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Private companies that follow U.S. Generally Accepted Accounting Principles (GAAP) must comply with the landmark new revenue recognition standard in 2019. Many private company CFOs and controllers report that they still have significant work to do to meet the demands of the sweeping rules. If you haven’t started the implementation process, it’s time to get the ball rolling.

Lessons from public company peers

Affected private companies must start following Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification Topic 606), the first time they issue financial statements in 2019. For private companies with a fiscal year end or issuing quarterly statements under U.S. GAAP, that could be within the next few months. Other private companies have until the end of the year or even early 2020. No matter what, it’s crunch time.

Public companies, which had to begin following the standard in 2018, reported that, even if the new accounting didn’t radically change the number they reported in the top line of their income statements, it changed the method by which they had to calculate it. They had to comb through contracts and offer paper trails to back up their estimates to auditors. Public companies largely reported that the standard was more work than they anticipated. Private companies can expect the same challenges.

An overview

The revenue recognition standard erases reams of industry-specific revenue guidance in U.S. GAAP and attempts to come up with the following five-step revenue recognition model for most businesses worldwide:

1. Identify the contracts with a customer.2. Identify the performance obligations in the contract.3. Determine the transaction price.4. Allocate the transaction price to the performance obligations.5. Recognize revenue as the entity satisfies a performance obligation.
In many cases, the revenue a company reports under the new guidance won’t differ much from what it reported under old rules. But the timing of when a company can record revenues may be affected, particularly for long-term, multi-part arrangements. Companies also must assess:

• The extent by which payments could vary due to such terms as bonuses, discounts, rebates and refunds,
• The extent that collected payments from customers is “probable” and won’t result in a significant reversal in the future, and
• The time value of money to determine the transaction price.

The result is a process that offers fewer bright-line rules and more judgment calls compared to old U.S. GAAP.

We can help

Our accounting experts can help you avoid a “fire drill” right before your implementation deadline and employ best practices learned from public companies that made the switch in 2018. Contact us for help getting your revenue reporting systems, processes and policies up to speed.

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Commercial buildings and improvements generally are depreciated over 39 years, which essentially means you can deduct a portion of the cost every year over the depreciation period. (Land isn’t depreciable.) But special tax breaks that allow deductions to be taken more quickly are available for certain real estate investments.

Some of these were enhanced by the Tax Cuts and Jobs Act (TCJA) and may provide a bigger benefit when you file your 2018 tax return. But there’s one break you might not be able to enjoy due to a drafting error in the TCJA.

Section 179 expensing

This allows you to deduct (rather than depreciate over a number of years) qualified improvement property — a definition expanded by the TCJA from qualified leasehold-improvement, restaurant and retail-improvement property. The TCJA also allows Sec. 179 expensing for certain depreciable tangible personal property used predominantly to furnish lodging and for the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems.

Under the TCJA, for qualifying property placed in service in tax years starting in 2018, the expensing limit increases to $1 million (from $510,000 for 2017), subject to a phaseout if your qualified asset purchases for the year exceed $2.5 million (compared to $2.03 million for 2017). These amounts will be adjusted annually for inflation, and for 2019 they’re $1.02 million and $2.55 million, respectively.

Accelerated depreciation

This break allows a shortened recovery period of 15 years for qualified improvement property. Before the TCJA, the break was available only for qualified leasehold-improvement, restaurant and retail-improvement property.

Bonus depreciation

This additional first-year depreciation allowance is available for qualified assets, which before the TCJA included qualified improvement property. But due to a drafting error in the new law, qualified improvement property will be eligible for bonus depreciation only if a technical correction is issued.

When available, bonus depreciation is increased to 100% (up from 50%) for qualified property placed in service after Sept. 27, 2017, but before Jan. 1, 2023. For 2023 through 2026, bonus depreciation is scheduled to be gradually reduced. Warning: Under the TCJA, real estate businesses that elect to deduct 100% of their business interest will be ineligible for bonus depreciation starting in 2018.

Can you benefit?

Although the enhanced depreciation-related breaks may offer substantial savings on your 2018 tax bill, it’s possible they won’t prove beneficial over the long term. Taking these deductions now means forgoing deductions that could otherwise be taken later, over a period of years under normal depreciation schedules. In some situations — such as if in the future your business could be in a higher tax bracket or tax rates go up — the normal depreciation deductions could be more valuable long-term.

For more information on these breaks or advice on whether you should take advantage of them, please contact us.

© 2019

Under the Sarbanes-Oxley Act, the audit committee — not management or the full board of directors — is directly responsible for appointing, compensating and overseeing external auditors. Periodically, it’s a good idea to assess the effectiveness of your audit committee by performing a self-evaluation. Here are reasons to conduct a self-evaluation, along with some common techniques.

Why?

If your company is listed on the New York Stock Exchange, an annual self-evaluation is required. However, the American Institute of Certified Public Accountants (AICPA) recommends that all other companies, including not-for-profit entities and private firms, complete voluntary self-evaluations. The benefits include:

• Improving audit committee performance,
• Promoting candid discussions, and
• Identifying practices and procedures to conduct more effective meetings.

In general, a self-evaluation strives to make your audit committee more effective at assessing fraud risks and evaluating internal and independent auditors.

How?

There’s no universal right way to conduct a self-evaluation. Some companies do it strictly in-house, while others use outside evaluators. Some rely on written questionnaires, while others use personal interviews. According to the AICPA’s Audit Committee Effectiveness Center, common approaches to self-evaluation include:

Introspection. The committee members — and, possibly, the board chair — evaluate the committee’s performance by answering specific questions about the committee’s impact on the financial reporting process and its relationships with management and internal and independent auditors.

Performance improvement. The chief audit executive, CFO, CEO and independent auditor are asked to comment on the committee’s performance.

360-degree. Each committee member (including the chair) evaluates all the other members. To minimize the risk of alienating committee members, consider beginning the process by assessing the committee’s overall performance and then move on to individual performance reviews.

Competence. The committee, others within the company or an outside evaluator assesses the financial literacy of committee members. They look at, among other things, recent training on enterprise risk management, accounting, auditing, financial reporting developments, and current business and industry practices.

Leadership. The committee members discuss the committee chair’s performance, communicating any concerns to the board chair or the chair of the corporate governance committee.

Whichever approach or combination of approaches your company uses, it’s important to phrase questions in terms designed to elicit ideas for improvement rather than to highlight weaknesses.

Need help?

Whether your company is required to perform audit committee self-evaluations or you conduct them voluntarily, careful planning is critical to maximize the benefits. Contact us to help design an effective self-evaluation process based on your company’s specific needs.

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A variety of tax-related limits affecting businesses are annually indexed for inflation, and many have gone up for 2019. Here’s a look at some that may affect you and your business.

Deductions

• Section 179 expensing:
  • Limit: $1.02 million (up from $1 million)
  • Phaseout: $2.55 million (up from $2.5 million)
• Income-based phase-ins for certain limits on the Sec. 199A qualified business income deduction:
  • Married filing jointly: $321,400-$421,400 (up from $315,000-$415,000)
  • Married filing separately: $160,725-$210,725 (up from $157,500-$207,500)
  • Other filers: $160,700-$210,700 (up from $157,500-$207,500)

Retirement plans

• Employee contributions to 401(k) plans: $19,000 (up from $18,500)
• Catch-up contributions to 401(k) plans: $6,000 (no change)
• Employee contributions to SIMPLEs: $13,000 (up from $12,500)
• Catch-up contributions to SIMPLEs: $3,000 (no change)
• Combined employer/employee contributions to defined contribution plans (not including catch-ups): $56,000 (up from $55,000)
• Maximum compensation used to determine contributions: $280,000 (up from $275,000)
• Annual benefit for defined benefit plans: $225,000 (up from $220,000)
• Compensation defining “highly compensated employee”: $125,000 (up from $120,000)
• Compensation defining “key employee”: $180,000 (up from $175,000)

Other employee benefits

• Qualified transportation fringe-benefits employee income exclusion: $265 per month (up from $260)
• Health Savings Account contributions:
  • Individual coverage: $3,500 (up from $3,450)
  • Family coverage: $7,000 (up from $6,900)
  • Catch-up contribution: $1,000 (no change)
• Flexible Spending Account contributions:
  • Health care: $2,700 (up from $2,650)
  • Dependent care: $5,000 (no change) 

Additional rules apply to these limits, and they are only some of the limits that may affect your business. Please contact us for more information.

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The M&A market was hot last year, and that momentum is expected to continue in 2019. Before acquiring another business, however, it’s important to do your homework. Conducting comprehensive due diligence can be a daunting task, especially if you’ve never negotiated a deal before. So, consider seeking input from an experienced accounting professional.

Reviewing historical performance

For starters, the target company’s historical financial statements must be reviewed. This will help you understand the nature of the company’s operations and the types of assets it owns — and the liabilities it owes.

When reviewing historical results, it’s important to evaluate a full business cycle, including any cyclical peaks and troughs. If a seller provides statements during only peak years, there’s a risk that you could overpay.

Historical financial statements also may be used to determine how much to offer the seller. An offer should be based on how much return the business interest is expected to generate. An accounting expert can project expected returns, as well as provide pricing multiples based on real-world comparable transactions.

Evaluating the target’s historical balance sheet also may help you decide whether to structure the deal as a stock purchase (where all assets and liabilities transfer from the seller to the buyer) or as an asset purchase (where the buyer cherry-picks specific assets and liabilities).

Looking to the future

Prospective financial statements are typically based on management’s expectations for the future. When reviewing these reports, the underlying assumptions must be critically evaluated, especially for start-ups and other businesses where prospective financials serve as the primary basis for your offer price.

It’s also important to consider who prepared the prospective financials. If forecasts or projections are prepared by an outside accountant, do the reports follow the AICPA standards? You may have more confidence when reports provided by the seller conform to these standards. However, it’s a good idea to hire your own expert to perform an independent analysis, because management may have an incentive to paint a rosy picture of financial performance.

Digging deeper

A target company’s historical balance sheet tells you about the company’s tangible assets, acquired intangibles and debts. But some liabilities may not appear on the financial statements. An accounting expert can help you identify unrecorded liabilities, such as:

• Pending lawsuits and regulatory audits, • Warranty and insurance claims, • Uncollectible accounts receivable, and• Underfunded pensions.
You also need to be skeptical of representations the seller makes to seal a deal. Misrepresentations that are found after closing can lead to expensive legal battles. An earnout provision or escrow account can be used to reduce the risk that the deal won’t pan out as the seller claimed it would.

Avoiding M&A mishaps

Do-it-yourself acquisitions can lead to costly mistakes. In addition to evaluating historical and prospective financial statements, we can help identify potential hidden liabilities and misrepresentations, as well as prepare independent forecasts and projections. We also can help you determine the optimal offer price and deal terms based on an objective review of the target’s historical, prospective and unreported financial information.

© 2019

This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business increased by 3.5 cents, to the highest level since 2008. As a result, you might be able to claim a larger deduction for vehicle-related expense for 2019 than you can for 2018.

Actual costs vs. mileage rate

Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases depreciation write-offs on vehicles are subject to certain limits that don’t apply to other types of business assets.

The mileage rate comes into play when taxpayers don’t want to keep track of actual vehicle-related expenses. With this approach, you don’t have to account for all your actual expenses, although you still must record certain information, such as the mileage for each business trip, the date and the destination.

The mileage rate approach also is popular with businesses that reimburse employees for business use of their personal automobiles. Such reimbursements can help attract and retain employees who’re expected to drive their personal vehicle extensively for business purposes. Why? Under the Tax Cuts and Jobs Act, employees can no longer deduct unreimbursed employee business expenses, such as business mileage, on their individual income tax returns.

But be aware that you must comply with various rules. If you don’t, you risk having the reimbursements considered taxable wages to the employees.

The 2019 rate

Beginning on January 1, 2019, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 58 cents per mile. For 2018, the rate was 54.5 cents per mile.

The business cents-per-mile rate is adjusted annually. It is based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. Occasionally, if there is a substantial change in average gas prices, the IRS will change the mileage rate midyear.

More considerations

There are certain situations where you can’t use the cents-per-mile rate. It depends in part on how you’ve claimed deductions for the same vehicle in the past or, if the vehicle is new to your business this year, whether you want to take advantage of certain first-year depreciation breaks on it.

As you can see, there are many variables to consider in determining whether to use the mileage rate to deduct vehicle expenses. Contact us if you have questions about tracking and claiming such expenses in 2019 — or claiming them on your 2018 income tax return.

© 2019

Business owners sometimes mistakenly equate profits with cash flow. Here’s how this can lead to surprises when managing day-to-day operations — and why many profitable companies experience cash shortages.

Working capital

Profits are closely related to taxable income. Reported at the bottom of your company’s income statement, they’re essentially the result of revenue less the cost of goods sold and other operating expenses incurred in the accounting period.

Generally Accepted Accounting Principles (GAAP) require companies to “match” costs and expenses to the period in which revenue is recognized. Under accrual-basis accounting, it doesn’t necessarily matter when you receive payments from customers or when you pay expenses.

For example, inventory sitting in a warehouse or retail store can’t be deducted — even though it may have been long paid for (or financed). The expense hits your income statement only when an item is sold or used. Your inventory account contains many cash outflows that are waiting to be expensed.

Other working capital accounts — such as accounts receivable, accrued expenses and trade payables — also represent a difference between the timing of cash flows. As your business grows and prepares for increasing future sales, you invest more in working capital, which temporarily depletes cash.

The reverse also may be true. That is, a mature business may be a “cash cow” that generates ample cash, despite reporting lackluster profits.

Capital expenditures, loan payments and more

Working capital tells only part of the story. Your income statement also includes depreciation and amortization, which are noncash expenses. And it excludes changes in fixed assets, bank financing and owners’ capital accounts, which affect cash that’s on hand.

To illustrate: Suppose your company uses tax depreciation schedules for book purposes. In 2018, you purchased new equipment to take advantage of the expanded Section 179 and bonus depreciation allowances. The entire purchase price of these items was deducted from profits in 2018. However, these purchases were financed with debt. So, actual cash outflows from the investments in 2018 were minimal.

In 2019, your business will make loan payments that will reduce the amount of cash in the company’s checking account. But your profits will be hit with only the interest expense (not the amount of principal that’s being repaid). Plus, there will be no “basis” left in the 2018 purchases to depreciate in 2019. These circumstances will artificially boost profits in 2019, without a proportionate increase in cash.

Look beyond profits

It’s imperative for business owners and management to understand why profits and cash flow may not sync. If your profitable business has insufficient cash on hand to pay employees, suppliers, lenders or even the IRS, contact us to discuss ways to more effectively manage the cash flow cycle.

© 2019

There aren’t too many things businesses can do after a year ends to reduce tax liability for that year. However, you might be able to pay employee bonuses for 2018 in 2019 and still deduct them on your 2018 tax return. In certain circumstances, businesses can deduct bonuses employees have earned during a tax year if the bonuses are paid within 2½ months after the end of that year (by March 15 for a calendar-year company).

Basic requirements

First, only accrual-basis taxpayers can take advantage of the 2½ month rule. Cash-basis taxpayers must deduct bonuses in the year they’re paid, regardless of when they’re earned.

Second, even for accrual-basis taxpayers, the 2½ month rule isn’t automatic. The bonuses can be deducted on the tax return for the year they’re earned only if the business’s bonus liability was fixed by the end of the year.

Passing the test

For accrual-basis taxpayers, a liability (such as a bonus) is deductible when it is incurred. To determine this, the IRS applies the “all-events test.” Under this test, a liability is incurred when:

• All events have occurred that establish the taxpayer’s liability,
• The amount of the liability can be determined with reasonable accuracy, and
• Economic performance has occurred.

Generally, the last requirement isn’t an issue; it’s satisfied when an employee performs the services required to earn a bonus. But the first two requirements can delay your tax deduction until the year of payment, depending on how your bonus plan is designed.

For example, many bonus plans require an employee to still be an employee on the payment date to receive the bonus. Even when the amount of each employee’s bonus is fixed at the end of the tax year, if employees who leave the company before the payment date forfeit their bonuses, the all-events test isn’t satisfied until the payment date. Why? The business’s liability for bonuses isn’t fixed until then.

Diving into a bonus pool

Fortunately, it’s possible to accelerate deductions with a carefully designed bonus pool arrangement. According to the IRS, employers may deduct bonuses in the year they’re earned — even if there’s a risk of forfeiture — as long as any forfeited bonuses are reallocated among the remaining employees in the bonus pool rather than retained by the employer.

Under such a plan, an employer satisfies the all-events test because the aggregate bonus amount is fixed at the end of the year. It doesn’t matter that amounts allocated to specific employees aren’t determined until the payment date.

When you can deduct bonuses

So does your current bonus plan allow you to take 2018 deductions for bonuses paid in early 2019? If you’re not sure, contact us. We can review your situation and determine when you can deduct your bonus payments.

If you’re an accrual taxpayer but don’t qualify to accelerate your bonus deductions this time, we can help you design a bonus plan for 2019 that will allow you to accelerate deductions when you file your 2019 return next year.

© 2019

External audits aren’t required for every business. But whether required or not, they can provide lenders and investors with assurance that your financial statements are free from material misstatement and prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP).

How can you help facilitate efficient, timely audit fieldwork? The keys are frequent communication and coordination between a company’s internal audit department and its external audit firm throughout the year. Here are four ways to foster this partnership.

1. Encourage frequent communication

Scheduling regular meetings between members of the internal and external audit teams sets the stage for a more efficient audit process. You might discuss emerging issues, such as how the company intends to apply a new accounting standard or the status of internal control remediation efforts.

In preparation for an audit, auditors can meet to compare the internal audit department’s workplan to the external auditor’s audit plan. This comparison can help minimize duplication of effort and identify areas where the teams might work together — or at least complement each other’s efforts.

2. Provide access to internal audit reports

The external audit team can’t rely exclusively on the internal audit department’s reports to plan their audit. But sharing in-house findings provides the external audit with a bird’s-eye view of the company’s operations, including high-risk areas that deserve special attention.

Designate an individual on your internal audit team to act as liaison with external auditors. He or she should be charged with sharing reports in a timely manner. This gives external auditors adequate time to review in-house reports and avoids hasty decision making.

3. Help external auditors navigate the organization

During fieldwork, external auditors need access to employees, executives and data dispersed throughout the enterprise. Internal auditors can share key documents compiled during their audit procedures.

Examples include the company’s organization charts, copies of audit reports from previous years, and a schedule of unresolved internal control deficiencies. This information helps educate external auditors and identifies employees to interview during audit inquiries.

4. Conduct joint training sessions

Both internal and external audit teams require continuing professional education (CPE) to maintain their licenses and improve their understanding of issues they might encounter during an audit. For example, training sessions might explain new accounting standards, emerging fraud scams and technology-driven auditing methods.

Joint training sessions help auditors share best practices and forge lasting bonds with members of the other audit team. Plus, it might be more cost-effective for internal and external auditors to share the fixed costs of providing CPE courses.

Win-win situation

These four ideas are just a starting point. Let’s brainstorm additional ways to foster collaboration between your internal audit department and our external auditors. This exercise will allow both teams to improve efficiency and increase the likelihood of producing timely, accurate financial statements.

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