It’s that time of year again — time for pumpkin pies, holiday music (ready for it or not) and Cohen & Company’s annual Ohio CPE Conference. It was another great event, giving CFOs and controllers a look at topics to help them in their roles.
The day focused on taxes, including the new Wayfair decision poised to make a big impact; important A&A updates, including a special session on revenue recognition; cyber liability issues; robotic process automation in the workplace and an update on our economy. Below is an at-a-glance look at the event.
Russell Moenich of Sequoia Financial Group kicked things off with a look at the state of our economy. With GDP currently above average at 3%, overall we remain in the latter innings of our long-running, yet weak, business-cycle expansion with the possibility of a recession on the horizon. He pointed out our weak expansion since 2009 is due to the economic potential of our country, which depends on two factors — productivity of the work force and the population growth of working-age individuals (ages 25-54). These numbers are hard to influence and are currently not as strong as we would like to see. While Trumponomics remains a big factor for increasing productivity — lowering taxes and regulatory burdens — it can’t impact the other important factor of adding to those in the working-age population. The recent mid-term elections, which resulted in a divided government, should actually fare well for the economy. However, our biggest risk for a recession remains with the Fed, who often has limited insight into the business world. If it chooses to raise interest rates too high, too fast or both, that will likely tighten financial conditions to much and end the expansion. Sequoia continues to monitor the business cycle and where we are by watching the yield on government bonds (i.e., the slope of the yield curve), the growth of the money supply in the economy and initial (new) jobless claims.
Read more about the state of our economy in Sequoia’s Capital Markets Outlook for Q4
A&A Update and Year-End Considerations
Marie Brilmyer and Phil Ryan of Cohen & Company took a deep dive into implementation strategies and practical applications of the numerous accounting standards and updates impacting private companies in the near future. As the FASB continues its efforts to simplify and streamline financial statement reporting, 2018 is a fairly quiet year for the implementation of standards. Primary areas covered included:
- ASU 2015-17 — balance sheet classification of deferred taxes
- ASU 2016-14 — presentation of financial statements of not-for-profit entities, a standard important to understand if you sit on a board or audit/finance committee of a not-for-profit
- ASU 2016-09 — intended to simplify how share-based payments are accounted for and presented in the financial statements
- ASU 2017-09 — stock compensation scope of modification accounting
However it’s the ASUs effective after 2018 that are likely the most impactful, such as revenue recognition and leasing standards.
Organizations that issue any type of financial statement under GAAP will need to comply with Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, by January 1, 2019.
Read more in New Revenue Recognition Standard: Are You Ready?
Accounting Standards Update (ASU) No. 2016-02, Leases will impact organizations across all industries that have leases and issue any type of financial statement under GAAP. Phil pointed out the importance of evaluating the impact this new standard will have on EBITDA and debt covenants in particular. The ASU goes into effect for non-public companies for fiscal years beginning after December 15, 2019.
Read more in Don’t Underestimate the New Leases Standard: How To Be Ready
Other exposure drafts from the AICPA are in the works, posing potential changes to the audit opinion and simplifying the balance sheet classification of debt. However, those standards are not expected to be released until at least sometime in 2019, with longer-term implementation dates.
The message for year-end planning is to stay in communication with your audit team, talk through any changes to the business and start audit procedures early — it’s best for everyone involved.
Plotting Your Sales and Use Tax Course in the Post-Wayfair World
Sara Britt of Cohen & Company discussed how the recent Wayfair Supreme Court decision will impact all sellers of goods or services across state lines. The landmark case overruled the “physical presence” standard long held in the Quill case, significantly altering sales tax collection for sellers. Since the decision, many states have already put into place thresholds, either by dollar amount or number of transactions, to require businesses to collect sales tax.
Read more in “6 Things You Need to Know About Wayfair and Its Impact on Your Sales Tax Obligations”
Before registering to collect sales tax in a state, Sara urged attendees to be ready. She recommended first creating a comprehensive sales tax plan encompassing all sales tax obligations, keeping in mind physical presence still applies even if you don’t meet one of the new economic thresholds in a state. Here are a few things to consider prior to registering with a new state:
- Understand where and what your sales tax obligations are before a state comes to you asking questions (which they likely will once you register). Talk with various groups in your organization to determine where your inventory is, where your sales reps are going, when your company last had a nexus review, etc.
- Know how to determine the taxability of your goods and services. Categorize them consistently among states even when taxability within those states may differ.
- Don’t forget to consider your own use tax processes. Make sure you aren’t paying use tax on a product or service on which your vendors are now charging you sales tax.
- Quantify your historical exposure. Talk to customers. Determine who has a sales tax exemption certificate (and make sure you have a valid copy on file), who has remitted use tax, and who has been previously audited by the state and if the audit period included invoices from your company. All of this information could keep you from paying tax you really don’t owe.
Once you have all of the information, evaluate remediation options for any taxes you owe. Some options could include asking customers to pay the tax, which may be tough; looking into voluntary disclosure agreements (VDAs) to limit how far back a state can go to assess your tax liabilities; or opting for an amnesty program. The right solution will depend on your situation. Remember, if you are not collecting the sales tax you should, ASC 450 requires you to report that new liability on your financial statements.
Ultimately, non-sales and use taxes likely will be impacted as well, leading to a busy spring for many state legislatures. For now, while ongoing sales tax compliance is not hard, it is time consuming. Reassess your resources, including both people and technology, to ensure you have what you need to handle the new compliance burden. Once your game plan is in place and prior exposures are remediated, then it will be time to begin registering in new states and collecting the tax.
Trends in Cyber Liability
Cyber security and liability is an important issue that affects all industries in today’s business environment — from damage done by human hackers to penalties brought on by not properly adhering to the array of regulatory compliance requirements when a breach occurs. Lacy Rex of Oswald Companies shared insights on ways to protect your company, many of which come down to remembering the basics, including the following thoughts:
- Have a “living, breathing” business continuity/incident recovery plan in place
- Offer employees security awareness training
- Update technology patches and software
- Employ perimeter defense mechanisms
- Use antivirus software
- Segment and separate networks
- Use multifactor authentication
- Consider using password software to keep track of complex passwords
- Encrypt all data
- Don’t forget about boxes of paper or documents that could be stolen or lost — it’s not just about getting your laptop stolen
- Restrict or lock access to computers or server rooms
- Conceal electronics when left in vehicles
- Think before you connect to public Wi-Fi
Read “IRS Offers Guidance to Employers Affected by Tax ID Phishing Scam”
Lacy pointed out the benefits of cyber liability insurance, which can help in covering out-of-pocket costs associated with a breach (first-party damage/coverage) and economic damages suffered by others (third-party damage). First-party damage expenses could include costs related to:
- Event management,
- Expert computer services,
- Crisis management and PR, and
- Data restoration expenses.
Third-party expenses could include incidents involving network security, when malicious code is transmitted unknowingly to a third party; and privacy liability, when someone in the company accidentally sends out private information.
Lacy advised businesses to remember cyber policies terms and conditions are negotiable, whether you are buying a new policy or renewing a current one. Beware of retroactive dates of coverage, try to get your “waiting period” down as low as possible and be honest on all representations on the application (or risk voiding coverage when you need it most). Importantly, know how all of your policies, such as D&O policies, work together to protect your business.
Robotic Process Automation and How It Is Impacting How Work Gets Done
John Cavalier of Cohen & Company got the crowd up to speed on robotic process automation (RPA) and how companies today are already making it work for them, noting that a properly configured computer “bot” can actually do the work of three to five full-time employees. A huge opportunity for efficiency.
Triggers that often let a company know they may be ready to explore this functional transformation include developments such as:
- Growth that has not been systematically managed, particularly through acquisitions
- A patchwork of less-than-optimal business processes and applications that don’t talk to each other
- Disparate solutions that rarely ease the workload nor generate insights
- Inadequate attention to scalability
RPA tends to focus on aiding in functional areas, such as accounting and finance. Accounts payable tends to be where organizations first make the leap into RPA, helping to close the books earlier and more efficiently. Overall, RPA helps primarily with:
- Capacity redeployment — Redeploying resource capacity further up the value chain to allow your people to add more value in their roles (analyze data, offer insights, etc.)
- Workforce engagement — Allowing people to spend more time doing what they want to do and becoming more valuable to the company (more engaged + less turnover = better culture)
The best part? The process to create, test and employ RPA can occur rapidly, often with bots ready to deploy in a matter of weeks. This area could be a game changer for companies of all sizes.
Learn more in “Robotic Process and Intelligent Automation: How They Are Changing the Workplace As We Know It”
Business and Individual Tax Update
The update on year-end tax planning included considerations for businesses and individuals, particularly the most impactful planning opportunities from the Tax Cuts and Jobs Act (TCJA). Every tax situation is different, but there are some common themes to be discussing with your advisors before year-end.
Businesses will want to:
- Consider your entity structure in light of the new C Corporation tax rate and Section 199A’s Qualified Business Income Deduction (QBID). Detailed analysis is definitely necessary before making any changes.
- Evaluate your current accounting method, cash or accrual, as the TCJA significantly increased the limit for cash-basis accounting.
- Consider bonus depreciation and Section 179 expensing opportunities, as these remain fruitful areas of savings.
- Ensure you are complying with the new rules to properly account for meal and entertainment expenses.
- If you have foreign interests, take time to understand the international provisions of the TCJA, particularly FDII and GILTI, to mitigate potential tax consequences.
- Consider the many issues related to the new IRS audit partnership rules.
- Analyze the impact of the Wayfair decision on your multi-state sales tax obligations.
For individuals, the TCJA didn’t make as many sweeping changes, and the changes it did make will expire at the end of 2025. One opportunity to explore now is to defer gains, if possible. We know rates won’t go higher next year, but if a middle-class tax cut is passed or the NII tax is eliminated, taxes on gains will be lower in 2019 than 2018. Two of the biggest changes to the individual’s tax situation is the Section 199A QBID deduction and the cap on state and local tax deductions. Obviously the QBID offers some great planning options for owners, while opportunities to mitigate the cap on state and local taxes will depend on a state-by-state evaluation.
Other opportunities and compliance areas for individual taxpayers to consider include:
- Increasing charitable contributions, which could help mitigate the loss of other itemized deductions;
- Scrutinizing the kiddie tax, which now could land in the 37% bracket;
- Reducing NII where possible;
- Looking into the Opportunity Zone program as a way to defer tax on certain capital gains;
- Increasing annual exclusion gifts made during your lifetime to minimize estate tax upon death; and
- Increasing your tax basis to minimize or eliminate income tax obligations for heirs when an estate is sold.
Regardless of the tax opportunity or issue at hand, critically analyze and challenge your tax strategies, as the game has changed dramatically from last year.
As always, thank you to our speakers and clients for attending this event. We are proud to offer programs that help our clients learn and move their organizations forward. If you would like more information regarding any of these topics, please reach out to the speakers directly or contact us at firstname.lastname@example.org to request a copy of the presentation materials.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.