What You Need to Know About the Alternative Minimum Tax

Posted on April 27, 2016 by Debra Barcuch

Alternative Minimum Tax

Congress originally devised the alternative minimum tax (AMT) rules to ensure that high-income individuals who take advantage of multiple tax breaks will owe something to Uncle Sam each year. In recent years, however, that concept has eroded. Now, even upper-middle-income taxpayers are likely to owe the AMT. Here’s an overview of how the AMT works and possible ways to minimize it.

Don’t Overlook the AMT Credit

If you owed the AMT last year, you may have earned an AMT credit that will reduce your regular federal income tax bill in the current tax year. Many taxpayers who pay the AMT fail (or forget) to claim their rightful AMT credits the following year.

There are two reasons you earn an AMT credit for a tax year:

1. If you owed the AMT from exercising in-the-money incentive stock options, or

2. If your AMT bill was caused by claiming accelerated depreciation write-offs.

The first situation is common, especially with employees of start-ups and high-tech firms. The second typically happens only if you own an interest in a business with significant investments in depreciable assets.

Ask your tax adviser if you earned an AMT credit. But, be advised that you can claim it only if your regular federal income tax liability exceeds your AMT liability for the tax year. That’s because you’re allowed to use the credit to reduce only regular federal income taxes (not the AMT). Put another way, you can’t claim the AMT credit on your current return if you owe the AMT again this year.

So, you still must calculate your AMT liability for the current year. The difference between your AMT liability and your regular federal income tax liability is the maximum amount of AMT credit you can claim on your current-year return. In other words, you can use the AMT credit to equalize your regular federal income tax and the AMT for the current year, but that’s it. After taking this limitation into account, any leftover AMT credit is carried forward to next year.

AMT Basics

Think of the AMT as an alternate set of tax rules that are similar to the regular federal income tax system. But there are key differences. For example, under the AMT rules, certain types of income that are tax-free under the regular federal income tax system are taxable. The AMT rules also disallow certain deductions and credits that are allowed under the regular federal income tax system. And the maximum AMT rate is only 28% compared to the 39.6% maximum rate that applies under the regular federal income tax system.

In addition, taxpayers are allowed a relatively large inflation-adjusted AMT exemption, which is deducted when you calculate AMT income. Unfortunately, the exemption is phased out when your AMT income surpasses certain levels.

If your AMT liability exceeds your regular federal income tax liability for the tax year, you must pay the higher AMT amount.

Why Upper-Middle-Income Taxpayers Get Hit

After repetitive tax law changes, the AMT often doesn’t apply to the wealthiest taxpayers in the highest tax bracket. That’s because many of their tax breaks are already cut back or eliminated under the regular federal income tax rules before getting to the AMT calculation.

For instance, the passive activity loss rules greatly restrict the tax benefits that can be reaped from “shelter” investments, including rental real estate and limited partnerships. And, if your income exceeds certain levels, phaseout rules are likely to reduce or eliminate various tax breaks, such as personal and dependent exemption deductions, itemized deductions, higher-education tax credits and deductions for college loan interest.

Moreover, individuals in the 35% or 39.6% tax brackets are less likely to be hit with the AMT, which has a maximum tax rate of 28%. Finally, the AMT exemption — which is deducted when you calculate AMT income — is phased out as income goes up. This phaseout has little or no impact on individuals with the highest incomes, but it increases the likelihood that upper-middle-income taxpayers will owe the AMT.

AMT Risk Indicators

Various inter-related factors make it hard to pinpoint who will be hit by the AMT. But taxpayers are generally more at risk if they have:

Substantial (but not necessarily huge) salary income (more than $250,000 per year).

Significant long-term capital gains and/or dividends.

Large deductions for state and local income and property taxes.

A spouse and several children (e.g., at least four) who provide personal and dependent exemption deductions for regular federal income tax purposes. (These deductions are disallowed under the AMT rules.)

Significant miscellaneous itemized deductions, such as investment expenses, fees for tax advice and unreimbursed employee business expenses.

Interest from private activity bonds. This income is tax-free for regular federal income tax purposes, but it’s taxable under the AMT rules.

Significant depreciation write-offs for personal property assets, such as machinery, equipment, computers, furniture, and fixtures from your own business or from investments in S corporations, LLCs or partnerships. These assets must be depreciated over longer periods under the AMT rules.

Another noteworthy factor that’s likely to trigger the AMT is exercising in-the-money incentive stock options (ISOs) during the tax year. The so-called “bargain element” — the difference between the market value of the shares on the exercise date and the exercise price — doesn’t count as income under regular federal income tax rules, but it counts as income under the AMT rules.

A significant spread between a stock’s current market value and an ISO’s exercise price can result in an unexpected AMT liability. Consult your tax professional before exercising your options. Depending on current and anticipated market conditions, it may be advantageous to exercise them over several years to minimize the adverse AMT effects.

Possible Ways to Minimize the AMT

Any strategy that reduces your adjusted gross income (AGI) might help to reduce or avoid the AMT. AGI includes all taxable income items and certain non-itemized deductions, such as moving expenses and alimony paid.

By lowering AGI, you may be able to claim a higher AMT exemption. Here are some considerations that may help reduce your AGI:

Contribute as much as you can to your tax-favored retirement plan, such as a 401(k) plan, profit-sharing plan or SEP.

Contribute to your cafeteria benefit plan at work. Contributions lower your taxable salary and AGI. Most cafeteria plans include healthcare and dependent care flexible spending account arrangements.

Harvest losses from investments held in taxable brokerage firm accounts. Then use the capital losses to offset any capital gains. Any leftover capital losses up to $3,000 are deductible against income from salary, interest, dividends, self-employment and other sources.

Defer the sale of appreciated investments held in taxable brokerage firm accounts until next year. Doing so will defer the resulting taxable gains.

Prepay deductible business expenses near year end if you run a business as a sole proprietorship, limited liability company, partnership or S corporation. The resulting business deductions will be “passed through” to you, thereby lowering AGI. Similarly, postpone the receipt of business income until next year to reduce your AGI in the current tax year.

Important note: Lowering AGI will also slash your state and local income taxes, which are disallowed for AMT purposes and, therefore, increase your AMT exposure. Likewise, if you’re likely to be hit with the AMT, the traditional tax year-end strategy of prepaying state and local income and property taxes that are due early next year won’t help you. Those taxes aren’t deductible under the AMT rules. So prepay them in a year when you have a chance of not being in the AMT mode.

Address the AMT Head-On

Taxpayers can’t automatically assume they’re exempt from the AMT. Most individuals in the higher tax brackets probably have some risk factors. The IRS has trained auditors to find unsuspecting folks who owe the AMT. If you’re not careful, you could owe back taxes, interest and potential penalties under the AMT rules.

Consult with your tax adviser about your specific situation. Cornwell Jackson’s tax team can identify whether you’re at risk and help find ways to reduce your exposure to the AMT that also factor in current market conditions and other personal investment goals.

The Latest Tax Developments for Partnerships

Posted on April 26, 2016July 23, 2024 by Debra Barcuch

Tax Developments for Partnerships

In recent months, there have been several significant tax developments for partnerships. They also apply to multi-member limited liability companies (LLCs) that are treated as partnerships for federal tax purposes. (For simplicity, we’ll use the terms “partnership” and “partner” to refer to all entities and owners that are affected by the developments.)

Here are quick summaries of what’s brewing on the partnership tax front.

Accelerated Due Dates

The long-standing due dates for filing partnership federal income tax returns (Form 1065) were changed by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015.

For partnership tax years beginning after December 31, 2015, partnerships must file Form 1065 one month earlier than before. That means they’re due two and one-half months after the close of the partnership’s tax year — or March 15 for calendar-year partnerships. As before, six-month extensions are allowed. The deadline is adjusted for weekends and holidays until the next business day.

Under prior law, a partnership’s Form 1065 was due three and one-half months after the close of the partnership’s tax year — or April 15, adjusted for weekends and holidays, for calendar-year partnerships.

Important note. This change affects the due date for 2016 Forms 1065 for partnerships that use the calendar year for tax purposes. Those returns will now be due on March 15, 2017.

Changes to Varying Interest Rules

In August 2015, the IRS issued new final regulations that modify and finalize the so-called “varying interest rules.” These rules were previously contained in proposed regulations issued in 2009.

The varying interest rules are used to determine partners’ percentage interests in partnership tax items — including income, gains, losses, deductions and credits — when the partners’ interests change during the year. For example, interests can change due to the entrance of new partners or the exit of existing ones.

The new final regs require that 100% of all partnership tax items be allocated among the partners. In addition, no items can be duplicated, regardless of the allocation method adopted by the partnership.

The new final regs allow partnerships to use either of these two methods to determine distributive shares of partnership tax items when partners’ interests vary during the year:

Interim-closing-of-the-books method. Here, a snapshot of the partnership’s income statement from the beginning of the tax year through the date of the ownership change is used to allocate tax items up to that point of the partnership’s tax year.

Annual proration method. Alternately, partnership tax items for the year can be prorated based on the number of days that an entering or exiting partner is a member of the partnership.

Different methods can be used for different variations that occur within the same tax year. The new final regs are effective for partnership tax years that begin on or after August 3, 2015. For calendar-year partnerships, these changes will be effective for the 2016 tax year.

Partnership Audits

The Bipartisan Budget Act of 2015, which was passed in November 2015, changes how the IRS will audit partnerships. However, the new partnership audit rules generally won’t take effect until partnership tax years beginning in 2018. Until then, the current partnership audit rules will remain in effect unless the partnership voluntarily chooses to follow the new rules sooner.

Family Partnerships

The Bipartisan Budget Act also includes some important new tax provisions for family partnerships. For tax purposes, a family partnership is one that’s composed of members of the same family.

For many years, some taxpayers and tax professionals had argued that the existing family partnership rules provided an alternative test for determining who’s a partner in a partnership, without regard to how the terms “partner” or “partnership” are defined under the general partnership tax rules found in the Internal Revenue Code.

As a result, many partnerships have taken the position that if a person holds a capital interest in a partnership that was acquired as a gift, the partnership’s existence must be respected for tax purposes. They took this position regardless of whether the parties had demonstrated that they actually joined together to conduct a business or investment venture.

The new law attempts to eliminate this argument by making several statutory amendments. First, it clarifies that Congress did not intend for the family partnership rules to provide an alternative test for determining whether a person is a partner in a partnership.

Instead, the new law clarifies that the general partnership tax rules regarding who should be recognized as a partner for tax purposes apply equally to interests in partnership capital that are created by gift. Put another way, the determination of whether the owner of a capital interest that was acquired as a gift is a bona fide partner for tax purposes would be made under the generally applicable partnership tax rules.

Additionally, the new law removes statutory language that implied that the owner of an interest in partnership capital could always be treated as a partner if capital was a material income-producing factor for the partnership.

These amendments take effect starting with tax years beginning after December 31, 2015. So, for calendar-year family partnerships, 2016 federal tax returns could be affected.

Disguised Partnership Payments for Services

In July 2015, the IRS issued new proposed regulations that would treat certain arrangements that result in payments to partners as disguised payments for services, rather than as an allocation of partnership profits and a related distribution of cash.

The proposed regulations are mainly aimed at changing the tax treatment of so-called “fee waiver arrangements,” under which partnership service providers give up their right to receive current fees in exchange for an interest in future partnership profits. Such arrangements are common in the private-equity and hedge-fund industries.

Private-equity firms and hedge funds are often classified as partnerships for tax purposes. And they typically charge investors a 2% fee on managed assets. In many cases, such arrangements are accompanied by a fee waiver arrangement in which the private-equity or hedge-fund manager exchanges all or a portion of its not-yet-earned management fee for an interest in the fund’s future profits.

The tax planning objective of such arrangements is to allow the manager to trade current fee income — which would be treated as high-taxed ordinary income and be subject to federal employment taxes — for an interest in future capital gains collected by the fund. These future capital gains would be taxed at lower rates.

The proposed regulations would use a facts-and-circumstances approach to determine if such an arrangement should be treated as a disguised payment for services, rather than as a distribution of partnership profits. The proposed regulations list six non-exclusive factors that may indicate that an arrangement constitutes in whole or in part a disguised payment for services. These proposed rule changes would become effective when and if they’re issued in the form of final regulations.

Navigating the Rules

The tax rules for partnerships and multi-member LLCs are complicated. And they change frequently due to new tax legislation and new or updated IRS guidance. This article summarizes some key partnership taxation developments that have occurred in recent months.

Consult your tax adviser if you have questions or want additional information.

Gary Jackson, CPA, is the lead tax partner in the Cornwell Jackson’s compliance practice. 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 consulting services to management teams and business leaders across North Texas. Contact Gary today to learn more about IRS Audits for partnerships, and to see if your business is at risk.

Key Measurements to Turn up the Heat on Restaurant Efficiency

Posted on April 25, 2016July 23, 2024 by Debra Barcuch

Improving restaurant efficiency can become an ongoing part of your point of sale and accounting systems, allowing you to make continuous improvements. This can help owners and managers exceed industry benchmarks, free up focus for customers and growth, and create an easier path to sell when it’s time.

What are the best ways to improve restaurant efficiency and create peace of mind to free up attention for restaurant growth and customer service? Restaurant owners and managers want to be as effective as they can, but often don’t know where to start to have the greatest impact.

Some of the elements of restaurant efficiency that help owners and managers to continuously identify improvements include:

Tracking key measures
Policies and procedures that create consistency
The point of sale (POS) system and other restaurant inventory software
The accounting system

Owners and managers can supercharge this journey to restaurant efficiency by working with professionals who know the industry benchmarks and the tactics that will help restaurants reach or exceed them. We’ll mention some key measures and benchmarks, but working with a restaurant accountant will also help you stay on top of industry trends and tools.

Key measures to track

Tracking and measurement are essential because they help uncover areas of weakness where a small change can create a great improvement.

Key measures of restaurant efficiency that should be tracked include:

Food cost/inventory turnover
Beverage cost (both alcoholic and non-alcoholic)
Payroll and employee benefits
Paper cost
Management salaries
Rent and occupancy

Food cost percentage is found by taking each dollar you make in sales and determining how much was spent on food, beverage and paper. Restaurants also need to account for any rebates received from vendors. Food cost will usually be a little lower in full service restaurants.

Payroll percentage is also calculated from sales dollars. This will be higher for full service restaurants.

The combined total of food cost and payroll percentage should be at or below 60 percent. The other 40 percent is not all profits. There is also rent, occupancy, taxes and other costs.

Controlling food costs

The National Restaurant Association reports that controlling food costs is a top concern of most restaurant operators; 67% of quick-service restaurants and 77% of fine dining restaurants named it as a moderate to significant challenge.

Improving food efficiency through better inventory turnover and lower food costs is one of the most important areas to track and manage when pursuing restaurant efficiency. This helps in ordering the correct amount of food to avoid spoilage, but food should also be used efficiently in the cooking process. This means having standards in place. Cooks shouldn’t use different amounts of ground beef in the burgers, for example.

Owners and managers can track food much like a manufacturer tracks product. What is the theoretical cost of goods sold and how many were sold of each recipe? How much is each dish costing compared to the standard for that recipe? For each meal consumed, what was the variance from the standard recipe?

If a restaurant serves a meal of steak and fries and had the food to make 100 meals, but only made 80 meals, you can track backwards through the process to find where the missing food went:

Is someone making non-standard meals?
Are meals being comped and not recorded?
Are meals being made wrong and have to be made over?

Some restaurant owners will have a costing system that integrates with their suppliers. Those without such a system can start with a simple spreadsheet and track item cost by month. Owners with multiple restaurants or a single large location should talk to their vendors and find out if there is a preferred tracking system to use.

Tracking food costs and meals can also highlight profitability by food segment, which allows each restaurant to promote and create more of the dishes that keep it profitable. And isn’t that one great reason to be in business?

From choosing the right restaurant software to finding areas where owners and managers can improve the bottom line, an experienced restaurant accountant has the inside knowledge you need.

Restaurant accountants know the techniques that help restaurants be more efficient. We know the benchmarks discussed here and we’ve helped other restaurants reach them. If you have a serious interest in making your restaurant more efficient, talk to the accounting team at Cornwell Jackson. You’ll be surprised what a difference it can make in your efficiency, bottom line and peace of mind.

Scott Bates, CPA, is a partner in Cornwell Jackson’s audit practice and leads the Cornwell Jackson business services practice, including outsourced accounting, bookkeeping, and payroll services. He is an expert for clients in restaurants, healthcare, real estate, auto and transportation, technology, service, construction, retail, and manufacturing and distribution industries.

Changing the Mindset for Buy Here Pay Here Dealerships’ Customer Service

Posted on April 22, 2016 by Debra Barcuch

There are two schools of thought when creating cash flow for a buy here pay here auto dealership. One involves selling cars as quickly as possible and repossessing them just as quickly. The other more viable option is to focus on customer service. By keeping customers in a vehicle longer, the dealer can also secure steady cash flow and support repeat customers as well as referrals. Dealers, collections staff and service technicians are all involved in the customer experience. This article reviews the benefits of a customer-centric approach to cash flow and financial management and the tools that help dealers achieve more profitable payment streams.

Customers at buy here pay here lots may be down on their luck or simply looking for a short-term solution to their transportation needs. Regardless, the industry norm of high default rates has inspired some dealers to manage cash flow through repossession. They sell cars quickly and repossess them just as quickly — only to resell them again. A customer who fails to pay is an opportunity rather than a liability.

And yet, dealers interested in stronger financial management are choosing an alternative. It’s called customer service. Before we go down the road of discussing transient, hard-to-reach clientele, abandoned cars and months of missed payments, let me say that customer service in the buy here pay here world means something different than your average retail scenario. The ultimate goal is to secure a longer stream of monthly payments per customer — knowing that very few loans will get paid in full.

Change Your Service Mindset for Buy Here Pay Here Dealerships Customer Service

If a dealership is operating on the repossession model, it will take time to develop a focus on customer service. First of all, the sales process must shift from a focus on getting the car sold to a focus on learning about the customer. Each customer will have unique expectations, needs and approaches to problem solving and communication. This information will be important if the dealer’s mindset is now to keep the customer in a car and to collect payments.

For example, a dealer may explain up front that the customer has a full or limited warranty on any mechanical repairs for a set period of time. This option is designed to keep in contact with the customer and make small repairs to avoid bigger ones. Frequently, a broken down car equals stopped payments. Instead, the dealer offers to make repairs, eliminate this common excuse for non-payment and stay in contact with more customers.

Other examples of establishing regular communication and service include offering regular spot checks on the vehicle, letting customers upgrade to a nicer model and keep payments the same. Dealers may also offer to pick up a vehicle free of charge if it breaks down. While it seems that all the work and expense is on the dealer’s side, the benefit of extra service is to sustain thousands in payments each month while reducing the need to sell as many cars per month.

At the same time, the customer may feel more loyal for the help provided…and refer friends and family.

Get Your Team on Board for Customer Service Changes

For this customer-centric approach to work, the dealer must get buy-in from the entire team. This includes reception and collections staff and service teams. If, for example, the collections staff is now focused on keeping a customer in a vehicle rather than repossessing it, their communications style has to change. They also must communicate with customers as soon as a payment is missed rather than waiting 60 to 90 days to meet legal requirements for repossession.

Collections staff must be trained to ask more questions when calling about missed payments and to show sympathy by offering some solutions. They can ask the customer to come in and make a payment. They can offer a discount if the payment is made within the week. If the car is broken down, they can discuss repair options. Sometimes it is helpful to review the payment history and the customer’s income arrangements to discuss paying ahead when cash flow is healthy and then having a couple weeks or months of no payments when cash flow is thin.

Service technicians must provide a cordial environment to support the customer relationship. Their goal has changed from getting a job done to keeping a customer happy.

Follow a Consistent Strategy

A dealership cannot focus on repossession and also provide good customer service. A consistent, customer-centric approach looks more like this:

Review all existing customers on a weekly basis and identify which customers are currently behind on payments.
Contact customers and invite them to the dealership to talk about getting current on payments.
Offer a list of options that can support up-to-date payments.
Once customers visit the dealership, provide a welcoming experience that demonstrates your interest in keeping the relationship.
Outline a plan to continue the payment stream:
- Get the vehicle in and inspect it or make repairs
- Provide a discount
- Add missed payments or big repairs on the end of the existing loan
- Get customers into another vehicle through refinancing
- Adjust the payment schedule to support changes in circumstances
Follow up and stay in contact through in-person visits as much as possible.
Monitor payment habits and communicate as soon as there is a change.

Once the customer-centric approach is in place and working consistently, dealers can start to calculate how many customers making regular monthly payments are needed to support a consistent budget and profit margin. This can help dealers plan ahead by creating a fund to cover customer vehicle repairs, upgrade the service area or advertise. This consistent approach can also reduce the required quota on new sales per month, and therefore investment in new inventory.

If you think this approach could work better for your dealership in the long run, talk to the auto dealership team at Cornwell Jackson. To learn more, download the full article here.

Mike Rizkal, CPA is the audit and assurance partner in Cornwell Jackson’s assurance practice and auto dealership segment. Mike utilizes his real world practical experience to provide consulting and accounting services to buy here pay here owners and managers across North Texas.

A Guide to Selecting and Hiring an Employee Benefit Plan Auditor

Posted on April 20, 2016July 23, 2024 by Debra Barcuch

Generally, Federal law requires employee benefit plans with 100 or more participants to have an audit as part of their obligation to file an annual return/report (Form 5500 Series). If your employee benefit plan is required to have an audit, one of the most important duties of the plan administrator is to hire an independent qualified public accountant as the benefit plan auditor.

The sponsor of the plan is the plan administrator under the law unless another individual or entity is specifically designated to assume this responsibility. With the increased scrutiny going on currently towards benefit plan auditors, it is paramount for the plan administrator to choose a quality firm to conduct the benefit plan audit to avoid penalties from the Department of Labor (DOL) and Internal Revenue Services (IRS).

For a complete guide to selecting an auditor and the importance of hiring a quality benefit plan auditor, checkout these two whitepapers.

Guide to Selecting an Auditor

A quality audit will help protect the assets and the financial integrity of your employee benefit plan and ensure that the necessary funds will be available to pay retirement, health, and other promised benefits to your employees. A quality audit also will help you carry out your legal responsibility to file a complete and accurate annual return/report for your plan each year. Because an incomplete, inadequate, or untimely audit report may result in penalties being assessed against you as the plan’s administrator, selection of an experienced and reliable auditor is very important.

The Importance of Hiring a Quality Auditor to Perform Your Employee Benefit Plan Audit

The AICPA Employee Benefit Plan Audit Quality Center (EBPAQC) has prepared this advisory to provide you, the plan sponsor, administrator, or trustee with an understanding of the importance of hiring a quality auditor to perform your employee benefit plan financial statement audit, and information to help you select a quality auditor.

Selecting a Benefit Plan Auditor

Why is the choice of an auditor important?

Is a benefit plan auditor required to be licensed or certified?

Federal law requires that an auditor engaged for an employee benefit plan audit be licensed or certified as a public accountant by a State regulatory authority.

Is a plan auditor required to be independent?

Auditors of employee benefit plans should not have any financial interests in the plan or the plan sponsor that would affect their ability to render an objective, unbiased opinion about the financial condition of the plan.

Should a benefit plan auditor have experience in auditing employee benefit plans?

One of the most common reasons for deficient accountants’ reports is the failure of the auditor to perform tests in areas unique to employee benefit plan audits. The more training and experience that an auditor has with employee benefit plan audits, the more familiar the auditor will be with benefit plan practices and operations, as well as the special auditing standards and rules that apply to such plans. In some instances, a less experienced auditor may be assigned to perform routine audit procedures in order to reduce audit costs. When this happens, you should confirm that an experienced employee benefit plan auditor will review his/her work, as well as perform the more complicated audit procedures. The AICPA’s Employee Benefit Plans Audit Quality Center maintains a directory of employee benefit plan auditors who have agreed to meet specific experience, training and practice monitoring requirements. See Resources section.

Should I request references and check licenses?

When engaging an auditor, you may wish to obtain references and discuss the auditor’s work for other employee benefit plan clients. If you have additional questions, you may also wish to verify with the appropriate State regulatory authority that the provider holds a valid, up-to-date license or certificate to perform auditing services.

The Audit Process

What is an engagement letter?

In preparation for the audit, the auditor will prepare a contract, referred to as an “engagement letter,” describing the audit work to be performed, the timing of the audit, and fees. This letter also should describe the responsibilities of the auditor and the plan administrator. You should review this letter carefully and resolve any questions with the auditor prior to engagement.

Can I limit what the benefit plan auditor reviews?

Federal law permits the administrator of an employee benefit plan to limit an audit when plan assets are held by banks or insurance companies and written certifications are provided by the institutions holding those assets. You should consult with your accountant, attorney, or plan advisor to determine whether limiting the scope of an audit is appropriate for your plan.

Will I have to furnish or prepare documents for the auditor?

It is generally the responsibility of the administrator to maintain plan financial and other records. Many of these records will need to be made available to the auditor for review in the course of the plan audit. If a third-party service provider maintains plan records, you will need to arrange for auditor access to these records.

The Benefit Plan Audit Report

What happens when the audit is complete?

At the conclusion of the audit, the auditor will issue a report and state an opinion on the plan’s financial statements as well as any schedules required to be included as a part of the plan’s annual report filing. Auditors will also report on significant problems, if any were found. The auditor may also suggest ways for you to improve internal controls and plan operations. This is a good time for you to ask questions about the auditor’s work.

What questions should I ask the benefit plan auditor about his/her work?

Frequently audits are found to be deficient because of the failure of the auditor to conduct tests in areas unique to employee benefit plans. Accordingly, you should make sure that your auditor considered the following areas:

Whether plan assets covered by the audit have been fairly valued
Whether plan obligations are properly stated and described
Whether contributions to the plan were timely received
Whether benefit payments were made in accordance with plan terms
If applicable, whether participant accounts are fairly stated
Whether issues were identified that may impact the plan’s tax status
Whether any transactions prohibited under ERISA were properly identified.

To learn more about the benefit plan audit process, download The AICPA Guide to Hiring a Quality Auditor and the IRS Guide to Selecting an Auditor.

For more specific information about how the requirement of an benefit plan audit will affect your company, contact our in-house expert, Mike Rizkal, CPA.

Guide to Employee Benefit Plans Financial Statement Audits

Posted on April 13, 2016July 23, 2024 by Debra Barcuch

The primary objective of a benefit plan’s financial statements is to provide information that is useful in assessing the plan’s present and future ability to pay benefits.

Benefit Plan Audit Guide

Financial reporting for employee benefit plans financial statement audits may involve many parties, including the plan sponsor’s financial accounting and human resources departments, a third-party administrator, investment trustees and custodians, an actuary, ERISA legal counsel and the independent auditor. Plan management may hire service organizations to perform record keeping and reporting functions, but the ultimate responsibility for accurate financial reporting rests with plan management.

One of the most important duties of plan management is to hire the independent auditor. In some cases the plan sponsor may have an audit committee, employee benefits committee or administrative committee that oversees the financial reporting process, including internal control over financial reporting and the appointment, compensation and oversight of the independent auditor. The plan financial reporting and audit environment is unique in many respects, including the nature of plan operations; the various laws and DOL and Internal Revenue Service (IRS) regulations with which plans must comply; and special reporting and audit requirements. These matters, which affect every plan, add to the complexity of an employee benefit plan audit. Other matters that may complicate the plan reporting and audit process may include changes to the plan document; plan mergers, freezes or terminations; and changes in service organizations.

Purpose and Objectives of the Independent Audit

The Employee Retirement Security Act of 1974 (ERISA) generally requires employee benefit plans with 100 or more participants to have an independent financial statement audit as part of the plan sponsor’s obligation to file a Form 5500.

Financial statement audits provide an independent, third-party opinion to participants, plan management, the DOL and other interested parties that the plan’s financial statements provide reliable information to assess the plan’s present and future ability to pay benefits. A financial statement audit helps protect the financial integrity of the employee benefit plan, which helps users determine whether the necessary funds will be available to pay retirement, health and other promised benefits to participants. The audit may also help plan management improve and streamline plan operations by evaluating the strength of the plan’s internal control over financial reporting and identifying control weaknesses or plan operational errors. And the audit helps the plan sponsor carry out its legal responsibility to file a complete and accurate Form 5500 for the plan with the DOL.

The overall objectives of the plan auditor under professional standards are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error and to report on the financial statements in accordance with his or her findings. In addition, the DOL requires the independent auditor to offer an opinion on whether the DOL-required supplemental schedules attached to the Form 5500 are presented fairly in all material respects, in relation to the financial statements as a whole.

To accomplish these objectives, the auditor plans and performs the audit to obtain reasonable assurance (see a discussion of reasonable assurance below) that material misstatements, whether caused by error or fraud, are detected. The auditor assesses the reliability, fairness and appropriateness of the plan’s financial information as reported by plan management. The auditor tests evidence supporting the amounts and disclosures in the plan’s financial statements and DOL-required supplemental schedules; assesses the accounting principles used and significant accounting estimates made by management; and evaluates the overall financial statement presentation to form an opinion on whether the financial statements as a whole are free of material misstatement.

General Benefit Plan Audit Considerations

The following are some general audit considerations for all employee benefit plan financial statement audits.

Generally Accepted Auditing Standards
Adequate Technical Training and Proficiency
Professional Skepticism
Auditor Independence
Reasonable Assurance and Materiality
Professional Judgment
Auditor Communications

Full Scope vs. Limited Scope Benefit Plan Audits

Typically, financial statement auditors are engaged to audit and report on the reporting entity’s financial statements, including all assets; liabilities and obligations; and financial activities. These audits are performed without any client-imposed scope limitation or other restriction. ERISA is unique in that, when certain criteria are met, it permits plan management to instruct the auditor to limit the scope of testing of investment information included in the financial statements. This limited scope election must be supported by a certification from a qualified entity as to both the accuracy and completeness of the plan’s investment information. Such audits are referred to as “limited scope” audits. Plan management is responsible for determining that the conditions of the limited scope audit exemption have been met.

Full Scope vs. Limited Scope Image

Benefit Plan Audit Areas

The financial statement audit for employee benefit plans typically cover employee and employer contributions; benefit payments; plan investments and investment income (full scope audits); participant data; participant allocations; liabilities and plan obligations; loans to participants; and administrative expenses. In addition, the auditor considers other matters that may affect the financial statements, as shown below.

Benefit Plan Audit Areas

To learn more about benefit plan audits, and to find out if one is required for your company’s 401(k) plan, download the whitepaper here: Guide to Employee Benefit Plans – Financial Statement Audits Whitepaper The Whitepaper includes:

Plan Financial Reporting and Audit Process and Management’s Responsibilities
Purpose, Objectives, and Benefits of an Independent Audit
General Audit Considerations
Full Scope vs. Limited Scope
Audit Areas
The Audit Process
Auditor’s Report
Your Role in the Audit Process
Additional Resources

EBPAQC-Plan-Advisory-on-EBP-Financial-Statement-Audit Cover

For more specific information about how the requirement of an benefit plan audit will affect your company, contact our in-house expert, Mike Rizkal, CPA.

Despite Strides, More Effort Is Needed to Attract Women to Manufacturing

Posted on April 11, 2016 by Debra Barcuch

Women are sorely lacking in the manufacturing industry, according to a recent survey. They make up 47% of the U.S. workforce, but just 27% of workers are women in manufacturing jobs.

An annual survey commissioned by the Manufacturing Institute and others takes a look of this disparity and highlights some interesting points. The Institute, which works to develop manufacturing talent, conducted a survey of 600 women across a broad spectrum of the industry to try to understand why this gap exists.

Persuasive Argument for Attracting and Retaining Women in Manufacturing

The argument for attracting and retaining more women in manufacturing is compelling: They represent a vast untapped pool of workers that can help to fill a talent gap. Manufacturing is facing a shortfall of an estimated 2 million workers over the next decade, and a recent skills analysis referenced by the study shows that six out of 10 positions in the sector are currently unfilled due to a skills gap. It’s clear there is a place for more women in the sector.

And women are underrepresented in virtually every sector within the industry, from industrial and consumer products to technology, media, telecommunications and chemicals. In addition, the portion of women in leadership roles lags most other industries.

The respondents to the survey exhibited certain traits that are generally viewed as favorable when seeking new hires. Among them, the women:

Were experienced, with nearly 90% having more than 10 years experience and 47% with more than 25 years.
Held supervisory positions (65%), including director (15%) and C-suite executive (12%).
Were well educated; about 75% had bachelor’s or master’s degrees, and about 66% studied general business, engineering or operations.
Were ambitious, with the majority aspiring to be senior managers or reach the C-suite (of those, 82% said they see a career path to get there).

Motivational Tools

Seven out of every ten women participating in the survey said they’d stay in manufacturing if they were to start their careers today. Only three out of ten said they’d take a different career path. For those who might leave, the main reasons were poor working relationships, lack of opportunities and low compensation.

When asked to list the benefits that are most likely to attract and retain female workers, the respondents listed the following three items as key:

Flexible work practices,
Formal and informal mentorship and sponsorship programs, and
Identifying and increasing visibility of key leaders who serve as role models for employees.
Respondents were also asked which industries are superior to manufacturing in attracting and retaining women. Here are their answers:

Retail (38%),
Consumer products (22%),
Life sciences and medical devices (20%),
Technology, media and telecommunications (14%), and
Others (6%).

Interestingly, 42% of the respondents represented women in the industrial products, process and transportation sectors, and none of those wound up in the list.

Furthermore, about 66% of the respondents indicated that their companies don’t have active recruitment programs to attract women and only about 33% said they believe that their company is good at recruiting, attracting and developing female workers. Notably, 71% believed that there is a pay gap between women and men. All those sharing this belief said men are paid more.

Six Steps for the Future

Only 12% of the respondents believed that the K-12 educational system actively encourages female students to pursue careers in manufacturing and 53% said that it doesn’t. A similar recent study from the Manufacturing Institute echoes the results with only 40% of the respondents stating that today’s students are qualified for a job in modern manufacturing.

Yet the studies also show that industry familiarity would foster a positive perception. The best path forward, according to the respondents, is based on these six steps:

Start at the top. Any change in corporate culture must start in the C-suite. For diversity to have real meaning, executives must demonstrate their belief in programs and lead by example.
Eradicate gender bias. When promotions arise, women should be placed on an equal footing with men and should be compensated in kind.
Create a more flexible work environment. By accommodating a better balance between work and family, manufacturers improve the likelihood of attracting and retaining women.
Facilitate sponsorship. A sponsor helps a worker develop and progress professionally. In addition, sponsors extend beyond mentoring and coaching to being a vocal advocate, enhancing a worker’s presence in the organization.
Begin recruitment early. The survey cites a current lack of confidence in the education system. Manufacturers should begin recruitment in secondary school to encourage manufacturing careers.
Promote personal development. Offering women challenges and opportunities to succeed is part of what will make manufacturing an attractive option.

Perceptions May Change

Granted, women in manufacturing have made great strides. But there still is a long way to go. As the industry continues to evolve, perceptions may be changed from both the male and female perspectives.

Is the IRS Targeting Partnerships? Partnership IRS Audits up 18.6% in 2015.

Posted on April 7, 2016 by Debra Barcuch

Partnership IRS audits were up 18.6% in 2015 over the previous tax year, according to the agency’s Fiscal Year 2015 Enforcement and Service Results.

That’s the highest audit rate partnerships have experienced since 2006. By comparison, audits of large C corporations decreased by 8.8% in 2015.

The situation is expected to only get worse under the new rules for partnership IRS audits that were enacted last November under the Bipartisan Budget Act of 2015. The new rules also apply to multi-member limited liability companies (LLCs) that are treated as partnerships for federal tax purposes. (For simplicity, we’ll use the terms “partnership” and “partner” to refer to all entities and owners affected by the new partnership audit rules.)

Here’s what owners of these pass-through entities need to know, starting with the current partnership audit rules — which will remain relevant for a while longer.

Delayed Effective Date

The new partnership audit rules will generally apply to partnership tax years beginning after December 31, 2017. Affected partnerships may elect to apply the new rules to returns for partnership tax years beginning after November 2, 2015, and before January 1, 2018. But typically partnerships will be better off forgoing this election, since the new rules could make it easier for the IRS to audit them.

Current Rules for Partnership IRS Audits

Before delving into the new partnership audit rules, it’s important to review the current rules, which will continue to apply until the revised rules go into effect starting with tax years that begin in 2018. The IRS follows three regimes for auditing partnerships under the Tax Equity and Fiscal Responsibility Act (the law that was revised by the Bipartisan Budget Act).

Unified Audit Rules. These rules generally apply to partnerships with more than 10 partners. Under this audit regime, the tax treatment of partnership items of income, gain, loss, deduction and credit, as well as any additions to tax or penalties from IRS-imposed adjustments to partnership items, is generally determined at the partnership level. In other words, the IRS can conduct a single partnership-level audit to resolve all issues for partnership tax items. However, once the partnership-level audit is complete and the resulting adjustments are determined, the IRS must recalculate the tax liability of each partner for the affected tax year.
Small Partnership Audit Rules. Unless the partnership elects to have them apply, the unified audit rules do not apply to a partnership with 10 or fewer partners, each of whom is an individual (other than a nonresident alien), a C corporation or the estate of a deceased partner. For these small partnerships, the IRS generally conducts separate audits of the partnership and each partner.
Electing Large Partnership Audit Rules. These rules provide simplified audit procedures for partnerships with 100 or more partners that choose to be treated as large partnerships for federal income tax reporting and audit purposes. For such electing large partnerships, disputes over the treatment of partnership tax items are resolved at the partnership level. Then any IRS-imposed partnership-level adjustments generally flow through to the partners for the partnership tax year in which the adjustments take effect (the adjustment year), as opposed to the year that was under audit.

New Partnership Audit Rules

The Bipartisan Budget Act of 2015 repeals the current unified partnership audit rules and the current electing large partnership audit rules. They’re replaced by a single streamlined set of rules that call for auditing partnerships and their partners at the partnership level. Small partnerships can elect out of the new rules. (See below.)

Under the new streamlined guidance, any IRS-imposed adjustments to partnership items of income, gain, loss, deduction or credit for the applicable partnership tax year (and partners’ shares of such adjustments) are determined at the partnership level. Subject to the exceptions outlined below, any resulting additions to tax and any related penalties are generally determined, assessed and collected at the partnership level.

Under the new rules, the IRS will audit partnership items and partners’ distributive shares for the applicable partnership tax year (called the “reviewed year”). Any adjustments are taken into account by the partnership (not the individual partners) in the adjustment year.

Partnerships generally must pay tax equal to the imputed underpayment amount, which generally equals the net of all IRS-imposed tax adjustments for the reviewed year multiplied by the highest individual or corporate tax rate in effect for that year.

Partnership Adjustment Options

Under the new audit rules, partnerships will have the option of demonstrating that an adjustment would be lower (more favorable to partners) if it were based on actual partner-level information for the reviewed year, rather than imputed amounts based solely on partnership information for the reviewed year.

Such partner-level information could include amended returns filed by partners, tax rates applicable to specific types of partners (for example, individuals vs. C corporations and tax-exempt entities) and the type of income subject to the adjustment (for example, ordinary income vs. capital gains and qualified dividends).

As an alternative to taking an adjustment into account at the partnership level, the partnership can elect to issue adjusted Schedules K-1 for the reviewed year to its partners. In that case, the partners would take the adjustment into account on their individual returns in the adjustment year through a simplified amended return process. Schedule K-1 is the information return that must be provided to each partner. It shows the recipient partner’s share of all partnership tax items and includes other information needed to prepare that partner’s separate federal income tax return.

Finally, the partnership also has the option of initiating an adjustment for the reviewed year, such as when it believes an additional tax payment is due or a tax overpayment was made. The partnership would generally be allowed to take the adjustment into account either at the partnership level or by issuing adjusted Schedules K-1 to the partners.

As a result of the new rules, partners generally must treat each partnership item of income, gain, loss, deduction or credit in a manner that is consistent with the treatment of the item on the partnership return.

Exception for Small Partnerships

Similar to the provision in the current audit rules that exempts most small partnerships (with 10 or fewer partners) from the unified audit rules, the new rules allow eligible partnerships with 100 or fewer partners to elect out of the revised rules for any tax year. To be eligible for this election, all partners generally must be individuals, C corporations, foreign entities that would be treated as C corporations if they were domestic entities, S corporations or estates of deceased partners.

If the IRS audits a partnership that has elected out of the new rules, the partnership and its partners will be audited separately under the audit rules applicable to individual taxpayers.

Managing Audit Risks

Although the new partnership audit rules are complex, they’re expected to make it easier for the IRS to audit large partnerships. When they go into effect, businesses that are set up as partnerships and multimember LLCs could be at a greater risk of being audited.

The IRS is expected to issue additional guidance on the rules, and it’s currently asking for comments to assist in the development of this guidance. Feedback is due to the IRS by April 15, 2016, and additional guidance is expected to come out during the summer.

Guide to Financial Statement Assurance Services

Posted on April 6, 2016July 23, 2024 by Debra Barcuch

Compilation, Review, and Audit Assurance Services

You’ve worked hard to get your business off the ground. Business is good— so good that you’re ready to trade up from your leased space and build your own building. You’ve met with the bank and they’ve given you preliminary approval on a loan package. But the bank representative says she needs to see your financial statements before she can finalize your loan.

You know that timely, accurate and understandable financial statements are necessary to gauge how well your business has performed and to assess the strength of its financial position. You know that they are the foundation upon which you make important business decisions.

You can prepare your financial statements in house, but if you’re like many small business owners, you may prefer to have an outside professional to prepare your financial statements in accordance with an accounting framework that is appropriate for your business.

Oftentimes, the certified public accountant (CPA) who performs your general accounting and/or bookkeeping and prepares your annual tax return can also prepare your financial statements and, in addition, perform the appropriate service in order to meet your bank’s requirements. Keep in mind that not all accountants are CPAs. In most states, only a licensed CPA can perform certain services.

What are the differences between a compilation, review, and audit?

Compilation of financial statements is a service where the role of the CPA is more apparent to outside parties, and as such, the requirements for performing this service are more explicit.

For example, if the CPA is not independent from ownership, management and other circumstances in their relationship to you and your business, she is required to disclose the impairment to her independence in her compilation report. The compilation report is the first page before the actual financial statements and is written by the CPA on her firm’s letterhead.

The review service performs analytical procedures, inquiries and other procedures to obtain “limited assurance” on the financial statements and is intended to provide a user with a level of comfort on their accuracy.

The review is the base level of CPA assurance services. Similar to a compilation, the CPA is required to determine whether he is truly independent. If he determines that he is not independent, the CPA cannot perform the review engagement.

In a review engagement, your CPA is required to understand the industry in which you operate — including the accounting principles and practices generally used in the industry. Your CPA is also required to obtain knowledge about you — including your business and the accounting principles and practices that you use — sufficient to identify areas in the financial statements where it is more likely that material misstatements may arise.

The audit is the highest level of assurance service that a CPA performs and is intended to provide a user comfort on the accuracy of the financial statements.

The CPA performs procedures in order to obtain “reasonable assurance” (defined as a high but not absolute level of assurance) about whether the financial statements are free from material misstatement. In an audit, your CPA is required to obtain an understanding of your business’s internal control and assess fraud risk. Your CPA is also required to corroborate the amounts and disclosures included in your financial statements by obtaining audit evidence through inquiry, physical inspection, observation, third-party confirmations, examination, analytical procedures and other procedures. When performing an audit engagement, the CPA is required to determine whether her independence has been impaired. Similar to a review, if her independence has been impaired, the CPA cannot perform the audit engagement.

To learn more about the differences in assurance services, download our whitepaper Guide to Financial Statement Services – Compilation, Review and Audit. The Whitepaper includes:

Financial Statement Services Your CPA Can Provide
Basic Financial Statement Preparation
What is a Compilation?
What is a Review?
What is an Audit?
Service Comparison of Assurance Services

For more specific information about how the requirement of an audit or review will affect your company, contact our in-house expert, Mike Rizkal, CPA.

Unlock the Potential of Your Business

Let’s Connect

Don’t Overlook the AMT Credit

AMT Basics

Why Upper-Middle-Income Taxpayers Get Hit

AMT Risk Indicators

Possible Ways to Minimize the AMT

Address the AMT Head-On

Accelerated Due Dates

Changes to Varying Interest Rules

Partnership Audits

Family Partnerships

Disguised Partnership Payments for Services

Navigating the Rules

Key measures to track

Controlling food costs

Change Your Service Mindset for Buy Here Pay Here Dealerships Customer Service

Get Your Team on Board for Customer Service Changes

Follow a Consistent Strategy

Selecting a Benefit Plan Auditor

Why is the choice of an auditor important?

Is a benefit plan auditor required to be licensed or certified?

Is a plan auditor required to be independent?

Should a benefit plan auditor have experience in auditing employee benefit plans?

Should I request references and check licenses?

The Audit Process

What is an engagement letter?

Can I limit what the benefit plan auditor reviews?

Will I have to furnish or prepare documents for the auditor?

The Benefit Plan Audit Report

What happens when the audit is complete?

What questions should I ask the benefit plan auditor about his/her work?

The primary objective of a benefit plan’s financial statements is to provide information that is useful in assessing the plan’s present and future ability to pay benefits.

Purpose and Objectives of the Independent Audit

General Benefit Plan Audit Considerations

Full Scope vs. Limited Scope Benefit Plan Audits

Benefit Plan Audit Areas

Persuasive Argument for Attracting and Retaining Women in Manufacturing

Motivational Tools

Six Steps for the Future

Perceptions May Change

Partnership IRS audits were up 18.6% in 2015 over the previous tax year, according to the agency’s Fiscal Year 2015 Enforcement and Service Results.

Delayed Effective Date

Current Rules for Partnership IRS Audits

New Partnership Audit Rules

Partnership Adjustment Options

Exception for Small Partnerships

Managing Audit Risks

Compilation, Review, and Audit Assurance Services

What are the differences between a compilation, review, and audit?

Compilation of financial statements is a service where the role of the CPA is more apparent to outside parties, and as such, the requirements for performing this service are more explicit.

The review service performs analytical procedures, inquiries and other procedures to obtain “limited assurance” on the financial statements and is intended to provide a user with a level of comfort on their accuracy.

The audit is the highest level of assurance service that a CPA performs and is intended to provide a user comfort on the accuracy of the financial statements.

Local Firm, Top 25 Expertise

Unlock the potential of your business

Let’s Connect

Unlock the Potential
of Your Business

Let’s
Connect

Unlock the potential of
your business