Post on 13-Apr-2022
Year-end Tax Planning and Audit and Accounting (A&A) Updates
December 3, 2020
Year-End Tax Considerations for 2020 Agenda
▪CARES Act and FFCRA
▪Potential Changes to Tax Law
▪Year-end Tax Planning Strategies
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Your Year-End Tax Considerations Presenter
David A. Nash, CPAPartner, Tax Planning & Compliance Services
▪ Experience in public accounting and industry
▪ Specializes in strategic tax planning and preparation for closely
held domestic and international businesses
▪ Works with businesses in software/technology, manufacturing,
distribution, healthcare, construction and professional services
▪ Expertise: strategic tax planning, inbound tax strategies for
inbound international businesses, tax credits, business
structuring
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CARES Act & FFCRA
▪ Paycheck Protection Program (PPP)
▪ Retention credit (if no PPP funds were received)
▪ Employer payroll tax deferral (if no PPP funds were received)
• Also President Trump’s deferral for employee (not in CARES or FFCRA)
▪ Emergency Paid Sick Leave Act (EPSLA)
▪ Emergency Family Medical Leave Expansion Act (EFMLEA)
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U.S. Individual Tax RatesCurrent Law vs. New Administration’s Platform
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Ordinary LT CG & Qual. Div.
Taxable Income(MFJ) Current Platform Current Platform
< $19,750 10% 10% 0% 0%
$19,750 – $80,250 12% 12% 0% 0%
$80,250 – $171,050 22% 22% 15% 15%
$171,050 – $326,600 24% 24% 15% 15%
$326,600 – $414,700 32% 32% 15% 15%
$414,700 – $622,050 35% 39.6% 20%* 20%
$622,050 – $1,000,000 37% 39.6% 20% 20%
> $1,000,000 37% 39.6% 20% 39.6%
*20% Capital Gains bracket currently begins at $496,500
Current Ordinary rates are scheduled for sunset in 2026
Other Miscellaneous Tax ProvisionsCurrent Law vs. New Administration’s Platform
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Provision Current Platform
Standard Deduction(MFJ) $24,800 Not Discussed
SALT Deduction $10,000 Limit No Limit
“PEASE” Limitation N/A Applicable > $400k
QBI Deduction 20% Eliminate @ TI >$400k
Social Security Wages <$137,700 Also >$400k
Estate & Gift Lifetime Exemption
$11,580,000 Not Discussed
Estate Basis Step-Up Yes Eliminate
Corporate Tax Rate 21% 28%
Estate Tax Overview
▪ Jane owns the following on Dec. 30, 2020:
• Jane Inc. S-Corporation ($20 million FMV)
• $1 million of cash
• $3 million of securities
• $1 million home
▪ She has 2 children and a spouse (no prior spouses)
▪ She has used $2 million of lifetime exemption
▪ Current plan says to liquidate assets, give the husband $15 million, $2 million to a specified charity, and remainder equally to the two children (after taxes)
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Estate Tax Simple Calculation
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Provision Current Possible* Possible**
Total Estate $25 million $25 million $25 million
To Spouse $15 million $15 million $15 million
To Charity $2 million $2 million $2 million
Tentative Taxable Estate $8 million $8 million $8 million
Remaining Exemption $9.58 million $3 million $0
Taxable Estate $0 $5 million $8 million
Estate Tax $0 $1,945,800 $3,145,800
Amount left to each Child $4 million $3,027,100 $2,427,100
* $5 million revised lifetime exemption shown for possible comparison
**$1 million revised lifetime exemption shown for possible comparison
Year-End Planning Considerations
▪ An income tax rate increase is possible in the new year
• Consider recognizing ordinary income in the current year to the extent you and your tax advisor determine it will make sense
o Consider your method of accounting (individuals are cash basis), Your business may benefit from changing its method
o Consider IRA > ROTH conversions or other income events
• On the other side of the coin, defer any deductions until next year
o Capital expenditures(depreciation methods), charitable contributions, state tax payments
• Other CARES Act Provisions (5 Year Net Operating Loss Carryback)
• PPP Taxability
o Nontaxable income & nondeductible expenses
o Make sure proper consideration has been given to calculate expected taxable income
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Accrual Vs. Cash Basis Comparison
Balance Sheet at 12/31/19 12/31/20
Total Cash $500,000 $1,000,000
Total Accounts Receivable $2,500,000 $0
Total Accounts Payable $500,000 $0
Total Equity $2,500,000 $1,000,000
12/31/20 Accrual Basis Cash Basis 3115 A-C 3115 C-A
Taxable Income -1,500,000 $1,000,000 -1,000,000 -1,500,000
Est. Tax $0 $400,000 $0 $0
2021-2023 Income Adj.* N/A N/A $500,000 $0
Cash Available after taxes $1,000,000 $600,000 $1,000,000 $1,000,000
Cash Available from NOL** $675,000 N/A $450,000 $675,000
* Subject to tax rates and laws in each subsequent year** Assumed 45% fed/state rate. May be more beneficial to carry NOL forward.
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Year-End Planning Considerations
▪ Estate & Gift Tax uncertainty exists in the new year
• Consider making “known planned” gifts before year end.
• Revisit your wills and estate plans for necessary updates
▪ Capital Gains may be subject to a higher rate in the new year• Consider recognizing gains before year end
• Consider waiting to recognize losses in 2021
• Don’t let the tax tail wag the investment dog
▪ Charitable Contributions – can offset 100% of AGI this year• CARES ACT relaxed the 60% limitation
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Thank you.
David A. Nash, CPA
(770) 512-0500
dnash@wblcpa.com
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Audit and Accounting (A&A) Updates
December 3, 2020
Accounting & Audit Update Agenda
▪COVID-19: Common financial statement areas impacted• Management estimates: receivables and inventory reserves• Revenue recognition under ASC 606• Goodwill impairment considerations
▪COVID-19: Common transactions triggered:• Debt changes• PPP Loans and related accounting
▪Recent FASB Updates
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Your A & A Presenter
Leroy (Benny) Herman, Jr., CPAPartner, Assurance Practice
▪ More than 20 years in public accounting and industry
▪ Experience in manufacturing, distribution, fintech, technology,
construction and professional services
▪ Advises businesses from family-owned to late-stage private equity,
and has taken a company public
▪ Expertise: revenue recognition, inventory, stock-based compensation,
warrants, debt modifications, business combination accounting,
goodwill and intangible asset impairment, and other technical areas
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COVID-19: Common Financial Statement Areas Impacted
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Management Estimates: Receivables and Inventory Reserves
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COVID-19 Impact on Receivables and Inventory Reserves
▪ Receivables:
• COVID-19 likely caused a deterioration in credit worthiness across the entire customer base
o Commercial and consumer customers are likely experiencing cash flow challenges
o Government customers may lose expected funding for purchase orders
• Consider whether customer balances that fall into default after the balance sheet date but before financial statement issuance should have been reserved at the balance sheet date- did the credit profile degrade before the balance sheet date?
• Look at future expected cash flows at the balance sheet date- do you expect more customers to default in the future based on declines in their business before the balance sheet date? Has the damage already been done?
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COVID-19 Impact on Receivables and Inventory Reserves (continued)
▪ Inventory:
• COVID-19 has changed the way we work and live
• Although inventory may not be significantly aged, it may be obsolete
o Will consumers revert to pre-pandemic behavior before inventory becomes obsolete or spoiled?
• Examples: Perishable goods, travel vehicles and products
o Commercial office space lacks demand - will the market for associated products recover?
• Has the net realizable value declined?
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Management Estimates: ASC 606 - Revenue
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COVID-19 Impact on Management Estimates related to ASC 606-Revenue
▪ Key considerations:
• Step 1: Impact to key elements to a contract
o Collection of the consideration is at least 75% probable –looking back, was your determination accurate, or should a transaction not be considered revenue until collected?
• Step 2: Impact to performance obligations
o Have any customer rights or options that were not material become material due to value from customer’s perspective?
• Step 3: Impact to transaction price
o Are variable consideration estimates (refunds, credits, returns, performance bonuses) still accurate?
o Is a price concession a change to revenue or a bad debt?
o Under ASC 606, transaction price gets reassessed until all performance obligations are satisfied
• Step 4: Impact to transaction price allocation
o If transaction price changes, allocation may change
• Step 5: Recognize revenue
o Likely no impact here21
Management Estimates: Goodwill Impairment
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Qualitative Assessment of Goodwill Impairment and Triggering Events
Is COVID-19 a triggering event? It depends.• Any actual impact on business?
• Will the impact be lasting, or only temporary
• Impacted current year cash flows, but will it impact future cash flows?
• Have key assets (tangible or intangible) been impacted?
Is a qualitative assessment cost efficient?
Triggering event
Optional qualitative assessment
No goodwill impairment recognized
Quantitative assessment
PASS
FAIL/SKIP
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Goodwill Impairment Testing when Carrying Amount is Trending Downward
▪ Goodwill is impaired when:
▪ Amount of the goodwill impairment:
Carrying amount of the reporting unit or entity
Fair value or reporting unit or entity˃
Carrying amount of the reporting unit or entity
Fair value or reporting unit or entity
Key accounting tip: Goodwill impairment analysis is generally not required when the carrying amount of a reporting unit or an entity is zero or negative. Fair value would be less than carrying value.
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Debt Changes-Term Debt
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If Borrower applies…
Fees between Borrower and Lender are…
Costs incurred with third parties are…
Unamortized debt discount, premium and
issuance costs on old loan are…
Extinguishment accounting
Expensed Reflected in debt issuance costs
Written-off
Modification Accounting*
Reflected in debt discount and (or) debt premium (as
appropriate)
Expensed Left on books and continue to be amortized
Modification/Extinguishment Accounting: Costs Incurred
* - If a portion of the principal is repaid (such as under a prepayment option), the accounting may be different.
Debt Changes: Revolving Credit or Line of Credit
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Costs incurred to enter into a revolving debt or line-of-credit
▪ Defer and amortize costs incurred when entering into the agreement
• What if the agreement is modified? – it depends!
▪ Defer and amortize any new costs over the term of the new agreement
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Change in borrowing capacity
Existing unamortized costs New costs
New borrowing capacity > old borrowing capacity
Defer and amortize over new term Defer and amortize over term of new arrangement
Old borrowing capacity >new borrowing capacity
Write-off equivalent of percentage decrease in borrowing capacity; remaining costs deferred and amortized over new term
Defer and amortize over term of new arrangement
Accounting for Costs Incurred- Modifications to revolving debt or line-of-credit
Accounting for Paycheck Protection Program (PPP) Loans
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Forgiveness consideration For-profit entity options Not-for-profit entity options
Conditions for forgiveness are expected to be met
The following are permitted: • ASC 470- Debt• IAS 20, Accounting for Government
Grants and Disclosure of Government Assistance
• ASC 958-605, Not-for-Profit Entities –Revenue
• ASC 450-30, Gain Contingencies
ASC 470 or ASC 958-605
Accounting models for PPP loans
Some or all of the loan will not be eligible for forgiveness
Amount eligible for forgiveness- see aboveAmount not eligible for forgiveness - ASC 470 - Debt
FASB Updates
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The low-down on FASB activity:
▪ Significant activity in 2020 ─ but the impact is limited
▪ New standards issued were primarily limited to technical corrections, SEC clarifying guidance and implementation relief for previously issued standards
▪ For non-public companies, the primary impact was extending deadlines for implementing previously issued standards
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ASU 2020-05: Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities
▪ Revenue (ASC 606):
• Permitted non-public companies and not-for-profit organizations that had not yet adopted ASU 2014-09 to defer implementation until annual periods beginning after December 15, 2019
▪ Leases (ASC 842)
• Permits non-public companies and not-for-profit organizations that have not yet adopted ASU 2016-02 to defer implementation until annual periods beginning after December 15, 2021
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ASU 2020-06: Accounting for Convertible Instruments and Contracts in an Entity's Own Equity
Simplifies accounting for convertible instruments by condensing the number of models to consider under U.S. GAAP.
• More convertible debt instruments (primarily impacts instruments with a beneficial or cash conversion feature) will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it.
• In addition to the accounting impact, disclosures for all convertible instruments are simplified.
• Effective for non-public companies in annual periods beginning after December 15, 2023.
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Impact of ASU 2020-06: Fewer Accounting Models
Current Models:
Cash conversion
Beneficial conversion
feature
.Substantial premium
Embedded derivative
ASU 2020-06 Models: Derivative separation
Substantial premium
separation
Traditional convertible
debt
Single instrument
Includes: Embedded conversion features that are not clearly and closely related to the host contract, meet the definition of a derivative and do not qualify for a scope exception from derivative accounting.
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ASU 2020-06: Revised Disclosures for Convertible Instruments
▪ Additional disclosures:
• Disclose events or conditions that occur that cause conversion
contingencies to be met or significant changes to the conversion
terms
• Who controls the conversion rights
• Fair value disclosures must now be made for each individual
convertible instrument
▪ Additionally, contingently convertible instrument disclosures now
mirror those of other convertible instruments38
ASU 2020-07: Presentation and Disclosures by Nonprofit Entities for Contributed Nonfinancial Assets▪ New disclosure requirements:▪ Disaggregation of the amount of contributed nonfinancial assets
(by category and type) recognized within the statement of activities and associated disclosure
▪ For each category:• Description of contributed nonfinancial assets monetized or
used during the fiscal year, including in which program/activity they were used
• The Organization’s accounting policy about selling rather than using contributed nonfinancial assets
• Any donor-imposed restrictions on contributed nonfinancial assets
• Description of valuation techniques/inputs under ASC 820-Fair Value Measurements
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Status of Other Significant Pronouncements:
ASU No. Description Effective Date Primary Impact
2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
Annual periods beginning after December 15, 2021
Eliminates the need to analyze whether the following apply in a givenperiod:-Exception to the incremental approach for intraperiod tax allocation;-Exceptions to accounting for basis differences when there are ownership changes in foreign investments; and-Exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses.
Simplifies application of income tax-related guidance and GAAP for:-Franchise taxes that are partially based on income;-Transactions with a government with a step up in the tax basis of goodwill;-Separate financial statements of legal entities not subject to tax; and-Enacted changes in tax laws in interim periods.
2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
Effective for all entities as of March 12, 2020 through December 31, 2022 (application ends)
Provides optional expedients and exceptions for applying GAAP principles to contract modifications and hedging relationships, under certain criteria, that reference LIBOR or another reference rate expected to be discontinued.
2018-07 Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
Annual periods beginning after December 15, 2020
Aligns the accounting for share-based payments to nonemployees with the accounting for share-based payments to employees.
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Status of Other Significant Pronouncements (continued):
ASU No. Description Effective Date Primary Impact
2018-17 Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities
Annual periods beginning after December 15, 2020
Expands private company alternative for common control leasing arrangements to all qualifying common control arrangements and expand disclosures to include involvement with, and exposure to, the legal entity under common control.
The ASU also amends the guidance for determining whether a decision-making fee is a variable interest and requires organizations to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety (as currently required in GAAP). Adoption likely will result in more decision makers not consolidating VIEs.
2018-15 Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
Annual periods beginning after December 15, 2020
Aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. The amortization of the capitalized costs is included in the service expense, not depreciation and amortization.
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Status of Other Significant Pronouncements (continued):
ASU No. Description Effective Date Primary Impact
2018-13 Fair Value Measurement (Topic 820): Disclosure Framework —Changes to the Disclosure Requirements for Fair Value Measurement
Annual periods beginning after December 15, 2019(many adopted early)
Provides for significant modifications to the required disclosures under ASC 820.
2017-04 Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
Annual periods beginning after December 15, 2021(many adopted early)
Eliminates Step 2 from the goodwill impairment test, requiring only comparing the fair value of a reporting unit with its carrying amount. The impairment charge recognized would be the amount by which the carrying amount exceeds the reporting unit’s fair value.
Eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment.
2016-13 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
Annual periods beginning after December 15, 2021
Requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.
Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses.
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Thank you.
Benny Herman, CPA
(770) 512-0500
bherman@wblcpa.com
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