Information through the eyes of an accountant
In order to do our job as accountants, we have to understand your business. But sometimes we need to go deeper than that - we have to consider the implications of external standards as they apply to individual transactions. Whether we are a member of your internal accounting team or your external CPA, we accountants have to ask a lot of questions.
We aren't just being picky
When you enter a charge for dinner at a restaurant, for example, we see a meals & entertainment expense. We might ask you some questions like :
"Who was at the dinner?"
"Was it part of a team event?"
"Was it before or after a business discussion?"
"Was it in conjunction with out of town travel?"
... and the list could go on. We need more information just to figure out how to handle the expense for federal income tax purposes. Under federal tax law, only 50% of certain meals and entertainment expenses are deductible.
More than one way to skin an expenditure
Sometimes we are looking to evaluate your transactions in accordance with a set of financial statement standards called Generally Accepted Accounting Principles which dictate how information is to be recorded. These standards are designed to ensure consistent financial reporting across businesses of every type. We might be working with your information to create a compiled financial statement, or to deliver an audit or review.
Other times, we are seeking information based on adherence with a different set of standards :
- The ones promulgated by the United States Congress that dictate how your taxable income is to be calculated
or
- The ones promulgated by states who define their own version of taxable income. (In addition to state income taxes, there are also state and local sales, use, and property taxes to consider. )
Which lens are you wearing?
It is our job to keep all of your information correct for purposes of at least three different sets of external rules while trying to be mindful of your need for managerial information to run the business. You can see how different the information might appear through a different set of lenses.
We could be better communicators
We don't always do a great job of balancing external versus internal reporting requirements or explaining exactly why we need information when we request it. At the end of the year, when your accounting team is busy and thinking about the holidays, we send them a checklist with a long list of information that we need to get your taxes and financial statements prepared. No wonder it takes a while for them to get back to us.
What we see when we look at transactions
Here is a look at some business transactions through our lenses:
Expenditure description | GAAP Considerations | Federal and State Income Tax Considerations |
---|---|---|
Buy a new car |
An auditor will be concerned about the overstatement of assets on the balance sheet of the company if the asset is primarily used personally. Personal use of auto may need to be treated as compensation if provided as an employee benefit. |
There may be deductions available for property taxes, sales tax, and interest expense.
May have to recapture (treat as ordinary income) any gain resulting from exchange – based on the depreciated value of the car.
There may be taxable compensation to an owner or employee for the amount of personal use. |
Spend money on entertainment |
These expenses are generally limited to a 50% deduction, but may not be deductible at all if considered lavish or extravagant. |
|
Purchase equipment |
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Lease property or equipment |
Requires specific treatment and disclosures on financial statements. |
|
Take out a loan, borrow funds |
Need a copy of the loan amortization schedule to determine short term obligations (payable within one year) versus long term obligations. |
Need amortization schedule to make sure interest expense deduction is accurate. |
Spend money for meals | Will be interested in procedures and management of receipts and employee reimbursements. |
Is the food provided for an employee meeting? If so, the expenditure might be fully deductible, otherwise meals and entertainment expenses are limited to a 50% deduction. |
Sell goods at year end | An auditor or accountant will look for proper cutoff of revenues at the end of a given period. He or she will reclassify any un-shipped sales as deferred revenue reflected on the balance sheet. | For cash basis taxpayers, revenue is recognized when the cash is received, regardless of whether the item is shipped. |
Compensate an Owner | May request evidence of board authorization or compensation agreement . |
Looking for “Reasonable Compensation” which is deductible. If found to be unreasonable, excess amounts can be treated as nondeductible dividend distributions by the IRS. |
Owner’s Debt converted to Equity |
Looking for accurate treatment of any associated gains or losses, requires disclosures in financial statement notes. |
Looking for taxable gain on the conversion or forgiveness of debt income. |
Pay wages |
May need to be reclassified to inventory costs. |
Considered costs of inventory for wineries subject to Uniform Capitalization rules. |
Purchase Grapes |
Looking for long term agreements that represent off-balance sheet obligations of the company. Requires disclosures. |
Looking to capture all costs for grapes purchased in the current year, whether paid for or not. |
Related Party* Transactions *Generally >50% owners and family members. |
Looking for arm’s length treatment of transactions, reviewing “substance over form”, requires special disclosures. |
May not be deductible until the recipient is paid (or recognizes income for the payment.) In addition, losses are disallowed on exchanges between related parties. |
Spend money to repair an asset |
Repair expenses maintain an asset’s life or current condition. Expenditures that extend the life are considered capitalizable assets. Repairs over the company’s capitalization policy limit require further scrutiny based on the above definition. |
If the investment extends the life of the associated asset, it must generally be capitalized and depreciated. The IRS offers a safe harbor of $2500 per expenditure for “the improvement of existing property” that can be deducted, provided this amount is in accordance with your capitalization policy. More details are available here. |
Establish a home office |
A mixed-use area, like a kitchen won’t qualify for a tax deduction. If so, will need to allocate related utility costs based on square footage. |