The new revenue recognition standard: Don’t try this without a safety net

Soon, it will be easier for users of financial statements to compare companies. But as this new revenue recognition standard comes on line, there may be some growing pains for businesses.

George Pickard, CPA, MSA, principal in the Audit and Accounting Service Department at Ciuni & Panichi, says the new revenue recognition standard is a joint project between the Financial Accounting Standards Board, that establishes financial accounting and reporting standards for entities following U.S. Generally Accepted Accounting Principles (GAAP), and the International Accounting Standards Board, which establishes such standards for entities following international financial reporting standards or IFRS.

Smart Business spoke with Pickard about the new revenue recognition standard and what business leaders need to know.

What changes under the new standard?

It gives everyone core accounting rules for recognizing revenue when they enter into contracts with customers to provide goods or services, so there’s better comparability across entities, industries, jurisdictions and capital markets. It makes it easier to analyze a company through its financial statements and provides more disclosure for users of financial statements.

Companies will use a five-step process for recognizing revenue:

1. Identify all customer contracts to provide goods or services, whether written, oral or implied by customary business practices.
2. Define the performance obligation(s) within that contract. Are there multiple steps with different deliverables?
3. Determine the transaction price.
4. Allocate the transaction price across the different performance obligations.
5. Recognize revenue as each performance obligation is satisfied.

Many companies will recognize revenue sooner; before they might have recognized revenue upon completion of the contract.

When does the new revenue recognition go into effect? Are there exemptions?

Public entities, certain not-for-profits and certain benefit plans are implementing it for the 2018 calendar year — if they have not already done so. For all other entities, it will be effective for 2019 calendar year items.

Transactions that follow other standards are exempted. Examples include lease contracts, insurance contracts, financial instruments and guarantees.

How should business leaders act?

Even private companies should look at this now. Encourage your CFO and accounting department to be proactive and ask for help. Get your system up early, so it can capture the information you’ll need for decision-making or the different disclosures. That way, you’re not rushing around or incurring higher costs than necessary. Also, this is retroactive. If your 2019 reports compare to the previous year, you’ll have to restate the 2018 numbers to comply with the new rules.

Identify all of your revenue streams and contracts to see how things might change. Your human resources and/or IT department may need to get involved. In addition, look at your loan covenants and grants to determine if any reporting obligations are tied to revenue. You don’t want to trip a covenant and then start having conversations with your bank.

Where will biggest obstacles occur?

You may need to change your systems, which could be time consuming and costly. It may not just be your accounting system, but also the system, let’s say, on your manufacturing floor.

Of the five steps, determining the transaction price will be the most difficult piece. Do you have variable consideration, such as a bonus for early completion? If so, it may need to be recognized earlier. Are you getting paid in non-cash? For items like stock, when do you recognize it and how much should it be valued at? Could there be a financing component? If you’re not going to be paid until two years down the road, is that interest income? Do you give discounts or rebates and how will those be considered?

Recognize the issues and start having conversations with your bank, your accountant and internally. You may decide to simplify your contracts. You may need to change your bonus policy if it’s tied to revenue. It will take time to adjust, so the sooner you start, the better.

Insights Accounting is brought to you by Ciuni & Panichi, Inc.

How business is made better with a strong accountant relationship

While very few businesses operate without tapping into the services of an accountant in some shape or form, some businesses aren’t using the relationship they have with their accountants to the fullest.

“Some business owners might just go to their accountant for tax advice, but what they don’t realize is that they could use them for much more,” says Nancy Supowit, director at Clarus Partners.

She says accountants are trusted business advisers and many business owners talk regularly with their accountants regarding issues that range from strategic planning, purchasing real estate, entering a new market or estate planning. Others, however, might not think to reach out and get advice from their CPA.

Smart Business spoke with Supowit about how business owners can get the most out of their relationship with an accountant.

What issues might arise if business owners don’t regularly engage their accountant?

Some businesses don’t keep good financial records during the year. That means the accountant gets books at tax time that are in bad shape, so it takes a lot more effort at the end of the year to sort out the information. That should be a concern for business owners, not just because it means they’re paying their accountants for more billable hours, but because they’re using poor or incomplete information during the year; and basing decisions on what is likely an inaccurate picture of the business’s situation.

Undertaking debt financing or relocating without first talking to an accountant could lead to a non-optimal decision. Had the idea been run past an accountant, he or she could have helped identify the best type of debt for the situation, or find a tax offset that would reduce the cost of a move.

What is it business owners might misunderstand about their relationship with their accountant?

There are different types of accountants for different needs. Sometimes knowing which type of accountant can address specific issues is pretty clear — for instance, if a company has a tax issue or a tax filing need, it should go to an accounting firm that has expertise in tax. However, what might go unrecognized is that accountants offer other services and specialize in many areas of expertise that could benefit a business.

Business owners’ professional and personal lives are commingled. So as important as it is to keep an accountant informed about what’s happening in a business, it’s equally important that the accountant knows what’s happening in an owner’s personal life. For instance, an accountant should be informed if there is a change in marital status as it could have a significant impact on the business or the estate. An accountant can also be a valuable adviser when it comes to retirement and succession planning.

What does a good relationship with an accountant look like?

Ultimately, the tone and frequency of conversations with an accountant are up to the business owner. While a good accountant will check in and ask questions to find out what’s going on, it’s up to the business owner to make the time for that conversation.

At a minimum, business owners should talk with their accountant at tax time about what’s happening in the business — is it expanding, contracting, changing locations, planning to acquire another company? It’s also a good time to update the accountant on any personal life changes.

Though talking with their accountant at tax time is important, it shouldn’t be the only conversation of the year. Year-round expert advice could prove valuable if implemented.

Business owners should strive to have a healthy, ongoing relationship with their accountant, who in turn should genuinely be interested in the state of things and work to understand as much as possible about the business. The comfort level should be such that the business owner feels welcome and free to talk. What form those conversations take — coffee each week, a quarterly call — is up to the business owner.

Insights Accounting is brought to you by Clarus Partners

Ruling brings major change to out-of-state sales tax collection

For many years, businesses had to have physical presence or nexus in a state to be legally required to collect and remit sales tax on transactions. E-commerce has essentially skirted that law and states have argued that they’re losing out on tax revenue they’re due. They challenged the court cases that set the physical presence standard — Quill Corp. v. North Dakota and National Bellas Hess v. Department of Revenue of Illinois — to little avail. Finally, with the recent South Dakota v. Wayfair Inc. decision, states have gotten the ruling they were hoping for. And it means significant changes for businesses that do out-of-state business, whether online or not.

Smart Business spoke with Nicholas Schatte, tax manager at Clarus Partners, about the Wayfair decision and how it affects businesses of all types and sizes.

What is the decision the Supreme Court reached in the Wayfair case?

The Supreme Court, in a 5-4 decision, overruled the standards set forth in Quill and Bellas Hess. Now, a physical presence is no longer a prerequisite for states to compel a business to collect and remit sales tax. All applicable transactions can be taxed.

As it stands, the Supreme Court sent the decision back to South Dakota’s Supreme Court to be evaluated for any reason that it might be unconstitutional. It’s expected that the law will be found constitutional and states will implement their laws prospectively, most likely between July 1, 2018 and January 1, 2019, but some states may attempt to collect the tax retroactively.

How does the decision affect businesses?

While much of the attention is focused on online retailers, it’s going to impact any business selling products into a state where the business isn’t currently collecting tax, such as wholesalers and manufacturers. Businesses will soon have an obligation to register with states’ departments of revenue, and start collecting and remitting sales tax. It will require businesses to collect sales tax in a lot more states than they are currently.

Brick-and-mortar businesses that also transact with out-of-state customers through a complementary e-commerce portal should pay close attention. They might not have concerned themselves with collecting sales tax on those transactions, but will need a mechanism in place to do so now.

Some businesses might not have software that’s sophisticated enough to comply with all states’ tax laws. Businesses previously could collect tax at whatever rate was imposed where the store was located. Now they’ll need to know the rate and tax treatments for potentially 45 states and numerous local jurisdictions, which is difficult and costly to do manually.

Even if businesses aren’t making taxable sales, they still have documentation requirements to prove that their sales aren’t taxable in a state. Legislation in some states might require businesses to file if they have a certain amount in sales in that state, not just taxable sales, and may be compelled to register and prove that they had no obligation to collect tax. That complicates businesses’ record keeping and adds to their administrative requirements. Other states require that sellers collect tax or report untaxed sales made in the state to both the purchaser and the tax authority. Some impose substantial penalties for failing to file the reports or collect the tax.

What should affected businesses do now?

As soon as possible, businesses need to analyze where they’re making sales, how many sales they’re making and the dollar amount of sales in each state. They could need to register in the states where they are currently not and start collecting tax.

Businesses should also determine how they’ll comply with the law — by upgrading their software system, or more manual methods — and how they’ll remit tax. Will they prepare the returns themselves, or hire a firm or service provider to help with compliance?

Service providers can do more extensive reviews to see where a business needs to file returns, if at all. Businesses might not track activities close enough, which might expose them to liabilities. If that’s the case, there are ways to resolve the outstanding liabilities they have, but didn’t know about until a review was performed.

Insights Accounting is brought to you by Clarus Partners

The art and science of determining a business’s worth

For many business owners, approximately 40 to 60 percent of their net worth is their company. Given the impact a business transition will have on their future, the business owner needs to be aware of the business’s value to eliminate any unwanted surprises.

“To understand the value of a company, it’s important to have an experienced expert complete the process,” says Rob Zunich, a director at Barnes Wendling CPAs.

Smart Business spoke with Zunich about some of the aspects and processes involved in a business valuation.

What are some occasions when a business valuation is needed?
Business valuations can discover critical information in a number of situations. There are various circumstances that require a business valuation from a qualified expert. Some of these occasions include:

1)  Buy-Sell Agreements. Buy-sell agreements between co-owners stipulate what owners receive when a partner experiences a life-altering event such as death or disability. If co-owners specify an amount in the agreement that doesn’t adequately capture the true market value for the business, it can delay, complicate or potentially derail the transaction.

2)  Gifting or Estate Planning. Having a value for a specific ownership interest allows owners to effectively transfer wealth to other family members while also meeting IRS requirements.

3)  Succession Planning. A reasonably performed valuation can inform owners of what the marketplace value might be for their business. Occasionally, business owners experience a ‘value gap’ where their own assessment of what their business is worth and the market value are vastly different. A valuation performed well in advance of an exit can manage expectations or provide a roadmap for where action is needed to increase a business’s marketability to buyers.

How is the value of a business determined?
Performing a valuation is a mixture of art and science. There are certain standards or accepted methodologies, but the process also incorporates an amount of professional opinion and judgment. Every engagement provides its own unique set of circumstances.

Also, the type of value being determined is important to understand, and will dictate how certain underlying assumptions and estimates are factored. Appraisers will typically provide a detailed list of information they will want in analyzing the various financial, operating, quantitative and qualitative factors that will be used in their procedures.

Based upon the information provided, the appraiser will then determine which approach(es) are appropriate to consider. These approaches include:

1)  One method considers the underlying net value of a company’s assets deducting its liabilities (those recorded on and off the books). This approach may be utilized for companies that own underlying assets, such as investments or real estate, or for operating companies where the value of selling off the assets and paying off all liabilities provides a greater value than could be generated from the earnings.

2)  Another approach focuses on the earnings or cash flow as the potential benefit to a buyer, and also considers the risks associated with realizing those benefits. Professional judgment by the expert often comes into play in assessing an appropriate risk factor for those earnings.

3)  Lastly, an expert could look to a market approach, where data is assessed from public or private companies similar to the business being analyzed to derive pricing estimates based upon relevant factors.

What should be considered when looking for a valuation expert?
Cost shouldn’t be the only factor in choosing whom to hire. Rather, an owner should inquire about appraisers’ experience in performing valuations; their training, including continuing education; their background and knowledge of the respective industry; and their reputation within the professional community.

An owner should also consider whether such experts have valuation credentials or designations. These would be indicative of meeting certain minimum experience, knowledge and training requirements, and holding that expert to certain required professional standards.

Insights Accounting is brought to you by Barnes Wendling CPAs

Growth through acquisitions: What strategic buyers need to know

All companies try to grow organically. But depending on your industry’s maturity, it’s not always easy to grow from within. One way to supplement this is to acquire another company to gain market share, says John Troyer, CPA, Audit and Accounting Services Department, Partner-in-Charge at Ciuni & Panichi.

“For companies that want to grow their topline, and hopefully their bottom line, acquisition can be the easiest path,” he says.

However, strategic buyers, especially those who are new to these transactions, need to make the right moves to ensure a ROI. This is critical in today’s seller’s market.

Smart Business spoke with Troyer about what business owners need to remember when doing an acquisition.

Is now a good time to buy a business?

There’s a lot of capital in the market. The economy is strong. So, companies have good cash flow to finance an acquisition and banks are interested in lending to their customers. But in the near future, it should remain a seller’s market — even with baby boomers without strong succession plans looking to sell. Strategic buyers are competing against financial buyers, like family offices or private equity firms, which drives prices up.

How do you find a company to buy?

Look for a business that complements your industry, product lines, customers or geography. If you buy a competitor, there’s a double benefit as you reduce competition in your existing sales space. Another target could be a supplier. Vertical integration reduces uncertainty in your supply chain.

Consulting a team of advisers certainly helps. Business brokers specialize in sales transactions and can identify available companies. Meet with your CPA, attorney and banker, and express your goals and objectives. Professionals usually have large networks and often are the first to hear a company is on the market. They also can advise you how to finance and structure a transaction.

What happens when you identify a target?

It helps to have an existing relationship before you start the conversation with a target company. The seller likely will require a nondisclosure agreement. And you, as the potential buyer, will want to negotiate a letter of intent — with the help of your advisers — to make sure the buyer is serious and realistic with the price. Sometimes emotionally attached sellers have an unrealistic view of their company’s worth.

Perform your due diligence to understand the strengths and weaknesses of a potential acquisition. An experienced adviser can identify risk and opportunities in the information provided by the seller.

How do you determine a fair sale price?

There isn’t one way to value a company. You can project the future cash flows, or look at historical cash flows, similar private transactions or the book value. Whatever method, the sale price should be set using sound financial data. There’s risk with all transactions, so make sure your projected ROI justifies what you pay.

Again, surround yourself with advisers who have been through transactions. Try to take the emotion out of it. You don’t want to be on the wrong side of a transaction — where the other side is experienced at making a deal and on your side, there’s inexperience.

What else do strategic buyers need to know?

With the rise in valuations, it can be hard for companies to find what they’re looking for at a good value.

While a private equity firm could be looking at a shorter ownership window, it’s harder to flip a company at a profit in a seller’s market. Sellers typically are looking for more cash up front, but a strategic buyer also may appeal to their emotions. A lot of sellers want a buyer who will be loyal to their employees and around for the long haul. Some sellers want to see their legacy carry on, and not be swallowed up by a larger company where the name goes away.

Buying a company takes significant capital. You have to be confident in your ability to run the new company effectively. Have a plan for the operations. Go into it with your eyes wide open, so that the acquired company is a positive contributor to your cash flow. If you’re losing money, it’s not only problematic, it can also cause you to take your eye off the ball of your existing operations.

Insights Accounting is brought to you by Ciuni & Panichi, Inc.

The benefits of outsourcing a CFO

There are a number of companies that don’t have a CFO on staff. They might not have the budget for it, they don’t think they need one, or they think it’s enough to have a bookkeeper or a controller who manages the billing statements and books.

What gets lost in that reasoning, according to Michael Stevenson, managing partner at Clarus Partners, is the purpose of a CFO.

“They’re responsible for strategic operations,” he says. “They work in tandem with the CEO, taking on tasks and managing them so the CEO can focus on the things he or she does best.”

Smart Business spoke with Stevenson about the role of outsourced CFOs and how to deploy them in middle-market companies.

When does it make sense to outsource a CFO?

Outsourced CFOs are often brought in on a project basis to source financing, improve processes and controls or help drive the growth of the organization.

When a company is in growth mode, its working capital can be outstripped fast. A CFO can help introduce companies to different financing options, such as bank debt, asset-based lending or private equity. They can help companies find ways to raise the capital needed to sustain growth until they’re better positioned.

CEOs understand operations and their customers, but need guidance on where to find and make investments that could help drive growth. A CFO can help by taking responsibility of the financial aspects of the business, thinking about the company’s future cash flow and helping analyze the return on purchased assets.

An outsourced CFO isn’t an expense. A good one should add 1 to 2 percent of net income to the company through a strategy of finding the best return on investment, and that should more than cover whatever he or she is paid.

What arrangements should companies make with their outsourced CFO?

Each circumstance is different. In some cases, a CFO will visit with a company weekly to keep a finger on the pulse of the business. In some instances, an outsourced CFO will temporarily step into the role in companies that have lost theirs, filling the gap until a new one is hired.
Most often when a CFO is engaged, it’s on a time and material basis. A CEO might want a CFO to prepare the budget for the next two years. Sometimes the completion of one project leads to more assignments.

While an outsourced CFO’s assignment is naturally temporary, CEOs still need that person to be a business partner. A CFO hired to help with the budgeting process needs to be ingrained in every aspect of the business so it can be determined where to spend money and why. On a project basis, such as ahead of a merger or acquisition, the CFO may be directed to focus on the pluses and minuses of each opportunity, filing in any blind spots in the CEO’s vision.

Ultimately, the CEO needs to know what he or she wants from a CFO and give the CFO specific tasks. Companies that don’t have a specific project, but feel they need help that falls within a CFO’s wheelhouse, might just need a full-time CFO.

How does a company find an outsourced CFO?

There are myriad accounting and outsourced CFO firms that exist in any given region. They can be found through a web search, or through a word-of-mouth referral. However they’re found, it’s important to interview a few candidates to find the person who is the best fit not only for the task, but also for the CEO who he or she will aid. CFOs and CEOs can’t butt heads. It has to be a partnership, which is a personal thing and not a technical thing. Finding a CFO with the right personality is just as important as his or her technical ability.

In a growing business, the CEO has to know what he or she doesn’t know. Bringing in a specialist to fill those gaps is not a cost. The right outsourced CFO should bring any combination of greater profits, greater financial efficiency and better financing strategies that help the company achieve its goals.

Insights Accounting is brought to you by Clarus Partners

How positioning your business for longevity can increase its value

Business longevity is creating a business that can survive a change in ownership and/or management and thrive for many years. However, studies indicate that only 30 percent of all family-owned businesses survive into the second generation, only 12 percent survive into the third generation, and only 3 percent operate into the fourth generation and beyond.

“Preparing your company for longevity maximizes the likelihood of a successful exit in terms of price and overall outcome,” says Sean R. Saari, a partner at Skoda Minotti.

Smart Business spoke with Saari about the importance of thinking about and planning for the long-term to increase the value of a company.

What are the benefits of positioning your business for longevity?
Businesses that are positioned for longevity are almost always more valuable than those that are not. In its simplest form, the value of a company is a function of:

■  The expected future cash flows it produces for its owners.
■  The risks associated with achieving those cash flows.

There are two ways to increase value based on that basic formula: increase cash flows or decrease risk. Positioning a company in a manner that allows it to continue its success in the future without needing to rely heavily on a small group of key employees decreases the risk associated with the business.

This gives buyers more comfort that the expected future cash flows from the business will continue as expected after a sale or change in management. This reduction in risk translates to an increase in value in relation to what the company would be worth if not for the steps taken to prepare it for continued high performance in the future.

Why is positioning your business for longevity important?
Not only does positioning your business for longevity help to increase its value, it can also help separate it from other companies for sale. In a few years, all baby boomers will be at least 60 years old. Over 60 percent of privately held companies in the U.S. are owned by baby boomers.

With this as a backdrop, it is expected that there will soon be many more sellers than buyers in the marketplace, which will only make it more important to stand out from the crowd. Since most business owners’ wealth lies in their businesses — studies indicate somewhere between 80 and 90 percent — a critical element of their succession and retirement planning will center on monetizing the investment in their business at maximum value in order to support their retirement.

How do you position your business for longevity?
The most obvious area to focus on is the company’s management team, along with the adoption, implementation and execution of effective and efficient processes and procedures. If a company’s success or failure is tied to the efforts and/or relationships of a single person or a handful of key employees, work needs to be done to lessen this dependence.

The specific tactics will vary based on the facts and circumstances faced by each company, but it is imperative that enough management depth be developed so the company can survive the loss of any single employee, even its most important employee.

This can be done by ‘institutionalizing’ customers by giving them multiple points of contact within the company so that they associate with the company itself rather than with any one individual. Another best practice is to systematically ‘cross train’ employees to give them an understanding of other roles within the business so that they can step in if necessary. Any work that can be done to reduce the company’s reliance on specific individuals — reducing key person risk — helps to move the needle.

In addition, it is important to develop an exit plan — when do you plan on transitioning or selling the business? Even if the exit event isn’t imminent, setting time-bound goals will help hold business owners and their teams accountable in making the necessary progress so that when the transition or sale is nearing, the company is already as well positioned as possible to successfully overcome the change that inevitably accompanies such an event.

Insights Accounting is brought to you by Skoda Minotti

Four stages to entrepreneurial success

As in life, all businesses go through different phases of development. With each phase of development, there are different needs that are more acute or important.

“Researching and analyzing our privately held family businesses over the years, we have concluded there are four phases of an entrepreneur’s business life cycle: startup, growth, maturity and succession,” says Jeffrey Neuman, president of Barnes Wendling CPAs.

Smart Business spoke with Neuman about the phase of a business’s life cycle and the key needs companies have at each stage.

What characterizes the startup phase?
The startup phase is an exciting time for a business and represents its first five years. It is the stage at which the emergence of ‘the idea’ comes into play. Companies in this phase typically:
  Implement the business plan.
  Establish an organizational structure.
  Determine their choice of entity.
  Establish working capital needs.
  Implement simple, yet effective financial and management reporting systems.
  Acquire a proper location and facilities.
  Anticipate personnel requirements.
  Determine the costs of products or services to be rendered.
  Select a payroll service provider.
  Allocate time to analyze and brainstorm ‘the vision.’ Consider the utilization of an outside advisory board.

What stands out at the growth phase?
In the growth phase, the hard work of the prior phase is paying off and the business is heading for success. This phase usually begins around the fifth year, lasts until around year 15 and should include:
  Definition of goals and strategies to manage growth and remain focused.
  Focus on working capital needs to accommodate and sustain growth.
  Anticipate and develop personnel and establish an organizational structure to facilitate growth.
  Refine and redesign the financial and management reporting systems to measure performance and have accountability.
  Implement employee retention programs and employee benefit plans. Formalize the business’s marketing strategy.
  The entrepreneur moves into a focused leadership role, becoming more of an administrator and delegator.
  Enhance communication systems to foster continuous improvement and a total teamwork attitude. Move from a reactive to a proactive culture.

What is the focus at maturity?
The maturity phase starts at the 15th year and lasts until around the 25th year. Here:
  Profitability is usually stable and planning is more consistent.
  Divergent thinking is embraced to continue to expand the business in a more controlled manner.
  Asset management becomes an important priority. Development of compensation and incentive plans for non-owners are evaluated and instituted to bolster a high level of entrepreneurial spirit.
  Executive leadership should be highly focused on working as a team.
  Re-evaluation of the essential costs of providing products or services is crucial to maintain market share.
  Personnel development and continuous education allows for fresh ideas and improvements to business operations.
  Decentralization allows for employee development and future leaders to evolve.

What are some strategies for succession?
The entrepreneur’s life’s work culminates in the succession phase. Anywhere from the business’s 25th to 35th years, the entrepreneur succeeds the business in a manner aligned with his or her personal goals. Depending on the goals of the entrepreneur, he or she could execute an external or internal sale, or succeed it to the next generation.

External sales options include an initial public offering, sale to strategic buyer, sale to private equity firm or sale to an investor. Internal sale options include selling to the management team or selling to employees through an Employee Stock Ownership Plan.

Regardless of the option selected, the easiest way to succeed a business is to build a great business.

Insights Accounting is brought to you by Barnes Wendling CPAs

Be aware of changes to meal and entertainment tax deductions

With the recent changes to the tax law comes a change in the way meals and entertainment are deducted for tax purposes.

“This impacts everybody in one form or fashion, in every industry, from small businesses that pay for the occasional client dinner to multinationals that spend thousands of dollars on trips and sporting events,” says Maggie Gilmore, a partner at Clarus Partners.

She says the last time meal and entertainment deductions were changed, it came with increased scrutiny from the IRS, so it’s possible that it can become an issue should an audit be triggered.

Smart Business spoke with Gilmore about the changes to meal and entertainment deductions.

What had been the rules regarding the deduction of meals and entertainment?

In general, meals and entertainment for customers, clients and executives were 50 percent deductible on the taxpayer’s federal tax return. A 50 percent deduction was available for expenses incurred at a club if they were business-related — for example, for meals, golf, tennis, etc.

Meals while traveling for business or while attending a conference were 50 percent deductible, while meals provided for the convenience of the employer, such as providing meals to employees working late on a project, working over the weekend or other convenience reasons, were fully deductible by the business and the benefit would not be taxable income to the employee recipients.

Miscellaneous food and beverage provided to employees at the business were fully deductible for businesses as were office parties or company picnics.

What are the new rules?

The new rules have become more stringent. If a taxpayer takes a client to lunch, business must be conducted during the lunch to be tax-deductible. If a taxpayer takes a client to an entertainment event, such as a golf tournament, a musical performance, a football game or other like event, the 50 percent deduction is no longer available. No deduction is available for club-related expenses.

Meals provided for the convenience of the employer are reduced from 100 percent deductible to 50 percent deductible. Also miscellaneous food and beverage provided to employees at the business is now only 50 percent deductible. For both of these, beginning in 2026, none of the costs will be deductible as the law is currently written.

How significant are the deductions companies typically make in this regard?

The tax law treats the deductibility of meals and entertainment differently than how a company tracks cash flow and accounting records. The permanent difference between tax income and a company’s book income is a highlighted item on a business’s tax return, so it is an expense most companies have and would need to report on their tax returns.

There is now a definite demarcation line between partially deductible meals and full non-deductible entertainment. For professional service and relationship industries, client meals and entertainment expenses can be significant. Industries in which extensive customer and client entertainment is expected and facilitated will feel the impact more extensively than companies that have the occasional entertainment expense.

How can companies ensure they’re in compliance with these new rules?

Work with your accountant and your company expense manager to ensure that meals costs are being tracked separately from entertainment costs. For many companies, this will mean creating new accounts or sub-accounts, requiring additional documentation from employees submitting expense reports to document business purpose, attendees, dates incurred, etc.

When in doubt, talk with your accountant about expense deductibility, preferably before it is incurred. For example, if an employee attends a conference that has meetings, meals and entertainment, if the meal cost and entertainment cost are separately stated, a reasonable breakout of the expenses will be necessary for deductibility support documentation.

Meals and entertainment costs’ deductibility has changed in more restrictive ways. Preparing for correct tax reporting for 2018 is easier to start now than next April.

Insights Accounting is brought to you by Clarus Partners

Retirement plan design to attract and retain executive talent

As executives grow older, many of them want to put more money away than the limits of traditional plans — 401(k) and 403(b) plans, for example. They want to catch up and accelerate their savings before retirement. Several types of retirement plans are designed to not only help executives save more, but also defer their current income, and thus lower their current tax liability.

Because these plans are attractive to executives, they’re a recruitment and retention tool. Some plans can be designed to provide performance incentives with the reward of greater savings and deferred income. The company may also benefit from a tax deduction, depending on the plan.

“There’s more interest in these plans as the economy improves and the job market tightens up,” says Jeff Spencer, CPA, MAcc, tax principal at Ciuni & Panichi.

Smart Business spoke with Spencer about how company leaders can design retirement plans that fit their needs and provide great benefits for their executives.

What retirement plans benefit executives?

There are plans beyond the traditional 401(k) or 403(b) plans. Different allocation structures will compensate your executives, so you can attract and retain them. In fact, retirement plans for executives are common enough in larger organizations that not offering them can be a competitive disadvantage. Three common types are cash balance pension, nonqualified deferred compensation and 457(b) plans.

How do cash balance pension plans work?

Cash balance pension plans have recently gained popularity. These plans have an individual account balance, which makes them a hybrid between a traditional pension plan and a 401(k) plan. They’re geared toward older, high-paid executives who want to make large annual contributions and already maxed out their 401(k) plan limits. Depending on their age, pay, the company demographics, etc., the cash balance plan uses a formula — and the services of an actuary — to determine how much they can put away on a pre-tax basis. It could be $200,000 a year, for example.

These plans are typically utilized by smaller companies that are doing well, because once the plan is set up, the annual contribution is generally locked in. It can be very beneficial for professional service companies, law firms, consulting firms, doctor groups, etc., with a few key people who are nearing retirement. The company receives a corporate tax deduction, as well.

Cash balance pension plans also require an offset benefit that needs to be provided to some rank-and-file employees to make it work from a nondiscrimination standpoint. In a law firm, for example, the offset benefit might go to administrative staff who are lower paid and have higher turnover.

What are the benefits of nonqualified deferred compensation and 457(b) plans?

Nonqualified deferred compensation plans are best for larger employers. They’re often utilized by public companies, which want to benefit their top people who are already maxed out on their traditional retirement plan limit.

Nonqualified plans are very flexible. The company can earmark them for key people and design the plan to incentivize people to perform a particular way or create golden handcuffs to keep them around. These plans also can be designed to attract executives.

On the nonprofit side, one option is 457(b) plans. Nonprofits use them to reward, attract or retain top executives who max out their 403(b) plans. The executive pay in the nonprofit arena is typically lower, so midsize and large nonprofits sweeten the pot by adding something like 457(b) plans.

What are common challenges when designing these plans?

The cash balance pension plan is the most complex; the other two aren’t as involved to set up. But the most important thing is to ask, ‘Why are you doing this?’ Are you trying to reward people you already have? Are you trying or attract new people? What’s your end game? You don’t want to put in something that’s not going to fit your organization two or three years later — and have to go through this all again.

There are new and innovative ways to reward people, which is especially critical in today’s tighter labor market. So, if you haven’t looked at your plans in recent years, now is a good time to do so.

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