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As the economy reopens, many businesses have started to resume business-related travel and entertainment (T&E) activities—but you should be aware that these expense categories can be vulnerable to incomplete recordkeeping and even fraud. To ensure that reporting is complete, detailed, and accurate, your company will want to implement formal T&E policies.

T&E expenses: reporting and reimbursements

Expense reports enable workers who travel or entertain customers to receive reimbursement for expenses they pay personally. Traditionally, salespeople, executives, and other workers who incur such expenses must submit expense reports either at the end of each trip or by the end of the month the expenses are incurred in, then have these reports approved by supervisors. As an alternative, some companies may issue corporate credit cards which employees can use to cover approved T&E expenses.

Expense reports are typically required to include the following information in order to comply with financial reporting and tax rules:

• The time and place of the expense
• The business purpose of the expense
• The amount of the expense

If the expense is for meals or entertainment, the report must also include the business relationship between the taxpayer and any person fed or entertained.

When expense reports are submitted for T&E items that are above a predetermined limit (typically $25 or $50), most companies require employees to submit copies of original receipts instead of using credit card statements.

Airfare, lodging, rental cars, auto mileage, gas and tolls, taxis and ride-sharing services, business phone calls, wi-fi access charges, tips, and meals are a few common examples of costs that might qualify for reimbursement.

Entertainment expenses including sporting event tickets, fishing excursions, and green fees are typically eligible for reimbursement if the company’s T&E policy permits it. Under U.S. Generally Accepted Accounting Principles (GAAP), these expenses are deductible for book purposes, although they aren’t deductible under current tax law.

Common issues with expense reports

Many employees dread completing expense reports—but there’s good reason to avoid the temptation to procrastinate. Submitting expense reports at the very end of the reporting period can cause significant problems, as it may be hard to locate the right receipts or recall the details of a business trip weeks or months later. You’ll want to fill out and submit expense reports quickly after a trip to help avoid errors and omissions.

It’s also not uncommon for employees to “cheat” on expense reports. A dishonest employee may overstate expenses, for example—or they may change numbers on a receipt, request multiple reimbursements, or use other methods to falsify their expense reports. Mischaracterizing expenses by using legitimate receipts for nonbusiness-related activities is one of the most common methods of this kind of fraud.

Implement the right T&E policies

It may be a good idea to review your T&E reporting practices and implement formal policies where needed. For instance, your company can take the time to remind employees what expenses are considered reimbursable, as well as how often they should submit expense reports. These policies can help you avoid misunderstandings and make it easier to punish infractions when they do occur.

Expense tracking software may also be a worthwhile investment for your company, as it can help managers spot inconsistencies in expense reporting. In addition, you’ll want to keep an eye out for managers who override T&E policies to ensure that everyone in your organization is held to the same standards.

If you’d like more information on best practices for T&E expense reporting, contact us. We can help you reduce your chances of omissions, errors, and fraud.

IRS examiners typically prepare for business audits by researching the specific industries and issues that relate to the taxpayer’s return. In carrying out this research, many auditors use “Audit Techniques Guides,” or ATGs. Some ATGs are concerned with issues that are frequently encountered during audits, including executive compensation, capitalization of tangible property, and passive activity losses—but others specifically address a particular industry or type of business, such as architecture, veterinary medicine, construction, or art galleries. 

These guides are publicly available through the IRS website—and because they’re publicly accessible, your business can use them to gain an understanding of how the IRS will judge your business in terms of tax law and regulatory compliance. 

How ATGs are used

Before they meet with taxpayers and their advisors, an auditor will first do certain research to understand the specific industries or issues at play, how income is received, the accounting methods commonly used, and any areas where there may be issues of compliance for the taxpayer. Since each return may involve issues, business practices, or terminology that is unique to a particular industry, IRS auditors must start by examining different types of businesses in addition to individual taxpayers and tax-exempt organizations. 

In the case that reported income or expenses are inconsistent with what’s expected for the industry or there are anomalies within the geographic area the business is located in, using the right ATG may allow auditors to reconcile any discrepancies. 

Where to find the latest ATGs

Not every industry has its own ATG, and some guides have been written or updated more recently than others. ATGs that the IRS has added or revised this year include guides for the Retail Industry (March 2021), Construction Industry (April 2021), Nonqualified Deferred Compensation (June 2021), and Real Estate Property Foreclosure and Cancellation of Debt (August 2021).

ATGs are primarily intended to assist IRS examiners in uncovering common methods of inflating deductions or hiding income. However, you can also use them to help ensure that your business isn’t engaging in any activity that might serve as a red flag to auditors. You can find a full list of ATGs here on the IRS website.

Public stock prices are likely to fluctuate in the near future as continuing COVID-19 concerns, mounting inflation, supply shortages, threats of cyberattacks, and geopolitical turmoil continue to unsettle shareholders and disrupt long-term planning. In light of all this, it might not be a bad time to consider escaping the ups and downs by taking your company private.

Public companies benefit from easier access to capital, but there are several reasons why delisting may be a good choice for small- and mid-market public companies. “Going private” allows company management to focus on its long-term goals instead of chasing sort-tem profits to satisfy Wall Street’s demands. Because of this, delisting can help to stabilize a company’s value. In addition, going private can lower taxes, reduce compliance costs, and diminish regulatory and public scrutiny.

Unfortunately, going private can be a complicated process, and it’s important to take note of the financial reporting requirements involved before you decide to go private with your company.

Going private and the SEC

In addition to other requirements, companies that choose to go private—along with their controlling shareholders and other affiliates—are required to file detailed disclosures pursuant to Securities and Exchange Commission (SEC) Rule 13e-3.

Transactions are closely scrutinized by the SEC in order to ensure the fair treatment of unaffiliated shareholders. Companies must disclose the following in order to stay compliant with SEC Rule 13e-3 and Schedule 13E-3:

• The purposes of the transaction—this must include any alternatives considered and the reasons these alternatives were rejected
• Any reports, opinions, and appraisals that are “materially related” to the transaction
• Both the substantive (price) and procedural fairness of the transaction

Severe consequences may follow if a company fails to act with complete fairness and transparency. The aim of the SEC’s rules is to protect shareholders—and some states also have additional takeover statutes that provide dissenters’ rights to shareholders. This transition creates a limited trading market to allow shareholders to sell the stock.

We can help you take the proper precautions

Not all public companies will benefit from going private, and there are other possible methods for dealing with problems like corporate governance risk and high compliance costs. Even so, going private may be an excellent way to improve your company’s outlook, assuming your shareholders are supportive and the timing is right. 

However, companies that choose to go private will need to be diligent to ensure they stay compliant with SEC rules and avoid lawsuits. If you’re trying to decide whether going private is right for you or you plan to delist your company’s stock, contact us today. We can help you make the right choice for your company—and ensure that your transaction is structured and reported in a way that ensures procedural fairness, transparency, and a fair price. 

It’s not uncommon for people to record their will signings on video in order to provide evidence that their wills possess the requisite testamentary capacity. However, while this strategy may be helpful in preventing a will contest in some cases, there’s also a risk that the recording may be used by those who wish to challenge the will—and in most cases, this risk will outweigh any potential benefits.

Your recording may invite more scrutiny

Even the slightest hesitation or moment of apparent confusion on the part of the person signing the will may be used by a challenger as evidence that the person lacked testamentary capacity.

The discomfort of the recording process can sometimes make a person seem confused or under duress, even if neither is the case—and it’s all too easy to make a slight slip-up or misstate a fact in the moment.

And while it is possible to re-record portions of the video that may invite such accusations, this approach comes with its own set of drawbacks. If a challenge to the will is made, the challenger’s attorney may use additional video editing and the number of takes that were used as further evidence that the person signing lacked testamentary capacity.

Consider using different strategies

In most cases, recording your will signing will be less effective than other strategies in helping you avoid a will contest. Instead, consider using one (or several) of the following strategies:

• Arrange for a medical practitioner to examine you so they can attest to your capacity before the will is signed
• Include a “no contest clause” in your will 
• Make sure to choose reliable witnesses 
• Use a funded revocable trust (this will allow your assets to avoid probate, making it harder and costlier to challenge your will)

If you need help protecting your will from possible challengers, contact us today for more information.

In 2019, new accounting rules for long-term leases took effect for public companies. These changes were deferred for private companies several times by the Financial Accounting Standards Board (FASB), but starting in fiscal year 2022, private companies and private not-for-profit entities will be required to follow suit. 

Under this updated guidance, private organizations will be required to report the full extent of their long-term lease obligations on the balance sheet for the first time. Here are a few important details you should know.

Previous deferrals

Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), was initially deferred for private entities in 2019, when the FASB deferred the update to 2021. In 2020, another extension was granted to private firms regarding the effective date of the updated leases standard, due to disruptions caused by the COVID-19 pandemic.

As of right now, the new reporting standard for private entities will apply to annual reporting periods—and to interim periods within fiscal years—beginning after December 15, 2021. Private entities are also permitted to adopt this new standard early.

Depending on the size of your organization, as well as the nature and extent of its leasing arrangements, it may be time-consuming and costly to implement the required changes to your organization’s accounting practices and systems. Because of this, many private organizations have welcomed these deferrals. 

The new standard for long-term lease reporting

Currently, private entities are only required to record lease obligations that are considered financing transactions on their balance sheets. The accounting rules give lessees enough leeway that agreements can be arranged such that they are treated as simple rentals for the purposes of financial reporting—and as a result, few arrangements are recorded. Leaving these obligations unreported on the balance sheet can make a business appear to be less leveraged than it really is.

However, the FASB’s updated guidance will require major changes to current accounting practices regarding leases with terms of a year or longer. Under ASU 2016-02, lessees are required to recognize assets and liabilities associated with all long-term rentals of vehicles, real estate, equipment, and machines on their balance sheets. In addition, private businesses will now be required to make additional disclosures regarding the amount, timing, and uncertainty of any cash flows related to these leases.

Under the updated guidance, most existing arrangements that are currently reported as leases will still be reported as leases—but the new definition is also expected to encompass many additional kinds of arrangements that haven’t been reported as leases previously. In addition, arrangements that now need to be reported as leases may not always be readily apparent—such as arrangements that are embedded in service contracts or included in contracts with third-party manufacturers.

Need guidance? We can help

You won’t want to wait until the end of the year to adjust your reporting practices to the FASB’s new guidance. For many public companies, the implementation process for these new rules was more difficult and time-consuming than initially expected. If you need help evaluating which of your contracts need to be reported as lease obligations, contact us.

A “self-directed” IRA may allow you to increase the benefits of a traditional IRA or Roth IRA—self-directed IRAs can hold nontraditional investments of your choosing and may offer greater returns. However, you should be aware of certain pitfalls that can sometimes result in unfavorable tax consequences.

Using IRAs for estate planning

Although IRAs were primarily designed to help secure retirement savings, a well-designed IRA can also serve as a tax-advantaged estate fund for your family. For instance, if a spouse is named as the beneficiary of your IRA, they’ll be able to roll the funds over into their own IRA after your death, which will allow the funds to continue to grow on a tax-deferred basis (or on a tax-free basis if the IRA is a Roth IRA).

Self-directed IRAs

Unlike other IRAs, self-directed IRAs allow you complete control over your investment decisions. 

While traditional IRAs usually offer a limited selection of investment types including stocks, bonds, and mutual funds, self-directed IRAs enable you to select from almost any type of investment—including real estate, closely held stock, loans, limited liability company and partnership interests, precious metals, and commodities like lumber, oil, and gas. 

Due to this added flexibility, self-directed IRAs may potentially offer you higher returns while still giving you the same estate planning benefits you’d receive through a traditional IRA. With a self-directed IRA, you’ll be able to transfer almost any type of asset to your heirs while retaining the tax advantages of an IRA. A self-directed Roth IRA can even allow you to secure tax-free investment growth for your assets.

Potential issues with prohibited transactions

When establishing a self-directed IRA, prohibited transaction rules are the biggest potential pitfalls to watch out for. Prohibited transaction rules are intended to limit dealings between the IRA and “disqualified persons,” such as account holders, businesses controlled by account holders or their families, certain service providers or IRA advisors, and certain members of account holders’ families.

Among other prohibitions, these persons are barred from receiving compensation from the IRA, personally using IRA assets, selling property or lending money to the IRA, buying property from the IRA, guaranteeing a loan to the IRA, pledging IRA assets as security for a loan, and providing goods or services to the IRA.

Engaging in a prohibited transaction carries a severe penalty: the IRA involved in the prohibited transaction is disqualified and all of the IRAs assets are deemed to have been distributed on the first day of the year that the prohibited transaction took place in, subject to income taxes and also potentially subject to penalties.

Because of these prohibited transaction rules, it’s almost impossible to manage a business or other investments that are held in a self-directed IRA. As such, forming a self-directed IRA isn’t recommended unless you intend to take a purely passive role toward the IRA’s assets.

Contact us today if you have questions or need help setting up a self-directed IRA.

We’re thrilled to have some recent promotions here at Smolin Lupin!

Every individual listed below has shown major growth within the firm from the first day they started working at Smolin. We couldn’t be happier with their performance and we’re so excited to watch them continue to grow here as part of our team. 

Director

Anthony Wrobel:

Anthony joined the team in 2012 and is a graduate of Rutgers University, earning a Bachelor’s degree in Accounting & Finance with honors (Magna Cuma Laude), as well as a Master’s degree in Financial Accounting. He also has a Certificate in Financial Planning. 

Here at Smolin, Anthony services clients in Wealth Management, Family Office Division, Real Estate, and Medical industries. He provides these companies and their owners with tax, accounting, and consulting services

Rory Gannon:

Rory joined the team in 2016. He is a graduate of Saint Joseph’s University, earning a Bachelor’s degree in Accounting. He also attended Rutgers University, earning a Master’s degree of Accountancy in Taxation. 

Rory serves clients in many industries. He provides these companies and their clients with forensic accounting services pertaining to; matrimonial litigation, fraud investigation, commercial litigation support, business valuation, and shareholder dispute resolution.

Manager

Nick Gutzmer:

Nick joined the team in 2014 and is a graduate of Florida Atlantic University, with a Bachelor’s and Master’s degree in Accounting. 

Nick services a variety of clients including professional service firms , retail, restaurants, construction, and real estate. He provides these companies and their owners with accounting, tax planning and compliance, consulting, and business valuation support.

Tax Supervisor

Wendy Hermansen:

Wendy joined the team in 2014! She is a graduate of Kean University, earning a Bachelor’s degree in Accounting.

If you’re considering guaranteeing a loan to your corporation, you should be aware that acting as a guarantor, endorser, or indemnitor of one of your closely held corporation’s debt obligations may come with possible tax consequences. You’ll need to be prepared if your corporation defaults on the loan, as you may be required under the guarantee agreement to pay principal or interest.

Bed debt deductions for business and nonbusiness debts

In the case that you’re required to make good on the obligation, making a payment of principal or interest in discharge of the obligation will usually result in a bad debt deduction, which may be either a business bad debt deduction or a nonbusiness bad debt deduction. 

Business bad debts can be either totally or partly worthless and are deductible against ordinary income. Nonbusiness bad debts are deductible only if they’re totally worthless and are deducted as a short-term capital loss, which means they’re subject to limitations on deductions of capital losses. 

A guarantee must be closely related to your trade or business in order to be classified as a business bad debt. The guarantee is considered to be closely related to your trade or business as an employee if protecting your job is the reason for guaranteeing the corporation loan, but only if employment is the dominant motive. 

If your annual salary is greater than your investment in the corporation, this will usually serve as evidence that protecting your job was the dominant motive for the guarantee. By contrast, an investment in the corporation that is substantially greater than your annual salary is usually taken as evidence that protecting your investment was the dominant motive behind the guarantee, rather than protecting your job.

If guaranteeing the loan was not a case of job guarantees, demonstrating that a guarantee was closely related to your trade or business might be difficult. In this case, you’ll need to demonstrate that the guarantee was either related to your business as a promoter or related to another trade or business you carried on separately.

If you’re required to pay off a loan that you guaranteed for your corporation and your reason for guaranteeing the loan wasn’t closely related to your trade or business, you can take a nonbusiness bad debt deduction—but in this case, you must demonstrate that you guaranteed the loan to protect your investment or guaranteed the loan with a profit motive.

Both business and nonbusiness bad debt is only deductible if it meets the following criteria in addition to satisfying the requirements above:

• The guarantor entered into the agreement before the debt became worthless
• The guarantor has a legal duty to make the guaranty payment, despite there being no requirement that a legal action be brought against them
• The guarantor received reasonable consideration for entering into the guaranty agreement (though this reasonable consideration does not necessarily have to be cash or property)

Unless local law or the terms of the agreement provide for a right of subrogation against the corporation, any payments made on a loan you guaranteed are deductible as a bad debt in the year the payments are made. If you have a right of subrogation against the corporation or any other right to demand payment from them, you won’t be able to make a bad debt deduction unless the rights become partially or totally worthless.

Guaranteeing a loan to your closely held corporation may also come with other possible tax consequences. To learn more about the possible implications of your situation, contact us.

Pass-fail auditors’ reports have been in place for decades, but in 2019, a major change was made, as auditors of public companies began to report critical audit matters (CAMs) in audit opinions. 

Accounting rule makers are now making an assessment of how well this project has performed its function over the last two years, in order to decide whether changes are required to provide financial statement users with more cost-effective, useful information. 

Auditing and CAMs

Auditors are required to include a discussion of CAMs in the audit report under Auditing Standard (AS) 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. For these purposes, a CAM is defined as any matter that:

• Is related to accounts or disclosures that are material to the financial statements
• Has been communicated to the audit committee
• Requires an auditor to use complex judgment or make a subjective decision

Under this new guidance, auditors are required to identify each CAM, detail the reasons they selected it, and provide support for their assertions by citing relevant financial information. There is no specific list of possible CAMs provided by the Public Company Accounting Oversight Board (PCAOB), and there isn’t a prescribed number of CAMs that auditors must state in their report.

Auditors working with large public companies that have market values of $700 million or more must report CAMs for fiscal years ending on or after June 30, 2019. Auditors for smaller public companies are required to report CAMs for fiscal years ending on or after December 15, 2020.

Recent developments

The Center for Audit Quality (CAQ) issued a new review of the audit rules for CAMs in December 2020. 

Critical Audit Matters: A Year in Review reported that for S&P 100 companies, the most frequent categories of CAMs were taxes (at 16%), goodwill and/or intangibles (at 14%), contingent liabilities (at 12%), and revenue (at 9%).

The remaining 49% were split among 23 different categories including sales, returns, and allowances, business combinations, asset retirement, environmental obligations, and pensions and other post-employment benefits. CAMs are expected to continue changing from year to year.

The COVID-19 pandemic was one of 2020’s biggest developments. Although the virus itself doesn’t qualify as a CAM, auditors may need to report COVID-19’s impact on material accounts or disclosures as a CAM. For instance, market volatility caused by the pandemic could trigger a complex impairment analysis for goodwill.

Stay tuned for possible changes

The Financial Accounting Standards Advisory Council (FASAC) met in June 2021 to evaluate whether updates needed to be made. On the whole, FASAC members concluded that the accounting areas most frequently referenced as CAMs were generally aligned with FASAC’s expectations. 

However, there isn’t much information in financial statement disclosures for some accounting areas like loss contingencies. Research has also suggested that CAMs may have a greater impact on less sophisticated investors because they may highlight accounting areas the investor was previously unaware of.

So far, AS 3101 hasn’t triggered any immediate changes to accounting rules—but it may take several years for some effects of the CAM requirements to fully stabilize or manifest. The PCAOB has plans for a more thorough post-implementation review of the CAMs rules, to be published in 2024. For the latest news on the rules involving CAMs and auditing, contact your auditor.

The complete set of your business’s financial statements includes three reports. Each of these reports serves a different purpose, but they each assist stakeholders, including managers, investors, lenders, and employees, in evaluating a company’s performance. The following overview explains each report and the important questions they answer.

The income (or profit and loss) statement

The income statement helps stockholders to assess whether the business is growing and profitable.Your income statement will include the revenue, expenses, and earnings of your business over a given period. 

One key term to know when discussing income statements is “gross profit”—gross profit is the income earned after the cost of goods sold is subtracted from revenue. The cost of labor, materials, and overhead required to create a product are all included in the cost of goods sold.

“Net income” is another important term to understand. A business’s net income is the income that remains after it has paid all of its expenses, including taxes.

Growth and profitability aren’t the only important metrics, though. Companies with healthy top and bottom lines can lack the on-hand cash to pay their bills, for example. Although revenue and profit trends might seem like the most important part of your business’s statement, you’ll want to pay serious attention to the other two reports. 

The balance sheet

The balance sheet can help you assess what your company owns—and what it owes. Your balance sheet report provides a tally of your assets, liabilities, and “net worth,” and offers a basic overview of your company’s financial health. 

Assets are reported on financial statements at the lower of cost or market value, under U.S. Generally Accepted Accounting Principles (GAAP). 

Assets that can be reasonably expected to be converted to cash within the year (such as inventory or accounts receivable) are classified as “current assets.”  “Long-term assets” have longer lives and include assets such as property and equipment. 

Liabilities are classified in a similar way: payment obligations like accounts payable that come due within a year are “current liabilities,” while payment obligations extending beyond the current operating cycle or year are “long-term liabilities.”

Although intangible assets like goodwill, patents, and customer lists may provide your business with significant value, intangible assets only appear on the balance sheet when they’ve been acquired externally. Intangible assets that have been internally developed aren’t reported here.

The net worth, or owners’ equity, of a business is the value of the business’s assets once liabilities have been subtracted. This means that the net worth will be negative if the book value of liabilities is greater than the book value of the business’s assets. 

However, book value may not always be reflective of market value. As such, some companies may include a separate statement called the statement of retained earnings, which provides the details of the owners’ equity and details dividend payments, sales or repurchases of stock, and changes caused by reported profits or losses.

The cash flow statement 

The cash flow statement helps to clarify where a company’s cash is coming from and where it’s going to. 

Cash flow statements show all of a business’s inflows and outflows. For example, your business may have inflows of cash from selling products or services, selling stock, or borrowing money, while its outflows may result from repaying debt, paying expenses, or investing in capital equipment.

Cash flows are usually organized in three separate categories for operating, investing, and financing activities, and the net change in cash during the period is usually displayed at the bottom of the statement. 

Companies need to continually generate cash in order to pay vendors, creditors, and employees, so it’s important to pay close attention to your statement of cash flows.

Don’t ignore disclosures

Disclosures provide additional details at the end of a business’s financial statements. Disclosures are qualitative descriptions that can help your business make well-informed decisions in conjunction with the three qualitative reports discussed above. 

If you need help benchmarking financial performance and conducting due diligence, contact us.