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Please note: Our offices will be closed on July 16 and 17 for Employee Appreciation Days.
Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Please note: Our offices will be closed on July 16 and 17 for Employee Appreciation Days.
As you plan for the year ahead, you may wonder how changes to the accounting standards might affect the information you report on your company’s financial statements, including how it’s presented and what details are disclosed. The Financial Accounting Standards Board (FASB) establishes the standards for public and private companies to follow when they issue financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Here’s an overview of what the FASB is currently working on.
Although the FASB sometimes experiences delays in its publication schedule, it expects to issue final standards on the following topics by the end of the first quarter of 2016:
Leases. This revised recognition and measurement standard is big news for retailers, manufacturers, contractors and other companies that lease significant amounts of property and equipment. But the changes won’t be as far reaching as the FASB originally intended — and the standard won’t be aligned with international accounting rules for leases.
The revised standard aims to increase transparency and comparability among organizations by recognizing assets and liabilities on the balance sheet for leases with terms of more than 12 months and disclosing key information about leasing arrangements. The project addresses lease accounting from the perspective of both the lessee and the lessor.
The revised guidance wouldn’t apply for public companies until fiscal years beginning after December 15, 2018. Private businesses would have an extra year. Once the final standard is issued, however, the FASB would encourage early application.
Revenue recognition amendments. Revenue is considered one of the most important measures of a company’s financial health. In 2014, the FASB published Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. This standard replaces about 180 pieces of individual guidance under GAAP with a single principles-based model for recognizing revenue from customer contracts worldwide.
After fielding complaints that companies won’t have enough time to apply the standard, the FASB decided in April 2015 to delay the effective date by one year to give companies more time to implement the changes. Public companies, certain employee benefit plans and some not-for-profit organizations can wait to apply the new standard until annual financial statements for fiscal years that start after December 15, 2017. Private companies can wait until annual financial statements for fiscal years that start after December 15, 2018.
In the meantime, the FASB has been issuing amendments to the revenue recognition standard to clarify confusing parts of the standard — but not to change the core of the standard. One amendment aimed at identifying performance obligations and licenses would differentiate between 1) a license to intellectual property that has significant standalone functionality, and thus, satisfies the entity’s promise to the customer to use the intellectual property at a point in time, and 2) a license to symbolic intellectual property that includes support or maintenance of the intellectual property during the license period and, thus, that is satisfied over time.
The amendment also would address when to recognize revenue for a sales-based or usage-based royalty promised in exchange for a license of intellectual property. In terms of performance obligations, the amendment is expected to add guidance on goods and services that aren’t material in the context of the contract and accounting for shipping and handling activities.
Other revenue recognition amendments are in the works, too. The FASB is currently drafting a final standard to clarify the revenue recognition guidance for principal vs. agent arrangements. And it’s reviewing public comments on another proposal for narrow-scope improvements and practical expedients for implementing the revenue recognition standard. The effective dates for these revenue recognition amendments would be the same as the revised implementation date for ASU 2014-09.
Employee share-based payment accounting. This narrow-scope project aims to reduce complexity and improve the accounting for share-based payments that public and private companies award to employees. It would provide simplifications in accounting for income taxes, including tax benefits and deficiencies arising from the difference between the deduction for tax purposes and the compensation cost in the financial statements. The standard also would allow for an election to simplify accounting for forfeitures.
Transition to the equity method of accounting. Under current accounting, an equity method investor is required to determine the acquisition-date fair value of the identifiable assets and liabilities assumed in the same manner as for a business combination. The entity’s proportionate share of the difference between the fair value of the investee’s identifiable assets and liabilities assumed and the book value of recorded assets and liabilities generally must be accounted for in net income in subsequent periods.
This narrow-scope simplification project would eliminate the requirement to separately account for this basis difference. In other words, the equity method investment would be recognized at cost. The final standard is also expected to eliminate the requirement that an entity retroactively adopt the equity method of accounting if an investment unexpectedly qualifies for the method as a result of an increase in the level of ownership interest.
Finally, the FASB recently approved Private Company Council (PCC) Issue No. 2015-01, Effective Date and Transition Guidance. When it’s finalized, this standard would allow private companies an unconditional, one-time option to adopt four PCC accounting alternatives that were developed in 2014 related to goodwill, hedging, common control leasing arrangements and intangible assets.
The FASB has announced that it will issue proposed standards updates — also known as exposure drafts — on the following topics:
Classification of debt. This proposal would simplify the process for determining whether a liability should be classified as current or long term on the balance sheet. It replaces the existing fact-pattern-specific guidance in GAAP with a principle to classify debt as current or noncurrent based on the contractual terms of a debt arrangement and an entity’s current compliance with debt covenants.
Presentation of the costs of net periodic pension and postretirement benefits. This narrow-scope project would simplify the ways employers report “net benefit costs” on their financial statements.
During the FASB’s December 11 meeting, it also agreed to release a proposal to clarify eight narrow pieces of guidance for cash flow statements in the first quarter of 2016. This is a complex area of accounting — and the leading cause of financial restatements. The proposal would attempt to settle some of the frequent questions that crop up about the statement of cash flows.
The FASB has been working on several projects to simplify the disclosure requirements under GAAP by eliminating disclosures that don’t provide sufficient benefits to justify the costs of collecting the information to provide them. It plans to issue exposure drafts on required disclosures for defined benefit plans. It’s also reviewing public comments on the disclosure framework overall, including how the board and companies decide what’s appropriate to disclose in financial statement footnotes.
Public comments on the FASB’s exposure drafts on fair value and government assistance disclosures are due in February 2016. In addition, the FASB has begun to address disclosure requirements for income taxes, inventory and interim reporting.
We’ve only scratched the surface of these FASB projects. GAAP is constantly evolving to address the concerns of businesses and other users of financial statements. The FASB plans to conduct additional research and is beginning initial deliberations on many other areas of financial reporting. Contact us for more information and the latest updates on any of the items on the FASB’s current technical agenda.
In an effort to help employers subject to the Affordable Care Act’s (ACA’s) information reporting requirements meet those obligations, the IRS has extended two important deadlines. Employers now have an additional two months to provide employees Form 1095-B, “Health Coverage,” and Form 1095-C, “Employer-Provided Health Insurance Offer and Coverage.”
Employers have an additional three months to file the forms with the IRS. Reporting to the IRS is done by using Form 1094-C, “Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns,” and Form 1095-C, “Employer-Provided Health Insurance Offer and Coverage.”
The ACA enacted Section 6056 of the Internal Revenue Code (IRC), which requires all applicable large employers (ALEs) — generally those with at least 50 full-time employees or the equivalent — to report to the IRS information about what health care coverage, if any, they offered to full-time employees. Employers generally must report this information no later than February 28 — or March 31 if filed electronically — of the year following the calendar year to which the reporting relates.
Sec. 6056 also requires ALEs to furnish statements to employees that the employees can use to determine whether, for each month of the calendar year, they can claim a premium tax credit. The statements generally must be provided by January 31 of the calendar year following the calendar year to which the Sec. 6056 reporting relates.
Because of the deadline extension, however, for the 2015 calendar year, ALEs have until May 31, 2016, to file these information returns with the IRS (until June 30, 2016, if filing electronically). And they have until March 31, 2016, to furnish the employee statements.
Bear in mind that this reporting is required even if you don’t offer health insurance coverage. And employers with at least 50 but fewer than 100 full-time employees or the equivalent who are eligible for the transitional relief from the employer shared-responsibility provision for 2015 must still comply with the information reporting requirements.
Sec. 6055 of the IRC, also enacted by the ACA, requires health care insurers, including self-insured employers, to report to the IRS about the type and period of coverage provided and to furnish this information to covered employees in statements. The IRS’s extensions also apply to these deadlines: The 2015 calendar year information now must be reported by May 31, 2016, or, if filed electronically, June 30, 2016. Employee statements must be provided by March 31, 2016.
Every self-insured employer must report information about all employees, their spouses and dependents who enroll in coverage under the reporting requirements for insurers. This reporting is required even for self-insureds not subject to the ACA’s employer shared-responsibility provisions or the ALE reporting requirements. Self-insured ALEs must comply with the insurer requirements in addition to the Sec. 6056 requirements.
Further, non-ALE employers must comply with the Sec. 6056 requirements if they’re members of a controlled group or treated as one employer for purposes of determining ALE status. The employers that compose such a controlled-group ALE are referred to as “ALE members,” and the reporting requirements apply separately to each member.
Failure to comply with the information reporting requirements may subject you to the general reporting penalty provisions. Penalties for information returns and payee (employee) statements filed after December 31, 2015, are as follows:
Special rules apply to increase the per-statement and total penalties in the case of intentional disregard of the requirement to furnish a payee statement. Also, taxpayers with average annual gross receipts of no more than $5 million for the three preceding tax years are subject to lower maximum penalty amounts.
Even with the extensions provided by the IRS, now is the time for affected employers to begin assembling the necessary information for Forms 1094 and 1095. The compliance obligation will likely require a joint effort by the payroll, HR and benefits departments to collect the relevant data.
If you have questions about complying with the ACA’s information-reporting requirements, don’t hesitate to contact us. We’d be pleased to help.
Inside Public Accounting (IPA) presented its first ranking of the nation’s TOP 300 accounting firms—the only one of its kind. Stockman Kast Ryan + Co. (SKR + Co.) was named one of the largest accounting firms in the nation.
With year end right around the corner, Congress passed the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). The act extended numerous tax breaks that had expired December 31, 2014, and the President signed it into law December 18.
The new law is more significant than some tax “extenders” legislation in recent years because, in addition to extending relief, the PATH Act makes quite a few tax breaks permanent and also enhances some breaks. Let’s take a look at some of the breaks that may help you save tax on your individual and business returns in 2015 and beyond.
Sec. 179 of the Internal Revenue Code (IRC) allows businesses to elect to immediately deduct — or “expense” — the cost of certain tangible personal property acquired and placed in service during the tax year, instead of recovering the costs more slowly through depreciation deductions. However, the election can only offset net income; it can’t reduce it below zero dollars to create a net operating loss.
The election is also subject to annual dollar limits. For 2014, businesses could expense up to $500,000 in qualified new or used assets, subject to a dollar-for-dollar phaseout once the cost of all qualifying property placed in service during the tax year exceeded $2 million. Without the PATH Act, the expensing limit and the phaseout amounts for 2015 would have sunk to $25,000 and $200,000, respectively.
The new law makes the 2014 limits permanent, indexing them for inflation beginning in 2016. It also makes permanent the ability to apply Sec. 179 expensing to qualified real property, reviving the 2014 limit of $250,000 on such property for 2015 but raising it to the full Sec. 179 limit beginning in 2016. Qualified real property includes qualified leasehold-improvement, restaurant and retail-improvement property.
Finally, the new law permanently includes off-the-shelf computer software on the list of qualified property. And, beginning in 2016, it adds air conditioning and heating units to the list.
If your business is eligible for full Sec. 179 expensing, you might obtain a greater benefit from it than from bonus depreciation (discussed below) because the expensing provision can allow you to deduct 100% of an asset acquisition’s cost. Moreover, you can use Sec. 179 expensing for both new and used property.
The news is mixed on bonus depreciation, which allows businesses to recover the costs of depreciable property more quickly by claiming bonus first-year depreciation for qualified assets. It’s been extended, but only through 2019 and with declining benefits in the later years. For property placed in service during 2015, 2016 and 2017, the bonus depreciation percentage is 50%. It drops to 40% for 2018 and 30% for 2019.
The provision continues to allow businesses to claim unused AMT credits in lieu of bonus depreciation. Beginning in 2016, the amount of unused AMT credits that may be claimed increases.
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, qualified improvement property doesn’t have to be leased to be eligible for bonus depreciation.
Note that, if you qualify for Sec. 179 expensing, it could provide a greater tax benefit than bonus depreciation. (See above.) But bonus depreciation could benefit more taxpayers than Sec. 179 expensing, because it isn’t subject to any asset purchase limit or net income requirement.
The PATH Act permanently extends the 15-year straight-line cost recovery period for qualified leasehold improvements (alterations in a building to suit the needs of a particular tenant), qualified restaurant property and qualified retail-improvement property. The provision exempts these expenditures from the normal 39-year depreciation period.
This is especially welcome news for restaurants and retailers, which typically remodel every five to seven years. If eligible, they may first apply Sec. 179 expensing and then enjoy this accelerated depreciation on qualified expenses in excess of the applicable Sec. 179 limit.
The research credit (commonly referred to as the “research and development” or “research and experimentation” credit) provides an incentive for businesses to increase their investments in research. But businesses have long complained that the annual threat of extinction to the credit deterred them from pursuing critical research into new products and technologies.
The PATH Act permanently extends the credit. Additionally, beginning in 2016, businesses with $50 million or less in gross receipts can claim the credit against alternative minimum tax (AMT) liability, and 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 prove significant.
The American Opportunity credit (a modified version of the Hope credit) allows eligible taxpayers to take an annual credit of up to $2,500 (vs. the Hope credit maximum of $1,800) for various tuition and related expenses for each of the first four years of postsecondary education (vs. the first two years with the Hope credit). The credit phases out based on modified adjusted gross income (MAGI) beginning at $80,000 for single filers and $160,000 for joint filers, indexed for inflation.
The American Opportunity credit was scheduled to revert to the Hope credit after 2017, with the $1,800 and first-two-years limits and lower MAGI phaseout thresholds. The PATH Act makes the more beneficial American Opportunity credit permanent.
The PATH Act extends through 2016 the above-the-line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 for taxpayers whose adjusted gross income (AGI) doesn’t exceed $65,000 ($130,000 for joint filers) or, for those beyond those amounts, $2,000 for taxpayers whose AGI doesn’t exceed $80,000 ($160,000 for joint filers).
You can’t take the American Opportunity credit, its cousin the Lifetime Learning credit and the tuition deduction in the same year for the same student. If you’re eligible for all, the American Opportunity credit will typically be the most valuable in terms of tax savings. But in some situations, the AGI reduction from the deduction might prove more beneficial than taking the Lifetime Learning credit because the deduction ends up saving more tax than opting for the credit.
The PATH Act makes permanent the provision that allows taxpayers who are age 70½ or older to make direct contributions from their IRA to qualified charitable organizations up to $100,000 per tax year. The taxpayers can’t claim a charitable or other deduction on the contributions, but the amounts aren’t deemed taxable income and can be used to satisfy an IRA owner’s required minimum distribution.
To take advantage of the exclusion from income for IRA contributions to charities on your 2015 tax return, you’ll need to arrange a direct transfer by the IRA trustee to an eligible charity by December 31, 2015. Donor-advised funds and supporting organizations are not eligible recipients.
The law makes other tax benefits related to charitable giving permanent, too, including the enhanced deduction for contributions of real property for conservation purposes.
The itemized deduction for state and local sales taxes, instead of state and local income taxes, is now permanent. The deduction is especially valuable for individuals who live in states without income taxes. It can also benefit taxpayers in other states who purchase major items, such as a car or boat.
You don’t have to keep receipts and track all the sales tax you actually pay. Your deduction can be determined by using an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale plus the tax you actually pay on certain major purchases.
The PATH Act extends through 2016 the credit for purchases of residential energy property. Examples include new high-efficiency heating and air conditioning systems, insulation, energy-efficient exterior windows and doors, high-efficiency water heaters and stoves that burn biomass fuel.
The provision allows a credit of 10% of expenditures for qualified energy improvements, up to a lifetime limit of $500. If you’ve been thinking about investing in some energy upgrades, you’ll want to do it before the end of next year.
The PATH Act’s temporary and permanent extensions of numerous valuable tax breaks for individuals and businesses provide significant tax planning opportunities. We’ve only touched on some of the most popular here; the new law may include other extensions and enhancements that can benefit you. We can help you identify the ones that will minimize your taxes for 2015 and chart the best course in future years.
Taxpayers investing in Enterprise Zones (EZ) can earn an income tax credit for specific economic development activities. All businesses in the EZ must pre-certify in order to be eligible to take the Enterprise Zone credits. The pre-certification must be completed prior to the expenditure on which the credit is based.
The Colorado Economic Development Commission approved revised Enterprise Zone designations at their meeting on August 13, 2015. El Paso County is now part of a new zone called the Pikes Peak Enterprise Zone which also encompasses Teller County. Some areas have graduated out of EZ status while other have been newly added. These new designations are effective January 1, 2016.
You can search a map on the website as a preliminary step to determine if you are in an EZ. Click here for the map.
However, the map is based on Google Maps so is not always accurate. If you believe you are in an Enterprise Zone and that is not registering as true on the search, then contact your Enterprise Zone Administrator for confirmation.
We are happy to assist in this process if you would like, so please let us know if you would like us to search on your behalf. As our client, if we are already aware you are in an Enterprise Zone, we will apply for the pre-certification on your behalf.
Applicable Large Employers (ALEs) must file Form 1095-C for each full-time employee and provide a copy to the employee. Although there is a transition period for determining which employers qualify as ALEs, in terms of this tax form, any employer with at least 50 full-time or full-time equivalent employees during 2015 will be required to file the form. As January 31 falls on a Sunday in 2016, a copy of the form must be provided to each full-time employee by February 1, 2016. If paper filing, a copy of Form 1095-C for each employee must be filed with the IRS by February 28, 2016. If filing electronically, a copy must be filed by March 31, 2016. Copies filed with the IRS must be accompanied by transmittal Form 1094-C. An automatic 30-day extension for filing the forms with the IRS is available by submitting Form 8809.
Please note, small employers do NOT need to file Form 1095-C.
Health insurance providers, including employers with self-insured health plans must file Form 1095-B for each covered employee and provide a copy to the employee. It’s important to note that these forms must be completed without regard to the number of employees. As January 31 falls on a Sunday in 2016, a copy of the form must be provided to each covered employee by February 1, 2016. If paper filing, a copy of Form 1095-B for each covered employee must be filed with the IRS by February 28, 2016. If filing electronically, a copy must be filed with the IRS by March 31, 2016. Copies filed with the IRS must be accompanied by transmittal Form 1094-B. An automatic 30-day extension for filing the forms with the IRS is available by submitting Form 8809.
For additional information, please click here to see our article published June 1, 2015.
In the Accounting Services Department at Stockman Kast Ryan + Co, we take a balance sheet approach when closing a set of books. This means each account on the balance sheet (assets/liabilities and equity) is reconciled to source documents (bank statements, amortization schedules, payroll and sales tax returns, etc.) before closing the net income for the year. We view all the transactions during the year to capture any reclassifications that may need to be reallocated to a different account as well as reconciling expenses such as payroll.
There are many things to take into consideration when finalizing a Year End Closing.
Generally, we will make the final year-end adjustments to the balance sheet to zero out the owners’ distributions/draws for the upcoming year as well as to record depreciation. Occasionally, we have additional tax adjustments that may also affect your books.
We know that closing out your books for the year can be a daunting task. But taking the time to prepare now will likely save you both time and money later. “Clean” books make the tax preparation process that much easier and efficient. If you have questions regarding any of the suggestions listed here, please let us know.
Your donors are gearing up for tax-filing season soon. It’s not too late to make sure that your organization is following the IRS donation “substantiation rules” so that your benefactors have the proof they need to deduct financial gifts. Proper documentation is also crucial so that your donors don’t have any future problems with the IRS.
Case law generally supports the IRS. In the court ruling Durden v. Commissioner, a church had received $25,171 in contributions from a married couple. The taxpayers had canceled checks documenting these 2007 donations, and the church sent them a written acknowledgment of receipt. But the acknowledgment didn’t note whether the taxpayers had received any goods or services in exchange for their contributions. The IRS requires such a statement, so it disallowed the taxpayers’ deduction.
The taxpayers then obtained a second receipt from their church, stating that they hadn’t received any goods or services in exchange for their donations. The second receipt was dated June 21, 2009, and the IRS rejected it for failing to meet the “contemporaneous” requirement, which requires the notification to be obtained at the time of the gift.
The taxpayers appealed the IRS decision. Concluding that the couple had “failed strictly or substantially to comply with the clear substantiation requirements of Section 170(f)(8),” the Tax Court upheld the IRS’s disallowance of the deduction.
For donors’ charitable contributions to be eligible for deductions on their income tax returns, they must follow the IRS “substantiation rules.” These requirements vary with the nature and amount of the donation, but clearly state that, if a taxpayer fails to meet the substantiation and recordkeeping requirements, no deduction will be allowed.
For cash gifts of under $250, a canceled check or credit card receipt is generally sufficient substantiation. If, however, any goods or services were provided in exchange for a cash gift of $75 or more, the charity must provide a contemporaneous written acknowledgment that includes a description and good-faith estimate of the value of the goods or services.
For cash gifts of $250 or more, as well as noncash gifts of $500 up to $5,000, the rules generally also require a contemporaneous written acknowledgment from the charity, which must include these four elements: 1) the donor’s name, 2) the amount of cash or a description of the property contributed (separately itemized if one receipt is used to acknowledge two or more contributions), 3) a statement explaining whether the charity provided any goods or services in consideration, in whole or in part, for the gift, and 4) if goods or services were provided, a description and good-faith estimate of their value.
If the only benefit the donor received was an “intangible religious benefit,” this must be stated. Goods or services of “insubstantial value,” such as address labels or other small incentives in a fundraising campaign, don’t need to be taken into account.
The requirements for noncash donations valued over $500 include attaching a completed Form 8283 to the donor’s tax return and, if valued over $5,000, include obtaining a qualified appraisal of the donated property. Before you accept such donations, it may be wise to confirm with the donors that they are aware of the requirements and have obtained an appraisal, if necessary.
A donation at the end of the year might be your supporters’ holiday gift to your nonprofit. Make sure that you reciprocate by giving them credit and verifying that their donations are properly documented.
On December 18, the Senate passed the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), which the House had passed on December 17. Many popular tax breaks had expired December 31, 2014, so for them to be available for 2015, Congress had to pass legislation extending them. But the PATH Act does more than that.
Instead of extending breaks for just a year or two, which had been Congress’ modus operandi in recent years, the PATH Act makes many popular breaks permanent and extends others for several years. The PATH Act also enhances certain breaks and puts a moratorium on the Affordable Care Act’s controversial medical device excise tax.
It’s not all good news for taxpayers, however. For example, while the PATH Act does extend bonus depreciation through 2019, it gradually reduces its benefits. And it extends some breaks only through 2016.
Here is a quick rundown of some of the key breaks that have been extended or made permanent that may benefit you or your business.
Many of the PATH Act’s provisions provide an opportunity for taxpayers to enjoy significant tax savings on their 2015 income tax returns — but quick action (before January 1, 2016) may be needed to take advantage of some of them. If you have questions about what you need to do before year end to maximize your savings, please contact us.