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Working Capital Blog

Posted on: February 15th, 2018

What Does Tax Reform Have to Do with My Nonprofit?

What Does Tax Reform Have to Do with My Nonprofit?Most of the headlines about tax reform focus on the individual and for-profit business provisions. Nonprofit leaders may wonder how the Tax Cuts and Jobs Act (TCJA) will affect their finances and operations. Let’s examine two key ways tax reform directly impacts tax-exempt organizations.

Direct nonprofit tax reform impact: Unrelated business income

Tax reform changes how unrelated business income (UBI) is calculated and taxed.

Starting in 2018, nonprofits must calculate UBI on each trade or business individually, rather than the previous aggregated method. The definitions for trade or business in the TCJA are currently unclear – for example, do investments in multiple real estate partnerships count as one trade or business or must each partnership be counted separately? This is just one of the many areas of tax reform that will require additional clarification as regulations are drafted by the IRS.

Under tax reform, UBI will now be taxed at the new corporate rate of 21 percent, instead of the previous multi-level rate schedule. The financial impact of this rate change depends on the size of the nonprofit. Smaller organizations with less than $90,000 of taxable income will now pay more due to the switch, while larger organizations will see a smaller tax burden.

Net operating losses (NOLs) from prior years may still be used to offset all UBI tax. Tax reform sets new rules for NOL carryforwards at 80 percent of taxable income. Keep in mind, all new NOLs must be calculated by trade or business and can no longer “cross pollinate.”

Tax reform also expands the definition of UBI to include certain fringe benefits offered to employees, like transportation, parking or on premise athletic facilities.

How nonprofits can prepare for UBI change

Under the new UBI tax calculation and rate, nonprofit leaders must ensure they are allocating the appropriate general or shared expenses to each trade or business to maximize benefit. Other options, such as moving multiple taxable trade or business activities into a wholly owned corporation to offset profitable activities with loss activities, should be considered with the consultation of a tax advisor.

With regard to certain fringe benefits now considered as UBI, nonprofits should consider increasing wages and eliminating qualifying benefits from pay plans to avoid an additional tax burden. Your tax advisor can demonstrate the pros and cons of such a decision.

Direct nonprofit tax reform impact: Excise taxes

To bring nonprofit pay in line with public company compensation rules, the TJCA created a new 21 percent excise tax on annual compensation of $1 million or higher to an organization’s top five highest compensated employees. This new excise tax also applies to certain “golden parachute” separation pay packages. Medical services provided by doctors, nurses and veterinarians are excluded from this new tax, which is the obligation of the nonprofit, not the employee.

There are a lot of details to unpack around this new excise tax, related to issues like separation pay calculation and renumeration, so make sure to discuss your nonprofit’s unique situation with your tax advisor.

Additionally, the net investment income of some private colleges and universities are subject to a new 1.4 percent excise tax. Institutions with at least 500 students (over half of which are based in the U.S.) and prior year assets of at least $500,000 per full-time student will be hit with this new tax. This asset threshold calculation does not include assets used to carry out a school’s educational purpose, but it does include assets and net investment income of all organizations related to the private university.

How nonprofits can prepare for excise taxes

To continually assess the annual impact of the compensation excise tax, nonprofit leaders should keep close track of “covered employees” and “remuneration” from related entities to determine liability. One tactic worth discussing with your tax advisor is whether or not certain individuals above this pay threshold can be paid partly or in full by an affiliate not deemed a related party.

RKL to monitor implementation

As mentioned earlier, many of the ambiguous or unclear areas of tax reform will be fleshed out during the rule-writing process. RKL’s team of professionals dedicated to serving the not-for-profit industry are monitoring this process with an eye to nonprofit impact and will provide additional updates and clarifications as more information becomes available.

In the meantime, contact Douglas L. Berman, CPA, RKL’s Not-for-Profit Industry Group leader, with any questions regarding tax reform’s impact on nonprofits or for assistance preparing for the new tax landscape for organizations. Visit RKL’s Tax Reform Resource Center for more information and insights.

 

Stephanie E. Kane, CPAContributed by Stephanie E. Kane, CPA, Manager in RKL’s Tax Services Group. Her client responsibilities include serving clients in a wide variety of industries with a focus on not-for-profit entities.

 

 

 

 

 

RKL blog disclaimer

Posted on: February 13th, 2018

New PA Rules for Non-resident 1099-MISC Withholding

New PA Rules for Non-resident 1099-MISC WithholdingPennsylvania’s tax code underwent several changes in November 2017, when Governor Tom Wolf signed Act 43 into law. One of the most significant results of that legislation was the creation of a new withholding obligation for Pennsylvania companies that pay non-resident vendors or subcontractors.

Since issuing a bulletin on this topic last month, the PA Department of Revenue (DOR) received many questions regarding the timing and implementation for this 1099-MISC withholding requirement for tax year 2018. On February 5, 2018, the DOR announced that companies that fail to withhold this tax before July 1 will not be subject to fines and penalties. Any company that does withhold tax on 1099-MISC non-resident income, however, must file and remit it according to Act 43.

To assist clients with compliance, RKL’s State and Local Tax team assembled a quick primer on these new regulations.

Withhold PA Income Tax from Non-Resident Compensation or Business Income

PA-based companies that pay non-employee compensation or business income of $5,000 or above to a non-PA resident or disregarded entity with nonresident members (such as a limited liability company treated as a disregarded entity for federal purposes) must now file a 1099-MISC with DOR and withhold PA income tax (3.07%) from such payments. For amounts under $5,000, this withholding and filing is optional but recommended.

DOR defines non-employee compensation as any payment made to someone who is not an employee and payments made for services in the course of trade or business.

Withhold PA Income Tax from Certain Lease Payments

Individuals who make lease payments of $5,000 or more on Pennsylvania real estate in the course of trade or business to non-resident lessors must now withhold Pennsylvania income tax (3.07%) from the payment amount. For amounts under $5,000, this withholding and filing is optional but recommended.

For the purposes of Act 43, DOR defines lessor only as individuals, estates and trusts, and characterizes lease payments as rents, royalties, bonus payments, damage rents and other payments made pursuant to a lease.

Lessees must provide both DOR and the non-resident lessor with a copy of Form 1099-MISC demonstrating both the amount of lease payments and the amount withheld from them. Lessors must then also file a copy of any Forms 1099-MISC with their Pennsylvania tax returns.

1099-MISC PA Filing Requirements and Schedules

The DOR stated in its February 5 announcement that it expects payors and lessors to file the related 1099-MISC forms, with boxes 16 and 17 completed, timely in January 2019. DOR recommends that 1099-MISC withholding returns and monies be remitted and filed electronically via the e-TIDES system.

It also requires that payors and lessees adhere to the following schedules according to total withholding amount.

  • Quarterly schedule: If total withholding is under $300 per quarter, the taxes are due the last day of April, July, October and January.
  • Monthly schedule: If total withholding is $300 to $999 per quarter, the taxes are due the 15th day of the following month.
  • Semi-monthly schedule: If total withholding is $1,000 to $4,999.99 per quarter, the taxes are due within three banking days of the close of the semi-monthly period.
  • Semi-weekly schedule: If total withholding is $5,000 or greater per quarter ($20,000 per year), taxes are due on a semi-weekly basis. For employers with payrolls falling on Wednesday, Thursday or Friday, the remittance is due the following Wednesday after that payday. For employers with payroll on a Saturday, Sunday, Monday or Tuesday, the remittance is due the following Friday after that payday.

In addition to the above thresholds and schedules, DOR also requires payors to file quarterly reconciliation returns and an annual withholding reconciliation statement (REV-1667 R) with the 1099-MISC statements for each payee.

Clients with questions about this new requirement may contact their RKL advisor or reach out to me directly at jskrinak@rklcpa.com or 717.525.7447.

Jason C. Skrinak, CPAContributed by Jason C. Skrinak, CPA, State and Local Taxes (SALT) Practice Leader for RKL’s Tax Services Group. Highly regarded throughout the region for his deep knowledge and expertise in SALT consulting, Jason has significant experience representing taxpayers before Pennsylvania’s Board of Appeals and Board of Finance and Revenue.

 

 

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Posted on: February 12th, 2018

5 Things You Need to Know About International Tax Reform

5 Things You Need to Know About International Tax ReformWhile tax rate cuts and changes to deductions for individuals and businesses have been a focus of tax reform coverage, a significant shift is underway in the U.S. tax treatment of companies doing business overseas. Here’s a quick roundup of some of the central changes to international tax law that will have a profound impact on businesses with cross-border transactions.

Mandatory Repatriation

The most immediate impact of international tax reform will be a “transition tax” on the mandatory repatriation of accumulated earnings held offshore. This one-time tax is applicable to shareholders who own 10%, directly or indirectly, of a specified foreign corporation (SFC). The base for the tax is deferred income, or the accumulated foreign earnings of the SFC since 1986 that have not previously been taxed in the U.S. Shareholders subject to the tax should work quickly to quantify the earnings and profits (E&P) or deficit in E&P for each relevant foreign corporation.

Two preferential tax rates will be applied to a U.S. shareholder’s allocable share of post-1986 deferred foreign income. A 15.5% rate will be applied to the portion of earnings representing liquid assets such as cash, accounts receivable, certificates of deposit, government securities, etc. An 8% tax rate will be applied to the remainder of the allocated amount.

Since the transition tax will be a substantial sum for many taxpayers, an election is available to pay the tax on an installment basis over eight years or until a triggering event occurs (sale, liquidation, or cessation of the business, failure to pay an installment). The first installment of transition tax is due by the original due date of the shareholder’s return for the last tax year beginning before January 1, 2018. S Corporations are allowed a special election to defer the tax completely until a triggering event occurs or the entity ceases to be an S Corporation. The IRS has not yet specified the method to make these elections.

Territorial Tax System

One of the major talking points surrounding tax reform was a move from the U.S. system of worldwide taxation, whereby all income of U.S. citizens and residents is taxed in the U.S. regardless of the location it was earned, to a territorial system common among our trading partners. A purely territorial system would tax only income sourced to a particular jurisdiction.

To move the U.S. closer to this model, the new tax law uses a “participation exemption” in the form of a 100% dividends received deduction (100% DRD). This deduction is allowed against the foreign-source portion of distributions from specified 10% foreign corporations (those owned at least 10% by a domestic corporation). This DRD is only available to U.S. companies structured as C Corporations, so it will be worthwhile to analyze the entity types in a U.S. group that has ownership in at least one specified 10% foreign corporation.

Expansion of Anti-Deferral Provisions

While the participation exemption effectively excludes foreign-source income from U.S. taxation, provisions of existing law meant to prevent certain types of earnings from being held offshore long-term have been retained under the law and expanded to encompass new categories of income. Specifically, a new category labeled “Global Intangible Low-Taxed Income,” (GILTI) will be taxed currently. GILTI includes not only intangible income, but all income earned by a controlled foreign corporation (CFC) above a 10% return on its depreciable tangible property used to generate the income.

Reduced Tax Rate on High-Margin Exports, Intangibles and Services

Consistent with the goal of bringing profits home to the U.S., the legislation provides for an export incentive in the form of a deduction for foreign-derived intangible income (FDII). Similar to the determination of GILTI income inclusion, income eligible for the FDII deduction is not intangible income in the traditional sense, but income above a 10% return on its depreciable tangible property used to generate the income.

Income eligible for the deduction includes both the sale, lease, license and other disposition of property by a domestic corporation to a foreign person for foreign use and services provided by a domestic corporation to a person outside of the U.S. Through 2025, FDII is 37.5% deductible, with the intention to reduce the effective tax rate on such income to 13.125%. As with the 100% dividends received deduction, the deduction for FDII is only available to C Corporations.

Base Erosion and Anti-Abuse Tax

The base erosion and anti-abuse tax (BEAT) is a new alternative tax computation. A 10% tax rate applies to the modified taxable income of C Corporations, determined by adding back “base-eroding” deductions for payments made to foreign affiliates. BEAT only applies to corporations with a three-year average of at least $500 million in gross receipts and a “base-erosion percentage” of 3% or higher.

Tax reform replaces the previous deferral of items of foreign-source income with a system in which foreign-source income will either be taxed currently or not taxed at all. There are a number of incentives in the new law meant to encourage domestic business activity, but many of the new deductions are only allowed to be used by C Corporations.

Contact your RKL advisor for assistance with determining whether these taxes and incentives apply and to map out actions required for elections, planning or restructuring opportunities. Visit RKL’s Tax Reform Resource Center for more information and insights.

 

David W. Achey, CPA, MST, Manager in RKL’s Tax Services GroupContributed by David W. Achey, CPA, MST, Manager in RKL’s Tax Services Group. Dave specializes in business tax services including combined reporting, multistate and international issues, as well as accounting for income taxes. He has extensive experience working with small and medium-sized businesses as well as multinational companies, serving clients in industries ranging from industrial manufacturing and transportation to consumer electronics and pharmaceuticals.

 

 

 

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Posted on: February 7th, 2018

The Good, the Bad and the Unknown of Gov. Wolf’s 2018-19 Budget Proposal

The Good, the Bad and the Unknown of Gov. Wolf's 2018-19 Budget ProposalThe 2018-19 Fiscal Year budget address delivered by Pennsylvania Governor Tom Wolf yesterday was short and sweet. While recognition of the Philadelphia Eagles’ recent Super Bowl victory opened the proceedings with a unified and celebratory tone, it was not long until partisan differences emerged in this first stage of the annual state budget process. Despite his brevity, Governor Wolf did announce some ideas and proposals that would directly impact Pennsylvania taxpayers in a variety of ways.

The Good: No broad-based tax increases

Pennsylvania residents should be glad to hear that the Governor did not propose any broad-based tax increases. The 2018-19 budget address does not contain the broad-based tax proposals included in recent budget years, such as increases in the personal income tax, sales and use tax rates and possible sales and use tax base expansion on various services. Given how many state officials are up for re-election this year, it is not surprising that tax increases on residents were taken off the table.

In addition to personal taxes remaining at current levels, the proposed budget should also please the education sector with its call for $225 million in additional spending on early childhood, special education, basic education and career/technical training.

The Bad: Proposed natural gas severance tax

Although residents of Pennsylvania avoided possible tax increases, the oil and gas industry was not so lucky. Governor Wolf spent a significant amount of his proposed budget address calling for a severance tax in Pennsylvania. In the post-address commentary, however, it became clear that the Republican leadership will not be lending their support for this proposed tax.

The main concern regarding the severance tax is that increased taxes on the oil and gas industry could lead directly to lesser investment into the Commonwealth and a possible reduction of Pennsylvania jobs. It should also be noted that the industry is contributing to Pennsylvania’s revenues through current impact fees, corporate net income tax, sales and use tax and personal income taxes. Just because Pennsylvania is the only state without a “severance tax” does not mean one should be enacted; in fact, several analysts noted after the address that the absence of such a tax could be a differentiator in attracting more investment and keeping jobs in Pennsylvania.

The Unknown: Conformity with Federal Tax Reform

Governor Wolf’s mention of the possible location of Amazon’s second headquarters in Philadelphia or Pittsburgh was another headline of the address, since attracting an employer the size of Amazon would be a win for the Commonwealth.

Decisions by large companies such as Amazon to relocate and/or expand their footprint within the Commonwealth may be directly related to how Pennsylvania applies and treats the recent federal tax reforms. Pennsylvania already has an uphill battle in attracting corporations into the state based upon its 9.99% corporate tax rate, but this rate coupled with how Pennsylvania reacts to federal tax reforms could turn the uphill battle into a nearly impossible feat.

Due to the healthy amounts of repatriated cash businesses will experience thanks to federal tax reform, states are going to be incredibly competitive in attracting additional expenditures within their borders. A prime example of this competition is how states will treat 100% bonus depreciation. A recent position implemented by the state Department of Revenue (DOR) places Pennsylvania significantly behind most other states. Not only will the DOR not allow 100% bonus depreciation, the department will not provide for any depreciation for Pennsylvania corporate net income tax purposes until the year of disposition. As feedback to this DOR policy flows in from the business community and the General Assembly considers legislation to address this and other federal tax conformity issues, it is clear that short-term decisions may have long-term effects on the entrepreneurial landscape in Pennsylvania for years to come.

RKL’s State and Local Tax team closely tracks state budget negotiations, along with all proposed legislative efforts, for taxpayer impact. Readers with questions about the Governor’s latest proposal or Pennsylvania tax matters should contact me at jskrinak@rklcpa.com.

Jason C. Skrinak, CPAContributed by Jason C. Skrinak, CPA, State and Local Taxes (SALT) Practice Leader for RKL’s Tax Services Group. Highly regarded throughout the region for his deep knowledge and expertise in SALT consulting, Jason has significant experience representing taxpayers before Pennsylvania’s Board of Appeals and Board of Finance and Revenue.

 

 

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Posted on: January 17th, 2018

Initial Guidance for 2018 Federal Withholding Now Available

Initial Guidance for 2018 Federal Withholding Now AvailableEmployers now have initial information to proceed with 2018 withholdings. While this information will get you started on 2018 withholdings, final information will not be available until sometime in February.

On January 11, the IRS released Notice 1036, which is an early copy of its percentage method tables for 2018 income tax withholding. The IRS also published Frequently Asked Questions to provide employers with additional information on withholding this year and next. Withholding tables are designed to streamline the process for employers to take out the correct amount of income tax from an employee’s paycheck, as dictated by the Form W-4 on file. There is no action required by employees at this time.

Tax Reform Impact on Withholding

Typically issued before the calendar year end, 2018 withholding information was delayed by the enactment of the Tax Cuts and Jobs Act on December 22, 2017. The withholding information in Notice 1036 is typically included alongside additional information like wage-bracket tables in Publication 15, (Circular E), Employer’s Tax Guide. The IRS is expected to release Publication 15 sometime in February.

Timing and Deadline for New Rate Use

In the meantime, the updated withholding tables show the rates employers should use in 2018. The IRS recommends that employers begin using the 2018 tables as soon as possible, but by February 15, 2018 at the very latest. Until the 2018 tables are implemented into their payroll processing systems ahead of the February 15 deadline, employers may continue to use the 2017 withholding rates.

Supplemental wage and backup withholding for 2018

The Tax Cut and Jobs Act also changes the rates to be used for supplemental or nonregular wages, like bonuses or commissions, and backup withholding for tax years 2018 through 2025.

During this period, the backup withholding rate drops from 28 percent to 24 percent.

The law keeps the two tiers for supplemental withholding:

  • For supplemental wages over $1 million, a mandatory flat rate of 37% applies (down from 39.6% in 2017).
  • For supplemental wages up to and including $1 million, the following options are available:
    • Withhold a flat 22% (down from 25% in 2017), no other percentage is allowed
    • Combine with regular wages and apply to the withholding tables 

Revisions to Withholding Calculator and W-4s Underway

In addition to the new withholding tables, the IRS is also updating other resources and tools used by business owners and payroll processors.

The IRS expects to release an updated withholding tax calculator before the end of February. A revision of Form W-4 is also in the works, and can be used in tandem with the updated calculator by employees starting a new job or existing employees seeking to adjust their withholding in the wake of tax reform or other personal changes in 2018 and beyond. Until the new Form W-4 is issued, however, employers and employees should continue to use the 2017 version.

RKL’s team of professionals dedicated to serving the needs of small business owners is available to answer questions about the federal withholding information and changes in 2018. Contact your RKL advisor or one of our local offices to get started.

Tina Dodson, CPP, EA, of RKL’s Small Business Services Group.Contributed by Tina Dodson, CPP, EA, in RKL’s Small Business Services Group. Tina has two decades of experience helping small business owners and their management teams meet their financial reporting and individual and corporate tax return preparation needs.

 

 

 

Working Capital blog disclaimer

Posted on: January 11th, 2018

Nonprofit Update: PA Raises Audit Requirement Threshold

Nonprofit Update: PA Raises Audit Requirement Threshold Starting in February 2018, Pennsylvania nonprofits must reach higher levels of annual contributions in order to trigger audit requirements.

Act 71 of 2017, which Governor Wolf signed into law in December, increased the annual contribution levels at which a nonprofit must undergo an audit, review or compilation. The new thresholds are:

  • Annual contributions of $750,000 and above: Audit required
  • Annual contributions between $250,000 and $750,000: Review or audit required
  • Annual contributions between $100,000 and $250,000: Compilation, review or audit required
  • Annual contributions below $100,000: Audit, review or compilation optional

Pennsylvania defines annual gross contributions as federated campaign contributions, membership dues (contribution portion only), all income from fundraising and gaming events, contributions from related organizations and general contributions. On Form 990, these categories of annual gross contributions are captured in Part VIII on lines 1a, 1b, 1c, 1d, 1f, 8a and 9a. On Form 990-EZ, annual gross contributions are tallied in lines 1, 6a and 6b, less any government grants.

While these new state thresholds can be a strong indicator of the type of financial statement a nonprofit must prepare, leaders of the organization should consider other circumstances that may also necessitate financial statements before making any changes to routine compliance procedures. Beyond state regulators, there are other entities that use and require financial statements, like grant issuers and financial institutions.

A companion bill simultaneously signed into law by the Governor, Act 72 of 2017, addresses the timeliness of state charitable registration forms. Currently, nonprofits must ensure their forms are received by state regulators before the renewal date to be considered timely. Under Act 72, however, nonprofit forms will be considered timely so long as they are postmarked on or before the date of renewal. Act 72 will also hold the Department of State’s Bureau of Corporations and Charitable Organizations to a standard, 15-day review timeframe for renewal forms.

Acts 71 and 72 take effect February 20, 2018. For financial statement purposes, these means any organization with a fiscal year ending March 31, 2017 or later will follow the new thresholds. For filing purposes, any return due after February 20, 2018 will be considered filed when postmarked.

For more information on these legislative changes or to assess what type of financial statement your nonprofit may require, contact Douglas L. Berman, CPA, RKL’s Not-for-Profit Industry Group Leader.

 

Stephanie E. Kane, CPAContributed by Stephanie E. Kane, CPA, Manager in RKL’s Tax Services Group. Her client responsibilities include serving clients in a wide variety of industries with a focus on not-for-profit entities.

 

 

 

 

 

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Posted on: January 9th, 2018

5 Factors in Valuing the Family Business During a Divorce

5 Factors in Valuing the Family Business During a DivorceGiven the intertwined nature of personal and commercial factors at play in a family owned business, it’s natural for the enterprise to wind up in the center of an owner’s divorce dispute. An equity ownership in a private company often represents the largest component of an owner’s personal net worth. Calculating its overall value for the equitable distribution of marital property plays a significant role in the financial aspect of divorce proceedings. Below, we outline several steps to help owners assess the value of the family owned business during a divorce settlement.

Examine and recast five years of financial data

A sustainable level of profits is one of the biggest factors that drives value. Looking back at five years of financial statements and tax returns provides a good sample size of the business’ activities and trends. From there, income statements may require adjustment, eliminating any unusual and nonrecurring income or expense items. Typical expense adjustments might include changes to officer compensation, fringe benefits and related party rents.

Review normalized profitability

Recasting expenses to a normalized level creates a true economic profit level for the company, exposing the entity’s actual financial performance. Making those adjustments can often be an educational experience for the owners, as the normalized results may look quite different from the financial data reported on income tax returns and year-end financial statements. As a result, the owners may find out their businesses make significantly more or less profits than they realized.

Valuation approaches

To determine value, an asset-based approach, income approach or market approach can be used. In the case of a business with an adequate level of normalized profits, it is most appropriate to use an income-based approach. Under this approach, a normalized profit level can be divided by a risk rate to equate a measure of value. While it may seem simple on paper, it is a complex process to measure those two elements in the formula. Because of the scrutiny and debate around the assumptions made and results obtained during the divorce process, it is best to tap the judgment and expertise of a professional business valuation expert.

Impact of valuation discounts

The privately owned business is not readily marketable like a publicly traded stock. This marketability factor may result in a significant investment in time and transaction costs before the owner can receive any cash from the sale of their business. In addition, the value of an ownership interest in a closely held business is seldom equal to a proportionate share of the total value determined from the various valuation approaches. If the owner is not the majority shareholder (ownership of greater than 50 percent), the stock may be treated as a non-controlling interest. Estimating the valuation discounts associated with a lack of marketability or lack of control is a process best left up to a professional valuation expert, particularly since these factors can be frequently disputed as the underlying value of the marital asset is determined.

Other factors in measuring a business’ marital value

If the business was started before the marriage occurred, then its value at the date of the marriage is considered non-marital. And, if any business interest was received through an inheritance or gift, that value at the date of receipt is considered non-marital. In these cases, only the appreciation that occurs during the marriage would be considered marital property.

Often a small business owner represents a significant portion of the enterprise value, maintaining most of the critical relationships or operational skills. Continued success can be dependent on the owner’s unique attributes. Where these skills cannot easily transfer to another owner is referred to as personal goodwill. Under Pennsylvania law, personal goodwill is not considered martial property. The difficulties in measuring the business owner’s personal attributes and quantifying personal goodwill presents an additional challenge to the valuation process.

Determining the value of a family business is a critical step in completing the property settlement phase in a divorce. There are many factors to consider, and, with the high degree of professional judgment required, it is important to address the business value issue early in the process. This allows both parties and their respective advisers time to gain a good understanding of the overall property value of the marital estate.

Given the complexity of the factors outlined above and the high degree of professional judgment required, family business owners should rely on an expert to gain a thorough and comprehensive assessment of the overall property value of the marital estate. RKL’s team of business consultants has deep experience in a variety of valuation circumstances – contact us today to learn how we can serve your valuation needs. 

 

Francis D. Morris, CPA, ABV, CFF, a Manager in RKL’s Business Consulting Services GroupContributed by Francis D. Morris, CPA, ABV, CFF, a Manager in RKL’s Business Consulting Services Group. Frank has experience conducting valuations and financial analysis for a variety of transactions, including divorce proceedings and business sales.

 

 

 

Working Capital blog disclaimer

Posted on: December 21st, 2017

New Tax Law: Top-Level Impacts for Businesses and Individuals

New Tax Law: Top-Level Impacts for Businesses and IndividualsThe U.S. tax landscape will undergo significant changes, with the sweeping overhaul bill on its way to the president’s desk for signature. At RKL, our tax team has been monitoring this tax overhaul push through its various forms and stages. The new law is sizeable and complex, so we’ve assembled a quick primer on some high-level takeaways for business and individual taxpayers.

An important point about this bill is that some of its provisions are temporary, while others are permanent. Without additional legislative action, some of the tax breaks and benefits in this bill will expire in the future.

Key Individual Provisions

Reduced Tax Rates

The new law temporarily adjusts the individual income tax rates. Previously, the rates were 10, 15, 25, 28, 33, 35 and 39.6 percent. Starting in 2018, the rates will be 10, 12, 22, 24, 32, 35 and 37 percent. These rates will return to previous 2017 levels after 2025. The IRS recently announced that it will issue updated guidance next month on withholding under the new law (Notice 1036).

AMT Retained, Exemption Temporarily Increased

While the individual alternative minimum tax (AMT) remains in the new tax law, there are some alterations, including a temporary increase through 2025 of the exemption amount to $109,400 for joint filers and $70,300 for all others (excluding estates and trusts). The exemption phase-out level is also raised to subject income of $1 million and above (joint filers) and $500,000 (all other filers) to AMT. These amounts will be adjusted annually for inflation.

Standard Deduction Doubled

The law nearly doubles the standard deduction. For married taxpayers filing jointly, the standard deduction rises to $24,000; for head-of-household filers, it increases to $18,000; and for individual filers, the amount jumps to $12,000.

The standard deduction increase is intended to offset another component of the law – the elimination or reduction of many tax credits and deductions. Many taxpayers who previously itemized deductions may now fall under the standard deduction threshold.

Numerous Deductions and Credits Changed

As with the new tax rates, all changes made to individual tax credits and deductions are temporary and generally expire after 2025.

Starting in 2018, the mortgage interest deduction is reduced to mortgages of up to $750,000, from a previous $1 million level. Second home mortgage interest is still deductible, within the limit listed above, but deductions of home equity loan interest are now disallowed.

The combined deductibility of state and local income taxes, sales tax in lieu of income taxes and real estate taxes is capped at $10,000, starting in 2018. The law also disallows a 2017 deduction for the prepayment of state and local taxes attributable to taxable income earned in 2018 and beyond.

Miscellaneous itemized deductions, including professional service fees, are repealed under the tax bill. The deduction for medical expenses, however, remains and is temporarily lowered for tax years 2017 and 2018 to a threshold of 7.5 percent of adjusted gross income.

Under the new law, alimony payments are no longer deductible, nor must the recipient report such payments as income.

Child Tax Credit Doubled, Eligibility Expanded

The law temporarily doubles the child tax credit from $1,000 to $2,000 per child, with up to $1,400 of the total amount refundable. The adjusted gross income (AGI) phase-out thresholds are also raised, starting at $400,000 AGI for joint filers and $200,000 AGI for the rest. An additional $500 nonrefundable credit for dependents other than children was also introduced in the new law.

Estate, Gift Tax Exemption Doubled

While previous iterations of the tax legislation proposed a full repeal of the estate tax, the bill signed into law instead doubles the exclusion amounts for estate and gift taxes, effective January 1, 2018. This doubled exclusion sunsets after January 1, 2026.

The maximum federal estate tax is 40 percent for tax year 2017 remains in place moving forward. The estate and gift exclusion amount for married couples, however, increases from $10.98 million in 2017 to $22 million in 2018. In future years, the $22 million joint exclusion will be adjusted annually for inflation.

Individual Mandate Repealed

The tax law repeals the individual shared responsibility requirement of the Affordable Care Act by reducing penalties assessed after 2018 to $0. The IRS recently cautioned that returns submitted for tax year 2017 that do not report full-year coverage, report a shared responsibility payment or claim a coverage exemption will be rejected as incomplete and inaccurate.

Key Business Provisions

Corporate tax rate reduced, excluded from AMT

The tax law permanently reduces the corporate tax rate from 35 to 21 percent, and also excludes corporations from AMT.

Asset Purchase Tax Benefits Expanded

Under the new law, bonus depreciation doubles from 50 to 100 percent for property purchased between September 27, 2017, and January 1, 2023 (or January 1, 2024, for a small category of property). After that date, at 20 percent phase-down takes effect. Also, bonus depreciation amount is now permitted for the purchase of used property, in addition to new property.

The tax law also raises the cap on depreciation write-offs for business-use vehicles (now including passenger automobiles) purchased after December 31, 2017. The new cap schedule is: $10,000 (up from $3,160) for the first year a vehicle is used; $16,000 (up from $5,100) for the second year; $9,600 for the third year (up from $3,050); and $5,760 (up from $1,875) for each remaining year until all costs are fully recovered.

The Section 179 expensing limitations under the new law are $1 million (dollar) and $2.5 million (investment).

Favorable Treatment for Pass-Through Businesses

Generally taxed at the top individual rate, owners of so-called “pass-through” entities – partnerships, S corporations, most LLC’s, and sole proprietorships – are permitted to deduct 20 percent of qualified income, subject to variety of qualifications and limitations.

Small Business Expansion

The definition of “small business” has been expanded to include many companies with average annual gross receipts of less than $25 million, allowing these taxpayers to take advantage of several favorable tax accounting rules previously only available to taxpayers with under $10 million of gross receipts. 

One-Time Repatriation Tax

In addition to systemic changes to the taxation of multinational companies, the new law imposes a one-time reduced tax on overseas-held earnings and profits: 15.5 percent for cash and 8 percent for illiquid assets.

In addition to these top-level impacts, the new tax law alters a number of other tax policies, deductions and strategies. Over the coming weeks and months, RKL will drill down into the changes and assess the impact to various industries and segments of the business community, so be sure to sign up for our monthly e-news, follow us on LinkedIn and stay tuned to rklcpa.com.

As always, contact your RKL tax advisor or one of our local offices with any questions.

Robert M. Gratalo, CPA, MST, partner and leader of RKL’s Tax Services GroupContributed by Robert M. Gratalo, CPA, MST. Rob is a Partner and Leader of RKL’s Tax Services Group. He serves as business and tax advisors for a wide range of clients, with a focus on the manufacturing, distribution, construction and real estate development industries. Rob specializes in the taxation of privately held businesses and their owners, and he often consults on the tax impact of transactions like business sales, mergers or acquisitions.

 

 

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Posted on: December 19th, 2017

Year-End Tax Strategy: Pay Fourth Quarter Estimated State and Local Taxes Now to Lock in 2017 Deduction

Year-End Tax Strategy: Pay 4th Quarter Estimated State & Local Taxes Now to Lock in 2017 DeductionTax reform legislation is on track for passage before the end of this year, significantly transforming the U.S. tax code. One of the key aspects of the current legislation is capping the state and local income tax, sales tax in lieu of income tax and real estate tax deduction at $10,000 for 2018.

For individual taxpayers that make quarterly estimated payments of these taxes throughout the year, we highlight an opportunity to potentially lock in tax benefits in 2017 before 2018 changes take effect.

Due date for 2017 fourth quarter installment

The 2017 fourth quarter state and local estimated income taxes are not due until January 15, 2018. For taxpayers with more than $10,000 in combined state and local income and real estate taxes, paying the estimate in January means they would be ineligible for a combined deduction of amounts over $10,000.

In addition, any 2017 state and local tax liabilities paid with the 2017 tax returns in April could also be lost.

Benefits to paying now

Paying this installment before December ends will allow taxpayers to potentially deduct the full amount of taxes paid during the 2017 tax year. The anticipated 2017 state and local tax liabilities due in April can also be built into the fourth quarter estimate and paid before December ends.

This two-week difference in payment timing could keep a sizeable payment deductible, or change it into a fully non-deductible category, provided a taxpayer already exceeded the $10,000 threshold. Be sure to discuss any potential alternative minimum tax impact and any overall limitations on your itemized deductions with your tax advisor, as accelerating this deduction may not be beneficial to all.

Caution about prepaying 2018 state and local taxes

This guidance specifically focuses on the payment of 2017 fourth quarter tax estimates. The legislative language, as it stands at time of publication, disallows a deduction for the prepayment of state and local taxes due in tax years 2018 and beyond.

Ready to execute this strategy? RKL can help.

Contact your advisor or one of our local offices today to lock in this tax benefit before the end of the year.

Kevin A. Eisenhart, CPA, MBA, MST, RKL Tax PartnerContributed by Kevin A. Eisenhart, CPA, MBA, MST, Partner in RKL’s Tax Services Group. Kevin takes a strategic approach to tax planning and compliance to help his clients build value. He specializes in the taxation of corporations, S corporations and partnerships, including issues surrounding multistate taxation and consolidated return matters.

 

 

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Posted on: December 13th, 2017

How to Avoid Gift Card Fraud This Holiday Season

How to Avoid Gift Card Fraud This Holiday SeasonAmericans spent $46 billion on gift cards throughout 2016, according to market research firm Packaged Facts. While gift givers and receivers value the convenience and flexibility of gift cards, they have also been targeted by fraudsters over recent years. Gift card fraud is far less pervasive and damaging than credit card fraud, but it can present headaches for both consumers and retailers. It is important for those buying and selling gift cards to understand the risk of fraud and take precautions to protect their investments this holiday season and beyond.

Common types of gift card fraud

Most fraudsters use one of two methods to commit gift card fraud: hacking into accounts associated with gift cards or stealing gift cards or gift card numbers from a retailer.

  • Hacking into accounts associated with gift cards: As online registration for gift card balance tracking and reloading becomes more common among retailers, it has also opened opportunities for hackers to exploit weaknesses in the system. In 2015, Starbucks experienced a hack of its mobile app that allowed fraudsters to drain bank accounts attached to the gift card auto-load feature. Conversely, fraudsters are also using gift cards to drain value in other hacked accounts, like credit card rewards. In these cases, hackers gain access to a consumer’s credit card rewards or points and redeem them for gift cards, which they can then convert into cash via online services or physical kiosks that offer over 50 percent of gift card face value.
  • Theft of gift cards: Another method of gift card fraud is physical theft. Particularly during the holidays, retailers might position stacks of gift cards throughout the store for convenient shopping. Thieves will often steal a stack of these cards in order to write down the identifying information (card number, PIN, security code) or unlock the information using a magnetic strip reader. Once the information is exposed, they will return the cards to the store and then use software that allows them to keep track of card activation and balance in order to drain the card value before the consumer can use it.

Gift card fraud prevention tips for consumers

This holiday season and beyond, consumers can avoid gift card fraud by adopting the following best practices.

  • Only purchase gift cards from trusted, reputable retailers both in person and online. Ideally, try to buy them directly from the store where they’ll be redeemed. Cards purchased from reseller or auction sites may be stolen or counterfeit.
  • Do not disclose personally identifying information when buying a gift card. Unlike a credit card, this information is not required, so requests for bank account number, Social Security number, date of birth or similar personal data are red flags to be avoided.
  • When purchasing a card, examine it for physical signs of tampering. Details like an exposed PIN may indicate that the card has been redeemed. Return any card that looks questionable and ask for another that is unblemished.
  • Have the cashier scan the card at the time of purchase to ensure the card is valid and has the correct balance
  • Take advantage of available online registration and activation services. Having online access to monitor the card allows consumers to detect issues or drained balances sooner.
  • Keep the receipt as proof of purchase until the card balance has been depleted. If the gift card is lost, some retailers may re-issue the card at full value with proof of purchase.

Gift card fraud prevention tips for retailers

Retailers can also reduce the risk of gift card fraud by implementing the following policies and procedures.

  • Improve in-store security by only placing blank gift cards at the register. Consider keeping them behind the counter or behind lock and key.
  • Require a PIN for the use of gift cards, instead of just the number on the front of the card.
  • Maintain gift card PINs in a separate database from gift card numbers.
  • If an online registration portal is available, limit account balance look-ups within a certain time period.

As the popularity of gift cards continues to rise during the holidays, so does the potential for their fraudulent use. Remaining vigilant against signs of tampering and securing physical and online access to cards can help consumers and retailers avoid the financial and reputational damage associated with gift card fraud.

RKL’s team of fraud consultants are available to help businesses assess prevention protocol and implement best practices to ward against a wide range of fraud threats. Contact one of our local offices today to get started.

 

Jeremy L. Witmer, CPA, CVA, CFE, Senior Consultant in RKL’s Business Consulting Services GroupContributed by Jeremy L. Witmer, CPA, CVA, CFE, Senior Consultant in RKL’s Business Consulting Services Group. He provides forensic accounting, litigation support and business valuation services to companies and organizations across a number of industries. Jeremy’s expertise includes reconstruction of financial records, employee theft investigation, damage calculations for litigation purposes, and valuation of stock for gifting, buyouts and marital settlement. 

 

 

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