalf of their nonresident owners. By Donna L. Niesen, CPA

Survey Sees Hoosier Manufacturers Investing in Growth, Despite Workforce, Regulatory Concerns
The results from Katz, Sapper & Miller's 2013 Indiana Manufacturing Survey: Manufacturing's Renaissance, reveal an often unnoticed but growing renaissance is underway in Hoosier (and American) manufacturing.

Hospital and Health System Survival Strategy
Change has dominated the healthcare arena over the last few years and there is no evidence of a slowdown or calming period in the near future. In attempts to avoid panic with newly released requirement deadlines from the Center for Medicare & Medicaid Services, hospitals and health systems across the country are searching for ideas, strategies and guidance for how to remain relevant, earn a dollar and prosper in the new era of the Affordable Care Act. By KSM's Healthcare Resources Group

 

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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