The Cooperative Accountant - Spring 2019

Spring 2019 | The Cooperative Accountant

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CONTENTS FEATURES 3 From the Editor

By Frank M. Messina, DBA, CPA

4 Utility Cooperative Forum: Impacts of the Tax Cuts and Jobs Act of 2017 (TCJA) for Electric Cooperatives

By Peggy Boldissar Ph.D.

12 ACCTFAX Bulletin Board

By Phil Miller

18 TAXFAX

By George W. Benson; David F. Antoni, CPA; Sandra E. Hofman, CPA; Wright Schickli; Daniel S. Welytok

30 Small Business Forum: Workplace Bullying: Why It’s Important, How to Recognize It and What to Do About It

By Dr. Barbara A. Wech

EXECUTIVE COMMITTEE

82 ––––––––––– EXECUTIVE COMMITTEE AND NATIONAL DIRECTORS ––––––––––––– 82 EXECUTIVE COMMITTEE AND NATIONAL DIRECTORS ––––––––––––– ––––––––––– EXECUTIVE COMMITTEE AND NATIONAL DIRECTORS ––––––––––––– 8282––––––––––– ––––––––––– EXECUTIVE COMMITTEE AND NATIONAL DIRECTORS –––––––––––––

PRESIDENT: PRESIDENT: PRESIDENT: PRESIDENT: *William Miller, CPA (806) 747-3806 *William (806) *William Miller,CPA CPA (806)747-3806 747-3806 *William Miller, CPA (806) 747-3806 Electric Miller, Co-op Chapter bmiller@bsgm.com Electric Co-op Chapter Electric Co-op Chapter bmiller@bsgm.com Electric Co-op Chapter bmiller@bsgm.com Bolinger, Segars, Gilbert & Moss, LLP bmiller@bsgm.com Bolinger, Segars, Gilbert Bolinger, Segars, Gilbert&&&Moss, Moss,LLP LLP Bolinger, Segars, Gilbert Moss, LLP 8215 Nashville Avenue 8215 Avenue 8215Nashville Nashville Avenue 8215 Nashville Avenue Lubbock, TX 79423 Lubbock, Lubbock,TX TX79423 79423 Lubbock, TX 79423

President William Miller, CPA Bolinger, Segars, Gilbert & Moss, LLP

VICE PRESIDENT: VICE PRESIDENT: VICE PRESIDENT: VICE PRESIDENT: *Nick Mueting (620) 227-3522 *Nick (620) *NickMueting Mueting (620)227-3522 227-3522 *Nick Mueting (620) 227-3522 Mid-West Chapter nickm@.lvpf-cpa.com Mid-West nickm@.lvpf-cpa.com Mid-West Chapter nickm@.lvpf-cpa.com Mid-West Chapter nickm@.lvpf-cpa.com Lindburg,Chapter Vogel, Pierce, Faris, Chartered Lindburg, Lindburg, Vogel,Pierce, Pierce,Faris, Faris,Chartered Chartered Lindburg, Vogel, Pierce, Faris, Chartered P.O. BoxVogel, 1512 P.O. 1512 P.O.Box Box 1512 P.O. Box 1512 Dodge City, KS 67801 Dodge DodgeCity, City,KS KS67801 67801 Dodge City, KS 67801

Vice President Nick Mueting, CPA Lindburg, Vogel, Pierce, Faris, Chartered

SECRETARY-TREASURER: SECRETARY-TREASURER: SECRETARY-TREASURER: SECRETARY-TREASURER: *Dave Antoni *Dave Antoni *Dave Antoni *Dave Antoni Capitol Chapter Capitol CapitolChapter Chapter Capitol Chapter KPMG, LLP KPMG, LLP KPMG, LLP St. KPMG, LLP 1601 Market 1601 Market 1601 MarketSt. St. 1601 Market St. Philadelphia, PA 19103 Philadelphia, Philadelphia,PA PA19103 19103 Philadelphia, PA 19103

Secretary-Treasurer David Antoni, CPA KPMG, LLP

(267) 256-1627 (267) (267)256-1627 256-1627 (267) 256-1627 dantoni@kpmg.com dantoni@kpmg.com dantoni@kpmg.com dantoni@kpmg.com

IMMEDIATE PAST PRESIDENT: IMMEDIATE PAST IMMEDIATE PASTPRESIDENT: PRESIDENT: IMMEDIATE PAST PRESIDENT: *Jeff Brandenburg, CPA, CFE (608) 662-8600 *Jeff Brandenburg, CPA, (608) *Jeff Brandenburg, CPA,CFE CFE jeff.brandenburg@cliftonlarson (608)662-8600 662-8600 *Jeff Brandenburg, CPA, CFE (608) 662-8600 Great Lakes Chapter Great Lakes Chapter jeff.brandenburg@cliftonlarson GreatLakes LakesChapter Chapter jeff.brandenburg@cliftonlarson Great jeff.brandenburg@cliftonlarson ClifftonLarsonAllen LLP ClifftonLarsonAllen LLP ClifftonLarsonAllen LLP ClifftonLarsonAllen LLP 8215 Greenway Boulevard, Suite 600 8215 Greenway Boulevard, 8215 Greenway Boulevard,Suite Suite600 600 8215 Greenway Boulevard, Suite 600 Middleton, WI 53562 Middleton, WI 53562 Middleton, WI 53562 Middleton, WI 53562

Immediate Past President Jeff Brandenburg, CPA, CFE CliftonLarsonAllen LLP

*Indicates Executive Committee Member *Indicates *IndicatesExecutive ExecutiveCommittee CommitteeMember Member *Indicates Executive Committee Member

At Large NATIONAL OFFICE NATIONAL OFFICE NATIONAL OFFICE Erik Gillam, CPA NATIONAL OFFICE Kim Fantaci, Executive Director Kim KimFantaci, Fantaci,Executive ExecutiveDirector Director Kim Fantaci, Executive Director Aldrich CPAs +Advisors Jeff Roberts, Association Executive Jeff JeffRoberts, Roberts,Association AssociationExecutive Executive Jeff Roberts, Association Executive Tina Schneider, Chief Administrative Officer Tina TinaSchneider, Schneider,Chief ChiefAdministrative AdministrativeOfficer Officer Tina Schneider, Chief Administrative Officer Krista Saul, Client Accounting Manager Krista KristaSaul, Saul,Client ClientAccounting AccountingManager Manager Krista Saul, Client Accounting Manager Bill Erlenbush, Director of Education Bill BillErlenbush, Erlenbush,Director Directorof Education Bill Erlenbush, Director ofofEducation Education Phil Miller, Assistant Director of Education Phil Miller, Assistant Director of Phil Miller, Assistant Director Education Phil Miller, Assistant Director ofofEducation Education THE COOPERATIVE ACCOUNTANT

136 S. Keowee Street 136 136S. KeoweeStreet Street 136 S.S.Keowee Keowee Street Dayton, Ohio 45402 Dayton, Dayton,Ohio Ohio45402 45402 Dayton, Ohio 45402 info@nsacoop.org info@nsacoop.org info@nsacoop.org info@nsacoop.org

At Large Winter 2018 April Graves, CPA THE COOPERATIVE ACCOUNTANT Winter 2018 THE COOPERATIVE ACCOUNTANT Winter 2018 THE COOPERATIVE ACCOUNTANT Winter 2018 United Agricultural Cooperative, Inc.

For a complete listing of NSAC’s National Board of Directors and Committees, visit National Society of Accountants for Cooperatives 2

www.nsacoop.org Spring 2019 | 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

Spring brings newness. It brings transformation and change; from darkness to light, from cold to warmth, from grey to bursts of color. Renewed life, new beginnings, and bright, colorful new looks remind us that spring brings life on this earth that renews again and again. We do not remain stuck in any one season or cycle in life indefinitely. Seasons and life changes.

Thus, with the Spring issue, this is a perfect time of year to introduce you to the new look of The Cooperative Accountant (TCA). As I look on my shelf in my office, the TCAs that I have from the 1960s on all seem to look the same. The look doesn’t matter to me. It is the great content that is inside that truly matters. Technology and a new jazzy look will not change the great content in TCA. We will continue to strive to publish the tools we all need to help make our members and NSAC the best we can be.

Remember, we too are always looking for you to share your knowledge (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 reflet the official postion of he 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 Dayton, Ohio 45402. Second-class postage paid at Dayton, Ohio and at additional mail offices. 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 at university libraries, government agencies and other libraries (where there is already a current member) at a rate of $90.00 a year. International subscriptions are $110 a year. Land Grant colleges may receive a complimentary copy. Single copies are avaiable at a rate of $25.00 an issue. Postmaster: send address changes to National Society of Accountants for Cooperatives, 136 South Keowee Street, Dayton, Ohio, 45402.

Spring 2019 | The Cooperative Accountant

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Editor & Guest Writer Peggy Boldissar Manager, Financial Accounting LCEC (Lee County Electric Cooperative, Inc.) Peggy Boldissar Ph.D. PO Box 3455 North Fort Myers, FL 33918-3455 Phone (239) 656-2117 peggy.boldissar@lcec.net

President Trump signed into law the Tax Cuts and Jobs Act of 2017 (TCJA), H.R.1, on December 22, 2017. This was the first major tax reform passed since the IRS amended the Internal Revenue Code in 1986.

The legislation includes substantial changes to the taxation of individuals as well as U.S. businesses, multi-national enterprises, and other types of taxpayers.

Overall, it provides a net tax reduction of approximately $1.456 trillion over the 10-year “budget window” (according to estimates provided by the Joint Committee on Taxation (JCT) that do not take into account macroeconomic/ dynamic effects). (KPMG, 2018, para. 1) One of the purposes of the TCJA was to lower tax rates for businesses, to make American more competitive in global markets, and to spark the economy here in the US. While the TCJA allows electric cooperatives to keep their notfor-profit status, taxable cooperatives and cooperatives with subsidiaries may have experienced some changes from prior tax 4

law. If there is a taxable subsidiary of an electric cooperative that is a corporation, the new laws would apply. Changes to expensing of capital improvements and deductibility of interest expenses may also apply in these cases. Additional changes might apply to a partnership arrangement. If your consolidated tax return includes a taxable subsidiary, check with your tax expert in determining whether you can expense 100 percent of capital improvements and fully deduct its subsidiaries’ interest expenses. (Rocha, 2018, para. 3) For Generating & Transmission (G&T) cooperatives, previous carry backs or carry forwards of operating losses to offset taxable income are limited as compared to prior tax law. Taxable cooperatives will still be allowed to exclude capital credits, thus there was no change in that area.

Finally, tax law in regards to renewable tax incentives did not change. But, these tax incentives may be addressed in future legislation currently under consideration by the Congress.

Spring 2019 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM Every electric cooperative should attempt to identify and understand the impacts of the TCJA on their organization and its members.

Some of the laws that remain unchanged or substantially unchanged include: ●

Not-for-profit cooperatives retain current tax exempt status, and entities created and owned by these electric cooperatives also maintained current tax treatments.

●

Tax treatment of 401(K) and 457(b) plan contributions - employees are allowed to continue to save with pre-tax dollars. Some changes were made to hardship distributions and distributions at age 59.5 from pension plans and 457 plans. There also were modifications to nondiscrimination rules for “closed” defined-benefit plans, which allow the plans to continue despite current IRS nondiscrimination rules which indicate they might be forced to close.

●

No changes were made to expiration dates of existing renewable tax incentives or tax credits. But, on February 9, 2018, Congress passed and the President signed the “Bipartisan Budget Act of 2018” (H.R. 1892). Under this law, many renewable tax incentives were reinstated, and others added. Some of the things that this act included were reinstatement of the nonbusiness energy property credit for 2017, reinstatement of the residential energy efficient property credit for qualified small wind energy property costs, qualified geothermal heat pump property costs, and qualified fuel cell property costs to the end of 2021. Additional information can be found related to this act by accessing the Congress.gov website: https://www.congress.gov/bill/115thcongress/house-bill/1892/text

Some of the areas of consideration where laws changed include those mentioned in the Spring 2019 | The Cooperative Accountant

following discussion: 1. Notable corporate tax changes: A Reduction in corporate tax rates to a flat 21% with statutory provisions requiring that excess tax reserves associated with public utility property be normalized B Repeal of the corporate Alternative Minimum Tax (AMT) C Net Operating Losses (NOL) modified

With the reduction of corporate income tax rates from a maximum of 35% to a flat 21%, not-forprofit electric cooperatives that purchase wholesale power and transmission services from a for-profit provider may see the rates decrease.

D Limitation of the deduction for interest expense with an exception for interest expense properly allocable to certain rate regulated trade or businesses

2. Modifications to the capital contribution rules under “Section 118 - Contributions to the capital of a corporation” 3. Other notable corporate tax changes Corporate tax changes With the reduction of corporate income tax rates from a maximum of 35% to a flat 21%, not-for-profit electric cooperatives that purchase wholesale power and transmission services from a for-profit provider may see the rates decrease. This may be done voluntarily by the for-profit provider, or may be required to be reduced by those regulatory bodies overseeing and governing 5

UTILITY COOPERATIVE FORUM electric rates in that jurisdiction.

Additionally, the new TCJA law provides that a normalization period of accounting be used for excess tax reserves associated with public utility property. Both the Tax Reform Act of 1986 and the new TCJA provide for the use of the average rate assumption method (ARAM) for determining the timing of the return of excess deferred taxes. But, the new law also allows for an alternative method if the company’s records do not contain vintage accounting data necessary to apply ARAM. The new tax law also added a provision to address violations of the normalization requirements. These law changes may also impact a for-profit provider, thus also potentially impacting the rates the power supplier charges to the electric cooperative that purchases their services.

It is recommended that electric cooperative management and regulators understand the impacts of the TCJA to the rates charged by the for-profit provider, as any rate reductions could possibly, and hopefully, be passed on to the electric cooperative members. While the two aforementioned items could significantly impact the for-profit provider’s rates, there are other tax changes worth noting that should also be considered, and which will be discussed in the remainder of this article.

The corporate AMT was repealed under the TCJA. Taxpayers with an AMT credit can use the credit to offset their regular tax liability. Taxpayers will be unable to claim a refund of 50% (100% for years beginning in 2021) of the remaining credits (to the extent the credits exceed regular tax for the year) in tax years beginning before 2022.

Under the new law, net operating losses in the years after 2017 will have an indefinite carry-forward period. But, they will be limited to 80% of taxable income. They continue to be subject to the valuation allowance measurement for financial 6

statement purposes. Losses that already existed prior to this new TCJA law will remain subject to the 20-year carry-forward and offset 100% by taxable income.

In the past, business interest expense was deductible in the taxable year paid or accrued per “Section 163(j) - Business interest limitation.” The limitation was 30% of adjusted taxable income (ATI). Disallowed interest could be carried forward indefinitely, and any excess limitation could be carried forward for three years. In the final version of the TCJA, the Senate ruled that this does not apply to certain regulated public utilities, which included electric cooperatives. So, this eliminated the negative impact on taxable electric cooperatives and their subsidiaries.

Tax-exempt electric cooperatives were not impacted by this.

Modifications to the capital contribution rules under “Section 118 - Contributions to the capital of a corporation” Under the TCJA law changes, government grants were changed to be considered nonmember income. This includes federal, state, or local grants. This leaves federal disaster aid, energy efficiency grants, and broadband grants included in non-member income. For not-for-profit electric cooperatives, these had not been considered non-member income in prior law, and instead were considered contributions to capital. This was an important change because it could threaten the IRS tax-exempt status of an electric cooperative if that cooperative accepts too many federal disaster grants or new government program funding. If accepting the grants causes the not-for-profit electric cooperative to fail the IRS 85%-15% test, their tax-exempt status could be revoked.

The 85%-15% revenue test requires that cooperatives can receive no more than 15% of their revenue from non-member sources and remain tax exempt. This new law change has many electric cooperatives Spring 2019 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM evaluating whether they can continue to choose to take government or civic funding at this point, as they do not want to jeopardize their tax exempt status with the IRS. Some have explained that this was an unintended result of the new TCJA law.

Kienbaum (2018) notes that “In her press release, Senator Smith pointed out that the tax code change was not intended to impede co-ops from accepting government broadband funding. Rather, the goal was to force for-profit corporations to pay taxes on economic development incentives offered by state and local governments” (Doing What’s Best for Rural Broadband section, para. 2). Brasher (2018) cites Kirk Johnson, National Rural Electric Cooperative Association’s (NRECA) senior vice president of government relations, as explaining that the tax provision was driven by congressional concerns about the benefits that states and local governments have been offering to corporations in luring them to relocate.

“We want to make sure that there is no unintended consequence of having co-ops losing their tax exempt status because they want to provide broadband or have a big disaster. That’s not the intent of the law,” he [Johnson] said. (Brasher, 2018, para. 7) At this writing, electric cooperative industry lobby associations are working with Congress, the IRS, and the Treasury Department to resolve this issue. But, at this time, government and civic grants remain classified as non-member income.

By not taking government or civic grants, the electric rates of electric cooperative customers run the risk of being higher than if the cooperative could accept these grants.

Cash (2018) notes that government aid has been long considered vital for operations and community development initiatives for the electric cooperative industry. This includes grants from the USDA’s Rural Utilities Service, the Rural Economic Development Loan and Grant (REDLG) program and the Spring 2019 | The Cooperative Accountant

Federal Emergency Management Agency for recovery from hurricanes, floods or other disasters (Cash, para. 6, 2018).

Other corporate tax changes Here is a list of some other notable corporate tax changes under the new law: A Excise tax of 21% implemented on compensation in excess of $1M for a covered employee. A “covered employee” is one of the five highest paid employees in any year after 2016. It is noted that the $1M threshold is not the employee’s salary, but instead consists of the amounts accrued under the Pension Restoration Plan and the Employee Benefit Restoration Plan that vest at normal retirement age. Compensation is defined as all compensation subject to federal income tax withholding. This also includes amounts that are subject to tax under Code section 457(f), which applies to certain deferred compensation arrangements. Roth contributions made by the employee are not included. This law change applies to taxable and taxexempt organizations. This matches the current excise tax on taxable corporation compensation.

B Net unrelated business taxable income (UBTI) and losses are calculated separately for each trade or business activity. There are some exceptions for net operating loss carryovers incurred prior to 2018. UBTI is defined as gross income from an unrelated trade of business regularly carried on by an exempt organization less allowable deductions.

Prior to the TCJA, an organization that derived gross income from the regular conduct of two or more unrelated trades or businesses less the aggregate deductions were permitted to report combined net taxable income from those activities. This method allowed 7

UTILITY COOPERATIVE FORUM organizations to substantially reduce total UBTI. The TCJA changes the aggregate method by adding section 512(a)(6), which requires exempt organizations with one or more unrelated trades or businesses to compute UBTI for each separate activity. A deduction from one trade or business for a taxable year is no longer permitted to be used to offset income from a different trade or business. The IRS published Notice 2018-67 on Aug. 20, 2018 to provide some guidance on this so-called “offset” rule. Notice 2018-67 provides interim guidance on UBTI grouping and other UBTI-related tax reform provisions including debt-financed UBTI and net operating loss (NOL) ordering rules.

(Bakertilly, 2018, Unrelated business taxable income: offset/activities rule section, para. 2-4) C Dividends received deduction was 70% prior to TCJA, now 50%. Specifically, the amount of deduction allowable against the dividends received from a domestic corporation was reduced. The deduction for dividends received from other than certain small businesses or those treated as “qualifying dividends” was reduced from 70% to 50%. Dividends received from 20%-owned corporations were reduced from 80% to 65%.

D Bonus depreciation was 50% expensing until 2019 prior to TCJA, and now is 100% expensing after 9/27/17, phased out from 2024-2028, available for used property, and G&T property is excluded after 12/31/17.

E Meals and entertainment deduction was 50% disallowed (with no limitation on company cafeteria meals) prior to TCJA, and now entertainment expenses are no longer allowed but business meals remain at 50% disallowed. Under TCJA, meal 8

costs at a company cafeteria are now subject to 50% disallowance until 2025 when they become 100% disallowed.

Schreiber (2018) notes that: The IRS on Wednesday [October 3, 2018] issued guidance clarifying that taxpayers may generally continue to deduct 50% of the food and beverage expenses associated with operating their trade or business, despite changes to the meal and entertainment expense deduction under Sec. 274 made by the tax law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97 (Notice 2018-76).

According to the IRS, the amendments specifically deny deductions for expenses for entertainment, amusement, or recreation, but do not address the deductibility of expenses for business meals. This omission has created a lot of confusion in the business community, which the IRS is addressing in this interim guidance. Taxpayers can rely on the guidance in the notice until the IRS issues proposed regulations. (para. 1) Future IRS guidance on this topic is expected to be coming soon.

F Qualified employee parking expenses The IRS released “Notice 2018-99” on Dec. 10, 2018 which provides interim guidance on how to determine employee parking expenses that are no longer deductible for businesses or may increase the unrelated business taxable income (UBTI) for tax-exempt organizations.

The notice provides complex and potentially onerous methods for determining nondeductible parking expenses as well as specific guidance and transition relief for tax-exempt organizations, but certain questions remain unanswered. Employers should begin considering ways to minimize the deduction disallowance and overall parking expenses. They should also Spring 2019 | The Cooperative Accountant

UTILITY COOPERATIVE FORUM consider other reasonable methods for determining the nondeductible portion of parking expenses, which may reduce their exposure to the new rules.

(Grant Thornton, 2018, para. 4) G Deductions removed for sexual harassment settlement amounts paid subject to nondisclosure.

H Depreciation limits on luxury automobiles have been increased.

I Like kind exchange treatment has been generally allowed prior to TCJA, and now only allowed on real estate not held for sale. Current law still applies for like-kind exchanges if the property disposed of by the taxpayer in the exchange is disposed of on or before 31 December 2017, or the property received by the taxpayer in the exchange is received on or before 31 December 2017. Otherwise, the limitation is effective for exchanges completed after 2017.

J R&D expenses were deductible prior to TCJA, and now must be capitalized and amortized over a five year period.

K Lobbying expenses that were 100% deductible, now become not deductible after 12/22/17.

The aforementioned list is representative of other notable corporate tax changes, but not all changes. If anyone of these items noted above might apply to your organization, please seek qualified tax advice.

Summary The passage of the TCJA is intended to drive economic growth and foster energy development. The electric utility industry is very capital-intensive, making large dollar Spring 2019 | The Cooperative Accountant

investments that The passage are intended to serve in many cases of the TCJA over decades. The is intended to TCJA appears to be drive economic written to support growth and and encourage companies to foster energy continue investing development. significantly, specifically in The electric the US. Electric utility industry cooperatives should carefully analyze the is very capitalprovisions of the intensive, TCJA and evaluate impacts on their own making operations, strategic large dollar planning, and investments financial statements. that are The analysis should be completed on intended to a company-byserve in many company basis, with a good cases over understanding of decades. the impacts to the overall electric utility industry.

Some of the recommended actions to take now are as follows, recommended by EY (2018): â—?

Model the Act - Model the effect of tax reform legislation to understand how it impacts your tax liability and business.

â—?

Analyze and document earnings and profits (E&P) - For-profit organizations should prepare E&P studies to calculate and document the transition tax while understanding the impact on your state and local taxes. In the case of a not-forprofit, analyze and document impacts to revenues, net margins, and customer rates.

â—?

Review executive compensation programs 9

UTILITY COOPERATIVE FORUM - Understand transition rules and the potential need to re-design executive compensation structures. â—?

Execute accounting method change opportunities - Analyze accounting method change opportunities to implement as we shift from a high- to lowtax rate environment.

â—?

Identify any provisions that may require additional legislation or regulatory guidance to achieve congressional intent or to allow taxpayers to comply with enacted legislation. (EY, p. 8)

References Brasher, P. (July 3, 2018). Electric co-ops say tax law threatens rural broadband aid.

Retrieved February 17, 2019 from https:// www.agri-pulse.com/articles/11193electric-co-ops-say-tax-law-threatens-ruralbroadband-aid Bakertilly. (Sep. 13, 2018). Tax Cuts and Jobs Act provisions and other recent developments affecting tax-exempt organizations. Bakertilly Insights. Retrieved February 17, 2019 from https://bakertilly. com/insights/unrelated-business-taxableincome-offset-activities-rule/ Cash, C. (Nov. 27, 2018). Inadvertent Tax Bill Language Could Jeopardize Exempt Status for Some Electric Co-ops. Retrieved February 17, 2019 from https://www. electric.coop/inadvertent-tax-bill-languagejeopardize-exempt-status-electric-co-ops/

and%20its%20impact%20on%20the%20 energy%20sector.pdf Grant Thornton. (Dec.14, 2018). IRS clarifies nondeductible employee parking expensing.

Retrieved February 17, 2019 from https:// www.grantthornton.com/library/alerts/ tax/2018/Flash/IRS-clarifies-nondeductibleemployee-parking-expensing.aspx Kienbaum, K. (Nov.9, 2018). Tax Change Deters Rural Co-ops From Expanding Internet Access. Community Networks, A project of the Institute for Local Self-Reliance.

Retrieved February 17, 2019 from https:// muninetworks.org/content/tax-changedeters-rural-co-ops-expanding-internetaccess KPMG. (Jan. 8, 2018). Power and utility industry measures in new tax law. Retrieved February 17, 2019 from https://home.kpmg/ content/dam/kpmg/us/pdf/2018/01/tnfpower-utilities-new-law.pdf Rocha, V. (Jan. 25, 2018). Q&A: What Does Tax Reform Mean for Your Co-op? Retrieved February 17, 2019 from https://www. cooperative.com/news/Pages/tax-reformand-your-electric-co-op.aspx Schreiber, S., JD. (Oct. 3, 2018). Meals continue to be deductible under new IRS guidance. Retrieved February 17, 2019 from https://www.journalofaccountancy. com/news/2018/oct/tax-deduction-mealentertainment-expenses-201819848.html

EY. (Dec. 29, 2017). US Tax Cuts and Jobs Act and its impact on the energy sector. EY Global Tax Alert. Retrieved February 17, 2019 from https://www.ey.com/ Publication/vwLUAssets/US_Tax_Cuts_and_ Jobs_Act_and_its_impact_on_the_energy_ sector/$FILE/2017G_07180-171Gbl_US%20 Tax%20Cuts%20and%20Jobs%20Act%20 10

Spring 2019 | The Cooperative Accountant

NATIONAL DIRECTORS Kent Erhardt Director CoBank, ACB

Mark Feldman Director Crowe LLP

Jo Ann Fuller Director Alabama Farmers Cooperative, Inc.

Jeff Krejdl Director Ag Valley Cooperative

Eric Krienert, CPA Director Moss Adams LLP

Tucker Lemley Director Peace River Electric Cooperative

Emery Lewis Director CoBank

Michael Mayhew, CPA Director Countryside Cooperative

Christy Norton, CPA Director K Coe Isom LLP

Lynn Smith Director Land O’ Lakes, Inc.

For a complete listing of National Directors and Committees, please visit www.NSAC.coop

Spring 2019 | The Cooperative Accountant

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GENERAL EDITOR Philip W. Miller Assistant Education Director NSAC 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 PROPOSES NARROW-SCOPE IMPROVEMENTS TO FINANCIAL INSTRUMENTS STANDARDS On November 19, 2018, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) that would clarify and improve areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement. Stakeholders were encouraged to review and provide comment on the proposal by December 19, 2018.

“Since issuing the financial instruments standards, the FASB staff has been working with stakeholders to obtain feedback and address questions on the guidance,” noted FASB Chairman Russell G. Golden. “Through these interactions, the FASB identified areas of the guidance that require clarification and correction. The amendments in the proposed ASU would address those areas.”

The proposed ASU is part of the FASB’s ongoing agenda project focused on improving the FASB Accounting Standards Codification and correcting its unintended application.

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

FASB ISSUES NARROW-SCOPE IMPROVEMENTS TO ACCOUNTING FOR LESSORS On December 10, 2018, the Financial Accounting Standards Board (FASB) issued an 12

Bill Erlenbush Education Director NSAC (309) 530- 7500

Accounting Standards Update (ASU) expected to reduce lessor’s implementation and ongoing costs associated with applying the new leases standard. The ASU also clarifies a specific lessor accounting requirement.

In 2016, the FASB issued ASU No. 201602, Leases (Topic 842), that establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases.

Since that time, the FASB has been assisting stakeholders with implementation questions and issues as organizations prepare to adopt the new lease requirements.

Specifically, the ASU addresses the following issues facing lessors when applying the leases standard: ● Sales taxes and other similar taxes collected from lessees. The amendments in the ASU permit lessors, as an accounting policy election, to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Instead, those lessors will account for those costs as if they are lessee costs and exclude the costs from being reported as lease revenue with an associated expense. ● Certain lessor costs paid directly by lessees. The amendments in the ASU related to certain lessor costs require lessors to exclude from variable payments, and therefore revenue, lessor costs paid by lessees directly to third parties. The amendments also require lessors to Spring 2019 | The Cooperative Accountant

ACCTFAX account for costs excluded from the consideration of a contract that are paid by the lessor and reimbursed by the lessee as variable payments. A lessor will record those reimbursed costs as revenue. ● Recognition of variable payments for contracts with lease and nonlease components. The amendments in the ASU related to recognizing variable payments for contracts with lease and nonlease components require lessors to allocate (rather than recognize as currently required in the new leases standard) certain variable payments to the lease and nonlease components when the changes in facts and circumstances on which the variable payment is based occur. After the allocation, the amount of variable payments allocated to the lease components will be recognized as income in profit or loss in accordance with the new leasing guidance, while the amount of variable payments allocated to nonlease components will be recognized in accordance with other accounting guidance, such as revenue from contracts with customers.

More information about the new ASU can be found at www.fasb.org.

Related: FASB PROPOSES CODIFICATION IMPROVEMENTS TO LESSOR IMPLEMENTATION OF NEW LEASES STANDARD On December 19, 2018, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) that would address potential lessor implementation issues related to ASU No. 2016-02, Leases (Topic 842).

The proposed ASU aligns the guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers in Topic 842, with that of existing guidance. As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting Spring 2019 | The Cooperative Accountant

any volume or trade discounts that may apply.

However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease commences, the definition of fair value (in Topic 820, Fair Value Measurement) should be applied.

The proposed ASU would also require lessors within the scope of Topic 942, Financial Services—Depository and Lending, to present all “principal payments received under leases” within investing activities.

Stakeholders were encouraged to review and provide comment on the proposal by January 15, 2019.

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

FASB PROPOSES ALTERNATIVE TO ACCOUNTING FOR GOODWILL AND CERTAIN IDENTIFIABLE INTANGIBLE ASSETS FOR NOT-FOR-PROFITS On December 20, 2018, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) that would reduce the cost and complexity of accounting for goodwill and measuring certain identifiable intangible assets for not-for-profit organizations. Stakeholders were encouraged to review and provide input on the proposed ASU by February 18, 2019.

In 2014, the Private Company Council (PCC) worked with the FASB to issue two private company alternatives on the Accounting for Goodwill and the Accounting for Identifiable Intangible Assets in a Business Combination.

The FASB issued the two standards to address concerns expressed by private companies and their stakeholders about the cost and complexity of the goodwill impairment test and the accounting for certain identifiable intangible assets, among other concerns.

“Stakeholders subsequently told us that these two private company alternatives would also benefit not-for-profit organizations – as the benefits of current accounting for goodwill and identifiable intangible assets in a business 13

ACCTFAX combination did not justify the costs,” said FASB Chairman Russell G. Golden. “This proposed standard simply extends the scope of the two private company alternatives to notfor-profits, which will enable them to recognize fewer items as separate intangible assets in acquisitions and to account for goodwill in a more cost-effective manner.”

In this proposed ASU, instead of testing goodwill for impairment annually at the reporting unit level, a not-for-profit organization that elects the accounting alternative would: ● Amortize goodwill over 10 years or less, on a straight-line basis ● Test for impairment upon a triggering event ● Have the option to elect to test for impairment at the entity level, and ● Have the option to subsume certain customer-related intangible assets and all non-compete agreements into goodwill.

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

FASB PROPOSES TARGETED TRANSITION RELIEF TO INSTITUTIONS APPLYING THE CREDIT LOSSES STANDARD On February 6, 2019, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) that would ease transition to the credit losses standard by providing the option to measure certain types of assets at fair value.

Stakeholders are asked to review and provide comments on the proposal by March 8, 2019.

Issued in 2016, the credit losses standard introduced the expected credit losses method for measuring credit losses on financial assets measured at amortized cost, replacing the previous incurred loss method. It also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis.

Some stakeholders – including auto financing institutions that extend credit to borrowers with limited or impaired credit 14

histories – noted that certain financial statement preparers have begun (or are planning) to elect the fair value option on newly originated or purchased financial assets that have historically been measured at amortized cost. They noted that electing the fair value option would require them to maintain dual measurement methods—fair value measurements and amortized cost basis.

The proposed ASU would allow preparers to irrevocably elect the fair value option, on an instrument-by-instrument basis, for eligible financial assets measured at amortized cost basis upon adoption of the credit losses standard. This would increase the comparability of financial statement information provided by institutions that otherwise would have reported similar financial instruments using different measurement methodologies, potentially decreasing costs for financial statement preparers while providing more useful information to investors and other users.

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

RELATED: FASB ISSUES STAFF Q&A DOCUMENT ON ESTIMATING CREDIT LOSS RESERVES On January 10, 2019, the Financial Accounting Standards Board (FASB) staff issued a question-and-answer document that addresses particular issues related to the weighted average remaining maturity (WARM) method for estimating the allowance for credit losses as required in Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

The credit losses standard issued in 2016 requires organizations to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts with the objective of presenting an entity’s estimate of the net amount expected to be collected on the Spring 2019 | The Cooperative Accountant

ACCTFAX financial assets. The standard does not require a specific credit loss method; however, it allows organizations to use judgment in determining the relevant information and estimation methods that are appropriate in their circumstances.

Some stakeholders, including small financial institutions, asked the staff whether it would be acceptable to use the WARM method to estimate expected credit losses. The WARM method uses an average annual chargeoff rate as a foundation for estimating the credit losses for the remaining balances (that is, losses occurring through the end of the contractual term) of financial assets in a pool at the balance sheet date.

In the question-and-answer document, the FASB staff agrees that the WARM method is one of many methods that could be used to estimate an allowance for credit losses for less complex financial asset pools. The staff also provides examples of how it could be used.

The staff question-and-answer document is available at www.fasb.org.

SEC ADOPTS FAIR ACT RULES PROMOTING RESEARCH REPORTS ON INVESTMENT FUNDS On Nov. 30, 2018, the Securities and Exchange Commission adopted rules and amendments designed to promote research on mutual funds, exchange‑traded funds, registered closed-end funds, business development companies, and similar covered investment funds. These changes reduce obstacles to providing research on investment funds by harmonizing the treatment of such research with research on other public companies. The Commission took this action in furtherance of the mandate in the Fair Access to Investment Research Act of 2017 (FAIR Act).

“These rules will promote greater access to research for investors in funds,” said SEC Chairman Jay Clayton. “Our response to this legislation is crafted to facilitate more informed decision making, which in turn Spring 2019 | The Cooperative Accountant

should improve the quality of a market that has become important to our Main Street investors.”

The rules and amendments generally establish a safe harbor for a broker or dealer to publish or distribute research reports on investment funds under certain conditions.

SEC APPROVES 2019 PCAOB BUDGET AND ACCOUNTING SUPPORT FEE On Dec. 19, 2018, the Securities and Exchange Commission voted to approve the 2019 budget of the Public Company Accounting Oversight Board (PCAOB) and the related annual accounting support fee.

The 2019 PCAOB budget totals $273.7 million. The accounting support fee totals $262.9 million, of which $228.5 million will be assessed on public companies and $34.4 million will be assessed on broker-dealers.

The accounting support fee approximates the PCAOB’s annual budget, with any differences attributable to certain timing differences, adjustments to the working capital reserve, and the potential under spending from the prior year budget being carried forward into the accounting support fee calculation.

“The PCAOB plays a key role in our capital markets through the oversight of the auditors of public companies and broker-dealers registered with the SEC,” said SEC Chairman Jay Clayton. “We should all recognize that these important PCAOB responsibilities are a means to a fundamental end – reliable, consistent, and meaningful financial reporting and high audit quality. I am appreciative of the PCAOB’s continued commitment to use their resources effectively, for enhancing the quality of audit services and evaluating whether any changes are needed to its program and operations.”

The PCAOB’s 2019 budget represents an increase of approximately five percent from its 2018 budget of $259.9 million. The 2019 accounting support fee of $262.9 million is approximately 12 percent higher than the 2018 accounting support fee of $235.3 million.

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ACCTFAX IFRS 2019 “BLUE BOOK” NOW AVAILABLE The IFRS Standards Required 1 January 2019 publication contains all official pronouncements that are mandatory on January 1, 2019. It does not include IFRSs with an effective date after January 1, 2019.

The Annotated IFRS Standards Required 2019 includes the same content as IFRS Standards Required January 1, 2019 but with additional annotations containing extensive cross-references, explanatory notes and IFRS Interpretations Committee agenda decisions.

In addition, the IFRS Foundation has released a video describing the differences in the four volumes it publishes each year.

For more information, see the press release on the IASB’s website.

AICPA PUBLICATION: U.S. GAAP Financial Statements - Best Practices in Presentation and Disclosure The AICPA has published its 2019 version of this highly helpful publication. The document includes hundreds of carefully selected high-quality disclosure examples from U.S. companies of different sizes across virtually any industry.

It also includes illustrations of virtually every required disclosure, coverage of current hot topics, and clear guidance to help with understanding and compliance with all significant reporting requirements.

Additionally, detailed indexes will help users quickly find exactly what they need.

For auditors, an up-to-date auditor’s report – fully in compliance with GAAS – is included.

Key topics include: ● GAAP-compliant financial statement disclosures ● GAAS-compliant auditor’s reports ●

Review of current accounting and auditing pronouncements

●

List of most required disclosures

●

Pronouncement index

16

Who will benefit?: ● Practitioners in firms of all sizes ● Accountants in business and industry Price for AICPA members is $159.00, Nonmembers pay $199.00.

See AICPA website under Publications.

AICPA PUBLICATION: Employee Benefit Plans - Best Practices in Presentation and Disclosure This publication provides illustrative disclosures for financial statements for defined benefit pension plans, defined contribution retirement plans, and health and welfare benefit plans. It has been designed to be beneficial for those practicing in smaller, regional, and large accounting firms.

Learning objectives: ● Increase user understanding of the effects of the simplification standard resulting in changes to the notes to the financial statements ● Increase user understanding of the effects of the liquidation basis of accounting standards resulting in changes to all audit reports that are to be filed with the DOL, in accordance with GAAS ● Stay up to date with a multitude of illustrative auditor’s reports for various reporting situations ● Gain access to illustrative disclosures that include the latest fair value measurement and disclosure requirements in GAAP ● View actual employee benefit plan deficiencies noted and suggestions for improving operations of the plan This edition provides a multitude of illustrative disclosures for financial statements of employee benefit plans. It has been modified to include changes to issuance of authoritative pronouncements. It also includes additional changes necessary to keep the book current on industry and regulatory matters.

Spring 2019 | The Cooperative Accountant

ACCTFAX Updates included: ● FASB ASU No. 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting, and ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities ● FASB ASU No. 2015-07, Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share (or its Equivalent ● FASB ASU No. 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): (Part I) Fully BenefitResponsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient Price for AICPA members is $79.00, Nonmembers pay $99.00.

Se AICPA website under Publications.

Goodwill and Certain Identifiable Intangible Assets: PCC members were supportive of the FASB’s Invitation to Comment and noted that future amendments should align future amendments should align with the alternatives afforded private companies today with respect to amortizing goodwill.

Distinguishing Liabilities from Equity: Given the narrow scope of the project, PCC members were very supportive of adding a probability threshold to the indexation component of the derivative scope exception.

Disclosure Improvements in Response to SEC Release on Disclosure Update and Simplification: PCC members discussed the recently added FASB research project. Some disclosures received broad support from PCC members, while other potential disclosures were not widely supported—primarily due to concerns over relevance of these disclosures to private company users.

LATEST DISCUSSIONS AT FASB’S PRIVATE COMPANY COUNCIL The Private Company Council (PCC) met on Tuesday, December 11, 2018. Below is a brief summary of issues addressed by the PCC at the meeting, categorized by project:

Codification Improvements – Share-Based Consideration Payable to a Customer: PCC members unanimously supported the tentative Board decisions reached on the share-based consideration payable to a customer project.

Disclosures by Business Entities about Government Assistance: PCC members provided feedback on the scope of the project and the types of government assistance that would require disclosure under this standard. PCC members were generally split on their view of the project, with users expressing strong support and some preparers and auditors questioning whether the expected benefits would justify the costs. The PCC suggested that the FASB initiate educational initiatives to ensure private company stakeholders are aware of the new requirements, particularly the type of assistance included in the scope.

Practical Expedient to Measure GrantDate Fair Value of Equity-Classified Share-Based Payments: The PCC added a project to its Technical Agenda to consider a practical expedient to measure grant-date fair value of equity share-based payments for private companies. PCC members and Board members discussed a possible approach. PCC members directed FASB staff to conduct further research in advance of the next meeting on the operability and understandability of a potential expedient that would allow a private company to use the strike price (as the input for fair value) of the underlying share when measuring grantdate fair value of an equity-classified award.

Spring 2019 | The Cooperative Accountant

17

TAXFAX

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

CHARACTER OF CAPITAL GAINS FROM COOPERATIVE SUBSIDIARY

By Daniel S. Welytok In Ltr. 201809005 (November 30, 2017), the Internal Revenue Service (“Service”) addressed a cooperative’s inquiry as to the treatment of capital gains realized from the sale of spectrum licenses held by a cooperative and its wholly-owned subsidiary.

The taxpayer (“Taxpayer”) is a nonprofit, nonexempt rural telephone cooperative that operates on a cooperative basis. Taxpayer was previously exempt under § 501(c)(12) of the Internal Revenue Code (“Code”), but, as with most telephone cooperatives, no longer qualifies for that exemption.

Like many telephone cooperatives, Taxpayer provides regulated and nonregulated services to members and uses subsidiaries to hold non-regulated assets.

In reaction to changes in the marketplace for telephone services, Taxpayer acquired licenses for wireless spectrum in order to provide cellular and other wireless services to its members. Taxpayer transferred one license to its subsidiary, “Sub 1”, and retained the other licenses. Taxpayer subsequently realized that it could not effectively utilize the spectrum, and so decided to sell the licenses before they expired. Taxpayer ultimately sold 18

TAXFAX GUEST WRITERS the licenses David F. Antoni, CPA to unrelated Tax Managing Director third parties KPMG, LLP 1600 Market Street at a gain, and Philadelphia, PA 19103 requested 267-256-1627 a private dantoni@kpmg.com letter ruling concerning Sandra E. Hofmann, CPA Tax Managing Director the treatment Crowe, LLP of the gain.

9910 Dupont Circle E. The Service Suite 230 begins its Fort Wayne, IN 46825 analysis by 260-487-2312 sandy.hofmann@crowe.com noting that Code § 501(c) Wright Schickli (12) provides a Managing Director Washington tax exemption National Tax for rural KPMG, LLP telephone Daniel S. Welytok cooperatives, Shareholder but very few von Briesen & Roper, s.c. rural telephone 411 East Wisconsin Avenue cooperatives Suite 1000 Milwaukee, WI 53202 actually 414-287-1408 qualify for the dwelytok@vonbriesen.com exemption.

Subchapter T of the Code provides the statutory scheme for taxing most cooperatives, but telephone cooperatives were excluded from Subchapter Spring 2019 | The Cooperative Accountant

TAXFAX T when Congress enacted it in 1962. Rural telephone cooperatives that are not exempt are taxed according to the rules of taxation that applied to cooperatives prior to the enactment of Subchapter T. See, Rev. Rul. 83-135, 1983-2 C.B. 149 (holding a nonexempt rural electric cooperative is taxed under pre-Subchapter T law). In many important respects, Subchapter T codified pre-Subchapter T law. As a result, the development of the tax law for telephone cooperatives has generally been through cases and rulings interpreting Subchapter T, even though such cases and rulings do not necessarily control the taxation of rural telephone cooperatives. In any event, these cases and rulings are indicative of the position of the Service and courts on many tax issues generally applicable to such cooperatives.

The Service then briefly reviews what it considers to be the unique characteristics of cooperatives, including requirements of democratic control, subordination of capital and operation at cost. Nonetheless, the taxable income of a cooperative is calculated similar to that of a taxable corporation, but with a fundamental difference: the income of a cooperative attributable to business done with or for its members may be deducted or excluded from the income of the cooperative when it is allocated to the cooperative’s patrons.

When a cooperative realizes capital gain from the sale or exchange of a capital asset used in the business conducted with or for its patrons, it is the Service’s view that, to the extent possible, that gain should be allocated to the persons who were patrons during the years in which the capital asset was used by the cooperative in proportion to the amount of business done by those patrons with the cooperative during those years.

In order for a cooperative to deduct income allocated to its patrons, that income must be patronage-sourced income.

Because neither the Code nor the Treasury Spring 2019 | The Cooperative Accountant

regulations provide a clear definition of patronage-sourced income, the Service relies on common law to analyze whether the income at issue is produced by a transaction directly related to the cooperative enterprise, meaning that the transaction facilitates the cooperative’s marketing, purchasing, or service activities. If this direct relationship is found to exist, then the income will be deemed to be patronage-sourced income.

The Service also discusses Rev. Rul. 69576, 1969-2 C.B. 166, and Rev. Rul. 74-160, 1972-1 C.B. 245, each of which examine the relationship of the activity generating the income to the marketing, purchasing or service activities of the cooperative. The import of these rulings is that where the income produced by a transaction which actually helps accomplish the cooperative’s marketing, purchasing or service activities, then the income is from patronage sources.

But where the transaction only enhances the over-all profitability of the cooperative and is merely incidental to its operation, the income will be characterized as non-patronage sourced. And with respect to deductibility, the Service notes that Rev. Rul. 83-135 provides that a taxable cooperative which is not subject to Subchapter T (such as the Taxpayer) may exclude patronage dividends from its gross income when they are paid or allocated to the patrons in accordance with its bylaws.

Moving to the analysis of the character of income from a cooperative subsidiary, the Service reviews Farmland Industries, Inc. v. Commissioner, 78 T.C.M. 846 (1999), acq. There, a cooperative that provided petroleum products to its patrons sought to have several kinds of capital gains and losses (including gains and losses from sale of stock of subsidiaries) classified as patronagesourced income. The Tax Court held that the income was patronage-sourced, because the capital gains and losses at issue resulted from transactions that were directly related to the cooperative’s cooperative business.

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TAXFAX Specifically, the Tax Court analyzed whether the cooperative’s subsidiaries were formed to perform functions related to its cooperative enterprise. Noting that the subsidiaries had been organized to explore for, produce, and transport crude oil, the Tax Court found that the subsidiaries were organized to perform functions that helped accomplish the cooperative enterprise, and were not merely passive investments.

Similar results were found in Astoria Plywood Corp. v. United States, 43 A.F.T.R. 2d 79-816, 79-1 USTC ¶9197 (D. Or. 1979), where the court held that capital gain income derived from cancellation of a lease was patronage-sourced because the production of plywood at the leased facility was integral to the cooperative’s business, and in Linton Plywood Association v. United States, 410 F. Supp. 1100 (D. Or. 1976), where the court held that dividends received from an adhesive company, which a cooperative helped organize to supply its adhesive needs, were patronage-sourced because glue was essential for the production of plywood.

Finally, the Service noted that in CF Industries, Inc. v. Commissioner, 995 F.2d 101 (7th Cir. 1993), the court implied that a cooperative would be gaining an unfair tax advantage for its members if it was investing in businesses unrelated to its cooperative purpose and in effect running a mutual fund (for example, by making temporary investments in securities). However, the Taxpayer in this case does not fall within that category.

In consideration of the foregoing authorities, the Service held that the Taxpayer’s gains on the sales of spectrum licenses were patronage-sourced because the licenses were directly related to its cooperative business. The ruling concluded that the cooperative could exclude those gains “when allocated to [its] memberpatrons based on member-patrons’ respective patronage during the time that [the cooperative and Sub 1] owed the [licenses].”

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IRS Tips for Reconstructing Records After a Disaster

By Sandra E. Hofman, CPA With the record-setting number of hurricanes, wildfires, and other disasters occurring in many parts of the country in 2018, some Americans are facing the challenge of reconstructing their financial records that were lost or destroyed.

This can be a difficult task, but a necessary one. In tax matters, taxpayers generally have the burden of proof. That means that if a tax matter ends up in court, taxpayers are required to present credible evidence substantiating claimed deductions, including the basis of assets where that is relevant.

For instance, Tax Court Rule 142 provides that, except for certain special matters (for instance, fraud), “the burden of proof shall be on the petitioner” (i.e., the taxpayer).

They also have the burden of establishing the correct amount of their income. In the absence of credible evidence to the contrary, what the IRS asserts in a notice of deficiency is presumed correct.

Having said that, in the case of individual taxpayers, the Tax Court has shown a willingness to accept less than perfect evidence. As the Tax Court observed in Columbus W. Henson v. Commissioner, T.C. Memo. 1979-110: “In prior cases, too numerous to list here, upon finding the taxpayer to be candid and forthright, we have chosen to follow the rule of approximating a figure for an allowable deduction if reasonable evidence is presented, while bearing heavily upon the taxpayer whose inexactitude is of his own making. Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).”

IRS Fact Sheet FS-2018-18 (November 30, 2018) The IRS recently published a fact sheetthat provides tips to help taxpayers reconstruct Spring 2019 | The Cooperative Accountant

TAXFAX their records. Some of the key parts of this fact sheet are paraphrased below. Interested readers should refer to the fact sheet for further detail.

Certain records are required to substantiate and properly document a tax-deductible casualty loss or to obtain federal assistance or insurance reimbursement. If all of a person’s home or office records are destroyed, how can that person substantiate those losses?

In the event of lost documentation, the IRS allows other ways to prove expenses.

Whether lost or destroyed property is personal or business, following are some steps the IRS suggests can help.

Personal residence and real property: ● Take photographs or videos as soon after the disaster as possible. This helps establish the extent of the damage. ● Contact the title company, escrow company, or bank that handled the purchase of the home to get copies of appropriate documents. ● Use the current property tax statement for land-versus-building ratios. If the current statement is not available, property owners usually can get copies from the county assessor’s office. ● Establish a basis or fair market value of the property by reviewing comparable sales within the same neighborhood. This information can be found by contacting an appraisal company or visiting a website that provides home valuations. ● Check with the mortgage company for copies of appraisals or other information it might have about cost or fair market value in the area. ● Review insurance policies, as these usually list the value of a building, which will establish a base figure for replacement value insurance. ● f improvements were made to the home, contact the contractors who did the work to see if records are available.

Personal property: It can be difficult to reconstruct records Spring 2019 | The Cooperative Accountant

showing the fair market value of some types of personal property. Following are some IRS tips for cataloguing lost items and determining their values. ● Look on mobile phones for pictures that were taken in the home before the disaster and that might show the damaged property in the background. ● Check websites that can help establish the cost and fair market value of lost items. ● Support the valuation with photographs, videos, canceled checks, receipts, or other evidence. ● If items were purchased using a credit or debit card, contact the credit card company or bank for past statements.

Vehicles: For loss of or damage to vehicles, the Kelley’s Blue Book, National Automobile Dealers Association, and Edmunds are resources that can help determine the current fair market value of most motor vehicles. Additionally, the dealer where the vehicle was purchased should be able to provide a copy of the contract.

Business property and records: ● To create a list of lost inventories, get copies of invoices from suppliers.

Whenever possible, the invoices should date back at least one calendar year. ● Check mobile phone or other cameras for pictures and videos taken of buildings, equipment, and inventory. ● For information about income, get copies of bank statements. The deposits should closely reflect what the sales were for any given time period. ● Obtain copies of the previous year’s federal, state, and local tax returns. This includes sales tax reports, payroll tax returns, and business licenses from the city or county. These documents will reflect gross sales for a given time period. ● If there are no photographs or videos available and the building was newly constructed, contact the contractor or a planning commission for building plans.

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TAXFAX ●

If the business was pre-existing, ask the broker for a copy of the purchase agreement.

Claiming casualty and disaster tax losses: A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.

If damage is to an income-producing or business property, taxpayers might be able to claim a casualty loss deduction on their tax return. However, deduction limits and other restrictions apply to personal casualty losses.

Beginning in 2018, net personal casualty losses are only deductible if they relate to a federally declared disaster. Taxpayers must enter the Federal Emergency Management Agency (FEMA) disaster number on Form 4684, “Casualties and Thefts.”

Usually a casualty loss is deductible only in the year it occurred. But if the property was damaged as a result of a federally declared disaster, taxpayers can choose to deduct that loss on their tax return for the tax year immediately preceding the year in which the disaster happened. If a return has already been filed, a taxpayer can amend it by filing Form 1040X, “Amended U.S. Individual Income Tax Return.”

For more information on losses, see the following IRS publications: ● Publication 547, Casualties, Disasters, and Thefts – this has information on figuring your casualty loss deduction. ● Publication 584, Casualty, Disaster, and Theft Loss Workbook – this can help individuals prepare a list of stolen or damaged personal-use property and figure the loss. ● Publication 584-B, Business Casualty, Disaster and Theft Loss Workbook – this is available to help businesses list stolen or damaged business or income-producing property and to figure the loss.

________________________________________ It should be noted that businesses are generally held to higher standards than 22

individuals when it comes to maintaining and reconstructing, if necessary, records needed for tax purposes. Most businesses today have some form of disaster recovery plan and routinely back-up computer files.

In the past the IRS refused to provide cooperatives with extra time to pay patronage dividends where, for instance, patronage records had been destroyed in a fire. For instance, in Ltr. 7004071070A (April 7, 1970), the IRS stated: “While we recognize the very difficult position in which the taxpayer finds itself, we can find no authority for granting the taxpayer’s request for extending the payment period set forth in section 1382(d) of the Code.”

On the other hand, the IRS has shown a willingness to work with cooperatives in other situations. See, for instance, Ltr. 201105008 (October 5, 2010), where the IRS approved a period as “an acceptable representation of proportional use of the facilities” by members to be used in connection with the allocation of a capital gain where records before a certain date were unavailable because of “the partial destruction of Coop’s records … by fire.” https://www.irs.gov/newsroom/fact-sheets 2 https://www.fema.gov/Disasters More Details Regarding Elections Out of Section 163(j)

By George W. Benson The new Section 163(j) limitation on the deduction of interest contained in the Tax Cuts and Jobs Act of 2017 allows “specified agricultural and horticultural cooperatives” (as that term is defined in Section 168(g)) to elect out. See, Section 163(j)(7)(C)(ii).

However, the election has a cost. Section 168(g)(1)(G) requires that a cooperative making an election out to depreciate “any property with a recovery period of 10 years or more” using the alternative depreciation system (“ADS”). Among other things, the ADS requires the use of longer recovery periods for assets and of the straight-line Spring 2019 | The Cooperative Accountant

TAXFAX method.

The proposed regulations under Section 163(j) describe how to make an election and some of its consequences. See, Prop. Treas.

Reg. § 1.163(j)-9. According to the proposed regulations, an election is made by trade or business so, if a cooperative is engaged in several trades or businesses, multiple elections must be made. The proposed regulations provide that a “taxpayer may make elections for multiple trades or businesses on a single election statement.”

Once made, an election is irrevocable. The proposed regulations contain anti-abuse rules designed to back-stop the irrevocability of the election.

The election does not apply only to newly acquired property in the year made. Rather, it applies to all property with a recovery of 10 years or more.

According to the IRS, “Some taxpayers that are … electing farming businesses have inquired about how depreciation is changed from the general depreciation system under § 168(a) to the alternative depreciation system under § 168(g) for property placed in service in taxable years beginning before 2018.”

In response, the IRS has released Rev. Proc.

2019-8. See, in particular, Section 4.02.

Rev. Proc. 2019-8 provides that the change is not regarded as a change in accounting method for tax purposes. The election is treated as if a change in use occurs for the election year under Section 168(i)(5) and Treas. Reg. § 1.168(i)-4(d). In general, this means that each asset with a recovery period of 10 years or longer is treated as originally placed in service with the ADS recovery period using straight-line depreciation.

Depreciation (and bonus depreciation) is not refigured for prior years, but, going forward, depreciation is figured using the adjusted depreciable basis of the assets as of the first day of the year of change.

The revenue procedure makes it clear that a cooperative making the election cannot Spring 2019 | The Cooperative Accountant

claim additional first-year depreciation under Section 168(k) for any newly-acquired property with a recovery period of 10 years or longer.

There are still a number of unanswered questions regarding the election out of Section 168(k). For many cooperatives, the tax cost of making such an election may be minimal when the patronage dividend deduction is taken into account. However, that might not be the case for a cooperative with significant nonpatronage business.

Cooperatives thinking about making an election should continue to monitor the guidance that is being released (including eventually the final regulations under Section 163(j)). They should carefully study the shortand long-term consequences, including the potential impact on patronage dividends, before making the election.

Tax Return Preparation Software Provides No Defense Against Penalties A recent Tax Court decision provides a reminder that “my tax return preparation software made me do it” is not generally a defense against accuracy-related penalties.

Marlon Dasent v. Commissioner, T.C. Memo.

2018-202.

After concluding that the Dasents had improperly deducted certain claimed business expenses and unreimbursed employee business expenses and had failed to properly report early distributions from a qualified retirement plan, the Tax Court held the Dasents liable for the 20% accuracyrelated penalty. The Tax Court observed that the Dasents did not rely on a tax professional to prepare their return, but rather used TurboTax. It then observed: “This Court has found that ‘[t]ax preparation software is only as good as the information one inputs into it.’

See, Bunney v. Commissioner, 114 T.C. 259, 267 (2000). The software does not constitute professional advice for which this Court can rely in a reasonable cause/good faith analysis.”

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TAXFAX The Tax Court appears convinced that gains from the sale of property before a errors attributed by taxpayers to theirBy return Barbarabankruptcy A. Wech proceeding commenced. See, preparation software are almost always the Lynwood D. Hall v. United States, 132 S. Ct. result of taxpayer error inputting data. As 1882 (2012). This case was discussed in the one Judge stated: “Simply put, garbage Fall 2012 TAXFAX column. Most sales in in, garbage out.” Brenda F. Bartlett v. connection with work-out plans take place Commissioner, T.C. Memo. 2012-254. after a bankruptcy filing so the decision The Judge in another case observed: largely nullified the intent of the 2005 “… petitioners failed to introduce amendment. other evidence that demonstrates Soon after the Hall decision, Senators their improperly claiming the firstGrassley and Franken introduced legislation time homebuyer credit was the result to reverse the holding. In a September 13, of a TurboTax programming flaw or 2012 statement on the floor of the Senate, instructional error. We note we find it Senator Grassley stated: unlikely that TurboTax would allow a “In a 5-4 decision, the Supreme Court result inconsistent with the Code if its ruled the provision I inserted into the 2005 instructions were properly followed.

Bankruptcy Abuse Prevention and Consumer Petitioners may have acted in good faith Protection Act did not accomplish what we but likely made a mistake.” intended. The Family Farmer Bankruptcy Tax Robert P. Morales v. Commissioner, T.C. Clarification Act of 2012 [Senator Grassley Memo. 2012-341. The Judge in that case and Franken’s bill] corrects this and clarifies then noted that “[w]e leave for another day that bankrupt family farmers reorganizing whether reliance on tax preparation software their debts are able to treat capital gain taxes such as TurboTax is sufficient to avoid the owed to a governmental unit, arising from accuracy-related penalty where the taxpayer the sale of farm assets during a bankruptcy, has provided evidence demonstrating a as general unsecured claims. This bill will programming flaw or an instructional error.” remove the Internal Revenue Service’s veto power over a bankruptcy reorganization Family Farmer Bankruptcy Clarification plan’s confirmation, giving the family farmer a Act of 2017 Limits Priority of Government chance to reorganize successfully.”

Claims for Taxes Resulting from Asset Sales Senator Grassley and Franken’s efforts The federal bankruptcy laws contain special finally came to fruition in 2017. The provisions for farm bankruptcies. See, legislation (the Family Farmer Bankruptcy Chapter 12 of the Bankruptcy Code.

Clarification Act of 2017) was not part of Generally, federal tax claims are priority the TCJA, but rather was attached to the claims in a bankruptcy. However, in 2005, Additional Supplemental Appropriations for Congress amended the Bankruptcy Code Disaster Relief Requirements Act of 2017. to provide otherwise if “the claim is a claim The legislation makes it clear that any owed to a governmental unit that arises as claim that “arises before the filing of the a result of the sale, transfer, exchange, or petition, or that arises after the filing of the other disposition of any farm asset used in petition and before the debtor’s discharge the debtor’s farming operation…” The 2015 under section 1228, as a result of the sale, amendment was intended by its sponsors to transfer, exchange, or other disposition of facilitate reorganization plans which involved any property used in the debtor’s farming the sale of part, but not all, of a farm, leaving operation…” (emphasis added) is not entitled the farmer with his debts discharged. to priority treatment.

However, the U.S. Supreme Court After passage, Senator Grassley stated: interpreted the amendment as limited to “Family farmers face obstacles that others 24

Spring 2019 | The Cooperative Accountant

TAXFAX don’t when dealing with bankruptcy. Their assets are largely tied up in farmland, which creates significant challenges for these family operations when reorganizing debt. Years ago Congress took specific steps to address these disadvantages, but the Supreme Court failed to recognize Congress’ intent when evaluating the law. Thankfully Congress has now approved a fix for this problem and family farmers facing hard times can breathe a sigh of relief.”

“Grassley-Franken Farm Bankruptcy Relief Bill Sent to President for Signature” (October 24, 2017), https://www.grassley.senate.gov/news/ news-releases/grassley-franken-farm-bankruptcy-reliefbill-sent-president-signature.

President Trump signed the bill into law on October 26, 2017. See, Public Law 115-72.

Refundable AMT Credits Are Not Subject to Sequestration After All As part of the Tax Cuts and Jobs Act of 2017, Congress repealed the corporate alternative minimum tax (“AMT”). As part of the repeal, Congress provided what happens to a taxpayer’s unused AMT credits. Under certain circumstances, the credits are refundable. On the surface, when credits were refundable, taxpayers were entitled to receive the full face amount of the credits.

But there was a potential problem. In an article entitled “Refundable AMT Credits and Sequestration After Tax Reform” which appeared in the Fall 2018 TAXFAX Column, Michael Fincher and Anna Borden described how the Office of Management and the Budget (“OMB”) had decided that AMT credit refunds were subject to sequestration.

For credits processed during the Government’s fiscal year ending September 30, 2019, sequestration meant that 6.2% of the amount otherwise refundable would not have been paid.

Affected taxpayers sought to convince the OMB to reconsider its decision. In December, the OMB informed Treasury that it had changed its mind. On January 14, 2019, the IRS updated a notice on its website Spring 2019 | The Cooperative Accountant

regarding sequestration to provide that “for taxable years beginning after December 31, 2017, refund payments and credit elect and refund offset transactions due to refundable minimum tax credits under section 53(e) will not be subject to sequestration.” See, https://www.irs.gov/newsroom/effect-ofsequestration-on-the-alternative-minimumtax-credit-for-corporations-fiscal-year-2019.

FDII: Opportunities and Challenges for Cooperatives

By David F. Antoni, CPA and Wright Schickli Introduction This is part of a series of articles that the Cooperative Accountant will publish periodically regarding various tax reform rules enacted on December 22, 2017 (“2017 Act”). This article provides a high level summary of the foreign-derived intangible income (“FDII”) rules of section 250 that were enacted by the 2017 Act, and how they apply to cooperatives. This article is based on the statutory language of section 250 and legislative history. Proposed regulations under section 250 are expected to be released very soon, and will be the topic of a future article.

What are FDII Benefits, and Who Can Claim Them?

The FDII provisions grant export incentives for certain types of activities (discussed below) conducted by U.S. corporations. As with other similar incentives enacted by Congress in the past, the basic policy behind the FDII rules is to encourage U.S. corporations to export goods and services and thereby “serve foreign markets” from within the United States, instead of using a foreign corporation to serve those foreign markets.

The primary goals underlying this policy appear to be (i) to stimulate U.S. employment (particularly manufacturing and production activities), (ii) to broaden the U.S. tax base by attracting new intellectual property (“IP”) investment in the United States, and (iii) to 25

TAXFAX encourage the relocation of existing IP assets (by U.S. or foreign corporations) and activities to the United States.

Similar to section 199, FDII benefits come in the form of a permanent deduction that can be claimed only by domestic corporations (including corporations that own a share in a pass-through entity). Unfortunately, REITs, RICs, “S” corporations, and individuals are not eligible for FDII benefits. Because a cooperative is a type of C corporation (albeit subject to some special tax rules in subchapter T of the Code), cooperatives also can claim FDII benefits.

For taxable years beginning after December 31, 2017 and ending before January 1, 2026, a cooperative can claim a deduction equal to 37.5% of its qualifying FDII income. Assuming a full 37.5% deduction, the effective tax rate on qualifying FDII income is approximately 13.125%.

For taxable years beginning on or after January 1, 2026 the deduction is reduced to 21.875%, resulting in an effective tax rate of approximately 16.406%.

Computing FDII At a high level, a U.S. corporation’s FDII is the amount of its “deemed intangible income” (“DII”) that is attributable to qualifying transactions. Section 250(b)(1) defines FDII as the amount that bears the same ratio to a corporation’s DII as its foreign-derived deduction eligible income (“FDDEI”) bears to the corporation’s deduction eligible income (“DEI”). DII is the excess (if any) of DEI over a deemed tangible income return (which equals 10% times a taxpayer’s qualifying business asset investment (“QBAI”)). Section 250(b) (3) defines a corporation’s DEI as the excess of a corporation’s gross income (determined by excluding certain classes of income) minus properly allocable deductions (including taxes). The classes of income excluded from qualifying as DEI (and thereby also excluded from FDDEI) are (i) subpart F income, (ii) section 951A “GILTI” income, (iii) financial services income, (iv) dividends received from 26

a controlled foreign corporation in which the U.S. corporation is a U.S. shareholder, (v) any domestic oil and gas extraction income, (vi) any foreign branch income, (vii) income of a kind that would be foreign personal holding company income, and (vii) qualified electing fund inclusions (PFIC).

Qualifying Income Two general types of income can qualify as FDDEI eligible for FDII benefits under section 250(b): (i) income derived in connection with certain sales (including leases, licenses and property exchanges); and (ii) income from the performance of certain services. In the case of both sales and services income, a taxpayer must “establish to the satisfaction of the Secretary” that the income is qualifying income. Additional requirements apply in the case of transactions involving a related person.

Income from the sale of property qualifies if the property is sold to an unrelated foreign person for use outside the United States. In the case of a sale to a related person, a sale does not qualify unless the property is ultimately sold to an unrelated foreign person, or used by a related person in connection with sales of property or the provision of services to an unrelated foreign person for use outside the United States.

A sale to a U.S. person cannot qualify for FDII benefits unless the special attribute redetermination rules of Treas. Reg. § 1.150213 apply because the sale took place within a consolidated group of U.S. corporations.

Income from services only qualifies it the services are provided to a person, or with respect to property, not located in the United States. These rules allocate attributes such as FDII benefits within a consolidated group to each relevant member so as to not unfairly disadvantage consolidated groups.

Services income qualifies if derived in connection with services “provided to any person, or with respect to property, not located within the United States.” In the case of services provided to a related person, the Spring 2019 | The Cooperative Accountant

TAXFAX income cannot qualify if the services provided to the related person are “substantially similar” to services provided by that foreign related person to any person located in the United States.

QBAI/Taxable Income Limitation The FDII deduction is subject to a “taxable income limitation” which applies if the sum of a taxpayer’s GILTI inclusion/section 78 and FDII amount exceed its taxable income (in which case the amounts of GILTI (including the section 78 gross-up) and FDII are reduced pro rata). A FDII deduction is also reduced by 10% of the aggregate adjusted basis (determined quarterly and using section 168(g) “ADS” depreciation) of a U.S. corporation’s depreciable tangible property that is used to produce qualifying income (qualified business asset investment or “QBAI”). As a result of the QBAI limitation, a cooperative is subject to the standard 21% U.S. corporate tax rate to the extent it’s taxable income (after its section 1382 patronage deduction) is equal to or less than a fixed 10% return on its QBAI, and a 13.25% rate (increased to 16.406% in 2026) on its excess return that is attributable to qualifying exports (i.e., its qualifying FDII).

FDII Opportunities for Cooperatives Based on the existing statutory language, the FDII rules appear to apply to cooperatives in the same manner as they apply to other C corporations. Given the special rules that apply to cooperatives, however, the availability of benefits may depend on whether the Cooperative has positive retained taxable income after its section 1382 patronage deduction. Such taxable income earned by a cooperative may be derived from any retained patronage income or nonpatronage income.

Sales of product by a cooperative to a related or unrelated foreign person can qualify for FDII benefits if the cooperative can establish to the satisfaction of the Secretary that the sale was for foreign use Spring 2019 | The Cooperative Accountant

(or ultimate foreign use in the case of related party transactions). Services provided by a cooperative to a related or unrelated person can qualify if the services are performed for a person, or with respect to property, not located in the United States. In the case of a related party services transaction, a cooperative must establish that the related party does not provide “substantially similar” services to any person in the United States.

As discussed below, while the same rules technically apply to both patronage income and non-patronage income, patronage income raises some challenges because of the accompanying section 1382 deduction that is available to cooperatives for distributions to its patrons.

FDII Challenges for Cooperatives In contrast to some previous export incentives, there is no statutory rule that takes into account the special nature of patronage dividends, and their impact on cooperatives. For example, the FSC, ETI and section 199 rules all had a special provision whereby patronage dividends were “addedback” for purposes of determining the tax benefits granted by those provisions.

Lobbying efforts likely helped facilitate those prior patronage add-back exceptions, but the quick evolution of the FDII rules and “closed door” proceedings left no time for meaningful discussion about the intended scope of the rules. The section 250 FDII provisions were not contained in the original House bill, and surfaced only in the Senate’s amended version of the House Bill and accompanying report. Absent such an addback rule, the FDII benefits may be trapped at the cooperative level where they could not be claimed because of patronage dividends which reduce or zero out a cooperative’s patronage sourced taxable income.

Another challenge for cooperatives and their members is the fact that sales to U.S. persons and the provision of services to persons located in the United States generally do not qualify for 27

TAXFAX

FDII benefits (except in a consolidated group context). As a result, income from the sale by members of product to a cooperative does not appear to qualify for FDII benefits even if the sale or service relates to what ultimately is an export transaction. One possible source of relief could be an expanded affiliated group rule for cooperatives that extends the attribute redetermination rules of Treas. Reg. § 1.1502-13 to a much lower threshold of member ownership in a cooperative. Members rarely own 80% or more of a cooperative, which is required for consolidated group status. A threshold significantly less than 80% could allow members to claim benefits with respect to sales to cooperatives when there is ultimately a qualifying export sale or service. Nevertheless, there seems to be little precedent for such a rule.

Under the former ETI rules, a corporation generally determined its qualifying export income at the cooperative level.

Nevertheless, the ETI rules contained a specific rule that allowed a cooperative to pass-through benefits to its members.

Similarly, section 199(d)(3) allowed a cooperative to choose between claiming section 199 benefits itself or passing all or a portion of them through to members. A pass-through rule, and particularly a partial pass-through rule, could provide needed flexibility for cooperatives. As an example, a partial pass-through rule might be written to allow a cooperative to pass-through FDII benefits to qualifying members, and retain FDII benefits for members who may not qualify (e.g., individuals and S corporations).

A similar issue currently exists with respect to a cooperative’s ability to pass-through its section 199A(g) deduction to members.

The section 199A deduction can only be used by non-corporate taxpayers, such that a corporate member receiving a section 199A(g) pass-through deduction from a cooperative is ineligible to claim the deduction. Section 199A(g) does not 28

contain any language specifically permitting the pass-through deduction to be allocated only to section 199A eligible members.

In addition, from a practical perspective, a cooperative may not be able to easily determine which of its members are eligible for the deduction. For example, the use of “Corp.” or “Inc.” is common to both C Corporations and S Corporations. An “LLC” may be in the name of a disregarded sole proprietor, tax partnership or C Corporation or S Corporation that has made an entity classification election.

Similar to section 199, where the statute and other authoritative guidance is not specific, a cooperative will need to consider the mechanics of the computation in terms of whether to prepare one overall FDII computation no different than other corporations or seek to prepare separate FDII computations for patronage activities versus non-patronage activities. Given that FDII does not provide an add-back for patronage dividends, a cooperative may choose to explore modeling these differing approaches in an effort to maximize its FDII benefits. In addition, a common consideration will be once a FDII deduction is computed, to the extent it may be attributable to patronage business can it be applied against non-patronage sourced taxable income?

Another consideration will be for a cooperative that is a parent or member of a federal consolidated tax return group.

Suppose that certain corporations in the group have a wholly non-patronage business. Would these non-patronage entities be able to compute their FDII deduction on a separate entity nonpatronage basis? While nothing in the statute or legislative history appears to support such an approach from a FDII perspective, the IRS has advocated and litigated a similar separate accounting approach for patronage and non-patronage activities in a section 199 context. A separate calculation might be desirable Spring 2019 | The Cooperative Accountant

TAXFAX

if the rules for expense allocation might result in the patronage dividend limiting the overall FDII benefit, not just the FDII benefit attributable to patronage business.

However, it would appear that section 250 mandates that the taxable income limitation be determined on a consolidated return basis. Whether that would preclude a separate non-patronage business computation is unclear. In addition, it is less clear whether DEI/FDDEI and QBAI should be determined on a separate entity or affiliated group basis. Current statutory interpretation refers to FDII of a “domestic corporation.” It is possible that the soon to be released proposed regulations may require an affiliated group determination.

Another consideration for some cooperatives involves the interaction of the FDII rules with contract manufacturing agreements. Some cooperatives have found it necessary to structure certain contract manufacturing agreements as a sale and a repurchase of the refined product (for ultimate sale to a foreign person), instead of engaging the contract manufacturer to perform services. The FDII rules would deny FDII benefits with respect to the income attributable to the cooperative’s “sale” to a U.S. manufacturer, although profits from the sale of the refined product could qualify for FDII benefits.

Wright Schickli, Managing Director, Washington National Tax, KPMG LLP David F. Antoni, CPA, Tax Managing Director, KPMG LLP ________________________________ The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information specific situations should be determined through consultation with your tax adviser.

This article represents the views of the authors only and does not necessarily represent the views or professional advice of KPMG LLP. Spring 2019 | The Cooperative Accountant

About our TAXFAX Contributors TAXFAX EDITOR George W. Benson Counsel McDermott Will & Emery LLP Chicago, Illinois 444 West Lake Street Suite 4000 Chicago, Illinois 60606 312-984-7529 gbenson@mwe.com TAXFAX GUEST WRITERS David F. Antoni, CPA Tax Managing Director KPMG, LLP Philadelphia, Pennsylvania 1600 Market Street Philadelphia, PA 19103 267-256-1627 dantoni@kpmg.com Daniel S. Welytok Shareholder von Briesen & Roper, s.c.

Milwaukee, Wisconsin 411 East Wisconsin Avenue Suite 1000 Milwaukee, WI 53202 414-287-1408 dwelytok@vonbriesen.com Sandra E. Hofmann, CPA Tax Managing Director Crowe, LLP Fort Wayne, Indiana 9910 Dupont Circle E. Suite 230 Fort Wayne, IN 46825 260-487-2312 sandy.hofmann@crowe.com Wright Schickli Managing Director, Washington National Tax KPMG, LLP Silicon Valley 29

SMALL BUSINESS COOPERATIVE FORUM

By Dr. Barbara A. Wech

Abstract Bullying is a problem in today’s society from the schoolyard to senior citizen assisted living.

Sandwiched in the life cycle is the workplace where bullying is also alive and well. This article looks at why we should be concerned about workplace bullying and what such bullying looks like. Some of the many negative consequences of such bullying are also discussed. The article ends with some suggestions of developing a policy to help address workplace bullying.

Introduction We hear a lot about bullying these days. It is in the news and we may have experienced it or seen or heard about incidents happening to family or friends. Bullying occurs in schoolaged children (www.stopbullying.gov) all the way through senior citizens (National Center for Assisted Living, 2017). Our concern here is workplace aggression and bullying.

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“You were talking about bullying. Why did you throw aggression in there?” Because bullying is much more front and center in the news, but bullying is only one part of a larger group of behaviors referred to as aggression.

Workplace aggression is all types of behavior by which individuals attempt to harm others at work or in their organizations (Neuman & Baron, 1998). Individuals can be employees, customers, clients, and the general public.

In other words, aggression in the workplace can be perpetrated by anyone who comes in contact with an organization’s employees. It can be physical or psychological. According to some, workplace bullying includes aggressive behaviors, but only if the behaviors are intentional, occur repeatedly, and over time with some estimates up to six months (Einarsen, Hoel, Zapf, & Cooper, 2011). For our purposes, we will refer to bullying in a broad sense: Workplace bullying is the unwanted abuse Spring 2019 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM of any source of power Why Should We Care?

Workplace bullying that has the effect of Workplace bullying has many negative or intent to intimidate, has many negative control or otherwise strip consequences. These consequences. These a target of his/her right to consequences are real for consequences are real for esteem, growth, dignity, not only the victim, but not only the victim, but voice or other human for those observing the rights in the workplace. for those observing the bullying behaviors, and Workplace bullying the organization. bullying behaviors, and may take the form of There are numerous harassment, incivility, physical, psychological, the organization. abusive supervision, and work-related violence, aggressions consequences of and other types of objectionable behaviors. bullying for victims (Glasø, Vie, & Løkke, Further, these behaviors may take the 2010). Consequences that have been form of interpersonal interactions or identified include very high stress levels, organizational practices. The behaviors may headaches, fatigue, depression, low selfcome from any level of the organization esteem, and problems sleeping. In a study – supervision, co-workers, customers and by the Workplace Bullying Institute (2012), even direct reports. (Carbo, 2017, p. 105).

80% of bullying victims reported anxiety Accounting professionals are not associated with their bullying. Anxiety is immune to workplace bullying. Some the most reported psychological symptom. examples follow. An intern working Panic attacks, the second highest reported at a financial services company told a symptom, was reported by 52% of the researcher that one of the customer service respondents. Victims have been found to associates threatened financial advisors have lower job satisfaction and are more that an auditor could show up at any time dissatisfied with the work environment than and did this so often, the intern decided nonvictims. This is not surprising given that against a career in financial services of 44% of respondents who reported that (Carbo, 2017). The Big Four accounting their organization knew of the bullying they firms in the United Kingdom recently were experiencing, 46% did an investigation announced that dozens of partners had and there were no changes and 25% of the been terminated or otherwise forced out for organizations did nothing (Workplace Bullying inappropriate behaviors including bullying Institute, 2017). Victims of bullying are also and harassment (Skoulding, 2018). Carl more likely to be absent, report intentions Nicholson of Nicholson and Co. CPA firm to turnover, and actually quit in order to was accused in court by his partner of actual alleviate the bullying. One study found that physical violence noting that Nicholson absenteeism for bullying victims was 1.5 grabbed him and held him against a times higher than for nonbullied employees wall while yelling and screaming at him (Kivimäki, Elovainio, & Vathera, 2000).

(Beveridge, 2019). Lastly, research into Bullying in the workplace does not ethical standards in accounting found that take place in a vacuum. Many bullying 94% of accountants in Ireland had observed behaviors take place in front of others and or encountered distressing behavior during there are negative consequences to the their career (Hilliard, 2019). Bullying was observers of bullying (Glasø et al., 2010). listed in the top 6 behaviors.

Observers experience increased general Spring 2019 | The Cooperative Accountant

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TCA SMALL BUSINESS FORUM

Companies will have to institute their own culture and behavioral expectations to combat workplace bullying. This begins with a policy stating that all people regardless of organizational position will be treated with dignity and respect. and mental stress reactions and are more dissatisfied with the work environment than non-observers. In a study of public-sector employees, approximately one in five workers reported having considered terminating their employment as a result of witnessing bullying taking place (Rayner, 1999).

The organizations themselves experience negative effects from bullying (Glasø et al., 2010). Organizations experience increased turnover, absenteeism, decreased organizational commitment, and reduced productivity. These consequences have negative effects on the bottom line. Bullying is estimated to cost U.S. businesses over $40 billion in direct and indirect costs (Porter, Day, & Meglich, 2017). Countries outside the U.S. such as Canada, the United Kingdom, and the European Union, have laws against workplace bullying. In such places, organizations must pay for legal representation in the legal process and possible additional payments in back wages, damages, etc. (Einarsen et al., 2011). There are numerous states considering workplace bullying legislation (see which ones at https://healthyworkplacebill.org/).

How do I recognize it?

Bullying can be exhibited in a variety of ways. The following is a list of broad bullying behaviors divided into categories. It by no means is meant to be all-inclusive: 32

Verbal bullying: • Yelling at coworkers, customers, or clients OR vice versa. (Yes, customers and clients can bully your employees.)

• Insults including those done behind the victims back • Unwarranted criticism • Malevolent gossip • Threats of aggression or violence Nonverbal bullying: • Intimidating gestures such as glaring, nonverbal insults such as shaking one’s fist at another person • Aggressive emails or other such notes • Threats of aggression or violence Physical bullying: • Aggressive behaviors (shoving, etc.)

• Violent behaviors (hitting, etc.)

• Destroying someone’s personal property (defacing family photos, etc.)

Exclusion: • Socially isolating individuals (inviting everyone but the bullied individual to lunch or an after-work social hour, etc.)

• Refusing access to resources to do someone’s job What Can We Do? It may seem logical that many workplace bullying behaviors would be prohibited by some law. However inappropriate and unacceptable workplace bullying behavior is, it is not prohibited by any U. S. state or federal law. So, what can we do to help reduce and hopefully eliminate workplace bullying?

Companies will have to institute their own culture and behavioral expectations to combat workplace bullying. This begins with a policy stating that all people regardless of organizational position will be treated with dignity and respect. The policy should also specify that any kind of bullying behaviors will Spring 2019 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM not be tolerated and as such will be dealt with under the organization’s disciplinary process and can include actions up to and including termination. (Figure 1 includes a sample policy from the Society for Human Resource Management.) While a policy is a beginning, it is just that: a start. There must be strong management support at the top of the organization to put an emphasis on publicizing, implementing, and following the policy. In addition, as with any policy, employee involvement is also a must to get commitment for the policy (Einarsen et al., 2011).

The development of the policy should involve employees from various organizational levels and departments. The first step in developing a policy is to identify the need for such (SHRM, retrieved from https://www.shrm.org/resourcesandtools/ tools-and-samples/how-to-guides/pages/ howtodevelop andimplementanewcompanypolicy.aspx).

While the case for such a policy could be argued with information from this article, it is best to include upper level management in the meeting to explain why the organization needs such a policy. Next, the group should decide on the content of the policy. The draft in Figure 1 will be useful to this end.

The third step is to gain stakeholder support.

This can be accomplished by communicating via email, for example, to all managers and supervisors during the policy development process and once it is complete. Holding in-person meeting can also be useful to address any questions. The fourth step is to communicate to all employees via whatever method is usual for the organization: email, departmental meetings, etc. Lastly, update and revise the policy as needed.

Summary Workplace bulling is a prevalent problem.

A study found that 19% of Americans are bullied in the workplace and another 19% witness such behaviors; 60.4 million Spring 2019 | The Cooperative Accountant

Americans are impacted by workplace bullying (Workplace Bullying Institute, 2017).

These behaviors negatively impact the target of the bullying, witnesses, and the organizations within which the bullying takes place. Examples of such behaviors were included earlier in this article and they range from physical to nonverbal to psychological to exclusion.

Workplace bullying is a global problem.

While many countries have laws to help address workplace bullying, such laws are lacking in the U.S. While laws do not exist yet (various state legislatures are looking at workplace bullying legislation), it does not mean that organizations cannot proactively try to address the situation. In fact, given an estimated cost of workplace bullying of $40 billion annually to U.S. organizations, companies have a big incentive to proactively address this costly problem.

Developing and communicating a workplace bullying policy is one place to begin to help address this issue. This idea is given support from the International Federation of Accountants’ who publish a booklet giving advice to small- and medium-sized accounting practices (2010).

Figure 1 Sample workplace bullying policy Retrieved from https://www.shrm.org/ resourcesandtools/tools-and-samples/ policies/pages/cms_018350.aspx.

Objective The purpose of this policy is to communicate to all employees, including supervisors, managers and executives, that [Company Name] will not in any instance tolerate bullying behavior. Employees found in violation of this policy will be disciplined, up to and including termination.

Definition [Company Name] defines bullying as repeated, health-harming mistreatment 33

TCA SMALL BUSINESS FORUM of one or more people by one or more perpetrators. It is abusive conduct that includes: • Threatening, humiliating or intimidating behaviors.

• Work interference/sabotage that prevents work from getting done.

• Verbal abuse.

Such behavior violates [Company Name]’s Code of Ethics, which clearly states that all employees will be treated with dignity and respect.

Examples [Company Name] considers the following types of behavior examples of bullying: • Verbal bullying. Slandering, ridiculing or maligning a person or his or her family; persistent name-calling that is hurtful, insulting or humiliating; using a person as the butt of jokes; abusive and offensive remarks.

• Physical bullying. Pushing, shoving, kicking, poking, tripping, assault or threat of physical assault, damage to a person’s work area or property.

• Gesture bullying. Nonverbal gestures that can convey threatening messages.

• Exclusion. Socially or physically excluding or disregarding a person in work-related activities.

In addition, the following examples may constitute or contribute to evidence of bullying in the workplace: • Persistent singling out of one person.

• Shouting or raising one’s voice at an individual in public or in private.

• Using obscene or intimidating gestures.

• Not allowing the person to speak or express himself of herself (i.e., ignoring or interrupting).

• Personal insults and use of offensive nicknames.

• Public humiliation in any form.

• Constant criticism on matters unrelated or minimally related to the person’s job performance or description.

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• Public reprimands.

• Repeatedly accusing someone of errors that cannot be documented.

• Deliberately interfering with mail and other communications.

• Spreading rumors and gossip regarding individuals.

• Encouraging others to disregard a supervisor’s instructions.

• Manipulating the ability of someone to do his or her work (e.g., overloading, underloading, withholding information, setting deadlines that cannot be met, giving deliberately ambiguous instructions).

• Assigning menial tasks not in keeping with the normal responsibilities of the job.

• Taking credit for another person’s ideas.

• Refusing reasonable requests for leave in the absence of work-related reasons not to grant leave.

• Deliberately excluding an individual or isolating him or her from work-related activities, such as meetings.

• Unwanted physical contact, physical abuse or threats of abuse to an individual or an individual’s property (defacing or marking up property).

Individuals who feel they have experienced bullying should report this to their supervisor or to Human Resources before the conduct becomes severe or pervasive. All employees are strongly encouraged to report any bullying conduct they experience or witness as soon as possible to allow [Company Name] to take appropriate action.

References Beveridge, L. (February 7, 2019). ‘It was a bad business divorce,” Carl Nicholson’s former business partner testifies. Retrieved from https://www.hattiesburgamerican. com/story/news/crime/2019/02/07/formerpartner-hattiesburg-cpa-carl-nicholson-saysworkplace-tense/2800652002/.

Spring 2019 | The Cooperative Accountant

TCA SMALL BUSINESS FORUM Bullying Among Seniors: A prevention and surveillance resource for assisted living providers. (2017). Retrieved from: https://www.ahcancal.org/ncal/operations/ Documents/Bullying%20Among%20Seniors. pdf.

Carbo, J. A. (2017). Understanding, defining, and elimination workplace bullying: Assuring dignity at work. New York: Routledge.

Einarsen, S., Hoel, H., Zapf, D. and Cooper, C.L. (Eds) (2011). Bullying and Harassment in the Workplace: Developments in Theory, Research, and Practice (2nd ed.). Taylor & Francis, Boca Raton, FL. Hilliard, M. (February 1, 2019). Unethical behaviour encountered by 94% of accountants. Retrieved from https://www. irishtimes.com/news/ireland/irish-news/ unethical-behaviour-encountered-by-94-ofaccountants-1.3778131.

International Federation of Accountants (2010). Guide to practice management for small and medium-sized practices. New York: IFAC. KivimaĚˆki, K., Elovainio, M., & Vathera, J. (2000). Workplace bullying and sickness absence in hospital staff. Occupational and Environmental Medicine, 57, 656–660.

National Center for Assisted Living (2017).

Bullying among seniors (and not the high school kind). Retrieved from https://www. ahcancal.org/ncal/operations/Documents/ Bullying%20Among%20Seniors.pdf.

Neuman, J. H., & Baron, R. (1998).

Workplace violence and workplace aggression: Evidence concerning specific forms, potential causes, and preferred targets. Journal of Management, 24(3), 391-419.

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Porter, T. H., Day, N., & Meglich, P. (2017).

City of Discontent? The Influence of Perceived Organizational Culture, LMX, and Newcomer Status on Reported Bullying in a Municipal Workplace. Employee Responsibilities and Rights, 30(2), 119-141.

Rayner, C. (1999). Workplace bullying. PhD thesis, University of Manchester Institute of Science and Technology.

SHRM. Workplace bullying policy.

Retrieved from https://www.shrm.org/ resourcesandtools/tools-and-samples/ policies/pages/cms_018350.aspx.

SHRM. How to develop and implement a company policy. Retrieved from https:// www.shrm.org/resourcesandtools/toolsand-samples/how-to-guides/pages/ howtodevelopandimplementanew companypolicy.aspx Skoulding, L. (December 13, 2018).

Remaining Big Four follow Deloitte in revealing partners fired for inappropriate conduct. Retrieved from https://www. accountancyage.com/2018/12/13/remainingbig-four-follow-deloitte-in-revealing-partnersfired-for-inappropriate-conduct/.

Stopbullying.gov. What is bullying? Retrieved from: https://www.stopbullying.gov/.

Workplace Bullying Institute (2012). U.S. Workplace Bullying Survey. Retrieved from https://www.workplacebullying.org/2012-d/.

Workplace Bullying Institute (2017). U.S. Workplace Bullying Survey. Retrieved from https://www.workplacebullying.org/ wbiresearch/wbi-2017-survey/ EDITOR & GUEST WRITER Dr. Barbara A. Wech Department of Management, Information Systems, and Quantitative Methods University of Alabama at Birmingham Collat School of Business

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NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2017 AND 2016

GOLDSHOT, LAMB & HOBBS, INC. CERTIFIED PUBLIC ACCOUNTANTS 3066 KETTERING BLVD DAYTON, OHIO 45439

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TABLE OF CONTENTS

Page Independent Auditor's Report ...................................................................................................

2

FINANCIAL STATEMENTS: Statements of Financial Position ..........................................................................................

3

Statements of Activities ........................................................................................................

4

Statements of Cash Flows ....................................................................................................

5

Notes to Financial Statements ..............................................................................................

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INDEPENDENT AUDITOR’S REPORT Board of Directors National Society of Accountants for Cooperatives Dayton, Ohio We have audited the accompanying financial statements of National Society of Accountants for Cooperatives (a nonprofit organization), which comprise the statements of financial position as of December 31, 2017 and 2016, and the related statements of activities, and cash flows for the years then ended, and the related notes to the financial statements.

Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of National Society of Accountants for Cooperatives as of December 31, 2017 and 2016, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

March 12, 2018 3066 Kettering Blvd. | Dayton, Ohio 45439 | V 937.297.3400 F 937.297.3406 W glhcpas.com 38

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NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 2017 AND 2016

ASSETS CURRENT ASSETS Cash and Cash Equivalents Investments Accounts Receivable Prepaid Expenses

2017 $

TOTAL

314,472 1,193,102 532 7,000

2016 $

231,919 1,084,054 3,659 7,000

$ 1,515,106

$ 1,326,632

$

$

LIABILITIES AND NET ASSETS CURRENT LIABILITIES Accounts Payable Chapter Dues Payable Chapter Events Payable RDU Seminar Deposits Deferred Income Total Current Liabilities UNRESTRICTED NET ASSETS TOTAL

5,103 6,759 19,639 66,425 97,926

2,994 4,479 3,486 19,639 68,275 98,873

1,417,180

1,227,759

$ 1,515,106

$ 1,326,632

The accompanying notes are an integral part of these financial statements.

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NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES STATEMENTS OF ACTIVITIES YEARS ENDED DECEMBER 31, 2017 AND 2016

2017

REVENUES Membership Dues Conference Publications Seminars Investment Income Total Revenue

$

EXPENSES Program Services: Conference Publications Seminars Committee Expenses Industry Relations Total Program Services Expenses Supporting Services: Member Services Management Fee Meetings and Travel Investment Fees Total Supporting Services Expenses Total Expenses CHANGE IN NET ASSETS UNRESTRICTED NET ASSETS - BEGINNING OF YEAR UNRESTRICTED NET ASSETS - END OF YEAR

245,655 185,933 1,100 14,111 166,272 613,071

2016 $

250,798 164,094 1,555 24,063 107,610 548,120

136,704 38,519 15,323 52,074 5,500 248,120

195,158 39,761 9,631 37,863 5,500 287,913

29,845 113,652 23,303 8,730 175,530

34,229 110,880 8,118 7,960 161,187

423,650

449,100

189,421

99,020

1,227,759

1,128,739

$ 1,417,180

$ 1,227,759

The accompanying notes are an integral part of these financial statements.

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NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2017 AND 2016

CASH FLOWS FROM OPERATING ACTIVITIES Change in Net Assets Adjustments to Reconcile Change in Net Assets to Net Cash Provided (Used) by Operating Activities: Net Realized and Unrealized Gain on Investments Accounts Receivable Prepaid Expenses Accounts Payable Chapter Dues Payable Chapter Events Payable RDU Deposits Deferred Income Net Cash Provided by Operating Activities

2017 $

CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sales of Investments Purchase of Investments Net Cash Used by Investing Activities NET CHANGE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR CASH AND CASH EQUIVALENTS - END OF YEAR

$

189,421

2016 $

99,020

(101,214) 3,127 2,109 2,280 (3,486) (1,850) 90,387

(52,625) 1,250 (6,016) (3,149) 860 (304) (20,450) 18,586

134,395 (142,229) (7,834)

30,473 (219,929) (189,456)

82,553

(170,870)

231,919

402,789

314,472

$

231,919

The accompanying notes are an integral part of these financial statements.

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NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2017 AND 2016

1.

NATURE OF ORGANIZATION: The National Society of Accountants for Cooperatives (NSAC) is a not-for-profit membership organization originally incorporated in Minnesota in 1936. NSAC serves the cooperative accounting community through education programs and professional publications. NSAC’s principal revenue sources are its membership dues, and conference fees.

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Financial Statement Presentation Organizations are required to report information regarding their financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. NSAC had no temporarily or permanently restricted net assets as of December 31, 2017 and 2016.

Basis of Presentation The financial statements of NSAC have been prepared on an accrual basis, which recognizes revenue in the period earned and records expenses in the period to which they apply. NSAC records disbursements for future conventions as prepaid expenses and receipts of fees and registrations related to future periods as deferred revenues.

Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Cash and Cash Equivalents For purposes of the Statement of Cash Flows, cash and cash equivalents consist of checking, savings, and money market funds. NSAC considers all investments with maturities of three months or less to be cash equivalents.

Accounts Receivable Accounts receivable are stated at the amount management expects to collect from outstanding balances.

Management provides for probable uncollectible amounts through a provision for bad debt expense and an adjustment to an allowance account based on its assessment of the current status of individual accounts. An allowance was not considered necessary as it was immaterial to the financial statements.

Investments NSAC carries investments in marketable securities with readily determinable fair values at their fair values in the Statement of Financial Position. Unrealized gains and losses are included in the change in net assets in the accompanying Statement of Activities.

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NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2017 AND 2016

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued): Income Taxes NSAC is exempt from federal income taxes under Section 501(c)(6) of the Internal Revenue Code.

However, income from activities not directly related to an organization’s tax-exempt purpose is subject to taxation as unrelated business income. For the years ended December 31, 2017 and 2016, NSAC had not engaged in activities deemed unrelated to its exempt purposes.

NSAC determines the recognition of uncertain tax positions, if applicable, that may subject the organization to unrelated business income tax necessary by applying a more-likely-than-not recognition threshold and determines the measurement of uncertain tax positions considering the amounts and probabilities of the outcomes that could be realized upon ultimate settlement with tax authorities.

Currently, the tax years ended December 31, 2016, 2015 and 2014 are open and subject to examination by taxing authorities.

Expense Allocation The costs of providing various programs and other activities have been summarized on a functional basis in the Statement of Activities. Accordingly, certain costs have been allocated among the programs and supporting services benefited.

Deferred Income Membership dues are billed to members annually on their anniversary date. Membership dues received in advance of a membership year are reported as deferred income. Deferred income also includes sponsorships and registration fees received in advance of the annual conference.

Date of Management’s Review Subsequent events have been evaluated through March 12, 2018, which is the date the financial statements were available to be issued.

3.

INVESTMENTS: Investment values as of December 31, 2017 and 2016 were as follows: 2017 Fair Value

Cost Value

Unrealized Gain (Loss)

Mutual Funds $ 1,028,817 Exchange-Traded and Closed-End Funds 19,035 Common Stocks 117,130 Corporate Bonds 0 Government Securities 28,120 Total $ 1,193,102

868,932 19,398 110,000 0 26,722 $1,025,052

159,885 (363) 7,130 0 1,398 $ 168,050

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NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2017 AND 2016

3.

INVESTMENTS (Continued): 2016 Fair Value

Cost Value

Unrealized Gain (Loss)

Mutual Funds $ 879,142 Exchange-Traded and Closed-End Funds 18,605 Common Stocks 122,785 Corporate Bonds 25,246 Government Securities 38,276 Total $ 1,084,054

812,304 19,398 123,895 25,275 35,089 $1,015,961

66,838 (793) (1,110) (29) 3,187 68,093

$

The following schedule summarizes the investment income in the statement of activities for the years ended December 31, 2017 and 2016: 2017 Interest, Dividends and Capital Gains Net Realized and Unrealized Gains Total Investment Income 4.

$

65,058 101,214 $ 166,272

2016 $

54,985 52,625 $ 107,610

RELATED PARTY TRANSACTIONS AND MANAGEMENT CONTRACT: A management services company, Advanced Management Concepts, Inc. (AMC), serves NSAC under a formal management agreement which was in effect through March 31, 2013. The agreement now automatically renews annually unless terminated by either party. Management fees were $113,652 and $110,880 for the years ended December 31, 2017 and 2016, respectively.

NSAC also reimburses AMC on a monthly basis for administrative costs such as postage, telephone, printing and reproduction. The Executive Director of NSAC is an employee and part owner of AMC.

5.

CONCENTRATIONS OF CREDIT RISK: NSAC maintains cash balances with Fifth Third Bank and Morgan Stanley Smith Barney. The balances at Fifth Third Bank are insured by the Federal Deposit Insurance Corporation up to $250,000. At December 31, 2017 and 2016, there were no uninsured cash balances. NSAC also maintains investments at Morgan Stanley Smith Barney, which are uninsured. These funds are insured under the Securities Investor Protection Corporation which protects the investor only in the event of fraudulent broker activity. At December 31, 2017 and 2016, uninsured investment balances totaled $1,268,305 and $1,084,054, respectively.

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NATIONAL SOCIETY OF ACCOUNTANTS FOR COOPERATIVES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2017 AND 2016

6.

SUPPLEMENTARY CASH FLOW INFORMATION: No cash was paid for interest or income taxes for the years ended December 31, 2017 and 2016.

7.

FAIR VALUE MEASUREMENTS: A three-level fair value hierarchy that prioritizes the inputs is used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.

The three levels of inputs used to measure fair value as follows: •

Level 1 - Observable inputs such as quoted prices in active markets;

•

Level 2 - Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

•

Level 3 - Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

NSAC has determined that the only material financial assets or liabilities that are measured at fair value on a recurring basis and categorized using the fair value hierarchy are investments. For such investments, fair value measurement is based upon quoted prices. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. All investments at December 31, 2017 and 2016 are measured at Level 1 inputs.

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136 Keowee Street Dayton, Ohio 45402 Phone: (937) 222-6707 Fax: (937) 222-5794 www.nsac.coop

National Society of Accountants for Cooperatives

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