The cash basis or accrual basis relates to how income and expenses are accounted for; hence these are referenced as methods of accounting. This information is used for a variety of reasons, such as the preparation and reporting of income tax returns, to obtain financing and completion of credit applications, preparation of a business valuation and in family law matters to name a few; therefore, it is important to understand their differences and limitations.
Generally, the cash basis of accounting is utilized by individuals and small businesses. The accrual basis of accounting is most often utilized by larger businesses; however, small businesses may also utilize the accrual basis, if they so choose. The basis of reporting (cash or accrual) will determine when income and expenses are recognized to compute a business’ profit for the year.
With the cash basis of accounting, income is recorded when cash is received, and expenses are recognized when cash is paid. In contrast, the accrual basis of accounting records income when it has been “earned” and not when the cash is received. Expenses are recorded when they “occur” and not when cash is paid. The main difference between cash and accrual basis accounting lies in the timing of when income and expenses are recognized.
So why does this matter? Recognizing income and expenses under either basis will result in a different income and profit calculation. These differences, if significant, could have a significant financial impact on a business, individual, or both. Businesses are most often valued based upon their income and/or profits – therefore, it is extremely important to be aware of the accounting method relied upon. An individual’s income is most often computed based upon tax returns. Other sources of income may not be reported on an individual’s cash basis tax return.
Both methods of reporting have different purposes and result in different outcomes. To ensure that the relied upon basis of reporting is consistent with its intended purpose (i.e., valuation, marital litigation), it is prudent to consult with an experienced professional.
With all the obstacles and challenges manufacturers are dealing with in their day-to-day operations, implementing artificial intelligence (AI) is an opportunity that could bring exponential benefits. Streamlining operations, driving growth, preventing defects/human error, and avoiding inefficiencies are a few of the potential advantages AI can bring to the industry.
Benefits of employing AI to enhance controls in monitoring output and equipment maintenance include decreases in scrap materials, less rework due to errors or ineffectiveness in the production line, and the visibility to employ continuous upkeep and supervision of machinery. Implementation of AI drives costs down while increasing margins and efficiency.
AI also has advantages beyond the production line. Companies have applied AI capabilities to accounting and finance departments, resulting in greater accuracy in forecasting, more effective analysis of data and trends, and increased precision in the application of accounting estimates. The technology also has applications in the training and development of employees.
Since the outbreak of the coronavirus pandemic, the implementation of AI in the manufacturing industry has only become more rapid. More than ever, manufacturers are facing more obstacles regarding workforce shortages, government shutdowns, and a host of unknowns still facing businesses each day. AI mitigates these concerns by managing risks and delivering results, all while optimizing costs.
Recent industry studies and surveys have documented the successes and advances AI has brought to industrial manufacturing thus far, the most key of which are driving growth and optimizing costs. Trends have shown that it’s not just the large players bringing AI into the arena; more and more small and middle-sized firms are looking at AI as an opportunity to stay competitive.
If you have any questions, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.
Are the Protections of P.L. 86-272 For Remote Sellers of Tangible Personal Property Dwindling?
P.L. 86-272 was enacted in 1959 to protect sellers of tangible personal property from the imposition of state income taxes outside of its home state. It was intended to be a temporary provision of the law; however, it remains unchanged for the sixty years since its enactment.
Although the law remains unamended, there have been multiple legal disputes over the years due to many key elements that lack clarity and terms that are not clearly defined. In an effort to assist taxpayers in achieving compliance with their application of P.L. 86-272 to their business activity, the Multistate Tax Commission (MTC) issued the original version of the Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272 on July 11, 1986. The statement has been revised four times since then, with the latest revision being adopted on August 4, 2021.
Many sellers who are in the business of selling tangible personal property have relied on the protection of P.L. 86-272 (Public Law 86-272 – September 14, 1959) that prevents a state, outside of their home state, from imposing state income tax when the following conditions are met:
- The only activity “within” a State by the taxpayer or their representative in the state, are for the solicitation of orders of tangible personal property.
- Orders received are sent outside of the State for approval or rejection.
- Approved orders are filled by shipment or delivery from a point outside the state.
The Statement of information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272 describes how states in agreement with the way they interpret the law would apply it to various activities that a business may have in said states. Included in the statement is a list of activities that are deemed to be protected under P.L. 86-272 and a list of those activities that are not protected under P.L. 86-272.
The most recent version adopted on August 4, 2021 was issued to revise the statement to address modern business activities including:
- Telecommuting Employees:
Revision of Section A of Article IV – Unprotected Activities: “Activities performed by an employee who telecommutes on a regular basis from within the state unless the activities constitute the solicitation of orders for sales of tangible personal property or are entirely ancillary to such solicitation.”
- Business activities conducted via the internet
Addition of Section C to Article IV“As a general rule, when a business interacts with a customer via the business’s website or app, the business engages in a business activity within the customer’s state. However, for the purpose of this Statement, when a business presents static text or photos on its website, that presentation does not in itself Constitute a business activity within those states where the business’s customers are located. “The Statement includes eleven (11) examples of scenarios between an internet seller and its customer where the orders are approved or rejected as well as the products are shipped from a point outside of the customer’s state. The examples given indicate whether internet activities are protected by P.L. 86-272 as being merely a solicitation of sales, an activity entirely ancillary to the sale, or whether the internet activity exceeds the protection afforded by P.L. 86-272.
- Independent Contractors:
Expansion of Article V pertaining to Independent Contractors to include: “Performance of unprotected activities by an independent contractor on behalf of a seller, such as performing warranty work or accepting returns of products, also removes the statutory protection.”
- Foreign Commerce:
P.L. 86-272 is only applied to “interstate commerce” as Congress does not have authority to regulate foreign commerce. Revision of the language in Section VII eliminates the language that says “This state will apply….” as it may be construed that Congress was attempting to protect business activities pertaining to foreign commerce.
- Application of Joyce Rule:
Article VII.E was deleted as the Statement is no longer taking a position on the sourcing of sales
If your business is one of the many that continues to look to the protection that P.L. 86-272 affords from being imposed state income taxes outside of your home state for the sale of personal tangible personal property, now is the time to re-examine the presumptions that have been made in the past. DiSanto, Priest & Co. can assist you in analyzing your business activities and determining any state compliance that needs to be addressed regarding the applicability of P.L. 86-272, as well as other areas of state tax nexus. Give us a call at (401)-921-2000, or fill out our online contact us form to get started.
Consider More Than Just Your 1040 for Accurate Income Determination
What is an individual’s annual income? An income tax return, specifically the individual federal income tax return (Form 1040), is the most heavily relied upon document that attorneys and the courts gravitate to in order to answer this question. This is a mistake that could have a significant and detrimental financial impact, especially in matrimonial litigation.
The word “income” is overly broad; its application results in differing definitions and usages of the word itself, examples, of which, include, “taxable income,” “gross income,” and “net income” to name a few. All these types of income can be substantially different simply based upon definition alone.
Line 1 of Form 1040 reports wages, salaries, tips, etc., and these amounts are derived from a W2 Wage and Tax Statement; this statement has four (4) different reported wage amounts. The different wage amounts reflect differences in the tax treatment of specific components of wages. All these reported wage amounts can be significantly different, and Box 1 is generally the lowest wage amount. Would you be surprised to learn that this is the figure that receives most attention? It is this figure that is reflected on that line 1 of Form 1040. At the very least, “actual” wages are best reflected by utilizing Box #5, “Medicare wages and tips.” However, this too may understate an individual’s actual wages. Non-taxable benefits may not appear on Form W-2, such as retirement contributions, health savings accounts, pre-tax deductions, employee perquisites, stock options, etc., and they certainly are not observable simply by reviewing an individual’s federal tax return. To determine an individual’s “actual” income from wages, a detailed analysis must be performed utilizing not only tax returns, but also W-2s, payroll earnings statements and pertinent employer records.
A tax return reports taxable income and, depending on the specifics, some of the reported taxable income may be further reduced by allowable deductions. While Form 1040 is a great source of information, it is only the beginning of understanding and computing an individual’s income and not the end.
The more complex an individual’s tax return and/or compensation plan is, the more imperative it is to have a professional who has extensive knowledge and experience in performing an income analysis, so that all income components can be accurately determined, considering the purpose of which it will be used.
If you have any questions about income determination, tax returns, or W-2 statements, give us a call at (401)-921-2000, or fill out our online contact us form.
Throughout the COVID-19 Pandemic, individuals and businesses have turned to crowdfunding to support their financial needs. Crowdfunding sites like GoFundMe and Kickstarter have made it accessible for companies to acquire much-needed financial support. Although crowdfunding has grown in popularity, the implications of this funding can be tricky to navigate. To properly understand the implications it can have on your business, it’s important to start at the beginning.
What is it?
Crowdfunding is the process of raising capital through various backers by way of the internet.
Common Crowdfunding Sites
Types of Crowdfunding
- Donor-Based: The most popular type of crowdfunding that involves the donation or receipt of donations without any resources or services exchanged.
- Reward-Based: Involves the exchange of funds in return for goods or services.
- Equity-Based: The exchange of funds in return for an ownership interest in a company.
- Donor-Based: For the most part, funds received from donors, with no expectation of getting something in return, are not considered income. Under the “something for nothing” rule, the donation is considered a personal gift from the backer. For this reason, the gift would be nontaxable to the receiver, but the gift is restricted to the $15,000 annual gift tax exemption for the donor. Since the donations are usually made to a non-qualified charity, the donation does not qualify for the charitable deduction.
- Reward-Based: Keeping in line with the “something for nothing” rule, any funds received using the reward-based crowdfunding source would be considered taxable income. This is because the contributor is receiving something in return for the funds provided. For example, if a clothing company needs additional funds for a new clothing line, it may offer a “free” T-Shirt in return for any funds received. Since an exchange is taking place, this would be deemed a business transaction and reported as a source of income.
- Equity-Based: Under the Jumpstart Our Business Startups (JOBS) Act of 2012, an exemption was created that allowed non-accredited investors the opportunity to participate in funding campaigns. It is debatable how exchanges using this source of crowdfunding should be taxed based on the specifics of the situation. Hence, it’s critical to reach out to your local CPA for help on how to account for the matter.
It’s important to keep in mind that the details provided above are the general rule, and that not all transactions should be treated the same way. Additionally, all records should be preserved to demonstrate when income can be properly excluded from your tax return. If you have any questions about crowdfunding, and their tax implications for your business, please reach out via email, give us a call at (401)-921-2000, or fill out our online contact us form.
Important company documents often overlooked are Buy-Sell and Shareholder Agreements (referenced as the “Agreements”). These are legally binding documents that provide for the orderly transition of a company or company interest(s). Often these Agreements are used interchangeably; however, a Shareholder Agreement explicitly defines the roles of each shareholder and their responsibilities to each other and the company. It protects the rights of existing shareholders/owners and outlines their decisions on what outside parties may become future shareholders/owners. By having such an Agreement in place, shareholders/owners will be able to ensure that they are all aware of the direction of the company. With everyone in agreement, the company is more likely to maintain a stable ownership interest and operate effectively. When a company lacks a plan for succession, significant expense, delay, and a disruption of company operations and profits may result.
 A Shareholder Agreement may contain provisions of a buy-sell agreement.
Shareholder vs. Buy-Sell Agreement
Unlike the Shareholder Agreement, a Buy-Sell Agreement strictly deals with the transfer of ownership interests of the company; it includes provisions relative to the agreed upon handling of the transfer of ownership upon the occurrence of certain “triggering events” such as death, divorce, disability, or departure. This document allows shareholders/owners to plan for one of these triggering events before it inevitably occurs. Not only is it essential to have such a document in place, but it is of equal importance to review this document every few years to adjust for changes in the practice such as growth, changes in value, etc. If an Agreement is in place, the terms of said agreement will be executed even if it is old and outdated. If no Agreement is in place, then there is no plan to preserve the rights of the surviving owners or the continuation of the company. Although it is best to have these agreements formed at the inception of the company, a Buy-Sell or Shareholder Agreement may be put into effect at any time to protect the interests of those that have dedicated themselves to the success of the company.
What Goes Into an Effective Agreement?
An effective Buy-Sell Agreement should include provisions addressing the valuation of the ownership interests or the circumstances in which a company may dispose of an ownership interest(s), though it is ultimately at the owners’/shareholders’ discretion to tailor the agreement to their expectations. Another consideration is whether owners/shareholders will have the option to buy an exiting owners’/shareholders’ interest prior to it being sold to an outside party. With this provision, ownership interests in the company can be better managed by existing owners/shareholders. This protects the company from a break in management or voting control, which can potentially lead to needless expenses or even the collapse of the company.
Shareholders of a company founded on years of hard work, dedicated time, and invested capital will greatly benefit from implementing or reviewing either of these agreements. The expense of planning ahead and establishing these documents are minimal compared to the potential costs – both monetarily and structurally – associated with litigation resulting from ownership disputes. A well thought out Buy-Sell or a Shareholder Agreement will help mitigate problems before they occur and save countless hours of time and capital.
If you would like a review of your current Buy-Sell Agreement and/or Shareholder Agreement or would like to discuss putting one in place, please contact us at 401-921-2000 or complete our online contact form.
Are physical audits becoming a thing of the past and e-audits becoming the norm? Due to COVID travel restrictions, auditors have been conducting inventory observations remotely with the help of technology. This is gaining popularity as a safe and flexible alternative that can produce the same results as the conventional method. E-auditing follows auditing standards throughout the engagement process, while keeping both parties safe. To prepare for a potential remote audit visit, it is important to stay informed on necessary applications to make it successful. Some assistance is required from the company to streamline the process and prevent issues on the day of the visit.
The most common method, live streaming, allows for two-way communication and video. Clients can film themselves as they perform the walk-through, allowing the audit team to watch it live. Audio capability from the live feed allows for questions asked as needed and to host open conversations.
Another technology option is video recordings and photographs. The recordings performed by the client can simulate an auditor first hand, or can be performed by an independent third-party. High-definition security cameras can also serve as an effective tool to stream inventory to auditors.
With video recordings and lack of authenticity, there is a possibility that the recording is not a current representation of the inventory. Material information could be omitted or manipulated from this, creating a scope limitation. Also, it is possible that the technology does not produce a clear enough image for the auditor to base their opinion.
Tips for Remote Auditing
Clients should begin to prepare for potential remote audit visits as they become a more viable option. Communication between the client and auditor is key to receive the most effective and reliable results.
Prevent technology fails by testing the procedures beforehand. To start, download a live streaming app onto the intended portable device and test for a strong connection, without lagging and delays. Testing the clarity of the camera when live streaming ensures the auditors can collect sufficient evidence.
Companies can also practice recording and streaming themselves counting the inventory, or find a third-party to do so. If security cameras are the selected method, find out if it has the necessary features to allow auditors to use them for the inspection.
As the world changes in response to COVID, the auditing industry is following along, and it is important to be ready for the inevitable shift. Virtual audits are quickly becoming reality. If you have any questions about the audit process, please call us at 401-921-2000, or reach us through email or complete our online contact form.
If there is a silver lining at all to COVID-19’s effect on industry, it’s that its forced managers to re-evaluate their profit margins. Striving to optimize profitability has never been more of a factor in financial endurance as it is right now. Handled correctly, the changes implemented to survive financially during COVID-19 will reap its greatest benefits once the worst of the pandemic is behind us. The good starting point in a reassessment is to disaggregate the components feeding into company margins and identify those reaping the greatest rewards. There are several ways to dissect and capitalize on profitability streams.
- By customer: As a rule of thumb, analysts estimate that the top 20% of customers generate approximately 120% of company profits; and the bottom 20% account for 100% of losses. While it feels counter intuitive to many business owners whose mantra is to grow a customer base, culling your revenue pool is probably one of the quickest ways to improve profitability. Start by identifying which customers belong in the top, middle, and bottom buckets. Which of the poor performers can be renegotiated, and which need to be let go?
- By product: Unless a manufacturer produces a single homogenous item, there will be variability in margins by product. Managers that do not have visibility at this level do themselves a disservice. Identifying fixed and variable costs by product reveal which perform at or above expectations, and which hurt the bottom line.
- By distribution channel: How business owners get their products to their customers can have vastly different cost structures. How much does it cost to use traditional wholesalers, regional distributors, direct-customer avenues? Will there be repercussions to the business in upsetting the apple cart? Are there new opportunities in web-based sales?
- By supply chain: Time is money. Logistical challenges to get inventory in the door and through processing plays an inherent role in product costs. Examine the interface between engineering and production. Which products can be produced to QC standards, within budget, and put out to market quickly?
This self-examination may be borne of the need to stay afloat during these unprecedented times, however, it does create an opportunity. Understanding what truly drives company profit puts management in a position to devise and execute a margin optimization strategy. A focused plan based on relevant data will mitigate the financial strain of the pandemic and, even more importantly, fortify the business model in a post COVID-19 economy.
If you have any questions on how your business would benefit from a profit margin evaluation, please call us at 401-921-2000, or reach us through email or complete our online contact form.
Health care providers have dedicated their resources to providing patients with the care they need throughout a rapidly evolving pandemic. During these unprecedented times, medical providers have been faced with additional costs related to treating coronavirus patients as well as lost revenues due to government shutdowns and the suspension of elective procedures. To help mitigate the financial impact on providers, the U.S. Department of Health and Human Services (HHS) issued Provider Relief Fund (PRF) payments to be used towards eligible coronavirus related expenses and to help cover lost revenues.
Recipients of these funds agreed to certain terms and conditions, including reporting requirements pertaining to the use of these funds. If in any Payment Received Period you received one or more payments totaling $10,000 or more in the aggregate, you are subject to the reporting requirements. Failure to meet these requirements could result in HHS seeking recoupment of the funds. The following table provided by HHS summarizes each Payment Received Period, along with the Deadline to Use the Funds and the respective Reporting Time Period:
Summary of Reporting Requirements
*On September 10, 2021, HHS offered a 60-day grace period for Period 1. Although the reporting time period and deadline to use the funds has remained the same, HHS will not initiate collection procedures during this grace period.
Providers will be required to report on eligible coronavirus related expenses, such as personal protective equipment, tele-health costs, touch-free technology, hazard pay to employees, physical barriers meant to reduce the spread of COVID-19, and costs related to COVID testing to name a few. The expenses need to be for the preparation for, prevention of or response to coronavirus. Additionally, if you received any other funds, either from federal, state, or local governments or from business insurance, those monies need to be reported and applied against the eligible expenses first. If you have not used all the PRF payments for eligible expenses, you will need to provide information on lost revenues attributable to coronavirus. HHS is allowing several different methods to report on lost revenues.
Additional reporting requirements will include interest earned on the funds if they were held in an interest-bearing account, metrics related to personnel, patients and facilities and you will need to answer various questions about the impact of the payments during the period of availability. Providers that expend $750,000 or more in federal funds, including the PRF payments, are subject to a Single Audit requirement.
The reporting requirements outlined above are a general overview of the complex calculations and reporting required to comply with HHS guidelines. For additional information and guidance related to the Provider Relief Fund payments and the related reporting requirements, click here. If you would like assistance or advice regarding your reporting obligations, please call us at 401-921-2000, or complete our online contact form.
Under the American Rescue Plan Act of 2021 (ARP), new tax credits are being provided for paid leave to employees who take time off related to COVID-19. The ARP allows small and medium-sized employers, and certain governmental employers, to claim refundable payroll tax credits equal to 100% of the qualified sick leave. Eligible employers that are entitled to claim the refundable tax credits include businesses and tax-exempt organizations with fewer than 500 employees and pay qualified sick leave wages. Self-employed individuals are eligible for similar tax credits.
Qualified sick leave includes wages for an employee who is directly affected, experiencing symptoms, and seeking a medical diagnosis for COVID-19 as well as employees in the process of obtaining or recovering from the effects of any COVID-19 vaccination. The credit is allowed for up to 80 hours of paid sick leave in an amount equal to the employee’s regular wage, capped at $511 per day for a total of 10 workdays, for a total cap of up to $5,110.
Businesses and nonprofits will be eligible to claim the tax credits available to eligible employers that pay sick and family leave from April 1, 2021 through September 30, 2021. The Emergency Paid Sick Leave Act allows employers to reclaim the original credit as written under the Families First Coronavirus Response Act from its enactment up to March 31st, 2021. Employers can claim the credit again from April 1st, 2021 to September 30, 2021 for another 10 days on the same employee if needed.
Eligible employers claiming the credits for qualified leave wages must retain records and documentation related to and supporting each employee’s leave. Credits can be claimed on Form 941, Employer’s Quarterly Federal Tax Return. Eligible employers can keep the federal employment taxes that they otherwise would have deposited, including federal income tax withheld from employees, the employees’ share of social security and Medicare taxes, and the eligible employer’s share of social security and Medicare taxes with respect to all employees up to the amount of credit for which they are eligible. If the eligible employer does not have enough federal employment taxes on deposit to cover the amount of the anticipated credits, the eligible employer may request an advance by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Self-employed individuals may claim comparable credits on the Form 1040, U.S. Individual Income Tax Return. The credit will be based on the net earnings during the year divided by 260 days to determine the credit limitations. The ARP increased the day limitation to 60 days ($12,000 overall; $200 per day).
- IRS: Under the American Rescue Plan, employers are entitled to tax credits for providing paid leave to employees who take time off related to COVID-19 vaccinations
- IRS: American Rescue Plan tax credits available to small employers to provide paid leave to employees receiving COVID-19 vaccines; new fact sheet outlines details
If you have any questions on the above and how it applies to you, please call us at 401-921-2000, or reach us through email or complete our online contact form.