Posted by Rachel Roan, CPA, MT

In December 2014, the federal Achieving a Better Life Experience (ABLE) Act created a new type of tax-advantage account, the ABLE account, for individuals with disabilities. On June 1, 2016, Ohio became the first state to launch its own ABLE account available to eligible individuals nationwide. 

What Is An ABLE Account?
Similar to 529 Qualified Tuition Plans for college savings, ABLE accounts are designed to encourage disabled individuals and their families to save money to help support the disabled individual’s needs, whether that means funds for their healthcare, independent living, etc. ABLE accounts allow eligible individuals to save money yet still qualify for needs-based programs, such as Medicaid or Social Security.

An eligible individual is defined as a person with a disability that occurred prior to age 26, and they must do one of the following:

• Be entitled to Supplemental Security Income (SSI) because of their disability,
• Be entitled to Social Security Disability Insurance (SSDI) because of their disability,
• Have a condition listed on the Social Security Administration’s List of Compassionate Allowances Conditions, OR
• Self-certify their disability and diagnosis when opening a STABLE account.

Distributions from the account should only be used for qualified disability expenses. Account earnings used for non-qualified expenses will be subject to income tax and a 10% additional tax.

Posted by Chris Madison, CPA, MT

As a part of House Bill 233 (HB 233) recently passed by the Ohio General Assembly and signed by Governor Kasich, Ohio cities now have a new financing tool to use toward helping historic tax credit projects succeed.

Currently, proceeds from a tax increment financing (TIF) bond, which is issued by a government agency based on the expected real estate tax increase resulting from a development project, generally can only be used for public improvements, such as local streets, sewers, public parking garages, etc. 

Effective August 5, 2016, HB 233 allows a municipality to establish downtown redevelopment districts (DRDs) and then issue TIF bonds — the proceeds of which can be used to directly support a project, as long as it is an historic renovation project. This is an important change in the process, since many historic tax credit (HTC) deals fall apart because the syndication of the federal tax credits doesn’t generate cash for the project until it is complete and the rehabilitation is certified — which may be two or more years from the start of construction. That funding (as much as 20-25% of the project) is generally bridged via some type of subordinated gap financing, which is often hard to get. Beginning August 5^th, TIF proceeds can be used for any number of pieces of the capital stack, including grants, loans, infrastructure improvements and gap funding, which should move the needle on many HTC projects.

If you are involved in or are contemplating an HTC deal, talk to your advisors about maximizing this new tool.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Chris Madison at cmadison@cohencpa.comor a member of your service team for further discussion.

Posted by Josh Messina, CPA, MT

The research and development (R&D) tax credit has been around since the early ’80s and has seen its share of changes. With the signing of the PATH Act (Protecting Americans from Tax Hikes) on December 18, 2015, the credit has undergone more changes — three to be specific — and all are positive for business owners. Below are the changes that take effect beginning with the 2016 tax year. 

1.Permanence: The credit is now permanent, which makes it easier to plan for and take advantage of. Businesses can build the credit into their budget and use the resulting funds for investment in other areas.

2. Alternative Minimum Tax (AMT) offset: For eligible small businesses — defined as a corporation, partnership or sole proprietorship without publicly traded stock that has average annual gross receipts of less than $50 million in the three prior tax years — the credit may now offset Alternative Minimum Tax (AMT). This benefit will allow the R&D credit to be fully utilized, especially for owners and partners of pass-through entities.

3. Payroll tax credit in lieu of R&D credit: Qualified small businesses may elect to apply a portion of its R&D credit against the 6.2% payroll tax imposed on business wage payments to employees. A qualified small business is defined as a partnership or corporation with gross receipts less than $5 million, and no gross receipts in any tax year preceding the five-year period that ends with the period of the election. The same rules apply for sole proprietors, except gross receipts include receipts from all trades or businesses.

This new election is a game changer for startup companies who may be generating R&D credits but do not have any income in the current year against which to use them. Instead of carrying forward the credits (allowable up to 20 years), qualified small businesses can now elect to apply a portion, or all, of their R&D credit towards their payroll taxes, saving the company money sooner. The payroll tax credit will be applied on the quarterly payroll tax return (Form 941), but the IRS will provide guidance on specifics at a later date.

Other aspects of the R&D credit have remained the same, including the calculation itself and definitions of qualified research expenditures and qualifying activities, as well as the four-part test gauging qualifying R&D activity (permitted purpose, technological in nature, a process of experimentation, and a level of uncertainty). Read more about qualifying for the R&D credit in our blog post “R&D Credit: Why Your Business May Qualify.”

You may be spending money on activities you didn’t even know qualify as R&D expenditures. With the credit now a permanent part of the tax planning landscape, speak with your tax advisory team to identify any qualifying activities and expenditures.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Josh Messina at jmessina@cohencpa.com or a member of your service team for further discussion.

Posted by Guest Blogger Russell Moenich, Managing Director, Asset Management at Sequoia Financial Advisors, LLC

The United Kingdom’s (UK: England, Scotland, Wales and Northern Ireland) vote to leave the European Union (EU) is causing a massive global equity selloff along with a "flight to quality," i.e., U.S. Treasuries, the yen and gold are rallying. The result of the British exit (Brexit) vote will clearly weaken the near-term outlook for the UK and global economies, but it most likely will prove to be less damaging than many panicking folks are currently suggesting.

The estimated result of a 52% to 48% victory for the "leave" camp (Bloomberg) is a substantial surprise, particularly after the recent swing in the opinion polls back towards remaining. The widespread assumption that the majority of “undecideds” would plump for the status quo was clearly wrong. The market response to the outcome has been predictably negative.

From Monday’s open through last night’s market close, the book-makers and opinion polls have lifted the Global and US equity markets up week to date on hopes of a “Remain” vote supporting staying in the European Union (EU).  The MSCI All Country World Index IMI has been up approximately 3.8% and the Russell 1000 US stock market index has been up approximately 2.1% over the same time period (Bloomberg).  Today you will no doubt read headlines indicating a “massive global equity selloff,” and as of market open the Russell 1000 opened down 2.5% (Bloomberg). While it would be a fool’s errand to guess precisely what the markets will close today, we can only expect that the inflated hopes of a vote to remain in the EU will rush out of the market place as indicated by market opening values.  Wherever the market closes tonight, remember to adjust for the market expectations occurring this week.

The outcome clearly creates considerable short-term uncertainty, which is likely to weigh on the UK and global economies in the coming quarters. Business confidence will presumably drop sharply for a while. Nonetheless, our guess is that the ultimate damage likely will be smaller than some of the more pessimistic projections made by financial media.

It is important to remember the following:

1. The UK will probably remain a member of the EU for several years as the result of the referendum is only an "advisory.” The UK will remain inside the EU for at least two years and possibly longer. This will allow time to clear up some uncertainties, such as the UK’s future trading relationship with the remainder of the EU and rest of the world.
2. While UK politicians cannot ignore the views of the electorate completely, most of them favored "remain" and could drag the process out or try to find a relationship that replicates EU membership in all but name.
3. Leaders of the "leave" camp have suggested that Brexit would not actually take place until 2020, which means there is plenty of time for negotiations to clear up some of the most important uncertainties about the wider impact, notably the arrangement that would govern UK trade with the remainder of the EU and the rest of the world.
4. During this limbo period, the focus of global markets will most likely shift elsewhere.

However, the "leave" vote may embolden EU-sceptics elsewhere on the European continent, and governments may not be able to resist pressure for their own referendums. Brexit could be the first step for the break-up of the EU or the exit of one or more countries from the Eurozone (monetary union within the EU). Presumably any country thinking about exiting would wait and see what sort of deals the UK could make and what the economic impact would be. This contagion risk would likely be a very slow burner.

While the direct economic impact on other parts of the world should be limited, global business and investor confidence will presumably weaken in the near-term, particularly in Europe. As such, don't be surprised if the European Central Bank provides additional monetary policy support, and tighter monetary policy in the U.S. delayed further.

In time, the dust will settle and global markets will presumably refocus on key issues, such as the strength of China and the timing and pace of Fed tightening.

The counsel to clients in times like this should focus on the episode being another profound example of the importance of asset allocation and the strength of our investment strategy, as fixed income assets have rallied. While we do not have to tell you volatility is a necessary part of the investment experience, emotion can be the enemy of sound investment decision making. Fear can cause investors to make poor investment decisions in the short-term that are detrimental to their long-term-wealth-planning horizon. While these market corrections may appear to be disastrous, they are generally temporary.

This, too, shall pass.

We want to hear from you! We encourage you to share this post on social media or contact Russell Moenich at rmoenich@sequoia-financial.com for further discussion. You can also visit www.sequoia-financial.com.

The views and opinions expressed in this article do not necessarily reflect those of Cohen & Company.

This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.

The information above is for educational purposes, is not intended to provide specific advice or recommendations for any individual, and is being provided to you through the courtesy of Sequoia Financial Advisors, LLC.  The above information does not constitute tax, legal, investment or any other type of professional advice. You should consult with a qualified tax, legal or financial advisor prior to making a decision.  These materials are based upon publicly available information believed to be reliable.  There can be no assurance as to the accuracy or completeness of these materials.  These materials, and the information contained in these materials, may change at any time and without notice.

Though related entities, Sequoia Financial Group, LLC and its affiliates, and Cohen & Company, Ltd. are separate companies with common, but not identical ownership. Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. 

Posted by Tracy Monroe, CPA, MT

Cohen & Company’s most recent CPE day for our clients covered a lot of great topics and gave information CFOs and financial staff can use back at the office. We’ve provided a brief synopsis below of each topic.

Susan Rodgers of Buckingham Doolittle and Burroughs spoke on the new Department of Labor overtime rules, which drastically change the determination of which white-collar workers are paid overtime. The rule will make it more difficult for employers to classify employees as exempt from overtime requirements. In fact, the DOL estimates that 4.1 million salaried workers will become eligible for overtime when they work more than 40 hours in a week. The changes also have a tax impact, increasing employers’ payroll tax liability. Find more detail on this development in “DOL’s Final Overtime Rule Brings Sweeping Changes.”

Josh Messina and Alex Schneider of Cohen & Company briefed the audience on the three changes for the research and development (R&D) tax credit effective for the 2016 tax year. The PATH Act (Protecting Americans from Tax Hikes) signed at the end of 2015 does three things: 1) makes the credit permanent, 2) allows for eligible small businesses to use the credit to offset the Alternative Minimum Tax (AMT) and 3) allows qualified small businesses to apply a portion of the R&D credit against the 6.2% payroll tax imposed on businesses’ wage payments to employees. All of these are positive changes for business owners and could open up many new opportunities. Read more in “R&D Tax Credit: 3 Changes That May Impact You.”

Mike Meloy of Involta discussed data security in today’s vulnerable business environment. With security breaches always in the public eye, any breach in customer data could result in public controversy and financial loss for a company. Mike suggested businesses use a common sense, basic approach to security — monitor, monitor, monitor. Keep a watchful eye on everything inside and outside of your company; train employees to conduct safe practices, such as changing passwords and not clicking on links in emails that seem questionable; hold internal IT staff and external vendors accountable; have repeatable processes in place, particularly regarding using the cloud and personal devices; stay current on all software patches on all devices; and have a documented architecture in place. Bottom line: don’t make assumptions when it comes to security, start by putting your security efforts (and dollars) where your major revenue comes from, and know that you should always be working towards a secure environment. New risks are being created every day. Mike’s message was to learn from past mistakes, and try to make things better in the future. 

Brian Fiedler of Cohen & Company shared details on the Financial Accounting Standards Board’s (FASB’s) long-awaited update that revises the proper treatment of leases under U.S. Generally Accepted Accounting Principles (GAAP). Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), will affect companies that lease real estate, vehicles, construction and manufacturing equipment, and other assets. The standard requires these businesses to recognize most leases on their balance sheets, potentially inflating their reported assets and liabilities. Find more detail in “New Accounting Standard Change Lease Reporting on Financial Statements.”

Ray Polantz of Cohen & Company gave attendees an update on a host of international tax issues, highlighting the latest headlines, including corporate inversions, why companies are inverting and the legality and ultimate tax impact; the Panama Papers; and the Base Erosion and Profit Shifting (BEPS) initiative. Ray also focused on international issues affecting private companies, such as foreign tax credit utilization; accidental permanent establishment; and tax information reporting compliance, including FBAR filings and related Form 8938.

Tim O’Connor and Glynis Priester of Wells Fargo presented on the topic of managing transactional risk through insurance, namely representations and warranties insurance as well as environmental risk insurance. The former facilitates M&A and other business combinations by transferring risk from a buyer or seller to a third-party insurer. If there is a breach in representation and warranties, such as seller fraud, the insurance protects the policyholder from loss and acts as a more secure financial backstop for everyone involved. Tim pointed out that while the policy is attractive to private equity firms for protection reasons, it can also add value to a buyer’s bid early on in the transaction process. For environmental risk, particularly pollution legal liability, this specific insurance product is used in transactions to replace indemnifications, supplement them or satisfy lenders, since basic insurance usually doesn’t cover environmental liabilities. The policy protects buyers and sellers from financial loss due to unknown clean-up costs on and off site and within the building — mold, buried chemicals, unknown storage tanks, and even nuclear or biological terrorism. Glynis shared that the policy also helps with liability costs, e.g., if an individual or even a neighboring business is affected by mold or other contaminants from the policyholder’s building. Regardless of the type of transaction, once it’s closed the properties and other liabilities now become the buyer’s responsibility. Evaluating options for these and other insurance policies is something to put on the checklist early on in the transaction process.

We sincerely thank all of our speakers and attendees for another great program. See you in the fall!
 

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Tracy Monroe at tmonroe@cohencpa.com or a member of your service team for further discussion.

 

Posted by Randy Myeroff, CPA, CGMA

By now you may have heard about a very progressive move by the world’s two largest accounting associations — the American Institute of CPAs (AICPA) and the Chartered Institute of Management Accountants (CIMA) — to merge and create a new organization for the accounting profession. After much thought and reflection, in June members of both the AIPCA and CIMA cast an overwhelmingly positive vote in favor of the merger. 

The AICPA primarily has focused on public accountants, while CIMA has focused on management/business accountants. So why merge? Quite frankly, the business world and our profession continue to change at a rapid pace. More than ever before, CPAs are opting for industry and consulting roles to fill the increasing needs of businesses. Businesses are also increasing their global footprint, calling for more advisory and specialized resources. The leadership in both the AICPA and CIMA recognized that together they can strengthen the resources and enhance the value offered to members, both in and out of public accounting, and ultimately their clients.

At Cohen we pride ourselves on being thought leaders in the accounting profession, which ultimately drives value to our clients. Through our collective involvement in the AICPA and my current role as chair of its Major Firms Group, we were proud to play a leadership role in this important effort and are very pleased with this new direction. As the new association defines its goals and roles throughout the rest of this year and readies for launch in 2017, I am truly excited about the strength of this organization and the possibilities for the profession in the future.

We want to hear from you! We encourage you to comment below on this blog post or share it on social media.
 

Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.

Posted by Karen Raghanti, CPA, MT

July 1, 2016, marked the beginning of the second year in Ohio’s FY 2016-2017 budget — and the last scheduled year for the state’s popular InvestOhio tax credit program. At least through June 30, 2017, this program still offers a valuable incentive for taxpayers making new equity investments in either new or existing qualifying Ohio small businesses. 

It’s a win-win-win for taxpayers, businesses and communities. Investors, including individuals, estates, trusts and certain pass-through entities, can receive a credit of up to 10% of the qualifying investment and as much as $1 million in credits during a fiscal biennium, and can even carry forward those credits up to seven years. Qualifying businesses can use the new funds to reinvest in their business by purchasing tangible and intangible personal property, real property, business vehicles or using the funds for new employee compensation. Communities benefit from thriving businesses.

There are stipulations to follow. Businesses in which you are investing must qualify under the program’s rules. For example, businesses must meet an asset or receipts test and must acquire the credit approved property/people within six months of the investor’s qualifying investment. Additionally, investors must hold their investment and businesses must hold the purchased property for a two-year period before receiving the credit. Ohio will dole out up to $100 million in credits every two years. Credits are awarded on a first-come, first-served basis, meaning applying for the credit as soon as possible is critical to taking advantage of the program.

We have worked with numerous companies in structuring qualifying transactions and assisting with the application and subsequent reporting requirements. If you are a making an investment in an Ohio business and have questions on whether your investment qualifies for InvestOhio, please contact Karen Raghanti at kraghanti@cohencpa.com or a member of your service team.

For more details on the program, read more in “State of Ohio Issues Guidance on InvestOhio Tax Credit Program.”

We want to hear from you! We encourage you to comment below on this blog post and share it on social media.

Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.

Posted by Kim Palmer, CPA, MT

Targeted capital allocations are becoming standard in new LLC or partnership operating agreements. Historically, operating agreements typically provided for income/loss allocations to the partners based on the safe harbor provided under IRC Regulation 1.704-1(b)(2). This was more of a “cash follows tax” approach, in which the operating agreement provided a calculation for the allocation of taxable income/loss and distributions were then made based on the balance of the each partner’s capital account. The Regulation provides a safe harbor for economic effect if: 

1. Capital accounts of the partners are maintained under 704(b);

2. Upon liquidation of the partnership, liquidating distributions are to be made in accordance with positive capital account balances; and

3. If such partner has a deficit balance in his/her capital account following the liquidation of his/her interest in the partnership, he/she is unconditionally obligated to restore the amount of such deficit balance or the agreement provides for a “qualified income offset.”

Conversely, the targeted capital allocation language we are seeing more frequently in partnership agreements is more of a “tax follows cash” approach. With this method, the partnership makes distributions based up on the liquidation provisions of the operating agreement (usually referred to as the “waterfall”). Taxable income/loss is allocated so that, after the income/loss allocation has been made, the balance in each partner’s capital account shall, to the extent that is possible, be equal to an amount that would be distributed to the partner based on a hypothetical liquidation of the partnership. Distributions are made based on the waterfall calculation. 

Note that the term “capital account” referred to in the operating agreement means the capital accounts under IRC Section 704(b) and are referred to as the “book” capital accounts. This is a fair market value concept and should not be confused with the books as maintained by the business that may or may not be on a GAAP basis. Tax capital accounts can be different than “book” capital accounts. The intention of the targeted capital allocations is that each partner’s book capital account reflects the amount that partner would receive upon liquidation of the partnership. The book capital account often does not reflect this though, because income/loss does not always reflect the appreciation/depreciation of the entity’s value. 

There can also be an ongoing difference between book and tax capital accounts. These differences can be caused by a difference in the basis of the assets that were contributed to the partnership. For book purposes, assets are accounted for and depreciated based on the fair market value on the contribution date; for tax purposes, assets are based on a carryover basis concept. Or it could be that the assets of the partnership were booked up or down as a result of a revaluation event, e.g., a new partner was admitted to the partnership. There are many reasons that book and tax income/loss amounts and book and tax capital accounts may differ. Because of these differences, the allocations of both book and taxable income need to be reviewed annually, and a standard formula will not work under the targeted capital allocations approach.

The intent of targeted capital allocations is to allocate income/loss that reflects the economic arrangements among the partners. What does this really mean for a partnership? How do taxable income and losses get allocated? It depends on a multitude of factors, including:

• The waterfall distribution calculation, i.e., is it pro rata? Are there preferred returns to preferred members? How is capital returned and in which order?;
• Whether the taxable loss is reflective of an economic loss;
• Whether the taxable income is reflective of an economic gain;
• The historic allocations of income and loss;
• Whether there are any special allocations required under IRC Section 704(c); and
• Whether “book” and tax both reflect a loss or income, i.e., there is “book” income but a tax loss.

We often find in working with LLCs and partnerships that the economic arrangement or value of the entity is different than the taxable income/loss calculation. For example, the entity may reflect a taxable loss for the year, possibly as a result of depreciation expense and/or interest expense, but the value of the entity is actually increasing — which can be supported by a cash flow analysis or an event that books up the capital accounts, such as admission of new units that determines value. When this happens, it is important to note that the targeted capital allocations can produce a counterintuitive allocation, so should be reviewed carefully each year.

There is no template or formula that can be applied in each and every case, so keeping your tax team involved from day one is truly critical.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Kim Palmer at kpalmer@cohencpa.com or a member of your service team for further discussion.

Posted by Kimberly Rossman

Accounting Standards Update 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (ASU 2015-07) was issued in May 2015 with an effective date for public entities for fiscal years beginning after December 15, 2015, and, for all other entities, for fiscal years beginning after December 15, 2016. Because this ASU allows for simplified fair value disclosures and calls for retrospective reporting, meaning that all periods presented in the financial statements will conform to the presentation, your organization may want to consider early adoption. 

If your entity holds investments, like many nonprofit organizations, you should be familiar with the fair value measurements footnote disclosure. Depending on the types of investments your organization has and their placement within the fair value hierarchy, this footnote can be quite lengthy. With ASU 2015-07, you do not have to categorize certain types of investments that measure fair value using net asset value (NAV) — which includes those that are traded on the open markets, such as mutual funds or real estate investment funds (REITS), as well as other investments that do not have readily determined fair values, such as hedge funds and private equity funds. Instead, entities are required to disclose the total amount of investments measured using NAV, to allow financial statement users to easily reconcile the investments included in the fair value hierarchy to the statement of financial position.

Prior to this update, investments where fair value is measured at NAV (or its equivalent) were categorized within the fair value hierarchy based on liquidity, or whether the investment is redeemable with the investee at its NAV on the measurement date, at a future date or never redeemable. Classification within the fair value hierarchy was dependent on the length of time estimated for investments to become redeemable at a future date. Determining that length of time proved to be complicated and inconsistent in practice; ASU 2015-07 solves this problem.

ASU 2015-07 also removes certain disclosures relating to roll forward of investment activity for investments measured at NAV that were previously categorized as a Level 3 in the fair value hierarchy. However, entities are encouraged to continue to include such disclosures to aid users in understanding the nature, characteristics and risks of the reporting entities investments. All other disclosures related to the fair value hierarchy remain the same.

Implementing ASU 2015-07 is relatively easy! It starts with simply identifying all investments measured at fair value using NAV. Once they are identified, remove them from categorization as Level 1, Level 2 or Level 3 within the fair value hierarchy footnote.

You may ask how this is an improvement to the accounting standard. By removing the investments measured at NAV from the fair value hierarchy, it allows for a more consistent approach in reporting investments, simplifies the fair value disclosures, and may save you time come your year end audit going forward.  Electing to early adopt this ASU allows your organization to see these benefits sooner.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Kimberly Rossman at krossman@cohencpa.com or a member of your service team to discuss this topic further.

Posted by Jennifer K. Tapia, CPA, MAcc

As an update to our March 7, 2016, post “Ohio Clarifies Growing Tax Scope for Online Services and Internet Access,” on July 14, 2016, Ohio passed HB 466 that will exempt certain digital advertising services from Ohio sales and use tax. These services include those that provide access, via telecommunications equipment, to computer equipment that is used to enter, upload, download, review, manipulate, store, add or delete data for the purpose of electronically displaying promotional advertisements to potential customers, e.g., a website used by a business to list and advertise their inventory online.

The exemption will be effective 91 days after filing with the Secretary of State, and applicable on the first day of the first month that begins at least 30 days after the effective date of the legislation. We anticipate that effective date to be December 1. We do not believe this will change any audit determinations for periods prior to the law change. However, keep in mind that the proposed legislation does not change the definition of EIS and therefore does not affect any services except those related specifically to digital advertising.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Jen Tapia at jtapia@cohencpa.com

Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.

Posted by Hannah Prengler, CPA

As it did last year, the state of Ohio will offer a sales tax holiday weekend for back-to-school shopping. Beginning Friday, August 5th (starting at 12:00 a.m.) through Sunday, August 7th (until 11:59 p.m.), individuals can purchase items in the following three categories without being charged any Ohio sales or use tax:

1.   Clothing ($75/item or less)

2.   School supplies ($20/item or less)

3.   School instructional materials ($20/item or less)

The state has compiled a detailed Q&A section for more information about the tax holiday, but below are the definitions of each category:

Items of clothing. These include, but are not limited to, shirts; blouses; sweaters; pants; shorts; skirts; dresses; uniforms (athletic and nonathletic); shoes and shoe laces; insoles for shoes; sneakers; sandals; boots; overshoes; slippers; steel-toed shoes; underwear; socks and stockings; hosiery; pantyhose; footlets; coats and jackets; rainwear; gloves and mittens for general use; hats and caps; ear muffs; belts and suspenders; neckties; scarves; aprons (household and shop); lab coats; athletic supporters; bathing suits and caps; beach capes and coats; costumes; baby receiving blankets; diapers, children and adult, including disposable diapers; rubber pants; garters and garter belts; girdles; formal wear; and wedding apparel.

School supplies. These include onlybinders; book bags; calculators; cellophane tape; blackboard chalk; compasses; composition books; crayons; erasers; folders (expandable, pocket, plastic, and manila); glue, paste, and paste sticks; highlighters; index cards; index card boxes; legal pads; lunch boxes; markers; notebooks; paper; loose leaf ruled notebook paper, copy paper, graph paper, tracing paper, manila paper, colored paper, poster board, and construction paper; pencil boxes and other school supply boxes; pencil sharpeners;  pencils; pens; protractors; rulers; scissors; and writing tablets.

School instructional materials. These include only reference books; reference maps and globes, textbooks and workbooks.

Keep in mind that if you purchase items for use in a trade or business, those items will be subject to sales tax. If the retailer does not collect sales tax at the time of purchase, you will need to report and pay the appropriate use tax on the items.

The state is offering the holiday as a way to help consumers with their back-to-school shopping. Take advantage while it lasts!

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Hannah Prengler at hprengler@cohencpa.com or a member of your service team for further discussion.

Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.

Posted by Laura White, CPA

Earlier this year, the U.S. Federal Trade Commission (FTC) reported there was an almost 50% jump in identity theft complaints in 2015. The primary driver of that spike, by far, was tax identity theft. The FTC received 490,220 complaints about identity theft last year, with tax identity theft accounting for 221,854 of the complaints.

Individual Tax Identity Theft
To date, most of the attention has been paid to individual victims of tax identity theft. According to the IRS, it occurs when someone uses a stolen social security number (SSN) to file a tax return claiming a fraudulent refund. The victim may be unaware of this until he or she attempts to file a return and learns that one has already been filed. Alternatively, the IRS might send a taxpayer a letter saying it has identified a suspicious return with the taxpayer’s SSN.

In addition, a fraudster might use another’s SSN to obtain a job. The employer then reports that person’s income to the IRS under the stolen SSN. The victim, obviously, won’t include those earnings when filing his or her tax return, so IRS records will indicate that the victim underreported income.

IRS Actions
Tax identity theft is a top concern for the IRS. The agency will be implementing new provisions and is working with states and the payroll industry to put new safeguards in practice.

Most notably for employers, the Protecting Americans from Tax Hikes (PATH) Act signed in late 2015 now requires employers to file W-2, W-3 and 1099 forms by January 31 of the year following the tax year. The idea is that it will be easier for the IRS to catch discrepancies between legitimate forms filed by employers and those filed by fraudsters seeking refunds based on false forms.

The earlier deadline takes effect for forms filed in 2017 for the 2016 tax year. With these forms now due to be filed with the IRS a month earlier than in the past (or, for electronic filers, two months earlier), employers will need to pull together the necessary information more promptly.

Risks for Businesses
Thieves are going after employer identification numbers (EINs), which is a startling proposition for the many businesses that put far more effort into protecting SSNs than their EINs. A fraudster could use a stolen EIN to report false income and withholding on a W-2 and file for a refund. Moreover, the legitimate business could find the IRS coming after it for payroll taxes that were reported as withheld but not remitted.

As with SSN theft, EIN theft victims may not discover something’s amiss until they file their tax returns and receive IRS notification that they had already filed for that tax year. They also might be tipped off by receipt of an IRS notice regarding nonexistent employees.

Tips for Preventing Tax Identity Theft
Businesses should bear in mind — and remind their employees and customers — that the IRS does not initiate contact with taxpayers by email, text messages or social media to request personal or financial information.

For additional guidance on this topic, read our blog “Tax Identity Fraud Still Major Concern.”
 

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Laura White at lwhite@cohencpa.com or a member of your service team for further discussion.

Posted by Scott Adelson

Every successful business needs the ability to expand and grow alongside their customers. This may mean adding new services, products, and/or experiences to anticipate or meet clients’ needs. As an auto dealership, there are many options for growth, but one popular strategy is to start an in-house leasing program. Here are a few important considerations when making this big decision:

1.  Analyze the market. Are there many other auto leasing companies nearby? If so, consider whether this venture would be worthwhile with the decreased margins that come along with competition. 

2.  Consider demographic demands. What does your customer base need? Fleet leasing or individual leases? Are your customers mainly small local mom and pops or are they growing corporations? Or does it make more sense to offer individual leases for customers’ personal use?  

3.  Consider your infrastructure. You must be able to maintain and manage numerous leases at once. That means having the right software and experienced employees in place. 

4.  Create a lease management plan. Once you have established the proper structure, the next step is to develop a lease management plan. There are many ways a dealership can manage lease plans, but if you went through the previous steps thoroughly, then you should already have a pretty good idea of what needs to be done to manage your leases successfully.

5.  Know what you’re getting into. There are many reasons why offering an in-house lease program can be a good move for a dealership, but it can also come with its own mix of complications. Be aware and ready to take on issues such as lessees defaulting on their lease(s), wreckage of leased vehicles, keeping up insurance and registration on vehicles, and varying residual rates.

There are many issues to consider before starting an in-house leasing program; but, if done correctly, it can be a great next step to help keep current customers, gain new ones and grow your bottom line. If you decide it’s worth it, then start planning and selling!
 

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Scott Adelson at sadelson@cohencpa.com or a member of your service team for further discussion.
 

Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.

The IRS released proposed regulations (I.R.C. 2704) on August 2, 2016, that, if adopted, would significantly reduce or potentially eliminate the valuation discounts used by many high-net-worth taxpayers to minimize transfer taxes (such as gift and estate taxes) when transferring interests in a closely held family business. 

Highlights of the Proposed Regulations
As currently drafted, the proposed regulations would materially reduce the discounts currently available in valuing non-marketable and non-controlling (minority) interests in family controlled entities — regardless of whether the investment is passive or active. Specifically, the proposed regulations impact the following areas.

“Deathbed Transfers”
The proposed regulation imposes a look-back for any transfers made within three years of the transferor's death. Any transfers made within three years of death that result in a liquidation right lapse would be treated as testamentary transfers.

In practical terms, let’s assume that “Bob” owns 51% of a family controlled entity. On Bob’s deathbed he gifts 2% of the stock to his children. The value of the 2% gift along with the remaining 49% of the stock (upon Bob’s death) would be reduced because each interest lacks control (minority interest). Under the proposed regulation, if the 2% gift was made within three years of Bob’s death the minority interest discount of the remaining 49% would be eliminated (requires the valuator to assume the 51% interest is still present).

Quantifying Discounts for Lack of Control and Marketability
When quantifying discounts for lack of control and marketability, valuators consider a variety of factors, including the nature of the company’s underlying assets, historical and expected income distributions, market conditions, rights and restrictions granted in the company’s agreement, state laws and legal precedent. The proposed regulations would significantly limit the provisions that could be considered when discounting a family business interest:

Under the proposed regulations, certain restrictions previously included in a company’s agreements (such as the ability to liquidate or redeem an interest) are in essence disregarded, while other restrictions (such as an effective put-right) are essentially “written” into the governing documents. The effect of these “changes” to the corporate records are expected to significantly reduce the lack of marketability and lack of control discounts that valuators are able to justify.

Transfers to Non-Family Members
The proposed regulations also tackle the treatment of the transfer of an interest in a family business to a nonfamily member. The IRS believes that taxpayers have avoided the applicable restriction rules by transferring a nominal interest in their family business to a nonfamily member, such as a charity or an employee, to ensure that the family alone doesn’t have the power to remove a restriction. Under the proposed regulations, the existence of such an interest would be recognized only if the transfer meets certain "bright line tests” (ownership percentages and lack of put-rights). If all nonfamily member interests are disregarded, the entity is treated as if it’s controlled by the family.

Below is an illustrative example of the potential reduction in discounts as a result of the proposed regulations:

Timing & Action
The IRS faces an uphill battle against many taxpayers, estate planning advisors and some lawmakers when it comes to closing the door on this gift and estate planning tool. Opponents argue that the IRS may have overstepped its authority in issuing these proposed regulations. The IRS might be persuaded to water down its proposal before finalizing it.

A public hearing on the proposed regulations has been scheduled for December 1, 2016, and the regulations won’t take effect until at least 30 days after they’re finalized, which likely would not be until sometime in 2017 at the earliest. The current rules still exist for now, but there are a few action steps you can take:

1. Be aware that these regulations exist and significantly alter the transfer tax planning landscape;

2. Consider accelerating transfer tax planning by taking advantage of the current regulations in applying valuation discounts ahead of the release of final regulations;

3. Work with your advisors closely for assistance in structuring transfers and applying discounts in a way that will pass muster with the IRS.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Andy Whitehair at awhitehair@cohencpa.com with estate tax planning questions or Aaron Caya at acaya@cohencpa.com with valuation questions. 
 

Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.

Posted by Randy Myeroff, CPA, CGMA

We were honored to have Greg Valliere, renowned political strategist with nearly 40 years of experience following Washington issues for institutional and retail investors, address clients of Cohen & Company and Sequoia Financial Group recently. A regular guest on media outlets such as CNBC, Fox Business Network and CNN, and actively quoted in the nation’s financial press, Greg is always insightful when it comes to giving his view of the economy, political landscape and the resulting impact on the markets. Below are a few of the highlights he shared with the group.

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Even though economic angst is still present among many Americans, Greg feels the economy is actually doing fine. With the recession ending over seven years ago, inflation is low, the Federal Reserve Bank doesn’t seem to be raising interest rates for a while yet and the Gross Domestic Product (GDP) is good. Unemployment is still going down, and, most importantly, disposable income is going up. Investors should feel confident in these fundamentals, and we should continue to see moderate growth of 2.5 % for the next few quarters.

But the big question on everyone’s mind is:  What about after the election and into 2017 (and beyond)?

Posted by Ray Polantz, CPA, MT

Many U.S. taxpayers are familiar with the requirement to annually file a foreign bank account report (FBAR). However, it’s important to note that the Foreign Account Tax Compliance Act (FATCA) adds another filing requirement for certain taxpayers who hold foreign financial assets. These taxpayers must report these assets on Form 8938, Statement of Specified Foreign Financial Assets. Below are seven things to know. 

1. Who Must File Form 8938? Generally, a specified individual who has an interest in specified foreign financial assets and the value is more than the applicable thresholds must file Form 8938 if the applicable threshholds are exceeded.

Earlier this year, the IRS and U.S. Treasury finalized regulations that require certain specified domestic entities to report specified foreign financial assets. These regulations are effective for taxable years beginning after December 31, 2015, meaning that calendar-year domestic entities must include these assets in their 2016 tax returns.

2. Specified Individual
A specified individual is one of the following:

• A U.S. citizen;
• A resident alien of the United States for any part of the tax year; and
• Certain nonresident aliens, such as those who make an election to be treated as a resident alien, and those who are bona fide residents of American Samoa or Puerto Rico.

3. Specified Domestic Entity
A specified domestic entity is defined as a domestic corporation, domestic partnership or domestic trust formed or used, directly or indirectly, for holding specified foreign financial assets. The determination of whether a domestic entity is a specified domestic entity is made annually. A corporation or partnership is treated as a specified domestic entity if:

1) the corporation or partnership is closely held by a specified individual, i.e., greater than 80% of the total vote or value of a corporation or 80% of the total capital or profit interest of a partnership is held by a specified individual; and

2) at least 50% of the corporation or partnership’s gross income is passive or at least 50% of the assets produce or are held for the production of passive income.

4. Specified Foreign Financial Asset
Specified foreign financial assets include the following assets:

• Financial accounts maintained by a foreign financial institution.
• The following foreign financial assets if they are held for investment and not held in an account maintained by a financial institution:
•  Stock or securities issued by someone who is not a U.S. person;
• Any interest in a foreign entity; and
• Any financial instrument or contract that has an issuer or counterparty that is not a U.S. person.

5. Reporting Thresholds
The reporting thresholds depend on whether the taxpayers live in or outside of the United States and their filing status.

• Taxpayers living in the United States
• Unmarried taxpayers:  More than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
• Married taxpayers filing a joint income tax return:  More than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
• Married taxpayers filing separate income tax returns:  More than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

• Taxpayers living outside the United States
• Unmarried taxpayers:  More than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.
• Married taxpayers filing a joint income tax return:  More than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.
• Married taxpayers filing separate income tax returns:  More than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.

6. When and How to File
Taxpayers must attach Form 8938 to their annual return and file it by the due date (including extensions) for that return.

7. Penalties
Taxpayers who fail to report information on specified foreign financial assets may be subject to a penalty of $10,000. If the taxpayer does not file a correct and complete Form 8938 within 90 days after the IRS issues a failure-to-file notice, the taxpayer may be subject to an additional penalty of $10,000 for each 30-day period during which they continue to fail to file Form 8938 (not to exceed $50,000).

For taxpayers who fail to file Form 8938 or fail to report a specified foreign financial asset, the statute of limitations for the tax year may remain open for all or a part of your income tax return until three years after Form 8938 is filed.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Ray Polantz at rpolantz@cohencpa.com or a member of your service team for further discussion.

Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.

Posted by Steve Cotter and Marie Brilmyer, CPA, MAcc

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-14 (ASU 2016-14) on August 18, 2016. This much anticipated guidance is hailed as one of the most significant changes affecting not-for-profits in more than 20 years and will be effective for fiscal years beginning after December 15, 2017, and for interim periods beginning after December 15, 2018. The guidance affects multiple areas, but the most significant are: 

• Net asset classification,
• Presentation of the statement of cash flows,
• Expenses,
• Reporting investment return, and
• Disclosures surrounding liquidity.

Below is a brief explanation of the impact to these areas.

1. Net Asset Classification. Currently, generally accepted accounting principles (GAAP) shows the classification of net assets as unrestricted, temporarily restricted and permanently restricted.  The new standard would require the net assets to be classified into two buckets, showing the classifications as “without donor restrictions” and “with donor restrictions.” The required disclosures have not changed in regards to the nature and amount of donor restrictions. However, ASU 2016-14 will now require new disclosures for the “without donor restrictions” bucket, which will involve expanded disclosures for the amount, purpose and type of any board designations. In addition, ASU 2016-14 requires enhanced disclosures surrounding changes and the net asset classification of underwater endowment funds.

2. Presentation of the Cash Flows. ASU 2016-14 continues to allow organizations to use either the direct method or the indirect method to prepare its statement of cash flows. Current GAAP requires entities to present the indirect method reconciliation if the direct method is used. ASU 2016-14 removes this requirement. 

3. Expenses. Organizations will need to report their expenses by natural classification as well as functional allocation, either in the financial statements or in the footnotes. Additionally, the method used to allocate costs between program and support services is required to be disclosed.

4. Reporting Investment Return. Organizations will now report investment return net of external and internal investment expenses. Current GAAP requires entities to net investment expenses for financial statement presentation purposes. The change will allow a better comparison of investment returns among all nonprofit organizations — regardless if their investments are managed internally, externally or if the organization uses mutual funds or other investment vehicles in which fees are embedded.

5. Disclosures Surrounding Liquidity. Perhaps the most significant change with ASU 2016-14 is the requirement for an organization to disclose information surrounding its liquidity. The new disclosures will provide more transparent information that will enable financial statement users to have a better understanding of how an organization manages its risks in this regard. The new disclosures will require an organization to include qualitative and quantitative liquidity information. Such information includes how a not-for-profit manages (qualitative) its liquid available resources to meet cash needs for general expenditures within one year of the balance sheet date, as well as the availability (quantitative) of financial assets at the balance sheet date to meet those same expenditures.

ASU 2016-14 brings many beneficial changes to substantially all not-for-profits, as well as donors, grantors, creditors and others that use the financial statements. To prepare, not-for-profits should read ASU 2016-14 and talk to advisors about which specific issues will affect your organization’s financial statements the most. Early application of the standard is permitted, and if you believe your organization would benefit from early adoption, reach out to your accounting and auditing team.

Read more about this update on the FASB website.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Steve Cotter at scotter@cohencpa.com or Marie Brilmyer at mbrilmyer@cohencpa.com for further discussion.

Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.

Posted by Phil Baptiste, CPA, MT

In Revenue Procedure 2016-47 issued August 24, 2016, the IRS has given taxpayers who miss the 60-day rollover deadline for IRA or retirement plan benefits another chance. Effective immediately, taxpayers can rollover benefits after the 60 days if they meet one of the 11 “acceptable” reasons listed in the Rev. Proc.:

1.  An error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates;

2.  The distribution, having been made in the form of a check, was misplaced and never cashed;

3.  The distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan;

4.  The taxpayer’s principal residence was severely damaged;

5.  A member of the taxpayer’s family died;

6.  The taxpayer or a member of the taxpayer’s family was seriously ill;

7.  The taxpayer was incarcerated;

8.  Restrictions were imposed by a foreign country;

9.  A postal error occurred;

10. The distribution was made on account of a levy under § 6331 and the proceeds of the levy have been returned to the taxpayer; or

11.  The party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover, despite the taxpayer’s reasonable efforts to obtain the information.

Rev. Proc. 2016-47 is significant. Mistakes outside of the taxpayer’s control — such as a financial institution missing the deadline or putting the rollover money in a non-qualified account — will no longer penalize the taxpayer. Prior to this ruling, the taxpayer had to file a private letter ruling for relief, which is very expensive. Now, the taxpayer can simply send a letter to their IRA trustee or plan administrator and the IRA or plan can accept the rollover after the 60-day deadline. However, keep in mind the contribution must be made as soon as practicable, which the Rev. Proc. states would be 30 days after the reason the deadline was missed is no longer an issue.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Phil Baptiste at pbaptiste@cohencpa.comor a member of your service team for further discussion.

Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.

Posted by Jim Boland, MBA

Technology is top of mind for many business owners. Some invest heavily in leading systems and information technology (IT) professionals, while others focus on the minimum spend to keep the emails flowing. Regardless of where you fall on this spectrum, the rapid evolution of technology and rising customer expectations mean it makes sense to step back and think through your company’s IT strategy. PwC’s 2015 Annual Director’s survey confirms that a majority of business owners are doing just that — with 67% of boards of directors reported as being very engaged in understanding a company’s IT budget, up 10 points from three years earlier. 

So how do you develop the right IT strategy for your business?

Your industry likely dictates base requirements for your business. For example, financial institutions require rapid transaction processing and real-time data visibility, while industrial product companies often rely on historical-looking financials and operational metrics to guide decision making. But, similar to corporate strategy or culture, your IT strategy should be unique to your business. Considerations such as your operational efficiency and employee engagement also should guide the direction and execution of your specific strategy. Thoughtful strategy, planning and investment is always better than disparate maverick IT spend. Eliminating shadow IT costs (a.k.a. ad-hoc solutions created within individual departments) and one-off processes and tools that often take hold without a clear IT strategy can lead to significant business benefits.

To effectively enable and support your business objectives, start by linking your IT strategy to your overall business strategy:

1. Consider key elements of your business strategy and define the technology capabilities that must be in place to achieve those goals.

2. Map your current technology environment and the business areas that are supported.

3. Develop an understanding for the gaps between your current and desired capabilities.

As you work through these detailed elements of your IT strategy, consider structuring your objectives around the following tactical processes and tools to find the right balance for your business:

Growth Drivers

• Predictive Analytics – Connect enterprise data with external information to identify trends and opportunities to increase business value.
• Brand / Web Presence – Make a lasting first impression on your customers. Provide the information and tools via your website and relevant social media channels to create an engaging customer experience and foster a community of supporting advocates.
• Innovation / Product Lifecycle Management (PLM) – Manage your core intellectual property to generate new products and services, while providing consistent product information internally and externally.
• Sales Pipeline / Customer Relationship Management (CRM) – Segmentation allows for more targeted marketing. Use a tool to provide timely touchpoints based on a prospect’s status in the sales process.

Operational Efficiency

• Management Reporting – Provide reliable, standard reports to your management team that highlight progress against key performance indicators from your strategic plan.
• Transaction Processing / Enterprise Resource Planning (ERP) – Understand your core business activities and optimize those processes. Integration to PLM and CRM optimizes work flow and ensures data quality.
• Employee Engagement / Human Capital Management (HCM) – Attract, grow, and retain your most valuable assets. Think beyond payroll and benefits to create an engaging workplace.

Foundational Stability

• IT Infrastructure Model / Cloud – Consider which resources, activities and systems should be outsourced to minimize distraction and cost.
• Data Governance / Mobile Device Management (MDM) – Control the building blocks of an effective technology environment. Establish thoughtful processes to create and update item, customer and supplier data.

With your desired capabilities defined, you can begin to develop plans for your future IT architecture and the roadmap to get there. Technology transformation doesn’t occur overnight, but with a well-aligned strategy and thoughtful planning, you can build the unique capabilities that will best support your business and enable ongoing value creation and success.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Jim Boland at jboland@cohenconsulting.com or a member of your service team for further discussion.