November 2016

Changes to Compensation Return Due Dates

Posted on November 29, 2016July 22, 2024 by Debra Barcuch

As we wrap up our end-of-year to-do lists, it’s time to look ahead to the New Year’s to-do list. That new list should include changes to the due date for wage (W-2) and non-employee (1099) compensation returns. Today, The Tax Warriors® explain the changes and what businesses can do to avoid the increased penalties. As in previous years, employees and independent contractors must receive W-2 and 1099 statements by January 31st, but now so must the IRS and Social Security. E-filers no longer get the extended time to file. This means you must review, mail employees’ forms, and have your authorization back to the accountant before January 31st. This change is an IRS effort to reduce fraud. While admirable, it adds to an already busy time of the year for businesses and accountants.

What can you do now to meet this shorter deadline? Ensure you have W-9s for all contractors and vendors paid more than $600 in 2016. Then, as soon as you print that last check for 2016, print those vendor ledgers and employee year-to-date registers, or copy the check register pages and get them to your accountant ASAP.

The due dates for Form 1099 MISC still have the same due dates of February 28th to the IRS if paper filed, and March 31st if electronically filed. However, since your accountant will need the materials for independent contractors, you should consider sending all the information at once. There are only 20 working days in January 2017, so this proactive measure will save time for both you and your accountant. The penalties for late filings and non-filing have increased. Here is a list of the new penalties, which are PER FORM so they can add up quickly:

Filing only 30 days late is now $50 (previously $30)
Filing 31 days until August 1st is now $100 (previously $50)
Filing with missing or incorrect TIN or filing after August 1st is now $260 (previously $100)
Intentional disregard of filing requirements is now $530 (previously $250)

These fines double if you do not send the form to the payee, and if it is not submitted to the IRS. The IRS is looking for all sources of revenue and the best defense is likely a good offense. So, plan now to meet the new deadlines!

A Focus on BHPH Business Model

Posted on November 28, 2016 by Debra Barcuch

At the 2016 NIADA Convention, discussion of deep subprime competition on Wall Street emphasized that the model is not sustainable. But the question is not “when will the competition go away?” The question is “how can BHPH dealers compete now?”

Studies of the auto industry have shown that the average used car loan term is upwards of 63 months (5.25 years) with average monthly payments of $359. In essence, the deep subprime industry is extending the term, accepting a lower down payment and a lower monthly payment on average to increase volume.

However, successful independent BHPH dealers are limiting terms to 15-42 months, asking for at least $1,000 down and $12 more a month on average (amazing, but true).

This business model is cash focused rather than loss focused. Successful dealers limit their cash outlay for vehicles and set up transactions to recover their cash as quickly as possible. This is done by limiting their ACV to $5,000 and not more than $7,000. Also, while industry averages for customer down payments have slipped below $800, successful dealers are maintaining average down payments around $1,000.

Remember that the competitive landscape is increasing your risk. Your customers accept the benefit of lower-priced cars by putting some skin in the game with a higher down payment and higher weekly or biweekly payments. The National Bureau of Economic Research estimates that – all things being equal — extending a given buyer an extra $1,000 in credit correlates to an increased risk of default rate by 15 percent. Consider a customer putting $1,000 down on a $5,000 vehicle. The customer already has 20 percent equity in the deal, which has been shown to motivate more customers to make payments and not lose their initial investment. In turn, the BHPH dealership is receiving more cash up front.

A study for DriveTime noted that charging 20 percent APR is a fair return for risk in the current deep subprime market. Depending on caps in your state, reasonable APR can be as high as 23 percent, which puts your monthly interest payments at just under 2 percent.

Be aware that simple interest is a better method of accounting for BHPH dealers than accrued interest. The customer’s next interest payment is based on the previous month’s balance and doesn’t matter whether the customer makes a payment on the first day or last day of the billing cycle. Simple interest is a fairer process for dealers, especially with the variety of payment options offered to customers.

Now, if your salespeople are focused more on commissions than on securing a high average down payment, you may not be achieving the highest possible down payment available. Calculate the average down payments in your portfolio. Are the down payments fairly similar from one transaction to another? If so, then you may have a sales process problem. You will need to observe how salespeople are handling deals to make sure they are asking for higher down payments relative to the total sale price.

Cash Flow is Still King

As we have written about before, a healthy BHPH dealership has financial flexibility. That occurs through careful management of cash flow. With financial flexibility, your dealership can seize on opportunities that range from inventory purchases to upgrades in the service department and more sales or office staffing.

Cash flow can be improved by restructuring your business model and ensuring that transactions in your portfolio are achieving higher down payments and healthy margins. Old contracts should be replaced at a healthy rate while keeping customers in their vehicles as long as possible.

We also observe that dealers who control warranties and flexible service contracts also have stronger ongoing cash flow. These income streams make BHPH dealers more competitive as they encounter more of the “least-able-to-pay” customers in the market.

Some BHPH dealers are also exploring Lease Here Pay Here programs. This is not for every dealer. First of all, because the car title remains in the dealership’s name under a lease agreement, the dealership could be held vicariously liable in some states if the customer has an accident. Dealers need to carry “contingent” or “excess” liability insurance to mitigate the additional risk.

Monthly payments are smaller compared to financing, however dealerships can defer taxes because they can depreciate their inventory. Sales tax expense is typically reduced because it is remitted gradually over the course of the lease with each lease payment.

The residual value of the car at the end of the lease can make it easier to sell the car because the customer gets more car for a lower monthly payment. Most of the time, the customer will opt to extend the lease on the same car or lease a different car. If the customer opts to return the car at the end of the lease, this supports inventory at a time when finding vehicles at lower price points is difficult.

Another alternative source of cash flow is to sell part of the dealership’s entire credit portfolio. Although the credit portfolio is a dealer’s best asset, not every dealer has the skills or interest to manage it well. Certain financial services companies are offering programs to purchase all or part of the portfolio in exchange for up front cash — lowering long-term risk and eliminating any service or collections issues. The down side to this option is less control over the customer relationship and potentially less flexibility in deal structuring.

Continue Reading: Traditional BHPH Income Opportunities

Cornwell Jackson works with BHPH dealers frequently to adopt new approaches to service, cash flow and profitability. Review our previous whitepapers for your industry or contact us for a consultation. We can even assist with audits, reviews and compilations specific to dealerships to help your dealership access traditional bank financing or working capital if needed. We can also consult on timing and requirements to establish a related finance company as part of BHPH auto financing and portfolio management.

Scott Bates, CPA, is a partner in the audit practice and leads Cornwell Jackson’s Business Services Department, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in auto, healthcare, real estate, transportation, technology, service, retail and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Which employee benefits offer 2016 tax savings?

Posted on November 28, 2016July 23, 2024 by Debra Barcuch

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

Qualified deferred compensation plans

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

Retirement plan credit

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

HSAs and FSAs

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

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

HRAs

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

Small-business health care credit

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

Fringe benefits

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

Play-or-pay penalty risk

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

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

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

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

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

Webinar: Don’t Let ACA Reporting Catch You Off Guard

Posted on November 17, 2016 by Debra Barcuch

The challenges of Affordable Care Act reporting for the 2015 tax year will likely follow companies and organizations into 2016 — and the honeymoon period with the IRS is over. It will take more than careful administration to ensure proper reporting and avoid kicked back forms or penalties for missing or inaccurate data. Benefits brokers that specialize in ACA reporting recommend a combination of careful administration along with support from payroll outsourcing companies. This planning includes a CPA team that can advise on tax and payroll administration.

Watch the Webinar Here

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What are the best 2016 business deductions?

Posted on November 14, 2016July 23, 2024 by Debra Barcuch

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

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

Deferring income to next year

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

Accelerating deductible expenses into the current year

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

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

Section 179 expensing election

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

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

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

50% bonus depreciation

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

Accelerated depreciation

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

Tangible property repairs

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

Cost segregation study

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

Hire Your Children

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

Vehicle-related deductions

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

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

NOLs

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

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

Section 199 deduction

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

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

Continue Reading: Which employee benefits offer 2016 tax savings?

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

BHPH Auto Financing Trends

Posted on November 11, 2016 by Debra Barcuch

Subprime lending is alive and well on Wall Street, and not just in real estate. Low interest rates and less consumer demand are prompting brick-and-mortar and online lenders to tap into subprime auto finance more than ever before. Rather than focus on this increased competition for indirect loans, auto industry experts recommend that BHPH dealers focus on operational efficiency and alternative sources of revenue. Dealers who improve cash flow through after-care products and customer retention can ride out the subprime boom. As a bonus, a more efficient dealership will be less reliant on working capital financing in the future.

In our last article about BHPH structuring and scalability, we wrote about ways to maintain compliance on bank financing, filing an accurate and clean tax return and operating at a profit. For start-ups and independent BHPH dealers, a clean structure will create more cash flow and level the field with subprime lenders at banks, credit unions and online. As we’ve said before, your best asset is not your inventory; it’s your credit portfolio. Let’s take a closer look at your competitors in auto financing. By learning about your dealership’s competitive advantages, you can add more streams of revenue, get more customers to finance on site and get more customer referrals.

Auto Financing Trends

According to a report by the Center for Responsible Lending, car pricing information available online helps consumers more effectively negotiate the sales price of a car. Because this has reduced the profit margin dealers receive on the sale of cars, all dealers are relying heavily on profits generated after the sale of the car — extended warranties, credit insurance, guaranteed asset protection (GAP) insurance, vehicle service contracts and so on.

In the case of auto financing, however, information is not readily available. Consumers can’t really shop around because financing is based on things like the type of car, the sales price and possible trade-in value as well as the consumer’s credit worthiness. An application for financing is submitted after most decisions are made — and that application could happen online or with the customer’s local bank or credit union.

Due to most consumers’ large appetite for used vehicles and lower tolerance for debt, BHPH dealers face increased competition from brick and mortar lenders and online deep subprime lenders. These lenders are accepting a larger share of consumers to finance for smaller loans than they would prior to the recession. BHPH dealers are a final destination for the least credit-worthy consumers who can’t get a loan anywhere else. This demographic is not easy to manage in collections anyway, which is typically why many BHPH dealers focus on repossession and resale more than on collections and service.

We get it. The competition to control financing is tough. Cash flow is tight. Inventory at auction isn’t what it used to be. You are competing for fewer cars with higher mileage and higher average cost per vehicle (ACV). However, BHPH dealers who focus on what they can control are faring better with customers and profits. A good place to start is to seek outside expertise from professional associations and your CPA.

Continue Reading: Focus on BHPH Business Model

IRS Issues New Regs on Allocating Debt to Partners and LLC Members

Posted on November 7, 2016 by Debra Barcuch

On October 5, 2016, the IRS released new temporary and final Section 752 regulations. Sec. 752 of the Internal Revenue Code and related regulations explain how to allocate partnership debt among partners for purposes of calculating the basis of their partnership interests. This calculation determines what’s often referred to as the partners’ “outside basis” in the partnership (their basis for deducting losses and receiving tax-free distributions). In some situations, the new regulations make it more difficult for partnerships to manipulate the rules to increase the outside basis of certain partners for tax planning purposes. In most situations, however, the effects of the new regulations are neutral.

Here are the most important changes included in the new Sec. 752 regulations — and how they may affect your investments in partnerships and limited liability companies (LLCs).

Why Sec. 752 Matters

A partner’s share of partnership liabilities, as determined under the Sec. 752 rules, is added to the partner’s outside basis. That gives the partner more room to deduct partnership losses and/or receive tax-free partnership distributions.

However, a reduction in a partner’s share of partnership liabilities, as determined under the Sec. 752 rules, is treated as a deemed cash distribution that reduces the partner’s outside basis. A reduction can trigger a taxable gain to the extent the deemed distribution — along with actual cash distributions and actual distributions of certain marketable securities — exceeds the partner’s outside basis.

For these reasons, the Sec. 752 rules are important. In general, these rules apply equally to LLCs that are treated as partnerships for federal tax purposes. For simplicity, this article uses the terms 1) “partnership” to refer more generally to both partnerships and LLCs that are treated as partnerships for tax purposes, and 2) “partner” to refer more generally to the owners of those entities (partners and LLC members).

How to Define a “Payment Obligation”

IRS temporary regulations typically have the same authority as final regulations. As such, they are in force as of the specified effective date. However, temporary regulations may be amended before being reissued as final regulations, with a new effective date for any changes.

A new temporary regulation issued in October clarifies when a partner is considered to have a payment obligation with respect to a partnership recourse debt for purposes of allocating that debt among the partners under the Sec. 752 rules. (Recourse debt is debt for which the borrower is personally liable — the lender can collect what is owed beyond any collateral.)

Without having a payment obligation with respect to a recourse liability, a partner generally can’t be allocated any basis from that liability under the Sec. 752 rules. However, in some cases, a partner can be allocated basis from a recourse liability when a taxpayer related to the partner has a payment obligation with respect to that liability.

The new guidance stipulates that the determination of the extent to which a partner or related person has a payment obligation with respect to a recourse liability is based on the facts and circumstances at the time of the determination. It also lists some specific factors that should be considered.

To the extent that the obligation of a partner or related person to make a payment with respect to a partnership recourse liability is not recognized under this rule, the payment obligation is ignored for purposes of allocating that debt to that partner under the Sec. 752 rules. All statutory and contractual obligations relating to the payment obligation are considered in applying this rule.

Example 1: Payment Obligations

If a partner guarantees a partnership recourse debt, but the guarantee isn’t legally binding under applicable state law, the purported guarantee won’t be recognized as a payment obligation. Therefore, the guarantee will have no impact on how that debt was allocated to that partner under the Sec. 752 rules.

The new clarification of payment obligations with respect to partnership recourse debts generally applies to liabilities incurred or assumed by a partnership on or after October 5, 2016. It also applies to payment obligations imposed or undertaken with respect to a partnership liability, other than liabilities incurred or assumed by a partnership and payment obligations imposed or undertaken pursuant to a written binding contract in effect prior to that date.

A partnership can, however, elect to apply all the new rules to all of its liabilities as of the beginning of the first taxable year of the partnership that ends on or after October 5, 2016 (calendar year 2016 for a calendar year partnership). A special transitional rule allows the impact of the new rules to be postponed for up to seven years in some situations when the new rules would be harmful to a partner.

Important note: This temporary regulation is basically neutral in its effect on partners.

How to Handle Guarantees of Recourse Debt and Exculpatory Liabilities

Another new temporary regulation creates a new term called “bottom-dollar payment obligation.” For purposes of allocating recourse liabilities among partners under the Sec. 752 rules, a bottom-dollar payment obligation isn’t recognized. That means it’s ignored for purposes of allocating the entity’s recourse liabilities under the Sec. 752 rules.

In this context, so-called exculpatory liabilities are treated as recourse debts. Exculpatory liabilities are debts that are secured by all partnership property. Therefore, they’re effectively recourse to the partnership, even though no partner is personally liable.

The new guidance also requires partnerships to disclose to the IRS all bottom-dollar payment obligations for the tax year in which the bottom-dollar payment obligation is undertaken or modified.

Important note: The new rules for bottom-dollar payment obligations are primarily aimed at LLCs treated as partnerships for tax purposes that use member guarantees of exculpatory liabilities. Guarantees of LLC exculpatory liabilities have been used “creatively” to increase the basis of certain LLC members in their membership interests (outside basis). The IRS doesn’t look kindly on these types of arrangements, and the new rules make it more difficult to use them for tax planning purposes. As such, the new rules are unfavorable to taxpayers.

Limited liability partnerships (LLPs) can also have exculpatory liabilities. But LLPs are unlikely to have bottom-dollar payment obligation arrangements, because LLPs are most often used simply to operate professional practices. In contrast, some LLCs have been used as “creative” tax-planning vehicles.

Exculpatory liabilities aren’t relevant in the context of garden-variety general or limited partnerships, because one or more of their general partners will always be personally liable for partnership recourse debts.

Example 2: Guarantee of First and Last Dollars of LLC Exculpatory Liability

Individual taxpayers A, B and C are equal members (owners) of ABC LLC, which is treated as a partnership for federal tax purposes. ABC borrows $1 million from the bank. The $1 million liability is an exculpatory liability of ABC, because all of ABC’s assets are potentially exposed to the debt, but none of the three members have any personal liability for the debt.

Member A guarantees payment of up to $300,000 of the debt if any part of the $1 million isn’t recovered by the bank. Member B guarantees payment of up to $200,000, but only if the bank otherwise recovers less than $200,000.

Member A is obligated to pay up to $300,000 if, and to the extent that, any part of the $1 million liability isn’t recovered by the bank. So, Member A’s guarantee is not a bottom-dollar payment obligation, and his or her payment obligation is recognized for Sec. 752 purposes. Therefore, Member A is allocated $300,000 of basis from the $1 million debt, because he or she has an economic risk of loss to that extent.

On the flip side, Member B is obligated to pay up to $200,000 only if, and to the extent that, the bank otherwise recovers less than $200,000 of the $1 million loan. So, Member B’s guarantee is a bottom-dollar payment obligation, which is not recognized under the new guidance, because Member B isn’t considered to bear any economic risk of loss for the $1 million liability.

In summary, the first $300,000 of ABC’s $1 million liability is allocated to Member A. The remaining $700,000 is allocated to Members A, B and C under the rules for nonrecourse liabilities, because none of ABC’s members have any personal liability for the $700,000.

The same effective date and transitional relief rules that apply to the updated definition of payment obligations with respect to recourse debts also apply to the new rules regarding bottom-dollar payment obligations.

How to Allocate Excess Nonrecourse Liabilities

Under the Sec. 752 rules, partnerships must allocate nonrecourse liabilities among the partners using a three-tiered procedure. The last tier applies to so-called excess nonrecourse liabilities, which are allocated according to the partners’ percentage shares of partnership profits.

Effective for partnership liabilities incurred or assumed on or after October 5, 2016 — subject to an exception for pre-existing binding contracts — a new final regulation stipulates that the partnership agreement can specify the partners’ percentage interests in partnership profits for purposes of allocating excess nonrecourse liabilities.

But the specified percentages must be reasonably consistent with valid allocations of some other significant item of partnership income or gain. This is often referred to as the “significant item method” of allocating excess nonrecourse liabilities.

The new regulation also allows two other alternative methods of allocating excess nonrecourse liabilities. Moreover, excess nonrecourse liabilities aren’t required to be allocated under the same method each year.

Important note: This new final regulation is basically neutral in its effect on determining the outside basis of partners.

Where to Find Additional Information

This is only a brief summary of the key changes under the new temporary and final Sec. 752 regulations. Consult your Cornwell Jackson tax professional for full details on how the new rules might affect your partnership (or LLC) and its partners (or members).

Being Green Is Becoming Increasingly Status Quo

Posted on November 7, 2016July 19, 2024 by Debra Barcuch

reen building” is no longer a fringe movement among environmentally conscious contractors. Nor can it be dismissed as a pie-in-the-sky aspiration.

It appears that green building is here, at long last, and likely to stay in vogue for the foreseeable future. There was ample evidence of this at the recent 2016 Greenbuild International Conference & Expo in Los Angeles. The same was expected at the gathering in Boston on November 8-10.

Background Information

Green building — also known as green construction or sustainable building — refers to practices and procedures that are environmentally sensitive and make efficient use of resources. It encompasses the entire life cycle of a building, from design and construction through operation and maintenance to renovation and, if necessary, demolition.

This type of construction requires firms to find the proper balance between traditional considerations such as quality, functionality and affordability with sustainability. And green building isn’t limited to just new construction, it can be applied to all buildings.

Among the technologies and materials you might use if you are constructing a green building are:

1. Natural paints, which are void of the volatile organic compounds typically found in their traditional counterparts, eliminate indoor pollution and decompose naturally without contaminating the earth.

2. Zero-energy designs that use solar cells and panels, wind turbines, and biofuels, among others, to provide electricity and HVAC needs.

3. Water recycling, which reuses treated wastewater for agricultural and landscape irrigation, industrial processes, toilet flushing, and replenishing a groundwater basin.

4. Low-emittance windows coated with metallic oxide to block the sun’s harsh rays during summer and keep the heat inside in the winter. They significantly bring down HVAC costs.

Although the ground rules and technology continue to evolve, the main shared objective of green building remains protecting the environment. This may be accomplished through such elements as:

More efficient use of energy, water and other resources,
Improved productivity,
Reduced waste, pollution and general deterioration of the environment, and
Sustainability.

Data Collection and Analysis Trends

Previously, green building relied primarily on anecdotal evidence or limited instances documented on a case-by-case basis. Now, with support from certification organizations (see box below), improvements in data collection and analysis are furthering green building initiatives.

Data collection is only now moving to the forefront of the construction process. This may transform how buildings are designed, constructed and operated.

Specifically, it’s now possible to track data sets during the operations and maintenance stages, including:

Air quality,
Lighting,
Utility and leading data,
Thermal comfort, HVAC and weather,
Waste recycling,
Security, and
Occupancy.

Gathering this information and then acting on it can have a profound impact, especially when technology is used, and it may result in greater energy efficiency and cost reduction.

A potential stumbling block is the complexity of varying software tracking methods. This is being overcome by advances in technology that make it easier to quantify and apply the data. With programs like GRESB, companies can track the continuing performance of their buildings and make improvements when necessary.

Furthermore, innovators using this approach are being recognized as leaders in their industries, generating greater interest from investors, while attracting and retaining top-notch talent. This happy confluence of events creates even more momentum for the green building movement.

Investors and other interested parties have also sparked green building activity by trumpeting the need for reducing the world’s carbon imprint. Naturally, the investors are interested in protecting their assets, but they are also addressing environmental concerns and promoting the type of sustainability that will benefit them in the long run. Finally, environmentalists in certain other fields (notably, the manufacturing sector) have rushed to join the cause.

Outlook for More Greening

Now that the steps of data collection and analysis are being implemented, proponents of green building hope to move forward through innovation and sensitivity to environmental issues. But certifications and adopting different approaches for utilizing data to improve building performance shouldn’t be the final goal. It’s important for green building to become integral to the construction process.

Expect technology to facilitate the next phase. Stakeholders in the industry, including construction firms of all shapes and sizes, should learn from others and then “pay it forward” by sharing information and new developments with peers.

Those who don’t jump on the bandwagon now run the risk of being left in the dust.

Seven Top Shelf Products

At the 2016 Expo, BuildingGreen Inc., a green resource center based in Vermont, presented its annual selection of green products that have the potential to change construction processes and procedures.

They ranged from products that conserve electricity to those that reduce construction waste to replacements of traditional materials with healthier alternatives. Here are seven of them:

1. Accoya Acetylated Wood, which is stable, insect repellent and moisture resistant.

2. Securock ExoAir 430, a weather barrier that allows for faster installation and reduces jobsite waste.

3. Aquion Low Toxicity Battery, which uses non-hazardous sodium sulfate electrolyte instead of the common lithium ion or lead acid found in typical batteries.

4. Nextek Power Hub Driver, an all-in-one AC to DC power converter that uses solar energy, batteries, and other renewable energy sources to convert power currents.

5. HyperPure Water Piping, a flexible potable water pipe made from bi-modal polyethylene.

6. Designtex Textiles, a database that allows search through more than 8,000 certified sustainable textile materials based on criteria ranging from specific certifications, to chemicals, logistics and optimized chemistry.

7. The d-Rain Joint Rainwater Filter Drain that is a low-cost system to manage water runoff.

Being Certified

Supporting the green construction movement are standards, certifications and rating systems aimed at mitigating the impact of buildings on the natural environment through sustainable design.

The Building Research Establishment’s Environmental Assessment Method (BREEAM) is the first green building rating system in the U.K. It is the oldest rating system, created in 1990.

In 2000, the U.S. Green Building Council (USGBC) followed suit and developed and released criteria also aimed at improving the environmental performance of buildings through its Leadership in Energy and Environmental Design (LEED) rating system for new construction. The U.S. Green Building Council developed it.

Various other efforts stimulating green building have been championed by the World Green Building Council and World Bank. Netherlands-based Global Real Estate Sustainability Benchmark (GRESB), a for-profit organization specializing in assessing real estate properties, has also been a valuable contributor.

Managing the Ups and Downs of Seasonal Businesses

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

What do pumpkin patches, ski resorts, ice cream shops and accounting firms have in common? They’re all seasonal businesses that experience a surge in revenues during their busy seasons that tapers off in the slow season. Seasonal peaks and troughs present challenges that require creative planning and fiscal prudence.

Consider a Fiscal Year End

Most businesses operate on a calendar year basis that begins on January 1 and ends on December 31. It’s straightforward, matches the owner’s personal record keeping, and may be required by the IRS under certain circumstances.

But seasonal businesses may have good reasons to elect to use a fiscal year. (A fiscal year is 12 consecutive months ending on the last day of any month except December.) For example, reporting income by calendar year could split up the peak season between two years and give a distorted view of income and expenses. This also happens when a seasonal business reports most of its expenses in one calendar year and income in another.

A company that wants to adopt a fiscal year for a seasonal business will need to consistently maintain its books and records and report income and expenses using the time period adopted. But first and foremost, it’s important to consult a tax advisor to determine if the business is allowed to switch its year end under the tax rules and whether doing so is worth the extra effort.

Understand the Cash Flow Cycle

Every business has some degree of ups and downs during the year. But cash flow fluctuations are much more intense for seasonal businesses. So, it’s important to understand a seasonal business’s operating cycle to anticipate and minimize shortfalls.

To illustrate, consider a manufacturer and distributor of lawn-and-garden products like topsoil, potting soil and ground cover. Its customers are lawn-and-garden retailers, hardware stores and mass merchants.

The company’s operating cycle starts when customers place orders in the fall — nine months ahead of its peak selling season. The company begins amassing product in the fall but curtails operations in the winter. In late February, when the thaw begins for most of the country, product accumulation continues, with most shipments going out in April.

At this point, a lot of cash has flowed out of the company to pay operating expenses, such as utilities, salaries, raw materials costs and shipping expenses. But cash doesn’t start flowing into the company’s checking account until customers pay their bills around June. Then, the company counts inventory, pays all remaining expenses and starts preparing for the next year. Its strategic selling window — which will determine whether the business succeeds or fails — lasts a mere eight weeks.

Maximize the Selling Window

Seasonal businesses put substantial pressure on their marketing and sales teams. They have a limited amount of time to attract customers and little opportunity to take corrective actions. Successful seasonal businesses use targeted, tailored marketing programs that address these questions:

Who’s the company’s typical customer?
What’s the best way to reach that customer base?
When are customers making their buying decisions?

In the example of the lawn-and-garden distributor, customers place orders in the fall. So, an end-of-summer “early bird” discount program, communicated via an email campaign in September and paper inserts with customer invoices in May, might entice customers to place orders early — and choose that company over its competitors.

Seasonal businesses that market to consumers increasingly turn to social media to generate sales. Customers who follow a business on Facebook or LinkedIn provide a narrow target audience, and social media posts can be cheap and relatively simple to generate. For example, a summer camp sent personalized “Happy Birthday” messages to last year’s campers throughout the year. These posts were viewed by all of the campers’ Facebook friends, many of whom could be potential new campers next summer.

Ramp Up for Busy Season

Ideally, a seasonal business should stockpile cash received at the end of its operating cycle, and then use those cash reserves to finance the next operating cycle. But cash reserves may not be enough, especially for a high-growth company.

Many seasonal businesses apply for a line of credit to avert potential shortfalls. However, banks tend to be leery of such enterprises, particularly those with limited history. To increase the chances that a loan application will be approved, business owners should compile a comprehensive loan package, including historic financial statements and tax returns, as well as marketing materials and supplier affidavits (if available).

More important, the company’s owner should draft a formal business plan that includes financial projections for the next year. Some companies even project financial results for three to five years into the future. Seasonal business owners can’t rely on gut instinct. They need to develop budgets, systems, processes and procedures ahead of the peak season.

Without a line of credit, a business that has severe fluctuations might not have enough working capital to make it through the operating cycle. If there’s insufficient money to pay suppliers, they could stop delivering materials. If the employees aren’t paid, they’re unlikely to report for work. If the weather doesn’t cooperate, revenues might fall short of the business plan. The line of credit is a solid backup plan. If one lender turns down an application for a line of credit, a smart business owner will find out why, remedy any shortcomings and try again.

Plan for the Off-Season

Some companies, such as a local ice cream or golf pro shop, may decide to close during the off-season. Others, such as a hotel or accounting firm, are open year-round, offer promotional discounts or cut operating hours to weather the slow times.

Creative seasonal businesses try to find ways to operate two (or more) seasonal businesses with opposite busy cycles using the same resources. Examples include a midwestern landscaping company that plows snow in the winter, a ski resort that offers hiking and rafting packages in the summer, and costume stores that sell outdoor furniture in the spring.

Another off-season survival strategy is hiring part-time seasonal workers. Salaries and employee benefits quickly drain savings. Using part-timers converts a fixed expense (full-time salaries) into a variable expense that ebbs and flows with the operating cycle. But recruiting reliable, skilled part-timers — who are available to work on demand — is often harder than it seems.

So it’s a good strategy for an employer to build a pool of part-time workers that it can draw on year after year, such as an ice cream shop or a day camp that hires teachers to work during the summer. Also, part-timers should be treated with the same respect as full-timers. A positive work environment will lower turnover, improve morale and increase the likelihood that people will come back to work for the business again. Employers may want to consider offering financial incentives to employees who refer friends and family members for part-time positions.

Remember, most of the same labor laws regarding such issues as harassment, discrimination, child labor, minimum wages, and workplace health and safety apply to all workers, both seasonal and full-time. It’s still necessary to withhold taxes just as for regular employees and pay overtime for nonexempt employees.

Seasonal workers also may affect a company’s headcount under the Affordable Care Act. And, if a seasonal worker exceeds an average of 30 hours per week, large businesses may be required to provide health insurance coverage for them and their children during the months they’re employed. Typically, full-time employment is measured month-to-month. But some large companies avoid providing health insurance benefits for part-timers by electing a measurement period longer than one month or adopting a 90-day waiting period for eligibility.

Need Help?

Many seasonal businesses struggle during the operating cycle, and some owners can’t resist the urge to spend their windfall, rather than saving it for the next operating cycle. Financial advisors can help manage seasonal fluctuations and the unique challenges they present.

What Can Business Owners Expect for Follow-up After an Audit or Review?

Posted on November 5, 2016 by Debra Barcuch

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

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

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

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

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

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

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

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