Month: July 2022

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Helpful Articles

Optimizing and Embracing Best Practices for Finance and Accounting

As market fluctuations and rising interest rates put added stress on internal finance departments, it is wise for organizations to step back and reassess their finance and accounting (F&A) processes and systems. These assessments can help determine whether F&A workflows are enabling timely outputs for reporting, budget forecasting, internal processes like payroll, and other important tasks. Among the many benefits of analyzing and improving internal F&A processes, cost effectiveness and efficiency are paramount.

Balancing Cost and Efficiency

Cost reduction strategies that initially seem intuitive could yield unexpected and counterproductive outcomes. For example, some F&A departments might put policies in place to discourage unnecessary spending. Despite the benefit of cost savings, implementing cumbersome spending parameters can complicate and delay F&A reconciliation and expense processes, which could impact productivity, damage employee morale and increase the risk of employee burnout at a time when attracting and retaining talent is increasingly difficult.

When processes are not running efficiently, your gut reaction may be to hire more employees in an attempt to fill gaps. However, a more cost-effective and employee-centric option is to examine your F&A department’s overall posture and effectiveness, with a particular focus on systems and technology that may no longer be working. Try asking questions such as:

  • Which manual processes can be automated?

Automation can reduce the time your employees have to spend on tedious tasks. This not only helps to balance their workloads, but also allows employees to better invest their time in other high-value services.

  • How can financial reporting be improved?

Organizations are better equipped to make decisions when they are armed with more insightful reporting. This includes setting benchmarks based on industry-specific metrics and reassessing them regularly for accuracy. Assessing internal processes for diligence and efficiency can also help an organization more successfully meet reporting deadlines.

 

Finding the Right Solution

With new F&A tools and technology entering the market every day, the issue is not whether a solution exists to match your organization’s needs, but how to sift through the available options and implement the right choice.

While this may appear to be a daunting process, it is not one that any organization has to go through alone. Rather than jumping to invest in more internal resources, organizations should first examine existing operations to determine which changes can be handled internally and which may benefit from external assistance.

Third-party finance and accounting professionals can help organizations set up robust controls, align spending, optimize financial reporting and find new opportunities to adopt automated technologies and processes.

Click here to find a location closest to you.

Categories
Tax

Is Your Company Effectively Managing Tax Risk?

The concept of “tax risk” is an increasingly important and regular topic of discussion across organizations and in boardrooms, and for good reason. Businesses that operate across state lines or internationally can in certain cases trigger tax liabilities in jurisdictions where they do not have a physical presence. In addition, many countries are adopting policies requiring greater transparency in tax and financial reporting, providing tax administrations more information with which to raise investigations and issue assessments. As companies place additional focus on social responsibility and fiscal transparency, the benefits of having a tax risk policy in place can be substantial. Given the rapidly changing global tax environment combined with the continued demand for tax departments to add value to the organization, an effective tax risk policy is a necessity for any business needing to better manage tax risk.

Is tax risk currently top of mind for business leaders? According to the 2022 BDO Tax Outlook Survey, 51% of tax executives surveyed said they have a tax risk policy “complete and ready,” and 46% said their tax risk policy is a “work in progress.” Additionally, 94% of respondents reported that tax risk is “highly” or “moderately” included as part of their board of director’s oversight function. Whether they have fully implemented policies or are still in the drafting stage, all businesses should take the appropriate steps to be certain their tax risk policy contains what it needs to effectively manage tax risk.

Insight

Every business decision has a tax implication, and with each decision comes the potential for tax risk. An important part of managing tax risk rests with the ability of the tax department to proactively analyze and plan for the tax effects of business transactions as well as correctly report the associated tax consequences. A sound tax risk policy should involve the tax department having a seat at the table as business decisions are being planned and executed so that the associated tax implications may be effectively assessed in real time. Effective processes and controls that include regular, transparent communication with non-tax leaders and decision makers are essential.

A comprehensive tax risk policy will help tax departments mitigate financial reporting risk and potentially adverse operational consequences including negative cash flow impacts. In addition, a tax risk policy can provide shareholders and other stakeholders, tax authorities and regulators greater assurance that an organization has a thoughtful and robust approach to tax strategy and tax risk.

 

What is tax risk?

Tax risk is a company’s risk of incurring additional tax, interest or penalty costs due to incorrectly underreporting its tax obligations in its financial statements or in tax or other regulatory filings. It also includes the risk a company will unnecessarily pay more taxes than it might otherwise legally owe due to missed planning opportunities and lack of clear tax strategy. Tax risk generally is heightened when a company has, for example, multi-jurisdictional or cross-border transactions or complex supply chains, remote employees or agency arrangements, valuable intellectual property or digital operations. Further, businesses that do not effectively manage tax risk also run the risk of reputational damage, for example, with investors or other stakeholders, or with tax or other governmental administrations. In addition, where errors are significant, companies may be required to restate their financial statements.

Some examples of potential areas of tax risk include:

  • Failing to properly consider the tax impacts of a transaction or other business development due to a lack of communication between tax and the business organization.
  • Incorrectly underreporting taxes due to computational errors or misapplication of tax rules and regulations. Underreporting errors can expose a company not only to additional tax cost but also underpayment interest and civil or even criminal penalties.
  • Unnecessarily over reporting taxes due to insufficient or erroneous tax analysis or lack of tax planning. Over reporting errors can result in needless cash flow drains, as well as potential examinations and delayed refunds.
  • Failing to identify changes in tax law or other new developments affecting the company’s tax positions due to a lack of tax department resources.

 

The benefits of a tax risk policy

As part of an overall tax policy, every business should have a documented policy that addresses tax risk. According to the BDO 2022 Tax Outlook Survey, there is a correlation between tax department involvement in strategic planning decisions and having a tax risk policy. Of the survey respondents who said that leadership “always” includes tax in strategic planning decisions, 72% also indicated they had completed a tax risk policy. By comparison, only 38% of respondents who said they are “sometimes” included have a tax risk policy in place.

A comprehensive and properly implemented tax risk policy helps ensure a company’s tax behavior is in alignment with the company’s overall risk profile. An effective tax risk policy also strengthens tax risk awareness across the wider organization through better communication, processes and controls that include executive oversight of tax strategy. A well-developed tax risk policy will include:

  • A clearly articulated tax strategy, approved by management and the board of directors, that is aligned with the risk appetite of the broader organization.
  • Robust internal control policies, processes and review and oversight procedures around tax reporting and planning that can be shared with tax authorities and stakeholders or published as part of ESG reporting.
  • Sufficient tax department resources, technology and training along with clearly defined roles and responsibilities for tax department personnel.
  • A documented policy setting out the company’s approach to interaction with tax authorities and regulators.
  • A regular cadence of communication with organization leaders and board members regarding tax strategy, as well as procedures to help ensure that tax risk is considered when engaging in business planning.

 

Is your company’s tax risk policy effectively managing tax risk?

Every business should have a tax risk policy in place that not only articulates their tax strategy and vision but also reflects the way the company operates. In other words, to be effective, a tax risk policy must be consistent with the policies of the broader business organization.

In an ever-changing business and tax environment, an effective tax risk policy will include procedures that require the policy to be regularly assessed and modified as needed. Indications that your tax risk policy should be reviewed include:

  • Increased tax examination activities or unexpected tax examination findings.
  • Recent control deficiencies related to the tax function.
  • Legislative changes.
  • Tax department turnover or a department reorganization that could lead to loss of institutional tax knowledge.
  • Upcoming M&A or other significant business transactions.
  • Changes to business operating models or supply chains, organizational transformation or similar business factors.
  • Increased board or stakeholder inquiries related to tax, including around ESG concerns.

Contact one of our experts to discuss tax risk policies for your business.

Categories
General

The Inflation Reduction Act

The Inflation Reduction Act has moved a step closer to being passed in the U.S. Senate.

 

Sen. Chuck Schumer (D-NY) and Sen. Joe Manchin (D-WV) have agreed to a pared down package of provisions once part of the larger Build Back Better Act. Tax-wise, the bill would impose a 15% minimum tax on corporations with profits over $1 billion, raising $313 billion over a decade. Companies could claim net operating losses and tax credits against the 15%. The bill also aims to close the so-called “carried interest loophole.” Eliminating the loophole is estimated to raise $14 billion. In addition, the bill aims to raise an estimated $124 billion through increased IRS funding for stronger tax enforcement.

Contact one of our experts for any questions regarding the Inflation Reduction Act.

Categories
General

Deadline for 2021 Tax Returns

If you’re one of the estimated 19 million taxpayers who’ve requested an extension to file their 2021 tax return, the filing deadline is Oct. 17. The IRS is reminding those taxpayers that they don’t have to wait until mid-October to file. If you have all the necessary information to file a return, contact us or file electronically at any time before the October deadline to avoid possible delays in processing your return. If you contact the IRS, you’ll likely interact with a voice bot, otherwise known as the IRS’s Automated Collection System. Voice bots are intended to help callers navigate interactive voice responses to simple payment questions.

Contact us for more personalized service.

Categories
General

Weathering the Storm of Rising Inflation

Like a slowly gathering storm, inflation has gone from dark clouds on the horizon to a noticeable downpour on both the U.S. and global economies. Is it time for business owners to panic? Not at all. As of this writing, a full-blown recession is possible but not an absolute certainty. And the impact of inflation itself will vary depending on your industry and the financial strength of your company. Here are some important points to keep in mind during this difficult time.

Government response

For starters, don’t expect any dramatic moves by the federal government. Some smaller steps, however, have been taken. For instance, the Federal Reserve has raised interest rates to “pump the brakes” on the U.S. economy. And the IRS recently announced an increase in the optional standard mileage rate tax deduction for the last six months of 2022 (July 1 through December 31). The rate for business travel is now 62.5 cents per mile — up from 58.5 cents per mile for the first half of 2022. This is notable because the IRS usually adjusts mileage rates only once annually at year-end. The tax agency explained: “in recognition of recent gasoline price increases, [we’ve] made this special adjustment for the final months of 2022.” Otherwise, major tax relief this year is highly unlikely.

Some tax breaks are inflation-adjusted — for example, the Section 179 depreciation deduction. However, these amounts were calculated at the end of 2021, so they probably won’t keep up with 2022 inflation. What’s more, many other parts of the tax code aren’t indexed for inflation.

Strategic moves

So, what can you do? First, approach price increases thoughtfully. When inflation strikes, raising your prices might seem unavoidable. After all, if suppliers are charging you more, your profit margin narrows — and the risk of a cash flow crisis goes way up. Just be sure to adjust prices carefully with a close eye on the competition. Second, take a hard look at your budget and see whether you can reduce or eliminate nonessential expenses.

Inflationary times lead many business owners to try to run their companies as leanly as possible. In fact, if you can cut enough costs, you might not need to raise prices much, if at all — a competitive advantage in today’s environment. Last, consider the bold strategy of taking a growth-oriented approach in response to inflation. That’s right; if you’re in a strong enough cash position, your business could increase its investments in marketing and production to generate more revenue and outpace price escalations. This is a “high risk, high reward” move, however.

Optimal moves

Again, the optimal moves for your company will depend on a multitude of factors related to your industry, size, mission, and market. One thing’s for sure: Inflation to some degree is inevitable. Let’s hope it doesn’t get out of control. We can help you generate, organize and analyze the financial information you need to make sound business decisions. Contact one of our experts to find out how. © 2022

 

Categories
General

2022 Q3 Tax Calendar

Key Deadlines for Businesses and Other Employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2022. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

August 1

Report income tax withholding and FICA taxes for second quarter 2022 (Form 941), and pay any tax due. (See the exception below, under “August 10.”) File a 2021 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10

Report income tax withholding and FICA taxes for second quarter 2022 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 15

If a calendar-year C corporation, pay the third installment of 2022 estimated income taxes. If a calendar-year S corporation or partnership that filed an automatic six-month extension: File a 2021 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due. Make contributions for 2021 to certain employer-sponsored retirement plans. © 2022

Categories
General

When Interest Rates Rise, Optimizing Tax Accounting Methods Can Drive Cash Savings

U.S. businesses have been hit by the perfect storm.

As the pandemic continues to disrupt supply chains and plague much of the global economy, the war in Europe further complicates the landscape, disrupting major supplies of energy and other commodities. In the U.S., price inflation has accelerated the Federal Reserve’s plans to raise interest rates and commence quantitative tightening, making debt more expensive. The stock market has declined sharply, and the prospect of a recession is on the rise. Further, U.S. consumer demand may be cooling despite a strong labor market and low unemployment. As a result of these and other pressures, many businesses are rethinking their supply chains and countries of operation as they also search for opportunities to free up or preserve cash in the face of uncertain headwinds.

Enter income tax accounting methods.

Adopting or changing income tax accounting methods can provide taxpayers opportunities for timing the recognition of items of taxable income and expense, which determines when cash is needed to pay tax liabilities.

In general, accounting methods either result in the acceleration or deferral of an item or items of taxable income or deductible expense, but they don’t alter the total amount of income or expense that is recognized during the lifetime of a business. As interest rates rise and debt becomes more expensive, many businesses want to preserve their cash, and one way to do this is to defer their tax liabilities through their choice of accounting methods.

Some of the more common accounting methods to consider center around the following:

  • Advance payments. Taxpayers may be able to defer recognizing advance payments as taxable income for one year instead of paying the tax when the payments are received.
  • Prepaid and accrued expenses. Some prepaid expenses can be deducted when paid instead of being capitalized. Some accrued expenses can be deducted in the year of accrual as long as they are paid within a certain period of time after year end.
  • Costs incurred to acquire or build certain tangible property. Qualifying costs may be deducted in full in the current year instead of being capitalized and amortized over an extended period. Absent an extension, under current law, the 100% deduction is scheduled to decrease by 20% per year beginning in 2023.
  • Inventory capitalization. Taxpayers can optimize uniform capitalization methods for direct and indirect costs of inventory, including using or changing to various simplified and non-simplified methods and making certain elections to reduce administrative burden.
  • Inventory valuation. Taxpayers can optimize inventory valuation methods. For example, adopting to (or making changes within) the last-in, first-out (LIFO) method of valuing inventory generally will result in higher cost of goods sold deductions when costs are increasing.
  • Structured lease arrangements. Options exist to maximize tax cash flow related to certain lease arrangements, for example, for taxpayers evaluating a sale vs. lease transaction or structuring a lease arrangement with deferred or advance rents.

Insights

Optimizing tax accounting methods can be a great option for businesses that need cash to make investments in property, people and technology as they address supply chain disruptions, tight labor markets and evolving business and consumer landscapes. Moreover, many of the investments that businesses make are ripe for accounting methods opportunities — such as full expensing of capital expenditures in new plant and property to reposition supply chains closer to operations or determining the treatment of investments in new technology enhancements. For prepared businesses looking to weather the storm, revisiting their tax accounting methods could free up cash for a period of years, which would be useful in the event of a recession that might diminish sales and squeeze profit margins before businesses are able to right-size costs.

​While an individual accounting method may or may not materially impact the cash flow of a company, the impact can be magnified as more favorable accounting methods are adopted. Taxpayers should consider engaging in accounting methods planning as part of any acquisition due diligence as well as part of their regular cash flow planning activities.

Example

The estimated impact of an accounting method is typically measured by multiplying the deferred or accelerated amount of income or expense by the marginal tax rate of the business or its investors.

For example, assume a business is subject to a marginal tax rate of 30%, considering all of the jurisdictions in which it operates. If the business qualifies and elects to defer the recognition of $10 million of advance payments, this will result in the deferral of $3 million of tax. Although that $3 million may become payable in the following taxable year, if another $10 million of advance payments are received in the following year the business would again be able to defer $3 million of tax.

Continuing this pattern of deferral from one year to the next would not only preserve cash but, due to the time value of money, potentially generate savings in the form of forgone interest expense on debt that the business either didn’t need to borrow or was able to pay down with the freed-up cash. This opportunity becomes increasingly more valuable with rising interest rates, as the ability to pay significant portions of the eventual liability from the accumulation of forgone interest expense can materialize over a relatively short period of time, i.e., the time value of money increases as interest rates rise.

Accounting Method Changes

Generally, taxpayers wanting to change a tax accounting method must file a Form 3115 Application for Change in Accounting Method with the IRS under one of two procedures:

  • The “automatic” change procedure, which requires the taxpayer to file the Form 3115 with the IRS as well as attach the form to the federal tax return for the year of change; or
  • The “nonautomatic” change procedure, which requires advance IRS consent. The Form 3115 for nonautomatic changes must be filed during the year of change.

In addition, certain planning opportunities may be implemented without a Form 3115 by analyzing the underlying facts.

What Can Businesses Do Now?

Taxpayers should keep in mind that tax accounting method changes falling under the automatic change procedure can still be made for the 2021 tax year with the 2021 federal return and can be filed currently for the 2022 tax year.

Nonautomatic procedure change requests for the 2022 tax year are recommended to be filed with the IRS as early as possible before year end to give the IRS sufficient time to review and approve the request by the time the federal income tax return is to be filed.

Engaging in discussions now is the key to successful planning for the current taxable year and beyond. Whether a Form 3115 application is necessary or whether the underlying facts can be addressed to unlock the accounting methods opportunity, the options are best addressed in advance to ensure that a quality and holistic roadmap is designed. Analyzing the opportunity to deploy accounting methods for cash savings begins with a discussion and review of a business’s existing accounting methods.

To learn more contact us to talk to an expert on how you can drive you cash savings.