Trends – Roth&Co

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For a corporate taxpayer, the combination of a reduced corporate rate, a special deduction, and access to indirect FTCs largely mitigates the impact of GILTI and section 965 –Individuals and pass-through entities have no such benefits.

Consider an individual who owns, directly or through a pass-through entity, 100 percent of a German services company which pays a 30 percent rate of local income tax. If the German company generates $1,000 U.S. dollars of income, that income is first subject to $300 U.S. dollars of German taxes, then potentially the entire $700 remainder could be currently taxed as GILTI and subject to an additional 37 percent U.S. individual tax rate in the year incurred (note that GILTI inclusions are not eligible for the new section 199A business income deduction). The outcome: a current effective tax rate of over 55 percent, regardless of whether the individual owner draws a dividend or reinvests the business’ earnings.

Enter section 962 which allows an individual (or trust or estate) U.S. shareholder of a CFC to elect to be subject to corporate income tax rates (under Sections 11 and 55) on amounts that are included in his or her gross income.

The keys to the effectiveness of the election to minimize U.S. tax on anti-deferral income are:

1. The use of the 21% corporate tax rate to determine the baseline U.S. tax liability.
2. Access to the 50% Section 250 deduction against GILTI (although such offset is not available against income included under the historic anti-deferral rules).
3. The availability of the foreign tax credit mechanism to offset the calculated U.S. tax with foreign taxes on the included income (subject to the GILTI haircut of foreign taxes).
4. A special rule that prevents the spillover of personal or business deductions that could otherwise impair the use of foreign tax credits or subject the 50% deduction to a taxable income limitation.

Returning to the facts of the prior example, if the individual makes a section 962 election for the year, the German earnings are now subject to GILTI tax at the deemed-corporate level instead of the individual level. Applying GILTI’s rules for corporate indirect foreign tax credits and section 250 deductions, the $1,000 of pre-tax income is eligible for a 50 percent deduction ($500 U.S. dollars) and the net income of $500 U.S. dollars is subject to a 21 percent U.S. corporate rate. A FTC is available of up to 80 percent of the German taxes, or $240 U.S. dollars. The FTC offsets the full $105 U.S. dollars of corporate-level tax and, assuming the German earnings are not distributed to the shareholder, there is zero residual U.S. tax in the current year.

The §962 election is made on a year-by-year basis with the tax return filed for that year. As a result, US individual shareholders facing a significant tax on GILTI may wish to consider making this election to lower the taxes due. However, an individual making this election will also be subject to US tax when it receives a dividend from the CFC. Dividends from a foreign corporation are generally taxed at regular tax rates unless the dividend is from a “qualified foreign corporation” which is taxed at the long term capital gains tax rate of 20%. A qualified dividend is a dividend from a foreign corporation that is eligible for benefits under an income tax treaty between the US and their home country. The US has income tax treaties with many nations (e.g., England, France, Germany), but not with all nations.

Section 962 election may be a valuable tool in softening or deferring the double-tax blow of being a U.S. shareholder in a foreign business – but careful consideration should be used before making the election. Depending on the specific circumstances, using section 962 could result in an individual paying a greater effective rate of tax on their foreign earnings once they have been repatriated (distributed).

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Roughly half of CFOs believe an economic recession will hit by the end of 2020, and about three-quarters expect a recession by mid-2021, according to the 2019 year-end Duke University/CFO Global Business Outlook survey. In light of these bearish predictions, many businesses are currently planning for the next recession. Are you? Here are four steps to help your company strengthen its balance sheet against a possible downturn.

1. Identify what’s most important

The balance sheet shows your company’s financial condition — its assets vs. liabilities — at a specific point in time. Some line items are more critical to your success than others. For example, inventory is a top priority for retailers, and accounts receivable is important to professional service firms.

A “common-sized” balance sheet can help you determine what’s most relevant. This type of statement presents each account as a percentage of total assets. Items that represent the highest percentages are generally the ones that warrant the most attention.

2. Analyze ratios

Ratios compare line items on your company’s financial statements. They may be grouped into four categories: 1) profitability, 2) solvency, 3) asset management, and 4) leverage. While profitability ratios focus on the income statement, the others assess items on the balance sheet.

For example, the current ratio (current assets ÷ current liabilities) is a solvency measure that helps assess whether your company has enough current assets to meet current obligations over the short run. Conversely, the days-in-receivables ratio (accounts receivable ÷ annual sales × 365 days) is an asset management ratio that gauges how efficiently you’re collecting receivables. And the debt-to-equity ratio (interest-bearing debt ÷ equity) focuses on your company’s use of debt vs. equity to finance growth.

3. Set goals

The common-sized balance sheet and ratios can be used to create “goals” for each key line item. What’s right depends on the nature of your business and industry benchmarks.

For example, you may strive to meet the following goals over the next year:

Increase cash as a percentage of total assets from 5% to 15%,
Improve the current ratio from 1.1 to 1.2,
Decrease the days-in-receivable ratio from 40 to 35 days, and
Lower the debt-to-equity ratios from 5.6 to 4.

4. Forecast the impact

Once you’ve set goals, devise a plan to achieve them. For example, you might cut fixed costs or forgo buying equipment to build up your cash reserves. In turn, stockpiling cash — along with improving collections — might help boost your current ratio.

Part of your plan should be forecasting how the changes will filter through the financial statements. This exercise can help you determine whether your goals are realistic. For example, if you decide to build up cash reserves, it might be difficult to simultaneously pay down debt. You can generate only a limited amount of incremental cash in a year. Forecasting can help pinpoint the shortcomings of your plans.

We can help

Markets are cyclical. So, it’s only a matter of time before another downturn happens. We can help you take steps to position your organization to weather the next storm — whenever it arrives.

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Have you applied for a business loan lately? Or had some repairs done on your facilities? Maybe you’ve signed a contract with a certain technologically inclined customer or vendor. In any of these instances, you (or one of your employees) probably had to electronically sign a digital document.

So, the next question is: Why isn’t your company using this technology? If the answer is, “We are,” kudos to you (assuming it’s working out). But if your reply is, “We’ve always used paper and don’t want to deal with the expense and hassle of converting to digital documentation,” you may want to reconsider — because it’s not going away.

Why go digital?

For businesses, there are generally three reasons to use digital documents with e-signatures:

1. Speed. When you can review and sign a business document electronically, it can be transmitted instantly and approved much more quickly. And this works both ways: your customers can sign contracts or submit orders for your products or services, and you can sign similar documents with vendors, partners or consultants. What used to take days or even weeks, as paper envelopes crisscrossed in the mail, now can occur in a matter of hours.

2. Security. Paper has a way of getting lost, damaged and destroyed. That’s not to say digital documents are impervious to thievery, corruption and deletion, but a trusted provider should be able to outfit you with software that not only allows you to use digital docs with e-signatures, but also keep the resulting files encrypted and safe from anyone or anything who would do them harm.

3. Service. This may be the most important reason to incorporate digital docs and e-sigs into your business. Younger generations have come of age, if not grown up, with digitized business services. They expect this functionality and may prefer a company that offers it to one that still requires them to put pen to paper.

What about the law?

Many business owners hesitate to dive into digital docs and e-sigs because of legal concerns. This is a reasonable concern. However, e-signatures are now widely used and generally considered lawful under two statutes:

The Electronic Signatures in Global and National Commerce Act of 2000, a federal law, and
The Uniform Electronic Transactions Act, which governs each state unless a comparable law is in place.
What’s more, every state has some sort of legislation in place legalizing e-signatures. There may be some limited exceptions in certain cases, so check with your attorney for specifics.

Is now the time?

To be clear, investing in digital documents with e-signatures, and training your employees to use them, is a major strategic initiative. You need to ensure the return on investment will be worth the effort. We can assist you in evaluating whether now’s the time to “go digital” and, if so, in setting a budget for the software purchase and implementation.

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Auditors use various procedures to verify the amounts reported on your financial statements. In addition to reviewing original source documents and comparing trends from prior years, they may reach out to third parties — such as customers and lenders — to confirm that outstanding balances and estimates agree with their records. Here are answers to questions you may have about audit confirmations.

When are they used?

External confirmations received directly by the auditor from third parties are generally considered to be more reliable than audit evidence generated internally by your company. Auditors may, for example, send paper or electronic confirmations to customers to verify accounts receivable and to financial institutions to confirm notes payable. They also may choose to substantiate cash, inventory, consigned merchandise, long-term contracts, accounts payable, contingent liabilities, and related-party and unusual transactions.

Before wrapping up audit procedures, a letter also will be sent to your attorney, asking whether the information provided about any pending litigation is accurate and complete. Your attorney’s response can help determine whether a legal situation has a material impact on the company’s financial statements.

What are the options?

The types of confirmations used vary depending on the situation and the nature of your company’s operations. Three forms of confirmations include:

1. Positive. This type asks recipients to reply directly to the auditor and make a positive statement about whether they agree or disagree with the information included.

2. Negative. This type asks recipients to reply directly to the auditor only if they disagree with the information presented on the confirmation.

3. Blank. This type doesn’t state the amount (or other information) on the request. Instead, recipients are asked to complete the confirmation form and return it to the auditor.

Some banks no longer respond to confirmation letters mailed through the U.S. Postal Service. Instead, they respond only to electronic requests. These may be in the form of an email submitted directly to the respondent by the auditor or a request submitted through a designated third-party provider.

How can you help?

You can facilitate the confirmation process by approving your auditor’s requests in a timely manner. However, there may be situations when you object to the use of confirmation procedures. When this happens, discuss the matter with your auditor and provide corroborating evidence to support your reasoning. If the reason for the refusal is considered valid, your auditor will apply alternative procedures and possibly ask for a special representation in the management representation letter regarding the reasons for not confirming.

Auditors also might ask your staff about confirmation recipients who aren’t responding to requests or exceptions found during the confirmation process. This may include discrepancies over the information provided in the request, as well as responses received indirectly, oral responses and restrictive language contained in a response. Your staff can help the audit team determine whether a misstatement has occurred — and adjust the financial statements accordingly.

Simple but effective

Audit confirmations can be a powerful tool, enhancing audit quality and efficiency. Let’s work together to ensure the confirmation process goes smoothly.

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Numbers can be misleading. While data can give the impression of clarity and transparency, figures can mean different things depending on how they are presented.

For example: The Federal Reserve Chairman Jay Powell held a press conference and commented that US consumers in aggregate are propping up the economy. This phrase subtly highlights the very different situations experienced by the wide range of US consumers that are thrown together and summarized in one number. In short, the consumers that added $1.3 trillion to their savings last year are not the same ones who owe $1 trillion on their credit cards. Is this good news or bad news?

Charles Munger, one of the greatest business minds of our time and vice chairman of Berkshire Hathaway, calls out another example of misinformation by numbers, citing the proliferation of EBITDA as a fake profit metric. In business, there’s more than meets the eye in any given set of numbers. Take Uber for example. Its shares jumped last week after it announced it was moving up its EBITDA profitability target to the fourth quarter of this year.

Good investment? “It’s ridiculous,” Munger said, EBITDA — which is short for earnings before interest, taxes, depreciation and amortization — does not accurately reflect how much money a company makes, unlike traditional earnings. “Think of the basic intellectual dishonesty that comes when you start talking about adjusted EBITDA. You’re almost announcing you’re a flake.”

Today, with nearly all activities measured or recorded, it is more challenging than ever to discern what to keep track of and whether the numbers you’re seeing are telling the whole story. The right metrics enable your organization to examine concrete criteria and to meet its business goals. The wrong metrics lead you down a risky road.

Don’t risk it…Roth and Co.

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A financial power of attorney can be a valuable planning tool. The most common type is the durable power of attorney, which allows someone (the agent) to act on the behalf of another person (the principal) even if the person becomes mentally incompetent or otherwise incapacitated. It authorizes the agent to manage the principal’s investments, pay bills, file tax returns and handle other financial matters if the principal is unable to do so as a result of illness, injury, advancing age or other circumstances.

However, a disadvantage of a power of attorney is that it may be susceptible to abuse by scam artists, dishonest caretakers or greedy relatives.

Watch out for your loved ones

A broadly written power of attorney gives an agent unfettered access to the principal’s bank and brokerage accounts, real estate, and other assets. In the right hands, this can be a huge help in managing a person’s financial affairs when the person isn’t able to do so him- or herself. But in the wrong hands, it provides an ample opportunity for financial harm.

Many people believe that, once an agent has been given a power of attorney, there’s little that can be done to stop the agent from misappropriating money or property. Fortunately, that’s not the case.

If you suspect that an elderly family member is a victim of financial abuse by the holder of a power of attorney, contact an attorney as soon as possible. An agent has a fiduciary duty to the principal, requiring him or her to act with the utmost good faith and loyalty when acting on the principal’s behalf. So your relative may be able to sue the agent for breach of fiduciary duty and obtain injunctive relief, damages (including punitive damages) and attorneys’ fees.

Take steps to prevent abuse

If you or a family member plans to execute a power of attorney, there are steps you can take to minimize the risk of abuse:

Make sure the agent is someone you know and trust.
Consider using a “springing” power of attorney, which doesn’t take effect until certain conditions are met, such as a physician’s certification that the principal has become incapacitated.
Use a “special” or “limited” power of attorney that details the agent’s specific powers. (The drawback of this approach is that it limits the agent’s ability to deal with unanticipated circumstances.)
Appoint a “monitor” or other third party to review transactions executed by the agent and require the monitor’s approval of transactions over a certain dollar amount.
Provide that the appointment of a guardian automatically revokes the power of attorney.
Some state laws contain special requirements, such as a separate rider, to authorize an agent to make large gifts or conduct other major transactions.

Act now

If you’re pursuing legal remedies against an agent, the sooner you proceed, the greater your chances of recovery. And if you wish to execute or revoke a power of attorney for yourself, you need to do so while you’re mentally competent. Contact us with questions.

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Teamwork: What does it mean to you?

Let’s start with a short clip to get you thinking about what good teams can accomplish: Click here.

If you search for definitions of teamwork, you’ll find a variety of them, all similar, but not quite the same.

Here are a few examples I found:

• “Teamwork is the process of working collaboratively with a group of people in order to achieve a goal. Teamwork means that people will try to cooperate, using their individual skills and providing constructive feedback, despite any personal conflict between individuals.”
~ Business Dictionary
• “Work done by several associates with each doing a part but all subordinating personal prominence to the efficiency of the whole.” ~ Merriam-Webster
• “The combined actions of a group of people working together effectively to achieve a goal.”
~ Cambridge Dictionary

They’re okay; but they don’t really convey what a team, or teamwork, really is. To me, good teamwork means so much more.

It means working with others in a way that takes advantage of each team member’s unique strengths to achieve results that exceed the cumulative results they each could have individually accomplished. When team members complement each other, their potential is greater than the sum of the parts. Think 1+1+1 = 5!

It means working towards a common goal by setting aside egos and personal goals for the good of the team.

It means working in a way that lifts your teammates and enables them to perform better, filling roles that are aligned and in tune with each other so that everyone pulls in the exact same direction.

It means working with teammates who are passionate about working together and easy to get along with because they care about each other.

It means collaboration and open communication in both directions, up and down, coordinated by a leader who motivates and initiates connections rather than dictates, but who also knows how and when to make the tough decisions for the good of the team. It means keeping team members in the loop and involved in the decision-making process.

And when a team works this way, the results are AMAZING! (As you may have noticed, I’m very passionate about teamwork.)

So tell me… what does teamwork mean to YOU?

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Perhaps you’re an investor in mutual funds or you’re interested in putting some money into them. You’re not alone. The Investment Company Institute estimates that 56.2 million households owned mutual funds in mid-2017. But despite their popularity, the tax rules involved in selling mutual fund shares can be complex.

Tax basics

If you sell appreciated mutual fund shares that you’ve owned for more than one year, the resulting profit will be a long-term capital gain. As such, the maximum federal income tax rate will be 20%, and you may also owe the 3.8% net investment income tax.

When a mutual fund investor sells shares, gain or loss is measured by the difference between the amount realized from the sale and the investor’s basis in the shares. One difficulty is that certain mutual fund transactions are treated as sales even though they might not be thought of as such. Another problem may arise in determining your basis for shares sold.

What’s considered a sale

It’s obvious that a sale occurs when an investor redeems all shares in a mutual fund and receives the proceeds. Similarly, a sale occurs if an investor directs the fund to redeem the number of shares necessary for a specific dollar payout.

It’s less obvious that a sale occurs if you’re swapping funds within a fund family. For example, you surrender shares of an Income Fund for an equal value of shares of the same company’s Growth Fund. No money changes hands but this is considered a sale of the Income Fund shares.

Another example: Many mutual funds provide check-writing privileges to their investors. However, each time you write a check on your fund account, you’re making a sale of shares.

Determining the basis of shares

If an investor sells all shares in a mutual fund in a single transaction, determining basis is relatively easy. Simply add the basis of all the shares (the amount of actual cash investments) including commissions or sales charges. Then add distributions by the fund that were reinvested to acquire additional shares and subtract any distributions that represent a return of capital.

The calculation is more complex if you dispose of only part of your interest in the fund and the shares were acquired at different times for different prices. You can use one of several methods to identify the shares sold and determine your basis.

First-in first-out. The basis of the earliest acquired shares is used as the basis for the shares sold. If the share price has been increasing over your ownership period, the older shares are likely to have a lower basis and result in more gain.
Specific identification. At the time of sale, you specify the shares to sell. For example, “sell 100 of the 200 shares I purchased on June 1, 2015.” You must receive written confirmation of your request from the fund. This method may be used to lower the resulting tax bill by directing the sale of the shares with the highest basis.
Average basis. The IRS permits you to use the average basis for shares that were acquired at various times and that were left on deposit with the fund or a custodian agent.
As you can see, mutual fund investing can result in complex tax situations. Contact us if you have questions. We can explain in greater detail how the rules apply to you.

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Finding the right person to head up your company’s finance and accounting department can be challenging in today’s tight labor market. While it may be tempting to simply promote an existing employee, external candidates may offer fresh ideas and skills that take your financial reporting to the next level. Here are four traits to put on your wish list.

1. Leadership and strategy experience

The finance and accounting department provides critical feedback on how your company is performing and is expected to perform in the future. That information helps the rest of the management team make critical business decisions.

The CFO must provide timely, relevant financial data to other departments — including information technology, operations, sales and supply chain logistics — to help improve how the business operates. He or she also must be able to drum up cross-departmental support for major initiatives. If you operate overseas or plan to expand there soon, experience operating and reporting in a global context would be a bonus.

2. Command of the basics

Your CFO must have a working knowledge of finance and accounting fundamentals, such as:

U.S. Generally Accepted Accounting Principles (GAAP) and, if applicable, international accounting standards, Federal and state tax law, Budgeting and forecasting, and Financial planning and benchmarking. Accounting rules and tax law have undergone major changes in recent years. Candidates should understand the business provisions of the Tax Cuts and Jobs Act, as well as the impact of updated accounting standards on reporting revenue, leases and credit losses. It’s also helpful to have experience with managerial accounting and cost-cutting initiatives.

3. Previous employment in public accounting

Many CFOs start off their careers in public accounting for good reason: They learn about a broad range of accounting, tax and consulting projects in many different industries.

This experience positions candidates for leadership roles in the private sector. Former CPAs know how the auditing process works and can implement procedures to support that process within your organization. They’ve also seen the best (and worst) business practices in the real world. This insight can help your company seize opportunities — and avoid potential pitfalls.

4. Forensic and technology skills

CFOs sometimes need to examine the business from a forensic perspective. That could include overseeing a fraud investigation, evaluating compliance with new or updated government regulations, or remediating a data breach.

In turn, the prevalence of cyberattacks has made technology skills increasingly important for CFOs. Candidates should know how to protect against loss of sensitive data, including customer credit card numbers and company financial data and intangible assets. Candidates also must have a working knowledge of accounting systems and how they operate in the cloud.

Help wanted

As your business evolves, so too must the role of the CFO. We can help you evaluate candidates to find the right mix of skills and experience for your finance and accounting department.

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To guard against natural disasters and other calamities, many companies buy business interruption insurance. These policies provide cash flow to cover revenues lost and expenses incurred while normal operations are limited or suspended.

But buying coverage is one thing — making a claim and receiving the funds is quite another. Depending on the scope of your loss, the insurer may enlist its own specialists to audit and reduce your claim. Fortunately, you can enlist a CPA to help you prepare a claim, quantify business interruption losses and anticipate your insurer’s challenges.

Major roles

There are two major roles your accountant can play in managing the claims process:

1. Point person. He or she can be the primary contact with the insurer, dealing with the typical onslaught of document requests. This leaves you free to run your business and bring it back up to speed.

Your CPA can also keep the claims process on track by informing the insurer about your actions and dealing with requests to inspect the damaged property. It’s possible that your accountant may already have an established relationship with the insurer and knows how its claims department works.

2. Damage estimator. Most policies define losses based on the earnings a company would have made if the interruption hadn’t occurred. To project lost profits, a CPA can analyze, identify and segregate revenues and expenses. The insurer will cover only losses that are directly attributable to the damage, as opposed to macroeconomic or other external causes, such as an economic downturn.

Detailed documentation

Most insurers require you to provide detailed documentation on the steps you took to mitigate losses during the business interruption period, which is the time it took your company to resume normal operations. The steps may involve shutting down all or part of the business or moving to a temporary location. The interruption period is critical and one of the determining factors the insurer will use when examining the total amount of your company’s claim.

Your CPA can review your documentation and, in particular, calculate or double-check any financial information provided to ensure accuracy. It’s also a good idea to work with an attorney who can aid in the legal interpretation of your policy.

A well-crafted claim

Filing a well-crafted business interruption claim can speed processing time and ease the resolution of any disputes that may arise with your insurance company. As a result, you’ll be more likely to receive much-needed cash-flow relief while getting your business back up and running after a disaster. We’d be happy to provide the services mentioned here as well as any other support necessary to pursuing a claim.

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Are you an employer who owns a business where tipping is customary for providing food and beverages? You may qualify for a tax credit involving the Social Security and Medicare (FICA) taxes that you pay on your employees’ tip income.

How the credit works

The FICA credit applies with respect to tips that your employees receive from customers in connection with the provision of food or beverages, regardless of whether the food or beverages are for consumption on or off the premises. Although these tips are paid by customers, they’re treated for FICA tax purposes as if you paid them to your employees. Your employees are required to report their tips to you. You must withhold and remit the employee’s share of FICA taxes, and you must also pay the employer’s share of those taxes.

You claim the credit as part of the general business credit. It’s equal to the employer’s share of FICA taxes paid on tip income in excess of what’s needed to bring your employee’s wages up to $5.15 per hour. In other words, no credit is available to the extent the tip income just brings the employee up to the $5.15 per hour level, calculated monthly. If you pay each employee at least $5.15 an hour (excluding tips), you don’t have to be concerned with this calculation.

Note: A 2007 tax law froze the per-hour amount at $5.15, which was the amount of the federal minimum wage at that time. The minimum wage is now $7.25 per hour but the amount for credit computation purposes remains $5.15.

How it works

Example: A waiter works at your restaurant. He’s paid $2 an hour plus tips. During the month, he works 160 hours for $320 and receives $2,000 in cash tips which he reports to you.

The waiter’s $2 an hour rate is below the $5.15 rate by $3.15 an hour. Thus, for the 160 hours worked, he or she is below the $5.15 rate by $504 (160 times $3.15). For the waiter, therefore, the first $504 of tip income just brings him up to the minimum rate. The rest of the tip income is $1,496 ($2,000 minus $504). The waiter’s employer pays FICA taxes at the rate of 7.65% for him. Therefore, the employer’s credit is $114.44 for the month: $1,496 times 7.65%.

While the employer’s share of FICA taxes is generally deductible, the FICA taxes paid with respect to tip income used to determine the credit can’t be deducted, because that would amount to a double benefit. However, you can elect not to take the credit, in which case you can claim the deduction.
Get the credit you’re due

If your business pays FICA taxes on tip income paid to your employees, the tip tax credit may be valuable to you. Other rules may apply. Contact us if you have any questions.

Talking Tax: Going Deeper Into Section 962

4 Steps to a Stronger Balance Sheet

Digital Documents With E-Signatures Aren’t Going Away

FAQ’s About Audit Confirmations

Safety in Numbers

Take Steps to Curb Power of Attorney Abuse

Core Value: Teamwork

The Tax Aspects of Selling Mutual Fund Shares

4 Key Traits to Look for When Hiring a CFO

Getting Help With a Business Interruption Insurance Claim

Do Your Employees Receive Tips? You May Be Eligible for a Tax Credit