In August 2012, the Securities and Exchange Commission (SEC) issued a final rule regarding the conflict minerals disclosures mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Act). Public companies will be required to disclose whether they use conflict minerals such as tantalum, tin, tungsten and gold in their manufactured products — and whether the minerals originated from one of the “covered countries” defined by the Act.
“This rule could be very broad reaching, with the SEC estimating approximately 6,000 issuers will be required to provide new disclosures under the rule. Many private companies may also be impacted,” says Dale Jensen, partner-in-charge of Weaver’s SEC practice.
Smart Business spoke with Jensen about how to prepare for compliance.
Why do companies need to be concerned with supply chains now?
Hundreds of products contain conflict minerals, from cell phones and laptop computers to jewelry, golf clubs, drill bits and hearing aids. The SEC estimates that thousands of public companies will have to provide the new disclosures, and many private companies that are part of the impacted public companies’ supply chains may also be affected. Additionally, they estimate the initial compliance costs to be $3 to $4 billion, with subsequent costs of more than $200 million annually.
Who is impacted by this new rule?
Public companies, foreign private issuers, emerging growth companies and smaller companies must all comply. Packaging essential to the product’s function, such as a tin can, is also covered, but materials purchased or inventoried before Jan. 31, 2013, should be outside the rule’s scope.
Retailers are not required to report on products bought or resold, only manufactured or contracted to manufacture. When contracting, the retailer’s degree of influence determines compliance, though it doesn’t need to be substantial.
What’s involved with complying?
First, a company should determine whether any products it manufactures or contracts to be manufactured contain conflict minerals necessary to functionality or production. If the minerals are necessary, but they didn’t come from covered countries or are from scrap or recycled sources, the company’s inquiry method and conclusion has to be annually disclosed on SEC Form SD. This information must also be posted on the company’s website.
However, if there’s reason to believe the minerals originated from covered countries, their origin is unknown, or they may not be from scrap or recycled sources, the company must perform due diligence on the source and chain of custody of the minerals.
After due diligence, if the issuer determines that its conflict minerals are from a covered country and not from scrap or recycled sources, the company will be required to file a Conflict Minerals Report as an exhibit to Form SD. An independent audit of the Conflict Minerals Report is required. The SEC estimates that 75 percent of companies subject to the Act will need to develop a Conflict Minerals Report and have it audited.
What is the timing for compliance?
The first filing isn’t due until May 2014 for the 2013 calendar year, but complying may require substantial preparation for public companies. Companies will also need to file a new Form SD annually by May 31.
What are some next steps for companies?
Management must determine whether the new rule impacts the company, prepare cost estimates for compliance and put a plan in place. Companies should identify products that may contain conflict minerals as soon as possible, keeping in mind that they must comply even if the product contains only small traces of a mineral. Companies should be prepared to report results on a product-by-product basis. Finally, they should work with advisers to develop policies and procedures for supply chain vetting, filing Form SD, and if needed, conducting due diligence and preparing and auditing Conflict Minerals Reports.
Dale Jensen, CPA, CFE, is partner-in-charge, SEC Practice, at Weaver. Reach him at (972) 448-9283 or Dale.Jensen@WeaverLLP.com.
Blog: To stay current on audit, tax and advisory issues that may impact your business, visit Weaver’s blog.
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The Patient Protection and Affordable Care Act imposes two new Medicare taxes — one on wages and self-employment income and one on net investment income.
“As a result, executives subject to these new Medicare taxes will now incur a 3.8 percent Medicare tax on most of their taxable income,” says Mark Watson, partner, Houston Tax and Strategic Business Services, at Weaver.
Smart Business spoke with Watson about what this new tax means for executives.
How will the Medicare tax impact wages and self-employment income?
Beginning this year, an additional 0.9 percent Medicare tax is imposed on wages and self-employment income in excess of $250,000 for joint filers and $200,000 for single filers. So, the total Medicare tax on wages and self-employment income is now 3.8 percent, up from 2.9 percent.
If a couple files a joint return, the added tax is imposed on their combined wages and self-employment income. Employers must withhold this additional tax on wages paid to an employee in excess of $200,000 in a calendar year. This withholding applies even though the employee may not actually be liable for the additional tax because, for example, the employee’s wages with that of his or her spouse doesn’t exceed $250,000. Any excess withheld Medicare tax will be credited against the total tax liability shown on the employee’s income tax return.
The $250,000 and $200,000 threshold amounts aren’t indexed for inflation. So, over time, more executives will likely be subject to the additional Medicare tax.
How is net investment income affected?
Many executives also will be subject to a new Medicare tax on their unearned income in 2013. This new tax, commonly called the ‘net investment income tax,’ applies to individuals, estates and trusts when income exceeds $250,000 for joint filers, $200,000 for single filers and $11,950 for estates and trusts, and equals 3.8 percent of net investment income.
Net investment income equals investment income less properly allocable deductions. Investment income includes:
• Gross income from interest, dividends, annuities, royalties and rents.
• Gross income from a passive activity.
• Gross income from a trade or business of trading in financial instruments or commodities.
• Net gain from the sale of property.
• Gross income and net gain from the investment of working capital.
However, gain excluded from taxable income, such as gain on the sale of a personal residence and gain deferred through a like-kind exchange, isn’t included in investment income. Similarly, gain from the sale of certain property used in a non-passive trade or business isn’t included.
Properly allocable deductions include:
• Deductions allocable to rent and royalty income.
• Deductions allocable to income from a passive activity and to a trade or business of trading in financial instruments or commodities.
• Penalties imposed on early withdrawal of funds from a certificate of deposit.
• Investment interest expense.
• Investment adviser fees.
• State/local taxes on investment income.
In the case of an estate or trust, deductions also are available for distributions of net investment income to beneficiaries.
How can these taxes be minimized?
Executives subject to the net investment income tax and the maximum federal income tax rate — applying to joint filers with annual income in excess of $450,000 and to single filers with annual income in excess of $400,000 — will face a 43.4 percent federal tax rate on ordinary income and 23.8 percent federal tax rate on long-term capital gains and qualified dividends. Minimize taxable net investment income by:
• Documenting and claiming all allocable deductions.
• Making distributions from an estate or trust to beneficiaries with income below $250,000 or $200,000 who are not subject to the tax on net investment income.
• Investing through tax-sheltered investment vehicles such as 401(k) plans, Individual Retirement Accounts, annuities and life insurance policies.
Although Congress passed the last-minute fiscal cliff tax deal in a seemingly haphazard way, many changes in the American Taxpayer Relief Act of 2012 will have both positive and negative impacts on executives, says Elizabeth Bunk, partner-in-charge of Houston Tax and Strategic Business Services at Weaver.
“Unlike the Congressional change two years ago, the American Taxpayer Relief Act of 2012 provides permanent changes to certain tax rates and exemption levels,” she says. “Therefore, we won’t be in the same situation again two years from now because many of these tax changes won’t expire. This will allow executives to plan for their future taxes with greater confidence.”
Smart Business spoke with Bunk about what executives need to know about their tax considerations for 2013.
What is the new maximum rate?
Congress added a top income tax rate of 39.6 percent for those with an annual income of more than $400,000 for single filers and more than $450,000 for joint filers. They also kept the same rates of 10, 15, 25, 28, 33 and 35 percent that were available in prior years. Therefore, executives earning above the $400,000 or $450,000 threshold will pay an additional 4.6 percent on the portion of their income that exceeds the highest bracket limit. While it was widely anticipated that income tax rates on high-income earners would increase in 2013, executives can at least be pleased that the final version of the act doubled the threshold amounts at which the 39.6 percent rate begins from the often-mentioned $200,000 and $250,000 threshold amounts.
How are capital gains and dividend rates handled?
Following the same threshold — $400,000 and $450,000 — the capital gains and dividend rates permanently increased from 15 to 20 percent. It is also important to note that higher income taxpayers will get hit by the new 3.8 percent surtax on investment income imposed by the Patient Protection and Affordable Care Act. This surtax, which applies at an income threshold of more than $200,000 for single filers and more than $250,000 for joint filers, will bring the final tax rate on capital gains and dividends to 23.8 percent.
How will health care reform impact other income?
Starting in 2013, high-income taxpayers will be subject to a brand new Medicare tax on their unearned income. The 3.8 percent surcharge applied to capital gains and dividends, as mentioned above, is applied to other investment income as well. A different set of limits — $200,000 for single and $250,000 for those married filing jointly — are the baseline for the surtax to apply. Taxpayers whose adjusted gross income exceeds the threshold will be subject to this tax. This surcharge combined with the increased maximum tax bracket could mean that some taxpayers are paying 43.4 percent on their highest levels of income.
What other provision is noteworthy?
A key provision to be aware of is the reinstatement of the phase out for itemized deductions and exemptions. Itemized deductions, which had avoided phase out during 2010 through 2012, will now be subject to severe limits, depending on income levels. Total itemized deductions in 2013 and beyond, which include real estate taxes, mortgage interest and charitable contributions, will be reduced by 3 percent of the amount by which a taxpayer’s AGI exceeds a threshold of $250,000 for single taxpayers and $275,000 for those married and filing jointly. The reduction cannot exceed 80 percent of the total deductions.
What’s the overall impact?
For many executives, these provisions are probably what they anticipated. There are certainly some negative changes in the act, but there are at least two positive results:
1. Permanent changes to tax rates, including the dividend and capital gain rates.
2. Applying the new top income tax rate to a threshold amount that is double what was originally predicted.
These positives should at least slightly raise revenue without significantly raising taxes for all Americans.
Elizabeth Bunk, CPA, CFP, is partner-in-charge, Houston Tax and Strategic Business Services at Weaver. Reach her at (832) 320-3220 or Elizabeth.Bunk@WeaverLLP.com.
Our coverage of the fiscal cliff law continues next month with more insight into how these taxes will interact with those related to health care reform.
For more information about the fiscal cliff law’s impact to businesses and individuals, see the articles on Weaver’s website: http://weaverllp.com/News.aspx.
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As a result of the Patient Protection and Affordable Care Act (PPACA) and its effects, employers are taking steps to manage the cost of care by moving toward self-funded insurance and greater oversight of health benefit plan subcontractors. Others are making a cost trade-off between the tax burden of providing versus not providing coverage.
Selvadas Govind, a senior manager in Assurance Services at Weaver, says it’s too soon to say whether costs will go up or down in our complex health care system.
“The only thing one can do is try to manage the risks that are presented at a particular point in time,” he says. “You’re not going to be able to influence the market or analyze it in any significant way.”
Smart Business spoke with Govind about some of the risks employers face in this new era of health plan benefits.
What is the impact of companies increasingly self-insuring?
Larger businesses are making the shift toward self-insurance, which is more transparent in terms of management. Insurers no longer go to a company and give them a rate; rather, companies can pay medical costs themselves and hire a third-party administrator (TPA) to handle administration. It’s a great business practice, but the downside is employers are on a less-than-level playing field with insurance companies that know how the industry works.
It’s a big risk that needs to be managed, and many organizations are not in a position to mitigate those risks. In fact, one study found employer audits of TPAs had error rates for medical claims of 3 percent to 16.8 percent. Similarly for pharmacy benefit programs, errors ranged between 3 percent and 8 percent. A 3 percent error rate by a plan’s pharmacy benefit manager in a medium-sized entity of 2,000 employees can amount to an overpayment of $155,000. For this reason, it is often worthwhile to bring in external auditors with specialized knowledge to mitigate this risk exposure.
Employers also need greater oversight of health benefit plan subcontractors. For example, after an employee pays his or her pharmacy co-pay, the balance is charged to a pharmacy benefit manager (PBM) which, in turn, pays off the distributor or manufacturer and submits the claim to the self-insured company. However, there is usually a rebate from the distributor or manufacturer to the PBM. By right, that rebate — which can be quite substantial — belongs to the employer, not the PBM.
How does the individual mandate create new risks for employers?
With the individual mandate and the increased dependent eligibility age of 26, there’s a financial incentive for children to remain on their parents’ health care plans. The risk companies should consider is that some may try to retain children on their plans beyond age 26 and/or include dependents who are not necessarily their own. The benefit of this abuse to perpetrators is that they can choose to pay the lower tax penalty for not having individual coverage and still obtain coverage through their parents at employer-subsidized rates. So, the situation leads to an educated decision on whether it is more cost effective to try to stay on the parents’ plan, pay the penalty for not buying coverage, or buy coverage through an employer or a health benefit exchange.
You can audit this risk, but health benefit plan audits tend to be invasive, which could irritate employees. A way to sensitively handle it is to educate employees on the potential issue and what the cost could be if even a small percentage of employees are dishonest. Companies should also review the amount of evidence required to justify a dependent; however, if the requirements are too stringent, employees could resist.
Are many employers deciding to take the penalties and not offer insurance?
It depends on the attitude of the employer and the type of work force. There will always be employers who offer better benefits than others. However, it’s a very industry-specific question, and in an industry with narrow margins, businesses may simply not be able to offer insurance. There could also be a shift away from full-time employees who qualify for health care benefits to the use of more part-time employees who would not qualify for employee-sponsored health benefits.
Selvadas Govind, MPA, CPA, CIA, CICA, CRMA, senior manager, Assurance Services, Weaver. Reach him at (512) 609-1940 or Selvadas.Govind@WeaverLLP.com.
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Texas offers specific sales tax exemptions that can benefit the energy and manufacturing industries.
“These two industries are considered ‘tent poles’ for the Texas economy,” says Chris Wallace, senior manager in Weaver’s state and local tax practice. “Even in the information age, a large percentage of the state’s economy is directly or indirectly tied to energy companies and manufacturers. The state wants to encourage businesses to stay in Texas, expand in Texas and locate to Texas.”
Smart Business spoke with Wallace about how energy companies and manufacturers can fully take advantage of the available tax incentives and exemptions.
What should energy and manufacturing companies know about Texas sales tax exemptions?
It’s a good news, bad news scenario. The good news is that Texas offers numerous exemptions to the energy and manufacturing industries related to equipment, supplies and other operational purchases. The bad news is that the exemptions can be complicated, subject to change and difficult to track when you consider how many vendor invoices companies have to process. The bottom line is that companies need to be proactive if they want to benefit from the exemptions that the Texas legislature has granted to them.
What are examples of specific exemptions that lead to refunds?
Exemptions for exploration and production companies are all over the board — well services, lease equipment, chemicals, etc. One simple exemption many businesses miss out on is oil-soluble chemicals. Since these chemicals become part of the oil and gas stream and are later resold, clients can purchase them tax free. However, vendors are required to charge tax on these chemicals unless they receive an exemption form from the purchaser.
As for manufacturing, operations obviously vary greatly from company to company. Let’s use an example everyone is familiar with — restaurants. A restaurant can issue an exemption certificate in lieu of tax when purchasing cooking equipment such as a microwave. Since the microwave causes a physical change to the product that is being sold, it qualifies as exempt manufacturing equipment. Again, it is the purchaser who is ultimately responsible for issuing the appropriate exemption form when making the purchase to ensure they take advantage of the exemption.
How can energy and manufacturing companies take advantage of sales tax exemptions in Texas?
It’s a three-step process. First, companies need to understand the exemptions that the legislature has granted to them. Next, they need to identify the vendors from which they make exempt purchases and that may have erroneously charged sales tax on exempt purchases. The last step is to communicate with the vendors, provide any needed exemption forms and then monitor them to minimize or eliminate future tax overpayments.
Are Texas sales tax exemptions significantly different than other states?
Not surprisingly, it is difficult to find a state with sales tax exemptions for the energy industry that are as generous as those in Texas. Most states do not offer any specific exemptions for the energy industry. Many states offer some exemptions related to manufacturing. However, with a high sales tax rate and many useful exemptions, Texas manufacturers stand to benefit more than most others.
What are some mistakes companies might be making regarding tax incentives, and how can they mitigate them?
All companies take steps to ensure that they are charging tax correctly to their customers. However, most companies do not make the same effort with regard to the taxes they pay to suppliers. The most common mistake, which leads to tax exemptions being wasted, is when companies assume their vendors are charging tax correctly without proactively addressing the issue. Reviewing all vendors that make a material amount of sales to your company is the best way to improve your sales tax compliance and reduce both overpayments and underpayments. Comptroller regulations require that a vendor charge tax on a purchase even if an exemption can be applied if the vendor does not receive the required exemption forms from the purchaser.
If a company is audited for sales tax by the Comptroller, won’t the auditor explain the exemptions that apply to that business?
Unfortunately, it is exceedingly rare for an auditor to be forthcoming with information about exemptions and potential refunds when conducting an audit. Their audit procedures are specifically designed to focus solely on underpayments. Offhand, I can only remember one audit in my entire career where an auditor voluntarily scheduled refunds related to these kinds of operational exemptions.
How can businesses ensure they’re utilizing all of the exemptions available to them?
One option is to engage a service provider to do a sales tax refund review. This consists of a detailed review of a company’s purchases to identify vendors who charge tax on exempt items. The adviser would communicate its findings to management and review specific vendors and invoices where tax was charged in error to help reduce future overpayments.
The service provider can tailor reviews to require minimal assistance from the company’s personnel. It’s not uncommon to only need five to 10 hours of a company’s time to complete a sales tax refund review. Saving money by taking advantage of available exemptions is much more ‘knowledge intensive’ than
Chris Wallace is a senior manager in state and local tax services at Weaver. Reach him at (972) 448-9294 or
The oil and gas industry in the United States faces various trends within the next five years that promote considerable optimism but that also highlight the need for continual vigilance, says Melvin F. “Trey” Hunt III, partner-in-charge of Oil and Gas Services at Weaver. Those trends relate to the cost and availability of credit and capital, technology, the regulatory landscape, and global conditions and energy demand.
Smart Business spoke with Hunt about the challenges and rewards that those in the oil and gas industry can expect over the next five years.
What do cost and availability of capital and credit look like going forward for the oil and gas industry?
Adverse business conditions in the U.S. during the past five years prompted the Federal Reserve to reduce the prime lending rate to promote investment and economic growth. Although the national economy continues to display signs of recovery, interest rates are likely to remain low for quite some time, leaving credit readily available for capital expenditures. That is great news for oil and gas companies seeking funds to expand operations.
How has new technology revolutionized this industry?
Horizontal drilling and hydraulic fracturing might represent a modern-day Industrial Revolution that will make much more hydrocarbon energy available to consumers in the U.S. and beyond.
The Eagle Ford shale area, a few hours southwest of Houston, serves as an example of the impact those technologies can have for increasing hydrocarbon energy production. For more than 50 years, oil and gas companies largely ignored the Eagle Ford shale due to its marginal economic profile. During that span, the area was home to more white-tailed deer, javelinas and rattlesnakes than people. Thanks to the combination of hydraulic fracturing and horizontal drilling, the vast reserves of the Eagle Ford shale area are now being exploited.
While these technologies are often associated with natural gas production and previously untapped areas, oil companies are also using technology to greatly extend the productive lifespans of mature oil-producing regions. Without question, technological advancements will continue to impact the industry.
How is the regulatory landscape creating a potential challenge for oil and gas exploration?
While the low cost of capital, the availability of credit and improved technology hold tremendous promise for energy companies, the national regulatory landscape presents the potential for unfavorable conditions.
The two major political parties in the U.S. differ in how they view the oil and gas industry. Among other issues, those differences are reflected in debates regarding the continuation of the Intangible Drilling Costs deduction, Cost Depletion allowance and other federal tax incentives favorable to the oil and gas industry. Whether or not such tax provisions remain in effect for 2013 and beyond may hinge on the November election results and any ensuing Congressional and White House
While domestic oil and gas companies benefit from technological advances, they also face calls for more stringent regulation regarding hydraulic fracturing and other practices. Up to now, those calls have mainly affected companies operating in the Eastern United States. Such calls, though, may also affect Texas oil and gas operations during the next five years.
What is in store for the future of the oil and gas industry because of global conditions and energy demand?
Various economic side effects caused by regulatory and geopolitical changes may affect oil companies more than traditional market fundamentals, such as supply and demand.
The measured and efficient exploitation of natural resources around the world depends upon maintaining political stability in Saudi Arabia, Nigeria, Venezuela and other energy-exporting nations. Political unrest in such international regions will influence market conditions for Texas companies. At some point, though, the global economy will also regain momentum, and the hydrocarbon-hungry economies of China, India and other countries will most likely drive energy commodity prices higher. All the while, Big Oil, smaller tech-oil innovators backed by eager venture capital firms and everyone in between will be frenetically pursuing new and creative ways to extract the world’s hydrocarbon treasures.
The next five years offer the promise of low interest rates and access to capital, presenting ideal conditions for business expansion by oil and gas companies. The capabilities of horizontal drilling and hydraulic fracturing make it economically feasible for companies to extract more oil and gas. If the geopolitical and regulatory environments cooperate, the United States could have a recipe for energy independence and economic prosperity for generations, a recipe that would particularly benefit Texas oil and gas companies.
Melvin F. “Trey” Hunt III, CPA, is Weaver’s partner-in-charge of Oil and Gas Services. Weaver is ranked the largest independent regional accounting firm in the Southwest with seven offices throughout Texas. Reach him at (832) 320-3296 or Trey.Hunt@weaverllp.com.
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Not only is Texas a leading provider of crude oil and natural gas, but the state’s abundant sunlight and persistent winds offer businesses yet another opportunity to lead the nation by tapping renewable energy sources to power manufacturing plants, distribution centers and office buildings.
But despite the fact that Texas companies can leverage more than 80 federal, state and local incentive programs to defray the cost of purchasing and installing renewable energy systems and energy conservation equipment, executives in the Lone Star state are still leaving money on the table.
“Renewable energy and conservation incentives and credits allow companies to demonstrate environmental stewardship, increase operating efficiencies, and lower income taxes by defraying the cost of purchasing renewable energy and energy conservation equipment and systems,” says Laura Roman, CPA, CMAP, a partner in tax and strategic business services at Weaver. “Unfortunately, the funds often go unused, and the programs won’t last forever.”
Smart Business spoke with Roman about the opportunities to lower taxes and operating expenses and positively impact the environment by taking advantage of underutilized conservation and renewable energy credits and incentives.
Why should companies consider switching to renewable energy or energy efficient building materials?
The benefits include the opportunity to lower energy consumption and utility bills by installing modern, energy-efficient manufacturing equipment, windows or HVAC systems, and the chance to promote a positive public image by launching green initiatives and supporting environmental stewardship. Plus, both tenants and building owners can utilize the incentive programs and reap the financial rewards. For example, the improvements help owners by boosting property values, while tenants benefit from increased energy efficiency, which ultimately reduces operating costs.
What types of incentives are available?
There are more than 54 federal and 28 state and local programs that can be used for equipment purchases or upgrades that reduce energy consumption or utilize solar, wind, ethanol and biodiesel energy. The programs include tax deductions, credits and exemptions, loans and grants, rebates and performance-based incentives. For example, Texas businesses can qualify for commercial energy efficiency rebates, energy-efficient incentive programs, green building corporate tax credits and sales tax exemptions for purchasing energy and water efficient products. While the U.S. Treasury Department offers renewable energy grants for projects involving solar photovoltaics, landfill gas, wind, biomass, hydroelectric, geothermal, municipal solid waste, CHP/cogeneration, solar hybrid lighting, hydrokinetic, tidal/wave energy, and ocean and fuel cells using renewable fuels or micro turbines.
Best of all, executives don’t have to commandeer large amounts of cash to complete the projects because companies can tap different programs to train employees, purchase equipment or pay for installation contractors. So, companies can still invest in that much-needed marketing program or software upgrade if they utilize renewable energy incentives and credits to hire renewable energy specialists, replace inefficient manufacturing equipment or install a new HVAC system.
How do the incentives provide financial benefits?
Essentially there are five areas where companies benefit from renewable energy incentives and tax credits.
- Gross income exclusions. Companies can deduct the full amount of incentive payments or grant funds they receive for qualified renewable energy or energy conservation projects from gross income.
- Dollar-for-dollar deductions. There are no sliding scales or phased-out deductions. Companies can use every dollar they invest in qualified renewable energy and energy conservation projects to reduce their tax liability.
- Accelerated depreciation. Under IRS Section 179D, companies can depreciate the cost of purchasing new plant and energy equipment at a faster rate than typically allowed. So, instead of taking 39 years to recover the cost of a new lighting, HVAC system or building envelope, the owner of a 100,000-square-foot building can deduct up to $1.80 per square foot, or up to $180,000 in the first year.
- Ancillary funding and allowances. Funding is available to hire specialized workers or train current employees on the use of renewable energy equipment and processes.
- Multiple opportunities. Companies can tap multiple incentives for each project including loans, performance-based incentives, deductions, tax exemptions and grants, as well as property and sales tax rebates.
Should executives be aware of any special qualifications or rules?
The incentive plans and tax codes are fairly straightforward, but there’s no need to spend hours interpreting the criteria or deciphering nebulous clauses when a tax professional is intimately familiar with the nuances of each program. At the same time, he or she may help identify additional opportunities to complete the project without tapping cash reserves, and can often share tips and ideas from experience helping other companies navigate the process.
How can executives evaluate the ROI and choose the most advantageous projects?
Companies should discuss ideas and energy needs with architects, contractors and energy professionals so they can create a list of feasible projects and determine the material and labor cost for the various improvements. Review the list with an accountant, since he or she is familiar with the tax code and incentives and can provide an estimate of the cash outlay and ROI. Finally, act now. Remember, it costs virtually nothing to investigate these opportunities, and there’s no sense in waiting when the money to complete renewable energy or energy conservation projects is there for the taking.
Laura Roman, CPA, CMAP, is a partner in tax and strategic business services at Weaver. Reach her at (432) 570-3030 or Laura.Roman@weaverllp.com.
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The Division of Corporation Finance, a part of the Securities and Exchange Commission, has issued guidance on disclosure obligations related to cyber security risks and incidents. And although public companies aren’t yet required to disclose this information to shareholders, it’s just a matter of time, says Brittany Teare, IT advisory manager with Weaver.
“Right now, this is just guidance in the best interest for your shareholders, but that will likely change. It could become a requirement, probably sooner rather than later,” says Teare.
Just as the Senate headed for its August recess, efforts were made to pass cyber legislation. Although the bill didn’t pass, more regulation surrounding cyber risks and security is certainly coming.
Smart Business spoke with Teare about what the guidance entails and how businesses can measure and guard against cyber risks.
Have the SEC reporting requirements for cyber security changed with this guidance?
The new guidance takes the existing requirements that public companies follow and expands upon them. There’s no mandatory piece yet that results in a direct impact on a company if it doesn’t disclose information on cyber incidents.
Basically, the guidance states that if cyber security risks and cyber incidents have a material effect on your shareholders — if it could affect how financial information is reported — you have to report them.
How can you tell when cyber security risks are going to materially impact your company?
The guidance addresses some of the possible risks and whether they should be voluntarily reported to shareholders. If you don’t have cyber security controls around your key financial systems, for example, then the way you record or report your data can be easily manipulated or altered. Even if a cyber breach has not yet occurred, it is very likely.
Cyber security itself is a gray area. Employers typically know that network and perimeter security, access and change controls should be in place, but executives may not consider disclosing vulnerabilities. CEOs and CFOs are used to looking at the balance sheet and seeing line items for hardware and other things they can touch. It can be challenging to consider the likelihood and risk that the organization could be breached and the ways it could happen. Addressing weaknesses is something that companies need to continue to do.
What is your advice to CEOs about quantifying data and seeing vulnerabilities?
A starting point is to designate a person or group of people responsible for cyber security. These people should not only understand where the SEC is at and where requirements are potentially heading with this guidance, but should also identify risks to the specific organization.
There is a central entry point in any network, but key people need to know where an attacker will head and what the most sensitive data is. If an attacker can get to the most sensitive data in a network, this could add up to a huge loss. If the company does not store much of this type of information, then an attack could involve a company’s reputation, which is much more difficult to value.
Another challenge is improving communication from the CIO or IT manager. Often, IT will say, ‘We need X dollars for new equipment, applications and hardware that are going to help make our organization more secure.’ It’s usually a considerable amount of money and can be millions of dollars in larger organizations. When management hears that number, they want to know what the return on that investment is going to be. IT typically struggles with quantifying that return.
A CIO needs to be able to tell other executives, ‘If this firewall, application or system is not installed, a breach would cost us X dollars, or the company could lose X dollars per day,’ for example. Not everything can be quantified, such as a company’s reputation, but this gives CIOs a place to start.
Is cyber security a big factor for investors?
Yes, and it is becoming more so as the public realizes the prevalence of cyber attacks. Shareholders and employers alike are justifiably concerned about this because some of the most secure companies in the world have been breached in the recent past. For example, RSA, which provides security management solutions such as strong two-factor authentication for many well-known organizations, was recently breached. If a large company that specializes in security can be breached, then small and mid-market businesses are susceptible.
What are some steps businesses should take to protect their data and reputation?
There are some key, high-level steps that companies should consider:
- Take inventory of the data systems and gain an understanding of where critical data is located. Then, work to ensure that there is an appropriate amount of security on those areas.
- Use complex, strong passwords to help protect the network, systems and data, and regularly change them. Have the system lock out users after a certain number of failed attempts and log all such activity.
- Most important, heavily monitor the networks and all systems. Check who is logging in and from where, who is successfully entering and who is failing. Then set a baseline to understand any abnormalities.
- Use the principle of least privilege, especially for critical accounts and functions. This ensures that no single employee has all access; instead, access is tailored to the job function. If there is a breach, it prevents those accounts from being abused for something they shouldn’t be used for in the first place.
These simple steps are often overlooked by many companies. There is much more that companies can do, but first take small steps to implement key, basic controls. Then, if a breach occurs, the business can more easily identify what and how it happened.
Brittany Teare is an IT advisory manager with Weaver. Reach her at (972) 448-9299 or email@example.com.
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If your business leases equipment, vehicles, office space or other facilities, the proposed lease accounting standards could have a significant impact on your company’s financial statements.
Over the past two years, the business and financial communities have been awaiting finalization of the proposed lease standards that will transform balance sheets. The proposed changes, originally outlined in an exposure draft issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) in August 2010, have been delayed due to the large number of comments and questions received during the comment period. Some companies may have been hoping that the scope of standards would be lessened before they were finalized.
However, that doesn’t appear to be happening. In July 2011, the boards agreed to re-expose the revised standards to businesses and financial statement users. While the revised exposure draft isn’t expected until later in 2012, the boards have released some tentative decisions reached in their June 2012 meetings that shed light on how the standards may ultimately look.
“The boards haven’t changed their initial position that long-term leases represent an obligation that should be reported on a business’s balance sheet,” says Mark Lund, assurance services partner for Weaver. “The tentative decisions reached in their last meetings helped clarify some questions raised during the first round of responses from the public. Additionally, the boards appear to have addressed the issue of the acceleration of expenses for lessees in certain circumstances, which was criticized in the initial draft. Beyond that, I don’t see any reduction in scope or administrative relief in the updates.”
Smart Business spoke with Lund about the tentative decisions on the proposed standards and what they mean for businesses.
What are the major components of the proposed lease standards?
The proposed lease standards are a joint effort to help create convergence between U.S. and international accounting standards for leases and to address perceived weaknesses regarding current financial statement presentations of leasing arrangements. Under existing U.S. standards, leases are either classified as capital leases or operating leases. Businesses are not required to include operating lease commitments as liabilities on their balance sheets.
Under the proposed standards, lease commitments — existing and new — are to be recorded on a company’s balance sheet as liabilities with an offsetting asset called a ‘right-of-use asset.’ The lease obligation will be divided between current liability and non-current liability, similar to a note payable, and the existing capital lease presentation. The boards expect to issue a revised draft in the third quarter of 2012 and then take additional comments. The final standard likely will be issued in 2013.
How has the acceleration of expenses over the lease term been tentatively addressed?
In the first draft, capitalization of leased assets and liabilities accelerated the recognition of expenses earlier in the lease term. Companies were required to amortize the asset over the lease term, while the lease obligation was amortized using the effective interest method. That method results in more interest expense being recognized earlier in the lease term. Based on concerns, the boards have tentatively decided leases of property, such as buildings and real estate, can be accounted for using a straight-line approach, meaning the expense recognition will be recorded evenly over the lease term.
However, if your lease term represents the major part of the asset’s economic life, or if the lease payment obligation amount is the equivalent of essentially buying the asset, you won’t be able to utilize the straight-line expense approach. All other leases of assets other than property will continue to be accounted for as outlined in the original exposure draft, including:
- A business will initially recognize a right-of-use asset and the related liability for its lease obligation measured at the present value of the lease payments.
- The right-of-use asset will be amortized, similar to depreciation, on a systematic basis that represents the use or consumption of the asset.
- The amortization expense of the asset and the interest expense related to the liability are shown separately on the income statement.
What are some other key provisions?
The FASB further identified leases that are within the scope of the new standard to include long-term leases of land. Leases of 12 months or less, including the option periods, however, are excluded from the new standard. Proposed financial statement disclosures are lengthy and will add time to comply.
How will the changes impact businesses?
There will be an immediate gross-up of the balance sheet, adding right-to-use assets and related current and noncurrent liabilities to financial statements. The amounts could be significant, depending on lease activity. Bankers, sureties and other users often analyze companies’ liquidity and performance using financial ratios.
Current ratio, debt-to-equity ratio, and other leverage and coverage ratios will be affected with the addition of these new lease liabilities and related interest expenses. Covenant agreements will have to be revised for companies to remain in compliance.
How can employers prepare for the changes?
Prepare a pro-forma of your company’s balance sheet and income statement reflecting the new standard. Then, sit down with the users of your financial statement and discuss how the new standards will impact your company’s financial statements and ratios. This proactive approach will help bankers and creditors plan ahead on what to expect and how to maintain covenant compliance once the standards are finalized.
Mark Lund is an assurance services partner for Weaver. Reach him at (713) 297-6907 or firstname.lastname@example.org.
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Mid-sized manufacturing companies face a number of pressures — inflation, a weak dollar, growing foreign demand and stagnant domestic sales — but targeted tax incentives can help businesses decrease their tax and allow them to breathe a little easier.
Two incentives drawing interest from employers are the Last-In, First-Out (LIFO) method of accounting and establishing an IC-DISC (Interest Charge-Domestic International Sales Corporation) entity, says Philippe Simoens, CPA, partner in tax and strategic business service for Weaver.
“Although the U.S. has one of the highest corporate tax rates in the world, there are ways to get more sophisticated with your tax planning through LIFO, IC-DISC or other special deductions and credits to help control your tax situation,” says Simoens.
Smart Business spoke with Simoens about how manufacturers can efficiently attain tax savings with LIFO and IC-DISC.
How can LIFO accounting or launching an IC-DISC help manufacturers and other businesses?
The LIFO method allows manufacturers to use the price of the most-recently purchased inventory (last-in) as a basis for determining the cost of goods sold (first-out). This method works well when inflation and supply costs are increasing, as the manufacturer declares small net profits on goods sold, leading to lower taxes.
To simplify the calculation process, companies can follow simplified methods such as dollar-value pooling. One particular method uses indices from the Bureau of Labor Statistics, which make it simple to calculate inflation.
Companies also are turning to IC-DISCs with the demise of other U.S. export incentives. When a business exports products that are extracted, grown or manufactured in the U.S., the company can set up an IC-DISC. This separate entity receives a commission of 50 percent of export profits or 4 percent of gross receipts. The IC-DISC then pays out at the dividend rate of 15 percent, while the remaining profit is taxed at the regular corporate rate of 35 percent. Employers may have some products that qualify for the deduction and others that do not. So, a periodic review of export sales is required at least annually after the IC-DISC is set up.
Right now, more companies are taking advantage of IC-DISC than LIFO accounting, but both can offer savings.
What types of businesses benefit from LIFO or IC-DISC?
Both tax incentives are mostly targeted at U.S. manufacturing companies, but some distributors and/or producers may be able to take advantage of them, as well.
The benefit that businesses receive from LIFO depends on the types of inventory and products manufactured, and also varies by industry and regional location. Companies that process raw materials that have steadily increased in price could be a good fit, such as those in the food or metal fabrication sectors.
In general, companies within specific global industries that make substantial allowances for inflation in financial and production planning would also benefit from the increased cash flow LIFO brings. However, a business that produces technological components, such as a computer manufacturer, would not usually gain an advantage because productivity gains and a short inventory life cycle do not lead to increasing inventory costs.
When considering setting up an IC-DISC, companies need to consider whether they meet the requirements. Businesses that sell only in the domestic market or that have a foreign supply chain won’t be able to leverage the IC-DISC as a general rule, as one requirement is that the exported item must be manufactured or produced for at least 50 percent of its value in the U.S.
Are there drawbacks to either tax incentive?
One issue for employers is the uncertainty of the world market and tax laws. For example, with the euro currency crisis, commodity prices may fall, which would curtail the advantages of LIFO accounting. At the same time, there is uncertainty as to what Congress will do in this election year, which means tax rates could change based on the outcome of the November election for the 2013 tax year. The 15 percent dividend tax rate may increase or be extended unchanged; while there could also be changes to corporate taxation and special accounting methods and deductions.
In addition, there is a debate about federal corporate taxation. Many politicians want to reduce the top federal corporate tax rates and repeal special deductions and credits. However, under the current system, a profitable mid-market employer can start with a marginal tax rate of 35 percent; however, after applying tax incentives that reward manufacturing companies that create domestic jobs in the U.S. — such as the domestic production activities deduction, IC-DISC benefit, the R&D tax credit and the LIFO benefit — the resulting effective tax rate can drop substantially.
One should also note that the LIFO method could be repealed under the current process of convergence to IFRS.
Another potential barrier is these tax incentives can be complicated to implement and calculate, and they require a solid understanding by company management. If an employer is considering a capital transaction with a private equity group or putting the company on the market, having these methods in place may not appeal to buyers. For example, the new partner or owner of a consolidated group may prefer to use an alternative method, such as maximizing earnings per share, which is impacted by LIFO accounting.
That said, a mid-market company owner that wants to implement effective corporate tax planning would be well served to explore special deductions such as LIFO accounting or creating an IC-DISC, among others, to see if the benefits may outweigh any challenges.
Philippe Simoens, CPA, is a partner in tax and strategic business services at Weaver. Reach him at (832) 320-3215 or email@example.com.
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