November, 2014 | RKL LLP
Posted on: November 24th, 2014

Crunch Time: Capture Fringe Benefits before Year-End

Benefits Concept

With year-end approaching, you may be busy reconciling the fringe benefits you provided in 2014 in order to get them into payroll and onto W-2s.

Whether you’ve provided standard fringe benefits like group-term life insurance or more extravagant perks like trips or company-provided vehicles, the fact is that the IRS expects taxes to be paid on most of the benefits provided to employees and contractors. With year-end approaching, you may be busy reconciling the fringe benefits you provided in 2014 in order to get them into payroll and onto W-2s. To keep you on the right side of the IRS, here are some of the basics of reporting fringe benefits.

What are fringe benefits?

The IRS defines fringe benefits as a form of pay for the performance of services. Most times, we think of fringe benefits as being provided to employees, but this definition also applies to benefits you provide to independent contractors. These include benefits you provide directly, as well as those provided by a third party. Common examples include moving expenses, employee discounts, health insurance premiums paid on behalf of two-percent S Corp shareholders, prizes and awards, business expense reimbursements and educational assistance.

When are fringe benefits taxable?

Any fringe benefit you provide is taxable and must be included in the recipient’s pay unless the law specifically excludes it. Tax treatment and exemption limits vary by type of benefit. The value of fringe benefits must be included in wages if it is more than the sum of any amounts the law excludes and the amount the recipient paid for the benefit.

How can I stay compliant?

The value of non-cash fringe benefits must be determined at least annually. For cash fringe benefits or fringe benefits that include a transfer of tangible or intangible personal property, you must report in the year the cash or property was transferred.

There is a special accounting rule that allows you to treat the value of non-cash fringe benefits provided during the last two months of the calendar year as paid in the following year, thus allowing you enough time to in November and December to calculate the benefits and add it to wages accordingly. If you choose not to use this special accounting rule, you can reasonably estimate the value of the fringe benefits and determine proper withholding and submission of payroll taxes accordingly. You would then have to true-up the value and could possibly be overpaid or underpaid on your tax deposits.

Once the taxable fringe value is determined for your employees, you’ll want to decide if applicable taxes will be your employees’ responsibility or the company’s. If the employee will be responsible, the value of the fringe would need to be added to a regular payroll period and applicable taxes withheld from your employees’ pay. If you choose to pay the employees’ share of taxes without deducting them from your employees’ pay, you can gross up the value of the fringe, therefore leaving the net pay unaffected.

Have questions about staying compliant with your fringe benefits? RKL is here to help. Contact your RKL service provider or one of our local offices.

dodsonContributed by Tina Dodson, CPP, EA, in RKL’s Small Business Services Group. Tina draws on more than 16 years experience helping small business owners and their management teams meet their financial reporting and individual and corporate tax return preparation needs.

Posted on: November 14th, 2014

The Powerful Tax Planning Strategy You May Be Overlooking

With guidance from your CPA, a change in your accounting method could reap significant tax savings for your company.

With an improving economy, and the possibility that bonus depreciation will not return, the “easy” tax planning days are over and more complex alternatives need to be explored to reduce a company’s tax burden while profits rise.

One of the most powerful, yet often overlooked, tax planning opportunities is selecting optimal methods of accounting for income tax purposes.  A taxpayer’s accounting method determines the period in which a taxpayer includes income or deducts an expense in calculating taxable income. The tax code allows a taxpayer to employ the most advantageous method of accounting insofar as it provides conformity, consistency and a clear reflection of income. Therefore, it is important for a taxpayer to understand what methods of accounting they are employing for tax purposes and verify that they are the most advantageous for their particular business.

An accounting method can refer to an overall method of accounting or the treatment of a single item.  When a taxpayer determines that they would like to switch to a more advantageous method, the mechanism for doing so is through an application for an accounting method change with the IRS. Just a few common examples of accounting method changes that can be beneficial to a taxpayer include:

  • Overall accounting method from accrual to cash – defers revenue and expenditures until cash is received or paid for qualifying taxpayers
  • Accelerating the deduction of certain prepaid liabilities – allows certain prepaid expenses to be deducted when paid
  • Capitalization vs. deduction of expenditures related to tangible property –allows remaining basis of certain items on the depreciation schedules to be currently deducted
  • Deferring the recognition of income from advance payments – allows a deferral for certain advanced payment
  • Determining the value of inventory – allows advantageous inventory valuation and cost flow assumptions
  • Depreciation acceleration – allows accelerated depreciation deductions for assets improperly using long lives
  • IBNR reserves – allows a taxpayer to deduct expenses for self insured claims incurred but not reported at year end in certain circumstances

Note that when an accounting method change results in a favorable position for the taxpayer, in most cases the effect of all of the prior years’ missed deduction are reflected at one time in the tax return for the year of the applicable change.

Common misconceptions surrounding tax accounting method changes include:

  • Accelerating deductions will make my financial statements look bad – The truth is that tax accounting method changes do not affect a taxpayer’s reporting of the item for book or GAAP purposes
  • These changes are only a benefit for one year and then I’ll have to reverse it and pay tax the next year – While technically true, once an advantageous tax accounting method is adopted, the accelerated deductions or deferred income is in place as long as that taxpayer remains in business and has similar items, effectively creating a semi-permanent tax savings in many cases

The tax code allows for many automatic accounting method changes, which allow you to apply the change even after the tax year has ended!  In some cases, more complicated changes require advanced IRS consent, an application prior to the year end, and a $7,000 IRS user fee.  In either case, employing the often overlooked tax accounting method strategies described above have resulted in millions of dollars of tax deferrals and savings for our clients.

Interested in learning more about how an accounting method changes can impact your tax planning? RKL is here to help. Contact your RKL Service Provider today or one of our local offices.

Contributed by Bradley J. Bowers, CPA, supervisor in RKL’s Tax Services Group. He specializes in providing tax planning and compliance solutions for businesses and Individuals. Bowers has more than 5 years experience in public accounting and primarily serves companies in the construction/real estate and manufacturing/distribution industries.

 

Posted on: November 10th, 2014

Timing is Everything: Today’s M&A Activity and Your Exit Strategy

mergers and acquisition services, investment banking

Considering selling your business or some other type of ownership transition? Here are a few reasons why now be the time to make a move.

In life and business, they say it all comes down to timing. If you’ve been considering the sale of your business or some other form of ownership transition, now may be the time to act as the latest data in the mergers and acquisitions arena spell opportunity for exiting business owners.

A Look at Today’s Seller’s Market

The equity capital markets are flush with cash earmarked for investment in privately owned business, and banks are supporting buyers by providing debt at reasonable rates and terms to help fund M&A activity. During the first half of 2014, private equity firms raised $85 billion in new equity capital, bringing the total amount of private equity capital (“PE Capital Overhang” or “dry powder”) to $486 billion at mid-2014.[i] In addition, strategic corporate buyers with excess cash reserves of over $300 billion have initiated aggressive acquisition growth strategies.

During the last five years, there has been an increase of lower middle-market business sale, merger and acquisition transactions valued at under $250 million. With smaller private equity funds of $100 million or less that tend to invest in smaller, lower middle market, family-owned and closely held businesses accounting for 37% of all private equity fund closings in the first half of 2014, it’s safe to say that lower middle market deals are here to stay.

It’s not just the large amount of available capital, but also research that supports that seven out of 10 privately held businesses will transition ownership sometime in the next year to ten years, that indicates that private company M&A activity can be expected to increase going forward. In fact, we currently have a viable seller’s market where demand from qualified buyers exceeds the supply of interested sellers.

Your Next Steps to Seize Today’s Opportunities

As available capital is invested and acquisition growth initiatives are satisfied, buyers will become more selective about future acquisitions and there will be downward pressure on valuations as the cycle shifts from the current sellers’ market to a buyers’ market.

If you are thinking about completely cashing out or considering a two-step private equity recapitalization, sale of a minority interest, a management buy-out or other full or partial liquidity transaction, now is the time to seek professional guidance to gain a thorough understanding of the liquidity options available to you in order to make an informed and timely ownership transition decision. With help from an experienced investment banker, you’ll be better positioned to take action before the current “window of opportunity” begins to close.

RKL_cap_logo_horz01Considering an ownership transition? RKL Capital Advisors is here to help. Our full-service investment banking firm helps owners of middle-market, family-owned and closely held businesses define and achieve their financial and personal goals during their ownership transition. Learn more at http://www.rklcapadvisors.com.

investment banking Allentown PAContributed by Joseph T. DiGiacomo, president of RKL Capital Advisors LLC. Joe has more than 35 years of experience in the area of mergers and acquisitions, sales of businesses, recapitalization transactions, raising capital, ownership transitions, management buy-outs, business valuations and other management consulting services.



[i] Source: PitchBook Data, Inc.

Posted on: November 5th, 2014

Court Rules Leases Are Not Subject to Business Privilege Taxes

A recent case bars taxing jurisdictions from imposing the business privilege tax on leases.

A recent case bars taxing jurisdictions from imposing business privilege taxes on leases or lease transactions.

A recent court case has barred taxing jurisdictions from imposing a tax on leases or lease transactions. While the case is expected to be appealed, refund opportunities may be available if the business has included these receipts in their tax base in prior periods.

What Is the Court Case Affecting Business Privilege Taxes?

The Pennsylvania Commonwealth Court, in a five to two decision, held the Local Tax Enabling Act (“LTEA”) bars taxing jurisdictions from imposing business privilege taxes on leases or lease transactions. Fish, Hrabick and Briskin v. Township of Lower Merion, No. 1940 C.D. 2013 (September 19, 2014). This holding seemingly applies whether or not the Local Taxing Authority (LTA) imposes a transaction-based or privileged-based tax and has created refund opportunities for certain businesses.

While the LTEA allows for the imposition of business gross receipts taxes (business privilege or mercantile taxes), the LETA expressly excludes the power to impose tax “on…leases or lease transactions.” As a result, gross receipts from leases – whether for real property or personal property – may not be taxed under this decision.

Who Does This Decision Apply To?

The case will have the most impact on businesses located in townships where the business privilege tax is particularly high, including Reading, Wyomissing, Allentown, Harrisburg, York and others.

What Is the Timing of the Case?

The township is expected to request the Pennsylvania Supreme Court to hear an appeal of the decision. If the Pennsylvania Supreme Court denies the appeal, refund claims for all open periods should be filed. But if an appeal is granted, a final decision will be many months away.

What Are My Next Steps?

Taxpayers should monitor the developments of this case and also consider filing protective appeals if the business has included these receipts in their tax base in prior periods, especially for periods that may be closing due to statutes of limitations. Generally speaking, the statue of limitations for business privilege tax appeals is three years; however, it is necessary to review the applicable local ordinances and any regulations of the taxing jurisdiction to confirm timing questions.

frank tobias on the delaware holding companyContributed by Frank J. TobiasCGFM, (ftobias@rklcpa.com) a principal in RKL’s Tax Services Group. He specializes in the area of multi-state planning and compliance with extensive experience in all areas of Pennsylvania taxation. Frank brings a well-rounded perspective on state and local tax issues with his experience in both public accounting and his previous professional experience overseeing the administration of PA Corporation taxes for the PA Department of Revenue.

Posted on: November 5th, 2014

Team Members Earn Certified Construction Industry Financial Professionals Designation

PRESS RELEASE

YORK, PA (November 10, 2014) RKL is pleased to announce that Keith Eldredge, partner in the firm’s Audit Services Group; Duane Moyer, partner in the Small Business Services Group; and Steve Snyder, a manager in the firm’s Audit Services Group recently earned the Certified Construction Industry Financial Professionals (CCIFP) designation from the Construction Financial Management Association (CFMA). headshots

The CCIFP designation indicates that the RKL team members have met the association’s rigorous professional standards in the practice of construction financial management. The Certified Construction Industry Financial Professional designation is the only standard to recognize that a financial professional truly understands the industry’s financial opportunities and challenges. To earn the designation, an applicant must be in a professional financial position for a construction contractor or as accounting and/or financial service provider to the industry, complete intensive training program and comprehensive exam. To maintain this certification, the members are required to obtain ongoing continuing education in the field of construction financial management.

As a member of the RKL team since 2012, Keith is responsible for serving the accounting and auditing needs of privately held construction and real estate clients, including significant experience in auditing employee benefit plans. Keith provides taxation services tailored to the needs of his business and individual clients. He brings over 25 years of experience in the construction industry. He is a graduate of York College where he earned a Bachelor of Science in Accounting.

With over 20 years of experience in the construction industry, Duane is responsible for serving the accounting and auditing needs of privately held clients in the construction, and manufacturing and distribution industries, including significant experience in auditing employee benefit plans. He provides taxation services tailored to the needs of his business and individual clients. He is a graduate of Shippensburg University where he earned a Bachelor of Science in Accounting.

Steve joined RKL in 2012, bringing with him 15 years of experience in the construction industry. He works with clients to meet compliance, uncover opportunities to improve internal processes and maximize profitability. He specializes in employee benefit plan audits and primarily serves companies in the construction, real estate development, manufacturing and distribution and service industries. He is graduate of the University of Maryland where he earned a Bachelor of Science in Accounting.

For more information on services provided by RKL’s Real Estate Development & Construction Services Group, including industry analysis, cost segregation studies and strategic planning, click here.

css.php