Year end projects for small and middle market companies
By Jerry Lopatka, Managing Principal
Jerry Lopatka is Dugan & Lopatka’s managing principal. He specializes in business tax planning for privately-held companies and has extensive experience in the areas of corporate tax, LLCs, real estate transactions, and succession planning. This article appeared in the November 9, 2015, edition of the Daily Herald Business Ledger.
This is a busy time of year for everyone. And it’s not just the holidays.
Business owners and CFOs have a lot of year end projects on their plate. They can include budgets and forecasts, taxes, banking matters, insurance renewals, year-end bonuses, retirement and benefit plan updates – the list goes on.
On the tax side, we’re still waiting to see what Congress does with the so-called “tax extenders” bill. Last December Congress passed legislation that extended some popular business and individual tax breaks that affect many companies and business owners.
Those provisions expired at the end of last year and (at this writing) we’re waiting to see if Congress extends them again. Most Washington pundits say the tax breaks will be passed before the end of the year, retroactive to January 1, 2015. The main business extenders include the higher “Section 179 expense deduction,” “bonus” depreciation and the research and development tax credit.
Last year companies could fully expense up to $500,000 of fixed asset purchases, subject to a phase out when new purchases exceeded $2 million. Unless Congress passes the extenders bill, this year only $25,000 can be expensed with the phase out starting at $200,000.
And last year companies could take 50% up-front bonus depreciation on qualifying fixed asset purchases, with the balance deducted using normal depreciation. In addition, companies could claim a credit of 20% of qualified research expenses over a base amount. Both of these tax breaks won’t be available for 2015 - unless the tax extenders bill is passed.
The tax law uncertainty makes it difficult to plan ahead, whether it’s forecasting your short term cash flow needs, making decisions on capital expenditures or budgeting for 2016 and beyond.
So where to begin? Well, many companies start with several tax projections; in one case, assuming the extenders are not passed, and in the alternative assuming the extenders are reinstated. This at least sets some parameters to use for discussion purposes, as we wait for Congress to act.
On the financial side, some companies might have a new option this year for financial reporting. It’s under the AICPA’s “Financial Reporting Framework for Small-and Medium-Sized Entities”, or FRF for SMEs for short.
This new reporting method is not based on “generally accepted accounting principles”, or GAAP as it’s commonly called. So if you need GAAP-based financial statements the new reporting method won’t apply. But if GAAP-based financial statements are not required, this may give you another option for financial reporting.
The new reporting method hasn’t gained wide acceptance among privately-held businesses, in part due to “streamlined” standards now available for GAAP-based statements.
The Financial Accounting Standards Board (FASB) is the organization that sets the standards for financial reporting used by private sector companies. And FASB now exempts privately-held businesses from some of its more onerous recent accounting standards.
Private-sector companies can now report GAAP based financial statements using the more “streamlined” standards, which reduces time and cost. So the need for FRF for SMEs has diminished.
There are also major differences between statements issued under the new reporting method and GAAP based financial statements, especially reviewed or audited financial statements. The latter offers a higher level of assurance to the report users, whether the owners, management, lenders, bonding companies, investors, suppliers or customers.
Many companies are required to have GAAP-based financial statements for various business reasons. And business owners are often comfortable with the assurances that come with audited or reviewed financial statements. Not just in the near term, but also planning for the future needs of the company and the owners.
Contact your accounting firm if the new reporting is an option for you. And make sure you involve your outside advisors in any decision process, especially your banker, other lenders, consultants and other stakeholders.
Yes, this is a very busy time of year, there’s a lot to get done before the end of the business year.