February, 2015 | RKL LLP
Posted on: February 18th, 2015

New IRS Tangible Asset Accounting Rules for Small Business Taxpayers

IRS Small Business Rules for Tangible Asssets Accounting

Effective February 13, small businesses are not required to file Form 3115 to request an accounting method change as part of the new accounting rules for tangible assets.

A late-breaking change from IRS is eliminating the previously established requirement for small taxpayers to file Form 3115 to request an accounting method change as part of the new rules for accounting for tangible assets. Announced amid the 2014 filing season, this unexpected new development reverses the IRS’ previous guidelines for compliance with new tangible asset regulations, which were effective January 2014.

What’s changed?

Until just days ago, even some of the smallest taxpayers that had any business activity were required to file complicated additional tax forms – specifically Form 3115 – to address compliance with new IRS rules with their 2014 tax returns. On February 13, the IRS unexpectedly announced relief  to” small business taxpayers” in issuing Revenue Procedure 2015-20, allowing taxpayers, if they choose, to implement the new rules on a cut-off basis, reducing some of the compliance burden and eliminating the need for a form 3115.

In the same revenue procedure, the IRS announced that the Service is now reconsidering whether the $500 de minimis safe harbor is high enough for small businesses and is accepting feedback on the issue.

Who will be affected by the changes?

A small business taxpayer is a business or sole proprietor with assets less than $10,000,000 on January 1, 2014 (for a fiscal year taxpayer), or a business or sole proprietor with average gross receipts over the prior three tax years of $10,000,000 or less.

How will the changes affect me?

Taxpayers meeting the above criteria will have a choice as to whether to adopt the new rules on a cut-off basis or to adopt them under the normal procedures for accounting method changes. Following Friday’s announcement, your tax service provider now has another option to consider when evaluating and recommending the best course of action to meet the new compliance requirements depending on your unique situation.

What if I already filed Form 3115?

RKL was proactive in getting our clients in compliance with the new rules and many of our clients have already filed for the changes under the normal accounting method procedures using Form 3115. This strategy is still allowed under the most recent guidance from the IRS.

Although there are new procedures now available, compliance is still burdensome as taxpayers need to evaluate how and if to change the way they approach tangible asset acquisitions and repairs. Despite the relief now being offered by the IRS, filing Form 3115 under the normal procedures is still preferable in many cases and will provide a more favorable outcome due to:

  • The ability to deduct items from prior years that are currently on depreciation schedules
  • The ability to make a late partial disposition election for 2014
  • The back audit protection afforded by the IRS with a Form 3115 filing

Have questions about how new tangible asset regulations or Revenue Procedure 2015-20? Contact your RKL service provider today or one of our local offices today.

Robert Gratalo, CPA, York PAContributed by Robert M. Gratalo, CPA, MST, a partner in RKL’s Tax Services Group. Rob specializes in federal and state taxation of privately held businesses in the construction, manufacturing and distribution, real estate development, architecture and engineering and service industries.

 

 

Posted on: February 6th, 2015

New FASB Accounting Standard for Intangibles Acquired in a Business Combination

The FASB’s new guidance is is aimed at reducing the cost and complexity associated with the measurement of certain identifiable intangible assets acquired in a business combination.

The FASB, in conjunction with the Private Company Council (PCC), recently issued an accounting alternative for private companies which is intended to reduce the cost and complexity associated with the measurement of certain identifiable intangible assets acquired in a business combination.

This ASU allows a private company to elect an accounting alternative for the recognition of certain intangible assets acquired in a business combination.  In this alternative, a private company would no longer recognize the following separate from goodwill:

(a) customer-related intangible assets unless they are capable of being sold or licensed independently from the other assets of the business, and

(b) noncompetition agreements.

Some customer-related intangible assets that are capable of being sold or licensed independently would continue to be separately recognized, such as mortgage servicing rights, commodity supply contracts, core deposits, and customer information (e.g., names and contact information).

Who is Affected?

This guidance, if elected, is applicable to all entities except for public business entities and not-for-profit entities.  The accounting alternative applies when an entity within the scope of this Update is required to recognize or otherwise consider the fair value of intangible assets as a result of a business combination under Topic 805.  Other transactions where this accounting alternative can be applied are:

  1. Assessing the nature of the difference between the carrying amount of an investment and the  amount of underlying equity in net assets of an investee when applying the equity method under Topic 323 on investments—equity method and joint ventures
  2.  Adopting fresh-start reporting under Topic 852 on reorganizations.

Considerations for Private Companies

It is important to note that a private company adopting this guidance MUST adopt the previous PCC guidance issued in January 2014 where goodwill may be amortized over a period of 10 years or less (ASU No. 2014-02, Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill). The amortization of the goodwill will impact the income statement whereas, previously, there would have been no effect to the income statement if no impairment was indicated.  The amortization effect may not be significant to the Company if financial covenants related to debt agreements scope out amortization.  However, an entity that elects the accounting alternative in ASU No. 2014-02 is not required to adopt the amendments in this Update. These factors should be evaluated by Private Companies in making a decision whether to adopt these alternatives.

Effective Date

The decision to adopt ASU No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination, must be made upon the occurrence of the first transaction within the scope of this accounting alternative.  If the transaction occurs in the first fiscal year beginning after December 15, 2015, the adoption will be effective for that fiscal year and all periods thereafter.  If the transaction occurs in fiscal years beginning after December 15, 2016, the adoption will be effective in the interim period that includes the date of that first transaction and all periods thereafter.  Early application is permitted for any interim and annual financial statements that have not yet been made available for issuance.

Have questions about this guidance? RKL is here to help. Contact your RKL advisor or one of our local offices for details and assistance in assessing the impact of adoption.

New Goodwill Accounting Guidance from PCCContributed by Michael P. Jones, CPA, a manager in RKL’s Audit Services Group. Mike specializes in serving the audit and accounting needs of commercial, not-for-profit and governmental organizations.

 

Posted on: February 2nd, 2015

Three Questions to Ask When Bringing on New Shareholders in Your Business

buy sell agreements, shareholders

Open communication, clarity and preparation are key to ensuring the successful on-boarding of new shareholders.

In family-owned and privately-held businesses, bringing on new shareholders is a natural part of your company’s evolution. Whether it’s the next generation coming up the ranks or a loyal company leader whose time has come, the individuals you’ve identified as potential shareholders deserve to be set up for success. And in my experience consulting companies of all types and sizes, the best way to position the individual and the company for success involves clarity, preparation and communication.

Considering bringing on a new shareholder? Consider these important questions.

  1. Have you educated the potential shareholder on the upsides and risks of business ownership? When it comes to bringing on new potential shareholders, open and honest communication is critical. Take the time to ensure that potential shareholders understand the upsides of the potential for appreciation, as well as the financial risks involved. In many businesses, owners will need to guarantee debt with their bank and, for pass-through entities, owners will participate in paying income taxes associated with business profits. Help prepare new potential shareholders by giving them a thorough understanding of the benefits and risks associated with ownership.
  2. Has the business prepared administratively and legally for new ownership? In many cases, there are legal documents that you may want to update, including shareholder agreements, buy-sell agreements and corporate stock records. Now also may be a good time to review your company’s compensation and benefit policy for owners.
  3. Have you clearly defined the potential shareholders’ new role in the company? Business owners often play dual roles in the organization as both an owner and an employee. Take the time to discuss in-depth how the individual will operate in the day-to-day operations of business as well as in his or her new role as an investor or a stockholder. Many times, transitioning into ownership will mean a promotion for the individual. Be sure to give thought as to what this new role will mean to your existing team and be sure to communicate this both internally and externally.

Since all companies are unique, your specific planning should always be geared toward your individual circumstances. You’ll likely want to leverage external resources, including your CPA, to ensure all of your documentation is appropriately updated and that you’ve covered all bases when it comes to financial aspects of this new ownership on-boarding. By focusing on developing clarity, thorough preparation and open communication, you’ll be well-positioned to bring on new owners and continue your company’s legacy of success.

stonerContributed by John S. Stoner, CPA, CVA, partner and leader of RKL Business Consulting Services Group in the Lancaster office. John provides a wide range of business consulting services, including business valuation, financial analysis, litigation support, merger/acquisition assistance and business succession planning to business clients.

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