Acuity Advisors

Lower gas costs = lower business driving tax deductions

This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business went down. The reason? Compared with last year, the cost of driving is less because gas prices are lower.

Two options

If you use a vehicle for business, you can generally deduct the actual expenses attributable to your business use. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle, based on the percentage of business use. However, depreciation write-offs are subject to “luxury car” limits.

But some taxpayers don’t want to keep track of actual vehicle-related expenses. Another option: You may be able to use the IRS’s standard mileage rate. With this approach, you don’t have to account for all your actual expenses, although you still must record certain information, such as the mileage for each business trip, the date and the destination.

This year’s rate

Beginning on January 1, 2016, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 54 cents per mile. For 2015, the rate was 57.5 cents per mile.

The cents-per-mile rate is adjusted annually by the IRS. It is based on an annual study commissioned by the IRS about the costs of operating a vehicle.

Current gas costs

On June 15, 2016, the national average price of a gallon of regular unleaded gas was $2.36 and it fell below $2 a gallon earlier this year. This is down from the average price of $2.80 per gallon a year earlier. (There are variations in fuel prices from one state to another so the per-gallon price in your state could be higher or lower.)

Going forward

Not all taxpayers can use the cents-per-mile rate. It depends on how they’ve claimed deductions for the same vehicle in the past.

If you have questions about deducting mileage expenses in your situation, contact us.

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Could online crowdfunding work for you?

On May 16, new guidance went into effect that allows companies to raise as much as $1 million a year through regulated online portals as long as the companies have submitted annual financial reports to the Securities and Exchange Commission (SEC). They don’t have to actually register with the SEC. Such “crowdfunding” offers could be an alternative to venture capital and angel investor financing for startups and other privately held businesses. But it’s not for everyone.

Slow start

In October, the SEC finalized its long-delayed guidance under the Jumpstart Our Business Startups (JOBS) Act in Release No. 33-9974, Crowdfunding. It’s been more than a month since the guidelines went into effect — and so far, the market has been slow to warm up.

Limitations

The new rule allows online crowdfunding offers to be made to accredited and nonaccredited investors. The former are defined as those who make $200,000 a year, or $300,000 jointly with a spouse, or have at least $1 million in net worth, not including their primary residence. Both accredited and nonaccredited investors are, however, limited in how much they can contribute to crowdfunding deals each year based on their net worth and income.

Intermediaries

Online crowdfunding offers must be made through intermediaries that must either be registered brokers or a new type of registered entity called a “funding portal.” Currently only nine funding portals have successfully registered with the SEC. Setting up a portal requires significant upfront investment in technology, financial reporting and other compliance costs.

The SEC holds funding portals to a high standard, expecting them to act as “gatekeepers” to protect investors against fraud. The new guidance calls for intermediaries to establish a “reasonable basis” to believe an issuer is in compliance with the crowdfunding rules. And intermediaries must provide investors with educational materials, including descriptions of the securities offered and when they can be resold. In general, stock or debt purchased in a crowdfunding deal is subject to a one-year holding period.

Stay tuned

Over the next three years, the SEC will evaluate whether the restrictions in the crowdfunding guidance are too burdensome for run-of-the-mill startups. If so, lawmakers may go back to the drawing board once the process becomes more established. Contact us for more information on this up-and-coming opportunity to raise capital and market awareness for your private business. Our accounting professionals can help your crowdfunding offer comply with the SEC’s financial reporting requirements.

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Testing goodwill for impairment under GAAP

Acquired goodwill and other indefinite-lived intangible assets must be reported on your balance sheet at fair value and tested at least annually for impairment. Testing is also required when a “triggering event” — such as the loss of a key customer or unanticipated competition — occurs that could lower the asset’s value. But there are possible exceptions that could simplify your recordkeeping.

Two steps

Testing goodwill for impairment requires two steps under U.S. Generally Accepted Accounting Principles (GAAP). First, you must estimate the fair value of the company (or reporting unit if multiple product lines or divisions exist). If book value exceeds fair value, goodwill impairment has likely occurred.

Under the second part of the test, you must allocate fair value to the tangible and identifiable intangible assets. What’s left over is the implied fair value of goodwill. Once the book value of goodwill has been written down to its fair value, GAAP prohibits you from reversing impairment losses, even if the value eventually recovers. So, companies are understandably hesitant to report impairment and prematurely alarm investors about losses that may someday be recoverable.

Exceptions

In 2014, the Financial Accounting Standards Board (FASB) provided private companies with some simplified reporting alternatives. Under one exception, private companies are required to test for impairment only when there’s a triggering event. Private companies also may elect to amortize acquired goodwill over a period not to exceed 10 years, rather than capitalize it on the balance sheet and test for annual impairment.

In addition, the FASB recently proposed guidance that, if approved, would remove the second step of the goodwill impairment test for all companies. Under the proposal, an impairment charge for goodwill would equal the amount by which the company’s (or reporting unit’s) book value exceeds its fair value.

Work in progress

We can help you test for impairment or elect one of the simplified reporting alternatives. Contact us for more information.

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What’s the best entity choice for your business?

A principal consideration for any new or existing business is choosing an appropriate legal entity. Available options in most states include C corporations, S corporations, general and limited partnerships, limited liability companies (LLCs), limited liability partnerships (LLPs) and sole proprietorships.

Tax implications

Each entity type has advantages and disadvantages. It’s important to consider the tax implications. A certain type of entity can minimize your taxes. Understanding the total tax situation, including income tax, payroll tax, and estate tax exposure, is essential when determining the choice of entity.

Personal liability protection is often an owner’s main objective in choosing the appropriate entity. Operating as a proprietorship or general partnership offers no owner liability limitation. Limited partnerships, LLCs, LLPs, S corporations, and C corporations provide varying degrees of liability protection for the owners, depending on state law. For sole owners, the single-member LLC is a popular liability-limiting alternative to a proprietorship.

If a business is owned by more than one individual, it cannot be run as a proprietorship. If all owners provide management services, a limited partnership is not a viable option, because that would jeopardize their status as limited partners. Limited partnerships,
LLPs, LLCs, C corporations, and S corporations allow for management by multiple individuals without limitations.

Get ready for succession

In many cases, an entity status change is sought to accomplish a transition in ownership. Whether the objective involves moving ownership to a successor via gifts, an installment sale, a stock redemption, a bequest, or a combination of methods, it is often necessary to use a different form of entity to meet these objectives. Each entity selection situation is unique. The business owner’s objectives must be systematically matched with the various entities’ attributes. All major tax and nontax issues must be considered and alternatives explored before choosing the appropriate structure for your business.

As with most business decisions, planning can have a positive, lasting effect on your venture. Contact us with questions about the appropriate entity structure for your existing business, a business you intend to purchase, or a contemplated new start-up business.

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Subsequent events: To report or not to report?

Financial statements reflect a company’s financial position at a particular date and the operating results and cash flows for a period ended on that date. But major events or transactions sometimes happen after the reporting period ends but before financial statements are finalized. Do your financial statements need to address these so-called “subsequent events”? This is one of the gray areas in financial reporting. Fortunately, the AICPA offers some guidance.

Recognition

Financial statements often aren’t available to be issued for a few months after the close of the reporting period, because it takes time to schedule and complete fieldwork. Unforeseeable events may happen during this period in the normal course of business. Examples include disasters such as fires, buyouts, and changes in foreign exchange rates.

Chapter 27 of the AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities classifies subsequent events into two groups:

Recognized subsequent events. These provide further evidence of conditions that existed on the financial statement date — for example, a major customer files for bankruptcy, highlighting the risk associated with its accounts receivable.
Nonrecognized subsequent events. These reflect conditions that arise after the financial statement date, such as a natural disaster that severely damages the business.

Generally, the former must be recorded in the financial statements. The latter aren’t required to be recorded, but may have to be disclosed in the footnotes.

Disclosure

To decide which events to disclose in the footnotes, consider whether omitting the information about them would mislead investors, lenders and other stakeholders. Disclosures should, at a minimum, describe the nature of the event and estimate the financial effect, if possible.

In some extreme cases, the effect of a subsequent event may be so pervasive that your company’s viability is questionable. This may cause your CPA to re-evaluate the going concern assumption that underlies your financial statements.

Gray area

We can help take the guesswork out of reporting subsequent events. For more information, contact us.

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