March, 2016 | RKL LLP
Posted on: March 22nd, 2016

New Lease Accounting Rules: How Your Business Can Prepare

Professionals at a tableThe days of using off-balance-sheet financing for capital purchases are over. As we explained recently on the blog, big changes are ahead for the financial statements of businesses, thanks to a long-awaited major accounting standard update that brings operating leases onto company balance sheets.

The Financial Accounting Standards Board (FASB) finalized the new accounting standard in late February 2016, with an effective date of January 1, 2020, for privately-held businesses. All lease agreements in effect on or after January 1, 2020, must record a liability for the present value of the lease payments with the offsetting side to a noncurrent asset. This means billions of dollars of these lease obligations will soon need to be included on balance sheets.

Even though this new accounting standard is not effective until 2020, this change from current practice impacts businesses today in several ways. Let’s take a look at what business owners should be doing now to prepare for the impact of these new accounting rules.

Review: Compile all current lease programs for equipment and any lease agreements for real property, with an eye toward both lease length and renewal periods. A lease with a longer timeframe means a greater liability will need to be recorded on financial statements. Taking the time now to calculate the approximate impact the new standard will have on your balance sheets can help you better prepare to absorb a potentially larger liability.

Think ahead: Establish a protocol for evaluating all future lease agreements. Make sure the process includes analysis of accounting treatment, financial statement impact and financing issues. The leases you sign today could be included in these new standards, and could impact loan covenants.

Communicate: Get in contact with your financing institutions to educate them on the impact this standard will have on your balance sheet and prospective financial reporting. Also, use this opportunity to understand the financial institution’s interpretation of the standard and the impact it may have on the financial institution’s lending practices. This will help you determine if your financial covenants will be negatively impacted by this change in accounting for leases.

RKL’s audit and accounting team has the expertise to help businesses with the action items listed above in preparation for the new standards. Businesses with questions about how this will affect their bottom lines should contact your RKL professional or one of our local offices.

Keith L. Eldredge, CPA, CCIFP®Contributed by Keith L. Eldredge, CPA, CCIFP®, partner in RKL’s Audit Services Group. Keith is primarily responsible for serving the accounting and auditing needs of privately held construction and real estate clients.

 

 

 

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Posted on: March 16th, 2016

Recognizing Unrelated Business Income in your Nonprofit

Collecting donation at food bankDirect mail, sponsorships, fundraisers – these are just a few of the many ways nonprofits work to raise revenue to support their charitable or educational endeavors. But did you know that the IRS considers certain activities or types of revenue “unrelated business income”(UBI)? The presence or level of UBI on an organization’s books could jeopardize its tax-exempt status, so it’s important that nonprofit leaders understand this concept and how to stay in compliance.

What is unrelated business income?

The IRS classifies UBI as activities of a tax-exempt organization that are not substantially related to the performance of the group’s core mission. Net revenue generated by an unrelated business activity is subject to federal income tax.

Keep in mind that the IRS deploys the UBI rule not only to raise additional tax revenue, but also to eliminate a source of unfair competition with for-profit businesses.

It is safe to say that UBI is a grey area of taxation, with a great deal of subjectivity, modifications and exclusions. But in a general sense, there are a couple of tests that a revenue stream must pass in order to be considered UBI, such as:

  • It has to be substantially unrelated to the mission or goals on which the organization’s tax-exempt status is based.
  • It must have the general characteristics of a trade or business, which includes any activity carried on for the production of income.
  • It is carried on in a frequent and continual manner. This includes prep time and also can have a seasonal frequency component.

Exceptions to unrelated business income

There are several key activities common to nonprofits that are exceptions to UBI.

  • Convenience businesses: There must be a “substantial causal relationship” as the IRS would say, meaning that offering this product or service is a direct result of the organization’s mission to provide assistance or support to its members. Examples of a convenience business include vending machines, laundry facilities, cafeterias and coffee shops.
  • Sale of gift items: The items sold must have been donated. For instance, sales at a thrift shop operated to benefit a tax-exempt organization would not be considered UBI, nor would vehicles donated as part of a fundraiser.
  • Gambling activities: Bingo is an exception to UBI when it is not conducted on a commercial basis and it is permitted under state law. Other games of chance are also exempt from UBI if they are run by a volunteer and are not run on a regular basis.
  • Fairs, expos or industry events: Entertainment activities at a fair or expo designed to educate attendees on a particular topic are not considered UBI, nor are those conducted to attract members of the public to the fair. Also excluded from UBI are industry promotional activities like trade shows, conventions or annual meetings, both the cost of attendance as well as rental of display space.

Why it pays to be mindful of unrelated business income

A good rule of thumb is if 25 percent of gross income is derived from unrelated sources, an organization could come under IRS scrutiny. IRS audits of tax-exempt organizations have been on the rise in recent years, and there is no sign that the trend is reversing.

If gross revenue from UBI is more than $1,000 in a given tax year, it must be reported to the IRS using Form 990-T. These filings are due the 15th day of the 5th month, with some exceptions. UBI is taxed at the federal corporate tax rate, but may be reduced by applicable tax credits. In addition to federal tax requirements, there could also be state tax consequences. Your RKL advisor can help determine if a revenue stream qualifies as UBI and help you prepare the necessary tax paperwork to stay in compliance. Contact us today to assess your level of UBI.

Ruthann J. Woll, CPAContributed by Ruthann J. Woll, CPA, Principal in RKL’s Tax Services Group and member of the firm’s Not-for-Profit Industry Group. Ruthann has significant experience in tax planning and compliance and specializes in serving individual and not-for-profit clients.

 

 

Working Capital blog disclaimer

Posted on: March 15th, 2016

Regional CPA Firm Climbs “Top 100” List

RKL also recognized by Accounting Today among “Pacesetters for Growth”

PRESS RELEASE

RKL Climbs Accounting Today 2016 Top 100 Firms liist

LANCASTER, PA (March 15, 2016) – A professional services leader in Central and Eastern Pennsylvania once again stands among the top 100 firms in the nation, according to industry publication Accounting Today. Reinsel Kuntz Lesher LLP (RKL), Certified Public Accountants and Consultants, climbed three spots from its 2015 ranking to claim the 67th spot on the “2016 Top 100 Firms” list.

In addition to the “Top 100” ranking, Accounting Today also placed RKL 18th among its 30 “Pacesetters for Growth,” in recognition of the firm’s 14.9 percent growth in 2015, and once again named it the 14th largest CPA firm in the Mid-Atlantic region.

“What sets RKL apart from other firms in the region is the broad range of capabilities and unmatched expertise that our local professionals provide to clients,” RKL CEO Edward W. Monborne said. “Our steady rise among the nation’s top CPA firms is a testament to that unique approach and reflects our evolution into a professional services leader.”

2015 was a year of continued growth and innovation at RKL. In response to the evolving needs of its clients, the firm expanded its Business Risk Services and State and Local Tax practices. RKL also experienced coast-to-coast growth through RKL eSolutions, the firm’s wholly-owned IT subsidiary that was named 2015’s Business Partner of the Year by Sage North America. RKL eSolution’s March 2015 acquisition of Northern California-based Sage Partner, Accuvar, allows it to better serve its customer base in the Western United States, and is just one example of the growth initiatives that place RKL eSolutions among top-tier Sage software providers.

RKL also continues to see high demand for its various service areas including business valuations, business risk management, cost segregation, forensic/fraud accounting, mergers and acquisitions support, investment banking, international tax and others. Additionally, the firm’s client base continues to expand, particularly in the manufacturing and distribution, nonprofit, construction and real estate development.

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Posted on: March 8th, 2016

Plan Now to Avoid Future Student Loan Debt Pitfalls

Tips to avoid student loan debt pitfallsIt’s financial aid season, with college applicants and their families filling out the Free Application for Federal Student Aid (FAFSA) to find out how much federal student aid they’ll receive. For the majority of students, however, this aid will make up only a portion of the funding needed to cover higher education costs. Many will turn to student loans to cover the difference.

It is important that prospective borrowers and their families remain vigilant about borrowing for college in order to avoid the financial burden of large student loan debt down the road. Here are some key considerations to help manage student loan debt wisely.

Consider price of schools

There are a lot of factors that go into selecting an institution of higher education, but be sure to include price among them. Review all options with an eye for value, and consider an option that has worked out financially for many students: two years at a community college. Many credits can be obtained at a two-year school for a fraction of the cost, as long as they are transferrable. The price tag of a chosen school will impact the amount of loans that may need to be incurred.

Explore all financing options

There are ways to limit the amount borrowed, such as paying what is possible from existing savings or cash flow, applying for all possible scholarships, aid or grants, and using education tax credits when applicable. Students can help reduce the amount borrowed by earning or saving money while in school. For example, early graduation cuts down on tuition costs, work/study programs can help generate income during the semester, and room and board costs are eliminated if the student lives at home.

Recognize types of loans

For most students, loans are a necessary financial tool. There are important differences in the types of loans available, so make sure to consider federal loans first. These loans offer better terms than private student loans. Parents can also explore taking out a federal PLUS loan up to the full cost of the education. Keep in mind that PLUS loans typically carry a higher interest rate, and cannot be transferred from parent to child, which means the parent is solely responsible for repaying the loan. When exploring financing options, however, it is critically important that families avoid drawing down retirement funds. After all, students can take a loan out for school but parents cannot take out a loan for their retirement expenses.

Estimate monthly cost

Loans can seem like an abstraction when thought of as a whole, so to help students and families get a real-world sense of what loans will truly cost, break it down into monthly payments. Seeing how much will need to be paid back each month can help determine affordability. For instance, a $40,000 loan translates into a monthly payment for $410.52 at 4.29 percent over a 10-year fixed term.

Understand impact of student loan debt

Whether you are a recent college grad looking to purchase a first home or an empty nester looking to downsize, repayment of a student loan can have a negative impact on your credit worthiness. Lenders utilize a metric called debt-to-income ratio (DTI) to measure credit worthiness. DTI is calculated by dividing total monthly debt payments by gross monthly income, which include student loan, auto, and minimum credit card payments in addition to housing costs (mortgage and property taxes or rent). As a rule of thumb, a DTI of less than 36% is ideal, and a DTI of more than 43% can prevent you from being eligible to receive a qualified mortgage from certain lenders.

 

Thinking through the financial consequences of student loans before enrolling in college is a sensible way to reduce stress and cost after graduation. It is also important to revisit financing options if family financial circumstances change. The team of financial advisors at RKL Wealth Management can help students and their families plot a responsible course for student loan debt management. Contact us today. 

Judson S. Meinhart, MBAContributed by Judson S. Meinhart, MBA, of RKL Wealth Management LLC. Judd provides investment management and comprehensive financial planning services for his clients and their families.  

 

 

 

Working Capital blog disclaimer

Posted on: March 2nd, 2016

FASB Issues Major Lease Standard to Bring Operating Leases On the Balance Sheet

FASB accounting standards update on leasesLast week, the FASB finalized a long-awaited major accounting standard update (ASU) which will require the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases.

Nonpublic business entities should apply the amendments in this ASU for fiscal years beginning after December 15, 2019 (i.e. January 1, 2020, for a calendar year entity). Early application is permitted for all nonpublic business entities.

How Does the New Guidance Differ from Current Lease Accounting?

For operating leases, a lessee is required to do the following under this guidance:

  1. Recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the balance sheet. To determine the appropriate discount rate to calculate present value, the lessee should use the rate implicit in the lease. If that rate is not readily determinable, the lessee should use its incremental borrowing rate. For private companies, the lessee is permitted to make an accounting policy election to use a risk-free discount rate using a period comparable to the lease term.
  2. Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis.
  3. Classify all cash payments within operating activities in the statement of cash flows.

When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise that option.

For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight line basis over the lease term.

Notable Consistencies with Current Lease Accounting

Consistent with the prior lease guidance, a lessee (and a lessor) should exclude most variable lease payments in measuring lease assets and lease liabilities, other than those that depend on an index or a rate or are in substance fixed payments.

The FASB retained a dual model, requiring leases to be classified as either operating or financing, with the classification criteria similar to current guidance. Financing leases will largely follow the criteria in the current lease accounting guidance for capital leases.

Additionally, the accounting applied by a lessor is largely unchanged from that applied under previous GAAP.

Disclosures

The new guidance will require additional qualitative and quantitative disclosures to help the users of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

Transition Guidance

In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset.

Considerations for Private Companies

This guidance will have significant business implications on commercial entities in virtually every industry upon adoption.

Since the new guidance requires virtually all leases to be reported on the balance sheet and will require more extensive disclosures, companies should begin to develop a robust process to summarize and report their leases. An initial step in this process is to gather a complete inventory of all the company’s leases.

In addition to having a significant impact on the financial statements and disclosures, companies will need to consider how this accounting change will impact their bottom line and financial bank covenants and be prepared to explain to their lenders and/or investors the financial impact of the changes. It is not too early to start looking into responses and a transition strategy for the lease accounting rule changes.

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.

Michael P. Jones, CPAContributed by Michael P. Jones, CPA, a manager in RKL’s Audit Services Group. Mike specializes in serving the audit and accounting needs of commercial and not-for-profit organizations.

 

 

 

Working Capital blog disclaimer

Posted on: March 1st, 2016

4 Steps to Smoothly Onboard New Shareholders [VIDEO]

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Run-time: 04:03 Bringing new shareholders into your business? Learn how you can position new owners and your company for success.

Growth and expansion are natural parts of a business lifecycle, and how these play out is unique to each entrepreneur. One commonality, however, is the need to handle expanding ownership strategically and thoughtfully. Below are four areas that business owners should think through and plan for when preparing to bring on new shareholders.

  1. Share the risks and benefits of business ownership. It’s important to make sure the individuals being considered for a shareholder position understand what it means to become an owner. They need to recognize the investment possibility (potential for appreciation, stock ownership, etc.) as well as the impact on compensation. However, there are risks associated with becoming a business owner, such as the need to guarantee debt with the bank you use, and these risks should not be diminished or downplayed to potential shareholders. Be open and honest about the full entrepreneurial landscape that awaits them as a new owner.
  1. Be clear about tax responsibilities. Most small businesses operate as pass-through business entities, which means the individuals who own the company participate in paying the income taxes levied on the business profits. Individuals preparing to take an ownership stake in your company must be informed as to what their role in this process will be, so they can be prepared financially. It’s also a good idea to inform them as to what extent cash flow would be provided to them to help cover the corporate-level taxes.
  1. Focus on administrative onboarding. Bringing in new owners changes the structure of a business, and as such it also changes behind-the-scenes paperwork. Don’t neglect the administrative tasks your business must complete to support a new owner. This includes legal documents that need to be updated or adjusted, like shareholder agreements, buy-sell agreements or corporate stock records. You should also review your company’s compensation policy and benefit structure at the owner-level.
  1. Create clarity around owner’s new role. The impact of new owners on the day-to-day operations of your business must be clearly outlined and communicated to everyone involved. Many business owners wear many hats and play many roles in a company, and if this is the case at your company, it is important to inform new owners what will be expected of them. Conversely, the rest of the team should know what they can expect from the new owners. Will they have an impact on daily functions or will this new owner take a big picture, strategic role? A promotion may be involved in the inclusion of a new member in the ownership group, so internal and external communications will be needed to disseminate this information to interested or affected parties.

If you are thinking of bringing new shareholders into your business, it’s never too early to start planning to make onboarding as smooth as possible. Leveraging an external resource, like a business consultant or accountant, can help you start planning and cover all your bases. Interested finding the right partner? Contact RKL’s Business Consulting Services Group to learn how we can help you achieve your goals.

John S. Stoner, CPA, CVAContributed 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 to clients, including business valuation, financial analysis, litigation support, merger/acquisition assistance and business succession planning.

 

 

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