Specialized Services Archives - Page 6 of 7

The tax mechanics involved in the sale of trade or business property

Greencrest on April 26, 2022

What are the tax consequences of selling property used in your trade or business?

There are many rules that can potentially apply to the sale of business property. Thus, to simplify discussion, let’s assume that the property you want to sell is land or depreciable property used in your business, and has been held by you for more than a year. (There are different rules for property held primarily for sale to customers in the ordinary course of business; intellectual property; low-income housing; property that involves farming or livestock; and other types of property.)

General rules

Under the Internal Revenue Code, your gains and losses from sales of business property are netted against each other. The net gain or loss qualifies for tax treatment as follows:

1) If the netting of gains and losses results in a net gain, then long-term capital gain treatment results, subject to “recapture” rules discussed below. Long-term capital gain treatment is generally more favorable than ordinary income treatment.

2) If the netting of gains and losses results in a net loss, that loss is fully deductible against ordinary income (in other words, none of the rules that limit the deductibility of capital losses apply).

Recapture rules

The availability of long-term capital gain treatment for business property net gain is limited by “recapture” rules — that is, rules under which amounts are treated as ordinary income rather than capital gain because of previous ordinary loss or deduction treatment for these amounts.

There’s a special recapture rule that applies only to business property. Under this rule, to the extent you’ve had a business property net loss within the previous five years, any business property net gain is treated as ordinary income instead of as long-term capital gain.

Section 1245 Property

“Section 1245 Property” consists of all depreciable personal property, whether tangible or intangible, and certain depreciable real property (usually, real property that performs specific functions). If you sell Section 1245 Property, you must recapture your gain as ordinary income to the extent of your earlier depreciation deductions on the asset.

Section 1250 Property

“Section 1250 Property” consists, generally, of buildings and their structural components. If you sell Section 1250 Property that was placed in service after 1986, none of the long-term capital gain attributable to depreciation deductions will be subject to depreciation recapture. However, for most noncorporate taxpayers, the gain attributable to depreciation deductions, to the extent it doesn’t exceed business property net gain, will (as reduced by the business property recapture rule above) be taxed at a rate of no more than 28.8% (25% as adjusted for the 3.8% net investment income tax) rather than the maximum 23.8% rate (20% as adjusted for the 3.8% net investment income tax) that generally applies to long-term capital gains of noncorporate taxpayers.

Other rules may apply to Section 1250 Property, depending on when it was placed in service.

As you can see, even with the simplifying assumptions in this article, the tax treatment of the sale of business assets can be complex. Contact us if you’d like to determine the tax consequences of specific transactions or if you have any additional questions.

Leveraging internal audits

Greencrest on April 22, 2022

Many companies have an internal audit department that tests whether the organization is accurately reporting financial results and complying with U.S. Generally Accepted Accounting Principles (GAAP). But it’s important for internal auditors to think beyond compliance.

Internal auditors who understand the big picture can expand their department’s influence by helping their organizations mitigate risk, improve financial and operational processes, and evaluate business strategies. Here’s how to get more from your internal audit team.

Expand the scope

The skill sets of internal auditors make the department ideally suited to participate in managing a broad range of risks, including:

Operational,
Strategic,
Investment,
Information technology (IT),
Merger and acquisition (M&A),
Foreign corruption, and
Business continuity risks.

To maximize its value, the internal audit team should take a forward-looking approach. Individual auditors are well equipped to help identify and assess risks — and even help businesses anticipate and avoid obstacles before an adverse event occurs.

Use internal auditors like consultants

Your company should tap auditors’ expertise to evaluate and improve controls and ensure compliance before problems arise, instead of waiting for internal auditors to report possible control or compliance deficiencies. The department can also highlight ways for other functional areas — such as production, sales, HR, finance and procurement — to improve processes and eliminate waste and inefficiency.

Optimize technology

Advances in technology make it possible to greatly enhance the value of the internal audit function. For instance, continuous auditing is an automated approach that allows auditors to gather critical information and identify problems in real time. This is a dramatic improvement over the traditional approach, in which internal auditors test a limited number of samples and then report their findings after the fact. Likewise, data analytics and predictive modeling enable internal auditors to quickly spot anomalies and focus the team’s resources on high-risk areas.

Conduct quality assurance reviews

Businesses should conduct regular quality assessment reviews (QARs) of their internal audit departments. The Institute of Internal Auditors’ Code of Ethics requires Certified Internal Auditors to undergo a QAR at least once every five years. This oversight helps assess the department’s performance, competence and objectivity, allowing the company to quickly identify and remedy any issues.

Functional diversity is critical

Do your internal auditors have the skills and training necessary to meet the demands of today’s volatile, complex business world? Effective internal audit teams include people from a broad range of backgrounds, including those with IT, management consulting and engineering expertise.

If these skills are lacking in your internal audit team, your organization might need to hire some new auditors to infuse fresh ideas into the department — or you might consider “co-sourcing” with an external firm to help fill any internal skill gaps. Contact us for more information.

Are you ready for the 2021 gift tax return deadline?

Greencrest on February 22, 2022

If you made large gifts to your children, grandchildren or other heirs last year, it’s important to determine whether you’re required to file a 2021 gift tax return. And in some cases, even if it’s not required to file one, it may be beneficial to do so anyway.

Who must file?

The annual gift tax exclusion has increased in 2022 to $16,000 but was $15,000 for 2021. Generally, you must file a gift tax return for 2021 if, during the tax year, you made gifts:

That exceeded the $15,000-per-recipient gift tax annual exclusion for 2021 (other than to your U.S. citizen spouse),
That you wish to split with your spouse to take advantage of your combined $30,000 annual exclusion for 2021,
That exceeded the $159,000 annual exclusion in 2021 for gifts to a noncitizen spouse,
To a Section 529 college savings plan and wish to accelerate up to five years’ worth of annual exclusions ($75,000) into 2021,
Of future interests — such as remainder interests in a trust — regardless of the amount, or
Of jointly held or community property.

Keep in mind that you’ll owe gift tax only to the extent that an exclusion doesn’t apply and you’ve used up your lifetime gift and estate tax exemption ($11.7 million for 2021). As you can see, some transfers require a return even if you don’t owe tax.

Why you might want to file

No gift tax return is required if your gifts for 2021 consisted solely of gifts that are tax-free because they qualify as:

Annual exclusion gifts,
Present interest gifts to a U.S. citizen spouse,
Educational or medical expenses paid directly to a school or health care provider, or
Political or charitable contributions.

But if you transferred hard-to-value property, such as artwork or interests in a family-owned business, you should consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

The deadline is April 18

The gift tax return deadline is the same as the income tax filing deadline. For 2021 returns, it’s April 18, 2022 — or October 17, 2022, if you file for an extension. But keep in mind that, if you owe gift tax, the payment deadline is April 18, regardless of whether you file for an extension. If you’re not sure whether you must (or should) file a 2021 gift tax return, contact us.

4 levels of audit opinions

Greencrest on February 18, 2022

The first page of audited financial statements is the auditor’s report. This is an important part of the financials that shouldn’t be overlooked. It contains the audit opinion, which indicates whether the financial statements are fairly presented in all material respects, compliant with Generally Accepted Accounting Principles (GAAP) and free from material misstatement.

In general, there are four types of audit opinions, ranked from most to least desirable.

1. Unqualified. A clean “unqualified” opinion is the most common (and desirable). Here, the auditor states that the company’s financial condition, position and operations are fairly presented in the financial statements.

2. Qualified. The auditor expresses a qualified opinion if the financial statements appear to contain a small deviation from GAAP but are otherwise fairly presented. To illustrate: An auditor will “qualify” his or her opinion if a borrower incorrectly estimates the reserve for a contingency, but the exception doesn’t affect the rest of the financial statements.

Qualified opinions are also given if the company’s management limits the scope of audit procedures. For example, a qualified opinion may have resulted if you denied the auditor access to year-end inventory counts due to safety concerns during the COVID-19 pandemic.

3. Adverse. When an auditor issues an adverse opinion, there are material exceptions to GAAP that affect the financial statements as a whole. Here, the auditor indicates that the financial statements aren’t presented fairly. Typically, an adverse opinion letter outlines these exceptions.

4. Disclaimer. Even more alarming to lenders and investors is a disclaimer opinion. Disclaimers occur when an auditor gives up in the middle of an audit. Reasons for disclaimers may include significant scope limitations, material doubt about the company’s going-concern status and uncertainties within the subject company itself. A disclaimer opinion letter briefly outlines the auditor’s reasons for throwing in the towel.

Beyond the opinion

Auditors’ reports for public companies also must include a discussion of so-called “critical audit matters” (CAMs). Essentially, these are the most complicated issues that arose during the audit. CAMs are specific to the engagement and the year of the audit. As a result, they’re expected to change from year to year.

This requirement represents a major change to the pass-fail audit opinions that have been in place for decades. It’s intended to give stakeholders greater insight into the company’s disclosures and the auditor’s work when issuing an unqualified opinion. Contact us for more information on audit opinions.

Office Managers Gone Wild

rlewis on May 30, 2013

Over the past several months, I have been working with small business owners who have been victimized by their office managers. The office manager was able to steal from them as the individual was trusted and given too much control and access. The office manager recognized this internal control weakness and exploited it.

So, how did many of these business owners end up needing my services? How did they become victims within their own organization?

Trust and a Lack of Segregation of Duties
Many small business owners develop a relationship with their office manager beyond the office. They trust their office manager and rely heavily on them day to day. The owner functions with blinders on. He or she cannot fathom being a victim and trusts the office manager, forgetting to structure the office hierarchy by implementing segregation of duties when at all possible.

Business owners should not allow one individual to have access to everything. The business owner must maintain part of the office administration to a degree. This course of action will create good checks and balances.

Pays Personal Expenses on Company Dime
Some office managers aren’t shy about putting their hand in the company cookie jar. They will blatantly pay their personal bills or write checks to themselves directly out of the business checking account. When at all possible, implement segregation of duties to deter this situation from occurring.

If an organization is too small to separate the check writing function, the signing of the checks and the bank reconciliation, I suggest that the owner ask the bank to mail the monthly statement with copies of the canceled checks to the owner’s home. The owner can then review the original bank statement and scrutinize the monthly disbursements. The owner should always inquire about a few checks per month so that the employee knows the owner is monitoring disbursements.

Credit Cards
Credit cards can be a bad thing for small businesses. Limit the number of employees who have credit cards. Company policy should stipulate that employees always maintain possession of the business credit card and never loan it to anyone. Furthermore, the policy should indicate that if an employee loans the company card to others or charges personal items on the company credit card, the individual will be terminated.

If an office manager has a company credit card, do not give him or her authorization to review the monthly statements and authorize the payment. To ensure the segregation of duties, the owner may have to take on this task in order to deter fraud from occurring.

Company policy should require detailed receipts to be maintained for accounting records of items charged on the credit card. With so many one-stop shopping stores, it is difficult to determine if purchases are legitimate business expenses without the detailed cash register receipt.

Payroll
When an organization uses an outside payroll company to process payroll, the owner often assumes that fraud can’t occur because the office manager doesn’t write the payroll checks. However, in most companies, the office manager has the authority to direct the payroll company and provides them payroll information every week. The office manager usually relays information about bonuses and pay increases. In most cases the payroll company has been authorized to deal with the office manager so the provider doesn’t follow up with the owner to confirm that the transmitted information is accurate and authorized. What’s to stop the office manager from giving himself or herself an extra bonus or a pay raise? Nothing. In small organizations, the owner should either call in the payroll or be available to the payroll company in order to verify that the information provided is accurate.

Theft of Cash Receipts
Cash is the most appealing asset to steal because unlike a check it doesn’t need to be converted. The office manager accepts the payment from a customer but doesn’t record the payment. He or she pockets the money instead. In order to deter this situation from occurring, all customers should be given receipts.

Larceny is another scheme office managers employ by stealing from the daily receipts before the money is deposited in the bank. I frequently see this in the medical industry where the organization has a stand-alone billing system. The billing system is never reconciled to the accounting system, thus making it easy for the office manger to steal from the daily deposit. If your business uses a stand-alone billing system, the billing and accounting systems need to be reconciled regularly.

Adequate Dishonest Employee Coverage
During our investigations, when we determine that the owner is a victim of fraud, it is not unusual to find that the insurance policy does not include dishonest employee coverage or that the coverage levels are inadequate. The insurance policy should be analyzed once a year to determine if the coverage levels are adequate.

Not all fraud can be prevented but there are ways to reduce the business losses. If you have additional questions or concerns regarding fraud, please contact me.

Category: Specialized Services

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