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Information through the eyes of an accountant

Accountant View

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
  •  Is the asset business or personal?

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.

  •  Want to review sale document.

There may be deductions available for property taxes, sales tax, and interest expense.

  • Was there a trade-in that was used in business?

May have to recapture (treat as ordinary income) any gain resulting from exchange – based on the depreciated value of the car.

  • Will it be used personally by an employee or owner?

There may be taxable compensation to an owner or employee for the amount of personal use.

Spend money on entertainment   
  • Did you entertain a customer or employee?
  • Was it a clear business setting?
  • Was the main purpose of the entertainment the active conduct of business?
  • Was it before or after a substantial business discussion?

These expenses are generally limited to a 50% deduction, but may not be deductible at all if considered lavish or extravagant.

 Purchase equipment
  •  What is your capital expenditure policy?
  •  How long will this asset likely last? 
  • Is it used in the creation of an inventory item? 
  •  Is it used for investment purposes?  
 Lease property or equipment 
  • Is it a capital or operating lease? (starting in 2018 the rules change.

Requires specific treatment and disclosures on financial statements. 

  • Is it an ordinary and necessary business expense?

 

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 . 
  • What are the terms of the 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
  • Why was this done?

Looking for accurate treatment of any associated gains or losses, requires disclosures in financial statement notes.

  • Review the terms.

 Looking for taxable gain on the conversion or forgiveness of debt income.

Pay wages

 

  • Are there any cellar or vineyard worker wages?

 

May need to be reclassified to inventory costs.

  • Are there any cellar or vineyard worker wages?

Considered costs of inventory for wineries subject to Uniform Capitalization rules.

Purchase Grapes

 

  • What are the contract terms? 

Looking for long term agreements that represent off-balance sheet obligations of the company. Requires disclosures.

  • What are the contract terms?

 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.

  • Are there any accrued expenses for payments to be made to related parties?

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

 

  • What is the nature of the repair?

 

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.  

  • What is the nature of the repair?

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

 
  • Is your home office exclusively and regularly used as the principal place of business?

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.