2016 accounting & controls update - austin...
TRANSCRIPT
2016 Accounting amp Controls Update
A few housekeeping notes hellip
About Holtzman Partners
Formed 12 years ago
Serve the growing Austin market
70 team members
To empower our team to provide exceptional
service to clients in every phase of growth
Our Mission Statement
Todayrsquos Agenda
bull PCAOB Hotbutton Issues - Management Review and IPEbull Tax Update bull Accounting amp Compliance Update
PCAOB Hotbutton Issues
Management Review (MR) and Information Produced by Entity (IPE)
I Review of MR and IPE Requirements
II Practical Considerations for the Application of MR and IPE Requirements
- What Wersquove Learned
- Example Refresh Approach
- Specific Control Considerations
III Questions Shared Experiences
Key Topics
I Review of MR and IPE Requirements
Commission Guidance Regarding Managementrsquos Report on Internal
Control Over Financial Reporting Under Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (SEC Release No 33-8810)
The 2013 Committee of Sponsoring Organizations of the Treadway
Commission (COSO) Internal Control mdash Integrated Framework (the
COSO Framework)
Public Company Accounting Oversight Board (PCAOB)
What Has Driven the Increased Focus
What Are ldquoManagement Reviewrdquo ControlsEx
ampl
esSignificant Estimation Processes
Significant Risks
Fraud Risks
Unusual or Non-routine Classes of Transactions
Compensating Controls Being Relied Upon
bull Purpose and intent of the control
bull What are the expectations
Scope
bull Quantitative thresholds
bull Qualitative thresholds
Precision
bull Systems usedbull Completeness amp
accuracy of underlying data
Data
bull What types of questions arise
bull Nature of resolution
Follow Up
Whatrsquos Required for Management Review
Increased documentation is required for management review controls that considers the following
Whatrsquos The Sufficiency of Documentation
Low risk of failure or misstatement
Higher risk of failure or misstatement
Evidence required to substantiate
managementrsquos review
What is IPE
IPE = Information Produced by the Entity
Information presented in reports used in the operation of a control
Reports run and data extractions used to support audit tests
IPE Examples
Management Examples
IT System Dependent
Customer AR Aging
Financial Information
Manual
Excel Variance Analysis
Excel Calculation of Deferred Rent
Internal Audit Examples
IT System Dependent
Listing of Invoices for The Period
Manual
Listing of New Leases
Why IPE matters
Control execution dependent on reports
and data
Management reviews the
operation of the control
Management reviews the
validation of the completeness and
accuracy of the data
The effectiveness of the control depends on both the review of operation and evaluation of the underlying data used
Report generated from
IT System
Report Logic Controls
Parameter Controls
Source Data Controls
Yes
How do we know the report
is pulling the correct
information
Is the report relevant to the period under
review
Is the underlying data
accurate
Is report manipulated from original
output
No
Input Controls
Output Controls
ITGCs
Yes No
Example of Review over Completeness amp Accuracy of IPE
Accounts Receivable Aging ListingControl over the
calculation of
Allowance for Bad Debt
Accuracy
Clerically test the listing
Recalculate the aging category for a random sample of
invoices
Completeness
Select a random sample of invoices from the subledger
and agree to the Aging listing
Agree to the general ledger
II Practical Considerations for the Application of MR
and IPE Requirements
Everybody is going through some level of pain
- additional time being incurred by all parties (management and auditors)
- procedures moving from the auditor to the control owner (reviewer)
- internal auditors are incurring significantly more time performing walkthroughs
Each audit firm may have received different comments from the PCAOB
- different comments are driving different implementation requirements
- specific requirements vary by audit team within the same firm
- we have met with the partners from one firm in Austin to help set expectations
Each company should come up with its own formal implementation plan
- donrsquot ask external auditor to tell you what they want
- companies should come up with a risk-based plan and present it to their auditors to get their feedback (at salient points during its rollout)
- focus on areas that have the highest impact on the external auditorrsquos reliance strategy
What wersquove learned
Summary Some companies are using the implementation of the MR and IPE requirements to take a ldquoRefreshrdquo approach to review all of its SOX controls The following is an example of such an approach
1 Take an inventory of your significant financial processes and benchmark against other companies (if possible)
2 Take an inventory of internal controls within each process and benchmark against other companies (if possible)
3 Identify which controls are impacted by the MR and IPE requirements and assign them a High or Medium impact (no impact on low controls)
4 Develop MRIPE ldquoBefore and Afterrdquo standard templates for High and Medium impact controls ndash see example on upcoming slide
Example Refresh Approach
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
A few housekeeping notes hellip
About Holtzman Partners
Formed 12 years ago
Serve the growing Austin market
70 team members
To empower our team to provide exceptional
service to clients in every phase of growth
Our Mission Statement
Todayrsquos Agenda
bull PCAOB Hotbutton Issues - Management Review and IPEbull Tax Update bull Accounting amp Compliance Update
PCAOB Hotbutton Issues
Management Review (MR) and Information Produced by Entity (IPE)
I Review of MR and IPE Requirements
II Practical Considerations for the Application of MR and IPE Requirements
- What Wersquove Learned
- Example Refresh Approach
- Specific Control Considerations
III Questions Shared Experiences
Key Topics
I Review of MR and IPE Requirements
Commission Guidance Regarding Managementrsquos Report on Internal
Control Over Financial Reporting Under Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (SEC Release No 33-8810)
The 2013 Committee of Sponsoring Organizations of the Treadway
Commission (COSO) Internal Control mdash Integrated Framework (the
COSO Framework)
Public Company Accounting Oversight Board (PCAOB)
What Has Driven the Increased Focus
What Are ldquoManagement Reviewrdquo ControlsEx
ampl
esSignificant Estimation Processes
Significant Risks
Fraud Risks
Unusual or Non-routine Classes of Transactions
Compensating Controls Being Relied Upon
bull Purpose and intent of the control
bull What are the expectations
Scope
bull Quantitative thresholds
bull Qualitative thresholds
Precision
bull Systems usedbull Completeness amp
accuracy of underlying data
Data
bull What types of questions arise
bull Nature of resolution
Follow Up
Whatrsquos Required for Management Review
Increased documentation is required for management review controls that considers the following
Whatrsquos The Sufficiency of Documentation
Low risk of failure or misstatement
Higher risk of failure or misstatement
Evidence required to substantiate
managementrsquos review
What is IPE
IPE = Information Produced by the Entity
Information presented in reports used in the operation of a control
Reports run and data extractions used to support audit tests
IPE Examples
Management Examples
IT System Dependent
Customer AR Aging
Financial Information
Manual
Excel Variance Analysis
Excel Calculation of Deferred Rent
Internal Audit Examples
IT System Dependent
Listing of Invoices for The Period
Manual
Listing of New Leases
Why IPE matters
Control execution dependent on reports
and data
Management reviews the
operation of the control
Management reviews the
validation of the completeness and
accuracy of the data
The effectiveness of the control depends on both the review of operation and evaluation of the underlying data used
Report generated from
IT System
Report Logic Controls
Parameter Controls
Source Data Controls
Yes
How do we know the report
is pulling the correct
information
Is the report relevant to the period under
review
Is the underlying data
accurate
Is report manipulated from original
output
No
Input Controls
Output Controls
ITGCs
Yes No
Example of Review over Completeness amp Accuracy of IPE
Accounts Receivable Aging ListingControl over the
calculation of
Allowance for Bad Debt
Accuracy
Clerically test the listing
Recalculate the aging category for a random sample of
invoices
Completeness
Select a random sample of invoices from the subledger
and agree to the Aging listing
Agree to the general ledger
II Practical Considerations for the Application of MR
and IPE Requirements
Everybody is going through some level of pain
- additional time being incurred by all parties (management and auditors)
- procedures moving from the auditor to the control owner (reviewer)
- internal auditors are incurring significantly more time performing walkthroughs
Each audit firm may have received different comments from the PCAOB
- different comments are driving different implementation requirements
- specific requirements vary by audit team within the same firm
- we have met with the partners from one firm in Austin to help set expectations
Each company should come up with its own formal implementation plan
- donrsquot ask external auditor to tell you what they want
- companies should come up with a risk-based plan and present it to their auditors to get their feedback (at salient points during its rollout)
- focus on areas that have the highest impact on the external auditorrsquos reliance strategy
What wersquove learned
Summary Some companies are using the implementation of the MR and IPE requirements to take a ldquoRefreshrdquo approach to review all of its SOX controls The following is an example of such an approach
1 Take an inventory of your significant financial processes and benchmark against other companies (if possible)
2 Take an inventory of internal controls within each process and benchmark against other companies (if possible)
3 Identify which controls are impacted by the MR and IPE requirements and assign them a High or Medium impact (no impact on low controls)
4 Develop MRIPE ldquoBefore and Afterrdquo standard templates for High and Medium impact controls ndash see example on upcoming slide
Example Refresh Approach
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
About Holtzman Partners
Formed 12 years ago
Serve the growing Austin market
70 team members
To empower our team to provide exceptional
service to clients in every phase of growth
Our Mission Statement
Todayrsquos Agenda
bull PCAOB Hotbutton Issues - Management Review and IPEbull Tax Update bull Accounting amp Compliance Update
PCAOB Hotbutton Issues
Management Review (MR) and Information Produced by Entity (IPE)
I Review of MR and IPE Requirements
II Practical Considerations for the Application of MR and IPE Requirements
- What Wersquove Learned
- Example Refresh Approach
- Specific Control Considerations
III Questions Shared Experiences
Key Topics
I Review of MR and IPE Requirements
Commission Guidance Regarding Managementrsquos Report on Internal
Control Over Financial Reporting Under Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (SEC Release No 33-8810)
The 2013 Committee of Sponsoring Organizations of the Treadway
Commission (COSO) Internal Control mdash Integrated Framework (the
COSO Framework)
Public Company Accounting Oversight Board (PCAOB)
What Has Driven the Increased Focus
What Are ldquoManagement Reviewrdquo ControlsEx
ampl
esSignificant Estimation Processes
Significant Risks
Fraud Risks
Unusual or Non-routine Classes of Transactions
Compensating Controls Being Relied Upon
bull Purpose and intent of the control
bull What are the expectations
Scope
bull Quantitative thresholds
bull Qualitative thresholds
Precision
bull Systems usedbull Completeness amp
accuracy of underlying data
Data
bull What types of questions arise
bull Nature of resolution
Follow Up
Whatrsquos Required for Management Review
Increased documentation is required for management review controls that considers the following
Whatrsquos The Sufficiency of Documentation
Low risk of failure or misstatement
Higher risk of failure or misstatement
Evidence required to substantiate
managementrsquos review
What is IPE
IPE = Information Produced by the Entity
Information presented in reports used in the operation of a control
Reports run and data extractions used to support audit tests
IPE Examples
Management Examples
IT System Dependent
Customer AR Aging
Financial Information
Manual
Excel Variance Analysis
Excel Calculation of Deferred Rent
Internal Audit Examples
IT System Dependent
Listing of Invoices for The Period
Manual
Listing of New Leases
Why IPE matters
Control execution dependent on reports
and data
Management reviews the
operation of the control
Management reviews the
validation of the completeness and
accuracy of the data
The effectiveness of the control depends on both the review of operation and evaluation of the underlying data used
Report generated from
IT System
Report Logic Controls
Parameter Controls
Source Data Controls
Yes
How do we know the report
is pulling the correct
information
Is the report relevant to the period under
review
Is the underlying data
accurate
Is report manipulated from original
output
No
Input Controls
Output Controls
ITGCs
Yes No
Example of Review over Completeness amp Accuracy of IPE
Accounts Receivable Aging ListingControl over the
calculation of
Allowance for Bad Debt
Accuracy
Clerically test the listing
Recalculate the aging category for a random sample of
invoices
Completeness
Select a random sample of invoices from the subledger
and agree to the Aging listing
Agree to the general ledger
II Practical Considerations for the Application of MR
and IPE Requirements
Everybody is going through some level of pain
- additional time being incurred by all parties (management and auditors)
- procedures moving from the auditor to the control owner (reviewer)
- internal auditors are incurring significantly more time performing walkthroughs
Each audit firm may have received different comments from the PCAOB
- different comments are driving different implementation requirements
- specific requirements vary by audit team within the same firm
- we have met with the partners from one firm in Austin to help set expectations
Each company should come up with its own formal implementation plan
- donrsquot ask external auditor to tell you what they want
- companies should come up with a risk-based plan and present it to their auditors to get their feedback (at salient points during its rollout)
- focus on areas that have the highest impact on the external auditorrsquos reliance strategy
What wersquove learned
Summary Some companies are using the implementation of the MR and IPE requirements to take a ldquoRefreshrdquo approach to review all of its SOX controls The following is an example of such an approach
1 Take an inventory of your significant financial processes and benchmark against other companies (if possible)
2 Take an inventory of internal controls within each process and benchmark against other companies (if possible)
3 Identify which controls are impacted by the MR and IPE requirements and assign them a High or Medium impact (no impact on low controls)
4 Develop MRIPE ldquoBefore and Afterrdquo standard templates for High and Medium impact controls ndash see example on upcoming slide
Example Refresh Approach
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
To empower our team to provide exceptional
service to clients in every phase of growth
Our Mission Statement
Todayrsquos Agenda
bull PCAOB Hotbutton Issues - Management Review and IPEbull Tax Update bull Accounting amp Compliance Update
PCAOB Hotbutton Issues
Management Review (MR) and Information Produced by Entity (IPE)
I Review of MR and IPE Requirements
II Practical Considerations for the Application of MR and IPE Requirements
- What Wersquove Learned
- Example Refresh Approach
- Specific Control Considerations
III Questions Shared Experiences
Key Topics
I Review of MR and IPE Requirements
Commission Guidance Regarding Managementrsquos Report on Internal
Control Over Financial Reporting Under Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (SEC Release No 33-8810)
The 2013 Committee of Sponsoring Organizations of the Treadway
Commission (COSO) Internal Control mdash Integrated Framework (the
COSO Framework)
Public Company Accounting Oversight Board (PCAOB)
What Has Driven the Increased Focus
What Are ldquoManagement Reviewrdquo ControlsEx
ampl
esSignificant Estimation Processes
Significant Risks
Fraud Risks
Unusual or Non-routine Classes of Transactions
Compensating Controls Being Relied Upon
bull Purpose and intent of the control
bull What are the expectations
Scope
bull Quantitative thresholds
bull Qualitative thresholds
Precision
bull Systems usedbull Completeness amp
accuracy of underlying data
Data
bull What types of questions arise
bull Nature of resolution
Follow Up
Whatrsquos Required for Management Review
Increased documentation is required for management review controls that considers the following
Whatrsquos The Sufficiency of Documentation
Low risk of failure or misstatement
Higher risk of failure or misstatement
Evidence required to substantiate
managementrsquos review
What is IPE
IPE = Information Produced by the Entity
Information presented in reports used in the operation of a control
Reports run and data extractions used to support audit tests
IPE Examples
Management Examples
IT System Dependent
Customer AR Aging
Financial Information
Manual
Excel Variance Analysis
Excel Calculation of Deferred Rent
Internal Audit Examples
IT System Dependent
Listing of Invoices for The Period
Manual
Listing of New Leases
Why IPE matters
Control execution dependent on reports
and data
Management reviews the
operation of the control
Management reviews the
validation of the completeness and
accuracy of the data
The effectiveness of the control depends on both the review of operation and evaluation of the underlying data used
Report generated from
IT System
Report Logic Controls
Parameter Controls
Source Data Controls
Yes
How do we know the report
is pulling the correct
information
Is the report relevant to the period under
review
Is the underlying data
accurate
Is report manipulated from original
output
No
Input Controls
Output Controls
ITGCs
Yes No
Example of Review over Completeness amp Accuracy of IPE
Accounts Receivable Aging ListingControl over the
calculation of
Allowance for Bad Debt
Accuracy
Clerically test the listing
Recalculate the aging category for a random sample of
invoices
Completeness
Select a random sample of invoices from the subledger
and agree to the Aging listing
Agree to the general ledger
II Practical Considerations for the Application of MR
and IPE Requirements
Everybody is going through some level of pain
- additional time being incurred by all parties (management and auditors)
- procedures moving from the auditor to the control owner (reviewer)
- internal auditors are incurring significantly more time performing walkthroughs
Each audit firm may have received different comments from the PCAOB
- different comments are driving different implementation requirements
- specific requirements vary by audit team within the same firm
- we have met with the partners from one firm in Austin to help set expectations
Each company should come up with its own formal implementation plan
- donrsquot ask external auditor to tell you what they want
- companies should come up with a risk-based plan and present it to their auditors to get their feedback (at salient points during its rollout)
- focus on areas that have the highest impact on the external auditorrsquos reliance strategy
What wersquove learned
Summary Some companies are using the implementation of the MR and IPE requirements to take a ldquoRefreshrdquo approach to review all of its SOX controls The following is an example of such an approach
1 Take an inventory of your significant financial processes and benchmark against other companies (if possible)
2 Take an inventory of internal controls within each process and benchmark against other companies (if possible)
3 Identify which controls are impacted by the MR and IPE requirements and assign them a High or Medium impact (no impact on low controls)
4 Develop MRIPE ldquoBefore and Afterrdquo standard templates for High and Medium impact controls ndash see example on upcoming slide
Example Refresh Approach
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Todayrsquos Agenda
bull PCAOB Hotbutton Issues - Management Review and IPEbull Tax Update bull Accounting amp Compliance Update
PCAOB Hotbutton Issues
Management Review (MR) and Information Produced by Entity (IPE)
I Review of MR and IPE Requirements
II Practical Considerations for the Application of MR and IPE Requirements
- What Wersquove Learned
- Example Refresh Approach
- Specific Control Considerations
III Questions Shared Experiences
Key Topics
I Review of MR and IPE Requirements
Commission Guidance Regarding Managementrsquos Report on Internal
Control Over Financial Reporting Under Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (SEC Release No 33-8810)
The 2013 Committee of Sponsoring Organizations of the Treadway
Commission (COSO) Internal Control mdash Integrated Framework (the
COSO Framework)
Public Company Accounting Oversight Board (PCAOB)
What Has Driven the Increased Focus
What Are ldquoManagement Reviewrdquo ControlsEx
ampl
esSignificant Estimation Processes
Significant Risks
Fraud Risks
Unusual or Non-routine Classes of Transactions
Compensating Controls Being Relied Upon
bull Purpose and intent of the control
bull What are the expectations
Scope
bull Quantitative thresholds
bull Qualitative thresholds
Precision
bull Systems usedbull Completeness amp
accuracy of underlying data
Data
bull What types of questions arise
bull Nature of resolution
Follow Up
Whatrsquos Required for Management Review
Increased documentation is required for management review controls that considers the following
Whatrsquos The Sufficiency of Documentation
Low risk of failure or misstatement
Higher risk of failure or misstatement
Evidence required to substantiate
managementrsquos review
What is IPE
IPE = Information Produced by the Entity
Information presented in reports used in the operation of a control
Reports run and data extractions used to support audit tests
IPE Examples
Management Examples
IT System Dependent
Customer AR Aging
Financial Information
Manual
Excel Variance Analysis
Excel Calculation of Deferred Rent
Internal Audit Examples
IT System Dependent
Listing of Invoices for The Period
Manual
Listing of New Leases
Why IPE matters
Control execution dependent on reports
and data
Management reviews the
operation of the control
Management reviews the
validation of the completeness and
accuracy of the data
The effectiveness of the control depends on both the review of operation and evaluation of the underlying data used
Report generated from
IT System
Report Logic Controls
Parameter Controls
Source Data Controls
Yes
How do we know the report
is pulling the correct
information
Is the report relevant to the period under
review
Is the underlying data
accurate
Is report manipulated from original
output
No
Input Controls
Output Controls
ITGCs
Yes No
Example of Review over Completeness amp Accuracy of IPE
Accounts Receivable Aging ListingControl over the
calculation of
Allowance for Bad Debt
Accuracy
Clerically test the listing
Recalculate the aging category for a random sample of
invoices
Completeness
Select a random sample of invoices from the subledger
and agree to the Aging listing
Agree to the general ledger
II Practical Considerations for the Application of MR
and IPE Requirements
Everybody is going through some level of pain
- additional time being incurred by all parties (management and auditors)
- procedures moving from the auditor to the control owner (reviewer)
- internal auditors are incurring significantly more time performing walkthroughs
Each audit firm may have received different comments from the PCAOB
- different comments are driving different implementation requirements
- specific requirements vary by audit team within the same firm
- we have met with the partners from one firm in Austin to help set expectations
Each company should come up with its own formal implementation plan
- donrsquot ask external auditor to tell you what they want
- companies should come up with a risk-based plan and present it to their auditors to get their feedback (at salient points during its rollout)
- focus on areas that have the highest impact on the external auditorrsquos reliance strategy
What wersquove learned
Summary Some companies are using the implementation of the MR and IPE requirements to take a ldquoRefreshrdquo approach to review all of its SOX controls The following is an example of such an approach
1 Take an inventory of your significant financial processes and benchmark against other companies (if possible)
2 Take an inventory of internal controls within each process and benchmark against other companies (if possible)
3 Identify which controls are impacted by the MR and IPE requirements and assign them a High or Medium impact (no impact on low controls)
4 Develop MRIPE ldquoBefore and Afterrdquo standard templates for High and Medium impact controls ndash see example on upcoming slide
Example Refresh Approach
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
PCAOB Hotbutton Issues
Management Review (MR) and Information Produced by Entity (IPE)
I Review of MR and IPE Requirements
II Practical Considerations for the Application of MR and IPE Requirements
- What Wersquove Learned
- Example Refresh Approach
- Specific Control Considerations
III Questions Shared Experiences
Key Topics
I Review of MR and IPE Requirements
Commission Guidance Regarding Managementrsquos Report on Internal
Control Over Financial Reporting Under Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (SEC Release No 33-8810)
The 2013 Committee of Sponsoring Organizations of the Treadway
Commission (COSO) Internal Control mdash Integrated Framework (the
COSO Framework)
Public Company Accounting Oversight Board (PCAOB)
What Has Driven the Increased Focus
What Are ldquoManagement Reviewrdquo ControlsEx
ampl
esSignificant Estimation Processes
Significant Risks
Fraud Risks
Unusual or Non-routine Classes of Transactions
Compensating Controls Being Relied Upon
bull Purpose and intent of the control
bull What are the expectations
Scope
bull Quantitative thresholds
bull Qualitative thresholds
Precision
bull Systems usedbull Completeness amp
accuracy of underlying data
Data
bull What types of questions arise
bull Nature of resolution
Follow Up
Whatrsquos Required for Management Review
Increased documentation is required for management review controls that considers the following
Whatrsquos The Sufficiency of Documentation
Low risk of failure or misstatement
Higher risk of failure or misstatement
Evidence required to substantiate
managementrsquos review
What is IPE
IPE = Information Produced by the Entity
Information presented in reports used in the operation of a control
Reports run and data extractions used to support audit tests
IPE Examples
Management Examples
IT System Dependent
Customer AR Aging
Financial Information
Manual
Excel Variance Analysis
Excel Calculation of Deferred Rent
Internal Audit Examples
IT System Dependent
Listing of Invoices for The Period
Manual
Listing of New Leases
Why IPE matters
Control execution dependent on reports
and data
Management reviews the
operation of the control
Management reviews the
validation of the completeness and
accuracy of the data
The effectiveness of the control depends on both the review of operation and evaluation of the underlying data used
Report generated from
IT System
Report Logic Controls
Parameter Controls
Source Data Controls
Yes
How do we know the report
is pulling the correct
information
Is the report relevant to the period under
review
Is the underlying data
accurate
Is report manipulated from original
output
No
Input Controls
Output Controls
ITGCs
Yes No
Example of Review over Completeness amp Accuracy of IPE
Accounts Receivable Aging ListingControl over the
calculation of
Allowance for Bad Debt
Accuracy
Clerically test the listing
Recalculate the aging category for a random sample of
invoices
Completeness
Select a random sample of invoices from the subledger
and agree to the Aging listing
Agree to the general ledger
II Practical Considerations for the Application of MR
and IPE Requirements
Everybody is going through some level of pain
- additional time being incurred by all parties (management and auditors)
- procedures moving from the auditor to the control owner (reviewer)
- internal auditors are incurring significantly more time performing walkthroughs
Each audit firm may have received different comments from the PCAOB
- different comments are driving different implementation requirements
- specific requirements vary by audit team within the same firm
- we have met with the partners from one firm in Austin to help set expectations
Each company should come up with its own formal implementation plan
- donrsquot ask external auditor to tell you what they want
- companies should come up with a risk-based plan and present it to their auditors to get their feedback (at salient points during its rollout)
- focus on areas that have the highest impact on the external auditorrsquos reliance strategy
What wersquove learned
Summary Some companies are using the implementation of the MR and IPE requirements to take a ldquoRefreshrdquo approach to review all of its SOX controls The following is an example of such an approach
1 Take an inventory of your significant financial processes and benchmark against other companies (if possible)
2 Take an inventory of internal controls within each process and benchmark against other companies (if possible)
3 Identify which controls are impacted by the MR and IPE requirements and assign them a High or Medium impact (no impact on low controls)
4 Develop MRIPE ldquoBefore and Afterrdquo standard templates for High and Medium impact controls ndash see example on upcoming slide
Example Refresh Approach
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
I Review of MR and IPE Requirements
II Practical Considerations for the Application of MR and IPE Requirements
- What Wersquove Learned
- Example Refresh Approach
- Specific Control Considerations
III Questions Shared Experiences
Key Topics
I Review of MR and IPE Requirements
Commission Guidance Regarding Managementrsquos Report on Internal
Control Over Financial Reporting Under Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (SEC Release No 33-8810)
The 2013 Committee of Sponsoring Organizations of the Treadway
Commission (COSO) Internal Control mdash Integrated Framework (the
COSO Framework)
Public Company Accounting Oversight Board (PCAOB)
What Has Driven the Increased Focus
What Are ldquoManagement Reviewrdquo ControlsEx
ampl
esSignificant Estimation Processes
Significant Risks
Fraud Risks
Unusual or Non-routine Classes of Transactions
Compensating Controls Being Relied Upon
bull Purpose and intent of the control
bull What are the expectations
Scope
bull Quantitative thresholds
bull Qualitative thresholds
Precision
bull Systems usedbull Completeness amp
accuracy of underlying data
Data
bull What types of questions arise
bull Nature of resolution
Follow Up
Whatrsquos Required for Management Review
Increased documentation is required for management review controls that considers the following
Whatrsquos The Sufficiency of Documentation
Low risk of failure or misstatement
Higher risk of failure or misstatement
Evidence required to substantiate
managementrsquos review
What is IPE
IPE = Information Produced by the Entity
Information presented in reports used in the operation of a control
Reports run and data extractions used to support audit tests
IPE Examples
Management Examples
IT System Dependent
Customer AR Aging
Financial Information
Manual
Excel Variance Analysis
Excel Calculation of Deferred Rent
Internal Audit Examples
IT System Dependent
Listing of Invoices for The Period
Manual
Listing of New Leases
Why IPE matters
Control execution dependent on reports
and data
Management reviews the
operation of the control
Management reviews the
validation of the completeness and
accuracy of the data
The effectiveness of the control depends on both the review of operation and evaluation of the underlying data used
Report generated from
IT System
Report Logic Controls
Parameter Controls
Source Data Controls
Yes
How do we know the report
is pulling the correct
information
Is the report relevant to the period under
review
Is the underlying data
accurate
Is report manipulated from original
output
No
Input Controls
Output Controls
ITGCs
Yes No
Example of Review over Completeness amp Accuracy of IPE
Accounts Receivable Aging ListingControl over the
calculation of
Allowance for Bad Debt
Accuracy
Clerically test the listing
Recalculate the aging category for a random sample of
invoices
Completeness
Select a random sample of invoices from the subledger
and agree to the Aging listing
Agree to the general ledger
II Practical Considerations for the Application of MR
and IPE Requirements
Everybody is going through some level of pain
- additional time being incurred by all parties (management and auditors)
- procedures moving from the auditor to the control owner (reviewer)
- internal auditors are incurring significantly more time performing walkthroughs
Each audit firm may have received different comments from the PCAOB
- different comments are driving different implementation requirements
- specific requirements vary by audit team within the same firm
- we have met with the partners from one firm in Austin to help set expectations
Each company should come up with its own formal implementation plan
- donrsquot ask external auditor to tell you what they want
- companies should come up with a risk-based plan and present it to their auditors to get their feedback (at salient points during its rollout)
- focus on areas that have the highest impact on the external auditorrsquos reliance strategy
What wersquove learned
Summary Some companies are using the implementation of the MR and IPE requirements to take a ldquoRefreshrdquo approach to review all of its SOX controls The following is an example of such an approach
1 Take an inventory of your significant financial processes and benchmark against other companies (if possible)
2 Take an inventory of internal controls within each process and benchmark against other companies (if possible)
3 Identify which controls are impacted by the MR and IPE requirements and assign them a High or Medium impact (no impact on low controls)
4 Develop MRIPE ldquoBefore and Afterrdquo standard templates for High and Medium impact controls ndash see example on upcoming slide
Example Refresh Approach
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
I Review of MR and IPE Requirements
Commission Guidance Regarding Managementrsquos Report on Internal
Control Over Financial Reporting Under Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (SEC Release No 33-8810)
The 2013 Committee of Sponsoring Organizations of the Treadway
Commission (COSO) Internal Control mdash Integrated Framework (the
COSO Framework)
Public Company Accounting Oversight Board (PCAOB)
What Has Driven the Increased Focus
What Are ldquoManagement Reviewrdquo ControlsEx
ampl
esSignificant Estimation Processes
Significant Risks
Fraud Risks
Unusual or Non-routine Classes of Transactions
Compensating Controls Being Relied Upon
bull Purpose and intent of the control
bull What are the expectations
Scope
bull Quantitative thresholds
bull Qualitative thresholds
Precision
bull Systems usedbull Completeness amp
accuracy of underlying data
Data
bull What types of questions arise
bull Nature of resolution
Follow Up
Whatrsquos Required for Management Review
Increased documentation is required for management review controls that considers the following
Whatrsquos The Sufficiency of Documentation
Low risk of failure or misstatement
Higher risk of failure or misstatement
Evidence required to substantiate
managementrsquos review
What is IPE
IPE = Information Produced by the Entity
Information presented in reports used in the operation of a control
Reports run and data extractions used to support audit tests
IPE Examples
Management Examples
IT System Dependent
Customer AR Aging
Financial Information
Manual
Excel Variance Analysis
Excel Calculation of Deferred Rent
Internal Audit Examples
IT System Dependent
Listing of Invoices for The Period
Manual
Listing of New Leases
Why IPE matters
Control execution dependent on reports
and data
Management reviews the
operation of the control
Management reviews the
validation of the completeness and
accuracy of the data
The effectiveness of the control depends on both the review of operation and evaluation of the underlying data used
Report generated from
IT System
Report Logic Controls
Parameter Controls
Source Data Controls
Yes
How do we know the report
is pulling the correct
information
Is the report relevant to the period under
review
Is the underlying data
accurate
Is report manipulated from original
output
No
Input Controls
Output Controls
ITGCs
Yes No
Example of Review over Completeness amp Accuracy of IPE
Accounts Receivable Aging ListingControl over the
calculation of
Allowance for Bad Debt
Accuracy
Clerically test the listing
Recalculate the aging category for a random sample of
invoices
Completeness
Select a random sample of invoices from the subledger
and agree to the Aging listing
Agree to the general ledger
II Practical Considerations for the Application of MR
and IPE Requirements
Everybody is going through some level of pain
- additional time being incurred by all parties (management and auditors)
- procedures moving from the auditor to the control owner (reviewer)
- internal auditors are incurring significantly more time performing walkthroughs
Each audit firm may have received different comments from the PCAOB
- different comments are driving different implementation requirements
- specific requirements vary by audit team within the same firm
- we have met with the partners from one firm in Austin to help set expectations
Each company should come up with its own formal implementation plan
- donrsquot ask external auditor to tell you what they want
- companies should come up with a risk-based plan and present it to their auditors to get their feedback (at salient points during its rollout)
- focus on areas that have the highest impact on the external auditorrsquos reliance strategy
What wersquove learned
Summary Some companies are using the implementation of the MR and IPE requirements to take a ldquoRefreshrdquo approach to review all of its SOX controls The following is an example of such an approach
1 Take an inventory of your significant financial processes and benchmark against other companies (if possible)
2 Take an inventory of internal controls within each process and benchmark against other companies (if possible)
3 Identify which controls are impacted by the MR and IPE requirements and assign them a High or Medium impact (no impact on low controls)
4 Develop MRIPE ldquoBefore and Afterrdquo standard templates for High and Medium impact controls ndash see example on upcoming slide
Example Refresh Approach
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Commission Guidance Regarding Managementrsquos Report on Internal
Control Over Financial Reporting Under Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (SEC Release No 33-8810)
The 2013 Committee of Sponsoring Organizations of the Treadway
Commission (COSO) Internal Control mdash Integrated Framework (the
COSO Framework)
Public Company Accounting Oversight Board (PCAOB)
What Has Driven the Increased Focus
What Are ldquoManagement Reviewrdquo ControlsEx
ampl
esSignificant Estimation Processes
Significant Risks
Fraud Risks
Unusual or Non-routine Classes of Transactions
Compensating Controls Being Relied Upon
bull Purpose and intent of the control
bull What are the expectations
Scope
bull Quantitative thresholds
bull Qualitative thresholds
Precision
bull Systems usedbull Completeness amp
accuracy of underlying data
Data
bull What types of questions arise
bull Nature of resolution
Follow Up
Whatrsquos Required for Management Review
Increased documentation is required for management review controls that considers the following
Whatrsquos The Sufficiency of Documentation
Low risk of failure or misstatement
Higher risk of failure or misstatement
Evidence required to substantiate
managementrsquos review
What is IPE
IPE = Information Produced by the Entity
Information presented in reports used in the operation of a control
Reports run and data extractions used to support audit tests
IPE Examples
Management Examples
IT System Dependent
Customer AR Aging
Financial Information
Manual
Excel Variance Analysis
Excel Calculation of Deferred Rent
Internal Audit Examples
IT System Dependent
Listing of Invoices for The Period
Manual
Listing of New Leases
Why IPE matters
Control execution dependent on reports
and data
Management reviews the
operation of the control
Management reviews the
validation of the completeness and
accuracy of the data
The effectiveness of the control depends on both the review of operation and evaluation of the underlying data used
Report generated from
IT System
Report Logic Controls
Parameter Controls
Source Data Controls
Yes
How do we know the report
is pulling the correct
information
Is the report relevant to the period under
review
Is the underlying data
accurate
Is report manipulated from original
output
No
Input Controls
Output Controls
ITGCs
Yes No
Example of Review over Completeness amp Accuracy of IPE
Accounts Receivable Aging ListingControl over the
calculation of
Allowance for Bad Debt
Accuracy
Clerically test the listing
Recalculate the aging category for a random sample of
invoices
Completeness
Select a random sample of invoices from the subledger
and agree to the Aging listing
Agree to the general ledger
II Practical Considerations for the Application of MR
and IPE Requirements
Everybody is going through some level of pain
- additional time being incurred by all parties (management and auditors)
- procedures moving from the auditor to the control owner (reviewer)
- internal auditors are incurring significantly more time performing walkthroughs
Each audit firm may have received different comments from the PCAOB
- different comments are driving different implementation requirements
- specific requirements vary by audit team within the same firm
- we have met with the partners from one firm in Austin to help set expectations
Each company should come up with its own formal implementation plan
- donrsquot ask external auditor to tell you what they want
- companies should come up with a risk-based plan and present it to their auditors to get their feedback (at salient points during its rollout)
- focus on areas that have the highest impact on the external auditorrsquos reliance strategy
What wersquove learned
Summary Some companies are using the implementation of the MR and IPE requirements to take a ldquoRefreshrdquo approach to review all of its SOX controls The following is an example of such an approach
1 Take an inventory of your significant financial processes and benchmark against other companies (if possible)
2 Take an inventory of internal controls within each process and benchmark against other companies (if possible)
3 Identify which controls are impacted by the MR and IPE requirements and assign them a High or Medium impact (no impact on low controls)
4 Develop MRIPE ldquoBefore and Afterrdquo standard templates for High and Medium impact controls ndash see example on upcoming slide
Example Refresh Approach
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
What Are ldquoManagement Reviewrdquo ControlsEx
ampl
esSignificant Estimation Processes
Significant Risks
Fraud Risks
Unusual or Non-routine Classes of Transactions
Compensating Controls Being Relied Upon
bull Purpose and intent of the control
bull What are the expectations
Scope
bull Quantitative thresholds
bull Qualitative thresholds
Precision
bull Systems usedbull Completeness amp
accuracy of underlying data
Data
bull What types of questions arise
bull Nature of resolution
Follow Up
Whatrsquos Required for Management Review
Increased documentation is required for management review controls that considers the following
Whatrsquos The Sufficiency of Documentation
Low risk of failure or misstatement
Higher risk of failure or misstatement
Evidence required to substantiate
managementrsquos review
What is IPE
IPE = Information Produced by the Entity
Information presented in reports used in the operation of a control
Reports run and data extractions used to support audit tests
IPE Examples
Management Examples
IT System Dependent
Customer AR Aging
Financial Information
Manual
Excel Variance Analysis
Excel Calculation of Deferred Rent
Internal Audit Examples
IT System Dependent
Listing of Invoices for The Period
Manual
Listing of New Leases
Why IPE matters
Control execution dependent on reports
and data
Management reviews the
operation of the control
Management reviews the
validation of the completeness and
accuracy of the data
The effectiveness of the control depends on both the review of operation and evaluation of the underlying data used
Report generated from
IT System
Report Logic Controls
Parameter Controls
Source Data Controls
Yes
How do we know the report
is pulling the correct
information
Is the report relevant to the period under
review
Is the underlying data
accurate
Is report manipulated from original
output
No
Input Controls
Output Controls
ITGCs
Yes No
Example of Review over Completeness amp Accuracy of IPE
Accounts Receivable Aging ListingControl over the
calculation of
Allowance for Bad Debt
Accuracy
Clerically test the listing
Recalculate the aging category for a random sample of
invoices
Completeness
Select a random sample of invoices from the subledger
and agree to the Aging listing
Agree to the general ledger
II Practical Considerations for the Application of MR
and IPE Requirements
Everybody is going through some level of pain
- additional time being incurred by all parties (management and auditors)
- procedures moving from the auditor to the control owner (reviewer)
- internal auditors are incurring significantly more time performing walkthroughs
Each audit firm may have received different comments from the PCAOB
- different comments are driving different implementation requirements
- specific requirements vary by audit team within the same firm
- we have met with the partners from one firm in Austin to help set expectations
Each company should come up with its own formal implementation plan
- donrsquot ask external auditor to tell you what they want
- companies should come up with a risk-based plan and present it to their auditors to get their feedback (at salient points during its rollout)
- focus on areas that have the highest impact on the external auditorrsquos reliance strategy
What wersquove learned
Summary Some companies are using the implementation of the MR and IPE requirements to take a ldquoRefreshrdquo approach to review all of its SOX controls The following is an example of such an approach
1 Take an inventory of your significant financial processes and benchmark against other companies (if possible)
2 Take an inventory of internal controls within each process and benchmark against other companies (if possible)
3 Identify which controls are impacted by the MR and IPE requirements and assign them a High or Medium impact (no impact on low controls)
4 Develop MRIPE ldquoBefore and Afterrdquo standard templates for High and Medium impact controls ndash see example on upcoming slide
Example Refresh Approach
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
bull Purpose and intent of the control
bull What are the expectations
Scope
bull Quantitative thresholds
bull Qualitative thresholds
Precision
bull Systems usedbull Completeness amp
accuracy of underlying data
Data
bull What types of questions arise
bull Nature of resolution
Follow Up
Whatrsquos Required for Management Review
Increased documentation is required for management review controls that considers the following
Whatrsquos The Sufficiency of Documentation
Low risk of failure or misstatement
Higher risk of failure or misstatement
Evidence required to substantiate
managementrsquos review
What is IPE
IPE = Information Produced by the Entity
Information presented in reports used in the operation of a control
Reports run and data extractions used to support audit tests
IPE Examples
Management Examples
IT System Dependent
Customer AR Aging
Financial Information
Manual
Excel Variance Analysis
Excel Calculation of Deferred Rent
Internal Audit Examples
IT System Dependent
Listing of Invoices for The Period
Manual
Listing of New Leases
Why IPE matters
Control execution dependent on reports
and data
Management reviews the
operation of the control
Management reviews the
validation of the completeness and
accuracy of the data
The effectiveness of the control depends on both the review of operation and evaluation of the underlying data used
Report generated from
IT System
Report Logic Controls
Parameter Controls
Source Data Controls
Yes
How do we know the report
is pulling the correct
information
Is the report relevant to the period under
review
Is the underlying data
accurate
Is report manipulated from original
output
No
Input Controls
Output Controls
ITGCs
Yes No
Example of Review over Completeness amp Accuracy of IPE
Accounts Receivable Aging ListingControl over the
calculation of
Allowance for Bad Debt
Accuracy
Clerically test the listing
Recalculate the aging category for a random sample of
invoices
Completeness
Select a random sample of invoices from the subledger
and agree to the Aging listing
Agree to the general ledger
II Practical Considerations for the Application of MR
and IPE Requirements
Everybody is going through some level of pain
- additional time being incurred by all parties (management and auditors)
- procedures moving from the auditor to the control owner (reviewer)
- internal auditors are incurring significantly more time performing walkthroughs
Each audit firm may have received different comments from the PCAOB
- different comments are driving different implementation requirements
- specific requirements vary by audit team within the same firm
- we have met with the partners from one firm in Austin to help set expectations
Each company should come up with its own formal implementation plan
- donrsquot ask external auditor to tell you what they want
- companies should come up with a risk-based plan and present it to their auditors to get their feedback (at salient points during its rollout)
- focus on areas that have the highest impact on the external auditorrsquos reliance strategy
What wersquove learned
Summary Some companies are using the implementation of the MR and IPE requirements to take a ldquoRefreshrdquo approach to review all of its SOX controls The following is an example of such an approach
1 Take an inventory of your significant financial processes and benchmark against other companies (if possible)
2 Take an inventory of internal controls within each process and benchmark against other companies (if possible)
3 Identify which controls are impacted by the MR and IPE requirements and assign them a High or Medium impact (no impact on low controls)
4 Develop MRIPE ldquoBefore and Afterrdquo standard templates for High and Medium impact controls ndash see example on upcoming slide
Example Refresh Approach
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Whatrsquos The Sufficiency of Documentation
Low risk of failure or misstatement
Higher risk of failure or misstatement
Evidence required to substantiate
managementrsquos review
What is IPE
IPE = Information Produced by the Entity
Information presented in reports used in the operation of a control
Reports run and data extractions used to support audit tests
IPE Examples
Management Examples
IT System Dependent
Customer AR Aging
Financial Information
Manual
Excel Variance Analysis
Excel Calculation of Deferred Rent
Internal Audit Examples
IT System Dependent
Listing of Invoices for The Period
Manual
Listing of New Leases
Why IPE matters
Control execution dependent on reports
and data
Management reviews the
operation of the control
Management reviews the
validation of the completeness and
accuracy of the data
The effectiveness of the control depends on both the review of operation and evaluation of the underlying data used
Report generated from
IT System
Report Logic Controls
Parameter Controls
Source Data Controls
Yes
How do we know the report
is pulling the correct
information
Is the report relevant to the period under
review
Is the underlying data
accurate
Is report manipulated from original
output
No
Input Controls
Output Controls
ITGCs
Yes No
Example of Review over Completeness amp Accuracy of IPE
Accounts Receivable Aging ListingControl over the
calculation of
Allowance for Bad Debt
Accuracy
Clerically test the listing
Recalculate the aging category for a random sample of
invoices
Completeness
Select a random sample of invoices from the subledger
and agree to the Aging listing
Agree to the general ledger
II Practical Considerations for the Application of MR
and IPE Requirements
Everybody is going through some level of pain
- additional time being incurred by all parties (management and auditors)
- procedures moving from the auditor to the control owner (reviewer)
- internal auditors are incurring significantly more time performing walkthroughs
Each audit firm may have received different comments from the PCAOB
- different comments are driving different implementation requirements
- specific requirements vary by audit team within the same firm
- we have met with the partners from one firm in Austin to help set expectations
Each company should come up with its own formal implementation plan
- donrsquot ask external auditor to tell you what they want
- companies should come up with a risk-based plan and present it to their auditors to get their feedback (at salient points during its rollout)
- focus on areas that have the highest impact on the external auditorrsquos reliance strategy
What wersquove learned
Summary Some companies are using the implementation of the MR and IPE requirements to take a ldquoRefreshrdquo approach to review all of its SOX controls The following is an example of such an approach
1 Take an inventory of your significant financial processes and benchmark against other companies (if possible)
2 Take an inventory of internal controls within each process and benchmark against other companies (if possible)
3 Identify which controls are impacted by the MR and IPE requirements and assign them a High or Medium impact (no impact on low controls)
4 Develop MRIPE ldquoBefore and Afterrdquo standard templates for High and Medium impact controls ndash see example on upcoming slide
Example Refresh Approach
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
What is IPE
IPE = Information Produced by the Entity
Information presented in reports used in the operation of a control
Reports run and data extractions used to support audit tests
IPE Examples
Management Examples
IT System Dependent
Customer AR Aging
Financial Information
Manual
Excel Variance Analysis
Excel Calculation of Deferred Rent
Internal Audit Examples
IT System Dependent
Listing of Invoices for The Period
Manual
Listing of New Leases
Why IPE matters
Control execution dependent on reports
and data
Management reviews the
operation of the control
Management reviews the
validation of the completeness and
accuracy of the data
The effectiveness of the control depends on both the review of operation and evaluation of the underlying data used
Report generated from
IT System
Report Logic Controls
Parameter Controls
Source Data Controls
Yes
How do we know the report
is pulling the correct
information
Is the report relevant to the period under
review
Is the underlying data
accurate
Is report manipulated from original
output
No
Input Controls
Output Controls
ITGCs
Yes No
Example of Review over Completeness amp Accuracy of IPE
Accounts Receivable Aging ListingControl over the
calculation of
Allowance for Bad Debt
Accuracy
Clerically test the listing
Recalculate the aging category for a random sample of
invoices
Completeness
Select a random sample of invoices from the subledger
and agree to the Aging listing
Agree to the general ledger
II Practical Considerations for the Application of MR
and IPE Requirements
Everybody is going through some level of pain
- additional time being incurred by all parties (management and auditors)
- procedures moving from the auditor to the control owner (reviewer)
- internal auditors are incurring significantly more time performing walkthroughs
Each audit firm may have received different comments from the PCAOB
- different comments are driving different implementation requirements
- specific requirements vary by audit team within the same firm
- we have met with the partners from one firm in Austin to help set expectations
Each company should come up with its own formal implementation plan
- donrsquot ask external auditor to tell you what they want
- companies should come up with a risk-based plan and present it to their auditors to get their feedback (at salient points during its rollout)
- focus on areas that have the highest impact on the external auditorrsquos reliance strategy
What wersquove learned
Summary Some companies are using the implementation of the MR and IPE requirements to take a ldquoRefreshrdquo approach to review all of its SOX controls The following is an example of such an approach
1 Take an inventory of your significant financial processes and benchmark against other companies (if possible)
2 Take an inventory of internal controls within each process and benchmark against other companies (if possible)
3 Identify which controls are impacted by the MR and IPE requirements and assign them a High or Medium impact (no impact on low controls)
4 Develop MRIPE ldquoBefore and Afterrdquo standard templates for High and Medium impact controls ndash see example on upcoming slide
Example Refresh Approach
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
IPE Examples
Management Examples
IT System Dependent
Customer AR Aging
Financial Information
Manual
Excel Variance Analysis
Excel Calculation of Deferred Rent
Internal Audit Examples
IT System Dependent
Listing of Invoices for The Period
Manual
Listing of New Leases
Why IPE matters
Control execution dependent on reports
and data
Management reviews the
operation of the control
Management reviews the
validation of the completeness and
accuracy of the data
The effectiveness of the control depends on both the review of operation and evaluation of the underlying data used
Report generated from
IT System
Report Logic Controls
Parameter Controls
Source Data Controls
Yes
How do we know the report
is pulling the correct
information
Is the report relevant to the period under
review
Is the underlying data
accurate
Is report manipulated from original
output
No
Input Controls
Output Controls
ITGCs
Yes No
Example of Review over Completeness amp Accuracy of IPE
Accounts Receivable Aging ListingControl over the
calculation of
Allowance for Bad Debt
Accuracy
Clerically test the listing
Recalculate the aging category for a random sample of
invoices
Completeness
Select a random sample of invoices from the subledger
and agree to the Aging listing
Agree to the general ledger
II Practical Considerations for the Application of MR
and IPE Requirements
Everybody is going through some level of pain
- additional time being incurred by all parties (management and auditors)
- procedures moving from the auditor to the control owner (reviewer)
- internal auditors are incurring significantly more time performing walkthroughs
Each audit firm may have received different comments from the PCAOB
- different comments are driving different implementation requirements
- specific requirements vary by audit team within the same firm
- we have met with the partners from one firm in Austin to help set expectations
Each company should come up with its own formal implementation plan
- donrsquot ask external auditor to tell you what they want
- companies should come up with a risk-based plan and present it to their auditors to get their feedback (at salient points during its rollout)
- focus on areas that have the highest impact on the external auditorrsquos reliance strategy
What wersquove learned
Summary Some companies are using the implementation of the MR and IPE requirements to take a ldquoRefreshrdquo approach to review all of its SOX controls The following is an example of such an approach
1 Take an inventory of your significant financial processes and benchmark against other companies (if possible)
2 Take an inventory of internal controls within each process and benchmark against other companies (if possible)
3 Identify which controls are impacted by the MR and IPE requirements and assign them a High or Medium impact (no impact on low controls)
4 Develop MRIPE ldquoBefore and Afterrdquo standard templates for High and Medium impact controls ndash see example on upcoming slide
Example Refresh Approach
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Why IPE matters
Control execution dependent on reports
and data
Management reviews the
operation of the control
Management reviews the
validation of the completeness and
accuracy of the data
The effectiveness of the control depends on both the review of operation and evaluation of the underlying data used
Report generated from
IT System
Report Logic Controls
Parameter Controls
Source Data Controls
Yes
How do we know the report
is pulling the correct
information
Is the report relevant to the period under
review
Is the underlying data
accurate
Is report manipulated from original
output
No
Input Controls
Output Controls
ITGCs
Yes No
Example of Review over Completeness amp Accuracy of IPE
Accounts Receivable Aging ListingControl over the
calculation of
Allowance for Bad Debt
Accuracy
Clerically test the listing
Recalculate the aging category for a random sample of
invoices
Completeness
Select a random sample of invoices from the subledger
and agree to the Aging listing
Agree to the general ledger
II Practical Considerations for the Application of MR
and IPE Requirements
Everybody is going through some level of pain
- additional time being incurred by all parties (management and auditors)
- procedures moving from the auditor to the control owner (reviewer)
- internal auditors are incurring significantly more time performing walkthroughs
Each audit firm may have received different comments from the PCAOB
- different comments are driving different implementation requirements
- specific requirements vary by audit team within the same firm
- we have met with the partners from one firm in Austin to help set expectations
Each company should come up with its own formal implementation plan
- donrsquot ask external auditor to tell you what they want
- companies should come up with a risk-based plan and present it to their auditors to get their feedback (at salient points during its rollout)
- focus on areas that have the highest impact on the external auditorrsquos reliance strategy
What wersquove learned
Summary Some companies are using the implementation of the MR and IPE requirements to take a ldquoRefreshrdquo approach to review all of its SOX controls The following is an example of such an approach
1 Take an inventory of your significant financial processes and benchmark against other companies (if possible)
2 Take an inventory of internal controls within each process and benchmark against other companies (if possible)
3 Identify which controls are impacted by the MR and IPE requirements and assign them a High or Medium impact (no impact on low controls)
4 Develop MRIPE ldquoBefore and Afterrdquo standard templates for High and Medium impact controls ndash see example on upcoming slide
Example Refresh Approach
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Report generated from
IT System
Report Logic Controls
Parameter Controls
Source Data Controls
Yes
How do we know the report
is pulling the correct
information
Is the report relevant to the period under
review
Is the underlying data
accurate
Is report manipulated from original
output
No
Input Controls
Output Controls
ITGCs
Yes No
Example of Review over Completeness amp Accuracy of IPE
Accounts Receivable Aging ListingControl over the
calculation of
Allowance for Bad Debt
Accuracy
Clerically test the listing
Recalculate the aging category for a random sample of
invoices
Completeness
Select a random sample of invoices from the subledger
and agree to the Aging listing
Agree to the general ledger
II Practical Considerations for the Application of MR
and IPE Requirements
Everybody is going through some level of pain
- additional time being incurred by all parties (management and auditors)
- procedures moving from the auditor to the control owner (reviewer)
- internal auditors are incurring significantly more time performing walkthroughs
Each audit firm may have received different comments from the PCAOB
- different comments are driving different implementation requirements
- specific requirements vary by audit team within the same firm
- we have met with the partners from one firm in Austin to help set expectations
Each company should come up with its own formal implementation plan
- donrsquot ask external auditor to tell you what they want
- companies should come up with a risk-based plan and present it to their auditors to get their feedback (at salient points during its rollout)
- focus on areas that have the highest impact on the external auditorrsquos reliance strategy
What wersquove learned
Summary Some companies are using the implementation of the MR and IPE requirements to take a ldquoRefreshrdquo approach to review all of its SOX controls The following is an example of such an approach
1 Take an inventory of your significant financial processes and benchmark against other companies (if possible)
2 Take an inventory of internal controls within each process and benchmark against other companies (if possible)
3 Identify which controls are impacted by the MR and IPE requirements and assign them a High or Medium impact (no impact on low controls)
4 Develop MRIPE ldquoBefore and Afterrdquo standard templates for High and Medium impact controls ndash see example on upcoming slide
Example Refresh Approach
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Example of Review over Completeness amp Accuracy of IPE
Accounts Receivable Aging ListingControl over the
calculation of
Allowance for Bad Debt
Accuracy
Clerically test the listing
Recalculate the aging category for a random sample of
invoices
Completeness
Select a random sample of invoices from the subledger
and agree to the Aging listing
Agree to the general ledger
II Practical Considerations for the Application of MR
and IPE Requirements
Everybody is going through some level of pain
- additional time being incurred by all parties (management and auditors)
- procedures moving from the auditor to the control owner (reviewer)
- internal auditors are incurring significantly more time performing walkthroughs
Each audit firm may have received different comments from the PCAOB
- different comments are driving different implementation requirements
- specific requirements vary by audit team within the same firm
- we have met with the partners from one firm in Austin to help set expectations
Each company should come up with its own formal implementation plan
- donrsquot ask external auditor to tell you what they want
- companies should come up with a risk-based plan and present it to their auditors to get their feedback (at salient points during its rollout)
- focus on areas that have the highest impact on the external auditorrsquos reliance strategy
What wersquove learned
Summary Some companies are using the implementation of the MR and IPE requirements to take a ldquoRefreshrdquo approach to review all of its SOX controls The following is an example of such an approach
1 Take an inventory of your significant financial processes and benchmark against other companies (if possible)
2 Take an inventory of internal controls within each process and benchmark against other companies (if possible)
3 Identify which controls are impacted by the MR and IPE requirements and assign them a High or Medium impact (no impact on low controls)
4 Develop MRIPE ldquoBefore and Afterrdquo standard templates for High and Medium impact controls ndash see example on upcoming slide
Example Refresh Approach
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
II Practical Considerations for the Application of MR
and IPE Requirements
Everybody is going through some level of pain
- additional time being incurred by all parties (management and auditors)
- procedures moving from the auditor to the control owner (reviewer)
- internal auditors are incurring significantly more time performing walkthroughs
Each audit firm may have received different comments from the PCAOB
- different comments are driving different implementation requirements
- specific requirements vary by audit team within the same firm
- we have met with the partners from one firm in Austin to help set expectations
Each company should come up with its own formal implementation plan
- donrsquot ask external auditor to tell you what they want
- companies should come up with a risk-based plan and present it to their auditors to get their feedback (at salient points during its rollout)
- focus on areas that have the highest impact on the external auditorrsquos reliance strategy
What wersquove learned
Summary Some companies are using the implementation of the MR and IPE requirements to take a ldquoRefreshrdquo approach to review all of its SOX controls The following is an example of such an approach
1 Take an inventory of your significant financial processes and benchmark against other companies (if possible)
2 Take an inventory of internal controls within each process and benchmark against other companies (if possible)
3 Identify which controls are impacted by the MR and IPE requirements and assign them a High or Medium impact (no impact on low controls)
4 Develop MRIPE ldquoBefore and Afterrdquo standard templates for High and Medium impact controls ndash see example on upcoming slide
Example Refresh Approach
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Everybody is going through some level of pain
- additional time being incurred by all parties (management and auditors)
- procedures moving from the auditor to the control owner (reviewer)
- internal auditors are incurring significantly more time performing walkthroughs
Each audit firm may have received different comments from the PCAOB
- different comments are driving different implementation requirements
- specific requirements vary by audit team within the same firm
- we have met with the partners from one firm in Austin to help set expectations
Each company should come up with its own formal implementation plan
- donrsquot ask external auditor to tell you what they want
- companies should come up with a risk-based plan and present it to their auditors to get their feedback (at salient points during its rollout)
- focus on areas that have the highest impact on the external auditorrsquos reliance strategy
What wersquove learned
Summary Some companies are using the implementation of the MR and IPE requirements to take a ldquoRefreshrdquo approach to review all of its SOX controls The following is an example of such an approach
1 Take an inventory of your significant financial processes and benchmark against other companies (if possible)
2 Take an inventory of internal controls within each process and benchmark against other companies (if possible)
3 Identify which controls are impacted by the MR and IPE requirements and assign them a High or Medium impact (no impact on low controls)
4 Develop MRIPE ldquoBefore and Afterrdquo standard templates for High and Medium impact controls ndash see example on upcoming slide
Example Refresh Approach
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Summary Some companies are using the implementation of the MR and IPE requirements to take a ldquoRefreshrdquo approach to review all of its SOX controls The following is an example of such an approach
1 Take an inventory of your significant financial processes and benchmark against other companies (if possible)
2 Take an inventory of internal controls within each process and benchmark against other companies (if possible)
3 Identify which controls are impacted by the MR and IPE requirements and assign them a High or Medium impact (no impact on low controls)
4 Develop MRIPE ldquoBefore and Afterrdquo standard templates for High and Medium impact controls ndash see example on upcoming slide
Example Refresh Approach
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
5 Review prior year documentation of controls and tailor ldquoDesign Attributesrdquo for each control
6 Review new ldquoDesign Attributesrdquo with process owners and agree on game plan for implementation of the steps to meet those attributes
7 Process owners implement the controls
8 Internal auditors walkthrough the controls
9 Document new process in external auditorrsquos walkthrough templates
10 Create test plans which coincide with ldquoDesign attributesrdquo
Example Refresh Approach (contrsquod)
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Before and After Control TemplateExisting Attribute New Considerations Prospective Design Attribute
A The bank reconciliation was performed by the Senior Accountant
Timeliness of the reconciliation The bank reconciliation was performed monthly by the Senior Accountant within 30 days of month-end
B Verifying the completeness and accuracy of system reports used in the performance of the control
In order to support the Deposits In Transit (DIT) and Outstanding Checks (OC) listings generated from the GL the Senior Accountanta) generates screenshots of the parameters used to generate GL reports and includes the screenshots in the bank reconciliation workbookb) agree the total DIT and OC from the generated report to the bank reconciliation
C The bank reconciliation was reviewed by the Controller
1 Validating that the reconciliation is complete and accurate (a b c d e)2 Validating that the system reports used in the reconciliation were properly generated (c d)3 The level of precision is appropriate (e)4 The workbook is clerically accurate (f)
The bank reconciliation was reviewed by the Controller and this review included verifying the followinga) book balance agreed to the GLb) bank balance agreed to the bank statementc) the parameters used to generate the DITOC system reportsd) DIT and OS checks agreed to system generated reportse) support for other reconciling items greater than $5000f) the clerical accuracy of the reconciliation
D Reconciling items were pursued and resolved
Follow up items are documented To the extent that the reconciliation or review identified issues obtain support to verify that the issues were addressed and appeared to have been resolved
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Account Reconciliations
Perform risk assessment of accounts and enforce MR and IPE requirements on only high risk accounts
No IPE requirements on subledger reconciliations
Standardization of MR and IPE procedures is important
Challenge grouping controls into one main ldquoaccount reconciliationrdquo control
Documentation of IPE procedures could be quarterly (making them quarterly controls)
Since account recs are key control journal entries do not require changes for MR and IPE
Budget to Actual Reviews
Focus on income statement (not balance sheet)
IPE control requirements may be significant (including tying out totals to budgeting system and GL)
Clearly defining company level specific thresholds (for explaining variations) and comparisons (to budget forecast prior year) is important
Identify how to address changes from GL amounts used in this control and the final GL (included in the 10QK)
Specific Control Considerations
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
III Questions Shared Experiences
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Tax Update
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Key Topics
PATH Act
Tax Filing Deadlines
Changes to Partnership Audit Regime
Research Tax Credit
Export Incentives
Depreciation Incentives
Succession Planning
Planning for 2017 and Future Tax Years
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
PATH Act
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
PATH Act
Protecting Americans from Tax Hikes (PATH) Act of 2015
bull Signed December 18 2015
bull Extended key provisions
bull Made some provisions permanent
bull Made some provisions extended beyond 2016
Permanently extended
bull Research credit (discussed in detail later)
bull Increased Sec 179 (discussed in detail later)
bull 15 year straight-line cost recovery for qualified leasehold improvements
bull Exclusion of 100 of gain on certain small business stock
bull Built-in-Gains recognition period reduced to 5 years
bull Tax-free distributions from IRAs for charitable purposes
bull Deduction for state and local general sales tax
bull Basis adjustment to stock of S corporations making charitable contributions of property
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
PATH Act
Extended through 2019
bullBonus depreciation (discussed later)
bullNew Markets Tax Credits
bullWork Opportunity Tax Credits
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Tax Filing Deadlines
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Due Dates The Highway Trust Fund Extension legislation included many changes to the due dates of tax returns
Applicable to taxable years beginning after December 31 2015
bull C corporations
o All year ends other than June 30mdashthe due date is the 15th day of the fourth month following the close of the taxable year
ndash Can receive an automatic 6 month extension except for a December 31 year end which will receive a 5 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 a December 31 year end will receive a 6 month extension
o June 30 year endsmdashthe due date is the 15th day of the third month following the close of the taxable year
ndash Can receive an automatic 7 month extension for taxable years beginning before January 1 2026
ndash Effective for taxable years beginning after December 31 2025 the due date becomes the 15th
day of the fourth month and a 6 month extension may be received
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Due Dates
S corporations ndash no changes
bull Due date ndash the 15th day of the third month after the close of the taxable year
bull 6 month extension is available
Partnerships
bull All year ends ndash the 15th day of the third month
bull A 6 month extension is available
Change in due dates does not change the timing of any accrued expenses related to compensation
Change in due dates does impact the timing of when an accrued qualified retirement plan contribution must be paid to be deductible
Not all states have conformed to this change
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Due Dates
Forms W-2 and Forms 1099-MISC with amounts in box 7 Non-Employee Compensation with the IRS or SSA by January 31
FinCEN Form 114 (foreign accounts) is changed from June 30 to April 15
bullWill now allow a 6 month extension
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Partnership Audit Regime
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Partnership AuditsmdashSignificant Change
Bipartisan Budget Act of 2015 provides for a new partnership audit regime
Effective for tax years beginning after December 31 2017
Partnerships may elect to have these provisions apply to tax years beginning after November 2 2015 and before January 1 2018
bull This election must be made within 30 days of when the IRS first notifies the partnership in writing that the partnership has been selected for examination
o This election provides more control of an audit with the TEFRA positions apply under the existing audit regime
Will generally require a partnership adjustment to be taxed to the partnership in the year the adjustment is made
The partnership can elect to have the adjustment flow-through to the partners and have them pay the tax instead
Partnerships will be able to elect out of this new audit regime on an annual basis
bull Limitations apply
bull Annual election must be made
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Partnership AuditsmdashSignificant Change
Top tax rate used if partnership pays the tax
A partnership has 45 days after the date of the notice of the final partnership adjustment to elect an alternative regime with respect to the imputed underpayment
bullPartner includes change in income in the year the statement is received not the year audited
Rules only apply to taxes under Chapter 1 of the IRC
bullNIIT and SE tax are computed under Chapter 2 and 2A respectively of the IRC
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Research Tax Credit
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
How Can the RampD Credit Benefit Your Company
Credits reduce tax liability dollar per dollar
bull A $50000 credit reduces cash outflow to the IRS andor state
bull Limitations apply (discussed later)
Rules discussed are applicable for all open tax years
bull Allows returns to be amended to claim credit even if not previously claimed
bull Special rules for companies with NOLs may allow you to go beyond the normal statute of limitations
Deductions currently reducing taxable income and costs that may be classified as fixed assets are identified as qualified research expenditures (QRE)
bull Not creating additional deductions
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Common Myths
The credit applies only to large businesses
bull False There is no minimum amount of expense required to qualify for the credit
We are a custom manufacturer and do not develop our own products therefore our customers may qualify for the credit but we do not
bull False The credit applies to both products and processes often custom manufacturers are required to develop the processes that are capable of producing the partproduct based on specifications provided by the customer
We do not have a time tracking system in place therefore there is no way to determine our costs
bull False The courts have ruled that a time tracking system is not required to claim the credit rather businesses must be able to connect employeesrsquo activities to the qualified projects
If we claim the credit we will be audited
bull False The credit is one of many factors used to identify taxpayers for audit but it is not the only factor
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Does Your Company Incur RampD Expenses
We have found that many companies apply their own definition of research and development when determining the opportunity for the credit
The tax rules can vary significantly from what someone may consider research and development
Product development and product improvement activities may qualify
Process development and process improvement activities may qualify
bull These include activities to produce your own products as well as those required by contract manufacturers to develop a part that meets the customerrsquos part print andor specifications
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Tax Definition of RampD The Four-part Test
New or improved business component
Deductible under IRC Section 174
Process of experimentation
Technological in nature
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Funded Research
Research funded by another person is not eligible for the credit
bullReview of contract is required
o Fixed fee Qualified
o Time and materials Nonqualified
o Not to exceed Qualified
Certain related-party payments not considered funding
Fully funded if the taxpayer retains no substantial rights
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Examples of Qualified Activities
Develop new improved or more reliable products
Develop or improve manufacturing processes
Automate processes
Develop prototypes
Design andor build tools jigs fixtures dies and molds
Contract to have tools jigs fixtures dies and molds designed and built
Develop or apply for patents
Perform continuous improvement activities of manufacturing processes
Conduct testing of new concepts and technology
Develop new technology
Develop software
Design products to customer specifications
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Examples of Qualified Activities
Improvement or building of new manufacturing facilities
Implementation of new technologies to the manufacturing floor
Development of specialized machinery and modifications to existing equipment
Improvements made to a production process or to the materials used in a manufacturing process intended to result in lower environmental contaminants
Improvements to processes to lessen emissions of various gases
Manufacturing efforts that support new product development
Performance of certification testing
Attempting to use new materials
Scaling up of formulations from labs or a test facility to a production facility
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Qualified Research Expenditures
Qualified wages
Contract research expenses
Supplies
Computer lease time
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Supplies Change in Regulations Provides Increased Opportunity
IRS issued new regulations effective July 21 2014 regarding the definition of research and experimental expenditures
Prior to the issuance of the regulations the IRSrsquos position was that any cost related to an item which was a fixed asset (regardless of who owned the asset) tainted the cost from qualifying as a research expense
Definition of a product is expanded to include a ldquopilot modelrdquo
Pilot model
bull Any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during development or improvement of the product the term includes a fully functional representation or model of the product or a component of the product
This is a significant positive change for taxpayers
Opportunities for companies that develop custom machinery modify a stock model for customers produce tooling used in production develop automation equipment etc
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Regular Method
Federal credit of 20 of the lesser of
bullThe qualifying expenditures in excess of a base amount or
bullOne-half of the qualifying expenditures
bullCredit is added to income
Reduced credit is 13
bullCredit is not added to income
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Example Calculation 1
AAGR $25000000
Current-year QREs $1400000
Base period percentage 1
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Example Calculation 1
AAGR x base period percentage $25000000 x 1 = $250000
Total QRE = $1400000
Base = $ 250000
Eligible = $1150000
Limited to = $ 700000
Credit rate = 20
Credit = $ 140000
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Example Calculation 2
AAGR $25000000
Current-year QREs $1400000
Base period percentage 55
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Example Calculation 2
AAGR x base period percentage $25000000 x 55 = $1375000
Total QRE = $1400000
Base = $1375000
Eligible = $ 25000
Credit rate = 20
Credit = $ 5000
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Alternative Simplified Credit
Benefits companies with high fixed base percentage that have not increased research activities over time or for which computation of the base period is impossible
Enacted January 1 2007
Threshold = Half the average QREs for prior three years
Credit rate of 14
If no QREs in any one of the prior three years credit rate of 6 of current-year QREs
Is treated as an election
bull If ASC is claimed on a return it is irrevocable without IRS consent for that tax year
bull Can change from ASC to traditional from one tax year to another
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Example 1
QREsbull2013 - $1250000
bull2014 - $1300000
bull2015 - $1350000
bull2016 - $1400000
2016 QRE = $1400000
Base = $650000
Eligible = $750000
Credit rate = 14
Credit = $105000
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Example 2
QREsbull2013 - $400000
bull2014 - $400000
bull2015 - $400000
bull2016 - $400000
2016 QRE = $400000
Base = $200000
Eligible = $200000
Credit rate = 14
Credit = $28000
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Significant Changes from the PATH Act
Key changes
bullRampD credit made permanent
o Previously was a ldquotemporaryrdquo credit meaning Congress needed to continually extend the credit
bullOffset against AMT for certain taxpayers
bullPayroll tax credit for certain taxpayers
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
AMT Offset for Qualified Small Business
An ldquoeligible small businessrdquo will be allowed to offset both the regular tax and the Alternative Minimum Tax (AMT)
bullAdditional limitation applies may not be able to eliminate 100 of tax
Effective for tax years beginning on or after January 1 2016
Eligible small business
bullA corporation that is not publicly traded
bullA partnership or
bullA sole proprietorship (single-member LLC owned by an individual is a sole proprietorship unless a check-the-box election is made)
bullThe average annual gross receipts for the preceding three taxable years do not exceed $50000000
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
AMT Offset for Qualified Small Business
Related-party rules apply in determining the $50000000 gross receipts tests
bullParentsubsidiary relationships
bullBrothersister relationships
bull50 common ownership
bull If applicable treated as one taxpayer for determining the $50000000 gross receipts test
Partners and shareholders of S corporations are subject to the $50000000 gross receipts test at the partner or shareholder level in addition to the entity level
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
AMT Offset for Qualified Small Business
Overall tax limitation
bullCredits from an eligible small business cannot offset more than 25 of the tax liability in excess of $25000
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
AMT Offset for Qualified Small Business
Example
XYZ Manufacturing Inc is an S corporation owned by Shareholder A
XYZrsquos 2016 RampD credit - $50000
Shareholder Arsquos tax liability before RampD credit - $60000
Shareholder Arsquos tentative minimum tax - $58000
Without New Rule
Credit utilized - $2000 ($60000 minus $58000)
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
AMT Offset for Qualified Small Business
With New Rules
Credit utilized - $50000
Lesser of
bull Credit = $50000
bull Overall limitation = $51250 ($60000 total tax less $8750 [$60000 - $25000] x 25)
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Payroll Tax Credit Offset
Must be a ldquoqualified small businessrdquo
bullCorporation partnership or individual
bullLess than $5000000 in gross receipts in the current year and
bullDid not have gross receipts for any tax year before the five-tax year period ending with the tax year
o No receipts prior to 2012
Can make the election for only five years
All businesses owned by an individual must be aggregated in determining the $5000000 gross receipts test
Must be a true start-up asset purchase of an existing business does not qualify
Maximum credit per year is $250000
Must first apply general business credit utilization and carryback rules before electing to offset payroll taxes
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Payroll Tax Credit Offset
Offsets FICA tax only
Election is made on the entity-level tax return
Credit is allowed for the first calendar quarter that begins after the date on which the taxpayer files the tax return with the election made
Excess credit is carried forward
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Texas RampD Credit
Enacted in 2014 Taxpayers may claim either
bullSales and use tax exemption on the purchase lease rental storage or use of depreciable tangible personal property directly used in qualified research or
bullFranchise tax credit based on qualified research expensesbullCannot claim both in the same periodbullMay change between a sales tax exemption and a franchise tax credit from period to period
If the sales and use tax exemption is claimed the business must be registered with the Comptrollerrsquos office
The research credit must be applied for on or with the tax report for the period for which the credit is claimed
Expires December 31 2026
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Texas RampD Credit
Follows federal laws in determining what is qualified researchbull Change in Sec 174 supplies Regulations has potential positive benefit for self-constructed assets
Form 01-931 is used to claim the exemption Credit
bull 5 of the difference between the QREs for the report year and 50 of the average amount of QREs for the three prior report years
bull Only expenses incurred in Texas qualifybull Total credit is limited to 50 of the amount of franchise tax due before any other applicable
creditsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Contract research with a public or private institution of higher education in Texas is eligible for a
credit rate of 625 (3125 if no QREs in any one of the three preceding yearsbull Unused credits carryforward for 20 yearsbull If no qualified research expenses are incurred in one or more of the three tax periods preceding
the period on which the report is based the credit is 25 of the QREs for that yearbull Unused credits carryforward for 20 years
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Export IncentivesmdashIC-Disc
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
IC-DSC
What is an IC-DISC
bullDomestic C corporation
bullOwned by a corporation or individuals
bullDeemed to perform export services on behalf of a supplierexporter
o No true active operations
bullReceives commissions from supplierexporter (the business with active operations) for export service
bullPays a dividend to shareholders
bullDoes not pay any federal income tax
bullNot a tax shelter
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
IC-DSC
Commission is the greater of
bull50 of combined taxable income or
bull4 of export receipts from qualifying export profits
Commission is deductible by the operating entity as an ordinary deduction
Dividend
bullAmount is either paid or deemed to be paid by the IC-DISC entity to the parent corporation or shareholders depending on structure
bullDividend is a qualified dividend
o 15 or 20 rate
o 38 NIIT applies
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
IC-DSC
Typical structures
bullParentsubsidiary
ndash Parent is generally a pass-through entity
bullBrothersister
o Operating company is a regular corporation or
o Ownership of IC-DISC is not identical to ownership of operating entity
Export sales
bullBoth direct and indirect qualify
Can mix and combine transactions for determining the commission
Additional requirements apply
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
IC-DSC
Example
Export sales ndash $4000000
Combined taxable income on export sales ndash $430000
Commission is greater of
bull $160000 = $4000000 x 4 or
bull $215000 = $430000 x 50
Tax benefit
bullTax savings from commission ndash $215000 x 396 = $85140
bull Income from dividend ndash $215000 x 238 = $51170
bullTax savings = $33970 ($85140 minus $51170)
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Depreciation Incentives
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Depreciation Incentives
Bonus depreciation
bull Applicable to new qualified property
bull Allowable in the year the property is placed in service
bull Bonus depreciation allowed
o 50 for assets placed in service on or before December 31 2017
o 40 for assets placed in service in calendar year 2018
o 30 for assets placed in service in calendar year 2019
o 0 for assets placed in service after calendar year 2019
bull AMT depreciation = Regular depreciation for assets with bonus depreciation claimed
bull Certain real estate assets qualify
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Section 179
First year expensing of qualified property
Generally applies to new or used tangible personal property
Certain real property assets qualify
Aggregate cost that can be expensed for any tax year cannot exceed $500000
Dollar-per-dollar reduction of the maximum expense limit if the cost of qualified property exceeds $2010000 (2016 amount)
Amounts above are adjusted for inflation
Business income limitation applies
$500000 limit applies at the ownership level for pass-through entities
bull If an individual is allocated more than $500000 from multiple entities the excess deduction is lost
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Planning for Depreciation
You may not want to claim bonus depreciation or Section 179
bull Income in the future is at a higher tax rate than the current rate
bullLoss carryovers are expiring
bullCredit carryovers are expiring
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Succession Planning
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Proposed 2704 Regulations
Released August 4 2016
Aimed directly at valuation discounts in intra-family transfers in particular aimed at voting and liquidation rights
Will become final 30 days after publication in the Federal Register
bullLikely early 2017
Mark Mazur Assistant Secretary of the Treasury for Tax Policy
bull ldquoToday the US Department of the Treasury announced a new regulatory proposal to close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposesrdquo
Removes the ability to apply discounts in determining the value used for gifting of shares from one generation to another
This is a very complex area and additional rules apply
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Planning for 2017 and Future Years Taxes
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Tax Proposals - Trump
Trump tax plan
bullReduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 15
ndash Small business income (flow-through) max rate 15
ndash Eliminate most incentives other than the RampD credit
ndash Repeal AMT
ndash Impose a one-time 10 deemed repatriation tax on corporate profits held offshore
ndash Immediate expensing of assets
ndash No deduction for interest
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Tax Proposals - Trump
Trump tax plan
bull Individual
o Top individual rate ndash 33
o Maintain current capital gains tax rates
o Increase standard deduction
o Eliminate personal exemptions
o Cap itemized deductions at $200k for MFJ
o Repeal AMT
o Repeal Obamacare and NIIT
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Tax Proposals - GOP
GOP (Ryan) tax plan
bull Reduce both corporate and individual tax rates
o Corporate
ndash Cut tax rate to 20
ndash Small business income (flow-through) max rate 25
ndash Repeal AMT
ndash Immediate expensing of assets
ndash No deduction for interest
o Individual
ndash Top individual rate ndash 33
ndash Increase standard deduction
ndash Eliminate personal exemptions
ndash Repeal AMT
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Planning for Potential Changes
Regardless of which plan or a combination of the two planning can be utilized to minimize tax liability
bullAccelerate deductions
o Review accounting methods for changes
ndash Prepaid expenses is an easy change
o Ensure all accruals are properly stated
bullDefer income
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Questions
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Contact Info
Scott R Schumacher CPA MSTTax Partner Wipfli LLP
4144319334sschumacherwipflicom
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Disclaimer
This information is provided solely for general guidance and informational purposes and does not create a business or professional services relationship Accordingly this
information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal accounting tax or other professional advice and
services As such it should not be used as a substitute for consultation with professional accounting tax legal or other competent advisers Before making any decision or
taking any action you should obtain appropriate professional guidance
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Accounting amp Compliance Update
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Key Topics
Financial Statement Restatement Trends
Material Weaknesses
SEC Comment Letter Trends
Recently Issued Accounting Standards
Fraud Risk Management
Not-for-Profit Financial Statements
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Restatement TrendsA 15-year Comparison
Mike Panozzo
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Types of Restatements
1 Reissuance Restatements
bull Past financial statements can no longer be relied upon
bull Disclosed in an 8-K
2 Revision Restatements
bull Presumably does not undermine reliance on past financials
bull No 8-K disclosure requirement
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Trends
Overall ndash Both types of
restatements show six years
of relatively stable
restatement counts from
2009-2014 however this
trend stopped in 2015
when the quantity dropped
138 to a total of 737
Source Audit Analytics
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Reissuance Restatements
Nine consecutive
years of decline
down to 161 in 2015
which is the lowest
since 8-K disclosures
came into effect in
August 2004
Source Audit Analytics
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Restatement IssuesAccording to Audit Analytics a review of the top 10 issues in 2015 shows that the top two issues have
been the same for the past five years but their prevalence has decreased
1 Debt Quasi-Debt Warrants amp Equity (beneficial conversion features) Security Issues
2 Cash Flow Statements
3 Tax Expense Benefit Deferral and Other Issues
4 Liabilities Payables Reserves and Accrual Estimate Failures
5 Foreign Related party Affiliated or Subsidiary Issues
6 Revenue Recognition Issues
7 Expense (Payroll SGA Other) Recording Issues
8 AccountsLoans Receivable Investments amp Cash Issues
9 Inventory Vendor andor Cost of Sales Issues
10 Acquisitions Mergers Disposals Reorganization Accounting Issues
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Restatement Issues
Source Audit Analytics
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Restating Registrants By Filer Status
Source Audit Analytics
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
A Deeper Dive Into the Largest Restatement of 2015
bull $711 millionbull Company was Alphabet Inc (Parent company for Google)bull Nature of error was the incorrect classification of certain revenues
between legal entities which resulted in incorrect income tax expense dating back to 2008
bull Consolidated revenues were not impactedbull Revision restatement due to immaterial impact to financial
statements
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Material Weaknesses
Cassie Crist
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
What is a Material Weakness
A material weakness is a deficiency or combination of
deficiencies in internal control such that there is a reasonable
possibility that a material misstatement of an entityrsquos annual
or interim financial statements will not be prevented or
detected and corrected on a timely basis
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Material Weakness Drivers
The four primary drivers of material weaknesses
ldquoActualrdquo financial statement misstatements or errors
Internal control deficiencies
Significant accounting estimate variances
Financial fraud by management or other employees
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Types of Material Weaknesses
Source CFGI
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Material Weakness Trends
Source CFGI
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
IPO Material Weakness Trends by Sector
Sector of total IPOsDisclosing MWs of Total IPOs
Consumer 14 12Energy 7 11Financial 6 11Healthcare 31 28Industrial 7 10REIT 2 5Technology 33 23Total 100 100
IPO Material Weakness Disclosures by Sector
IPOs between January 1 2011 and September 30 2015 by sector
Source PwC Study
Material Weakness Case Studies
A few specific exampleshellip Walmart (September 2015) Misapplication and misrepresentation of ASC 840 ndash Leases specifically sale-
leaseback transactions
Resulted in an increase in 2014 SGampA by $277M
Etsy IPO (March 2015) Inappropriately accounted for certain non-income tax-related expenses and
did not comply with the related filing requirements
Lack of adequate cut-off procedures to ensure the timely recording of certain period-end accruals
Resulted in restatement of 2013 net income before taxes of $518K to $58K
Material Weakness Mitigation
How to mitigate these riskshellip
Hire or outsource qualified technical accounting tax or internal controls resources
Increase management oversight
More effective IT systems
SEC Comment Letter Trends
Ruth Snell
SEC Comment Letters ndash what are they
SEC staff comments are in response to a companyrsquos
disclosure and other public information and are based on
the staffrsquos understanding of that companyrsquos facts and
circumstances
SEC Comment Letter Trends
Source Ernst amp Youngrsquos SEC Comments and Trends September 2016
SEC Areas of Focus
Fair value measurements
Business combinations
Contingencies
Goodwill and intangible assets
Income taxes
SEC Areas of Focus
Technology
Revenue recognition and related cost of sales
Gross vs net revenue reporting
Multiple element arrangements
Segment disclosures
SEC Areas of Focus
Retail amp Consumer Goods
Key performance metrics
Healthcare
Revenue recognition and contractual allowances
Recently Issued Accounting Standards
Kat Peterson
Going concern
Share-based payments
Statement of cash flows
Revenue
Leases
Credit losses on financial instruments
Other Guidance Becoming Effective after 2015Recently Issued Accounting Standards
ASU 2014-15 Disclosure of Uncertainties about an Entityrsquos Ability to Continue as a Going
Concern
Effective for 2016
The amendments define managementrsquos responsibility to evaluate whether there is
substantial doubt about an organizationrsquos ability to continue as a going concern and
to provide related footnote disclosures
Management is now required to proactively evaluate organizationrsquos ability to
continue as a going concern
Auditors will now evaluate managementrsquos assessment
Going Concern
ASU No 2016-09 Improvements to Employee Share-Based Payment Accounting
Effective for 2017 for calendar year end public companies and 2018 for calendar year end
nonpublic companies but can be early adopted
Changes how companies account for certain aspects of share-based payments including
bull Elimination of APIC pools
bull Allow repurchase shares from employees for tax withholding without triggering liability accounting
bull Companies can elect to account for forfeitures as they occur
Additionally private companies can elect to use a practical expedient to estimate an awardrsquos
expected term as midpoint between vesting date and contractual term
Share-Based Payments
ASU 2016-15 Classification of Certain Cash Receipts and Cash Payments and ASU 2016-18
Restricted Cash
Effective for 2018 for calendar year end public companies and 2019 for calendar year
end nonpublic companies but can be early adopted
Requires certain cash flow presentation for specific situations
Requires the change in restricted cash and restricted cash equivalents to be included
with the change in cash and cash equivalents on the SOCF
Statement of Cash Flows
Type of Payment Classification on the Cash Flow Statement
Contingent consideration payments made after a business combination
If paid at or near the time of purchase investing activityOtherwise cash outflow from financing activities for the contingent consideration liability recognized at acquisition-date fair value (including measurement period adjustments) Cash outflow from operating activities for the balance
Proceeds from the settlement of insurance claims Based on the insurance coverage (iethe nature of the loss)
Distributions received by an investor from an equity method investee
Cumulative earnings approach All distributions would be presumed to be returns on the investment and classified as operating inflows
Debt prepayment costs Financing activities
Debt modification costs Creditor fees ndash Financing 3rd party fees ndash Operating
Debt extinguishment costs Creditor fees ndash Financing 3rd party fees ndash Financing
Statement of Cash Flows
ASU No 2014-09 Revenue from Contracts with Customers (Topic 606) and related
amendments (ASU 2016-08 ASU 2016-10 ASU 2016-12)
Effective for public entities for annual reporting periods beginning after December 15 2017 and
interim periods therein (calendar year 2018)
With three-year income statement presentation requirement public companies will need 2016 2017 and 2018
financial statement information presented under the new guidance
Effective for nonpublic entities for annual reporting periods beginning after December 15
2018 and interim periods within annual reporting periods beginning after December 15 2019
(calendar year 2019)
bull With two-year income statement presentation requirement nonpublic companies will present 2018 and 2019
Revenue
Increases the volume of required disclosures
bull Disaggregation of revenue
bull Contract asset and liability disclosures
bull Performance obligations disclosures
Significant judgments need to be disclosed
bull Determining transaction price
bull Allocation of amounts to obligations
Revenue
Other widespread changes include capitalizing and
amortizing incremental costs of obtaining a contract
Revenue
ASU No 2016-02 Leases (Topic 842)
Effective for 2019 for public business entities and effective
2020 for nonpublic entities
bull Modified retrospective transition will require 2017 2018 and 2019
revised presentation for SEC filers
bull Modified retrospective transition will require 2019 and 2020 revised
presentation for non-SEC filers
Leases
All leases will be recorded on the balance sheet with a right of
use (ROU) asset and liability recorded at the present value of
future lease payments
Leases with a term 12 months or less can be excluded from
balance sheet recognition and recorded same as today
Finance and operating lease ROU assets and liabilities must each
be presented in separate line items on the balance sheet (andor
disclosed in the notes)
Leases
Leases
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Material Weakness Mitigation
How to mitigate these riskshellip
Hire or outsource qualified technical accounting tax or internal controls resources
Increase management oversight
More effective IT systems
SEC Comment Letter Trends
Ruth Snell
SEC Comment Letters ndash what are they
SEC staff comments are in response to a companyrsquos
disclosure and other public information and are based on
the staffrsquos understanding of that companyrsquos facts and
circumstances
SEC Comment Letter Trends
Source Ernst amp Youngrsquos SEC Comments and Trends September 2016
SEC Areas of Focus
Fair value measurements
Business combinations
Contingencies
Goodwill and intangible assets
Income taxes
SEC Areas of Focus
Technology
Revenue recognition and related cost of sales
Gross vs net revenue reporting
Multiple element arrangements
Segment disclosures
SEC Areas of Focus
Retail amp Consumer Goods
Key performance metrics
Healthcare
Revenue recognition and contractual allowances
Recently Issued Accounting Standards
Kat Peterson
Going concern
Share-based payments
Statement of cash flows
Revenue
Leases
Credit losses on financial instruments
Other Guidance Becoming Effective after 2015Recently Issued Accounting Standards
ASU 2014-15 Disclosure of Uncertainties about an Entityrsquos Ability to Continue as a Going
Concern
Effective for 2016
The amendments define managementrsquos responsibility to evaluate whether there is
substantial doubt about an organizationrsquos ability to continue as a going concern and
to provide related footnote disclosures
Management is now required to proactively evaluate organizationrsquos ability to
continue as a going concern
Auditors will now evaluate managementrsquos assessment
Going Concern
ASU No 2016-09 Improvements to Employee Share-Based Payment Accounting
Effective for 2017 for calendar year end public companies and 2018 for calendar year end
nonpublic companies but can be early adopted
Changes how companies account for certain aspects of share-based payments including
bull Elimination of APIC pools
bull Allow repurchase shares from employees for tax withholding without triggering liability accounting
bull Companies can elect to account for forfeitures as they occur
Additionally private companies can elect to use a practical expedient to estimate an awardrsquos
expected term as midpoint between vesting date and contractual term
Share-Based Payments
ASU 2016-15 Classification of Certain Cash Receipts and Cash Payments and ASU 2016-18
Restricted Cash
Effective for 2018 for calendar year end public companies and 2019 for calendar year
end nonpublic companies but can be early adopted
Requires certain cash flow presentation for specific situations
Requires the change in restricted cash and restricted cash equivalents to be included
with the change in cash and cash equivalents on the SOCF
Statement of Cash Flows
Type of Payment Classification on the Cash Flow Statement
Contingent consideration payments made after a business combination
If paid at or near the time of purchase investing activityOtherwise cash outflow from financing activities for the contingent consideration liability recognized at acquisition-date fair value (including measurement period adjustments) Cash outflow from operating activities for the balance
Proceeds from the settlement of insurance claims Based on the insurance coverage (iethe nature of the loss)
Distributions received by an investor from an equity method investee
Cumulative earnings approach All distributions would be presumed to be returns on the investment and classified as operating inflows
Debt prepayment costs Financing activities
Debt modification costs Creditor fees ndash Financing 3rd party fees ndash Operating
Debt extinguishment costs Creditor fees ndash Financing 3rd party fees ndash Financing
Statement of Cash Flows
ASU No 2014-09 Revenue from Contracts with Customers (Topic 606) and related
amendments (ASU 2016-08 ASU 2016-10 ASU 2016-12)
Effective for public entities for annual reporting periods beginning after December 15 2017 and
interim periods therein (calendar year 2018)
With three-year income statement presentation requirement public companies will need 2016 2017 and 2018
financial statement information presented under the new guidance
Effective for nonpublic entities for annual reporting periods beginning after December 15
2018 and interim periods within annual reporting periods beginning after December 15 2019
(calendar year 2019)
bull With two-year income statement presentation requirement nonpublic companies will present 2018 and 2019
Revenue
Increases the volume of required disclosures
bull Disaggregation of revenue
bull Contract asset and liability disclosures
bull Performance obligations disclosures
Significant judgments need to be disclosed
bull Determining transaction price
bull Allocation of amounts to obligations
Revenue
Other widespread changes include capitalizing and
amortizing incremental costs of obtaining a contract
Revenue
ASU No 2016-02 Leases (Topic 842)
Effective for 2019 for public business entities and effective
2020 for nonpublic entities
bull Modified retrospective transition will require 2017 2018 and 2019
revised presentation for SEC filers
bull Modified retrospective transition will require 2019 and 2020 revised
presentation for non-SEC filers
Leases
All leases will be recorded on the balance sheet with a right of
use (ROU) asset and liability recorded at the present value of
future lease payments
Leases with a term 12 months or less can be excluded from
balance sheet recognition and recorded same as today
Finance and operating lease ROU assets and liabilities must each
be presented in separate line items on the balance sheet (andor
disclosed in the notes)
Leases
Leases
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
SEC Comment Letter Trends
Ruth Snell
SEC Comment Letters ndash what are they
SEC staff comments are in response to a companyrsquos
disclosure and other public information and are based on
the staffrsquos understanding of that companyrsquos facts and
circumstances
SEC Comment Letter Trends
Source Ernst amp Youngrsquos SEC Comments and Trends September 2016
SEC Areas of Focus
Fair value measurements
Business combinations
Contingencies
Goodwill and intangible assets
Income taxes
SEC Areas of Focus
Technology
Revenue recognition and related cost of sales
Gross vs net revenue reporting
Multiple element arrangements
Segment disclosures
SEC Areas of Focus
Retail amp Consumer Goods
Key performance metrics
Healthcare
Revenue recognition and contractual allowances
Recently Issued Accounting Standards
Kat Peterson
Going concern
Share-based payments
Statement of cash flows
Revenue
Leases
Credit losses on financial instruments
Other Guidance Becoming Effective after 2015Recently Issued Accounting Standards
ASU 2014-15 Disclosure of Uncertainties about an Entityrsquos Ability to Continue as a Going
Concern
Effective for 2016
The amendments define managementrsquos responsibility to evaluate whether there is
substantial doubt about an organizationrsquos ability to continue as a going concern and
to provide related footnote disclosures
Management is now required to proactively evaluate organizationrsquos ability to
continue as a going concern
Auditors will now evaluate managementrsquos assessment
Going Concern
ASU No 2016-09 Improvements to Employee Share-Based Payment Accounting
Effective for 2017 for calendar year end public companies and 2018 for calendar year end
nonpublic companies but can be early adopted
Changes how companies account for certain aspects of share-based payments including
bull Elimination of APIC pools
bull Allow repurchase shares from employees for tax withholding without triggering liability accounting
bull Companies can elect to account for forfeitures as they occur
Additionally private companies can elect to use a practical expedient to estimate an awardrsquos
expected term as midpoint between vesting date and contractual term
Share-Based Payments
ASU 2016-15 Classification of Certain Cash Receipts and Cash Payments and ASU 2016-18
Restricted Cash
Effective for 2018 for calendar year end public companies and 2019 for calendar year
end nonpublic companies but can be early adopted
Requires certain cash flow presentation for specific situations
Requires the change in restricted cash and restricted cash equivalents to be included
with the change in cash and cash equivalents on the SOCF
Statement of Cash Flows
Type of Payment Classification on the Cash Flow Statement
Contingent consideration payments made after a business combination
If paid at or near the time of purchase investing activityOtherwise cash outflow from financing activities for the contingent consideration liability recognized at acquisition-date fair value (including measurement period adjustments) Cash outflow from operating activities for the balance
Proceeds from the settlement of insurance claims Based on the insurance coverage (iethe nature of the loss)
Distributions received by an investor from an equity method investee
Cumulative earnings approach All distributions would be presumed to be returns on the investment and classified as operating inflows
Debt prepayment costs Financing activities
Debt modification costs Creditor fees ndash Financing 3rd party fees ndash Operating
Debt extinguishment costs Creditor fees ndash Financing 3rd party fees ndash Financing
Statement of Cash Flows
ASU No 2014-09 Revenue from Contracts with Customers (Topic 606) and related
amendments (ASU 2016-08 ASU 2016-10 ASU 2016-12)
Effective for public entities for annual reporting periods beginning after December 15 2017 and
interim periods therein (calendar year 2018)
With three-year income statement presentation requirement public companies will need 2016 2017 and 2018
financial statement information presented under the new guidance
Effective for nonpublic entities for annual reporting periods beginning after December 15
2018 and interim periods within annual reporting periods beginning after December 15 2019
(calendar year 2019)
bull With two-year income statement presentation requirement nonpublic companies will present 2018 and 2019
Revenue
Increases the volume of required disclosures
bull Disaggregation of revenue
bull Contract asset and liability disclosures
bull Performance obligations disclosures
Significant judgments need to be disclosed
bull Determining transaction price
bull Allocation of amounts to obligations
Revenue
Other widespread changes include capitalizing and
amortizing incremental costs of obtaining a contract
Revenue
ASU No 2016-02 Leases (Topic 842)
Effective for 2019 for public business entities and effective
2020 for nonpublic entities
bull Modified retrospective transition will require 2017 2018 and 2019
revised presentation for SEC filers
bull Modified retrospective transition will require 2019 and 2020 revised
presentation for non-SEC filers
Leases
All leases will be recorded on the balance sheet with a right of
use (ROU) asset and liability recorded at the present value of
future lease payments
Leases with a term 12 months or less can be excluded from
balance sheet recognition and recorded same as today
Finance and operating lease ROU assets and liabilities must each
be presented in separate line items on the balance sheet (andor
disclosed in the notes)
Leases
Leases
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
SEC Comment Letters ndash what are they
SEC staff comments are in response to a companyrsquos
disclosure and other public information and are based on
the staffrsquos understanding of that companyrsquos facts and
circumstances
SEC Comment Letter Trends
Source Ernst amp Youngrsquos SEC Comments and Trends September 2016
SEC Areas of Focus
Fair value measurements
Business combinations
Contingencies
Goodwill and intangible assets
Income taxes
SEC Areas of Focus
Technology
Revenue recognition and related cost of sales
Gross vs net revenue reporting
Multiple element arrangements
Segment disclosures
SEC Areas of Focus
Retail amp Consumer Goods
Key performance metrics
Healthcare
Revenue recognition and contractual allowances
Recently Issued Accounting Standards
Kat Peterson
Going concern
Share-based payments
Statement of cash flows
Revenue
Leases
Credit losses on financial instruments
Other Guidance Becoming Effective after 2015Recently Issued Accounting Standards
ASU 2014-15 Disclosure of Uncertainties about an Entityrsquos Ability to Continue as a Going
Concern
Effective for 2016
The amendments define managementrsquos responsibility to evaluate whether there is
substantial doubt about an organizationrsquos ability to continue as a going concern and
to provide related footnote disclosures
Management is now required to proactively evaluate organizationrsquos ability to
continue as a going concern
Auditors will now evaluate managementrsquos assessment
Going Concern
ASU No 2016-09 Improvements to Employee Share-Based Payment Accounting
Effective for 2017 for calendar year end public companies and 2018 for calendar year end
nonpublic companies but can be early adopted
Changes how companies account for certain aspects of share-based payments including
bull Elimination of APIC pools
bull Allow repurchase shares from employees for tax withholding without triggering liability accounting
bull Companies can elect to account for forfeitures as they occur
Additionally private companies can elect to use a practical expedient to estimate an awardrsquos
expected term as midpoint between vesting date and contractual term
Share-Based Payments
ASU 2016-15 Classification of Certain Cash Receipts and Cash Payments and ASU 2016-18
Restricted Cash
Effective for 2018 for calendar year end public companies and 2019 for calendar year
end nonpublic companies but can be early adopted
Requires certain cash flow presentation for specific situations
Requires the change in restricted cash and restricted cash equivalents to be included
with the change in cash and cash equivalents on the SOCF
Statement of Cash Flows
Type of Payment Classification on the Cash Flow Statement
Contingent consideration payments made after a business combination
If paid at or near the time of purchase investing activityOtherwise cash outflow from financing activities for the contingent consideration liability recognized at acquisition-date fair value (including measurement period adjustments) Cash outflow from operating activities for the balance
Proceeds from the settlement of insurance claims Based on the insurance coverage (iethe nature of the loss)
Distributions received by an investor from an equity method investee
Cumulative earnings approach All distributions would be presumed to be returns on the investment and classified as operating inflows
Debt prepayment costs Financing activities
Debt modification costs Creditor fees ndash Financing 3rd party fees ndash Operating
Debt extinguishment costs Creditor fees ndash Financing 3rd party fees ndash Financing
Statement of Cash Flows
ASU No 2014-09 Revenue from Contracts with Customers (Topic 606) and related
amendments (ASU 2016-08 ASU 2016-10 ASU 2016-12)
Effective for public entities for annual reporting periods beginning after December 15 2017 and
interim periods therein (calendar year 2018)
With three-year income statement presentation requirement public companies will need 2016 2017 and 2018
financial statement information presented under the new guidance
Effective for nonpublic entities for annual reporting periods beginning after December 15
2018 and interim periods within annual reporting periods beginning after December 15 2019
(calendar year 2019)
bull With two-year income statement presentation requirement nonpublic companies will present 2018 and 2019
Revenue
Increases the volume of required disclosures
bull Disaggregation of revenue
bull Contract asset and liability disclosures
bull Performance obligations disclosures
Significant judgments need to be disclosed
bull Determining transaction price
bull Allocation of amounts to obligations
Revenue
Other widespread changes include capitalizing and
amortizing incremental costs of obtaining a contract
Revenue
ASU No 2016-02 Leases (Topic 842)
Effective for 2019 for public business entities and effective
2020 for nonpublic entities
bull Modified retrospective transition will require 2017 2018 and 2019
revised presentation for SEC filers
bull Modified retrospective transition will require 2019 and 2020 revised
presentation for non-SEC filers
Leases
All leases will be recorded on the balance sheet with a right of
use (ROU) asset and liability recorded at the present value of
future lease payments
Leases with a term 12 months or less can be excluded from
balance sheet recognition and recorded same as today
Finance and operating lease ROU assets and liabilities must each
be presented in separate line items on the balance sheet (andor
disclosed in the notes)
Leases
Leases
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
SEC Comment Letter Trends
Source Ernst amp Youngrsquos SEC Comments and Trends September 2016
SEC Areas of Focus
Fair value measurements
Business combinations
Contingencies
Goodwill and intangible assets
Income taxes
SEC Areas of Focus
Technology
Revenue recognition and related cost of sales
Gross vs net revenue reporting
Multiple element arrangements
Segment disclosures
SEC Areas of Focus
Retail amp Consumer Goods
Key performance metrics
Healthcare
Revenue recognition and contractual allowances
Recently Issued Accounting Standards
Kat Peterson
Going concern
Share-based payments
Statement of cash flows
Revenue
Leases
Credit losses on financial instruments
Other Guidance Becoming Effective after 2015Recently Issued Accounting Standards
ASU 2014-15 Disclosure of Uncertainties about an Entityrsquos Ability to Continue as a Going
Concern
Effective for 2016
The amendments define managementrsquos responsibility to evaluate whether there is
substantial doubt about an organizationrsquos ability to continue as a going concern and
to provide related footnote disclosures
Management is now required to proactively evaluate organizationrsquos ability to
continue as a going concern
Auditors will now evaluate managementrsquos assessment
Going Concern
ASU No 2016-09 Improvements to Employee Share-Based Payment Accounting
Effective for 2017 for calendar year end public companies and 2018 for calendar year end
nonpublic companies but can be early adopted
Changes how companies account for certain aspects of share-based payments including
bull Elimination of APIC pools
bull Allow repurchase shares from employees for tax withholding without triggering liability accounting
bull Companies can elect to account for forfeitures as they occur
Additionally private companies can elect to use a practical expedient to estimate an awardrsquos
expected term as midpoint between vesting date and contractual term
Share-Based Payments
ASU 2016-15 Classification of Certain Cash Receipts and Cash Payments and ASU 2016-18
Restricted Cash
Effective for 2018 for calendar year end public companies and 2019 for calendar year
end nonpublic companies but can be early adopted
Requires certain cash flow presentation for specific situations
Requires the change in restricted cash and restricted cash equivalents to be included
with the change in cash and cash equivalents on the SOCF
Statement of Cash Flows
Type of Payment Classification on the Cash Flow Statement
Contingent consideration payments made after a business combination
If paid at or near the time of purchase investing activityOtherwise cash outflow from financing activities for the contingent consideration liability recognized at acquisition-date fair value (including measurement period adjustments) Cash outflow from operating activities for the balance
Proceeds from the settlement of insurance claims Based on the insurance coverage (iethe nature of the loss)
Distributions received by an investor from an equity method investee
Cumulative earnings approach All distributions would be presumed to be returns on the investment and classified as operating inflows
Debt prepayment costs Financing activities
Debt modification costs Creditor fees ndash Financing 3rd party fees ndash Operating
Debt extinguishment costs Creditor fees ndash Financing 3rd party fees ndash Financing
Statement of Cash Flows
ASU No 2014-09 Revenue from Contracts with Customers (Topic 606) and related
amendments (ASU 2016-08 ASU 2016-10 ASU 2016-12)
Effective for public entities for annual reporting periods beginning after December 15 2017 and
interim periods therein (calendar year 2018)
With three-year income statement presentation requirement public companies will need 2016 2017 and 2018
financial statement information presented under the new guidance
Effective for nonpublic entities for annual reporting periods beginning after December 15
2018 and interim periods within annual reporting periods beginning after December 15 2019
(calendar year 2019)
bull With two-year income statement presentation requirement nonpublic companies will present 2018 and 2019
Revenue
Increases the volume of required disclosures
bull Disaggregation of revenue
bull Contract asset and liability disclosures
bull Performance obligations disclosures
Significant judgments need to be disclosed
bull Determining transaction price
bull Allocation of amounts to obligations
Revenue
Other widespread changes include capitalizing and
amortizing incremental costs of obtaining a contract
Revenue
ASU No 2016-02 Leases (Topic 842)
Effective for 2019 for public business entities and effective
2020 for nonpublic entities
bull Modified retrospective transition will require 2017 2018 and 2019
revised presentation for SEC filers
bull Modified retrospective transition will require 2019 and 2020 revised
presentation for non-SEC filers
Leases
All leases will be recorded on the balance sheet with a right of
use (ROU) asset and liability recorded at the present value of
future lease payments
Leases with a term 12 months or less can be excluded from
balance sheet recognition and recorded same as today
Finance and operating lease ROU assets and liabilities must each
be presented in separate line items on the balance sheet (andor
disclosed in the notes)
Leases
Leases
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
SEC Areas of Focus
Fair value measurements
Business combinations
Contingencies
Goodwill and intangible assets
Income taxes
SEC Areas of Focus
Technology
Revenue recognition and related cost of sales
Gross vs net revenue reporting
Multiple element arrangements
Segment disclosures
SEC Areas of Focus
Retail amp Consumer Goods
Key performance metrics
Healthcare
Revenue recognition and contractual allowances
Recently Issued Accounting Standards
Kat Peterson
Going concern
Share-based payments
Statement of cash flows
Revenue
Leases
Credit losses on financial instruments
Other Guidance Becoming Effective after 2015Recently Issued Accounting Standards
ASU 2014-15 Disclosure of Uncertainties about an Entityrsquos Ability to Continue as a Going
Concern
Effective for 2016
The amendments define managementrsquos responsibility to evaluate whether there is
substantial doubt about an organizationrsquos ability to continue as a going concern and
to provide related footnote disclosures
Management is now required to proactively evaluate organizationrsquos ability to
continue as a going concern
Auditors will now evaluate managementrsquos assessment
Going Concern
ASU No 2016-09 Improvements to Employee Share-Based Payment Accounting
Effective for 2017 for calendar year end public companies and 2018 for calendar year end
nonpublic companies but can be early adopted
Changes how companies account for certain aspects of share-based payments including
bull Elimination of APIC pools
bull Allow repurchase shares from employees for tax withholding without triggering liability accounting
bull Companies can elect to account for forfeitures as they occur
Additionally private companies can elect to use a practical expedient to estimate an awardrsquos
expected term as midpoint between vesting date and contractual term
Share-Based Payments
ASU 2016-15 Classification of Certain Cash Receipts and Cash Payments and ASU 2016-18
Restricted Cash
Effective for 2018 for calendar year end public companies and 2019 for calendar year
end nonpublic companies but can be early adopted
Requires certain cash flow presentation for specific situations
Requires the change in restricted cash and restricted cash equivalents to be included
with the change in cash and cash equivalents on the SOCF
Statement of Cash Flows
Type of Payment Classification on the Cash Flow Statement
Contingent consideration payments made after a business combination
If paid at or near the time of purchase investing activityOtherwise cash outflow from financing activities for the contingent consideration liability recognized at acquisition-date fair value (including measurement period adjustments) Cash outflow from operating activities for the balance
Proceeds from the settlement of insurance claims Based on the insurance coverage (iethe nature of the loss)
Distributions received by an investor from an equity method investee
Cumulative earnings approach All distributions would be presumed to be returns on the investment and classified as operating inflows
Debt prepayment costs Financing activities
Debt modification costs Creditor fees ndash Financing 3rd party fees ndash Operating
Debt extinguishment costs Creditor fees ndash Financing 3rd party fees ndash Financing
Statement of Cash Flows
ASU No 2014-09 Revenue from Contracts with Customers (Topic 606) and related
amendments (ASU 2016-08 ASU 2016-10 ASU 2016-12)
Effective for public entities for annual reporting periods beginning after December 15 2017 and
interim periods therein (calendar year 2018)
With three-year income statement presentation requirement public companies will need 2016 2017 and 2018
financial statement information presented under the new guidance
Effective for nonpublic entities for annual reporting periods beginning after December 15
2018 and interim periods within annual reporting periods beginning after December 15 2019
(calendar year 2019)
bull With two-year income statement presentation requirement nonpublic companies will present 2018 and 2019
Revenue
Increases the volume of required disclosures
bull Disaggregation of revenue
bull Contract asset and liability disclosures
bull Performance obligations disclosures
Significant judgments need to be disclosed
bull Determining transaction price
bull Allocation of amounts to obligations
Revenue
Other widespread changes include capitalizing and
amortizing incremental costs of obtaining a contract
Revenue
ASU No 2016-02 Leases (Topic 842)
Effective for 2019 for public business entities and effective
2020 for nonpublic entities
bull Modified retrospective transition will require 2017 2018 and 2019
revised presentation for SEC filers
bull Modified retrospective transition will require 2019 and 2020 revised
presentation for non-SEC filers
Leases
All leases will be recorded on the balance sheet with a right of
use (ROU) asset and liability recorded at the present value of
future lease payments
Leases with a term 12 months or less can be excluded from
balance sheet recognition and recorded same as today
Finance and operating lease ROU assets and liabilities must each
be presented in separate line items on the balance sheet (andor
disclosed in the notes)
Leases
Leases
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
SEC Areas of Focus
Technology
Revenue recognition and related cost of sales
Gross vs net revenue reporting
Multiple element arrangements
Segment disclosures
SEC Areas of Focus
Retail amp Consumer Goods
Key performance metrics
Healthcare
Revenue recognition and contractual allowances
Recently Issued Accounting Standards
Kat Peterson
Going concern
Share-based payments
Statement of cash flows
Revenue
Leases
Credit losses on financial instruments
Other Guidance Becoming Effective after 2015Recently Issued Accounting Standards
ASU 2014-15 Disclosure of Uncertainties about an Entityrsquos Ability to Continue as a Going
Concern
Effective for 2016
The amendments define managementrsquos responsibility to evaluate whether there is
substantial doubt about an organizationrsquos ability to continue as a going concern and
to provide related footnote disclosures
Management is now required to proactively evaluate organizationrsquos ability to
continue as a going concern
Auditors will now evaluate managementrsquos assessment
Going Concern
ASU No 2016-09 Improvements to Employee Share-Based Payment Accounting
Effective for 2017 for calendar year end public companies and 2018 for calendar year end
nonpublic companies but can be early adopted
Changes how companies account for certain aspects of share-based payments including
bull Elimination of APIC pools
bull Allow repurchase shares from employees for tax withholding without triggering liability accounting
bull Companies can elect to account for forfeitures as they occur
Additionally private companies can elect to use a practical expedient to estimate an awardrsquos
expected term as midpoint between vesting date and contractual term
Share-Based Payments
ASU 2016-15 Classification of Certain Cash Receipts and Cash Payments and ASU 2016-18
Restricted Cash
Effective for 2018 for calendar year end public companies and 2019 for calendar year
end nonpublic companies but can be early adopted
Requires certain cash flow presentation for specific situations
Requires the change in restricted cash and restricted cash equivalents to be included
with the change in cash and cash equivalents on the SOCF
Statement of Cash Flows
Type of Payment Classification on the Cash Flow Statement
Contingent consideration payments made after a business combination
If paid at or near the time of purchase investing activityOtherwise cash outflow from financing activities for the contingent consideration liability recognized at acquisition-date fair value (including measurement period adjustments) Cash outflow from operating activities for the balance
Proceeds from the settlement of insurance claims Based on the insurance coverage (iethe nature of the loss)
Distributions received by an investor from an equity method investee
Cumulative earnings approach All distributions would be presumed to be returns on the investment and classified as operating inflows
Debt prepayment costs Financing activities
Debt modification costs Creditor fees ndash Financing 3rd party fees ndash Operating
Debt extinguishment costs Creditor fees ndash Financing 3rd party fees ndash Financing
Statement of Cash Flows
ASU No 2014-09 Revenue from Contracts with Customers (Topic 606) and related
amendments (ASU 2016-08 ASU 2016-10 ASU 2016-12)
Effective for public entities for annual reporting periods beginning after December 15 2017 and
interim periods therein (calendar year 2018)
With three-year income statement presentation requirement public companies will need 2016 2017 and 2018
financial statement information presented under the new guidance
Effective for nonpublic entities for annual reporting periods beginning after December 15
2018 and interim periods within annual reporting periods beginning after December 15 2019
(calendar year 2019)
bull With two-year income statement presentation requirement nonpublic companies will present 2018 and 2019
Revenue
Increases the volume of required disclosures
bull Disaggregation of revenue
bull Contract asset and liability disclosures
bull Performance obligations disclosures
Significant judgments need to be disclosed
bull Determining transaction price
bull Allocation of amounts to obligations
Revenue
Other widespread changes include capitalizing and
amortizing incremental costs of obtaining a contract
Revenue
ASU No 2016-02 Leases (Topic 842)
Effective for 2019 for public business entities and effective
2020 for nonpublic entities
bull Modified retrospective transition will require 2017 2018 and 2019
revised presentation for SEC filers
bull Modified retrospective transition will require 2019 and 2020 revised
presentation for non-SEC filers
Leases
All leases will be recorded on the balance sheet with a right of
use (ROU) asset and liability recorded at the present value of
future lease payments
Leases with a term 12 months or less can be excluded from
balance sheet recognition and recorded same as today
Finance and operating lease ROU assets and liabilities must each
be presented in separate line items on the balance sheet (andor
disclosed in the notes)
Leases
Leases
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
SEC Areas of Focus
Retail amp Consumer Goods
Key performance metrics
Healthcare
Revenue recognition and contractual allowances
Recently Issued Accounting Standards
Kat Peterson
Going concern
Share-based payments
Statement of cash flows
Revenue
Leases
Credit losses on financial instruments
Other Guidance Becoming Effective after 2015Recently Issued Accounting Standards
ASU 2014-15 Disclosure of Uncertainties about an Entityrsquos Ability to Continue as a Going
Concern
Effective for 2016
The amendments define managementrsquos responsibility to evaluate whether there is
substantial doubt about an organizationrsquos ability to continue as a going concern and
to provide related footnote disclosures
Management is now required to proactively evaluate organizationrsquos ability to
continue as a going concern
Auditors will now evaluate managementrsquos assessment
Going Concern
ASU No 2016-09 Improvements to Employee Share-Based Payment Accounting
Effective for 2017 for calendar year end public companies and 2018 for calendar year end
nonpublic companies but can be early adopted
Changes how companies account for certain aspects of share-based payments including
bull Elimination of APIC pools
bull Allow repurchase shares from employees for tax withholding without triggering liability accounting
bull Companies can elect to account for forfeitures as they occur
Additionally private companies can elect to use a practical expedient to estimate an awardrsquos
expected term as midpoint between vesting date and contractual term
Share-Based Payments
ASU 2016-15 Classification of Certain Cash Receipts and Cash Payments and ASU 2016-18
Restricted Cash
Effective for 2018 for calendar year end public companies and 2019 for calendar year
end nonpublic companies but can be early adopted
Requires certain cash flow presentation for specific situations
Requires the change in restricted cash and restricted cash equivalents to be included
with the change in cash and cash equivalents on the SOCF
Statement of Cash Flows
Type of Payment Classification on the Cash Flow Statement
Contingent consideration payments made after a business combination
If paid at or near the time of purchase investing activityOtherwise cash outflow from financing activities for the contingent consideration liability recognized at acquisition-date fair value (including measurement period adjustments) Cash outflow from operating activities for the balance
Proceeds from the settlement of insurance claims Based on the insurance coverage (iethe nature of the loss)
Distributions received by an investor from an equity method investee
Cumulative earnings approach All distributions would be presumed to be returns on the investment and classified as operating inflows
Debt prepayment costs Financing activities
Debt modification costs Creditor fees ndash Financing 3rd party fees ndash Operating
Debt extinguishment costs Creditor fees ndash Financing 3rd party fees ndash Financing
Statement of Cash Flows
ASU No 2014-09 Revenue from Contracts with Customers (Topic 606) and related
amendments (ASU 2016-08 ASU 2016-10 ASU 2016-12)
Effective for public entities for annual reporting periods beginning after December 15 2017 and
interim periods therein (calendar year 2018)
With three-year income statement presentation requirement public companies will need 2016 2017 and 2018
financial statement information presented under the new guidance
Effective for nonpublic entities for annual reporting periods beginning after December 15
2018 and interim periods within annual reporting periods beginning after December 15 2019
(calendar year 2019)
bull With two-year income statement presentation requirement nonpublic companies will present 2018 and 2019
Revenue
Increases the volume of required disclosures
bull Disaggregation of revenue
bull Contract asset and liability disclosures
bull Performance obligations disclosures
Significant judgments need to be disclosed
bull Determining transaction price
bull Allocation of amounts to obligations
Revenue
Other widespread changes include capitalizing and
amortizing incremental costs of obtaining a contract
Revenue
ASU No 2016-02 Leases (Topic 842)
Effective for 2019 for public business entities and effective
2020 for nonpublic entities
bull Modified retrospective transition will require 2017 2018 and 2019
revised presentation for SEC filers
bull Modified retrospective transition will require 2019 and 2020 revised
presentation for non-SEC filers
Leases
All leases will be recorded on the balance sheet with a right of
use (ROU) asset and liability recorded at the present value of
future lease payments
Leases with a term 12 months or less can be excluded from
balance sheet recognition and recorded same as today
Finance and operating lease ROU assets and liabilities must each
be presented in separate line items on the balance sheet (andor
disclosed in the notes)
Leases
Leases
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Recently Issued Accounting Standards
Kat Peterson
Going concern
Share-based payments
Statement of cash flows
Revenue
Leases
Credit losses on financial instruments
Other Guidance Becoming Effective after 2015Recently Issued Accounting Standards
ASU 2014-15 Disclosure of Uncertainties about an Entityrsquos Ability to Continue as a Going
Concern
Effective for 2016
The amendments define managementrsquos responsibility to evaluate whether there is
substantial doubt about an organizationrsquos ability to continue as a going concern and
to provide related footnote disclosures
Management is now required to proactively evaluate organizationrsquos ability to
continue as a going concern
Auditors will now evaluate managementrsquos assessment
Going Concern
ASU No 2016-09 Improvements to Employee Share-Based Payment Accounting
Effective for 2017 for calendar year end public companies and 2018 for calendar year end
nonpublic companies but can be early adopted
Changes how companies account for certain aspects of share-based payments including
bull Elimination of APIC pools
bull Allow repurchase shares from employees for tax withholding without triggering liability accounting
bull Companies can elect to account for forfeitures as they occur
Additionally private companies can elect to use a practical expedient to estimate an awardrsquos
expected term as midpoint between vesting date and contractual term
Share-Based Payments
ASU 2016-15 Classification of Certain Cash Receipts and Cash Payments and ASU 2016-18
Restricted Cash
Effective for 2018 for calendar year end public companies and 2019 for calendar year
end nonpublic companies but can be early adopted
Requires certain cash flow presentation for specific situations
Requires the change in restricted cash and restricted cash equivalents to be included
with the change in cash and cash equivalents on the SOCF
Statement of Cash Flows
Type of Payment Classification on the Cash Flow Statement
Contingent consideration payments made after a business combination
If paid at or near the time of purchase investing activityOtherwise cash outflow from financing activities for the contingent consideration liability recognized at acquisition-date fair value (including measurement period adjustments) Cash outflow from operating activities for the balance
Proceeds from the settlement of insurance claims Based on the insurance coverage (iethe nature of the loss)
Distributions received by an investor from an equity method investee
Cumulative earnings approach All distributions would be presumed to be returns on the investment and classified as operating inflows
Debt prepayment costs Financing activities
Debt modification costs Creditor fees ndash Financing 3rd party fees ndash Operating
Debt extinguishment costs Creditor fees ndash Financing 3rd party fees ndash Financing
Statement of Cash Flows
ASU No 2014-09 Revenue from Contracts with Customers (Topic 606) and related
amendments (ASU 2016-08 ASU 2016-10 ASU 2016-12)
Effective for public entities for annual reporting periods beginning after December 15 2017 and
interim periods therein (calendar year 2018)
With three-year income statement presentation requirement public companies will need 2016 2017 and 2018
financial statement information presented under the new guidance
Effective for nonpublic entities for annual reporting periods beginning after December 15
2018 and interim periods within annual reporting periods beginning after December 15 2019
(calendar year 2019)
bull With two-year income statement presentation requirement nonpublic companies will present 2018 and 2019
Revenue
Increases the volume of required disclosures
bull Disaggregation of revenue
bull Contract asset and liability disclosures
bull Performance obligations disclosures
Significant judgments need to be disclosed
bull Determining transaction price
bull Allocation of amounts to obligations
Revenue
Other widespread changes include capitalizing and
amortizing incremental costs of obtaining a contract
Revenue
ASU No 2016-02 Leases (Topic 842)
Effective for 2019 for public business entities and effective
2020 for nonpublic entities
bull Modified retrospective transition will require 2017 2018 and 2019
revised presentation for SEC filers
bull Modified retrospective transition will require 2019 and 2020 revised
presentation for non-SEC filers
Leases
All leases will be recorded on the balance sheet with a right of
use (ROU) asset and liability recorded at the present value of
future lease payments
Leases with a term 12 months or less can be excluded from
balance sheet recognition and recorded same as today
Finance and operating lease ROU assets and liabilities must each
be presented in separate line items on the balance sheet (andor
disclosed in the notes)
Leases
Leases
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Going concern
Share-based payments
Statement of cash flows
Revenue
Leases
Credit losses on financial instruments
Other Guidance Becoming Effective after 2015Recently Issued Accounting Standards
ASU 2014-15 Disclosure of Uncertainties about an Entityrsquos Ability to Continue as a Going
Concern
Effective for 2016
The amendments define managementrsquos responsibility to evaluate whether there is
substantial doubt about an organizationrsquos ability to continue as a going concern and
to provide related footnote disclosures
Management is now required to proactively evaluate organizationrsquos ability to
continue as a going concern
Auditors will now evaluate managementrsquos assessment
Going Concern
ASU No 2016-09 Improvements to Employee Share-Based Payment Accounting
Effective for 2017 for calendar year end public companies and 2018 for calendar year end
nonpublic companies but can be early adopted
Changes how companies account for certain aspects of share-based payments including
bull Elimination of APIC pools
bull Allow repurchase shares from employees for tax withholding without triggering liability accounting
bull Companies can elect to account for forfeitures as they occur
Additionally private companies can elect to use a practical expedient to estimate an awardrsquos
expected term as midpoint between vesting date and contractual term
Share-Based Payments
ASU 2016-15 Classification of Certain Cash Receipts and Cash Payments and ASU 2016-18
Restricted Cash
Effective for 2018 for calendar year end public companies and 2019 for calendar year
end nonpublic companies but can be early adopted
Requires certain cash flow presentation for specific situations
Requires the change in restricted cash and restricted cash equivalents to be included
with the change in cash and cash equivalents on the SOCF
Statement of Cash Flows
Type of Payment Classification on the Cash Flow Statement
Contingent consideration payments made after a business combination
If paid at or near the time of purchase investing activityOtherwise cash outflow from financing activities for the contingent consideration liability recognized at acquisition-date fair value (including measurement period adjustments) Cash outflow from operating activities for the balance
Proceeds from the settlement of insurance claims Based on the insurance coverage (iethe nature of the loss)
Distributions received by an investor from an equity method investee
Cumulative earnings approach All distributions would be presumed to be returns on the investment and classified as operating inflows
Debt prepayment costs Financing activities
Debt modification costs Creditor fees ndash Financing 3rd party fees ndash Operating
Debt extinguishment costs Creditor fees ndash Financing 3rd party fees ndash Financing
Statement of Cash Flows
ASU No 2014-09 Revenue from Contracts with Customers (Topic 606) and related
amendments (ASU 2016-08 ASU 2016-10 ASU 2016-12)
Effective for public entities for annual reporting periods beginning after December 15 2017 and
interim periods therein (calendar year 2018)
With three-year income statement presentation requirement public companies will need 2016 2017 and 2018
financial statement information presented under the new guidance
Effective for nonpublic entities for annual reporting periods beginning after December 15
2018 and interim periods within annual reporting periods beginning after December 15 2019
(calendar year 2019)
bull With two-year income statement presentation requirement nonpublic companies will present 2018 and 2019
Revenue
Increases the volume of required disclosures
bull Disaggregation of revenue
bull Contract asset and liability disclosures
bull Performance obligations disclosures
Significant judgments need to be disclosed
bull Determining transaction price
bull Allocation of amounts to obligations
Revenue
Other widespread changes include capitalizing and
amortizing incremental costs of obtaining a contract
Revenue
ASU No 2016-02 Leases (Topic 842)
Effective for 2019 for public business entities and effective
2020 for nonpublic entities
bull Modified retrospective transition will require 2017 2018 and 2019
revised presentation for SEC filers
bull Modified retrospective transition will require 2019 and 2020 revised
presentation for non-SEC filers
Leases
All leases will be recorded on the balance sheet with a right of
use (ROU) asset and liability recorded at the present value of
future lease payments
Leases with a term 12 months or less can be excluded from
balance sheet recognition and recorded same as today
Finance and operating lease ROU assets and liabilities must each
be presented in separate line items on the balance sheet (andor
disclosed in the notes)
Leases
Leases
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
ASU 2014-15 Disclosure of Uncertainties about an Entityrsquos Ability to Continue as a Going
Concern
Effective for 2016
The amendments define managementrsquos responsibility to evaluate whether there is
substantial doubt about an organizationrsquos ability to continue as a going concern and
to provide related footnote disclosures
Management is now required to proactively evaluate organizationrsquos ability to
continue as a going concern
Auditors will now evaluate managementrsquos assessment
Going Concern
ASU No 2016-09 Improvements to Employee Share-Based Payment Accounting
Effective for 2017 for calendar year end public companies and 2018 for calendar year end
nonpublic companies but can be early adopted
Changes how companies account for certain aspects of share-based payments including
bull Elimination of APIC pools
bull Allow repurchase shares from employees for tax withholding without triggering liability accounting
bull Companies can elect to account for forfeitures as they occur
Additionally private companies can elect to use a practical expedient to estimate an awardrsquos
expected term as midpoint between vesting date and contractual term
Share-Based Payments
ASU 2016-15 Classification of Certain Cash Receipts and Cash Payments and ASU 2016-18
Restricted Cash
Effective for 2018 for calendar year end public companies and 2019 for calendar year
end nonpublic companies but can be early adopted
Requires certain cash flow presentation for specific situations
Requires the change in restricted cash and restricted cash equivalents to be included
with the change in cash and cash equivalents on the SOCF
Statement of Cash Flows
Type of Payment Classification on the Cash Flow Statement
Contingent consideration payments made after a business combination
If paid at or near the time of purchase investing activityOtherwise cash outflow from financing activities for the contingent consideration liability recognized at acquisition-date fair value (including measurement period adjustments) Cash outflow from operating activities for the balance
Proceeds from the settlement of insurance claims Based on the insurance coverage (iethe nature of the loss)
Distributions received by an investor from an equity method investee
Cumulative earnings approach All distributions would be presumed to be returns on the investment and classified as operating inflows
Debt prepayment costs Financing activities
Debt modification costs Creditor fees ndash Financing 3rd party fees ndash Operating
Debt extinguishment costs Creditor fees ndash Financing 3rd party fees ndash Financing
Statement of Cash Flows
ASU No 2014-09 Revenue from Contracts with Customers (Topic 606) and related
amendments (ASU 2016-08 ASU 2016-10 ASU 2016-12)
Effective for public entities for annual reporting periods beginning after December 15 2017 and
interim periods therein (calendar year 2018)
With three-year income statement presentation requirement public companies will need 2016 2017 and 2018
financial statement information presented under the new guidance
Effective for nonpublic entities for annual reporting periods beginning after December 15
2018 and interim periods within annual reporting periods beginning after December 15 2019
(calendar year 2019)
bull With two-year income statement presentation requirement nonpublic companies will present 2018 and 2019
Revenue
Increases the volume of required disclosures
bull Disaggregation of revenue
bull Contract asset and liability disclosures
bull Performance obligations disclosures
Significant judgments need to be disclosed
bull Determining transaction price
bull Allocation of amounts to obligations
Revenue
Other widespread changes include capitalizing and
amortizing incremental costs of obtaining a contract
Revenue
ASU No 2016-02 Leases (Topic 842)
Effective for 2019 for public business entities and effective
2020 for nonpublic entities
bull Modified retrospective transition will require 2017 2018 and 2019
revised presentation for SEC filers
bull Modified retrospective transition will require 2019 and 2020 revised
presentation for non-SEC filers
Leases
All leases will be recorded on the balance sheet with a right of
use (ROU) asset and liability recorded at the present value of
future lease payments
Leases with a term 12 months or less can be excluded from
balance sheet recognition and recorded same as today
Finance and operating lease ROU assets and liabilities must each
be presented in separate line items on the balance sheet (andor
disclosed in the notes)
Leases
Leases
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
ASU No 2016-09 Improvements to Employee Share-Based Payment Accounting
Effective for 2017 for calendar year end public companies and 2018 for calendar year end
nonpublic companies but can be early adopted
Changes how companies account for certain aspects of share-based payments including
bull Elimination of APIC pools
bull Allow repurchase shares from employees for tax withholding without triggering liability accounting
bull Companies can elect to account for forfeitures as they occur
Additionally private companies can elect to use a practical expedient to estimate an awardrsquos
expected term as midpoint between vesting date and contractual term
Share-Based Payments
ASU 2016-15 Classification of Certain Cash Receipts and Cash Payments and ASU 2016-18
Restricted Cash
Effective for 2018 for calendar year end public companies and 2019 for calendar year
end nonpublic companies but can be early adopted
Requires certain cash flow presentation for specific situations
Requires the change in restricted cash and restricted cash equivalents to be included
with the change in cash and cash equivalents on the SOCF
Statement of Cash Flows
Type of Payment Classification on the Cash Flow Statement
Contingent consideration payments made after a business combination
If paid at or near the time of purchase investing activityOtherwise cash outflow from financing activities for the contingent consideration liability recognized at acquisition-date fair value (including measurement period adjustments) Cash outflow from operating activities for the balance
Proceeds from the settlement of insurance claims Based on the insurance coverage (iethe nature of the loss)
Distributions received by an investor from an equity method investee
Cumulative earnings approach All distributions would be presumed to be returns on the investment and classified as operating inflows
Debt prepayment costs Financing activities
Debt modification costs Creditor fees ndash Financing 3rd party fees ndash Operating
Debt extinguishment costs Creditor fees ndash Financing 3rd party fees ndash Financing
Statement of Cash Flows
ASU No 2014-09 Revenue from Contracts with Customers (Topic 606) and related
amendments (ASU 2016-08 ASU 2016-10 ASU 2016-12)
Effective for public entities for annual reporting periods beginning after December 15 2017 and
interim periods therein (calendar year 2018)
With three-year income statement presentation requirement public companies will need 2016 2017 and 2018
financial statement information presented under the new guidance
Effective for nonpublic entities for annual reporting periods beginning after December 15
2018 and interim periods within annual reporting periods beginning after December 15 2019
(calendar year 2019)
bull With two-year income statement presentation requirement nonpublic companies will present 2018 and 2019
Revenue
Increases the volume of required disclosures
bull Disaggregation of revenue
bull Contract asset and liability disclosures
bull Performance obligations disclosures
Significant judgments need to be disclosed
bull Determining transaction price
bull Allocation of amounts to obligations
Revenue
Other widespread changes include capitalizing and
amortizing incremental costs of obtaining a contract
Revenue
ASU No 2016-02 Leases (Topic 842)
Effective for 2019 for public business entities and effective
2020 for nonpublic entities
bull Modified retrospective transition will require 2017 2018 and 2019
revised presentation for SEC filers
bull Modified retrospective transition will require 2019 and 2020 revised
presentation for non-SEC filers
Leases
All leases will be recorded on the balance sheet with a right of
use (ROU) asset and liability recorded at the present value of
future lease payments
Leases with a term 12 months or less can be excluded from
balance sheet recognition and recorded same as today
Finance and operating lease ROU assets and liabilities must each
be presented in separate line items on the balance sheet (andor
disclosed in the notes)
Leases
Leases
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
ASU 2016-15 Classification of Certain Cash Receipts and Cash Payments and ASU 2016-18
Restricted Cash
Effective for 2018 for calendar year end public companies and 2019 for calendar year
end nonpublic companies but can be early adopted
Requires certain cash flow presentation for specific situations
Requires the change in restricted cash and restricted cash equivalents to be included
with the change in cash and cash equivalents on the SOCF
Statement of Cash Flows
Type of Payment Classification on the Cash Flow Statement
Contingent consideration payments made after a business combination
If paid at or near the time of purchase investing activityOtherwise cash outflow from financing activities for the contingent consideration liability recognized at acquisition-date fair value (including measurement period adjustments) Cash outflow from operating activities for the balance
Proceeds from the settlement of insurance claims Based on the insurance coverage (iethe nature of the loss)
Distributions received by an investor from an equity method investee
Cumulative earnings approach All distributions would be presumed to be returns on the investment and classified as operating inflows
Debt prepayment costs Financing activities
Debt modification costs Creditor fees ndash Financing 3rd party fees ndash Operating
Debt extinguishment costs Creditor fees ndash Financing 3rd party fees ndash Financing
Statement of Cash Flows
ASU No 2014-09 Revenue from Contracts with Customers (Topic 606) and related
amendments (ASU 2016-08 ASU 2016-10 ASU 2016-12)
Effective for public entities for annual reporting periods beginning after December 15 2017 and
interim periods therein (calendar year 2018)
With three-year income statement presentation requirement public companies will need 2016 2017 and 2018
financial statement information presented under the new guidance
Effective for nonpublic entities for annual reporting periods beginning after December 15
2018 and interim periods within annual reporting periods beginning after December 15 2019
(calendar year 2019)
bull With two-year income statement presentation requirement nonpublic companies will present 2018 and 2019
Revenue
Increases the volume of required disclosures
bull Disaggregation of revenue
bull Contract asset and liability disclosures
bull Performance obligations disclosures
Significant judgments need to be disclosed
bull Determining transaction price
bull Allocation of amounts to obligations
Revenue
Other widespread changes include capitalizing and
amortizing incremental costs of obtaining a contract
Revenue
ASU No 2016-02 Leases (Topic 842)
Effective for 2019 for public business entities and effective
2020 for nonpublic entities
bull Modified retrospective transition will require 2017 2018 and 2019
revised presentation for SEC filers
bull Modified retrospective transition will require 2019 and 2020 revised
presentation for non-SEC filers
Leases
All leases will be recorded on the balance sheet with a right of
use (ROU) asset and liability recorded at the present value of
future lease payments
Leases with a term 12 months or less can be excluded from
balance sheet recognition and recorded same as today
Finance and operating lease ROU assets and liabilities must each
be presented in separate line items on the balance sheet (andor
disclosed in the notes)
Leases
Leases
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Type of Payment Classification on the Cash Flow Statement
Contingent consideration payments made after a business combination
If paid at or near the time of purchase investing activityOtherwise cash outflow from financing activities for the contingent consideration liability recognized at acquisition-date fair value (including measurement period adjustments) Cash outflow from operating activities for the balance
Proceeds from the settlement of insurance claims Based on the insurance coverage (iethe nature of the loss)
Distributions received by an investor from an equity method investee
Cumulative earnings approach All distributions would be presumed to be returns on the investment and classified as operating inflows
Debt prepayment costs Financing activities
Debt modification costs Creditor fees ndash Financing 3rd party fees ndash Operating
Debt extinguishment costs Creditor fees ndash Financing 3rd party fees ndash Financing
Statement of Cash Flows
ASU No 2014-09 Revenue from Contracts with Customers (Topic 606) and related
amendments (ASU 2016-08 ASU 2016-10 ASU 2016-12)
Effective for public entities for annual reporting periods beginning after December 15 2017 and
interim periods therein (calendar year 2018)
With three-year income statement presentation requirement public companies will need 2016 2017 and 2018
financial statement information presented under the new guidance
Effective for nonpublic entities for annual reporting periods beginning after December 15
2018 and interim periods within annual reporting periods beginning after December 15 2019
(calendar year 2019)
bull With two-year income statement presentation requirement nonpublic companies will present 2018 and 2019
Revenue
Increases the volume of required disclosures
bull Disaggregation of revenue
bull Contract asset and liability disclosures
bull Performance obligations disclosures
Significant judgments need to be disclosed
bull Determining transaction price
bull Allocation of amounts to obligations
Revenue
Other widespread changes include capitalizing and
amortizing incremental costs of obtaining a contract
Revenue
ASU No 2016-02 Leases (Topic 842)
Effective for 2019 for public business entities and effective
2020 for nonpublic entities
bull Modified retrospective transition will require 2017 2018 and 2019
revised presentation for SEC filers
bull Modified retrospective transition will require 2019 and 2020 revised
presentation for non-SEC filers
Leases
All leases will be recorded on the balance sheet with a right of
use (ROU) asset and liability recorded at the present value of
future lease payments
Leases with a term 12 months or less can be excluded from
balance sheet recognition and recorded same as today
Finance and operating lease ROU assets and liabilities must each
be presented in separate line items on the balance sheet (andor
disclosed in the notes)
Leases
Leases
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
ASU No 2014-09 Revenue from Contracts with Customers (Topic 606) and related
amendments (ASU 2016-08 ASU 2016-10 ASU 2016-12)
Effective for public entities for annual reporting periods beginning after December 15 2017 and
interim periods therein (calendar year 2018)
With three-year income statement presentation requirement public companies will need 2016 2017 and 2018
financial statement information presented under the new guidance
Effective for nonpublic entities for annual reporting periods beginning after December 15
2018 and interim periods within annual reporting periods beginning after December 15 2019
(calendar year 2019)
bull With two-year income statement presentation requirement nonpublic companies will present 2018 and 2019
Revenue
Increases the volume of required disclosures
bull Disaggregation of revenue
bull Contract asset and liability disclosures
bull Performance obligations disclosures
Significant judgments need to be disclosed
bull Determining transaction price
bull Allocation of amounts to obligations
Revenue
Other widespread changes include capitalizing and
amortizing incremental costs of obtaining a contract
Revenue
ASU No 2016-02 Leases (Topic 842)
Effective for 2019 for public business entities and effective
2020 for nonpublic entities
bull Modified retrospective transition will require 2017 2018 and 2019
revised presentation for SEC filers
bull Modified retrospective transition will require 2019 and 2020 revised
presentation for non-SEC filers
Leases
All leases will be recorded on the balance sheet with a right of
use (ROU) asset and liability recorded at the present value of
future lease payments
Leases with a term 12 months or less can be excluded from
balance sheet recognition and recorded same as today
Finance and operating lease ROU assets and liabilities must each
be presented in separate line items on the balance sheet (andor
disclosed in the notes)
Leases
Leases
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Increases the volume of required disclosures
bull Disaggregation of revenue
bull Contract asset and liability disclosures
bull Performance obligations disclosures
Significant judgments need to be disclosed
bull Determining transaction price
bull Allocation of amounts to obligations
Revenue
Other widespread changes include capitalizing and
amortizing incremental costs of obtaining a contract
Revenue
ASU No 2016-02 Leases (Topic 842)
Effective for 2019 for public business entities and effective
2020 for nonpublic entities
bull Modified retrospective transition will require 2017 2018 and 2019
revised presentation for SEC filers
bull Modified retrospective transition will require 2019 and 2020 revised
presentation for non-SEC filers
Leases
All leases will be recorded on the balance sheet with a right of
use (ROU) asset and liability recorded at the present value of
future lease payments
Leases with a term 12 months or less can be excluded from
balance sheet recognition and recorded same as today
Finance and operating lease ROU assets and liabilities must each
be presented in separate line items on the balance sheet (andor
disclosed in the notes)
Leases
Leases
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Other widespread changes include capitalizing and
amortizing incremental costs of obtaining a contract
Revenue
ASU No 2016-02 Leases (Topic 842)
Effective for 2019 for public business entities and effective
2020 for nonpublic entities
bull Modified retrospective transition will require 2017 2018 and 2019
revised presentation for SEC filers
bull Modified retrospective transition will require 2019 and 2020 revised
presentation for non-SEC filers
Leases
All leases will be recorded on the balance sheet with a right of
use (ROU) asset and liability recorded at the present value of
future lease payments
Leases with a term 12 months or less can be excluded from
balance sheet recognition and recorded same as today
Finance and operating lease ROU assets and liabilities must each
be presented in separate line items on the balance sheet (andor
disclosed in the notes)
Leases
Leases
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
ASU No 2016-02 Leases (Topic 842)
Effective for 2019 for public business entities and effective
2020 for nonpublic entities
bull Modified retrospective transition will require 2017 2018 and 2019
revised presentation for SEC filers
bull Modified retrospective transition will require 2019 and 2020 revised
presentation for non-SEC filers
Leases
All leases will be recorded on the balance sheet with a right of
use (ROU) asset and liability recorded at the present value of
future lease payments
Leases with a term 12 months or less can be excluded from
balance sheet recognition and recorded same as today
Finance and operating lease ROU assets and liabilities must each
be presented in separate line items on the balance sheet (andor
disclosed in the notes)
Leases
Leases
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
All leases will be recorded on the balance sheet with a right of
use (ROU) asset and liability recorded at the present value of
future lease payments
Leases with a term 12 months or less can be excluded from
balance sheet recognition and recorded same as today
Finance and operating lease ROU assets and liabilities must each
be presented in separate line items on the balance sheet (andor
disclosed in the notes)
Leases
Leases
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Leases
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Leases
Scenario based on Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Leases
Source Illustration 9 in EampY Technical Line Final standard on leases is taking shape March 25 2015
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Key balance sheet metrics could change
Debt covenants and borrowing capacity might be affected
Decisions about whether to lease or buy significant assets
might change
Leases
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Other Guidance Becoming Effective after 2015Leases
Source PWCCBRE 2016 Lease Accounting Survey
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
McDonaldrsquos disclosed 15115 operating leases in 2015 10-K
bull $19 billion in rent expense
bull Future minimum lease payments of $125 billion
Starting in 2019 these leases will come on the balance sheet as an
asset and liability
Other Guidance Becoming Effective after 2015Leases
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
ASU 2016-13 Measurement of Credit Losses on Financial Instruments
Changes the impairment model for most financial assets including trade receivables and
held-to-maturity debt securities to an ldquoexpected lossrdquo model
Changes the impairment model for available-for-sale debt securities and requires
determining if unrealized loss is all or partially a credit loss
Includes requirement for significantly more disclosures
Effective for public SEC filers for annual reporting periods beginning after December 15 2019 and
interim periods therein (calendar year 2020)
Effective for nonpublic entities for annual reporting periods beginning after December 15 2020
(calendar year 2021)
Credit Losses on Financial Instruments
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Estimate lifetime ldquoexpected credit lossrdquo and record an allowance that when deducted
from the amortized cost basis of the financial asset presents the net amount expected to
be collected on the financial asset
An expected credit loss estimate should
bull be based on an assetrsquos amortized cost (including premiums or discounts net deferred fees and costs
foreign exchange and fair value hedge accounting adjustments)
bull reflect losses expected over the remaining contractual life of an asset considering the effect of voluntary
prepayments
bull consider available relevant information about the collectability of cash flows including information about
past events current conditions and reasonable and supportable forecasts
bull reflect the risk of loss even when that risk is remote meaning that an estimate of zero credit loss would
seldom be appropriate
Credit Losses on Financial Instruments
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Fraud Risk Management
Gretchen Leifeste
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Fraud Definitions
Any intentional act committed to secure an unfair or unlawful
gain
Occupational fraudmdashthe use of onersquos occupation for personal
enrichment through misuse of the organizationrsquos resources or
assets
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Fraud Statistics
According to the 2016 Global Fraud Study done by the Association of Certified Fraud
Examiners (ACFE)
bull Typical organization loses 5 of annual revenues to fraud
bull Median loss from a single case of occupational fraud was $150000
bull More than 23 of occupational fraud cases resulted in a loss of at least $1M
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Fraud Statistics
$125000 $200000
$975000
Median Loss per Scheme for Major Categories of Occupational Fraud
Asset Misappropriation Corruption Financial Statement Fraud
According to ACFE 2016 Global Fraud Study
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Fraud Statistics
$65000 $173000
$703000
Median Damage per Scheme for Levels of Perpetrators of Occupational Fraud
Employee Manager OwnerExecutive
According to ACFE 2016 Global Fraud Study
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
The Fraud Triangle
Model for explaining the factors that cause someone to commit
occupational fraud
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Fraud Case Studies
A few case studieshellip
Wells Fargo (2016) bull Employees opened more than 2 million checking savings and credit card
accounts without customer approval to meet sales quotasbull $185M fine
Satyam Computer Services (2009)bull Massive accounting fraud that cost investors an estimated $2 billionbull Fraud lasted for 8 years with company recording more than $1 billion in phony
revenue
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Fraud Risk Management
An effective fraud risk management approach encompasses controls that have
three objectives
1 Prevent
2 Detect
3 Respond
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Fraud Risk Management
Organizations that lacked anti-fraud controls suffered greater median losses
According to ACFE 2016 Global Fraud Study
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Not-for-Profit Financial Statements
Jamie Holtzman
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
Issued August 2016 First overhaul of NFP financial presentation since early lsquo90s (SFAS
115116)Applies to all NFPs including business-oriented health care entities Effective Annual financial statements issued for fiscal years beginning
after December 15 2017 (early adoption permitted)
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Not-for-Profit Financial Statements
Replace existing three classes of net assets (unrestricted temporarily restricted and permanently restricted) with two classes (net assets withwithout donor restrictions) Expiration of donor-imposed restriction on long-lived asset will be
when asset is placed in service rather than over useful life of assetUnderwater portion of endowments will be presented with donor-
imposed net assets rather than unrestricted net assets
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Not-for-Profit Financial Statements
Could choose direct method or indirect method of reporting cash flowsNo longer would require reconciliation of ldquochange in net assetsrdquo to ldquonet
cash flows from operating activitiesrdquo
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Not-for-Profit Financial Statements
Require NFPs to define the time horizon used to manage liquidity and disclose useful quantitative and qualitative informationQualitative info relative to how liquidity is managed (ie strategy for
addressing risks that may impact liquidity and basis for time horizon)
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Not-for-Profit Financial Statements
Would require investment returns to be reported net of external and direct internal investment expensesNo longer require disclosure of investment-related expenses netted
against returnsWould require disclosure of any employee comp expenses that are
netted against returns
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
Not-for-Profit Financial Statements
Report expenses by functional and natural classification in a single location in the financial statements Require disclosures about method used to allocate costs between
program and support functions and to clarify definition of management and general activities
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-
- Slide Number 1
- A few housekeeping notes hellip
- About Holtzman Partners
- Slide Number 4
- Todayrsquos Agenda
- PCAOB Hotbutton IssuesManagement Review (MR) and Information Produced by Entity (IPE)
- Key Topics
- I Review of MR and IPE Requirements
- What Has Driven the Increased Focus
- What Are ldquoManagement Reviewrdquo Controls
- Whatrsquos Required for Management Review
- Whatrsquos The Sufficiency of Documentation
- What is IPE
- IPE Examples
- Why IPE matters
- Slide Number 16
- Example of Review over Completeness amp Accuracy of IPE
- II Practical Considerations for the Application of MR and IPE Requirements
- What wersquove learned
- Example Refresh Approach
- Example Refresh Approach (contrsquod)
- Before and After Control Template
- Specific Control Considerations
- III Questions Shared Experiences
- Tax Update
- Key Topics
- PATH Act
- PATH Act
- PATH Act
- Tax Filing Deadlines
- Due Dates
- Due Dates
- Due Dates
- Partnership Audit Regime
- Partnership AuditsmdashSignificant Change
- Partnership AuditsmdashSignificant Change
- Research Tax Credit
- How Can the RampD Credit Benefit Your Company
- Common Myths
- Does Your Company Incur RampD Expenses
- Tax Definition of RampD The Four-part Test
- Funded Research
- Examples of Qualified Activities
- Examples of Qualified Activities
- Qualified Research Expenditures
- Supplies Change in Regulations Provides Increased Opportunity
- Regular Method
- Example Calculation 1
- Example Calculation 1
- Example Calculation 2
- Example Calculation 2
- Alternative Simplified Credit
- Example 1
- Example 2
- Significant Changes from the PATH Act
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- AMT Offset for Qualified Small Business
- Payroll Tax Credit Offset
- Payroll Tax Credit Offset
- Texas RampD Credit
- Texas RampD Credit
- Export IncentivesmdashIC-Disc
- IC-DSC
- IC-DSC
- IC-DSC
- IC-DSC
- Depreciation Incentives
- Depreciation Incentives
- Section 179
- Planning for Depreciation
- Succession Planning
- Proposed 2704 Regulations
- Planning for 2017 and Future Years Taxes
- Tax Proposals - Trump
- Tax Proposals - Trump
- Tax Proposals - GOP
- Planning for Potential Changes
- Questions
- Contact Info
- Disclaimer
- Accounting amp Compliance Update
- Key Topics
- Restatement TrendsA 15-year ComparisonMike Panozzo
- Types of Restatements
- Trends
- Reissuance Restatements
- Restatement Issues
- Restatement Issues
- Restating Registrants By Filer Status
- A Deeper Dive Into the Largest Restatement of 2015
- Material WeaknessesCassie Crist
- What is a Material Weakness
- Material Weakness Drivers
- Types of Material Weaknesses
- Material Weakness Trends
- IPO Material Weakness Trends by Sector
- Material Weakness Case Studies
- Material Weakness Mitigation
- SEC Comment Letter TrendsRuth Snell
- SEC Comment Letters ndash what are they
- SEC Comment Letter Trends
- SEC Areas of Focus
- SEC Areas of Focus
- SEC Areas of Focus
- Recently Issued Accounting StandardsKat Peterson
- Other Guidance Becoming Effective after 2015
- Slide Number 110
- Slide Number 111
- Slide Number 112
- Slide Number 113
- Revenue
- Revenue
- Revenue
- Slide Number 117
- Slide Number 118
- Slide Number 119
- Slide Number 120
- Slide Number 121
- Slide Number 122
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Other Guidance Becoming Effective after 2015
- Slide Number 126
- Slide Number 127
- Fraud Risk ManagementGretchen Leifeste
- Fraud Definitions
- Fraud Statistics
- Fraud Statistics
- Fraud Statistics
- The Fraud Triangle
- Fraud Case Studies
- Fraud Risk Management
- Fraud Risk Management
- Not-for-Profit Financial StatementsJamie Holtzman
- ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Not-for-Profit Financial Statements
- Slide Number 144
-