Here are some of the key tax-related deadlines that apply to businesses and other employers during the second quarter of 2019. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
April 1
File with the IRS if you’re an employer that will electronically file 2018 Form 1097, Form 1098, Form 1099 (other than those with an earlier deadline) and/or Form W-2G.
If your employees receive tips and you file electronically, file Form 8027.
If you’re an Applicable Large Employer and filing electronically, file Forms 1094-C and 1095-C with the IRS. For all other providers of minimum essential coverage filing electronically, file Forms 1094-B and 1095-B with the IRS.
April 15
If you’re a calendar-year corporation, file a 2018 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004) and pay any tax due.
Corporations pay the first installment of 2019 estimated income taxes.
April 30
Employers report income tax withholding and FICA taxes for the first quarter of 2019 (Form 941) and pay any tax due.
May 10
Employers report income tax withholding and FICA taxes for the first quarter of 2019 (Form 941), if you deposited on time and fully paid all of the associated taxes due.
June 17
Corporations pay the second installment of 2019 estimated income taxes.
In recent years, external auditors have focused more attention on related party transactions. Although related party transactions aren’t necessarily bad, they do raise some concerns about the risk of misstatement or omission in financial reporting.
3 focal points
Issues with related parties played a prominent role in the scandals that surfaced nearly two decades ago at Enron, Tyco International and Refco. Public outrage about these scandals led Congress to pass the Sarbanes-Oxley Act of 2002 and establish the Public Company Accounting Oversight Board (PCAOB). Similar problems have arisen in more recent financial reporting fraud cases, prompting the PCAOB to enact tougher standards on related-party transactions and financial relationships.
PCAOB Auditing Standard No. 2410 (AS 2410), Related Parties, requires auditors of public companies to beef up their efforts in financial statement matters that pose increased risk of fraud. Specifically, auditors must focus on three critical areas:
1. Related-party transactions, such as those involving directors, executives and their family members, 2. Significant unusual transactions (SUTs) that are outside the company’s normal course of business or that otherwise appear to be unusual due to their timing, size or nature, and 3. Other financial relationships with the company’s executive officers and directors.
Subjecting these transactions and financial relationships to enhanced auditor scrutiny may help avert corporate failures. The PCAOB also hopes that enhanced auditor scrutiny will lead to improvements in accounting transparency and disclosures, which will help investors to more clearly gauge financial performance and fraud risks.
From start to finish
AS 2410 requires auditors to obtain a more in-depth understanding of every related-party financial relationship and transaction, including their nature, terms and business purpose (or lack thereof). Tougher related-party audit procedures must be performed in conjunction with the auditor’s risk assessment procedures, which occur in the planning phase of an audit.
In addition, auditors are expected to communicate with the audit committee throughout the audit process regarding the auditor’s evaluation of the company’s identification of, accounting for and disclosure of its related-party relationships and transactions. They can’t wait until the end of the engagement to communicate on these matters.
During fieldwork, expect auditors to be on the hunt for undisclosed related parties and unusual transactions. Examples of information that may be gathered during the audit that could reveal undisclosed related parties include information contained on the company’s website, tax filings, corporate life insurance policies, contracts and organizational charts.
Certain types of questionable transactions — such as contracts for below-market goods or services, bill-and-hold arrangements, uncollateralized loans and subsequent repurchase of goods sold — also might signal that a company is engaged in unusual or undisclosed related-party transactions.
To facilitate the audit process, management should be up-front with auditors about all related party transactions, even if they’re not required to be disclosed or consolidated on the company’s financial statements.
Let’s be honest
Private companies also engage in numerous related party transactions, and they may experience spillover effects of the tougher PCAOB auditing standard, which applies only to audits of public companies. Regardless of whether you’re publicly traded or privately held, it’s important to identify, evaluate and disclose all related parties. We can help you present related party relationships and transactions, openly and completely.
The Tax Cuts and Jobs Act created a new federal tax credit for employers that provide qualified paid family and medical leave to their employees. It’s subject to numerous rules and restrictions and the credit is only available for two tax years — those beginning between January 1, 2018, and December 31, 2019. However, it may be worthwhile for some businesses.
The value of the credit
An eligible employer can claim a credit equal to 12.5% of wages paid to qualifying employees who are on family and medical leave, if the leave payments are at least 50% of the normal wages paid to them. For each 1% increase over 50%, the credit rate increases by 0.25%, up to a maximum credit rate of 25%.
An eligible employee is one who’s worked for your company for at least one year, with compensation for the preceding year not exceeding 60% of the threshold for highly compensated employees for that year. For 2019, the threshold for highly compensated employees is $125,000 (up from $120,000 for 2018). That means a qualifying employee’s 2019 compensation can’t exceed $72,000 (60% × $120,000).
Employers that claim the family and medical leave credit must reduce their deductions for wages and salaries by the amount of the credit.
Qualifying leave
For purposes of the credit, family and medical leave is defined as time off taken by a qualified employee for these reasons:
• The birth, adoption or fostering of a child (and to care for the child), • To care for a spouse, child or parent with a serious health condition, • If the employee has a serious health condition, • Any qualifying need due to an employee’s spouse, child or parent being on covered active duty in the Armed Forces (or being notified of an impending call or order to covered active duty), and • To care for a spouse, child, parent or next of kin who’s a covered veteran or member of the Armed Forces.
Employer-provided vacation, personal, medical or sick leave (other than leave defined above) isn’t eligible.
When a policy must be established
The general rule is that, to claim the credit for your company’s first tax year that begins after December 31, 2017, your written family and medical leave policy must be in place before the paid leave for which the credit will be claimed is taken.
However, under a favorable transition rule for the first tax year beginning after December 31, 2017, your company’s written leave policy (or an amendment to an existing policy) is considered to be in place as of the effective date of the policy (or amendment) rather than the later adoption date.
Attractive perk
The new family and medical leave credit could be an attractive perk for your company’s employees. However, it can be expensive because it must be provided to all qualifying full-time employees. Consult with us if you have questions or want more information.
Securities and Exchange Commission (SEC) Chairman Jay Clayton recently said that public companies shouldn’t be required to disclose information concerning environmental, social and governance (ESG) matters in their financial statements using a standardized format. Right now, these disclosures are voluntary and unstandardized.
ESG issues
The SEC is a long-standing member of the International Organization of Securities Commissions (IOSCO). But, in January, the SEC refused to sign a statement issued by IOSCO that urged companies to disclose nonfinancial ESG matters that may affect a company’s financial condition and performance. Examples include:
• The size of the company’s carbon footprint, • Efforts to replace fossil fuels with renewable energy sources, • Workplace, health and safety issues, and • Consumer product safety risks.
Media attention on these external threats has increased public awareness and prompted concerns about how ESG issues could impact value or increase a company’s risk of litigation. Some investor groups and regulators are calling for formal rules that would mandate the use of a standardized framework.
SEC position
SEC Commissioner Hester Peirce and Chairman Clayton recognize that voluntary ESG disclosures provide insight into company operations when used in conjunction with traditional financial metrics. But they oppose a one-size-fits-all reporting format. They contend that some ESG information isn’t relevant to a reasonable investor and thus takes time away from focusing on more pressing matters.
They also point out that companies that follow U.S. Generally Accepted Accounting Principles (GAAP) already must disclose material ESG matters in the following sections of their financial statements:
Description of business. This disclosure describes the business and that of its subsidiaries, including information about its form of organization, principal products and services, major customers, competitive conditions and costs of complying with environmental laws.
Legal proceedings. This disclosure briefly explains any material pending legal proceedings in which the company, any of its subsidiaries and any of its property are involved.
Risk factors. These disclosures highlight the most significant factors that make an investment in the company speculative or risky.
Management’s discussion and analysis (MD&A). Public companies must identify known trends, events, demands, commitments and uncertainties that are reasonably likely to have a material effect on financial condition or operating performance.
In addition, some companies voluntarily issue separate standalone “sustainability” reports that cover a broad range of nonfinancial issues. However, these nonfinancial figures aren’t audited, and, unfortunately, some companies use ESG data to present a stronger financial picture than the ones that appear in their audited financial statements.
A custom approach
Voluntary ESG reporting can provide valuable insight to investors and lenders. We can help your company create customized financial statement disclosures and standalone sustainability reports that reflect its most pressing ESG concerns. Contact us for more information.
If you own a business and don’t have a tax-advantaged retirement plan, it’s not too late to establish one and reduce your 2018 tax bill. A Simplified Employee Pension (SEP) can still be set up for 2018, and you can make contributions to it that you can deduct on your 2018 income tax return.
Contribution deadlines
A SEP can be set up as late as the due date (including extensions) of your income tax return for the tax year for which the SEP is to first apply. That means you can establish a SEP for 2018 in 2019 as long as you do it before your 2018 return filing deadline. You have until the same deadline to make 2018 contributions and still claim a potentially substantial deduction on your 2018 return.
Generally, other types of retirement plans would have to have been established by December 31, 2018, in order for 2018 contributions to be made (though many of these plans do allow 2018 contributions to be made in 2019).
Discretionary contributions
With a SEP, you can decide how much to contribute each year. You aren’t obligated to make any certain minimum contributions annually.
But, if your business has employees other than you:
1. Contributions must be made for all eligible employees using the same percentage of compensation as for yourself, and 2. Employee accounts must be immediately 100% vested.
The contributions go into SEP-IRAs established for each eligible employee.
For 2018, the maximum contribution that can be made to a SEP-IRA is 25% of compensation (or 20% of self-employed income net of the self-employment tax deduction), subject to a contribution cap of $55,000. (The 2019 cap is $56,000.)
Next steps
To set up a SEP, you just need to complete and sign the very simple Form 5305-SEP (“Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement”). You don’t need to file Form 5305-SEP with the IRS, but you should keep it as part of your permanent tax records. A copy of Form 5305-SEP must be given to each employee covered by the SEP, along with a disclosure statement.
Although there are rules and limits that apply to SEPs beyond what we’ve discussed here, SEPs generally are much simpler to administer than other retirement plans. Contact us with any questions you have about SEPs and to discuss whether it makes sense for you to set one up for 2018 (or 2019).
Many businesses have adopted robotic process automation (RPA), or plan to do so in the future. While most RPA initiatives target “core” business operations, routine accounting functions also can be automated to help lower costs and allow personnel to focus on higher-level analyses and strategic projects. Here’s some insight into how to integrate RPA in your accounting department.
Paving the way
In general, RPA eliminates the need for manual (human) intervention. In the accounting department, automation software can assume control of such tasks as journal entries, bank reconciliations, and certain aspects of the budgeting and forecasting process. To begin automating your accounting department, follow these five preliminary steps:
1. Inventory manual processes. Prepare a list of manual processes and rank them by complexity and the number of hours to administer them. This provides a prioritized list of RPA candidates. Select the most straightforward process to convert first.
2. Standardize processes. RPA requires standardized tasks and processes. So, you’ll need to apply a standard approach to all transactions. Identify exceptions and scrutinize why they exist and how they can be eliminated.
3. Focus on the source data. Accounting data often exists in different formats and locations, which doesn’t facilitate RPA. So, you’ll need to centralize your accounting data using a consistent structure and format.
4. Document requirements. Many types of RPA software solutions exist. Identify the functionality and capabilities you’ll need and use this list to screen potential providers.
5. Conduct robust testing. Before relying on the output generated by RPA software, test the output to make sure it’s accurate and reliable. Such testing should use statistically valid sampling techniques. You’ll also need to consider judgmental sampling procedures, which allows team members to select transactions based on their training and experience.
Right for your accounting department?
Throughout your organization, RPA can minimize data entry errors, reduce processing time and lower costs. However, getting it to work in the accounting department takes some initial legwork and a fresh mindset. It also may affect the procedures a CPA performs when preparing your financial statements. Contact us for more information.
Recent changes to federal tax law and accounting rules could affect whether you decide to lease or buy equipment or other fixed assets. Although there’s no universal “right” choice, many businesses that formerly leased assets are now deciding to buy them.
Pros and cons of leasing
From a cash flow perspective, leasing can be more attractive than buying. And leasing does provide some tax benefits: Lease payments generally are tax deductible as “ordinary and necessary” business expenses. (Annual deduction limits may apply.)
Leasing used to be advantageous from a financial reporting standpoint. But new accounting rules that bring leases to the lessee’s balance sheet go into effect in 2020 for calendar-year private companies. So, lease obligations will show up as liabilities, similar to purchased assets that are financed with traditional bank loans.
Leasing also has some potential drawbacks. Over the long run, leasing an asset may cost you more than buying it, and leasing doesn’t provide any buildup of equity. What’s more, you’re generally locked in for the entire lease term. So, you’re obligated to keep making lease payments even if you stop using the equipment. If the lease allows you to opt out before the term expires, you may have to pay an early-termination fee.
Pros and cons of buying
Historically, the primary advantage of buying over leasing has been that you’re free to use the assets as you see fit. But an advantage that has now come to the forefront is that Section 179 expensing and first-year bonus depreciation can provide big tax savings in the first year an asset is placed in service.
These two tax breaks were dramatically enhanced by the Tax Cuts and Jobs Act (TCJA) — enough so that you may be convinced to buy assets that your business might have leased in the past. Many businesses will be able to write off the full cost of most equipment in the year it’s purchased. Any remainder is eligible for regular depreciation deductions over IRS-prescribed schedules.
The primary downside of buying fixed assets is that you’re generally required to pay the full cost upfront or in installments, although the Sec. 179 and bonus depreciation tax benefits are still available for property that’s financed. If you finance a purchase through a bank, a down payment of at least 20% of the cost is usually required. This could tie up funds and affect your credit rating. If you decide to finance fixed asset purchases, be aware that the TCJA limits interest expense deductions (for businesses with more than $25 million in average annual gross receipts) to 30% of adjusted taxable income.
Decision time
When deciding whether to lease or buy a fixed asset, there are a multitude of factors to consider, including tax implications. We can help you determine the approach that best suits your circumstances.
In 2018, U.S. organizations that suffered a data breach lost an average of $7.91 million as a result. That’s the highest average organizational cost of all the countries and regions covered in the 2018 Cost of a Data Breach Study by IBM and independent research firm Ponemon Institute. Malicious or criminal attacks were the source of more than half of those breaches, rather than system glitches and human errors.
With so much at stake, it’s no surprise that auditors consider these issues when conducting their audit risk assessments. This audit season, prepare to answer questions about cybersecurity and the effectiveness of your company’s internal controls against cyberthreats.
Inspections of public companies
In recent years, Public Company Accounting Oversight Board (PCAOB) inspectors have interviewed auditors of companies that have experienced a breach into their computer systems to find out how the auditors and their firms responded to the incidents. They report that auditors today are increasingly focused on matters related to cybersecurity.
Audit firms have provided varying levels of guidance, both when assessing risk at the start of an engagement and when uncovering a cybersecurity incident that occurred during audit fieldwork or the period under audit.
“Many of the firms are actually factoring cybersecurity issues into their risk assessment at this point in time, and there is a real focus on developing real understanding about cybersecurity incidents,” reported William Powers, deputy director for technology in the PCAOB’s Division of Registration and Inspections.
Audit inquiries
Possible questions that auditors might ask during fieldwork include:
How does management identify and prioritize cyberrisks?
What kind of internal controls has management established to safeguard digital assets and sensitive data (such as formal policies and procedures, employee training and the use of security analytics)?
How does management monitor internal controls to ensure effective operation?
Does management have a detailed breach response plan?
If a breach occurred during the accounting period, how did management respond and how much did it cost?
Has the company purchased cyber liability and breach response insurance?
The PCAOB hasn’t yet found any material misstatements on a public company’s financial statements as a result of a cybersecurity breach. But there’s a risk that future attacks may affect financial reporting. So, the PCAOB is planning to expand its inspection program to explore what auditors are doing to protect clients’ data and stakeholder data.
Universal risk factor
PCAOB inspectors target audits of public companies. But private companies can also be victims of cyberattacks — and the effects may be even more devastating for companies with fewer resources to absorb the losses and assign dedicated staff to respond to breaches.
The increasing frequency and severity of cyberattacks underscores the need for auditors of entities of all sizes to update their procedures. It’s our job to ask key questions about cyberrisks and the effectiveness of your internal controls. The answers, in turn, can help you formulate more effective governance strategies.
The Federal Reserve Bank of New York’s Center for Microeconomic Data conducts a monthly survey of consumer expectations for the future. It found that in November 2018, for the eighth straight month, consumers expected an overall 3% inflation rate a year later. However, consumer expectations for home prices decreased 0.2% to 3.1%, and earnings’ growth expectations fell for the second straight month to 2.0%, from 2.5% in October.
PRODUCTIVITY RISES.
The Bureau of Labor Statistics reports that non-farm labor productivity rose 1.3% from the third quarter of 2017 through the same period in 2018. This reflects a combination of hours and real productivity growth. The increase includes a 2.3% increase in hours worked and a 3.7% increase in output.
JOB MARKET TIGHTENS.
In September of 2018 there were more job openings than unemployed people. There were 7 million job openings at the close of September 2018, while there were only about 6.1 million unemployed people. During the first eleven months of 2018 the number of unemployed persons per job opening ranged from 0.9 to 1.1. This is a dramatic drop from July 2009, when there were 6.6 unemployed persons per job opening.
WE LIKE OURS.
Healthcare is increasingly expensive and viewed by many Americans less positively on a national level. However, most people like their own healthcare and insurance coverage. These are the findings of a November 2018 Gallup Poll of 1,037 adult Americans. Eight of 10 survey respondents rated their healthcare quality as excellent or good, and 69% gave their coverage the same grades. Just 55% viewed healthcare in general positively, and only one in three thought positively about coverage nationally.
I have a life insurance policy that names my son as beneficiary. Do I also need to include this policy in my will?
ANSWER:
It wouldn’t hurt anything, but no you don’t. That’s because life insurance beneficiary designations take priority over terms of a will, even if they differ. In fact, the same holds true for the beneficiary designations of retirement plans and annuities. This is a good time to remind you that you should keep all your beneficiary and contingent beneficiary designations up to date. If you’re interested in your beneficiaries getting the most from the benefit without triggering estate taxes or you want to avoid the public glare of probate, you might consider putting the life insurance policy in a trust.
QUESTION:
My wife and I had investment losses in 2018 and would like to deduct them on my tax return. How much am I allowed to deduct for last year and going forward?
ANSWER:
When your capital losses exceed capital gains, you can deduct the difference as a loss, up to $3,000 per year, or $1,500 if married and filing separate returns. You may also carry over excess losses to the next tax year. Remember that long-term capital gains or losses are those on investments owned for more than one year.
