August, 2015 | RKL LLP
Posted on: August 26th, 2015

Your Entity Type Selection Cheat Sheet

Female business ownerThere are many different ways to set up a business, but understanding which one is the best fit for your entrepreneurial situation can be overwhelming. Whether you are just starting out or looking to change the structure of your existing business, it’s important to remember that the type of entity you choose will impact your core business objectives, such as:

We’ve put together a quick “cheat sheet” to look at business entity types and the high-level pros and cons related to these objectives. Remember to discuss these options with your tax professional or business advisor so you are aware of all financial and legal consequences of your choice.

Proprietorships     

PROS

  • Easy to form and simple to operate
  • Few administrative burdens
  • Income taxed at the personal level

CONS

  • Limited sources of capital
  • No limited liability (Exception: single-member LLC may be treated as a sole proprietorship for income tax purposes but provide liability protection)
  • Net income subject to self-employment tax

General Partnerships/Limited Partnerships

PROS

  • More sources of capital than proprietorships
  • More management resources
  • Less administrative burdens than corporations
  • Income is taxed at personal level and allocations of income can be flexible

CONS

  • Transfer of interests can be difficult
  • Each partner is personally liable for all partnership obligations (in Limited Partnerships, there is ability to have limited liability to the extent of partner’s investment)
  • Net income subject to self-employment tax
  • Partnership income tax and basis rules can be complex
  • Partners not entitled to all tax-deductible fringe benefits

Corporations

PROS

  • More sources of capital
  • Owners have limited liability
  • Corporations have unlimited lives
  • Easy to transfer ownership interests
  • More management resources

CONS

  • Double taxation
  • More administrative burden
  • More difficult to form and dissolution can trigger taxable income
  • Borrowing can be more difficult without stockholder guarantees

S Corporations (S Corp)

PROS

  • Avoid double taxation, income taxed at shareholder level
  • Owners have limited liability
  • Distributions to owners exempt from payroll taxes (assuming adequate compensation exists for the shareholder)

CONS

  • Number of shareholders is limited
  • Only have one class of stock (differences in voting rights allowed)
  • Limits on types of shareholders (certain trusts, corporations, partnerships)
  • Shareholders who own more than 2% must pay tax on some employee fringe benefits
  • Tax basis for deductions, losses and distributions does not include corporate debt guaranteed by shareholder

Limited Liability Company (LLC)                  

PROS

  • Members have limited liability, not personally liable for LLC’s debt, unless guarantee
  • Management participation can be limited based on the LLC agreement
  • Flexibility to choose to be taxed as a C Corporation or S Corporation

CONS

  • Transfer of interests may be difficult
  • Some industries and/or professions may not permit LLCs
  • Liability protection is relatively untested compared to other entity types

Limited Liability Partnerships (LLP)

PROS 

  • Income passed through and taxed at personal level
  • Ownership structure is flexible

CONS

  • Transfer of interests may be difficult
  • In some states, partners are liable for debts and obligations of LLP

Identifying your objectives and evaluating the advantages and disadvantages of various entity types before making your selection is an important part of the process when opening or changing your business. The chart above captures the main pros and cons to consider when selecting an entity type or changing entity status, but it is important to complete a full review of all factors before making such an important decision. RKL’s Tax Services Group is ready to help you through the entity type evaluation and selection process, to ensure that you find the right entity type for your specific business needs. Contact us today to get started.

Scott Myers, RKL Tax ManagerContributed by G. Scott Myers, CPA, CSEP, a Manager in RKL’s Tax Services Group. Scott’s area of emphasis is providing tax services for closely-held businesses in a wide variety of industries. He also focuses on estate and trust planning for individuals and their families.

 

 

 

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Posted on: August 19th, 2015

Avoid These Common Pitfalls in Internal Investigations

Magnifying glass over currencyThe day feared by every business owner arrives: you suspect an employee of stealing from your company. It’s only a hunch and you don’t want to act prematurely, so you start your own internal investigation. After a few days or even weeks of detailed analysis and painstaking work, you have gone from cautious concern to bold accusations. Justice must be served, and you will see to it!

It is only natural to become passionate when realizing that someone you know, trust and many times have worked with for years has most likely been engaging in unlawful and unethical activity. You’ve worked hard to protect and grow your company, and it is unthinkable that someone internal could be capable of fraud. While preliminarily reviewing records to confirm your understanding is a good idea, engaging in a full blown investigation, including review of digital data and interviews of the suspect and other associates may not be. Without proper training and consideration of risks, individuals and companies can find themselves in hot water while the suspect goes free.

Here are three common pitfalls that can set internal investigations off on the wrong foot, and suggestions for how to avoid them:

  • Mishandling of evidence: While it may seem like a good idea to take physical control of the suspected employee’s laptop and review his e-mails to find the “smoking gun,” you first need to consider that this laptop and the data contained on it may be needed in an unaltered state as evidence for future legal proceedings. Using this computer will alter the employee’s digital footprint and may even be considered evidence tampering, thus rendering any information on the computer inadmissible in legal proceedings. Companies should consider consulting with a professional services firm that offers forensic reviews before cracking open the computer.
  • Confronting employees alone: Businesses are especially at risk when an individual company representative decides to confront the suspected wrongdoer and does so alone. These types of meetings can result in a “he said, she said” situation or worse, a situation where the wrongdoer actually accuses the company representative of wrongdoing. Depending on their claims, the company may need to dedicate resources to defending their actions, resulting in unnecessary administrative and financial burdens. Companies should consider engaging an attorney who can guide management’s contact with the suspected wrongdoer. This step can help protect the company and its representatives from personal and corporate liability.
  • Jumping to conclusions: When an individual is suspected of wrongdoing, it is easy to consider all his activities under the same cloud of suspicion. The rationale is often, “well if the employee did this, then I’m sure he did that, too!” But the reality, however, is that the facts have to speak for themselves. If a company is unable to keep an impartial view and maintain the attitude of “innocent until proven guilty,” it is best for them to engage an independent firm to conduct a thorough and objective investigation.

Considering each of these areas before starting your own internal investigation can save you time, energy and money in the long run. Want to make sure your internal investigation is handled efficiently and effectively? RKL’s Business Risk Services team can help – contact us at (717) 394-5666.

Marcia HoffackerContributed by Marcia Hoffacker, CIA, CFE, CRMA, Business Risk Practice Leader for RKL’s Business Consulting Services Group. Marcia has extensive experience in the areas of business risk identification, evaluation and management; fraud prevention, detection and investigation; and internal audit services

 

 

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Posted on: August 13th, 2015

Regional CPA Firm Ranked among Nation’s Top 100

IPA 2015 Top 100

RKL rose four spots on this year’s Inside Public Accounting Top 100 Firms list.

PRESS RELEASE

LANCASTER, PA (August 13, 2015) – A regional CPA and business consulting firm is again ranked among the top 100 firms in the nation, according to a recent survey released by a notable accounting industry publication. Reinsel Kuntz Lesher LLP (RKL), Certified Public Accountants and Consultants, ranked 69th on Inside Public Accounting’s (IPA) “2015 IPA 100 Firms” list.

“As RKL continues to develop the range of specialized professional services we offer to an expanding geographical region, we remain focused on the people who make this all possible: our clients,” RKL CEO Edward W. Monborne said. “Our sustained rise in this annual ranking reflects our commitment to delivering value beyond compliance for each and every client we are privileged to serve.”

RKL’s position on the “Top 100” list, which is based on overall net revenue, is four spots higher than its 73rd position last year. The firm has consistently increased its ranking on the list each year since first entering the “Top 100” in 2012.

In addition to its inclusion in the “Top 100,” RKL was also named the 16th largest CPA firm in the Northeast region, the only Central Pennsylvania firm on a list primarily made up of firms located in larger metropolitan areas.

The firm has experienced in growth in various services areas including audit, business valuations, business risk management, cost segregation, forensic/fraud accounting, litigation support, mergers and acquisitions, international tax and others. Additionally, RKL’s client base saw growth in the manufacturing and distribution, nonprofit, construction and real estate development, and government sectors, among several others.

2015 marks the seventh consecutive year IPA has issued the Top 100 list, which is among the longest-running, most accurate and up-to-date for the nation’s largest accounting firms. Click here for more information and to read the full ranking.

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Posted on: August 11th, 2015

Thinking Ahead: Three Tips to Ensure Smooth Succession Planning [VIDEO]

View the video

Run-time: 03:29 Considering your exit strategy? A successful outcome depends on having a clear picture of your company’s value, your financial position and your ownership options.

You worked hard to build your business and make it a success, but what if it’s time to consider the next chapter? Familiarizing yourself with the succession planning process can help you turn the page smoothly. There are three main things to keep in mind when considering if it’s time to transition your business to its next phase 

  1. Determine your personal financial situation. Before moving forward with succession plans, it is imperative to have a clear understanding of your personal financial situation. This is an often overlooked step, but the importance cannot be overstated. Many entrepreneurs think they know their personal financial net worth, and feel as if they have adequate resources to maintain their desired quality of life into the future. However, it is highly recommended that these assumptions be validated by a personal financial planner. A professional review can spare you the devastation of moving through the succession planning process only to discover a shortfall in the proceeds needed for future living expenses.
  1. Consider business and ownership goals. Do you want your business to continue? If so, how do you see it evolving? Who do you see taking the reins from you? It’s important to think through these questions and make sure you express your goals and wishes to those affected. If there is a second or third generation family member you want to transition ownership to, or if there is a management team you think would be interested in purchasing the company, you have to ensure they have the interest and the financial wherewithal to acquire an ownership stake.
  1. Determine what your business is worth. Just like your personal financial situation, you may think you know what your company is worth, but it is critical to get a professional valuation that produces a reasonable estimate of the business’ value. Once you have this value, you can hold it up against your personal financial needs you will have already determined. If the numbers align, it is a sign that the succession process can begin. However, if they don’t match up the way you’d like, it’s a chance to examine and implement strategies to build value in your business.

Implementing these tips will provide you with the necessary information to conduct a smooth transition for your business. The succession planning process requires a wide range of expertise, and RKL is equipped to guide and assist you every step of the way. Our consulting team draws upon tax professionals, business valuation professionals and investment advisors to help you transition, sell or recapitalize your business. Whatever you need to meet your goals, we can help. Contact us today to learn more.

Paula K. Barrett, CPA/ABV, CVA, CGMAContributed by Paula K. Barrett, CPA/ABV, CVA, CGMA, partner and leader of RKL’s Business Consulting Services Group. Paula specializes in business valuation and litigation support services, assisting clients in the acquisition or sale of closely-held businesses and general business planning services. She also has experience in tax-exempt bond financing services, including bond verifications and arbitrage rebate computations.

 

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Posted on: August 6th, 2015

FASB Proposes Changes to Not-for-Profit Financial Statements

Balance sheet showing assets

New proposed changes could impact the financial statements of not-for-profits.

In April 2015, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) that would significantly impact nearly all not-for-profit organizations. The proposed changes are intended to improve existing presentation requirements for financial statements of not-for-profits, with the goal of providing more useful information to the users of these financial statements.

The proposed ASU addresses the following key issues:

  • Complexity and understandability of net asset classifications;
  • Liquidity of not-for profit organizations;
  • Inconsistent reporting of intermediate measure of operations;
  • Lack of consistency in the type of information provided about expenses of a period; and
  • Misunderstandings about and opportunities to enhance the utility of the statement of cash flows.

Let’s take a closer look at each of these items and how the ASU proposes to change them.

Net Asset Classification

Under current guidance, not-for-profits are required to present the amount for three classes of net assets (unrestricted, temporarily restricted, and permanently restricted) on the face of the statement of financial position. The proposed ASU would retain the requirement to provide information regarding the amount and nature of restrictions; however, to reduce complexity in financial reporting, only two classes of net assets (those with donor restrictions and those without) would need to be presented. Additional disclosures would be required to divulge board designations and other limits stipulated by donors.

The proposed ASU would also change the presentation of underwater amounts of donor-restricted endowment funds. The proposed standard would require these funds to be included in net assets with donor restrictions whereas current guidance requires underwater endowment funds to be reported in unrestricted net assets.

Liquidity Information

The proposed ASU includes the requirement to disclose both quantitative and qualitative information regarding the liquidity of assets and near-term demands for cash as of the reporting date. Not-for-profits would be required to disclose the amount of financial assets at the end of each period and the amount of those assets that, because of restrictions or limitations on their use, are not available to meet cash need in the near term. Additionally, not-for-profits would be required to disclose the amount of financial liabilities that require cash in the near term and the methods (including time horizon) used to manage its liquidity.

Measure of Operations

Currently, any change in each of the three classes of net assets is required to be presented on the statement of activities. Under the proposed ASU, a not-for-profit would continue to report the amount of any changes; however, they would be reported in just two classes of net assets.

The proposed ASU would also require presentation of two subtotals to be used for measuring operating activities related to changes in net assets not subject to donor restrictions.

  1. The first subtotal would include operating revenues, support, expenses, gains and losses that are without donor-imposed restrictions and before internal transfers.
  1. The second subtotal would include the effects of internal transfers resulting from governing board designations, appropriations, and similar actions that place (or remove) self-imposed limits on the use of resources that make them unavailable (or available) for current-period operating activities.

Reporting of Expenses

Not-for-profits would be required to present investment returns net of related external and direct internal expenses under the proposed ASU.

Additionally, all not-for-profits would be required to present expenses by both nature and function. Currently, only health and welfare organizations are subject to this requirement. The proposed changes would give not-for-profits the option to present this information one of three ways: in the statement of activities, as a separate statement, or in the notes to the financial statements. Enhanced disclosures would be required in order to explain the methods used to allocate expenses across functions.

Cash Flows

The proposed ASU would require not-for-profits to use the direct method of accounting to present operating cash flows. Additional presentation of the indirect method would be permitted but no longer required. Additionally, certain items reported in a statement of cash flows would be re-categorized to better align operating measures with the statement of activities.

The proposed ASU is currently out for review, with written comments due to FASB by August 20, 2015. Once FASB considers all the submitted feedback, it will set an effective date. RKL’s Not-for-Profit Industry Group will continue to monitor the progress of these proposed changes as they move through the approval process.

Not-for-profits with questions about how these proposed changes would affect their accounting and record-keeping procedures should contact Douglas L. Berman, Not-for-Profit Industry Group leader at 717.843.3804 or dberman@rklcpa.com.

Erika_SchachleContributed by Erika R. Schachle, CPA, supervisor in RKL’s Audit Services Group. Erika specializes in serving the accounting needs of not-for-profit organizations, including financial reporting and GAAP audits.

 

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Posted on: August 4th, 2015

How the Highway Funding Bill Affects Your Taxes

Road work

The recently enacted highway funding bill also contains tax provisions.

You may have heard on the news that the recently enacted highway bill provides short-term funding for road improvements. What you may not know is that the bill also contains provisions that impact the tax calendar for certain entities. Signed into law on July 31, this new highway funding bill alters tax return filing deadlines, beginning with 2016, for partnerships, C corporations and individuals who have reportable bank accounts in foreign countries.

What you need to know

The following revised due dates become applicable for tax years beginning after December 31, 2015.

  • Partnerships: For calendar-year partnerships and LLCs that file as partnerships the filing deadline has moved one month earlier, from 4/15 to 3/15. However, the extended filing deadline remains unchanged at 9/15. For fiscal-year partnerships, the deadline is the 15th day of the third month following the close of the fiscal year, and an extension of six months can be obtained.
  • C corporations: For calendar-year C corporations, the filing deadline is postponed from 3/15 to 4/15. However, the extended deadline remains 9/15. For 6/30 year-end C corporations no deadline changes apply until 2026, so the original due date remains 9/15 and the extended due date remains 3/15. For C corporations with a year-end other than 12/31 or 6/30, the original due date is the 15th day of the 4th month after year-end, and a six month extension is provided.
  • S corporations: No filing deadline changes have been made. For calendar year S corporations, the original due date is 3/15, and the extended due date remains 9/15.
  • Individuals with foreign bank accounts: Currently foreign bank account reporting must be completed by 6/30 and no extension is available. Starting with 2016 reports, the foreign bank reporting will be due on 4/15 and a new six month extension will be allowed until 10/15.

Have questions about how these new tax rules will impact you? Contact your RKL tax advisor for assistance.

Eric Wenger, CPA, MSTContributed by Eric R. Wenger, CPA, MST, a partner in RKL’s Tax Services Group and Tax Department Head in the Lancaster Office. Eric specializes in providing strategic tax planning and business advisory services to closely-held businesses and publicly-traded corporations. Eric leads the firm’s tax outsourcing niche and deals with issues surrounding consolidated tax returns, multi-state taxation, and accounting for income taxes.

 

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Posted on: August 4th, 2015

On the Horizon: Changes to A&A Guide for A/E Firms

An important audit and accounting procedural guide produced by a leading transportation trade association is undergoing some changes. The American Association of State Highway and Transportation Officials (AASHTO) started began updating the guide in 2014, and a draft with proposed changes is presented for review on the AASHTO website.

The External Uniform Audit & Accounting Guide, which was last updated in 2012, aims to assist users in understanding terminology, policies, procedures and audit techniques, and sources for applicable federal regulations. It is important that firms are familiar with this guide both from an internal financial operation and an external auditing standpoint. RKL’s Architecture and Engineering Industry Group reviewed the proposed changes in the current draft and below we break down what each change means for your firm.

Chapter 4 (Cost Principles)

  • Section 4.2 was added to this chapter to acknowledge State and Local Cost Principles. This addition was considered necessary in light of the creation by state and local governments of wage caps and other rules regarding cost principles and their application (for example, prescribing a treatment for overtime premium).
  • Chapter 4 also noted that the Federal Highway Administration (FHWA) is requiring governments to accept cognizant audits of Federal Acquisition Regulation (FAR) compliant rates. However, if funding is not coming from FHWA then governments can set more restrictive rules regarding cost allowability. Multiple rates may be necessary if you do work on both federal and state funded projects and the state has more restrictive rules.

Chapter 5 (Cost Accounting)

  • Section 2 of this chapter again emphasizes the need to analyze uncompensated overtime and reiterates that the burden of proof resides with the consultant firm to prove that uncompensated overtime will not materially impact the overhead rate.
  • Section 3 clarifies how to account for overtime premium in compliance with the FAR.
  • Chapter 5 also reworded best practice guidance related to bonus policies.

Chapter 7 (Compensation)

  • This chapter indicates that the National Compensation Matrix (NCM) has been issued and adopted. The draft notes that additional changes to this chapter may be necessary based on the latest rulings by the Armed Services Board of Contract Appeals (ASBCA). There have been recent discussions about a possible change to the NCM to include a geographical component, but no pending changes have been noted at this time.
  • This chapter also indicates that compensation should generally be reviewed for reasonableness in total vs. individual components of compensation (though individual components must be reviewed for allowance).
  • This section also re-iterates the guidance in FAR 31.205-6 dealing with compensation, advising that it should be reasonable for firms of the same size, industry, geographic area and engaged in similar non-government work under comparable circumstances. It further re-iterates that the consultant has to document compensation for each employee or job class for work performed.
  • With the severe drop in the Building & Construction Authority (BCA) rate (effective June 24, 2014), it could be possible that two rates may need to be calculated (for contract prior to the effective date and for contracts executed after the effective date). We will continue to monitor this possibility.

Chapter 8 (Selected Areas of Cost)

  • Edits to this section clarified employee morale, health and welfare costs. In particular, gifts related to service/achievement or related to compensation are the only allowable gifts allowed under the FAR guidelines. The proposed changes also indicate that morale, health and welfare costs are limited to house publications, health clinics, wellness/fitness, and employee counseling service. Food and dormitory services also fall under this guidance.
  • This chapter reworded common control with respect to related party rent, and also clarified travel expenses, including owned, leased, or chartered aircrafts and the requirements to constitute an allowable charge as well as personal usage of vehicles and related requirements.
  • Legal costs were also addressed in the draft as the use of legal counsel has grown immensely and ranges in use from very simple to very complex issues.
    • Given the unique nature of these costs, the guide illustrated several principles to help determine whether or not costs should be considered allowable.
  • This chapter also discussed directly related costs and indicated those costs can be eliminated or they can apply a disallowance based on using disallowed labor divided by total labor and multiplying it to those costs to determine a reasonable disallowance.

Chapter 10 (Guidance for Developing Audit Procedures)

  • This chapter addressed testing of labor and provided further insight regarding the size of the population and volume of transactions that should be reviewed.
  • It also reiterates that total direct and indirect labor costs recorded in the general ledger must be reconciled to the job cost system (direct labor) and the 941’s.

Chapter 11 (Audit Reports and Minimum Disclosures)

  • The reports in this section were updated to comply with current AICPA standards.

Chapter 12 (Cognizance and Oversight)

  • This chapter provided additional guidance regarding the cognizant approval process, who can perform a cognizant audit, and when a cognizant audited rate must be accepted.
  • Further guidance was provided that emphasizes the governmental auditor’s responsibility when utilizing the AASHTO Workpaper Review program discourages any self-imposed higher standard. Going forward, additional independent testing and auditing should only be performed where it is documented and substantiated that the engaged auditor has not met industry standards in performing their audit, workpaper development, and testing standards.

A/E firms with questions about these proposed changes should contact their RKL audit professional. Our team will continue to monitor changes to the guide as it moves through the approval process.

PCC Accounting Financial ReportingContributed by D. Hunter Mink, a manager in RKL’s Audit Services Group. Hunter is responsible for the planning and supervision of audit engagements for clients in various industries, including engineering, construction, manufacturing/distribution and higher education.

 

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