Business transactions with related parties — such as friends, relatives, parent companies, subsidiaries and affiliated entities — may sometimes happen at above- or below-market rates. This can be misleading to people who rely on your company’s financial statements, because undisclosed related-party transactions may skew the company’s true financial results.

The hunt for related parties

Given the potential for double-dealing with related parties, auditors spend significant time hunting for undisclosed related-party transactions. Examples of documents and data sources that can help uncover these transactions are:

• A list of the company’s current related parties and associated transactions,
• Minutes from board of directors’ meetings, particularly when the board discusses significant business transactions,
• Disclosures from board members and senior executives regarding their ownership of other entities, participation on additional boards and previous employment history,
• Bank statements, especially transactions involving intercompany wires, automated clearing house (ACH) transfers, and check payments, and
• Press releases announcing significant business transactions with related parties.

Specifically, auditors look for contracts for goods or services that are priced at less (or more) favorable terms than those in similar arm’s-length transactions between unrelated third parties.

For example, a spinoff business might lease office space from its parent company at below-market rates. A manufacturer might buy goods at artificially high prices from its subsidiary in a low-tax country to reduce its taxable income in the United States. Or an auto dealership might pay the owner’s daughter an above-market salary and various perks that aren’t available to unrelated employees.

Audit procedures

Audit procedures designed to target related-party transactions include:

• Testing how related-party transactions are identified and coded in the company’s enterprise resource planning (ERP) system,
• Interviewing accounting personnel responsible for reporting related-party transactions in the company’s financial statements, and
• Analyzing presentation of related-party transactions in financial statements.

Accurate, complete reporting of these transactions requires robust internal controls. A company’s vendor approval process should provide guidelines to help accounting personnel determine whether a supplier qualifies as a related party and mark it accordingly in the ERP system. Without the right mechanisms in place, a company may inadvertently omit a disclosure about a related-party transaction.

Let’s talk about it

With related-party transactions, communication is key. Always tell your auditors about known related-party transactions and ask for help disclosing and reporting these transactions in a transparent manner that complies with U.S. Generally Accepted Accounting Principles.

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Once a relatively obscure concept, “income in respect of a decedent” (IRD) may create a surprising tax bill for those who inherit certain types of property, such as IRAs or other retirement plans. Fortunately, there may be ways to minimize or even eliminate the IRD tax bite.

Basic rules

For the most part, property you inherit isn’t included in your income for tax purposes. Items that are IRD, however, do have to be included in your income, although you may also be entitled to an IRD deduction on account of them.

What’s IRD? It is income that the decedent (the person from whom you inherit the property) would have taken into income on his or her final income tax return except that death interceded. One common IRD item is the decedent’s last paycheck, received after death. It would have normally been included in the decedent’s income on the final income tax return. However, since the decedent’s tax year closed as of the date of death, it wasn’t included. As an item of IRD, it’s taxed as income to whomever does receive it (the estate or another individual). Not just the final paycheck, but any compensation-related benefits paid after death, such as accrued vacation pay or voluntary employer benefit payments, will be IRD to the recipient.

Other common IRD items include pension benefits and amounts in a decedent’s individual retirement accounts (IRAs) at death as well as a decedent’s share of partnership income up to the date of death. If you receive these IRD items, they’re included in your income.

The IRD deduction 

Although IRD must be included in the income of the recipient, a deduction may come along with it. The deduction is allowed (as an itemized deduction) to lessen the “double tax” impact that’s caused by having the IRD items subject to the decedent’s estate tax as well as the recipient’s income tax.

To calculate the IRD deduction, the decedent’s executor may have to be contacted for information. The deduction is determined as follows:

• First, you must take the “net value” of all IRD items included in the decedent’s estate. The net value is the total value of the IRD items in the estate, reduced by any deductions in respect of the decedent. These are items which are the converse of IRD: items the decedent would have deducted on the final income tax return, but for death’s intervening.
• Next you determine how much of the federal estate tax was due to this net IRD by calculating what the estate tax bill would have been without it. Your deduction is then the percentage of the tax that your portion of the IRD items represents.

In the following example, the top estate tax rate of 40% is used. Example: At Tom’s death, $50,000 of IRD items were included in his gross estate, $10,000 of which were paid to Alex. There were also $3,000 of deductions in respect of a decedent, for a net value of $47,000. Had the estate been $47,000 less, the estate tax bill would have been $18,800 less. Alex will include in income the $10,000 of IRD received. If Alex itemizes deductions, Alex may also deduct $3,760, which is 20% (10,000/50,000) of $18,800.

We can help

If you inherit property that could be considered IRD, consult with us for assistance in managing the tax consequences.

© 2022

That’s right! Columbus has announced that they will be allocating an additional $8 million to a grant program for small businesses. Grants from the Columbus-Franklin County Recovery Fund can range from $5,000 to $20,000 and are available for immediate access.

To be eligible for-profit small businesses must meet the following requirements:

• Be located in the City of Columbus or Franklin County
• Have 25 full-time employees or less
• Have documentation showing the pandemic caused at least a 25% loss in sales.
• Began operations prior to March 17, 2020
• Are currently open and operating
• Be owned by an owner that is at least 18 years or older

The intention of the grant is to help and prioritize businesses located in underserved communities that are minority-, women-, or veteran-owned. As Mayor Andrew J. Ginther said, “minority- and women-owned businesses were more likely to miss their chance or be passed over for Paycheck Protection Program loans from the federal government. By putting these entrepreneurs at the front line for local funding, we hope to support businesses disproportionately impacted by the pandemic.”

How are the grants allocated and how can they be used?

According to a City of Columbus press release: business owners can apply for one of three grants:

• $5,000 recovery grant: For self-employed, single entity, sole proprietors and sole owner LLCs
• $10,000 recovery grant: For small businesses with at least one full-time employee
• $20,000 job restoration grants: For businesses with at least one full-time employee that lost employees due to the COVID-19 pandemic. Business who are selected for this grant will start by receiving an initial $10,000. They then are eligible for the additional $10,000 for hiring an additional full-time employee within two months and maintaining their payroll for four months after receiving initial grant funding.

Grants provided by this fund can be used to relieve financial hardships caused by a loss of sales, hire new personnel, train staff, or even fill previously lost positions.

Small business owners who are interested in applying can use this link to learn more and prepare their applications. The next grant application begins on April 11^th, 2022 at 9:00 am, and ends on April 25^th, 2022. The application pool closes early if they meet their maximum capacity of 500 applicants prior to the closing date.