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Summing It Up

Keeping you ahead of the curve with timely news & updates.


Historic Tax Credits Keep Buffalo's Renaissance Going

The Historic Tax Credit program may be the most powerful tax incentive available to fund the rehabilitation of historic properties. Don Warrant, CPA and Tax Director at Freed Maxick, talked with Growing Buffalo about how the rehabilitation of historic properties can generate a 40% cash reimbursement to property owners.

Listen to the whole conversation here, or by clicking the button at the bottom of this blog.

Interested in discussing your eligibility for the Historic Tax Credit? Call Don Warrant, CPA at 716.847.2651 or click here.

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Tax Deadline Changes Impact Taxpayers and Tax Practitioners

April 15th due date coming up.

Historically, tax returns for C corporations have been due on March 15th and those for partnerships have been due on April 15th. Starting with the 2016 tax year, those deadlines flip in an effort to allow owners of pass-through entities enough time to receive K1s and be able to accurately file personal returns by the April 15th deadline. Old deadlines put a lot of pressure on tax practitioners, so the hope is these changes will help lighten he load during a busy time.

Bill Iannarelli, CPA and Tax Director at Freed Maxick, recently spoke with Growing Buffalo about these deadline changes, including what FBAR filers and corporations should know about filing requirements. Listen to the whole conversation here.

Non compliance is associated with significant penalties, so filings should not be taken lightly. Call Bill Iannarelli at 716.332.2720 to discuss your FBAR situation, or contact us here.

 

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New Tangible Property Regulations Updates: What Taxpayers Need to Know

tangible_property_regulations_update_2016

For taxable years beginning on or after January 1, 2014, all taxpayers with tangible property such as materials and supplies, furniture and fixtures, equipment, and buildings, are required to adopt new accounting methods under the final tangible property regulations. These regulations address every phase of an asset’s life cycle—from acquisition or construction, to repair or improvement, to disposition.
To comply, taxpayers filed Forms 3115 with their 2014 tax returns and the IRS National Office or, in the case of a small taxpayer, followed the procedures outlined in Rev. Proc. 2015-20. Rev. Proc. 2015-20 was only applicable for the 2014 tax year. In addition, certain automatic changes in accounting methods were only available for the 2014 tax year. 

In May 2016, the IRS issued Rev. Proc. 2016-29, providing a new comprehensive list of automatic method changes which all taxpayer must now use to file method changes for tangible property. 

In September 2016, the IRS released its Audit Techniques Guide on Capitalization of Tangible Property, which provides instructions to IRS agents on the examination of taxpayer compliance with the tangible property regulations. 

In December 2016, the IRS issued Notice 2017-6 waiving the five-year eligibility rule that would otherwise prevent a taxpayer from using the automatic method change procedures when they filed the same method change within the preceding five-year period. 

The waiver of the five-year eligibility rule creates an opportunity for taxpayers to re-visit the work that was performed for the 2014 tax year to comply with the tangible property regulations. Any missed or corrective method changes should be filed with the 2016 tax return in advance of an IRS audit. 

The IRS will request the following documentation during a tangible property regulation compliance audit: 

  1. All Forms 3115 filed in prior years (n/a in the case of a small taxpayer following Reg. Proc. 2015-20)
  2. Work papers supporting any Section 481(a) adjustments (n/a in the case of a small taxpayer following Rev. Proc. 2015-20)
  3. Documentation supporting changes in accounting methods
  4. Confirmation that accounting methods were in fact changed in 2014 and consistently followed in subsequent tax years
Small businesses that followed the procedures outlined in Rev. Proc. 2015-20 were required to adopt new methods of accounting beginning with the 2014 tax year without a Section 481(a) adjustment or the need to file Forms 3115.

Now is the time to make sure documentation is in place and to file Forms 3115 for any missed or corrective method changes. 

Freed Maxick’s Tax Experts Can Assist with New Tangible Property Regulation Compliance

Our tax team is well versed in the Tangible Property Regulations and implementing procedures, and the method changes that can result in significant tax savings.

If you have any questions or concerns regarding compliance with the new Tangible Property Regulations or any other tax issue, you can schedule a complimentary Tax Situation Review with a member of our Tax Team here.

Tax Situation Review

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Three Tax Credits You Should Know About

NY State Tax CreditsWith the new release of income tax credits, three New York State business tax credits have been extended or created to help reduce New York State income tax liability. These credits include potential claims for refundable credits even if you do not owe any income tax and may benefit employers.

For a full explaination of these credits please see our client alert here.

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Seeing Comments on Your Management Letter- A Consultant Can Help!

By Chris Piedici

Auditor comments within a management letter help address deficiencies with financial reporting so that board members and management can make informed and timely business decisions; with the ultimate goal being to strengthen the collection of data for financial reporting.

With the understanding that charter school boards vary in size and qualifications, the average board comprises 10 people and at least one person with a background in financial management. Charter boards have a fiduciary responsibility over budgeting and financial reporting, but are less likely to oversee the day to day control over human resources and financial processes. These challenges can make it difficult to obtain the right staffing to reduce deficiencies that are of high importance to remediate. Incorrect reporting of financial data can impede the progress of the future success of the educational system. With the source of funds from state aid flowing through Public School Districts to the Charter Schools, it’s especially important that Charter Schools are being fiscally responsible. The benefits of a consultant with backgrounds in Public Schools and Charter Schools can help reduce the burden of meeting the fiscal recommendations of management letters.

Consulting firms can assist with:

  •     Quarterly reviews of the financial data,
  •      Being an intermediate level of oversight between the auditor, internal finance positions and the board,
  •    Analysis of contract costs,
  •    Assessment reviews and recommendations of internal operations and,
  •    Development of Financial projections.

We understand the challenges that charter schools face with staffing limitations and can help provide remediation. For further information on the most recent audit guidelines please visit the NYS Department of Education:

http://www.p12.nysed.gov/psc/documents/NEWYORKSTATEEDUCATIONDEPARTMENTAUDITGUIDE-12.31.12-F.pdf

 

 

Charter schools are part of a broad movement in public education toward results based accountability. Charter Schools began operating in New York through the New York Charter School Act of 1998. Although charter schools have been in operation across the U.S. for nearly 15 years and in New York for ten, much of the current knowledge base is about the setup, financing, and funding of charter schools. This includes state charter school finance systems and education metrics for the students, all of which are important pieces but leave a gap in ensuring a proper financial management system is in place within these schools.

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Hidden tax benefits in the repair and maintenance regulations

By: Jennifer Birkemeier, CPA

 

describe the imageWith new temporary treasury regulations on repairs and maintenance costs, there will be requirements on capitalizing or deducting the cost of such repairs and maintenance.

How does this affect taxpayers? 

It is the responsibility of the taxpayer to ensure compliance with the temporary regulations. It also means the taxpayer will be responsible for adhering to the regulations for taxable years beginning on or after January 1st, 2014.

What is the benefit for taxpayers?

There has been a lot of feedback regarding the amount of time that is required to comply with the regulations and concern that the time spent will not result in reduced tax burdens for taxpayers. Recently CSP360 sponsored the inaugural AICPA Global Hospitality Conference where Mark Barbour presented updates on the repair regulations focusing on 263(a).  The repair regulations will impact all industries requiring accounting method changes that may have favorable taxpayer consequences. Some of the hidden tax benefits for taxpayers that were highlighted at the AICPA conference include:

  • Segregating the cost of structural components of buildings that were disposed of in prior years
  • Identifying expenditures in prior years or current years that do not constitute improvements to buildings or building systems and can be expensed as repairs
  • Reviewing the results of a prior year cost segregation study to identify dispositions of 1245 property
  • Identifying the cost of removal of a structural component not subject to capitalization under 263A
  • To segregate the cost of the eight building systems for purposes of applying the improvement and disposition rules under the final regulations

How are expenditures treated?

When capitalizing expenditures, the amounts paid fall into one of two categories:

  • Amounts paid to acquire or produce tangible property, or
  • Amounts paid to improve tangible property.

Generally capitalized costs include invoice price, transaction costs, and costs for work performed prior to the date the property is placed in service by the taxpayer. If the taxpayer is improving or “bettering” the real or personal property amounts that must be capitalized include correcting a material defect of the property, physical enlargement, expansion, or a material increase in capacity, productivity, or efficiency of the property. A taxpayer must capitalize costs that restore a unit of property to like new condition after the end of its class life. Costs incurred to adapt a unit of property to a new or different use must also be capitalized.

A Cost Segregation Analysis includes a thorough review of the property to properly depreciate the assets and accelerate tax deductions. These analyses include an intensive review of all blueprints and site visits to verify the assets and determine the quality of those assets. The professionals performing these analyses have an intimate knowledge of the building and building systems and provide valuable insight when examining repair and maintenance costs to determine if they must be capitalized or if they can be expensed.

Contact Us

CSP360 is a subsidiary of Buffalo, NY based Freed Maxick, CPAs  a Top 100 accounting firm and one of the nation’s leading providers of Cost Segregation and consulting services. Our philosophy is to offer clients a 360 degree view of a taxpayer’s assets; pairing engineering and LEED specialists with accountants for a truly unique tax advisory team. Since 1995, our in house team has provided specialty studies to CPAs in a private label arrangement. Products include Cost Segregation, 179D Energy Studies and 263a. CSP360 is Circular 230 compliant and has proven methodologies that are sustainable on IRS examinations. To learn more about our unique approach click here.

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Be mindful of debt restructuring for multiple properties

By: John Kleiman

 

ABLCommercial lenders often cross-collateralize loans in order to reduce risks. But beware: Accounting concerns and debt restructuring issues may emerge when using multiple properties to secure a loan associated with one property.

Nonaccrual status for loans

Typically, when interest payments on a loan are significantly overdue and collecting any principal is unlikely, the loan must be placed on what’s known as “nonaccrual status.” For example, if your bank experiences an increase in nonaccrual loans, it will likely be forced to bump up its reserves for loan losses, which may hurt profits in the long run.

Cross-collateralization can cause multiple loans to be placed on nonaccrual status, even if some of the loans are still performing. In the OCC’s June 2012 Bank Accounting Advisory Series (BAAS), the agency offers several examples that show the potential impact of cross-collateralization on nonaccrual status.

For instance, one example involves a real estate developer that has two loans with a bank for two separate projects. Loan A is up to date and the bank expects full repayment of interest and principal. Loan B, on the other hand, is placed on nonaccrual status.

According to the BAAS, placing one loan on nonaccrual status won’t automatically require your bank to place the other loan on the same status. The guidance stresses that the responsible party on the two loans are separate corporations and are wholly owned by the developer and that there’s no cross-collateralization or personal guarantees.

So, if the bank subsequently negotiates a cross-collateralization agreement with the developer, must loan A also be placed on nonaccrual status? According to the BAAS, when entering into a cross-collateralization agreement, the bank is simply taking steps to improve its own position relative to the borrower. The bank does not need to place loan A on nonaccrual status if cross-collateralization doesn’t change the repayment pattern of the loans or endanger loan A’s full repayment.

Yet another example shows loans A and B are related to separate real estate projects. The loans are personally guaranteed by the developer and were initially cross-collateralized. Project A has the cash flows to repay loan A in full, but no excess in order to meet a shortfall on loan B, which is already past due.

According to the OCC, if the developer has the intent and the ability to make the payments on both loans, the bank could keep both loans on accrual status. If, on the other hand, the developer lacks the ability and intent to make the payments, both loans should then be placed on nonaccrual status.

Because, in the above example, the loans are cross-collateralized, make sure that collectability is evaluated on a combined basis. The developer, as the guarantor, is the ultimate repayment source for both loans, so placing only loan B on nonaccrual status wouldn’t indicate that the collectability of the entire debt is in doubt.

Troubled debt restructurings

Under current accounting standards, if restructured loans are regarded as troubled debt restructurings (TDRs), they may result in losses on the bank’s financial statements or additional valuation allowances. Typically, a restructuring is a TDR if a bank grants a concession to a borrower that’s experiencing financial difficulties.

Some institutions use cross-collateralization in hopes of avoiding TDR status on reworked loans. They might, for example, defer loan payments or reduce the interest rate in exchange for additional collateral.

Work with an expert

Should you have any questions about the cross-collateralization strategy, contact a Freed Maxick ABL advisor here or call us at 716-847-2651.

 


 

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Know which Fraud Risk Profile Your Borrowers Need!

By: Dylan Walter, Sr. Field Examiner

Clients face two types of fraud risks: 1) employees who misappropriate assets and 2) those who “cook the books” to make the company look healthier than it is. Ask borrowers if they’ve prepared such a profile that reflects both of these fraud risks. After all, managing fraud risk is instrumental, to not only your customers’ success, but also yours.

The checklist below can help you create your own customized fraud risk profile for each of your borrowers. The left side identifies some of the most common risks. The right side shows a borrower’s relative risk on a scale from 0–5. A score of 0 means there’s no risk. A score of 5, however, indicates an imminent threat of material loss or misstatement with very few controls in place to mitigate risk.

If you’re not sure about the appropriate rating for any factor, contact your customer for more information.

Fraud Risk Checklist

 

Potential fraud risk factor

Rating

(0-5)

Excessive pressure. Evaluate if conditions exist that may tempt employees to massage the numbers, such as expiring credit lines, deteriorating financial performance and performance-based compensation.

 

Informal attitude. Determine whether fraud risk management is a top priority or is done simply to satisfy external auditors or the board of directors. Evidence of having formal fraud risk policies that includes internal audits, computer passwords, surveillance cameras, whistleblower hotlines, formal job descriptions, and corporate codes of conduct.

 

Changes. Pinpoint any major changes — such as updated accounting software, a new product line, a pending merger or acquisition, insurance claims or lawsuits, or IRS audits — that could offer opportunities to conceal fraud or result in a significant monetary loss.

 

Volatile industries. Assign higher scores to volatile industries that have high growth and failure rates, significant competition, strict legal regulations, and imminent changes in product obsolescence and technology.

 

Unusual activities. Look for unusual activities that may warrant additional investigation, such as the use of complex business transactions, accounting estimates, competitive bidding, proprietary intellectual property, offshore activities, related-party transactions, and contingent assets or liabilities. Also, look beyond the footnote disclosures for clarity.

 

Personal problems or conflicts of interest. Be wary of employees who have close relationships with suppliers, co-workers, competitors and customers — or financial interests in other companies. Also look for employees who have problems with addiction, gambling, or legal and credit problems.

 

Internal turnover. Consider whether the business has changed owners, managers, accountants or attorneys, or lenders in the last five years. Unreasonable demands or frequent disputes could signal that the company is in crisis.

 

Cash. Gauge how much cash the business has on-site and where it (and the company checkbook) is stored. Mitigate risk by performing background checks on employees who might handle cash, independent bank statement reconciliations and physical controls.

 

Receivables. Look for a stable relationship between sales and receivables (as well as receivables and total assets) over time. And evaluate write-offs and aging schedules.

 

Inventory. Evaluate controls over shipments, inventory receipts and write-offs. Consider ways a fraudster can pilfer inventory or manipulate records for their own personal gain. Ask your CPA to perform physical inventory counts annually to identify discrepancies with perpetual inventory records.

 

Fixed assets. Ask whether the business prepares a detailed fixed asset register and tags high-value assets, such as printers, scanners, phones and computers. Keeping a routine maintenance schedule can help the client track the whereabouts and condition of each item.

 

Payables. Look for payable fraud schemes, such as kickbacks and phantom vendors. Borrowers must take steps — such as confirming vendor balances and duplication of duties — to mitigate payable fraud risk.

 

Improper revenue recognition. Evaluate the business’s policy for recording sales. Some may prematurely book sales to either boost earnings or delay recognition to minimize taxable income. Also look for fictitious customers and excessive refunds, returns, discounts and voids.

 

Lax expense review. Ask the management team how they verify fees paid for services, such as rent and professional fees — because there’s no physical evidence of the expenditure, except a contract or invoice. Strong customers will also have formal expense report approval procedures.

 

Fraud risk profiles can help you identify your borrowers’ weaknesses, and expose which areas warrant additional due diligence. Often, lenders and borrowers will independently rate the company and then compare the results. This exercise can serve as a springboard for discussing risks, opportunities and perception gaps with your customers.

Contact Us

ABLFreed Maxick’s Asset Based Lending division is one of the nation’s largest providers for field exam outsourcing services. If you have questions regarding your asset based lending issues, give our Buffalo NY office a call at 716.847.2651, or you may contact us here.

 

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Do Your Borrowers Have a Business Plan?

By: Mary Lindsey

Operating a business is much like taking a road trip. There are things you need to plan for; check lists have to be created, packing that needs to be done, making sure your vehicle is in working order. These are all primary steps when planning a road trip. Businesses “should” operate in much the same way- but you’d be surprised at just how many small and midsize companies don’t have a “road map” to guide them through the bumps and detours that come up along the way. Having detailed business plans can help improve the odds that your clients will arrive at their destinations on time and on budget.

Creating a business plan

Business plans offer investors and lenders an assessment of current operations, as well as a “game plan” for the future. Such plans typically include an executive summary, industry and market analysis, and business and management team descriptions; then there are the implementation plan and financials.

A small or midsize company might put up a fuss at the thought of compiling a comprehensive business plan, but they’re critical when a business is in financial trouble or needs financing for a major capital expenditure. Believe it or not, the best plans are the simple ones. For example, an executive summary can be as short as a paragraph. A long-winded plan tends to bury management’s message.


For small clients, an executive summary shouldn’t go beyond one page, and the overall length should be less than, say, 40 pages.

Exploring the executive summary

While executive summaries are often the first place a lender looks,  they’re usually the last page that management should write. Instead, clients should approach a business plan like they would that road trip. Think of a destination first and then map out the best route.

In the same way, business planning should start with a long-term vision. This vision should describe where the company is now and where it wants to be in three, five or 10 years. Thus, it’s best to start with historic financial results and then identify the key benchmarks that the management team wants to achieve. These assumptions will literally drive the financials.

Reviewing budgets and projections

Lenders should take a close look when reviewing the financials section of the business plan. Management’s goals are fleshed out in its financial and budget projections.

For instance, suppose a company with $5 million in sales in 2012 expects to double over the next five years. How will the client get from Point A ($5 million in 2012) to Point B ($10 million in 2017)? There are many ways to reach the desired destination.

If the management team decides to double sales by hiring five new salespeople and acquire the assets of a bankrupt business, then this “plan” is what will help drive the balance sheet, projected income statement, and cash flow statement.

When projecting the income statement, management should make assumptions about its fixed and variable costs. Direct materials are usually considered variable. Rent and salaries are generally fixed. But there are many fixed costs that can be variable over the long term. Consider rent, for example. Once a lease expires, management can then relocate to a different facility to accommodate changes in size.

A client’s balance sheet items — inventory, receivables, payables and so forth — are typically expected to grow in tandem with revenues. Management will make assumptions about its minimum cash balance and then debt will increase or decrease to keep the balance sheet balanced. In other words, your institution will be expected to fund any cash shortfalls that might take place as the company grows.

The financials provide an outline of how much financing the borrower will need, how it will use those funds and when the client expects to repay its loans. It’s your job, as the lender, to assess whether the client’s plan is realistic.

Understanding the internal and external environment

The rest of the business plan describes your borrower’s external and internal environment. It can be highly informative reading material, even if you think you already know your existing borrower. These sections indicate that the management team has done its market research and performed a risk analysis — and that they truly understand the marketplace.

Bring in an expert

No one should drive cross-country without a GPS or a map. Drivers need to know exactly where they are, and how close they are to their destination.

When clients are proactive, rather than reactive, they’re more likely to reach their destination. Business plans can play a huge role for lenders who want to understand their borrowers’ goals and financing needs.

A CPA can’t demand a business plan from a client, and unless the client initiates the plan, it will likely fail. But working with an experienced outside advisor can help the client’s management team crunch the numbers, stay focused, and serve as devil’s advocate when preparing the plan.

Sidebar: Evaluating a company’s management team

Typically, lenders will go right to the executive summary and financials. But, in reality, the most important section from a lender’s perspective is the management team description. Get to know every member on the company’s management team and how each one fits into the mix.

ABLBe sure to identify people that would likely be hard to replace, and then discuss ways to make the borrower less dependent on these “key” people. It’s also critical to be realistic about how far entrepreneurs can stretch. At some point, many borrowers will outgrow their founders and require a professional management team.

Freed Maxick’s Asset Based Lending division is one of the nation’s largest providers. Contact us for more information about our services and how we can assist you.

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Fraud in the Workplace Event May 16th

The RMA (Risk Management Association) Buffalo-Chapter Presents:

Fraud in the Workplace

With Guest Speakers:

Adrienne Schreier
Senior Manager Freed Maxick, CPAs. P. C.

Shawn M. Frier
Director Freed Maxick, CPAs, P. C.

• How does Fraud affect you?

• Examples of Fraud

• Types of Fraud

• Common Fraud committed by employees

• Red Flag indicators for Fraud

• How to prevent fraud

Thursday May 16, 2013
8:00 a.m. Coffee/Breakfast, 8:30 a.m. Presentation

The Buffalo Club
388 Delaware Ave, Buffalo, NY
$25 for RMA members/$30 for RMA non-members/$10 Students

There will also be a Q&A period following presentation.

For questions and reservations, please contact:
Ann Berardi at: aberardi@mtb.com

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