Monthly Archives: May 2018

Business Deductions

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Taxpayers can generally deduct ordinary and reasonable costs of running a business, but they must provide proof, including the business purpose of expenses. In one case, a married couple was denied deductions when they failed to adequately prove that costs such as travel, meals and entertainment related to the wife’s business. They also deducted living expenses they paid for their college-age kids, which they called “compensation” but failed to show how the costs were reasonable or business-related. Their arguments were deemed “unpersuasive.” (TC Memo 2018-63)


IRS issues guidance to ease transition to FASB’s new revenue recognition rule

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In 2014, a new accounting standard on how to recognize revenue from contracts was issued by the Financial Accounting Standards Board (FASB). Now the IRS is allowing a new automatic change in accounting method for businesses to use to conform with the new financial accounting standard. This will allow for more book-tax conformity and facilitate accounting method change requests associated with adopting the new standard.

New accounting rules

Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, goes into effect in 2018 for public companies and 2019 for private ones. The new revenue recognition standard requires entities following U.S. Generally Accepted Accounting Principles (GAAP) to recognize contract revenue for promised goods and services to customers based on the following five steps:

1. Identify the contracts with a customer.

2. Identify the performance obligations in the contract.

3. Determine the transaction price.

4. Allocate the transaction price to the performance obligations.

5. Recognize revenue as the entity satisfies a performance obligation.

The new revenue recognition standard is a significant change from current accounting practices, particularly for technology firms, construction contractors and service providers with warranty and repair service contracts. However, the recognition rules for tax purposes remain unchanged.

Under the tax rules, businesses that follow the accrual method of accounting accrue income when the right to receive income is fixed and the amount can be determined with reasonable accuracy. This is known as the “all events” test.

IRS change of accounting method

Your business can apply for a change in accounting method by filing IRS Form 3115 and submitting detailed information about the change. To alleviate the administrative burden, the IRS created a list of “automatic” method changes whereby a business is deemed to have the consent of the IRS to change its accounting method if it’s within the scope of a revenue procedure and any related guidance for the specific method change.

When a business changes its accounting method for tax purposes, adjustments are generally required to be made to prevent items from being duplicated or omitted. Sometimes, the IRS allows a “cutoff” method instead, where only the items arising on or after the beginning of the year of change are accounted for under the new accounting method.

Syncing GAAP revenue and taxable income

Most entities would prefer to use the same method of recognizing revenue under GAAP as they do for reporting taxable income to the IRS. The new IRS guidance provides procedures to obtain automatic IRS consent to change to an otherwise permissible accounting method under ASU 2014-07, if such method change is otherwise permissible for federal income tax purposes and is made for the tax year in which a business adopts the new accounting standard.

Specifically, Revenue Procedure 2018-29 applies small business exception rules to more businesses and gives taxpayers the option of implementing the accounting method change either with an adjustment or on a cutoff basis. If needed, the IRS may issue additional guidance as the IRS and businesses obtain more experience with the interaction of the new standard with federal income tax accounting methods.

We can help

The new IRS guidance simplifies the procedures needed to align your taxable income with the amount of revenue reported on your financial statements. Contact us for answers to your questions about how to implement the changes.

© 2018


Tax Breaks

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Business owners: Don’t forget about these tax breaks. The IRS is encouraging small business owners and self-employed individuals who work from a home office to explore the guidelines surrounding home office deductions. See IRS Publication 587 at https://bit.ly/2r5JfH8 The agency also is reminding employers that they can take advantage of the Work Opportunity Tax Credit (WOTC) when hiring long-term unemployment recipients and other workers with employment barriers. There are now 10 categories of WOTC-eligible workers. Learn more at https://bit.ly/2rJhGUu


Beware of the Scam

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A revamped scam targeting international taxpayers and nonresidents is making the rounds again, warns the IRS. Criminals impersonate the IRS by mailing or faxing a letter and a fake Form W-8BEN (“Certificate of Foreign Status of Beneficial Owner for U.S. Tax Withholding and Reporting”) to certain individuals, to garner personal and bank account information. The phony letter or fax also refers to a Form W9095, which doesn’t exist, the IRS states, adding that the agency “doesn’t require a recertification of foreign status.” For more, see https://bit.ly/2rAtF6C.


What’s all the buzz about XBRL?

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The Securities and Exchange Commission (SEC) requires public companies to provide their financial statements in the eXtensible Business Reporting Language (XBRL) format as an exhibit to their regulatory filings. But XBRL isn’t just for reporting to the SEC. There are many compelling reasons for public companies to expand their use of XBRL data — and for private companies and financial statement users to jump on the XBRL bandwagon, too.

Many uses

Introduced in 1999, XBRL is based on a complex technical infrastructure. It provides a universal standards-based method to prepare, publish, exchange and analyze financial data across disparate accounting and operating systems.

Using a tagging system, computers filter XBRL data “intelligently,” automating many aspects of report preparation, data collection and due diligence. Companies can apply XBRL to various types of business data, such as internal and external financial reports, tax returns and loan applications.

Potential upsides

This machine-readable reporting format makes financial statements more useful to researchers, regulators and investors. It has the potential to increase the speed, accuracy and usability of financial disclosure — and eventually reduce costs.

Companies that report financial data using XBRL can share it directly with their auditors and lenders. This significantly reduces the need to manually re-enter data into spreadsheets and other analytic software programs and repackage it into new formats. Automation, in turn, cuts data processing costs and minimizes human error.

Another upside is that XBRL permits automatic validation of financial data by highlighting inconsistencies, deviations from industry norms and even transaction patterns characteristic of fraudulent behavior. And it provides a global framework for exchanging financial information that transcends current language and reporting standards barriers. XBRL doesn’t replace current operating or accounting systems but, instead, piggybacks onto existing systems.

Further, XBRL speeds up the financial reporting process, facilitating real-time disclosures and continuous auditing, and eases the burden of Sarbanes-Oxley compliance for public companies. For companies making acquisitions, XBRL can link formerly incongruent systems, eliminating costly conversions to a common operating system.

Put XBRL to work for you

Companies that choose to adopt XBRL can convert data to this format in two ways. They can either 1) purchase off-the-shelf software and categorize line items themselves, or 2) outsource their XBRL projects. Once the company incurs initial setup costs, ongoing costs generally are minimal.

XBRL may ultimately reduce compliance costs through greater efficiency. Contact us for more information on switching over to this user-friendly reporting format.

© 2018