Working Capital Blog | RKL LLP

Working Capital Blog

Posted on: March 28th, 2017

Unrelated Business Income: Two Common Examples for Nonprofits

Unrelated Business Income: Two Common Examples for NonprofitsFor nonprofit organizations heavily involved in fundraising and charitable activities, recognizing unrelated business income (UBI) and reporting it accordingly is critically important to maintaining tax-exempt status. In a previous post, we defined UBI and outlined the key exceptions. Now, we’ll take a look at two of the most common types of UBI and how to calculate them. 

Income from Debt-Financed Property

Debt-finance property is defined by the IRS as “any property which is held to produce income and with respect to which there is acquisition indebtedness at any time during the taxable year.” The same exceptions to general UBI also apply here, meaning property that derives its income from volunteer, convenience, donation, research or mission-driven activities is not considered debt-financed.

The amount included in UBI is proportionate to the debt associated with the property, and is calculated by this formula:

Gross receipts x Average Acquisition Indebtedness ÷ Average Adjusted Basis = Taxable Amount

“Average Acquisition Indebtedness” is the average amount of principal indebtedness on the property during the portion of the year the property is held. “Average Adjusted Basis” is the average of the adjusted basis of the debt-financed property on the first and last day of the year. Keep in mind, a proportionate amount of expenses associated with the rental may be claimed.

Here is a fictional example to demonstrate how the taxable amount of debt-financed income is calculated. Let’s say a not-for-profit organization owns a building, half of which is rented to a clothing store, which is unrelated to the nonprofit’s mission. The not-for-profit has debt of $100,000 on the property. The adjusted basis of the property is $200,000 and the rental income from the store is $20,000. Using the formula above, we calculate: $20,000 x ($100,000  $200,000) = $10,000 taxable income. Since it is over the $1,000 IRS threshold, this amount must be reported as UBI using Form 990-T.

Income from Controlled Entities

Normally, passive income is exempt from UBI. According to the IRS, however, interest, annuities, rents or royalties received from a controlled organization may constitute UBI. Dividends received from controlled entities are not considered UBI. The threshold for determining control is “more than 50 percent,” which means the tax-exempt organization owns more than 50 percent of the stock, profits or capital interest. Here are two examples to illustrate this concept:

  • Example #1: A §501(c)(3) educational organization licenses the right to use its name and logo to a taxable subsidiary that produces a television show. The subsidiary pays the organization $100,000 annually in royalties. The subsidiary had taxable income for the year of $900,000. The $100,000 royalty is considered UBI and must be reported as such.
  • Example #2: A not-for-profit organization owns a for-profit corporation to which it loans money. The for-profit corporation takes a deduction for interest expense on the loan, but the interest income to the not-for-profit is subject to UBI.

As with all taxation issues, specific circumstances and situations can impact the categorization or calculation of income as UBI. RKL’s Not-for-Profit Industry Group is here to help nonprofit leaders and financial executives determine UBI and file the necessary paperwork to preserve tax-exempt status. Contact one of our local offices today for assistance. 

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, 2017

Expenses Reporting Changes in Store for Nonprofits under FASB ASU 2016-14

RKL’s Not-for-Profit experts take a closer look at one of the ways recent accounting standard changes will impact investment returns and expense reporting. Last summer, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, which significantly alters the financial statements of nonprofits. As part of FASB’s comprehensive review of not-for-profit statement presentation, ASU 2016-14 is intended to increase reporting consistency by adjusting current requirements across a number of categories.

With an effective date of fiscal years beginning after December 15, 2017, now is the time for not-for-profits to familiarize themselves with each category of changes and what they mean for their organizations. In this post, we take a look at one of the components of this ASU: improved consistency related to investment returns and expense reporting.

Comparable measurement of investment returns

ASU 2016-14 requires that returns from investments (other than programmatic investments) be reported net of external and direct internal investment expenses. Not-for-profits are permitted, but no longer required, to disclose these netted expenses in the financial statement notes.

Programmatic investments are those directed at carrying out the not-for-profit’s mission, as opposed to investments in the general production of income or appreciation of an asset. An example of a programmatic investment is a loan made to lower-income individuals to promote home ownership.

Direct internal investment expenses are defined as costs of the direct conduct or supervision of strategic and tactical activities involved in generating investment returns. Examples include, but are not limited to, costs associated with the staff responsible for developing and executing investment strategy (salary, travel, etc.) and allocable costs associated with internal investment management or the supervision, selection and monitoring of an external investment management firm. These expenses do not include costs that are not associated with generating investment return, such as unitization and other such aspects of endowment management.

By requiring returns from investments to be reported net of external and direct internal investment expenses, ASU 2016-14 aims to provide a more comparable measure of investment returns across all not-for-profit entities, regardless of how investment activities are managed.

Additional expense allocation disclosure

Previously, only voluntary health and welfare entities were required to present a statement of expenses by both functional and natural classifications. ASU 2016-14 has removed that requirement for those organizations and now requires disclosure of an expense analysis by function and nature for all not-for-profit entities to be presented in one location, either on the face of the statement of activities, as a separate statement or in the notes to the financial statements. In addition to this analysis, all not-for-profits will be required to disclose the methods used to allocate expenses to the functional categories.

Expenses should be allocated to one of two functional categories: program services and supporting activities. Program services are those activities that result in goods or services being distributed to beneficiaries, customers or members that fulfill the organization’s purpose or mission. Supporting activities represent all activities outside these program services, such as management and general activities, fundraising activities and membership development activities.

Requiring additional disclosures related to the allocation of expenses improves the usefulness of information for users of the financial statements, helping them better understand the methods used for allocating costs among functional categories and the types of resources used in carrying out an organization’s activities.

Effective dates and next steps

ASU 2016-14 is effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. The amendments in this ASU should be applied on a retrospective basis; however, if presenting comparative financial statements, a not-for-profit has the option to omit the analysis of expenses by both natural and functional classifications (the separate presentation of expenses by functional classification and expenses by natural classification is still required). Organizations that have previously been required to present a statement of functional expenses do not have the option to omit this analysis and may present the comparative period information in any of the formats permitted in the ASU.

These are significant changes with considerable impact to the financial reporting practices of not-for-profits. Prior to the fiscal year in which ASU 2016-14 takes effect, organizations should review and digest these changes fully with their internal finance teams and external practitioners and develop a basis, or multiple bases, for the expense allocation and investment return changes.

For more information and questions on how to prepare for these reporting changes, please contact Douglas L. Berman, CPA, RKL’s Not-for-Profit Industry Group Leader.

 

Andrew D. Kehl, CPA, Manager in RKL's Audit Services GroupContributed by Andrew D. Kehl, CPA, Manager in RKL’s Audit Services Group. Andrew has accounting and auditing experience serving clients in a wide variety of industries including nonprofit, healthcare and government.

 

 

 

Working Capital blog disclaimer

Posted on: March 7th, 2017

Here’s How Your Company Can Fight Alternative Payment Fraud

Here’s How Your Company Can Fight Alternative Payment FraudAlternative payment methods – like Square, PayPal, Stripe and Payoneer – represent a convenient and flexible way for businesses to accept payments from customers. On the flip side, however, allowing your employees to pay vendors through these methods can be a risky proposition.

Because these payment methods are still relatively new, there is often confusion around the unique risks associated with them. However, once you understand these risks and common fraud schemes, you can institute a few best practices to prevent your company from falling victim to alternate payment fraud.

Know who is receiving your payment

One of the most concerning aspects of alternative payment methods is the anonymity that these methods provide to the fraudster. While most companies have strong policies for cutting checks or making ACH payments, few have updated these policies to expand controls related to alternative payment methods. Fraudsters know this and are happy to exploit this weakness.

For instance, a standard component of credit card or ACH electronic transactions is the identification of the payee on the credit card or bank statement. Alternative payment methods usually mask these payment details. Instead, the processor name, such as “Square” or “PayPal,” will first appear on your bank statement. In some cases, however, the payee name will only appear on the statement if the vendor has set up their account to do so. In alternate payment schemes, the fraudster vendor will omit their name or use a misleading company name to hide the true payee identity.

To avoid falling prey to a crafty fraudster, companies should institute a policy of tracking down the supporting documentation relating to any payment that has been processed through an alternative payment method. The goal is to verify that the payment was properly approved and is being made to a legitimate vendor. Supporting documentation can include purchase orders or original invoices.

Restrict access to company accounts and cards

Another best practice concerning alternative payment methods includes restricting the number of employees that have direct access to company bank accounts and credit card numbers. Alternative payment method fraud relies upon the fraudster having access to the company accounts; otherwise, he’ll need to devise a different scheme. Restricting employee use of company accounts is also important in investigating any suspicious activity. With limited users, it is much easier to quickly uncover the fraudster and stop them in their tracks.

Monitor your vendor approval process

While alternative payment fraud is still relatively new, it has quickly gained popularity with enterprising fraudsters due to the ease of the scheme and the high dollars involved. RKL’s fraud and forensic accounting team recently investigated a significant fraud where an employee created a fake vendor and used both Square and PayPal accounts to divert company funds to his bank account. In that case, the fraudster was successful because he was able to circumvent the company’s process for approval of new of vendors, had access to the company credit card and was a “trusted” employee.

Time is on your side

Perhaps the best thing to remember is that sometimes it pays to not be on the cutting edge.  While these new payment technologies are exciting and can be great ways for smaller businesses to get paid, there is no need for most companies to pay their vendors through these methods. It is much safer to continue to use traditional payment methods (check, ACH or credit card) until you are comfortable that your policies and procedures are ready. In other words, don’t be afraid to take it slow.

It is also important to remember that as the customer, you hold all the cards during the vendor evaluation process. Specifically outlining accepted payment methods in your company’s vendor approval policy will help eliminate the possibility that a vendor will try and seek payment through an alternative processor, like Square.

Finally, it is important to remember how fast technology can change. For that reason, you will need to continually revisit your policies and procedures to ensure that you have controls in place over new payment methods as they are developed.

Whether it’s crafting stronger payment and vendor policies, strengthening internal controls or investigating suspicious payments, RKL’s team of fraud consultants and forensic accountants can help you protect your business against alternative payment method fraud. Contact your RKL professional or one of our local offices today for more information.

 

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. 

 

Don’t miss the latest RKL business analysis and insights. Sign up for the monthly Working Capital e-news.

 

 Working Capital blog disclaimer

Posted on: February 23rd, 2017

Tax Tip: Gather W-9 and W-4 Info in Real-Time to Streamline Year-End Reporting

Tax Tip: Gather W-9 and W-4 Info in Real-Time to Streamline Year-End ReportingWith so many deadlines demanding attention, business owners will often meet one and then put it in the rearview mirror as they move onto the next. While it is certainly satisfying to scratch a filing off the to-do list, putting some compliance requirements out of mind until the next year-end can actually compound the work and stress the next time they come due.

A perfect example of this phenomenon is Form 1099 reporting of certain payments made in trade or business. Even though this year’s January 31 deadline has come and gone, companies that stay on top of collecting the necessary information from vendors throughout the year via IRS Form W-9 can considerably reduce the headache of tracking it all down at once at the end of the year.

Request W-9s in real time

Whether you do business as an individual or sole proprietor or your company is classified as a partnership, corporation or LLC, the IRS requires the reporting of vendor and other types of payments via Form 1099 each calendar year. Taxpayers must use Form W-9 to gather information about each vendor. Staying on top of the W-9 requirement becomes much easier when collected in real time.

Requesting a W-9 from each vendor as soon as the business relationship begins is a best practice for tax record keeping and also prevents a year-end rush to track down vendors with whom you may no longer be working. Now that 1099s are due to the IRS one month earlier (January 31 instead of the February 28 due date in previous years), businesses have even less time to gather information and prepare this filling.

Stay on top of W-4s

In order to file accurate payroll information with the IRS, companies need updated Form W-4s on file for every employee. This employee withholding allowance certification instructs employers on how much federal income tax to take out of each paycheck. While most companies do not require new W-4s to be filed each year, it is a good idea to consistently remind employees to review and update should their personal or financial situation changes.

RKL has a team of professionals dedicated to helping businesses prepare for and comply with payroll and 1099 reporting requirements. Contact one of our local offices with any questions or for assistance.

 

Contributed by Susan L. Smith, Advanced Tax Paraprofessional in RKL’s Tax Services Group. Sue has more than 30 years’ experience conducting payroll services and preparing individual tax returns for clients. 

Working Capital blog disclaimer

Posted on: February 21st, 2017

Is Your Company Prepared for a Sales Tax Audit?

Is Your Company Prepared for a Sales Tax Audit?As state governments cast a wider net to identify much-needed tax revenue, sales and use tax reporting has received greater attention. Last summer, the Pennsylvania Department of Revenue launched a desk review pilot program to remotely audit sales and use tax returns, and other states are also working to identify under-reporters or non-filers. Amidst this environment of increased scrutiny, business taxpayers can benefit from better understanding the audit process and proactively assessing their sales and use tax liability exposure.

Why sampling method matters

In a perfect world, all sales and use tax audits would consist of a detailed examination of every transaction that occurred during the audit period. In the real world, however, full transaction reviews are simply not possible due to the large volume of transactions, so state tax auditors rely on sampling to project liability and assess compliance.

Virtually all state sales and use tax auditors use some form of sampling on large corporate taxpayers, but auditors in recent years are trading the block sampling methods of the past for more advanced methods. The complexity of these newer sampling methods requires close scrutiny to verify the accuracy of the results and how they are projected against the entire population of transactions. Remaining engaged throughout the audit process and understanding the methods used can help taxpayers ensure the results are representative of their businesses.

How liability is identified

Most taxing agencies typically apply statistical sampling in sales and use tax audits. In certain cases, an auditor will also stratify the transaction population into groups based on a certain criteria. For sales and use tax audits, stratification is based on the dollar amount of the transaction. This process is intended to improve efficiency, preserve the validity of the sample population and offset the impact of extreme transaction values.

Once the sample transaction population is created and stratified if necessary, auditors examine it for errors like tax overpayments or underpayments. Errors identified in the sample population are projected to create an estimate of the errors in the general transaction population. Positive (overpayment) and negative (underpayment) errors are usually combined to yield a total net error; however, auditors are not obligated to identify overpayments or credits so the positive errors may not always be counted against the negative.

When being proactive pays off

Regardless of the method used, the auditor and the taxpayer must each evaluate the results of the sample and sample projection. It is the taxpayer’s right to challenge the audit outcome or assessment, including specific issues with the audit methodology. Unfortunately, most taxpayers do not have the in-house expertise or familiarity with sales and use tax audits needed to determine whether a challenge is warranted, and seek the counsel of an experienced state tax advisor like RKL.

Sales tax compliance is much more than knowing what tax rate to apply to a transaction – the reliability of a company’s record-keeping systems and the soundness of its financial procedures can also impact the outcome of a sales and use tax audit. Taxpayers who are proactive in managing compliance processes and using technology to increase the accuracy and realiability of transaction data can mitigate potential exposure and stress related to undergoing an audit.

RKL’s State and Local Tax professionals can conduct a sales and use tax process review for companies to better understand their level of compliance and identify improvements that will result in not only time savings but also expenses related to poor audit outcomes. Contact me with any questions about a process review or general inquiries about sales and use tax audits at ftobias@rklcpa.com or 717.394.5666.

 

 Frank J. Tobias, CGFM, Principal in RKL’s Tax Services Group. State and local taxes, Pennsylvania taxes, multi-state taxationContributed by Frank J. Tobias, CGFM, Principal in RKL’s Tax Services Group. He specializes in the area of multi-state planning and compliance, with extensive experience in all areas of Pennsylvania taxation.

 

 

 

Don’t miss the latest RKL business analysis and insights. Sign up for the monthly Working Capital e-news.

 

Working Capital blog disclaimer

Posted on: February 14th, 2017

The Cost of Risky Employees is High. Here’s How to Reduce It.

 RKL’s Business Consulting team explains why pre-hire verification and vetting is a critical component of a company’s fight against fraud. Business is booming and you need to hire more staff, but bringing new employees on board is not without risk. Employers should ask themselves how well they know the person they are about to hire, particularly those whose positions entail the handling of financial, sensitive or confidential information.

According to the Association of Certified Fraud Examiners, 40 percent of fraud is carried out by employees in the accounting or operations department. This statistic begs the question: If a company is going to give an employee access to sensitive or financial information, shouldn’t that company also screen those individuals as thoroughly as possible prior to hiring?

There is no magic wand to wave to ensure a perfect hire, but there are several steps companies can take to strengthen pre-hiring screening and verification.

Conduct a background check

Long considered a standard part of the hiring process, more companies are skipping the background check to cut costs. This is a huge oversight, as a background check can uncover critical red flags and help companies eliminate unfit candidates right out of the gate.

Run credit and employment-related checks

Financial troubles rank high on the list of factors that drive an employee to conduct fraud, so a credit check can highlight such vulnerabilities. Employment and education-related verifications are also key to determining honesty about credentials and experience.

Send applicants for drug tests

Another time-consuming expense that is often passed over, drug tests are a proven method for filtering out applicants. Substance abuse is another risk factor for fraudulent behavior, and it can also create other operational risks for a business.

Dig deeper with references

It is important to obtain references from job applicants, but it is even more important to make the most of them. Take the time to go beyond the basic checklist of questions – asking open-ended inquiries and encouraging elaboration is a great way to get a sense of what the applicant is like as a colleague.

Maintain confidentiality and legal regulations

When using these methods to obtain information about applicants, it is critical to adhere to the legal or regulatory precedent in the employment arena, like the federal Fair Credit Report Act or the U.S. Equal Employment Opportunity Commission. There are many employment and hiring related issues subject to litigation, regulation and legislation, so be sure to develop policies and procedures that protect the rights and personal data of both employer and applicant.

Pre-hire verification and vetting is a critical component of a company’s fight against fraud and an important investment of resources. Companies can work with a human resources consulting or fraud prevention partner, like RKL, to avoid confidentiality issues or violations and develop a thorough employment screening process. Learn more about RKL’s fraud and forensic accounting services or contact me at 717.394.5666 or bnovis@rklcpa.com.

 

Bethany A. Novis, CPA/ABV, CVA, CFE, partner in RKL’s Business Consulting Services GroupContributed by Bethany A. Novis, CPA/ABV, CVA, CFE, a partner in RKL’s Business Consulting Services Group. Bethany specializes in fraud investigation, business valuation and litigation services. In addition to being a licensed CPA accredited in business valuation, she holds designations as a Certified Valuation Analyst (CVA) and a Certified Fraud Examiner (CFE).

 

 

Working Capital blog disclaimer

Posted on: February 8th, 2017

How Gov. Wolf’s 2017-18 Budget Proposal Could Impact Taxpayers

Pennsylvania Governor Tom Wolf today proposed his 2017-18 budget. RKL’s state and local tax experts analyze the proposal and how it could impact taxpayers.Against the backdrop of a current projected $700 million shortfall and a multibillion-dollar structural deficit, Pennsylvania Governor Tom Wolf yesterday delivered his budget proposal for Fiscal Year 2017-18.

Outlining his priorities for the upcoming fiscal year, Governor Wolf steered clear of suggesting broad-based tax increases in his proposed $32.3 billion General Fund budget (1.8% higher than the current fiscal year budget). Instead, he discussed a blend of targeted taxes, cost-cutting measures and functional consolidations to remedy Pennsylvania’s worsening financial situation.

Let’s take a closer look at the main elements of Wolf’s proposal and what they mean for businesses and individual taxpayers.

Focused Spending

Governor Wolf’s main focus continues to be education spending. His budget proposal calls for an increase of $200 million in education spending, with the majority devoted to early childhood development and K-12 education. The Governor also continues to prioritize improving and expanding services for older Pennsylvanians and directing resources to combat the heroin and opioid addiction crisis that plagues the Commonwealth.

Cost Savings and Spending Reductions

Governor Wolf’s budget identifies a number of opportunities for cost savings and spending reductions that appear to have bipartisan support. The Governor’s budget identifies a proposed $2 billion in spending cuts, achieved through methods including:

  • Prioritizing agency expenditures and creating cost efficiencies;
  • Improved fiscal management;
  • Revenue enhancement;
  • Eliminating and reducing certain non-core programs;
  • Employee complement controls;
  • Consolidation and coordination of state services; and
  • Facility closures, lease management and facility downsizing.

These are just some of the ideas the Governor has proposed to achieve savings, but we will have to wait and delve deeper into the specific details of each proposal to get a true feel for just how realistic this $2 billion figure is.

Impact on business and taxpayers

In a stark contrast to his budget proposal from last year, Governor Wolf provided that he would not seek an increase in the personal income tax or any significant increase or expansion of the sales and use tax. Although there are no proposed increases to these two broad-based taxes, business and individual taxpayers should be aware of some of the Governor’s proposals that will have a direct impact on them, such as:

  • Increasing the minimum wage from $7.25 to $12 an hour;
  • Imposing a natural gas severance tax;
  • Closing “loop-holes” for insurers;
  • Reducing available tax credits;
  • Establishing uniform Net Operating Losses (NOL) provisions;
  • Eliminating tax “loop-holes” for certain sales and use tax exemptions including software and computer services, food sold to airlines, aircraft maintenance and repair; and
  • Adopting combined reporting; and
  • Reducing the corporate net income tax rate over several years to a rate of 6.49% by 2022.

Each of the items listed above require close scrutiny and raise a number of questions regarding this budget. What does the higher minimum wage mean for small business owners? How do the NOL provisions impact Pennsylvania’s ability to attract and keep businesses? How will changing the corporate net income tax system impact revenue in the short-term? These questions and more are issues we at RKL will be tracking closely as the budget process continues.

While it is important to understand what items are included in the budget address, it is equally important to be cognizant of those items excluded. The main driver behind the structural deficit is the rising cost of public pensions that Pennsylvania has been trying to resolve for a number of years. It is hard to imagine a budget that does not address such a prominent issue as pension reform.

The Governor’s address is the first move in the budget-balancing chess match that will play out over the coming months in the Capitol. RKL’s State and Local Tax Team will closely monitor state budget negotiations, just like all developments in state government, for potential impact on business and individual taxpayers. Readers with questions about the Governor’s proposal or Pennsylvania tax proposals 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.

 

 

Working Capital blog disclaimer

Don’t miss the latest RKL business analysis and insights. Sign up for the monthly Working Capital e-news.

Posted on: January 31st, 2017

OECD/G20 Base Erosion and Profit Shifting Project, Action 13: New Reporting Required for Multinationals

Action 13 is part of the Base Erosion and Profit Shifting initiative for large multinational entities. RKL’s tax team explains the reporting requirements. Not a week goes by without news of controversy surrounding the international corporate structure of a major U.S. firm, be it Apple, Starbucks or Amazon. Each company has come under scrutiny for placing rights to its intangible assets, such as trademarks and patents, in Ireland, Luxembourg or the Netherlands – countries with corporate tax rates significantly lower than the American levy of 35 percent.

A great deal of attention has also been paid to so-called inversion transactions, whereby a large U.S.-based multinational merges with a smaller competitor in a lower-tax jurisdiction and relocates its headquarters, and much of its profits, resulting in a lower tax bill but few changes to its operations.

As a way of identifying and combatting these strategies, member countries of the Organization for Economic Cooperation and Development (OECD) and the G20 have been working since February 2013 to implement a 15-point Action Plan to combat “base erosion and profit shifting” (BEPS). The information reporting required by Action 13 is one of the more urgent and impactful pieces of the BEPS initiative for large multinational entities (MNEs), in its initial phase generally applying to companies with consolidated revenues in excess of €750 million (U.S. $850 million).

What is Base Erosion and Profit Shifting Action 13?

There are three main components to the documentation requirements of Action 13: the master file (MF), local file (LF) and Country-by-Country Report (CbCR), with participation in each varying by member state.

  • MF: The master file is a collection of relevant information on a multinational group as a whole, including organizational structure, financial statements and descriptions of supply chain, as well as financing, intercompany services and intangibles strategies.
  • LF: The local file will include very similar information to the MF, but on a country-specific level for each jurisdiction where the company has a presence. The LF also must include a description of transfer pricing assumptions, agreements and methodology.
  • CbCR: The country-by-country report is made up of two tables of data, grouped by country and entity. The first is used to identify the main business activities of each entity. The second will reflect quantitative data by country including revenues, profit before tax, income tax paid and accrued, stated capital, accumulated earnings, number of employees and tangible assets. MNEs with a parent company based in the U.S. will prepare and submit Form 8975 with its federal return to satisfy this requirement.

Action 13 documentation may serve as a roadmap to audits for taxing authorities, so care should be taken to ensure that all three parts work together to tell the same story. Reporting data that appears inconsistent could invite increased scrutiny.

When do BEPS rules take effect?

Implementation of the rules are effective in most countries for fiscal years beginning on or after January 1, 2016 (July 1, 2016 in the U.S.). While due dates for preparation and/or submission of the three components vary by country (as early as May 2017 for China and the Netherlands), most are due by the tax return due date or one year from the end of the fiscal year in question. There is also an obligation to notify taxing authorities in each country which entity is the parent of the MNE, generally by December 31, 2016.

Is my company responsible for reporting?

The primary responsibility for reporting rests with the multinational entity’s parent company. The CbCR will be reported to the taxing authorities in its home country, then sent to other nations under to-be-completed information sharing agreements. In the U.S., a multinational parent’s filing of Form 8975 with its federal return will allow the IRS to share the data with the applicable member countries. For most jurisdictions the MF and LF are to be maintained, but only submitted to authorities upon request. Penalties apply for MNEs that fail to maintain the files as required. While the parent is ultimately responsible, significant coordination will be required by personnel at the local entity level to gather and document the information required for the MF, LF and CbCR.

RKL’s Tax Services team is available to help companies determine if and how BEPS Action 13 impacts their reporting obligations. Contact your RKL advisor or one of our local offices to get started.

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.

 

Working Capital blog disclaimer

Posted on: January 23rd, 2017

Attention Employers: New Version of Form I-9 in Effect

Business team standing in cubicle smilingForm I-9, Employment Eligibility Verification, is a familiar document to employers and hiring managers. In order to increase the ease of electronic completion and minimize reporting errors, the U.S. Citizen and Immigration Services (USCIS) issued a revised version of Form I-9, which took effect January 22, 2017. The new form expires on August 31, 2019, so employers must be sure to use the updated version moving forward.

Used to verify an individual’s identity and employment authorization, Form I-9 is an important enforcement tool for several federal immigration laws. All U.S. employers must ensure proper completion of Form I-9 for each individual they hire within the country. Though most employers are aware of and adhere to this requirement, the release of the updated Form I-9 is a chance to stress the importance of compliance and share tips for correct usage.

How to complete Form I-9

  • Form I-9 consists of four pages. The first three pages are to be completed by the employee and employer, and the fourth page provides a list of acceptable documentation to use for proof of identity. All documents used must be current and cannot be expired.
  • The employee must complete Section 1 of Form I-9, entering information in each box. If there are any areas that the information does not pertain to that particular employee, the employee must enter NA in any boxes that are left blank.
  • The employer is responsible for completing Section 2 of the document. Please note, at that the top each section the employee’s first, middle and last name from Section 1 must be completed.
  • It is also the responsibility of the individual who verified the documents to complete the Certification Section of the form.
  • Section 3 is the responsibility of the employer, when a rehired employee’s name has changed or when the noncitizen, nonresident documentation of a current employee expires during the course of employment.
  • Employers are not required to keep copies of the identification provided, however, if you choose to keep copies, copies must be kept for all Form I-9s on file.

Proper completion of Form I-9 allows employers to stay in compliance with federal requirements and avoid penalties or audits. Companies with questions about I-9 compliance or the new version of the form may contact Lindsey M. Heist at lheist@rklcpa.com or 717.394.5666.

Contributed by Lindsay M. Heist, Human Resources Consultant. Lindsay assists clients with a variety of HR projects and issues, including employee development, benefits/payroll and performance management. She has consulting experience across a wide variety of industries, including financial services, manufacturing, warehouse distribution, property management and nonprofits.  

Working Capital blog disclaimer

Posted on: January 17th, 2017

Data: Increasingly Important to Post-Acute Care Payments

Data: Increasingly Important to Post-Acute Care PaymentsThe financial landscape for post-acute care (PAC) providers is shifting, with alternative payment models steadily replacing traditional fee-for-service models. The transition started in 2015, when the Centers for Medicare & Medicaid Services (CMS) announced its intention to tie 30 percent of all Medicare payments to alternative payment models – a goal it reached one year ahead of schedule. Now, CMS is closing in on its second goal: 50 percent of payments transitioned by the end of 2018.

Data to support care outcomes

The traditional fee-for-service models are based on sheer volume; alternative payment models are based on the value and quality of care. The change from fee-for-service to alternative payment models could have a major impact on financial performance if PAC providers are not well-versed in the new models and their requirements.

This is where data comes into the conversation. The availability of comprehensive data will help PAC providers support their outcomes of care and translate quality of care into more dollars for providers.

One alternative: Bundled payment model

There are many alternative payment models out there, but let’s take a look at one for an example of how data is key to successful compensation. The bundled payment model, currently being tested by CMS, provides one payment for the range of services a patient receives during one episode of care that may occur at multiple settings. Bundled payment arrangements are incredibly dependent on highly supportive cost and outcomes data, because each provider will have to produce data to demonstrate the outcomes yielded by different points of care. Data will also be essential to determining the internal cost of providing different levels of care.

Financial leaders of PAC providers confronted with a bundled payment model must compile substantial data to support the care provided in their settings, with the goal of demonstrating favorable outcomes and reasonable costs. Data will also help ensure that payments are properly divided between providers in these payment models. It will require collaboration between the financial and clinical aspects of care to ensure that expenses and treatment are clearly outlined and supporting data are assembled. This will go a long way to help PAC providers get their fair share when payments are allocated.

Focus on improving health outcomes

The United States is higher in per capital health care spending than other developed nations like England, Germany and Japan, yet U.S. life expectancy trails many other nations by several years. While the shift to alternative payment models may not rectify this statistical disparity, a focus on improved care and reduced costs is definitely progress.

RKL’s Senior Living Consulting Group can help providers understand and prepare for the transition to alternative payment models. Contact one of our local offices today.

 

James M. Spencer, CPA, MBA, Manager in RKL’s Senior Living Services Consulting GroupContributed by James M. Spencer, CPA, MBA, Manager in RKL’s Senior Living Services Consulting Group. Jamie specializes in the preparation of financial models and analysis, including projections and forecasts, financial feasibility studies and transaction due diligence.

 

 

Working Capital blog disclaimer

css.php