Acuity Advisors

Boardroom and Management Diversity Adds Value

Diversity in a company’s board of directors and its management team helps enhance corporate value. The Securities and Exchange Commission (SEC) already requires limited disclosures on boardroom diversity and has plans to expand these disclosures in the future — but diversity isn’t just for public companies. Private companies can benefit from more diverse insights, too.

Benefits to businesses

Getting input on major decisions from people from a wide variety of backgrounds and experience levels helps enhance corporate value. During a recent speech, SEC Chief Accountant Wesley Bricker said, “Diversity of thoughts diminishes the extent of group thinking, and diversity of relevant skills (for example, industry or financial reporting expertise) enhances the audit committee’s ability to monitor financial reporting.”

Academic research has found that boards with diverse members have better financial reporting quality and are more likely to hold management accountable after poor financial performance. This concept also extends to private companies: Management teams with people from diverse backgrounds and/or functional areas expand the business’s abilities to respond to growth opportunities and potential threats.

Financial statement disclosures

In 2009, the SEC issued Release No. 33-9089, Proxy Disclosure Enhancements, to set a number of disclosure rules, including the extent to which the company considers diversity in selecting board candidates. But several institutional investors — including the California Public Employees’ Retirement System (CalPERS) and the New York State Common Retirement Fund — say the requirements don’t provide enough information and haven’t sufficiently increased diversity on corporate boards.

Some investor groups want the SEC to require all public companies to disclose more detailed information about boardroom diversity. In 2016, the SEC’s Advisory Committee on Small and Emerging Companies made a set of recommendations for improving the disclosure rules about the diversity of boards of directors. And, in May, Representatives Carolyn B. Maloney and Donald S. Beyer, Jr., sent a letter to SEC Chair Jay Clayton, urging him to take action on women’s underrepresentation on America’s corporate boards.

Be a leader, not a follower

In the meantime, some companies have voluntarily expanded their disclosures to meet these recommendations. These businesses openly disclose in their proxy statements the extent to which their boards are diverse in race, gender and ethnicity. We can help assess your level of boardroom or management team diversity — and provide cutting-edge disclosures that show your commitment to enhancing shareholder value.

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Prepare Now For 1099 Reporting

Are you prepared for 1099 reporting for 2017?

We are in the home stretch toward the 2017 calendar year end and that means 1099 reporting is just around the corner. Prepare now by reviewing your vendor list to determine who you will need to issue a 1099 for 2017 and begin gathering the required information. Our website contains valuable information regarding 1099 reporting under our Resources/Business Compliance section at www.acuitycpas.com or contact us directly if you have questions pertaining to your 1099 reporting obligations.

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Research credit can offset a small business’s payroll taxes

Does your small business engage in qualified research activities? If so, you may be eligible for a research tax credit that you can use to offset your federal payroll tax bill.

This relatively new privilege allows the research credit to benefit small businesses that may not generate enough taxable income to use the credit to offset their federal income tax bills, such as those that are still in the unprofitable start-up phase where they owe little or no federal income tax.

QSB status

Under the Protecting Americans from Tax Hikes Act of 2015, a qualified small business (QSB) can elect to use up to $250,000 of its research credit to reduce the Social Security tax portion of its federal payroll tax bills. Under the old rules, businesses could use the credit to offset only their federal income tax bills. However, many small businesses owe little or no federal income tax, especially small start-ups that tend to incur significant research expenses.

For the purposes of the research credit, a QSB is generally defined as a business with:

Gross receipts of less than $5 million for the current tax year, and
No gross receipts for any taxable year preceding the five-taxable-year period ending with the current tax year.

The allowable payroll tax reduction credit can’t exceed the employer portion of the Social Security tax liability imposed for any calendar quarter. Any excess credit can be carried forward to the next calendar quarter, subject to the Social Security tax limitation for that quarter.

Research activities that qualify

To be eligible for the research credit, a business must have engaged in “qualified” research activities. To be considered “qualified,” activities must meet the following four-factor test:

The purpose must be to create new (or improve existing) functionality, performance, reliability or quality of a product, process, technique, invention, formula or computer software that will be sold or used in your trade or business.
There must be an intention to eliminate uncertainty.
There must be a process of experimentation. In other words, there must be a trial-and-error process.
The process of experimentation must fundamentally rely on principles of physical or biological science, engineering or computer science.

Expenses that qualify for the credit include wages for time spent engaging in supporting, supervising or performing qualified research, supplies consumed in the process of experimentation, and 65% of any contracted outside research expenses.

Complex rules

The ability to use the research credit to reduce payroll tax is a welcome change for eligible small businesses, but the rules are complex and we’ve only touched on the basics here. We can help you determine whether you qualify and, if you do, assist you with making the election for your business and filing payroll tax returns to take advantage of the new privilege.

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4 questions to guide your prospective financial statements

CPAs don’t just offer assurance services on historical financial results. They can also prepare prospective financial statements that predict how the company will perform in the future. This list of questions can help you make more meaningful assumptions for your forecasts and projections.

1. How far into the future do you want to plan?

Forecasting is generally more accurate in the short term. The longer the time period, the more likely it is that customer demand or market trends will change.

While quantitative methods, which rely on historical data, are typically the most accurate forecasting methods, they don’t work well for long-term predictions. If you’re planning to forecast over several years, try qualitative forecasting methods, which rely on expert opinions instead of company-specific data.

2. How steady is your demand?

Sales can fluctuate for a variety of reasons, including sales promotions and weather. For example, if you sell ice cream, chances are good your sales dip in the winter.

If demand for your products varies, consider forecasting with a quantitative method, such as time-series decomposition, which examines historical data and allows you to adjust for market trends, seasonal trends and business cycles. You also may want to use forecasting software, which allows you to plug other variables into the equation, such as individual customers’ short-term buying plans.

3. How much data do you have?

Quantitative forecasting techniques require varying amounts of historical information. For instance, you’ll need about three years of data to use exponential smoothing, a simple yet fairly accurate method that compares historical averages with current demand.

Want to forecast for something you don’t have data for, such as a new product? In that case, use qualitative forecasting or base your forecast on historical data for a similar product in your arsenal.

4. How do you fill your orders?

Unless you fill custom orders on demand, your forecast will need to establish optimal inventory levels of finished goods. Many companies use multiple forecasting methods to estimate peak inventory levels. It’s also important to consider inventory needs at the individual product level and local warehouse level, which will help you ensure speedy delivery.

If you’re forecasting demand for a wide variety of products, consider a relatively simple technique, such as exponential smoothing. If you offer only one or two key products, it’s probably worth your time and effort to perform a more complex, time-consuming forecast for each one, such as a statistical regression.

Plan to succeed

You may not have a crystal ball, but using the right forecasting techniques will help you gaze into your company’s future with greater accuracy. We can help you establish the forecasting practices that make sense for your business.

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How to maximize deductions for business real estate

Currently, a valuable income tax deduction related to real estate is for depreciation, but the depreciation period for such property is long and land itself isn’t depreciable. Whether real estate is occupied by your business or rented out, here’s how you can maximize your deductions.

Segregate personal property from buildings

Generally, buildings and improvements to them must be depreciated over 39 years (27.5 years for residential rental real estate and certain other types of buildings or improvements). But personal property, such as furniture and equipment, generally can be depreciated over much shorter periods. Plus, for the tax year such assets are acquired and put into service, they may qualify for 50% bonus depreciation or Section 179 expensing (up to $510,000 for 2017, subject to a phaseout if total asset acquisitions for the tax year exceed $2.03 million).

If you can identify and document the items that are personal property, the depreciation deductions for those items generally can be taken more quickly. In some cases, items you’d expect to be considered parts of the building actually can qualify as personal property. For example, depending on the circumstances, lighting, wall and floor coverings, and even plumbing and electrical systems, may qualify.

Carve out improvements from land

As noted above, the cost of land isn’t depreciable. But the cost of improvements to land is depreciable. Separating out land improvement costs from the land itself by identifying and documenting those improvements can provide depreciation deductions. Common examples include landscaping, roads, and, in some cases, grading and clearing.

Convert land into a deductible asset

Because land isn’t depreciable, you may want to consider real estate investment alternatives that don’t involve traditional ownership. Such options can allow you to enjoy tax deductions for land costs that provide a similar tax benefit to depreciation deductions. For example, you can lease land long-term. Rent you pay under such a “ground lease” is deductible.

Another option is to purchase an “estate-for-years,” under which you own the land for a set period and an unrelated party owns the interest in the land that begins when your estate-for-years ends. You can deduct the cost of the estate-for-years over its duration.

More limits and considerations

There are additional limits and considerations involved in these strategies. Also keep in mind that tax reform legislation could affect these techniques. For example, immediate deductions could become more widely available for many costs that currently must be depreciated. If you’d like to learn more about saving income taxes with business real estate, please contact us.

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