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A quick look at the President-elect’s tax plan for businesses

The election of Donald Trump as President of the United States could result in major tax law changes in 2017. Proposed changes spelled out in Trump’s tax reform plan released earlier this year that would affect businesses include:

Reducing the top corporate income tax rate from 35% to 15%,
Abolishing the corporate alternative minimum tax,
Allowing owners of flow-through entities to pay tax on business income at the proposed 15% corporate rate rather than their own individual income tax rate, although there seems to be ambiguity on the specifics of how this provision would work,
Eliminating the Section 199 deduction, also commonly referred to as the manufacturers’ deduction or the domestic production activities deduction, as well as most other business breaks — but, notably, not the research credit,
Allowing U.S. companies engaged in manufacturing to choose the full expensing of capital investment or the deductibility of interest paid, and
Enacting a deemed repatriation of currently deferred foreign profits at a 10% tax rate.

President-elect Trump’s tax plan is somewhat different from the House Republicans’ plan. With Republicans retaining control of both chambers of Congress, some sort of overhaul of the U.S. tax code is likely. That said, Republicans didn’t reach the 60 Senate members necessary to become filibuster-proof, which means they may need to compromise on some issues in order to get their legislation through the Senate.

So there’s still uncertainty as to which specific tax changes will ultimately make it into legislation and be signed into law.

It may make sense to accelerate deductible expenses into 2016 that might not be deductible in 2017 and to defer income to 2017, when it might be subject to a lower tax rate. But there is some risk to these strategies, given the uncertainty as to exactly what tax law changes will be enacted. Plus no single strategy is right for every business. Please contact us to develop the best year-end strategy for your business.

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How accounting estimates are audited

Measuring accounting estimates involves some level of uncertainty. As a result, accounting estimates — such as allowances for doubtful accounts, impairments of long-lived assets, and valuations of financial and nonfinancial assets — require extra attention from auditors. Here’s a closer look at the current standards for auditing estimates and examples of specialists who may be hired to provide independent estimates.

Applying the auditing standards

Some estimates may be easily determinable, but many are inherently subjective or complex. Auditing standards generally provide three approaches for substantively testing fair value measurements and other accounting estimates:

Testing management’s process. Auditors evaluate the reasonableness and consistency of management’s assumptions, as well as test whether the underlying data is complete, accurate and relevant.
Developing an independent estimate. Using management’s assumptions (or alternative assumptions), auditors come up with an estimate to compare to what’s reported on the internally prepared financial statements.
Reviewing subsequent events or transactions. The reasonableness of estimates can be gauged by looking at events or transactions that happen after the balance sheet date but before the date of the auditor’s report.

Independence guidelines generally prohibit auditors from providing certain services for their public audit clients. To obtain independent accounting estimates, companies often turn to outside specialists.

Relying on specialists

Examples of specialists used to prepare accounting estimates include:

Actuaries to determine employee benefit obligations,
Engineers to determine obligations regarding environmental remediation,
Appraisers to determine the value of intangible assets or real estate,
Geologists to estimate mineral deposits or oil reserves for mining and energy companies, and
Lawyers to forecast the potential losses from a legal proceeding.

Auditors often help direct these specialists to minimize the risk of misstatement, especially when specialists aren’t subject to the audit firm’s training, resources and quality control systems.

Finding help

Business transactions have grown more complicated in recent years, leading companies to make a significant number of subjective estimates and rely more heavily on outside parties to bring in specialized knowledge. We understand how to apply the auditing standards to accounting estimates made in-house and/or using outside specialists. Contact us for additional information.

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Tips for efficient year-end physical inventory counts

Do you dread the year-end physical inventory count? Business owners and managers often view these procedures as time consuming and disruptive. But a well-executed inventory count is more than a matter of compliance. It can also provide valuable insight into improving operational efficiency. Here’s how to run your count to maximize the benefits and minimize the hassle.

The basics

Inventory includes raw materials, work-in-progress and finished goods. Your physical inventory count also may include parts and supplies inventory. Under U.S. Generally Accepted Accounting Principles (GAAP), inventory is recorded at the lower of cost or market value.

Estimating the value of inventory may involve subjective judgment calls, especially if your company converts raw materials into finished goods available for sale. For example, the value of work-in-progress inventory includes overhead allocations and, in some cases, may require percentage-of-completion assessments.

A moving target

The inventory count gives a snapshot of how much inventory is on hand at year end. The value of inventory is always in flux, as work is performed and items are delivered or shipped. To capture a static value, it’s essential that business operations “freeze” while the count takes place.

Usually, it makes sense to count inventory during off-hours to minimize the disruption to business operations. Larger organizations with multiple locations may be unable to count everything at once. So, larger companies often break down their counts by physical location.

Proactive planning

Planning is the key to minimizing disruptions. Before counting starts, management can:.

Order (or create) prenumbered inventory tags,
Conduct a dry run to identify roadblocks and schedule workers,
Assign workers to count inventory using two-person teams to prevent fraud,
Write off any unsalable items, and
Precount and bag slow-moving items.

If your company issues audited financial statements, your audit team will be present during the physical inventory count. They aren’t there to help count inventory. Instead, they’ll observe the procedures, review written inventory processes and cutoffs, evaluate internal controls over inventory, and perform independent counts to compare to your inventory listing and counts made by your employees.

Beyond the count

When the inventory count is complete, it’s critical to investigate discrepancies between your computerized accounting records and physical inventory counts. We can use this information to help you evaluate how to stock items more efficiently and safeguard against future write-offs due to fraud, damage or obsolescence.

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There’s still time to set up a retirement plan for 2016

Saving for retirement can be tough if you’re putting most of your money and time into operating a small business. However, many retirement plans aren’t difficult to set up and it’s important to start saving so you can enjoy a comfortable future.

So if you haven’t already set up a tax-advantaged plan, consider doing so this year.

Note: If you have employees, they generally must be allowed to participate in the plan, provided they meet the qualification requirements.

Here are three options:

Profit-sharing plan. This is a defined contribution plan that allows discretionary employer contributions and flexibility in plan design. You can make deductible 2016 contributions as late as the due date of your 2016 tax return, including extensions — provided your plan exists on Dec. 31, 2016. For 2016, the maximum contribution is $53,000, or $59,000 if you are age 50 or older.
Simplified Employee Pension (SEP). This is also a defined contribution plan that provides benefits similar to those of a profit-sharing plan. But you can establish a SEP in 2017 and still make deductible 2016 contributions as late as the due date of your 2016 income tax return, including extensions. In addition, a SEP is easy to administer. For 2016, the maximum SEP contribution is $53,000.
Defined benefit plan. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum annual benefit for 2016 is generally $210,000 or 100% of average earned income for the highest three consecutive years, if less. Because it’s actuarially driven, the contribution needed to attain the projected future annual benefit may exceed the maximum contributions allowed by other plans, depending on your age and the desired benefit. You can make deductible 2016 defined benefit plan contributions until your return due date, provided your plan exists on Dec. 31, 2016.

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