The Cooperative Accountant - Fall 2021

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Fall 2021 | The Cooperative Accountant

82 ––––––––––– EXECUTIVE COMMITTEE AND NATIONAL DIRECTORS –––––––––––––

PRESIDENT: *William Miller, CPA Electric Co-op Chapter Bolinger, Segars, Gilbert & Moss, LLP 8215 Nashville Avenue Lubbock, TX 79423

CONTENTS FEATURES 3 From the Editor

By Frank M. Messina, DBA, CPA

4 Utility Cooperative Forum: Comparing two lists or datasets in Microsoft Excel

By Peggy Maranan, CPA, MBA, Ph.D.

(806) 747-3806 bmiller@bsgm.com

VICE PRESIDENT: *Nick Mueting (620) 227-3522 Mid-West Chapter nickm@.lvpf-cpa.com Lindburg, Vogel, Pierce, Faris, Chartered P.O. Box 1512 Dodge City, KS 67801

EXECUTIVE COMMITTEE SECRETARY-TREASURER: *Dave Antoni Capitol Chapter KPMG, LLP 1601 Market St. Philadelphia, PA 19103

President David Antoni, CPA KPMG, LLP

(267) 256-1627 dantoni@kpmg.com

IMMEDIATE PAST PRESIDENT: *Jeff Brandenburg, CPA, CFE (608) 662-8600 Great Lakes Chapter jeff.brandenburg@cliftonlarson ClifftonLarsonAllen LLP 8215 Greenway Boulevard, Suite 600 Middleton, WI 53562

Vice President Eric Krienert, CPA Moss Adams LLP

*Indicates Executive Committee Member

7 ACCTFAX Bulletin Board

By Phil Miller, CPA; Greg Taylor, MBA, CPA, CVA; Bill Erlenbush, CPA

Treasurer NATIONAL OFFICE Erik Gillam, CPA Kim Fantaci, Executive Director Aldrich CPAs +Advisors Jeff Roberts, Association Executive Tina Schneider, Chief Administrative Officer

136 S. Keowee Street Dayton, Ohio 45402 info@nsacoop.org

Krista Saul, Client Accounting Manager

11 TAXFAX

By George W. Benson; Tara Guler

20 Small Business Forum: FASB Simplification Initiative Related to Income Taxes

By Barbara A. Wech, Ph.D.; Dr. Steve Grice, CPA; Dena Mitchell, CPA

41 Best Practices: A 4-Point Plan for Reducing Stress

Bill Erlenbush, Director of Education

Secretary THE COOPERATIVE ACCOUNTANT Kent Erhardt CoBank, ACB

Phil Miller, Assistant Director of Education

Winter 2018

Immediate Past President Nick Mueting, CPA Lindburg, Vogel, Pierce, Faris, Chartered

At Large April Graves, CPA United Agricultural Cooperative Inc.

For a complete listing of NSAC’s National Board of Directors and Committees, visit

www.nsacoop.org 2

Fall 2021 | The Cooperative Accountant

From the

Editor

Frank M. Messina, DBA, CPA Alumni & Friends Endowed Professor of Accounting UAB Department of Accounting & Finance Collat School of Business CSB 319, 710 13th Street South Birmingham, AL 35294-1460 • (205) 934-8827 fmessina@uab.edu

Every night when my eight-year old miracle son, Teddy (I’m 59) is ready for bedtime, he asks me to tell him a story about when I was little. By now, he has heard my best ones over and over and has them memorized. Yet, he still loves to hear me tell them in extreme details. The stories are usually related to family adventures, the outdoors, sports, and being raised by nuns in school, but usually revolve around the mistakes I made growing up as any child does such as basically doing stupid things. I always let him know that learning from mistakes is what we all should do in life and try your best not to make those same mistakes again.

These stories make me reflect quite often on my 59 years and all the many things I have seen in my blessed and fortunate life. Unfortunately, though, I continue to see the same mistakes being made by the same people over and over again. In my mind, maybe these are not mistakes being made over and over again, but simply, the actions of misguided people in our world who do not see that their decisions have profound effects on others due to lack of accountability. Maybe it’s from the amazing nuns who raised me that taught me that all decisions have consequences and that in many cases those consequences can be grave.

There are many today who are trying to continue to divide our world and cause continuous conflict – because of varying ideals and politics. However, I have discovered that simply getting along and cooperating openly with each other whether we disagree or not is the best thing!

Remember, we too are always looking for you to share your knowledge since you may have some extra time on your hands (like others continue to do) with us through articles in The Cooperative Accountant. Feel free to contact me (fmessina@uab.edu) if you have any ideas or thoughts on a potential article contribution. Sharing knowledge is a wonderful thing for all!!! Knowledge can change our world!

That is why we must remember – “The Past is history; the Future is a mystery, but this Moment is a Gift – that’s why it’s called the Present.”

Positively Yours, Frank M. Messina, DBA, CPA Articles and other information which appear in The Cooperative Accountant do not necessarily reflect the official position of the NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES and the publication does not constitute an endorsement of views or information which may be expressed.

The Cooperative Accountant (ISSN 0010-83910) is published quarterly by the National Society of Accountants for Cooperatives at Centerville, Ohio 45459 digitally. The Cooperative Accountant is published as a direct benefit/service to the members of the Society and is only available to those that are eligible for membership. Subscriptions are available to university libraries, government agencies and other libraries. Land Grant colleges may receive a digital copy. Send requests and contact changes to: The National Society of Accountants for Cooperatives, 7946 Clyo Road, Suite A, Centerville, Ohio 45459.

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Fall 2021 | The Cooperative Accountant

Editor & Guest Writer Peggy Maranan, Ph.D. DEMCO Director, Finance 16262 Wax Road Greenwell Springs, LA 70739 Phone 225.262.3026 Cell: 239.887.0131 peggym@DEMCO.ORG

Many tasks that accountants and auditors perform require comparing two lists, or datasets, to find matching, non-matching, or missing values. Some of these tasks include bank statement reconciliations, general ledger, and account reconciliations. Auditors also compare lists or datasets for analysis to investigate anomalies or identify trends in data, as well as to provide audit evidence.

The ability to analyze entire datasets instead of just samples can improve the quality of the audit. For example, it can aid in duplicate detection of transactional data, identify outliers or anomalies, or detect missing information.

In Excel, like many things, there are multiple ways to accomplish that task. Some of the methods include the use of conditional formatting, creating formulas, and the use of add-in’s such as Power Query. This article will examine some of these various methods and offer guidance on how to select the method that best fits the requirement at hand. It will not address all available methods. The article is also not meant to provide tutorials on these methods. Tutorials can be found on 4

the internet and in various Excel books and publications. This article will describe the methods so that you know what functions are available, and then what to search for when looking for tutorials.

The techniques discussed in this article include: 1. Quick conditional formatting to compare two columns of data 2. Match Data using Row Difference Technique 3. Row Difference using IF Condition 4. Matching data using the MATCH function 5. Range sizes in data set fluctuate – use Tables 6. VLOOKUP and XLOOKUP formulas 7. Creating a composite column 8. Using Excel Power Query 1. Quick conditional formatting to compare two columns of data This method might be the quickest and most simple method. It will allow you to highlight a cell or range of cells based upon defined criteria. A Duplicate Values setting box is available in the Conditional Formatting Fall 2021 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM drop down list, where you can define the formatting and selection of Duplicate or Unique values. Formatting of values identified can then be defined for both Duplicate or Unique values for datasets in both lists.

2. Match Data using Row Difference Technique When comparing two lists of data, select both columns of data, press F5 key on the keyboard, select the “Go to special” dialog box. Then select “Row difference” from the options. Matching cells of data across the rows in the columns are in white color and unmatched cells appear in grey color.

3. Row Difference using IF Condition The IF Condition formula states if there is a match in the row when comparing two lists of data. If there is a match, the result of the formula will be “Matching” and if not then “Not Matching”. The formula would look something like this: =IF(A2=B2, “Matching”, “Not Matching”). The formula would need to be copied down the row of cells.

4. Matching data using the MATCH function The MATCH function is one of many lookup functions in Excel. A lookup value is defined, and the function finds the location of that value in a list of values, and then identifies matches. It will return a number based upon the position of the value in a lookup array or range of data. Where there is no match, the return value will be an #N/A. Further, the ISNUMBER formula can additionally be used to turn these location numbers into “True” or “False” matches, which can be used where the relative location is not specifically required.

If using Excel 365, there is further capability to include an array as the lookup value of MATCH and the results will populate as a separate list. An array formula 5

is a formula that can perform multiple calculations on one or more items in a row or column of values, or a combination of rows and columns of values. This eliminates the need to copy a formula down the spreadsheet rows or across columns, and instead with just one formula identifying the array, matching values will be identified.

This is also achieved through the use of the ISNUMBER formula. The only difference between the MATCH formula and the ISNUMBER formula is that the MATCH formula points to a cell as the lookup value whereas a range of cells is included in the ISNUMBER formula.

Excel 365 also introduced the new function XMATCH. The XMATCH formula replaces the old VLOOKUP function, and has additional power. This formula returns a relative position value as does the MATCH formula. But, with XMATCH, dynamic arrays can also be used to create the formula.

Dynamic arrays are resizable arrays that can calculate automatically and return values into multiple cells based on a formula entered in a single cell. The XMATCH formula is very similar to the MATCH formula, except that you do not have to select 0 in the formula for an exact match because that is already built in as a default setting of the XMATCH formula. Finding values “not matching” can be then be determined by using the =NOT(ISNUMBER) formula applied to the same array of data.

5. Range sizes in data set fluctuate – use Tables For instances where the number of data rows can change in data sets, either rows are added or deleted, these lists are considered dynamic. For dynamic data sets, formulas pointing to specific nondynamic data sets would need to be updated manually. Converting the list of data in the data set to Tables solves this issue. When rows are added or deleted in the table, Fall 2021 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM formulas including the table reference, will automatically reflect the change.

pivot tables or reporting.

(Acampora, 2020, para. 3) Once the data has been transformed into 6. VLOOKUP and XLOOKUP formulas Power Query, there are three join features VLOOKUP formula is used to return a applied to the tables of data that can help corresponding value from a cell reference. complete these comparisons: If there is no corresponding value, an #N/A a. Inner – will return only those rows that are error will be returned. XLOOKUP was present in both tables, i.e. the rows that introduced in Excel 365. It does the same match or duplicate. thing as the VLOOKUP, but you can also b. Left Anti – will return rows that are present define the result if a value is not found. in the first table but not in the second table.

7. Creating a composite column c. Right Anti – will return rows that are When you have several columns of data present in the second table but not in the in two datasets, creating a new column first table. and combining the data into a string of More detailed instructions for completing information will create a unique value with these comparisons in Power Query can be which to compare against another set of found at the following myonlinetraninghub data. This combined, or composite value, website, which is one amongst several can be created using the CONCATENATE websites available on the internet feature. Then, the two columns containing providing instructions: https://www. the combined values can be compared for myonlinetraininghub.com/excel-comparematches. two-lists For more robust applications that have not 8. Using Excel Power Query been identified in this article, there are some Power Query is a free add-in for Excel 2010 software applications available for purchase and 2013 for Windows. It is a built-in feature that can assist with these comparisons. for Excel 2016 for Windows. Once the add-in These can be particularly helpful if there are is installed, the Power Query tab will appear data sets that are large or where there are in the Excel Ribbon. multiple criteria needing to be applied in Power Query can be used to compare two data comparison. lists to identify which items are duplicates, different, or missing from one list as References compared to another.

Acampora, A. (May 13, 2020). Power Query Data for comparison can be brought into Overview: An Introduction to Excel’s Most Excel from various sources. Examples include Powerful Data Tool. Retrieved from the other databases, other data from Excel, following website on August 31, 2021: the web, an Access database, a CSV file, https://www.excelcampus.com/power-tools/ your accounting system, etc. The steps to power-query-overview/ transform data from varying sources include: 1. You add your data sources (Excel tables, Treacy, M. (March 29, 2016). Excel Compare CSV files, database tables, webpages, etc.)

Two Lists. Retrieved from the following 2. Press buttons in the Power Query Editor website on August 31, 2021: https://www. window to transform your data. myonlinetraininghub.com/excel-compare3. Output that data to your worksheet or two-lists data model (PowerPivot) that is ready for 6

Fall 2021 | The Cooperative Accountant

GENERAL EDITOR UTILITY COOPERATIVE FORUM

Philip W. Miller, CPA NSAC Assistant Education Director 18 Tow Path Lane South Richmond, VA 23221 (804) 339-9577 pwm01@comcast.net

ASSISTANT EDITORS Greg Taylor, CPA, CVA, MBA Shareholder Williams & Company (806) 785-5982 gregt@dwilliams.net

By Phil Miller, NSAC Assistant Education Director

FASB ISSUES STANDARD TO IMPROVE A LESSOR’S ACCOUNTING FOR CERTAIN LEASES WITH VARIABLE LEASE PAYMENTS On July 19, 2021, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) intended to improve an area of the leases guidance related to a lessor’s accounting for certain leases with variable lease payments.

During the FASB’s post-implementation review (PIR) of leases (Topic 842), the Board received an agenda request highlighting an issue encountered by lessors. Specifically, a lessor may be required under Topic 842 to recognize a selling loss at lease commencement (day-one loss) for a salestype lease with variable payments even if the lessor expects the arrangement will be profitable overall. Stakeholders highlighted that this accounting outcome results in financial reporting that does not faithfully represent the underlying economics either at lease commencement or over the lease term.

Therefore, users of financial statements are not being provided with information for those transactions that is decision useful.

To address this, the Board is issuing this ASU to amend lessor lease classification requirements. Specifically, a lessor is now required to classify and account for a lease with variable payments as an operating lease if (a) the lease would have been classified as a sales-type lease or a direct financing lease and 7

Bill Erlenbush, CPA NSAC Education Director (309) 530-7500 nsacdired@gmail.com

(b) the lessor would have otherwise recognized a day-one loss. A day-one loss or profit is not recognized under operating lease accounting.

The resulting financial reporting is expected to more faithfully represent the economics underlying the lease and improve the decision usefulness of information provided to the users of financial statements.

The ASU is available at www.fasb.org.

RECENT ACTIVITIES OF THE PRIVATE COMPANY COUNCIL The Private Company Council (PCC) met on Monday, June 21 and Tuesday, June 22, 2021.

Below is a brief summary of topics addressed by the PCC at the meeting: PCC Issue No. 2018-01, “Practical Expedient to Measure Grant-Date Fair Value of Equity-Classified Share-Based Awards”: The PCC reached a final consensus on a practical expedient for a private company to determine the current price input of equityclassified share-based awards issued to both employees and nonemployees that describes the characteristics of a reasonable application of a reasonable valuation method. The PCC discussed significant external review feedback and addressed sweep issues related to scope, application, disclosure, effective date, and measurement.

Profits Interests and Their Interrelationship with Partnership Accounting: FASB staff provided the PCC with an update on the Fall 2021 | The Cooperative Accountant

ACCTFAX research and outreach conducted by the staff and Working Group on this PCC research project. PCC members shared their experiences with profits interests in practice, noting that generally profits interests awards are granted to senior management and that the terms of the awards are diverse and can be complex. PCC members noted that there are challenges associated with measuring profits interests and some noted that determining whether to apply the guidance in Topic 718, Compensation—Stock Compensation, or Topic 710, Compensation—General, can be challenging.

Current Issues in Financial Reporting: PCC members discussed practice issues arising from the current business environment under the COVID-19 pandemic. PCC members discussed the accounting and reporting for employee retention credits included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act and subsequent COVID-19related legislation.

Disclosures by Business Entities about Government Assistance: FASB staff reported that, at its May 26, 2021 meeting, the Board completed re-deliberations on the proposed Accounting Standards Update, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, including narrowing the scope to transactions a business entity is accounting for, by analogy, under a grant or contribution model. The Board directed the staff to draft a final Accounting Standards Update for vote by written ballot.

Improving the Accounting for Asset Acquisitions and Business Combinations (Phase 3 of the Definition of a Business project): FASB staff provided the PCC with a project update and noted this project’s objective and background. FASB staff then gave a summary of the accounting for contingent consideration in business combinations and solicited feedback from PCC members. PCC members had mixed views on how to account for contingent consideration in a business combination and what the expected costs and expected benefits would be under different models.

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Revenue—Post-Implementation Review: PCC members briefly discussed implementation issues related to Topic 606, Revenue from Contracts with Customers, and FASB staff provided an update on the next steps of the post-implementation review.

Leases (Topic 842)—Discount Rate for Lessees That Are Not Public Business Entities: FASB staff updated the PCC on the proposed Accounting Standards Update, Leases (Topic 842), Discount Rate for Lessees That Are Not Public Business Entities, which was issued on June 16, 2021, and has a comment period ending on July 16, 2021. The proposed amendments are intended to improve discount rate guidance for lessees that are not public business entities, including private companies.

Identifiable Intangible Assets and Subsequent Accounting for Goodwill: FASB staff provided a project update and solicited feedback from PCC members on certain factors that may be used to estimate the useful life of goodwill. Several PCC members did not agree with the use of an estimated payback period as a method to estimate the useful life of goodwill and cautioned against it being the only alternative method to a default amortization period. PCC members indicated that the transition was smooth for those private companies that have elected the accounting alternative to amortize goodwill and that most private companies have elected to test goodwill for impairment at the entity level, rather than at the reporting unit level.

Disclosure Framework: Disclosures—Interim Reporting: FASB staff solicited feedback from PCC members to better understand common reporting practices of nonpublic entities, including the types of financial information produced by private companies and requested by private company financial statement users at interim periods. PCC members provided feedback that private company interim financial information tends to exclude notes to the financial statements and that the content of the financial information is generally driven by covenant compliance and other debt considerations.

Fall 2021 | The Cooperative Accountant

ACCTFAX FASB PROPOSES IMPROVEMENTS TO DISCOUNT RATE GUIDANCE FOR LESSEES THAT ARE NOT PUBLIC BUSINESS ENTITIES On June 16, 2021, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) that would improve discount rate guidance for lessees that are not public business entities— including private companies, not-for-profit organizations, and employee benefit plans.

It is intended to reduce the expected cost of implementing the lease standard (Topic 842) for those entities while retaining the expected benefits for users of financial statements.

Stakeholders were encouraged to review and provide comment on the proposed ASU by July 16, 2021.

Topic 842 currently provides lessees that are not public business entities with a practical expedient that allows them to make an accounting policy election to use a riskfree rate as the discount rate for all leases.

The FASB originally provided this practical expedient to relieve those lessees from having to calculate an incremental borrowing rate, which could create unnecessary cost and complexity.

Some private company stakeholders expressed reluctance to use the risk-free rate election for all leases. Those stakeholders noted that in the current economic environment, a risk-free rate (for example, a U.S. Treasury rate) is low compared with their expected average incremental borrowing rates, and that using the risk-free rate election could increase an entity’s lease liabilities and right-of-use assets.

To address these concerns, the amendments in the proposed ASU would allow lessees that are not public business entities to make the risk-free rate election by class of underlying asset, rather than at the entity-wide level. It also would require that, when the rate implicit in the lease is readily determinable for any individual lease, a lessee would use that rate (rather than a risk-free rate or an incremental borrowing rate), regardless of whether it has made the risk-free rate election.

The proposed ASU is available at www.fasb. org.

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FAF ISSUES 2020 ANNUAL REPORT, “STANDARDS THAT WORK FROM MAIN STREET TO WALL STREET” On May 26, 2021, the Financial Accounting Foundation (FAF) posted its 2020 Annual Report to the FAF website. The report is available as a printable PDF file and as an interactive digital version.

The annual report theme is “Standards That Work from Main Street to Wall Street.”

The report provides a look at how the FASB and GASB supported stakeholders through an unprecedented year. By monitoring and responding to the situation as it evolved, the Boards sought to reduce the impact of the COVID-19 pandemic by providing technical assistance, delaying standard implementations, and always ensuring stakeholder needs were the top priority.

The 2020 Annual Report includes: • Letters from FASB, GASB, and FAF leadership • Snapshots of 2020 stakeholder outreach and engagement along with the many actions taken to ease the unforeseen challenges of the year • Complete 2020 management’s discussion and analysis and audited financial statements (previously posted to the FAF website).

The annual report is available online as a downloadable PDF file, along with a mobilefriendly version at accountingfoundation. org/street. The online version also includes complete lists of all FASB and GASB advisory group members, including the Emerging Issues Task Force and the Private Company Council.

FASB ISSUES AN INVITATION TO COMMENT ON FASB’S FUTURE AGENDA In December 2020, Financial Accounting Standards Board (FASB) Chair Richard R. Jones announced at the American Institute of Certified Public Accountants (AICPA) Conference on U.S. Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) Developments (2020 AICPA Conference) Fall 2021 | The Cooperative Accountant

ACCTFAX that the FASB would undertake an agenda consultation process in 2021 (the 2021 Agenda Consultation) to assist the Board in deciding where to focus its standard-setting efforts going forward.

On June 24, 2021, the FASB staff published an Invitation to Comment (ITC) to solicit broad stakeholder feedback about the future standard-setting agenda of the FASB. The feedback on the ITC is essential in ensuring that the FASB continues to allocate its finite resources to achievable standard-setting projects that fulfill its primary mission of improving financial accounting and reporting standards and addressing topics that are of the highest priority to its stakeholders.

The FASB staff is issuing the ITC to obtain broad stakeholder feedback. The ITC does not include Board views; the Board will consider the feedback received in response to the ITC when making decisions about potential changes to its agenda. Those decisions include which topics, if any, should be added to the FASB’s agenda (and in what order) and whether the current agenda projects remain a priority to stakeholders or could be reimagined.

The ITC and agenda consultation process are intended to complement, not replace, the FASB’s formal agenda request process; stakeholders are encouraged to continue to submit agenda requests about needed improvements to generally accepted accounting principles (GAAP) as they arise.

All stakeholders are invited to provide feedback on all matters in the ITC. The FASB staff welcomes comments from those who are interested only in a specific topic or topics described in the ITC. Comments are most helpful if they are as specific as possible, identify and clearly explain the topic or question to which they relate, and are specific to financial accounting and reporting. The ITC includes both general questions about the future of the FASB’s technical agenda and directed questions on specific topics.

Stakeholders are encouraged to submit comments on any aspect of the ITC by September 22, 2021, using one of the following methods: 10

Submitting comments through the electronic feedback form Emailing comments to director@fasb.org, File Reference No. 2021-004 Sending a letter to “Technical Director, File Reference No. 2021-004, FASB, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856-5116.”

SEC ANNOUNCES WIDE-SPREAD CHANGES IN LEADERSHIP OF THE PCAOB On June 4, 2021, the Securities and Exchange Commission announced that it has removed William D. Duhnke III from the Public Company Accounting Oversight Board (PCAOB). The Commission designated Duane M. DesParte to serve as Acting Chairperson, effective immediately.

The PCAOB was established by the Sarbanes-Oxley Act of 2002 and oversees the audits of the financial statements of public companies and brokers and dealers through registration, standard setting, inspection, and disciplinary programs. Under the Act, the Commission selects members and the Chairperson of the Board.

“The PCAOB has an opportunity to live up to Congress’s vision in the SarbanesOxley Act,” said SEC Chair Gary Gensler.

“I look forward to working with my fellow commissioners, Acting Chair DesParte, and the staff of the PCAOB to set it on a path to better protect investors by ensuring that public company audits are informative, accurate, and independent.”

Mr. DesParte, a CPA, was appointed as a member of the PCAOB by the SEC in December 2017 and was sworn in on April 9, 2018. He joined the Board after retiring from Exelon Corporation, where he served as corporate controller and in other financial roles for 15 years, following an 18-year career in the audit assurance profession. He graduated with highest honors from the University of Illinois at Urbana-Champaign with a B.S. in accountancy.

The SEC also announced that it intends to seek candidates to fill all five board positions on the PCAOB. The Commission has directed its Office of the Chief Accountant to begin the process for soliciting new applications; additional information about that process will be provided in the coming weeks.

Fall 2021 | The Cooperative Accountant

TAXFAX EDITOR George W. Benson Counsel McDermott Will & Emery LLP 444 West Lake Street Suite 4000 Chicago, IL 60606 (312) 984-7529 fax: (312) 984-7700 gbenson@mwe.com

Employee Retention Credit

By Tara Guler The CARES (“Coronavirus Aid, Relief, and Economic Security”) Act enacted in March of 2020 provided various benefits for employers to retain their current employees amid the economic downturn of the pandemic. The Employee Retention Credit (“ERC”) was first introduced in this Act. In December of 2020, the ERC was modified under the Consolidated Appropriations Act (“CAA”), which made significant taxpayer friendly changes. Specifically, the CAA provided retroactive changes to the ERC (allowing Payroll Protection Program (“PPP”) recipients to also claim the ERC) and extended the ERC into the first two quarters of 2021. Not long after, Congress extended and expanded the ERC a second time with the passage of the American Rescue Plan Act (“ARPA”), extending the ERC through December 31, 2021. Outside of the legislative language, guidance on the ERC can be found in IRS Notices 2021-20, 2021-23 and 2021-24.

The ERC is a refundable payroll tax credit claimed on Form 941 and is calculated as a percentage of qualified wages. In order to be eligible for the ERC, an employer must 11

have been GUEST WRITER subject to a Tara Guler full or partial Senior Manager Baker Tilly Virchow Krause, LLP closure due to Ten Terrace Court a government Madison, WI 53718 order or Tel: (608) 240-6714 Fax: (608) 249-8532 experienced e-mail: tara.guler@bakertilly.com a significant decline in gross receipts.

Exactly what can be treated as qualified wages hinges on whether the employer is a large or a small employer. Determination of eligibility and qualified wages can appear to be a simple on its face, but the rules are often vague, complex, and heavily facts and circumstances based, requiring employers to dig into the details to determine if they are truly entitled to a credit.

Aggregated group The existence of an aggregated group can have a considerable impact on an employer’s entitlement to the ERC. As such, before testing the employer’s eligibility and size, the employer must first determine if they are part of an aggregated group. For purposes of the ERC, employers are generally aggregated Fall 2021 | The Cooperative Accountant

TAXFAX under the controlled group and affiliated service group rules (different tests may apply to tax-exempt entities). These rules can be quite complex, and it is strongly encouraged employers consult their tax advisors. As an overview, the rules typically break out as follows: • Controlled Group o Parent-subsidiary with more than 50% ownership, vote or value o Brother-sister with five or fewer common owners which have both:  Controlling interest (80% or more, vote or value), and  Effective control (more than 50%, vote or value) • Affiliated service group o A-Type Group o B-Type Group o Management Group Full or partial government shutdown A business is considered to be fully or partially suspended if, due to COVID-19, the government fully or partially suspended business operations (this can include a reduction to business hours or even modifications to operations as required by local social distancing mandates). For those employers eligible under this provision, the credit is calculated only on wages during the suspension period, not the entire quarter of the suspension.

Significant decline in gross receipts For the 2020 calendar year, a significant decline in gross receipts is a greater than 50% decline compared to the same quarter in 2019. For 2021, a business must see a decline of greater than 20% in gross receipts when comparing corresponding quarters in 2021 and 2019. Employers should be aware that the mechanics for testing a significant 12

decline in gross receipts in 2021 is different than 2020. Additionally, employers need to ensure they have taken into account all revenue sources (e.g., forgiven PPP loans, grants, etc.).

Small and large employer definitions The determination of whether an employer is large or small is based on a count of its 2019 full time employees, defined to mean employees who worked at least 30 hours of service a week or 130 hours of service a month. For 2020, a small employer is one which had 100 or less full-time employees in 2019. For 2021, the small employee limit increased from 100 to 500.

Qualified wages For large employers, wages paid only to employees who are not performing services qualify for the ERC. In addition, paid time off or sick time paid in accordance with a pre-existing policy is not eligible. For small employers, all wages paid are eligible whether or not services were performed, including payments under a pre-existing leave policy.

Wages eligible for the ERC include FICA wages and qualified health plan expenses (employer provided coverage plus pre-tax employee contributions). Wages do not include: • Wages used in the calculation of PPP forgiveness • Wages used to claim credits under the Families First Coronavirus Relief Act or the Family Medical Leave Act • Wages used for the Work Opportunity Credit • Wages used to calculate the research and development credit • Wages paid to Internal Revenue Code Section 51(i)(1) related employees (50% or more owners) including a child, grandchild, Fall 2021 | The Cooperative Accountant

TAXFAX brother, sister, father, mother, ancestor, stepfather, stepmother, niece, nephew, aunt, uncle Credit Calculation For 2020, the credit is equal to 50% of qualifying wages up to $10,000 per employee per calendar year. For 2021, the credit is equal to 70% of qualifying wages up to $10,000 per employee per calendar quarter.

The credit may be claimed on a timely filed Form 941 or Form 941-X (amended Form 941). A taxpayer has three years from the original filing deadline to file Form 941-X and claim the credit for that quarter.

For federal income tax purposes, the employer is allowed to deduct the payroll taxes, but is not allowed to deduct the qualifying wages to the extent of ERC. States have taken various approaches to the deductibility of the wages so please consult your tax advisor for various state tax laws.

Conclusion The retrospective changes and the extension of the ERC period and dollar value can potentially provide a great deal of value to taxpayers. It would be beneficial to talk through the eligibility requirements with your tax advisor to make sure all credit options have been exhausted related to pandemic relief.

Are Bins at a Feed Mill Subject to Property Tax? – The Iowa Supreme Court Weighs In

By George W. Benson In the Spring 2021 TAXFAX Column, we described the decision on an Iowa Court of Appeals decision in a case involving Stateline Cooperative. That decision recently was affirmed in part and reversed in part by the Iowa Supreme Court. Stateline Cooperative v. Iowa Property Assessment Appeal Board, Case No. 19-0674 (Iowa Supreme Court, 13

April 30, 2021).

The controversy involved whether certain bins at a feed mill qualified for an exemption from property tax as “machinery used in manufacturing establishments.” The feed mill had (i) two large stand-alone silos for corn used in the manufacture of feed, (ii) twenty-four overhead bins holding milled corn and other components used in the feed manufacturing process, and (iii) eighteen load-out bins holding finished products until shipped to customers. The parties agreed that the load-out bins were not exempt, but disagreed as to the status of the corn silos and overhead bins.

As described in the prior article, the Court of Appeals concluded the corn silos and overhead bins qualified, but the loadout bins did not, observing that the storage feature of the silos and overhead bins “is only temporary and incidental, and their primary purpose is to serve directly in the manufacturing process.”

The Supreme Court disagreed with the treatment of the corn silos. It observed that they were separate buildings, similar to other grain storage facilities. In fact, the smaller of the two had served that purpose for thirty-five years prior to the construction of the feed mill. The Court observed that “no processing or manufacturing occurs at the silos themselves.” It concluded: “They should thus be viewed as storage buildings. Just as the load-out bins are the epilogue to the manufacturing process, and thus not a part of the process itself, the corn silos are the prologue.”

However, it agreed with the Court of Appeals that the overhead bins qualified: “They are part of the sequential manufacturing process at the feed mill building. They discharge directly into the scale and then the mixer. They do Fall 2021 | The Cooperative Accountant

TAXFAX not appear to have any independent value as storage apart from this particular manufacturing process. Nor does the fact that they are structurally part of the building alter the situation.”

But it did not stop there. The parties also disagreed as to the value of the overhead bins. The Property Assessment Appeal Board concluded that Stateline’s evidence as was not reliable and thus assigned no value to the bins. The Court of Appeals found that to be unreasonable and arbitrary. The Supreme Court agreed. However, the Court of Appeals had then taken the evidence in the record and determined a value. The Supreme Court concluded that it should not have done so given the conflicting evidence in the record. It remanded the case to the Property Assessment Appeal Board for further proceedings to determine the appropriate value of the overhead bins for exemption purposes.

IRS 2020 Data Book – Cooperative Statistics The IRS recently released the 2020 IRS Data Book, Publication 55-B (June 2021) describing IRS activities during its fiscal year 2020 (beginning October 1, 2019 and ending September 30, 2020).

In recent years, the IRS Data Books have included line item information regarding cooperative tax returns (Form 1120-C). The information historically has been hard to interpret because of the reporting format.

However, four things are clear:

past year). Perhaps it is attributable to reporting anomalies arising from the coronavirus situation. It will be interesting to see what is reported next year.

2. Not many cooperative tax returns are audited. The 2020 Data Book reports that only 13 of the 7,524 returns for 2018 have so far been examined (or 0.2%). This low audit rate is consistent with the reported rates for 2017 (0.2%), 2016 (0.2%) and 2015 (0.3%).

3. Audits of cooperative returns have not been very productive for the IRS (which may explain why there are so few audits). The IRS reported that it closed 28 examinations during its fiscal year 2020. Most were closed on an agreed basis with a total of $228,000 of proposed deficiencies. Five were unagreed. They involved a total of $166,000 of proposed deficiencies.

4. Refund claims attract examinations.

The IRS reported that it completed examinations of 16 amended returns involving refund claims during its fiscal year 2020. It reported denying 7 claims totaling $4,168,000 and allowing 9 claims totaling $2,464,000.

In addition, the Data Book reported that the IRS received 4 applications for Section 521 status during its 2020 fiscal year, a low, but not surprising, number.

The figures reported over the years in the Data Books for cooperative audits 1. There are not many Subchapter T have seemed to understate audit activity. cooperatives. This year’s Data Book However, even if the actual number of audits reports receipt of 7,524 cooperative tax is a multiple of those reported, the overall returns (Form 1120-C) for tax year 2018. In level of audit activity would still be very low. prior years, the number of reported returns In the years to come, this could change. was consistently approximately 9,000. The The Biden administration has proposed drop is unexplained (1,500 cooperatives significant increases in IRS funding over the did not go out of business during the next few years focused on enforcement and 14

Fall 2021 | The Cooperative Accountant

TAXFAX compliance and there have been reports that some parts of the IRS have already begun hiring agents in anticipation of that funding.

Section 481(a) Adjustments and Section 163(j) The limitation on the deduction of interest expense contained in Section 163(j) might have seemed simple to its Congressional architects, but it has proved very complicated to implement. Most areas of tax law are directly or indirectly affected. The IRS and taxpayers who are affected by the limitation will likely be wrestling with its intricacies for years to come.

A recent IRS Chief Counsel memorandum is a case in point. See, CCA 202123007 (May 10, 2021). Generally, for most taxpayers, the Section 163(j) limitation is equal to business interest income plus 30% (50% for taxable years beginning in 2019 and 2020) of “adjusted taxable income.” Cooperatives are permitted to add back patronage dividends in determining adjusted taxable income.

For years beginning before January 1, 2022, all taxpayers are permitted to add back depreciation in figuring adjusted taxable income. CCA 202123007 involves a taxpayer who had originally put a 7-year life on an asset acquired in 2017 (and who did not claim additional first-year depreciation).

The taxpayer later determined that the asset should have had a 5-year life. In 2020, the taxpayer sought permission to change its method of accounting for the asset, changing its life from 7 to 5 years (and not claiming additional first-year depreciation).

Permission was granted.

The change resulted in a negative Section 481(a) adjustment, which the taxpayer was entitled to deduct in 2020. The question posed was whether the Section 481(a) deduction retained its character as depreciation, which, although deducted 15

in determining the corporation’s tentative taxable income, could be added back in determining adjusted taxable income for Section 163(j) purposes. The CCA concluded that it did.

That conclusion is reasonable and taxpayer favorable for taxpayers running into a Section 163(j) limitation. However, the CCA suggests that if the taxpayer’s year of change was a taxable year beginning after January 1, 2022, when depreciation can no longer be added back, the Section 481(a) adjustment would reduce tentative taxable income and not be added back in determining adjusted taxable income (an unfavorable result).

The CCA also observes that if the Section 481(a) adjustment had been positive (as it would have been if an asset’s life had been changed from 5 years to 7 years), and if the change was taken into account in a taxable year beginning before January 1, 2022, then the Section 481(a) change would increase tentative taxable income, but be offset by a negative depreciation add-back in determining adjusted taxable income.

The CCA suggests that if the positive Section 481(a) adjustment was taken into account over four years and those years included years beginning both before and after January 1, 2022, the negative addback would apply only to the taxable years beginning before January 1, 2022.

Accruing Sales Incentives Many group purchasing cooperatives enter into contracts with suppliers that include incentives tied to achieving specified targets.

In negotiating those contracts, it is useful to understand how suppliers are taxed on the incentives they pay.

Virtually all suppliers are accrual basis taxpayers. Accrual basis suppliers are entitled to accrue a deduction for incentive payments in the taxable year in which (i) all events have occurred that establish the Fall 2021 | The Cooperative Accountant

TAXFAX fact of the liability, (ii) the amount of the liability can be determined with reasonable accuracy, and (iii) economic performance has occurred. For payments in the nature of rebates, economic performance occurs as payment is made. See. Treas. Reg. § 1.4614(g)(3). However, under the recurring item exception, a liability is treated as incurred for a taxable year if (i) at the end of the taxable year, all events have occurred that establish the fact of the liability and the amount of the liability can be determined with reasonable accuracy, (ii) the liability is recurring in nature, (iii) payment is made before the earlier of the date the taxpayer files its return or the 15th day of the ninth month after the close of the taxable year, and (iv) either the amount of the liability is not material or the accrual for the taxable year results in a better matching of income and expense. An example in the regulations illustrates the application of these rules to rebates. See, Treas. Reg. § 1.4614(g)(8), example 2.

These rules can delay accrual for a supplier if the supplier’s fiscal year is different than the measuring period used to determine the incentive. For instance, if a supplier is on a fiscal year ended September 30 and its contract with a cooperative calls for an incentive payment based on sales occurring during a calendar year, under these rules the supplier cannot accrue an estimate of the amount to be paid for the calendar year ending the next December 31. That is the case even if the amount is paid within eight and one-half months after September 30. All events have not occurred to establish the fact of the liability.

TAM 202121010 (released May 21, 2021) analyzes an attempt by a supplier to structure an incentive arrangement to allow it to accelerate its deduction.

This technical advice memorandum addresses the tax consequences of a sales incentive program offered by a manufacturer 16

of a product (“product A” in the ruling) to its customers, independently owned and operated stores, to encourage them to make sales of product A to their customers. The incentive was keyed to sales of product A by the stores to their retail customers. It applied to sales of product A which was in the stores’ ending inventories on a specified date and that was sold by the stores to customers by another specified date.

Normally such an incentive could not be accrued until the end of the measuring period because that is when all events would occur to establish the liability to make the payment. However, there was a twist in the design of the program.

The manufacturer guaranteed that it would pay a specified aggregate minimum amount (the “guaranteed payment”) to stores, to be allocated among the stores based on a method that apparently was never determined (because the amount was never paid). This, the manufacturer argued, established the fact of the liability before the measuring period began to run. However, the program provided that the guaranteed amount would be paid only if it was less than the aggregate amount of the sales incentives earned under the program by the stores.

Moreover, to be eligible to share in the sales incentive (or in the guaranteed payment) the stores had to sell product A to customers during the qualifying period which fell in manufacturer’s next fiscal year.

It seems apparent from the TAM that the IRS believed that the only reason for the guaranteed payment was to provide the manufacturer with a colorable argument for accruing a deduction earlier than it normally would. The IRS expressed skepticism as to whether stores even knew about the program and whether, as a practical matter, it was designed so that it would never be paid.

“For every taxable year of the [guaranteed Fall 2021 | The Cooperative Accountant

TAXFAX incentive program], Taxpayer [the [store] requires sales during the qualifying By Barbara A. Wech manufacturer] set the guaranteed minimum period during the next year. These facts are payment amount to be ‘somewhat below’ the distinguishable from the bonus cases and total incentive payments Taxpayer expected Mass. Mutual [cited by the manufacturer] to pay [stores] pursuant to the [sales incentive because at the end of Year 1, the class of program] for the qualifying period. In effect, eligible recipients does not yet have any Taxpayer did not develop a mechanism to members, no [stores] have earned sales allocate the guaranteed minimum payment incentives during the qualifying period.” among the [stores] for any of the taxable One wonders what the IRS would have said years at issue because participating [stores] if the measuring period had begun prior to the always qualified to receive sales incentive end of the manufacturer’s fiscal year end. payments in excess of the guaranteed Second, liability to make the minimum amount promised under the [guaranteed payment depended upon stores in the incentive program]. aggregate not earning incentives in excess of Also, for the taxable years at issue for the the minimum payment amount. The IRS viewed [guaranteed incentive program], there is no the liability to make the minimum payment to evidence indicating that participating [stores] be in the nature of a guarantee, not a primary relied upon the announcement letters to liability. purchase any additional [product A] prior to the fiscal year-end announcement period.

“Also, we conclude that the guarantee is Taxpayer was unable to confirm or track secondary to the liability to pay incentives whether any participating [stores] opened or under the [sales incentive program], so that viewed the [guaranteed incentive program] the [guaranteed payment] liability could only announcement letters.” arise if [the stores], in the aggregate failed to attain the minimum incentive payment In any event, on technical grounds, the offered in the [guaranteed minimum payment TAM concluded that the manufacturer was program], under the [sales incentive program] not entitled to accrue a deduction for the during the qualifying period.” guaranteed payment because all events had not occurred at the end of the manufacturer’s tax Thus, in the IRS view, the liability was year to establish the fact of the manufacturer’s contingent at the end of the manufacturer’s liability under the program. The IRS pointed to fiscal year. two conditions precedent to establishing the manufacturer’s liability that occurred after the Will the Biodiesel Mixture Tax Credit Be manufacturer’s year end.

Extended Again?

First and probably most important, stores had Producers of biodiesel mixtures are entitled to to sell product A to earn the incentive, and the claim a tax credit equal to $1.00 per gallon of sales did not occur until after the manufacturer’s biodiesel used in the mixture. Section 6426(c). year end.

This credit was originally enacted in 2005. It has always been temporary, but has repeatedly “In conclusion, assuming that the [guaranteed been extended, sometimes retroactively. incentive program] creates an unconditional The most recent extension occurred in 2019. obligation of [the manufacturer] to pay Currently the credit is scheduled to expire on the guaranteed minimum amount stated December 31, 2022. to qualifying [stores], to be a qualifying On May 25, 2021, a bipartisan group of 17

Fall 2021 | The Cooperative Accountant

TAXFAX Senators and Congressmen introduced a bill in the House and Senate to extend the current biodiesel tax credit through 2025.

The bill is entitled the Biodiesel Tax Credit Extension Act of 2021.

Given the discussions going on in Washington regarding the Biden administration’s spending and taxing plans, the sponsors of the legislation undoubtedly wanted to make sure that biodiesel was at the table. While it is not at all clear what may be enacted later by Congress this year, it seems likely that any legislative package will revisit credits related to energy production, repealing those related to fossil fuels, and rewriting those related to the production and use of green energy. The farming community wants to make certain that renewable biofuels remain part of the picture.

When the bill was introduced, one of the co-sponsors, Representative Cindy Axne (Iowa), stated: “Backing clean biodiesel means supporting and expanding an American industry that fuels our society while reducing carbon emissions. As Congress is engaged in discussions about how to invest in clean energy infrastructure while growing our economy, continued support for biodiesel will keep us on a pathway that has kept millions of tons of carbon out of our air and put 65,000 Americans to work.”

Obtaining Costs When a Taxpayer Prevails in a Case and the Government’s Position Was Not Substantially Justified Under certain narrowly-defined circumstances, some taxpayers who prevail in an administrative or court proceeding with the IRS may be entitled to reasonable administrative or litigation costs incurred in connection with the proceeding. See, Section 7430, which is patterned on the Equal Access to Justice Act, 28 U.S.C. § 2412.

18

Section 7430 is targeted to small taxpayers. It incorporates the requirements of the Equal Access to Justice Act. See, Section 7430(c)(4)(A)(ii). In the case of individuals, the relief is available only for those whose net worth did not exceed $2 million at the time the case was commenced.

For corporations, the relief is generally available only if, at the time the case was commenced, the corporation had a net worth which did not exceed $7 million and did not have more than 500 employees.

However, there is a special rule for cooperatives which was added to the law in 1980 by P.L. 96-481 (October 21, 1980).1 The net worth test does not apply to farmer cooperatives “defined in section 15(a) of the Agricultural Marketing Act (12 U.S.C. 1141j(a)).” See 28 U.S.C. § 2412(d)(2) (B). Cooperatives described in that section are eligible for relief under Section 7430 (assuming all of its other requirements are met) if they do not have more than 500 employees at the time the case was commenced.

The Agricultural Marketing Act definition is identical to the definition contained in the Capper-Volstead Act. To qualify, an association must be “operated for the mutual benefit of the members thereof as … producers or purchasers,” it must either be organized on a one-member, one-vote basis or must not pay dividends on stock or membership capital in excess of 8 per centum per year, and the value of the business it conducts with members must equal or exceed the value of business conducted with nonmembers.

Over the years, there have been many cases dealing with claims for costs under Section 7430. Only one of the cases has involved a cooperative. See, Columbus Fruit & Vegetable Cooperative Association v. United States, 8 Cl. Ct. 525 (U.S. Claims Court 1985), which awarded legal fees after Columbus Fruit prevailed in an IRS challenge Fall 2021 | The Cooperative Accountant

TAXFAX to its cooperative status because it did not do more than 50% of its business on a patronage basis.

Generally, to be eligible to claim such costs, the taxpayer must be the “prevailing party” and the position of the Government must not be “substantially justified.” There are other requirements as well. A complete description of this provision is beyond the scope of this article, which is intended principally to highlight the existence of the special cooperative rule.

This provision can be a tool for reaching a reasonable settlement of a case. Where a taxpayer makes made a “qualified offer” during the “qualified offer period” which the Government does not accept, the taxpayer will be treated as the prevailing party in litigation if the result is more favorable than the offer even though it would not otherwise be regarded as having prevailed.

It should be noted that most of the hundreds of reported cases under Section 7430 involve taxpayer losses. Even when taxpayers win, they rarely recover more than a fraction of their litigation costs. By statute, there is a cap set on attorney’s fees of $125 per hour, adjusted by inflation, “unless the court determines than an increase in the cost of living or a special factor, such as the limited availability of qualified attorneys for such proceeding, the difficulty of the issues presented in the case, or the local availability of tax expertise, justifies a higher rate.” Section 7430(c)(1)(B)(iii). For 2021, the inflation adjusted rate is $210 per hour.

Courts have been stingy in awarding costs. For instance, in Columbus Fruit, the Court refused to award more than the then statutory rate of $75 per hour, “if for no other reason that plaintiff was retreading ground argued before other courts.” More recently, in Charles P. Adkins v. United States, Docket No. 10-851T (U.S. Court of Federal Claims 2021), the Court refused to award 19

more than the inflation adjusted statutory rate (observing, “the fact their attorneys are experienced tax litigators is not a special factor justifying an increase in the cap…”) and reduced the reimbursed hours. The net effect was to award $60,800.60 (instead of the requested $185,330.40). In Jesse C. Morreale v. Commissioner, T.C. Memo 202190 (July 15, 2021), the Tax Court awarded the taxpayer only a fraction of the legal fees requested. The taxpayer requested $411,000, but was awarded only $15,034. A large portion of the claimed costs related to a bankruptcy proceeding (where the tax issue surfaced), not to the Tax Court proceeding, and the Tax Court held those not covered

by Section 7430. In addition, the Tax Court allowed all the hours related to the case itself, but disallowed some of the claimed hours related to the fee petition (since they related to correcting a procedural fault) and limited the award to the statutory rate.

The taxpayer argued that he could not have hired qualified counsel at the statutory rate.

But the Tax Court was not impressed.

“While petitioner may or may not have been able to retain counsel at the statutory rate, he cannot show that his market lacked competent counsel overall. Even assuming that petitioner’s claims are accurate, he has shown only that he could not retain those counsel at the statutory rate – and that is not enough to establish a special a special factor permitting an upward departure. … Moreover, while this case has a long knotted procedural background, the issues involved are ordinary questions of proper accounting methods and substantiation. These are not the types of egregiously complex legal or factual matters that justify an upward departure from the statutory rate.” (emphasis in original).

Fall 2021 | The Cooperative Accountant

TAXFAX TAXFAX

EDITOR Barbara A. Wech, Ph.D. Department of Management, Information Systems, and Quantitative Methods University of Alabama at Birmingham COLLAT School of Business 710 13th St. South Department of Management, Information Systems, & Quantitative Methods Birmingham, Alabama 35233 bawech@uab.edu

In recent years the Financial Accounting Standards Board (FASB) launched the Simplification Initiative to reduce unnecessary complexity in the various areas of accounting.

The Simplification Initiative has resulted in several narrow scope changes to the accounting guidance while maintaining the decision usefulness of the financial information. The FASB has issued the following Accounting Standards Updates (ASU) in an effort to simplify the guidance in Accounting Standards Codification (ASC) Topic 740, entitled Income Taxes: • ASU 2019-12, entitled Simplifying the Accounting for Income Taxes.

• ASU 2016-16, entitled Intra-Entity transfers of Assets Other Than Inventory.

• ASU 2015-17, entitled Balance Sheet Classification of Deferred Taxes.

This guidance reflects changes to the accounting standards that are a direct result of the Simplification Initiative. In general, the objective of the FASB with this new guidance is to reduce the cost and complexity associated with the accounting requirements related to income taxes while maintaining 20

the decision usefulness of the financial information.

GUEST WRITERS Dr. Steve Grice, CPA Sorrell College of Business School of Accountancy Botts Professor of Accounting 334-670-3136 sgrice@troy.edu Dena Mitchell, CPA Sorrell College of Business School of Accountancy Assistant Professor of Accounting Troy University dsmitchell@troy.edu

Eliminated Exceptions to the Provisions of ASC Topic 740 (ASU 2019-12) The FASB issued ASU 2019-12 to reduce the complexity of the accounting guidance by eliminating the following exceptions to the provisions of ASC Topic 740.

Incremental approach for intraperiod tax allocation. ASC 740-20-45-7 indicates that the tax effect of pretax income or loss from continuing operations should be determined by a computation that does not consider the tax effects of items that are not included in continuing operations. For example, assume that a reporting entity has a $1,000 ordinary loss from continuing operations and an $1,800 gain from discontinued operations that is a capital gain for tax purposes. Also, assume the reported entity determined that a Fall 2021 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM deferred tax asset (with no allowance) would have been recognized for the loss if the capital gain did not exist. Assuming the tax rates are 21% on ordinary income and 21% on capital gains, the income tax expense is allocated between continuing operations and discontinued operations as follows: $168 – Total Tax Expense ($1,800 capital gain less $1,000 ordinary loss = $800 x 21%) (210) – Tax benefit allocated to the loss from operations ($1,000 ordinary loss x 21%) $378 – Increment tax expense allocated to gain on discontinued operations Prior to ASU 2019-12, the exception to this incremental approach was that all items (e.g., discontinued operations) be considered in determining the amount of tax benefit that is allocated to continuing operations. Using the pre-2019-12 guidance, the tax benefit allocated to the loss from operations would assume that the $1,000 ordinary loss was used to offset a portion of the $1,800 capital gain that otherwise would have been taxed at 21%. Thus, $210 ($1,000 x 21%) of the tax benefit would have been allocated to continuing operations.

Transition from equity method investment to foreign subsidiary (or vice-versa).

Paragraphs ASC 740-30-25-15 and 74030-25-16 contained two exceptions to the general principles in ASC Topic 740 related to the recognition of a deferred tax liability when there is a transition from an equity method investment to a foreign subsidiary (or vice-versa). Specifically, paragraph 740-3025-15 indicated that the parent company of a foreign subsidiary that changes to an equity method investment should not recognize deferred taxes on the undistributed earnings that existed prior to the change in status until those earnings are remitted. When an equity method investment becomes a 21

foreign subsidiary, paragraph 740-30-2516 indicated that the deferred tax liability for the outside basis previously recognized could not be derecognized until dividends received exceeded earnings from the foreign subsidiary after the date of transition. ASU 2019-12 eliminated these two exceptions to the general principles in ASC Topic 740.

The FASB believes that these changes will mitigate the complexity associated with having to separately track the “frozen” outside basis differences and any basis differences arising subsequent to the change in status from an equity method investment to a foreign subsidiary (or vice-versa).

Interim-period income tax model. Prior to ASU 2019-12, the guidance in ASC 740270, entitled Interim Reporting, provided an exception to the general interim-period income tax model for calculating income taxes in an interim period when a year-todate loss exceeds the anticipated loss for the year. Specifically, paragraph 740-270-30-28 limited the income tax benefit recognized in the interim period in cases when the year-to-date loss exceeded the anticipated loss for the year. ASU 2019-12 removes this exception, thus, entities will recognize the entire benefit that is determined using the interim-period income tax model without limitation. The illustrative case found in paragraph 740-270-55-16 of the Implementation Guidance and Illustrations was modified to reflect this change.

Practitioners may find it helpful review this illustrative case when implementing this new guidance.

ASU 2019-12 also simplified the accounting for income taxes with the following requirements.

Franchise tax recognition. Under ASU 201912, entities are now required to recognize a franchise (or similar) tax partially based on income as an income-based tax and account Fall 2021 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM for any incremental amount incurred as a non-income-based tax. This requirement would apply if, for example, an entity is required to pay the greater of an incomebased tax or a capital-based tax. In addition, the provision simplifies deferred tax asset and liability calculations with the specification that the statutory income tax rate should be used but that temporary difference reversals need not be considered with regards to a valuation allowance when a tax base is other than the entity’s income. Consider the following example.

A state’s franchise tax on corporations is set at the greater of 0.30 percent of the corporation’s net taxable capital or 5 percent of the corporation’s net taxable earned surplus (defined by the state’s tax statute as federal taxable income). The amount of franchise tax equal to the tax on the corporation’s net taxable earned surplus is an income tax. Assuming the corporation’s net taxable capital is $2,000,000 and net taxable earned surplus is $110,000, the amount reported as franchise” tax on the corporation is $500 while state income tax is reported as $5,500.

The franchise tax is the greater of: Net Taxable Capital $2,000,000 Rate 0.30% $2,000,000 x 3% $6,000 or Net Taxable Earned Surplus (federal taxable income) $110,000 Rate 5% $110,000 x 5% $5,500 Per the state’s rules, the franchise tax is $6,000. Under ASU 2019-12, this tax would be reported as $5,500 of income tax and $500 of non-income-based tax (or franchise tax). Computed franchise tax exceeding the amount of tax on the corporation’s net taxable earned surplus ($500 in this example) should not be presented as a component of 22

income tax expense. Consider instead, using the same state’s rules: The franchise tax is the greater of: Net Taxable Capital $1,500,000 Rate 0.30% $2,000,000 x 3% $4,500 or Net Taxable Earned Surplus (federal taxable income) $110,000 Rate 5% $110,000 x 5% $5,500 Per the state’s rules, the franchise tax is $5,500. Under ASU 2019-12, state income tax is reported as $5,500 while no franchise tax is reported.

Under this subtopic, deferred tax assets and liabilities are required to be recognized for temporary differences existing as of the date of the statement of financial position using the tax rate to be applied to the corporation’s net taxable earned surplus (5 percent in the preceding example).

Goodwill step up in tax basis. ASU 201912 provides the following clarification for the recognition of a deferred tax asset resulting from a step up in tax basis of goodwill when the goodwill originates from either the prior business combination producing the goodwill, or a step up in basis related to a separate transaction.

When the step up in tax basis results from the business combination from which the goodwill originated, a deferred tax asset will only be recognized for the amount of additional goodwill exceeding the remaining balance of book goodwill.

However, if the step up in tax basis of goodwill is deemed to result from a separate transaction from the business combination originally producing the goodwill, a deferred tax asset will be reported for the amount of the newly created tax goodwill. (In this situation, there will not be a book basis for the goodwill.)

Situations resulting in a step up in tax basis of goodwill that may be considered as separate Fall 2021 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM transactions from the business combination originally resulting in the goodwill can include: A. a significant lapse in time occurs between the transactions, B. the transaction resulting in the step up in tax basis requires more than a simple tax election, C. the entity achieves the step up in tax basis by incurring a tax cost cash outlay or by sacrificing existing tax attributes, D. the business combination did not include the transaction resulting in the step up in tax basis, E. a valuation of the business or goodwill occurs after the date of the business combination results in the step up in basis, or F. the step up in basis of the goodwill does not directly result from the settlement of liabilities recorded as a result of the original business combination.

It should be noted that any of the above examples which take place during the same measurement period as the business combination could be considered as separate transactions.

Enacted change in tax laws in interim periods. Prior to ASU 2019-12 there were conflicting opinions regarding the reporting of the effect of an enacted change in tax laws or rates. The differences arose from the timing of the enactment date of the change and the calculation of the annual effective tax rate computation. ASU 2019-12 clarifies that the effects of tax rate or law changes should be reflected in the reporting for the interim period including the enactment date. For example, the corporate tax rate changed in late 2017 (12/22/2017) to a flat rate of 21%, effective for taxable years beginning after December 31, 2017. According to the FASB’s clarifying guidance in ASU 2019-12, entities would measure their deferred tax assets and liabilities and current payables in the interim period which included the enactment date. For a calendar year entity then, deferred tax assets and liabilities, and current payables would be 23

recalculated using the 21% tax rate for the fourth quarter of 2017 instead of waiting to recalculate starting in January of 2018.

These amendments also specify that there is no requirement to allocate the consolidated amount of tax expense (current and deferred provisions) to a legal entity that is not subject to tax in its separate financial statements. The amendments specify that an entity may elect to do so on an entity-by-entity basis when the entity is both a.) not subject to tax and b.) disregarded by the taxing authority, such as a single owner LLC. Effective Date This guidance in ASU 2019-12 is effective for nonpublic entities for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. The guidance is effective for public entities for fiscal years beginning after December 15, 2020 and interim periods within those years. Early adoption of this guidance is acceptable.

Income Tax Consequences of Intra-Entity Asset Transfers (ASU 2016-16) The FASB issued ASU 2016-16 to simplify the provisions ASC Topic 740 related to intraentity asset transfers. ASC Topic 740 identifies certain basic requirements for accounting for income taxes as of the date of an entity’s financial statements. Specifically, an entity should (1) recognize a tax liability (or asset) for the estimated taxes payable (or refundable) on the tax returns for current and prior years and (2) recognize a deferred tax asset or liability for the estimated future tax effects related to temporary difference and carryforwards.

However, paragraph 740-10-25-3e. in the preASU 2016-16 guidance prohibited entities from applying these basic requirements (i.e., not allowed to recognize current and deferred income taxes) for intra-entity asset transfers until the asset had been sold to a third-party.

The ASU 2016-16 amendments eliminated this recognition prohibition for intra-entity asset transfers other than inventory. Thus, the Fall 2021 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM reporting entity should recognize the current and deferred income taxes when those asset transfers occur. For example, the entity should recognize the income tax consequences of an intra-entity transfer of equipment.

Importantly, the amendments did not change the recognition exception as it relates to intraentity inventory transfers.

Thus, the reporting entity should not recognized the current and deferred income taxes related to such inventory transfers until the inventory has been sold to a third-party.

The amended exception provision in paragraph 740-10-25-3e. indicates that the reporting entity should not recognize a deferred tax asset for the difference between the tax basis of inventory in the buyer’s tax jurisdiction and the carrying value as reported in the consolidated financial statements as a result of an intra-entity inventory transfer between taxpaying components in the same consolidated group. As in the pre-ASU 2016-16 guidance, entities should account for income taxes paid on intra-entity profits on inventory within the consolidated group by following ASC Topic 810, entitled Consolidation. The provisions of ASB 2016-16 became effective for nonpublic entities beginning with December 31, 2019 calendar year end financial statements.

Classification of Deferred Taxes (ASU 2015-17) The FASB issued ASU 2015-17 to simplify the provisions of ASC 740 related to the balance sheet classification of deferred taxes. The pre-ASU 2015-17 guidance required reporting entities to classify deferred tax assets and liabilities within a tax jurisdiction as current or noncurrent based on the assets or liabilities that give rise to the deferred tax amounts.

For example, a deferred tax amount that is related to a difference between book and tax depreciation generally is classified as noncurrent since the depreciable asset is classified as noncurrent. When a deferred tax amount is not related to an asset or a liability (e.g., NOL carryforward), the guidance requires the deferred tax amount to be classified according to the expected reversal date. In 24

addition, the guidance required that all current (noncurrent) deferred tax assets and liabilities be offset and presented as a single current (noncurrent) amount in the classified balance sheet.

To illustrate, assume that Adam Co. had the following deferred tax amounts at December 31, Year 1:

Deferred Tax Deferred Tax Assets Liabilities

Current $12,000 $10,000 Noncurrent $15,000` Total

$19,000

$27,000 $29,000

Pursuant the pre-2015-17 guidance, Adam Co. should report a net current deferred tax asset of $2,000 ($12,000 minus $10,000) and a net noncurrent deferred tax liability of $4,000 ($19,000 minus $15,000) in its December 31, Year 1 classified balance sheet.

Simplified Guidance for Balance Sheet Classification of Deferred Taxes ASU 2015-17 simplified the guidance related to the balance sheet classification of deferred taxes by eliminating the current classification for deferred taxes. That is, the new guidance stipulates that all deferred tax assets and liabilities (as well as any valuation allowance) within a tax jurisdiction should be classified as noncurrent in a classified balance sheet. To illustrate, assume an entity had the deferred tax amounts shown in the table above at December 31, Year 1. Pursuant the new guidance, Adam Co. should report a net noncurrent deferred tax liability of $2,000 ($29,000 minus $27,000) in its December 31, Year 1 classified balance sheet. Importantly, the new guidance does not change the requirement to offset the deferred tax assets and liabilities and report a single amount.

The provisions of ASU 2015-17 became effective for nonpublic entities beginning with December 31, 2018 calendar year-end financial statements. The transition disclosures varied depending on whether the entity implemented the new guidance using a prospective or retrospective approach.

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TCA SMALL BUSINESS FORUM

Published September 30, 2019

Accountancy has long been a stressful, highstakes profession. Ensuring that a client’s books are in order is a task that comes with great responsibility. In today’s age, that sense of stress is compounded by reams of discourse about how the rise of advanced technology will forever alter the way we do our jobs, if not replace them altogether. We have to deal with innovation happening at an ever-increasing rate, which can induce a feeling of stress akin to whiplash.

Stress isn’t all bad. Internal pressure, after all, signifies that your work matters to you, that you care about doing a good job. If you are lax and carefree at your job, you’re probably just going through the motions.

Far more common than too little stress, though, is too much of it. Stress shouldn’t be so constant or overwhelming that it leads to sleepless nights. When you find yourself in a harried mood 24/7, it’s time to make a change — and fast.

As counterintuitive as it sounds, the way you live outside the office may contribute to your stress inside it. These external stressors, while not directly related to work, compound our sense of frustration. If you’ve ever been to work without enough sleep, you know how difficult it can be to focus on the job when your body and mind are not at 25

their best. When we treat ourselves without care and consideration, we are, in a certain sense, coming to the office without a fresh perspective every day. To avoid that fate, ask yourself how you measure up in the following four crucial wellness categories, each of which is essential for you to perform at a high level.

1. Get regular exercise Our minds and bodies are connected.

Ignoring the health of one has negative effects on the other. “Studies indicate that our mental firepower is directly linked to our physical regimen,” wrote Ron Friedman in Harvard Business Review. As such, maintaining a healthy exercise routine can help you feel more alert and energized at work.

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BEST PRACTICES Unfortunately, most of us simply don’t exercise enough. When I speak about this at conferences, it usually comes down to most saying they don’t have time. According to a recent National Health Statistics Report issued by the Centers for Disease Control, only “22.9% of U.S. adults ages 18–64 met the guidelines for both aerobic and musclestrengthening activities.” That means that roughly 4 out of every 5 accountants could stand to work out a little more.

It can seem like a burden to expend energy after you’re finished working, but that initial outlay of effort will reap huge benefits in no time. It can take as little as one week of working out to begin to see and feel benefits, and those will compound over time.

Exercise also can be worked right into your day. Walking has always proved to be one of the most beneficial exercises you can do.

So rather than meeting with one of your coworkers in the office, ask him or her to take a walk and meet instead! Then you can get a workout while getting work done.

2. Develop good sleep habits “The shorter your sleep, the shorter your life,” writes Matthew Walker, Ph.D., in his best-selling book Why We Sleep. “The leading causes of disease and death in developed nations — diseases that are crippling health-care systems, such as heart disease, obesity, dementia, diabetes, and cancer — all have recognized causal links to a lack of sleep.” It’s not a stretch to say that what happens when we sleep informs how

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we act when we’re awake.

What does good sleep look like? Adults should aim to have at least eight hours of quality sleep per night. Quality is the operative word here. Eight hours spent tossing and turning, trying to sleep, is not eight hours spent sleeping.

If you struggle to get enough sleep, try creating a regular sleep schedule, eliminating blue light in the hours before bedtime, and disconnecting from electronic devices (one of the main sources of blue light) before getting under the covers.

Accountants tell me all the time that they work right up until going to bed. I have found that it’s important to find a way to disconnect before going to sleep. One activity that has helped me is doing a sleep meditation using a guided meditation app to have a better night’s sleep. When you can’t get a good night’s sleep no matter how hard you try, you should consider consulting a doctor.

3. Embrace a healthy diet The fuel you put into your body is just as important as your rest and exercise.

If you’re familiar with the term “hangry,” you understand how much our food intake impacts our mood. But the links go beyond even that. A study from the University of Gothenburg found that hormones released during hunger adversely affect our decisionmaking skills.

It’s not just about how much we eat, but rather the nutritional profile of the foods we consume. Binging on sugar and caffeine may give you a jolt of energy, but it will leave you feeling burned out in a hurry. Instead of relying on cheap pick-me-ups to get you through the day, stay hydrated, eat well, and pack healthy snacks for when you’re getting weary. Review what food you are putting out in the office as snacks or assess your eating rituals when you are on the road visiting clients. It’s important that what we are putting into our body isn’t always processed, sugar-packed foods. Make an effort to eat Fall 2021 | The Cooperative Accountant

BEST PRACTICES of meditating, listen to music, read, or get up from the desk and take a walk. You will find when you give yourself mental breaks, you will actually be more productive and probably get more done than less.

As with anything, trying something once isn’t enough to know whether you truly like something or not. Dedicate 10 minutes a day for 30 days, and then assess how you are feeling and whether you are better for the people around you as well.

fruits, vegetables, and proteins that you know where all the ingredients came from. It will do wonders for evening out your energy throughout the day.

4. Practice mindfulness techniques I’m a huge proponent of teaching mindfulness in the workplace. Taking time to put ourselves in the present moment and reflecting on our surroundings helps us stay centered and calm in even the most chaotic of times. We can’t always change the circumstances of our day, but we can change how we respond to them.

Simply taking 10 minutes a day to step away from the grind and practice some guided meditation can make a world of difference. Apps like Calm and Headspace allow you to practice mindfulness no matter where you are or how much (or little) time you have.

At some workplaces, I have seen mindfulness breaks built into the morning and afternoon. During these times, employees can go to a designated area to meditate, read, or listen to music, so that they can reset, reduce stress, and be present.

If you’re resistant to mindfulness practice, I urge you to put those preconceived notions aside and give it a try, or instead 27

Bringing it all together While each of these practices has benefits in its own right, they really begin to work wonders when you apply them in concert.

We could all stand to improve our wellness outside of the office in at least one of these areas, however; as you can see, many of these areas can be accomplished right within our workday for optimum mind and body health.

You may be surprised to learn that success in the four areas not only can improve how you feel on the inside, but it also can possibly have a positive impact on those around you as well.

You can’t just flip a switch and begin attacking all of these areas at full speed.

Start piecemeal and try to improve a little bit in one or two places, beginning with those that are most in need of an upgrade. Don’t get discouraged. Building new habits takes time, but the results you’ll see both inside and outside the office will make it more than worth it.

Source: AICPA – CPA Letter Daily - CPA Insider – September 24, 2019

Fall 2021 | The Cooperative Accountant