Posted on Dec 12, 2016

advisory services, business tax, business services, tax services, CPA in DallasBusiness tax credits are particularly beneficial for planning because they reduce tax liability dollar-for-dollar. The Protecting Americans from Tax Hikes (PATH) Act of 2015 has made permanent the research credit and extended but not made permanent other credits, including the Work Opportunity credit (through 2019). Let’s explore a few details of these business tax credits.

Research credit

Also known as the Research & Development (R&D) credit, it gives businesses an incentive to step up their investments in research and innovation. The PATH Act permanently extends the credit, allowing businesses to earn a credit for pursuing critical research into new products and technologies. Plus, in 2016 businesses with $50 million or less in gross receipts can claim the credit against AMT liability. Certain start-ups (in general, those with less than $5 million in gross receipts) that haven’t yet incurred any income tax liability can use the credit against their payroll tax. While the credit is complicated to compute, the tax savings can be worth the effort.

Work Opportunity credit

This credit is for employers that hire from a “target group.” It has been extended through 2019. Starting this year, target groups are extended to include individuals who’ve been unemployed for 27 weeks or more. The size of the tax credit depends on the hired person’s target group, the wages paid to that person and the number of hours that person worked during the first year of employment. The maximum tax credit that can be earned for each member of a target group is generally $2,400 per adult employee. But the credit can be higher for members of certain target groups, up to as much as $9,600 for certain veterans. Employers aren’t subject to a limit on the number of eligible individuals they can hire. That is, if there are 10 individuals that qualify, the credit can be 10 times the listed amount. Bear in mind that you must obtain certification that an employee is a target group member from the appropriate State Workforce Agency before you can claim the credit. The certification generally must be requested within 28 days after the employee begins work.

New Markets credit

This credit has been extended through 2019. It gives investors who make “qualified equity investments” in certain low-income communities a 39% tax credit over a seven-year period. Certified Community Development Entities (CDEs) determine which projects get funded — often construction or rehabilitation real estate projects in “distressed” communities, using data from the 2006–2010 American Community Survey. Flexible financing is provided to the developers and business owners.

Empowerment Zones

Empowerment Zones are certain urban and rural areas where employers and other taxpayers qualify for special tax incentives, including a 20% credit for “qualified zone wages” up to $15,000, for a maximum credit of $3,000. The tax incentive expired December 31, 2014, but it has been extended through December 31, 2016.

If you have questions about any of these potential deductions, employee benefits incentives or tax credits for the current or coming tax year, talk to the Tax Services Group at Cornwell Jackson. You may also download our newest Tax Planning Guide.

Gary Jackson, CPA, is the lead tax partner at Cornwell Jackson. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing tax advisory services to individuals and business leaders in the Dallas/Fort Worth area and across North Texas. 

Posted on Nov 28, 2016

advisory services, business tax, business services, tax services, CPA in Dallas

Finding skilled talent is a high priority for almost any industry you read about in the US. Employee benefits like health insurance and paid time off are mainly done to attract and retain the best employees, but there are some tax savings incentives associated with this practice. Consider the following tax savings options through employee benefits:

Qualified deferred compensation plans

These plans include pension, profit-sharing and 401(k) plans, as well as SIMPLEs. You take a tax deduction for your contributions to employees’ accounts. Certain small employers may also be eligible for a credit when setting up a plan.

Retirement plan credit

Small employers (generally those with 100 or fewer employees) that create a new retirement plan may be eligible for a $500 credit per year for three years. The credit is limited to 50% of the first $1,000 in qualified plan startup costs. Employers must file IRS Form 8881 – Credit for Small Employer Pension Plan Startup Costs.

HSAs and FSAs

If your business provides employees with a qualified high deductible health plan (HDHP), you can offer them Health Savings Accounts to contribute dollars pre-tax for certain medical expenses. Regardless of the type of health insurance you provide, you can also offer Flexible Spending Accounts for health care. If you have employees who incur day care expenses, consider offering FSAs for child and dependent care.

Employees can also contribute to an FSA for unreimbursed business expenses such as parking. The money for HSAs and FSAs can be contributed pre-tax, helping employees reduce their taxable income for expenses they would pay for anyway. A certain amount of money from FSAs can be carried forward for non-health care related expenses.  HSAs can be a long-term investment vehicle if employees don’t need to use the funds for medical care.

HRAs

A Health Reimbursement Account reimburses an employee for medical expenses up to a maximum dollar amount. Unlike an HSA, no high deductible health plan (HDHP) is required. Unlike an FSA, any unused portion can be carried forward to the next year. But only the employer can contribute to an HRA. The employer sets the parameters for the HRA, and unused dollars remain with the employer rather than following the employee to new employment. Because the reimbursements occur pre-tax, employees and employers often save up to 50% in combined taxes on the cost of medical expenses.

Small-business health care credit

The maximum credit is 50% of group health coverage premiums paid by the employer, provided it contributes at least 50% of the total premium or of a benchmark premium. For 2016, the full credit is available for employers with 10 or fewer full-time equivalent employees (FTEs) and average annual wages of less than $25,900 per employee. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $51,800. To qualify, employers must generally be enrolled online in the Small Business Health Options Program (SHOP). The credit can be taken for only two years, and the years must be consecutive.

Fringe benefits

Some fringe benefits — such as employee discounts, group term-life insurance (up to $50,000 annually per person), parking (up to $255 per month), mass transit / van pooling (also up to $255 per month for 2016, because Congress has made parity permanent) and health insurance — aren’t included in employee income. Yet the employer can still receive a deduction for the portion, if any, of the benefit it pays and typically avoid payroll tax as well.

Play-or-pay penalty risk

Not all employee benefits are created equal in terms of tax advantage. The play-or-pay provision of the Affordable Care Act (ACA) does impose a penalty on “large” employers if just one full-time employee receives a premium tax credit. Premium tax credits are available to employees who enroll in a qualified health plan through a government-run Health Insurance Marketplace (e.g. exchanges) and meet certain income requirements — but only if: they don’t have access to “minimum essential coverage” from their employer, or the employer coverage offered is “unaffordable” or doesn’t provide “minimum value.” The IRS has issued detailed guidance on what these terms mean and how employers can determine whether they’re a “large” employer and, if so, whether they’re offering sufficient coverage to avoid the risk of penalties.

Review your company’s employee benefits with your tax advisor to determine which benefits may provide additional business tax savings. If you are planning to add new benefits, explore the advantages and tax implications first.

Continue Reading: Which tax credits apply to my business in 2016?

If you have questions about any of these potential deductions, employee benefits incentives or tax credits for the current or coming tax year, talk to the Tax Services Group at Cornwell Jackson. You may also download our newest Tax Planning Guide.

Gary Jackson, CPA, is the lead tax partner at Cornwell Jackson. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing tax advisory services to individuals and business leaders in the Dallas/Fort Worth area and across North Texas. 

Posted on Nov 14, 2016

advisory services, business tax, business services, tax services, CPA in Dallas

Running a profitable business these days isn’t easy. You have to operate efficiently, market aggressively and respond swiftly to competitive and financial challenges. Even when you do all of that, taxes may drag down your bottom line more than they should.

Projecting your business’s income for this year and next can allow you to time income and deductions to your advantage. It’s generally — but not always — better to defer tax, so consider:

Deferring income to next year

If your business uses the cash method of accounting, you can defer billing for products or services at year-end. If you use the accrual method, you can delay shipping products or delivering services.

Accelerating deductible expenses into the current year

If you’re a cash-basis taxpayer, you may pay business expenses by December 31 so you can deduct them this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid. You may also choose to take the opposite approach. If it’s likely you’ll be in a higher tax bracket next year, accelerating income and deferring deductible expenses may save you more tax over the two-year period.

Don’t forget about depreciation of larger assets as a way to reduce taxable income. For assets with a useful life of more than one year, you generally must depreciate the cost over a period of years. In most cases, the Modified Accelerated Cost Recovery System (MACRS) will be preferable to other methods because you’ll get larger deductions in the early years of an asset’s life. But if you made more than 40% of the year’s asset purchases in the last quarter of 2016, you could be subject to the typically less favorable midquarter convention. Careful planning can help you maximize depreciation deductions in 2017. Other depreciation-related breaks and strategies may still be available for 2016:

Section 179 expensing election

This election allows you to deduct (rather than depreciate over a number of years) the cost of purchasing eligible new or used assets, such as equipment and furniture. The expensing limit for 2015 had been $25,000 — and the break was to begin to phase out dollar-for-dollar when total asset acquisitions for the tax year exceeded $200,000 — but Congress revived the 2014 levels of $500,000 and $2 million, respectively, for 2015. These amounts are annually adjusted for inflation, with the election at $2.01 million and  $500,000 for 2016.

The new expensing election permanently includes off-the-shelf computer software as qualified property. Beginning in 2016, it adds air conditioning and heating units to the list. You can claim the election only to offset net income from a “trade or business,” not to reduce it below zero to create a loss.

The break allowing Section 179 expensing for qualified leasehold improvement, restaurant and retail-improvement property has also been made permanent. For 2015, a $250,000 limit applied, but for 2016 the full Sec. 179 expensing limit applies.

50% bonus depreciation

This additional first-year depreciation for qualified assets expired December 31, 2014, but it has now been extended through 2019. However, it will drop to 40% for 2018 and 30% for 2019. Qualified assets include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified leasehold improvement property. Beginning in 2016, the qualified improvement property doesn’t have to be leased.

Accelerated depreciation

The break allowing a shortened recovery period of 15 years — rather than 39 years — for qualified leasehold improvement, restaurant and retail-improvement property expired December 31, 2014. However, it has now been made permanent.

Tangible property repairs

A business that has made repairs to tangible property, such as buildings, machinery, equipment and vehicles, can expense those costs and take an immediate deduction. But costs incurred to acquire, produce or improve tangible property must be depreciated. Final IRS regulations released in late 2013 distinguish between repairs and improvements and include safe harbors for qualified businesses and routine maintenance. The final regulations are complex and are still being interpreted, so check with your CPA or tax services advisor on how it may apply to you.

Cost segregation study

If you’ve recently purchased or built a building or are remodeling existing business space, consider a cost segregation study. It identifies property components that can be depreciated much faster, increasing your current deductions. Typical assets that qualify include decorative fixtures, security equipment, parking lots and landscaping.

Hire Your Children

If your children don’t have earned income and you own a business, consider hiring them. As the business owner, you can deduct their pay. Other tax benefits may also apply. The children must be paid in line with what you would pay non-family employees for the same work.

Vehicle-related deductions

Business-related vehicle expenses can be deducted using the mileage-rate method (54 cents per mile driven in 2016) or the actual-cost method (total out-of-pocket expenses for fuel, insurance, repairs and other vehicle expenses, plus depreciation). Purchases of new or used vehicles may be eligible for Sec. 179 expensing. However, many rules and limits apply.

For autos placed in service in 2016, the first-year depreciation limit is $3,160. The amount that may be deducted under the combination of MACRS depreciation and Sec. 179 for the first year is limited under the luxury auto rules to $11,160. In addition, if a vehicle is used for business and personal purposes, the associated expenses, including depreciation, must be allocated between deductible business use and nondeductible personal use.

NOLs

A net operating loss occurs when a C corporation’s operating expenses and other deductions for the year exceed its revenues. Generally, an NOL may be carried back two years to generate a refund. Any loss not absorbed is carried forward up to 20 years to offset income. Carrying back an NOL may provide a needed influx of cash. But you can elect to forgo the carryback if carrying the entire loss forward may be more

beneficial. This might be the case if you expect your income to increase substantially compared to the prior two years…or for tax rates to go up in future years.

Section 199 deduction

The Section 199 deduction, also called the “manufacturers’ deduction” or “domestic production activities deduction,” (DPAD) is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts. The deduction is available to traditional manufacturers and to businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing. It isn’t allowed in determining net self-employment earnings and generally can’t reduce net income below zero. But it can be used against the Alternative Minimum Tax calculation.

Not all of these deductions will apply to your particular business, but knowing about them supports better business tax planning in 2017.

Continue Reading: Which employee benefits offer 2016 tax savings?

If you have questions about any of these potential deductions, employee benefits incentives or tax credits for the current or coming tax year, talk to the Tax Services Group at Cornwell Jackson. You may also download our newest Tax Planning Guide.

Gary Jackson, CPA, is the lead tax partner at Cornwell Jackson. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing tax advisory services to individuals and business leaders in the Dallas/Fort Worth area and across North Texas. 

Posted on Nov 5, 2016

After a formal audit, audit rules require a management communication letter presented to the owners, leaders and/or audit committee that outlines control deficiencies. The individual(s) overseeing the audit process will need to confirm receipt of the management letter and sign off on the stated deficiencies and/or demonstrate how they have already been handled in a formal response. Financial institutions may request copies of these audit findings from the company.

 If there are deficiencies that require immediate or timely improvements by the company, the company will have to show how and when those deficiencies will be addressed and communicate the plan to the financial institution(s).

Beyond that, the audit team’s “job” is done. It is up to the company to determine how to make internal controls or process improvements that support compliance. However, a knowledgeable audit team will give leaders and owners some items to think about beyond fulfilling the requirements of the management communication letter.

Typically, a senior member of the CPA firm will follow up with the owner, CFO or accounting staff and talk to them about operational or financial health and efficiency. It is this discussion — before, during and after the audit — that sets audit teams apart. During that follow-up call, the audit team sets the tone for an ongoing relationship with management and business owners. Ideally, clients will contact the audit partner with questions or concerns throughout the year — for compliance and growth considerations. Owners may have questions about employment growth and overtime rules. They may want to know if an employee benefit plan audit is required, or the timing of a merger. Audit teams can often be the first people who see the advantages of a change in entity structure.

A proactive follow-up by your audit team can make the difference between a dreaded annual obligation and an anticipation of true advisory support. It may never be an amusing experience to see your audit team, but the right team can give leaders the value from their many years of reviewing financial statements, putting issues in context and identifying a new direction for the coming year. For us, it’s not just a job. It’s a relationship that begins — or strengthens — once your audit is complete.

Download the Whitepaper: The True Benefits of an Audit or Review of Financial Statements

Mike Rizkal, CPA, is a Partner in Cornwell Jackson’s Audit and Attest Service Group. He provides a variety of services to privately held, middle-market businesses with a focus in the construction, real estate, manufacturing, distribution, professional services and technology industries. He also oversees the firm’s ERISA practice, which includes the audits of approximately 75 employee benefit plans.

 

Posted on Oct 21, 2016

Let’s look at some of the issues that an audit or review can bring to light for business owners and how it helps owners make better business decisions.

Keep in mind that experienced external audit teams conduct multiple engagements each year. The best teams stay up to date on changes in audit or review standards through their profession and the industries they serve. They also get a sense of best practices from seeing the best and the not-so-great examples of financial management.

For example, the team may notice that the size or level of experience in the accounting department has not kept pace with the growth of the company. Timing may be right to hire a controller or CFO or to consolidate accounting departments in multiple locations to one central location. Perhaps key financial measures that are typical of the industry are not in place to properly forecast…or A/R is consistently dated 120 days or more.

These issues will be brought to light by an experienced external audit team… issues that internal management may not notice or want to change. We find sometimes that aversion to change or personality conflicts can inhibit improvements in an accounting department — issues that an independent audit can recognize and communicate to owners for objective, third-party validation.

Experienced auditors will take notes on these improvements and also provide insight to the owners and staff as they go through the audit process. Some of their notations may not be required in the official opinion to satisfy compliance, while others are specific to the company culture and goals.

Auditing and Independence

The guise of independence stops some auditors from consulting during an audit and sticking to a checklist. In reality, independence has four parts: (1) auditors can’t function in management and make improvements for the company; (2) they can’t perform the accounting work they are auditing; (3) they can’t advise for personal benefit only; and (4) they can’t act as an advocate for the client to a third-party. However, providing suggestions for improvements is acceptable as long as the audit team steps back and lets the business owners make decisions and implement them.

It’s not an easy role to bridge the gap between compliance and business advisory. It takes a skilled auditor to see the forest for the trees — that is, interpreting the processes and accounting into actionable business steps.

Because a team may be on site for one or two weeks depending on the scope of the engagement, the following are additional areas they may note for later discussions from a tax or advisory services perspective.

  • Improvements to internal controls, company reports and disclosures
  • Reviewing how transactions are processed
  • Accounting department structure and capabilities
  • Accounting software or hardware recommendations
  • Consulting on entity structures or planned entity structures
  • Consulting on expansion plans in other states
  • Methods to improve cash flow
  • Debt and financing structures
  • Industry thought leadership and research

Building rapport and a relationship with the business owner, staff and audit committee members can bring these needs to light. The audit team is on site to do the job efficiently, but that doesn’t mean they have to be impersonal.

Continue Reading: What can business owners expect for follow-up after an audit or review?

Mike Rizkal, CPA, is a Partner in Cornwell Jackson’s Audit and Attest Service Group. He provides a variety of services to privately held, middle-market businesses with a focus in the construction, real estate, manufacturing, distribution, professional services and technology industries. He also oversees the firm’s ERISA practice, which includes the audits of approximately 75 employee benefit plans.

Posted on Oct 11, 2016

The True Benefits of an Audit or Review of Financial Statements, Audit and Review Benefits

An independent audit or review of a company’s financial statements by external auditors has been a keystone of confidence in the world’s financial markets since its introduction. However, when discussing the value of audited or reviewed financial statements with privately held, middle-market business owners and operators, their views might fall more along the lines of obligation to bank terms rather than any true benefit to the business. In fact, industry-focused audit teams can deliver many business insights. With the help of an audit team, business owners can improve controls and operational inefficiencies while gaining a sense of best practices within their industry. An annual audit or review can support proper regulatory reporting and compliance, implementation of accounting standards in a timely manner and improved company KPIs for forecasting.

 

It’s a rare experience when clients are truly happy to see their audit team.

They may like the people on the team and value their experience, but they may not enjoy the requests for data, the potential on-site distractions or the issues an audit team may discover.

wp-download-audit-benefitsAs a CPA and career auditor in the Dallas area, I didn’t know if I could offer a different spin on this subject. Google tells us that an audit is defined as an official inspection — typically by an independent body — of an individual’s or organization’s accounts. A review is defined as a formal assessment or examination of something with the possibility or intention of instituting change if necessary. Based on those definitions, it started to take shape in my mind…official inspection? Formal assessment or examination? None of those sound all that amusing to get business owners to appreciate the experience.

OK, I am under no illusion to make the case that an audit or review will be amusing. However, I can provide some insight on how an audit or review is helpful beyond satisfying a bank’s (or other financial institution’s) credit requirements. The larger — and often unsung — benefits to a business owner are worth the effort.

What are the benefits of an audit or review of financial statements?

We’ve already mentioned the obligatory reasons that companies schedule audits or reviews. Depending on the requirements of a bank or financial institution, business owners will need to seek an independent and outside perspective on the company’s financial statements. The chosen audit services team, at a minimum, should be able to review documents, processes and procedures and then issue an educated opinion on the general health of the financial statements.

I say “at a minimum” because that is all the audit services team is really engaged to do. To get the job done, they can go down their checklist, issue an opinion and get out of the business owner’s way. For some business owners, that may be enough. For others, there can be many more benefits to the audit or review experience.

A focused audit planning meeting in the fourth quarter is really the best place to start. With an experienced audit team, this doesn’t have to take long. They should ask questions about what’s going on in the business now as well as the owner’s short- and long-term goals; it helps the auditors look for issues, develop a plan for the engagement and open the lines of communication between management and the audit team. Prior to the audit planning meeting with the client, the engagement team will meet to review the previous years’ audit to give the whole team proper context on the client, its operations, areas for improved efficiency and unique things about the client and the engagement.

Bringing years of experience from other business situations is another plus during this planning meeting. The common complaint of having to “educate” the audit team about your company or industry shouldn’t happen during the audit. An experienced team will already have that knowledge base and use their time for constructive feedback throughout the engagement.

Speaking of consulting, keep this in mind. As a business grows, the complexity of a finance department changes. General bookkeeping gives way to the need for internal accounting staff, then a controller, then possibly a CFO. Companies traditionally engaged a CPA firm to support historic accounting, tax and assurance services, but as the competitive stakes get higher, owners need more sophisticated advisory services to keep pace with change. Auditors should ask the question: Why are you doing it that way? If the answer is: “That’s how we’ve always done it,” then it’s an opportunity for real time insight during the audit engagement. An audit team should not be viewed only as an enforcement agency that stops business owners from breaking the rules.  

When looking for an audit services team, owners and/or audit committees have to consider what they are really receiving from the engagement. Here are a few key characteristics to consider:

  • Does the audit team have industry-specific experience that can provide broader industry insights?
  • Is the audit team aware of industry and technical regulatory requirements that are specific to the company’s industry?
  • Has the audit team worked with similarly sized businesses to understand best practices for accounting requirements, company reports, controls and disclosures?
  • Has the audit team provided insight on accounting department staff capacity and levels of experience as they relate to the size of the company and its growth goals?
  • Will the audit team share operational best practices beyond providing baseline assurance on the financial statements?

This list may be considered above and beyond the confines of a typical audit or review — and owners may wonder if the price tag goes with it. In fact, an experienced audit services team can note many of these needs or issues within the timeline and hours of a competitively priced audit engagement. They know what to look for and can do it efficiently.

Continue Reading: How can an audit or review help business owners?

MR HeadshotMike Rizkal, CPA, is a Partner in Cornwell Jackson’s Audit and Attest Service Group. He provides a variety of services to privately held, middle-market businesses with a focus in the construction, real estate, manufacturing, distribution, professional services and technology industries. He also oversees the firm’s ERISA practice, which includes the audits of approximately 75 employee benefit plans.