Today’sCPA
Texas Society of Certified Public Accountants
ASSESSING AI
From a Tax Perspective, Part 1
Evaluating AI’s potential and limitations to assist with tax-related queries during tax season
Critical Timing for Licensure
Discussions in Texas
With the new year comes a new legislative session in Texas! In the 89th Texas Legislative Session, TXCPA is advocating for important developments that directly impact your profession and the future of the CPA pipeline in Texas.
In November, on the first day for bill pre-filing, Senator Charles Perry, CPA-South Plains, filed Senate Bill 262 (SB 262). On January 8, Rep. Angie Chen Button filed House Bill 1757 (HB 1757). These bills propose a new pathway to licensure for CPA candidates, a priority
CHAIR
Mohan Kuruvilla, Ph.D., CPA
PRESIDENT/CEO
Jodi Ann Ray, CAE, CCE, IOM
EDITORIAL BOARD CHAIR
Jennifer Johnson, CPA
STAFF
MANAGING EDITOR
DeLynn Deakins, MBA ddeakins@tx.cpa 972-687-8550 800-428-0272, ext. 8550
“Currently, all states require 150 semester hours of education, one year of work experience and the passage of the Uniform CPA Exam for CPA licensure.
item on TXCPA’s 2025 Legislative Agenda
We are grateful to Senator Perry and Rep. Button for their steadfast support of the profession and for championing key issues that will help address the workforce and pipeline issues raised by many of our members.
Currently, all states require 150 semester hours of education, one year of work experience and the passage of the Uniform CPA Exam for CPA licensure. While these requirements will remain in place for candidates, SB 262 and HB 1757 introduce a new alternative pathway to licensure.
The new pathway would allow candidates to earn a baccalaureate degree with the required accounting and business concentration, complete two years of work experience (with specific rules to be defined by the Texas State Board of Public Accountancy) and pass the Uniform CPA Exam. TXCPA is advocating for a January 1, 2027, effective date to allow ample time for proper implementation.
In addition to SB 262, Sen. Perry introduced SB 522 that addresses CPA
Jodi Ann Ray, CAE TXCPA President and CEO
MANAGER, MARKETING AND COMMUNICATIONS
Peggy Foley pfoley@tx.cpa
COLUMN EDITOR
Don Carpenter, MSAcc/CPA
DIGITAL MARKETING
SPECIALIST
Wayne Hardin, CDMP, PCM® whardin@tx.cpa
CONTRIBUTORS
Melinda Bentley; Kenneth Besserman; Kristie Estrada; Holly McCauley; Craig Nauta; Kari Owen; John Ross; Lani Shepherd; April Twaddle; Patty Wyatt
CHIEF OPERATING OFFICER
Melinda Bentley, CAE
CLASSIFIED
DeLynn Deakins
Texas Society of CPAs 14131 Midway Rd., Suite 850 Addison, TX 75001 972-687-8550 ddeakins@tx.cpa
EDITORIAL BOARD
Shivam Arora, CPA-Dallas; Derrick Bonyuet-Lee, CPA-Austin; Aaron Borden, CPA-Dallas; Don Carpenter, CPA-Central Texas; Rhonda Fronk, CPA-Houston; Aaron Harris, CPA-Dallas;
mobility. This legislation aims to create minimum standards for out-of-state CPAs who wish to practice in Texas, ensuring a smoother transition and reducing disruptions to the mobility of CPAs as the licensure landscape evolves across the country.
With many states working on similar legislation, 2025 promises to be an exciting and pivotal year for the profession. We encourage you to stay engaged with us as the session progresses. You can read more in the Government Affairs Update article in this Today’s CPA issue and stay informed on the latest developments through TXCPA member communications and our Legislative Action Center on the website. Your involvement and support will be crucial as we work to shape the future of our profession.
We hope you will consider joining us as we advocate for these and other issues that impact the profession at the state capitol during our Advocacy Day program on January 28. For more information, visit our website
Let’s Connect!
I’d love to hear your feedback and answer your questions. Drop me a note at jray@tx.cpa or connect with me on LinkedIn
Baria Jaroudi, CPA-Houston; Elle Kathryn Johnson, CPA-Houston; Jennifer Johnson, CPA-Dallas; Lucas LaChance, CPA-Dallas, CIA; Nicholas Larson, CPA-Fort Worth; Anne-Marie Lelkes, CPA-Corpus Christi; Bryan Morgan, Jr, CPA-Austin; Stephanie Morgan, CPA-East Texas; Kamala Raghavan, CPA-Houston; Amber Louise Rourke, CPA-Brazos Valley; Nikki Lee Shoemaker, CPA-East Texas, CGMA; Natasha Winn, CPA-Houston.
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Hold on Tight! Big Changes in the Accounting Profession for 2025
The 2025 Texas legislative session is just around the corner. January 14, 2025, will be the start the 89th Session of Texas Legislature. Representatives and Senators will come together to debate some of the biggest issues that Texas has faced in decades.
From continued proposals to further lower property taxes, to the ever-increasing need to find and secure water sources in a fast-growing state, to much-needed infrastructure projects, to the long-simmering debate over school choice, the 89th session will be the center of attraction in Austin and beyond for the next five months.
The 2025 Texas House of Representatives and the Texas Senate will remain in Republican control after the 2024 election. The biggest issue facing the House on opening day will be the election of a Speaker of the House. Speaker Dade Phelan –Speaker since 2021 – is in for a contested election, with at least six declared candidates for Speaker.
The accounting profession is facing some significant licensing issues in 2025 that will have repercussions in Texas and beyond. As the CPA pipeline and the need for talent continues to be a priority for the profession, states, state societies and state boards of accountancy are beginning to develop legislation to address the pipeline issue.
Texas is at the forefront of these discussions and these legislative proposals. As AICPA and NASBA propose exposure drafts on alternative pathways to licensure and mobility, states have seen the need to act in their best interests and timelines, which may not fully synchronize with the timelines of other organizations.
In Texas, Senator Charles Perry, CPA-South Plains, has filed Senate Bill 262 and Rep. Angie Chen Button has filed House Bill 1757 which will create an additional pathway to CPA licensure. This new pathway will require the completion of a baccalaureate degree (with the required accounting concentration), passage of the CPA Exam and two years of work experience to be defined by Board rule. Click here to learn more about the legislation that was filed.
While educational pathways are discussed, the issue of mobility and out-of-state practice privileges become more important than ever. All agree that current licensees should continue to have mobility even as the national fabric of mobility and licensing may change.
TXCPA’S 2025 LEGISLATIVE AGENDA
TXCPA’s advocacy efforts for the accounting profession ramp up during each legislative session. On November 7, 2024, the TXCPA Board of Directors approved the following 2025 Legislative Agenda:
• Additional Pathway to Licensure;
• Mobility for Existing and Future CPAs;
• Public Information Act Amendment;
• Evergreen TXCPA Advocacy Items, including:
- Prevent Any Proposed Sales Tax on Professional Services;
- Ensure Proper Regulatory Oversight of the CPA License; and
- Monitoring Proposed Tax Legislation
Click here for more details. We encourage all members to join in advocating for these important issues.
TXCPA will be supporting and advocating for legislation in 2025 that will continue and provide for ease and uniformity of mobility. On December 2, Senator Perry filed Senate Bill 522 that addresses CPA practice mobility and out-of-state practice privileges. Click here to learn more about the legislation that was filed.
BY KENNETH BESSERMAN, Director of Government Affairs and Special Counsel.
Contact him at kbesserman@tx.cpa.
TXCPA and the TXCPA Political Action Committee have had many good conversations with legislators during this past year, and we look forward to talking to legislators about our specific legislation in the months to come. TXCPA and its Key Persons and advocates will be spending a lot of time at the Capitol in 2025. Please reach out to Kenneth Besserman and the TXCPA team if you want to become involved.
Charting Success: SHRISTI UPRETI SHARMA’S
Inspiring Career Journey and Guiding the Next Generation
In this article, Shristi Upreti Sharma, CPAFort Worth, shares the pivotal moments that shaped her career, the insights she has gained along the way and the lessons she hopes to pass on to aspiring CPAs. Whether it’s navigating challenges, celebrating successes, or giving back through mentorship and volunteering, each step has reinforced her belief in the value and impact of the accounting profession.
Tell us about your career journey and what led you to become a CPA. I have been passionate about accounting ever since I was first introduced to it during middle school. Something about the logical structure and problem-solving aspect of accounting really resonated with me at a young age. However, when it came time to choose a major in college, I initially leaned towards finance. I enjoyed studying finance during my undergraduate years, but as I progressed, I realized my heart was still in accounting.
Accounting appealed to me because it offers both stability and a clear path into the job market, and I knew it would be a solid foundation for a long-term career. This realization led me to pursue a Master’s degree in accounting from Texas State University, where I could fully dedicate myself to this field.
During my first semester in the master’s program, I was fortunate to secure an internship with Grant Thornton. That internship was a game-changer for me. It gave me hands-on experience in public accounting and I absolutely loved it. The variety of clients, the dynamic nature of the work and the opportunity to learn from experienced professionals all solidified my decision to pursue a career in public accounting. It wasn’t just about stability anymore – it became about the excitement of solving real-world problems and contributing to businesses in meaningful ways.
After graduating, I have been working in public accounting since 2015 and I truly enjoy what I do. I love the challenges, the opportunities to grow, and the satisfaction of helping clients navigate complex financial and regulatory landscapes. As I joined public accounting, I recognized that to truly advance and unlock leadership opportunities in the field, earning my CPA license was essential. This realization motivated me to put in the hard work to achieve that milestone and it has been incredibly rewarding.
You are a Senior Audit Manager at Weaver in Fort Worth. What are your primary responsibilities at your firm?
As a Senior Audit Manager, my primary responsibilities involve managing and overseeing audit engagements to ensure they meet professional and firm standards. I work closely with clients to understand their business needs and provide tailored solutions while maintaining strong relationships to foster trust and collaboration.
I also play a key role in mentoring and guiding my team, ensuring they have the resources and support needed to excel in their roles. This includes planning engagements, reviewing workpapers, providing feedback, and ensuring deadlines are met efficiently.
Additionally, I have been actively involved in training initiatives, helping team members enhance their technical and professional skills. Another area of focus for me has been
building a strong pipeline within the Commercial practice group, ensuring we have the talent and resources necessary to sustain and grow our practice. This includes identifying growth opportunities, cultivating talent and aligning our strategies with the firm’s long-term goals.
I am also actively involved in business development. This aspect of my role includes attending networking events, identifying and meeting with prospective clients, and cultivating relationships to drive growth opportunities for the firm. These combined efforts allow me to contribute to the firm’s overall success and align our services with client and market demands.
You’ve served as the Vice Chair of TXCPA Fort Worth’s Accounting Career Education Committee for a number of years. What makes volunteering or committee service so meaningful to you?
Serving as the Vice Chair of TXCPA Fort Worth’s Accounting Career Education Committee has been an incredibly rewarding experience for me. Volunteering in this capacity allowed me to give back to the profession that has given me so much and to play a role in shaping the next generation of accounting professionals. What makes this service so meaningful is the opportunity to connect with students and young professionals who are exploring careers in accounting. Guiding them, sharing insights, and helping them navigate the challenges and opportunities in the profession is both fulfilling and energizing. It’s inspiring to see their enthusiasm and curiosity and to know that our efforts can positively impact their career paths. Additionally, volunteering on this committee has helped me build connections with
other professionals who are equally passionate about advancing the accounting profession. Collaborating with like-minded individuals has enriched my perspective and reinforced the importance of community and mentorship in fostering a vibrant and resilient profession.
Ultimately, committee service is about creating a legacy. It is about contributing to something larger than yourself – ensuring the profession remains strong, inclusive and prepared to meet future challenges. It is this sense of purpose and giving back that makes volunteering so meaningful to me.
"I love the challenges, the opportunities to grow, and the satisfaction of helping clients navigate complex financial and regulatory landscapes."
Tell us about your family.
I’ve been married to my husband for 14 years. He works in the administrative department of a hospital. Together, we have a three-year-old son, Leon, who is a happy and jolly little boy. He truly keeps me grounded and brings so much joy to our lives. I love spending time with him, taking him to various activities, and cherishing every moment as I watch him grow and learn.
My parents have played a significant role in my life. My father, who had a remarkable career in the banking industry as a C-suite leader, retired in 2014. My mother, a homemaker, has been the bedrock of our family, shaping who I am today. They continue to help me raise Leon, and I’m incredibly grateful for their love and support.
I’m also deeply thankful for my in-laws, who have been equally supportive and played an important role in helping us navigate parenthood. Their involvement has been invaluable, and it’s a blessing to have such a strong and loving family network. Family is everything to me and I deeply value the bond we all share.
How do you like to spend your weekends and time outside of work?
Outside of work, I love spending time with my son Leon. He is at such an exciting age and I enjoy taking him to his various activities. Saturday mornings are dedicated to his soccer classes and throughout the week, we also do activities like swimming, trampoline parks, Kids Strong, and visits to the play park.
Beyond family time, I am actively involved in community events and enjoy participating in volunteering activities on weekends. For me, weekends are about balancing quality time with family, catching up with friends and giving back to the community. It is a fulfilling way to recharge and stay connected with what matters most.
TXCPA TXCPA
November Service Month and Career Awareness Month Highlight Members Making a Difference
WHAT’S HAPPENING AROUND TEXAS
TXCPA’s Accounting Opportunities Month, held in conjunction with our annual Month of Service, put a spotlight on the incredible commitment of our members to making a meaningful impact in their communities. From charitable efforts to educational outreach and career awareness initiatives, the activities demonstrated the collective generosity of our members.
During Accounting Opportunities Month, 59 dedicated volunteers reached at least 1,911 students across 32 school events, exceeding our goal of reaching 1,800 students. Meanwhile, Month of Service supported local causes and contributed to charitable organizations throughout Texas. We thank all the TXCPA members who participated. Here are some of the inspiring ways members and chapters contributed in November.
TXCPA Corpus Christi hosted a Meet the CPAs event at the Texas State Aquarium. The chapter also organized its annual Counting on Santa Toy Drive, collecting gifts and monetary donations in partnership with Catholic Charities of Corpus Christi. Donations supported the Ministry and Life Enrichment for Persons with Special Abilities Program, with gifts distributed at the “Heart of Christmas” event in December.
TXCPA El Paso introduced high school students at Jefferson Silva Magnet School to the accounting profession and its vast amount of career opportunities through an engaging presentation. Volunteers also hosted a free Professional Development Workshop, offering valuable tips on resume writing, successful interviewing, crafting an elevator speech, and maintaining professional attire and presentation.
Members of TXCPA Panhandle dedicated their time to serving Fill With Hope, a local organization focused on supporting students in need. Volunteers packed Hope-Totes, which were filled with nutritious weekend meals. This effort highlighted the chapter’s efforts to address food insecurity and make a positive difference in the lives of children in their community.
TXCPA Rio Grande Valley members demonstrated their commitment to making a difference by volunteering at the Palm Valley Animal Society. Their efforts supported the organization’s mission of providing care and shelter for animals in need. Their service not only directly benefited the animals, but also supported the broader efforts of the shelter to provide a nurturing environment and promote animal welfare.
Members of TXCPA South Plains came together to support Food2Kids, a program dedicated to addressing child hunger. The chapter contributed an impressive $375 and provided 384 Pop-Tarts to help feed children on the South Plains. By supporting Food2Kids, the members demonstrated their commitment to making a meaningful impact on the lives of vulnerable children living in their region.
TXCPA Southeast Texas partnered with Edgar, Kiker & Cross, PC to host a blood drive at their office, supporting the community’s vital need for blood donations. Members also volunteered with School Tools, a local program operated by the food bank. This program provides a free store where approved teachers can shop for essential supplies to support students whose families are unable to afford them. Volunteers played an active role by assisting teachers in finding the materials they needed, tracking inventory and restocking shelves.
TXCPA El Paso
TXCPA Rio Grande Valley
TXCPA South Plains
TXCPA Southeast Texas
TXCPA Corpus Christi
TXCPA Panhandle
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TXCPA’s 2025 CPE Programs
Mark your calendar now for these conferences in spring and summer 2025!
• Technology Conference Webcast, May 5-6, 2025
• Energy Conference Webcast, May 12-13, 2025
• Nonprofit Organizations Accounting and Auditing Conference, Richardson and Webcast, May 19-20, 2025
• Texas School Districts Accounting and Auditing Conference, San Antonio and Webcast, June 2-3, 2025
• CPE by the Sea, League City, June 16-18, 2025
View the upcoming schedule in the Education area of our website.
Free CPE Webcasts for Members
Texas Taxes: Quarterly Update, Jan. 16, 2025
Professional Issues Update, Feb. 12, 2025
Professional Issues Update Replay, Feb. 26, 2025
TXCPA Passport – CPE on Your Schedule
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See the current list and subscribe now at www.tx.cpa/education/ passport.
Boost Your Well-Being: Printable Physical Wellness Checklist
Positive physical health habits can help decrease your stress, lower your risk of disease and increase your energy. Check out this printable physical wellness checklist from the National Institutes of Health for some tips on improving your physical health.
If you’re facing challenges related to addiction, substance abuse or mental health, TXCPA Peer Assistance is available to provide support. Go to tx.cpa/resources/acan
SAVE THE DATE: TXCPA’s Advocacy Day and Midyear Leadership Council Meeting
January 28-29, 2025
Austin, TX
Make your plans now to attend the 2025 Advocacy Day and Midyear Leadership Council Meeting on January 28-29 in Austin! Hear legislative updates from knowledgeable and popular speakers on Tuesday morning, then head to the Capitol to engage directly with lawmakers and staff about TXCPA’s key legislative agenda items. This dynamic event is open to all TXCPA members – don’t miss your chance to make an impact!
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Clarification for Today’s CPA Article on Mitigating Medicare Mistakes
The article, “Mitigating Medicare Mistakes: The CPA’s Role in Navigating IRMAA Challenges,” in the November/December 2024 Today’s CPA issue discussed strategies CPAs could recommend to help smooth out or reduce Modified Adjusted Gross Income (MAGI). It suggested tax-efficient investments, such as municipal bonds or life insurance policies, which might not count toward MAGI.
However, clarification is necessary: MAGI starts with Adjusted Gross Income (AGI) but requires adding back certain nontaxable items to arrive at MAGI. While tax exempt interest (such as interest on some municipal bonds) is excluded from AGI, it must be added back in computing MAGI for purposes of IRMAA. This add-back is required for determining Part B and Part D Medicare premiums under Title 42, Sections 1395r(i)(4) and 1395w-113(a)(7)(C) of the U.S. Code.
ASSESSING AI From a Tax Perspective
PART 1
Evaluating AI’s potential and limitations to assist with tax-related queries during tax season
BY WILLIAM M. VANDENBURGH, PH.D.; KIMBERLY JANE TRIBOU, PH.D., CPA; AND JAMES M. BRASWELL, PH.D.
The allure of artificial intelligence (AI) was highlighted daily when ChatGPT became publicly available back in late 2022.
A February 2024 Wall Street Journal (WSJ) front-page headline boldly declared, “AI Is Starting to Threaten White-Collar Jobs.”1 Citing an August 2023 working paper published by the University of Pennsylvania and OpenAI, the WSJ contended that “accountants are among the professionals whose careers are most exposed to the capabilities of generative artificial intelligence.”2
Ideally, generative AI could make the annual tax season process more efficient and effective; this could help with the shortage of accountants.
In this article, we ask Copilot (a commonly available AI tool) questions that arose during the 2023 tax filing season to assess the quality of answers provided. We had high hopes that Copilot would aid in the tax season push, but we found tax AI answers were often wrong and/or misleading. A companion article in the next issue of Today’s CPA (“Assessing AI From a Tax Perspective, Part 2”) will compare three commercially available AI tools, offer preparer pointers and identify risks in using AI.
EXAMINING AI
We evaluated the usefulness of AI in researching tax issues that arose while preparing client tax returns during the 2023 tax filing season (February to April 2024). While tax professionals may well find AI useful at times, the way questions are asked is crucial to the results.
Additionally, tax practitioners must exercise extreme care in reviewing AI’s answers, which may be incomplete and incorrect (in AI terms, a “hallucination”). When asking AI tools to research complicated tax areas, such as state and local taxation and trust taxation, AI tended to provide hedged responses. For example, Copilot tended to respond to tax questions with this or a similar warning:
Please note that tax matters can be complex and individual circumstances may vary. It’s advisable to seek professional advice for accurate and personalized guidance. How questions are phrased significantly affects the accuracy of AI’s responses, highlighting a need for users to be precise and critical when querying AI.
OVERALL ASSESSMENT
We primarily utilized Copilot (Microsoft AI), which offered several advantages for our study. Copilot incorporates the newest
Table 1. Key Responses to Copilot Prompts
Question Copilot Response
Closing value of Coca-Cola stock on October 5, 1995
If the Louisiana Fiduciary tax return for 2023 has taxable income of $140,525, what is the total tax due? 7
Copilot stated the “closing price for Coca-Cola (KO) on October 5, 1995 is not directly available. However, the closing price for Coca-Cola (KO) in 1995 was $9.30 on December 29, 1995.” It recommended checking a “detailed historical stock price database.”
In the “more balanced” mode, it stated the tax “would be approximately $7,231.50.” When re-asked in “more precise” mode, it calculated the correct amount of $5,432.31.
SPAXX % of U.S. government securities held in 2023
“As of 2023, the Fidelity Government Money Market Fund (SPAXX) was reported to have 30.59% of its holdings in U.S. government securities for state tax purposes.” Copilot recommended checking with Fidelity for updated information.
Our Response Assessment
Overall poor: The split-adjusted value of Coca-Cola stock on October 5, 1995 is $17.66. The actual closing value was $70.64, but it needs to be adjusted for two for one splits in 1996 and 2012.
Overall bad and good: This straightforward calculation should be easily determined, regardless of the mode selected. Initially, it was calculated based on rates of 2%, 4% and 6% (the rates in 2021).8 The correct rates for 2023 are 1.85%, 3.5% and 4.25%.
Fair to Poor: The 30.59% figure was for 2022. The 2023 percentage was not available as of the asking date. Copilot did recognize the fund symbol. When Fidelity released the 2023 percentage on February 15, 24, Copilot correctly linked to the document, but did not update its response with the correct percentage (41.18%).
Tested during the 2023 tax season, Microsoft’s Copilot frequently gave inaccurate, incomplete or misleading answers, showing that AI still has a ways to go before it can provide reliable responses for complex tax matters.
RELATED CPE
TXCPA offers these webcasts and more on artificial intelligence topics and emerging technologies:
• Artificial Intelligence for Accounting and Finance Professionals
• The Risks and Benefits of ChatGPT and Artificial Intelligence
• Navigating the 4IR (4th Industrial Revolution) Wave: Top 10 Trends to Stay Ahead For details and to register, go to the Education area of the TXCPA website and use the search term artificial intelligence.
Table 2. Determining an Heir’s Cost Basis in Coca-Cola Stock
generative pretrained transformer (GPT) technology offered by OpenAI, the company that licensed ChatGPT. Copilot has been integrated within Microsoft Windows 11 since November 2023, making it easily accessible to tax professionals and the public. Finally, Copilot offers three different answer modes (i.e., more creative, more balanced and more precise), allowing the user to select the precision level that best complements their expertise.
While tax professionals may be inclined to use the “More Precise” mode, posing the same question in the “More Creative” or “More Balanced” modes allows preparers a glimpse into the tool’s reasoning, which may be helpful when studying tax questions and verifying the technology’s accuracy.
When inquiring about a general tax issue (i.e., the teacher education expense of $300 in 2023), Copilot could draft a client
Table 3. Stock Basis Copilot Queries
Question
What is an heir’s basis per share of CocaCola (KO) stock inherited on October 5, 1995 for U.S. federal tax purposes?
What is an heir’s basis per share of ExxonMobil stock inherited on October 5, 1995 for U.S. federal tax purposes?
What is an heir’s basis per share of Bristol-Myers Squibb Co. stock inherited on October 5, 1995 for U.S. federal tax purposes?
What is the split-adjusted cost basis of Apple shares purchased on January 27, 2006?
letter that was responsive to our prompt. However, overall, it was a D+ student if the professor was kind.
At times, the tool provided different answers depending on which mode was selected. For example, when asked to calculate a reasonable estimate for tax basis of a stock, Copilot could not provide the correct determination and provided different determinations under each answer mode. Further, AI gave conflicting answers as to the total amount of tax due on a Fiduciary state tax return. Table 1 summarizes Copilot’s erroneous and/or misleading results.
STOCK TAX BASIS
When tax clients sell a stock investment acquired before 2011/2012, the determination of the stock basis can be problematic. The Energy Improvement and Extension
Copilot’s “Creative Mode” provided an adjusted closing price of $23.25 per share on the reference date. The tax basis for 1,000 shares would thus be $23,250.
It gave general advice in all three modes on how to determine a basis that was not technically correct.
Copilot referenced the FMV on the date of death, but did not give a value (creative mode).
It gave the steps to calculate the cost basis. It gave an example based on buying 10 shares at $10 each in 2006 and stated, therefore, the basis “is approximately $0.1786 per share.”
Table 4. Education Tax Provision Queries
Question Copilot Response
Act of 2008, P.L. 110-343, mandated that financial firms track the basis of clients’ assets and report it to their clients and the IRS upon sale. The phased implementation of this rule occurred between 2011 and 2013.3
Determining historical stock basis is a task, we thought, that could be safely delegated to AI. Calculating stock basis uses historically available stock data that is readily available on investment websites (e.g., Yahoo! Finance). Table 2 presents the manually calculated stock basis of 1,000 shares of Coca-Cola stock with a valuation date of October 5, 1995.
While Copilot knew the Energy Improvement and Extension Act requirement and its history, it could not determine the tax basis of the stocks we queried (Coca-Cola, ExxonMobil, Bristol-Myers Squibb, and Apple). Where Copilot sometimes gave an estimated value, it was often materially different than the actual
Wrong: Per our manual calculation (Table 2), Coca-Cola’s split-adjusted value for stock inherited on October 5, 1995 would be $17.77 and the tax basis of 1,000 shares would be $17,766.
Unable to Determine: ExxonMobil’s split-adjusted value for stock inherited on October 5, 1995 would be $18.4063. It did not mention the need to average high and low values for inherited value based on the valuation date, which could be the date of death or the alternative valuation date.
Unable to Determine: Bristol-Myers’ split-adjusted value for stock inherited on October 5, 1995 would be $17.94. The average high and low value was $75.38, and there were 2-for-1 splits in 1997 and 1999. Its basis was further reduced by 4.83% when in 2001, Zimmer Holdings was spun off.
Unable to Determine: The split-adjusted closing price of Apple shares purchased on January 27, 2006 is $2.57.9
Our Response Assessment
Per the IRC, does the cost of room and board qualify for education credits? Does not Correct
Per the IRC, is the cost of room and board an eligible education expense for a QTP distribution?
Per the IRC, does the cost of a computer qualify for education credits?
Per the IRC, is the cost of a computer an eligible education expense for a QTP distribution?
Yes, “if the QTP plan allows it, room and board expenses qualify as part of the higher education expenses, provided they are within certain limits.”
“According to the IRC, the cost of a computer may qualify for education credits under certain conditions.” When asked in all three modes, none were perfectly correct.
Yes, in all modes. However, the precise mode stated, “this information is current as of my last update in 2021, and I recommend consulting a tax professional or the IRS website for the most up-to-date information.”
Partially Correct: It failed to state the cost is limited to the amount charged by the school or the “actual amount charged if the student is residing in housing owned or operated by the school.”10
Partially Incorrect: Computers only qualify for the AOTC if required by the education institution. Computer costs do not qualify for LLC.
Correct, but troubling that Copilot stated its last update was in 2021.
shareholder’s basis. Table 3 shows the stock bases we requested, summaries of Copilot’s responses and our critique of its answers.
When we asked for the stock basis for an heir, Copilot referenced “the fair market value of the stock on the date of the decedent’s death,” which is ambiguous at best. Per IRS Instructions for Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, “the FMV of a stock or bond (whether listed or unlisted) is the mean between the highest and lowest selling prices quoted on the valuation date.”4 The valuation can be the date of death or the alternative valuation date (if elected by the executor for the entire estate).
Instead of asking for a calculation of stock basis, we prompted Copilot for the closing value of Coca-Cola on October 5, 1995. Concerningly, Copilot could still not return the correct answer, stating, “the closing price for Coca-Cola (KO) in 1995 was $9.30 on December 29, 1995.” The actual split-adjusted closing value as of December 29, 1995 is $18.56, which can simply be determined with Yahoo Finance’s historical data. Apparently, Copilot returned the value of the adjusted close and even this appears slightly off. The adjusted closing value incorporates “splits, dividends, and/or capital gains distributions.”5 Taxable dividends do not reduce one’s tax basis.
To see if Copilot could better handle more recent stock transactions, we later asked Copilot for the price of Apple shares purchased on January 27, 2006. In the “more creative” and “more balanced” modes, Copilot listed the steps to determine the price but could not determine it. Copilot’s response provided a hypothetical example based on if “you bought 10 shares at $10 each in 2006,” your basis per share would be $.1786. If you bought shares of Apple on January 27, 2006, you would have a cost basis per share around $2.58 (based on its closing value).
Tax Professional Tip: For the stock tax bases we inquired about in Table 2, we found that Yahoo Finance had historical data closing prices (which are adjusted for splits) that
William M. VanDenburgh, Ph.D., is an Associate Professor of Accounting at the College of Charleston (vandenburghbm@cofc.edu).
matched our stock basis records on the pershare amount.6
EDUCATION CREDITS AND QTPS
Copilot’s responses to prompts on education credits and Qualified Tuition Plans (QTP) were the most accurate tax concerns we examined. That said, Copilot’s seemingly correct answers were incomplete and could easily lead to incorrect tax filings if relied upon by taxpayers or tax professionals (see Table 4).
These inaccuracies may arise as qualifying education expenses for American Opportunity Tax Credit (AOTC), Lifetime Learning Credit (LLC) and QTP distributions vary. Determining eligible expenses and their interaction is difficult at best and can even require allocation between education credit and QTP of qualified expenses.
For example, Copilot indicated that the cost of a computer could possibly qualify for both AOTC and LLC. A computer only qualifies for AOTC if required by the university and does not qualify for the LLC. Copilot correctly responded that a computer is an eligible education expense for QTP, but this conclusion was based upon information that was last updated in 2021. Specifically, it stated (emphasis added): “Yes, according to the Internal Revenue Code (IRC), the cost of a computer is considered a qualified higher education expense for a Qualified Tuition Plan (QTP) distribution. This means that funds from a QTP, also known as a 529 plan, can be used tax-free to purchase a computer for the beneficiary’s use while they are enrolled at an eligible educational institution. Please note that this information is current as of my last update in 2021, and I recommend consulting a tax professional or the IRS website for the most up-to-date information.”
AI IS HELPFUL AT TIMES, BUT NOT YET RELIABLE
Using AI to help answer actual tax season questions in the 2023 tax filing season revealed that AI was of limited use and could easily lead to incorrect tax conclusions. Preparing a quality
Jane
Ph.D., CPA, is an Assistant Professor of Accounting at the College of Charleston (triboukj@cofc.edu).
individual tax return is typically a highly complicated process requiring the integration of federal, state and local tax laws, IRS Regulations, and supporting case law. Partnership and trust returns – and their K-1s – add another layer of complexity. While AI was helpful at times, it is not yet a substitute for the professional judgment of tax professionals. Our forthcoming companion article, “Assessing AI From a Tax Perspective, Part 2,” will examine the historical, professional and ethical considerations for preparers when using these tools.
Footnotes
1https://www.wsj.com/lifestyle/careers/ ai-is-starting-to-threaten-white-collar-jobsfew-industries-are-immune-9cdbcb90, 2/12/24.
2https://www.wsj.com/articles/thejobs-most-exposed-to-chatgpt-e7ceebf0, 3/28/23.
3https://www.journalofaccountancy.com/ issues/2013/sep/20137345.html, 9/1/13. 4www.irs.gov/pub/irs-pdf/i706.pdf, page 25. 5https://finance.yahoo.com/quote/ KO/history?period1=819590400&period2=820627200, 4/27/24.
6https://finance.yahoo.com/
7Actually asked initially, “If the Louisiana’s Fiduciary tax return for 2023 has taxable income $140,525 what is the total tax due?” Questions we asked in the tables at times varied slightly, as this one did.
8Louisiana Department of Revenue, "General Information and Instructions for Completing Form IT-541 Fiduciary Income Tax.” 10www.irs.gov/pub/irs-pdf/p970.pdf, page 51.
(braswelljm@cofc.edu).
James M. Braswell, Ph.D., is an Associate Professor of Accounting at the College of Charleston
Kimberly
Tribou,
For a retailer with stores and customers throughout the United States, sales tax reporting plays a large part in its tax compliance responsibilities. They may prepare the various required sales tax returns in-house or may hire an outside firm to take care of it for them.
Regardless of who prepares sales tax returns and otherwise plans for sales tax related matters (including audits), CPA firms and corporate tax departments that handle income tax returns need to have a detailed level of understanding of each state’s sales tax liability rules, as activities in multiple states can have a dramatic impact on their federal income tax returns based on the state sales tax rules they are subject to.
This article will cover the core, detailed rules as they relate to how state sales taxes imposed on intrastate sales can greatly impact major areas of a client’s federal income tax return. It will also provide practical guidance on making sure sales tax related items are not overlooked on the federal income tax side to prevent major audit vulnerabilities with the IRS and how to potentially plan to take advantage of pro-taxpayer options on the federal income tax return.
INCOME TAX RETURN GROSS RECEIPTS – DOES IT INCLUDE SALES TAX COLLECTIONS FROM CUSTOMERS?
In a nutshell, the answer is: it depends. For federal income tax purposes, the amount of reportable gross receipts of a business for the year can have impacts on a wide variety of items for the taxpayer. Some of the major impact items based on reported gross receipts for the year include whether the business can use the cash method (versus having to use the accrual basis), whether it is subject to the IRC §163(j) interest expense deduction limitations, and if it is required to capitalize certain overhead expenses to inventory under the UNICAP rules.
For the 2024 tax year, for most C corporations and partnerships with a C corporation partner, if they have average gross receipts for the prior three tax years of $30M or less1 they normally can use the cash method,2 are exempt from the §163(j) interest expense deduction limitations3 and are not subject to the UNICAP inventory rules.4
THE DEFINITION OF GROSS RECEIPTS FOR FEDERAL INCOME TAXES
Under Temp. Treas. Reg. §1.448-1T(f)(2)(iv) (A), gross receipts are defined as follows: “[G]ross receipts of the taxable year in which such receipts are properly recognized under the taxpayer’s accounting method used in that taxable year (determined without
The Impact of State Sales Tax Law on Federal Income Tax Returns for Businesses
BY JOEL M. BUSCH, CPA, JD, MST
regard to this section) for federal income tax purposes. For this purpose, gross receipts include total sales (net of returns and allowances) and all amounts received for services. In addition, gross receipts include any income from investments, and from incidental or outside sources. … [G]ross receipts do not include the repayment of a loan or similar instrument (e.g., a repayment of the principal amount of a loan held by a commercial lender).
Finally, gross receipts do not include amounts received by the taxpayer with respect to sales tax or other similar state and local taxes if, under the applicable state or local law, the tax is legally imposed on the purchaser of the good or service, and the taxpayer merely collects and remits the tax to the taxing authority. If, in contrast, the tax is imposed on the taxpayer under the applicable law, then gross receipts shall include the amounts received that are allocable to the payment of such tax [emphasis added].”
As such, a tax practitioner needs to know which states impose their sales tax directly on the seller (i.e., a seller-based regime) and which states impose sales tax on the buyer (i.e., a buyer-based regime, with the seller merely acting as a collection agent of the state).
ACCOUNTING FOR THE DIFFERING STATE TAX TREATMENT OF SALES TAX FOR FEDERAL INCOME TAX PURPOSES
If a sale is subject to sales tax in a state with a seller-liability regime, where the tax is imposed directly on the retailer, when the retailer collects the applicable sales tax from the buyer, the sales tax collection from its customers will need to be accounted for as taxable gross income on the retailer’s federal tax return, with a corresponding income tax deduction in the year paid to the applicable state tax agency (or when accrued at the time of the sale, as applicable).
On the other hand, if a sale is subject to sales tax in a state with a buyer-based liability regime, the sales tax collection from the buyer is neither included as taxable gross receipts nor reported as an income tax deduction on the federal income tax return.
STATES WITH A SELLER-BASED OR BUYER-BASED SALES TAX LIABILITY SYSTEM
Of the 46 states (including Washington, D.C.5) with a state-based sales tax (or the equivalent of a state sales tax6), 18 states impose the sales tax directly on the seller. These states are Alabama; Arkansas; Arizona; California; Washington, D.C.; Hawaii; Illinois; Florida; Kentucky; Michigan; Mississippi; New Mexico; Nevada; South Carolina; South Dakota; Tennessee; Virginia; and Wisconsin.
The following 28 states have a buyer-liability based sales tax system, with the seller generally acting as an agent of the state: Colorado; Connecticut; Georgia; Iowa; Idaho; Indiana; Kansas; Louisiana; Massachusetts; Maryland; Maine; Minnesota; Missouri; North Carolina; North Dakota; Nebraska; New Jersey; New York; Ohio; Oklahoma; Pennsylvania; Rhode Island; Texas; Utah; Vermont; Washington; West Virginia; and Wyoming. (Please see the TXCPA website for the citations for the related state tax statutes and regulations.)
liability regime, the following are examples of what it takes to properly report the sales tax component of a sale for federal income tax purposes.
Example #1. Acme Corporation, a calendar-year C corporation, sells a widget to a customer in its home state of California for $100. (To focus on the sales tax component on the sale, we will ignore the impact of cost of goods sold, which will be a reduction in gross income for tax purposes and an expense for book purposes.) The applicable sales tax on the sale is $9. Because California is a seller-based sales tax liability state, for federal income tax purposes the retailer would need to report the sale as $109 in gross receipts and then take a $9 deduction on its income tax return when the sales tax is paid to the state or accrued at the time of the sale.
If, for financial accounting purposes, Acme reports the same sale above as $109 in revenue with a corresponding $9 expense on the sale, no M-1/M-3 adjustment is needed on the corporate income tax return and the federal income tax return gross receipts and deduction would match the revenues and expenses on the books.
However, if only $100 is reported as revenue for book purposes, with the $9 sales tax reimbursement reported only on the balance sheet, the retailer would now have to report the $9 in sales taxes collected from the customer on Schedule M-1 or M-3 of the 1120 twice: first as $9 of gross income for tax purposes in excess of revenues per book and then $9 of tax deductions in excess of that expensed per books. The $9 M-1/M-3 difference will also show up in the gross income and deductions sections of the income tax return.
Example #2. Beta Corporation, another calendar-year C corporation, sells a gadget to a customer in its home state of Indiana for $200. Again, to focus on the sales tax component on the sale, we will ignore the impact of cost
Texas is a state that has a buyer-liability based sales tax system.
THE PROPER FLOW OF SALES TAX COLLECTIONS TO THE FEDERAL INCOME TAX RETURN
Now that we have down the general federal income tax rules on sales tax collections, as well as the details of which states have a seller-based or buyer-based sales tax
of goods sold. The applicable sales tax on the sale is $14. Because Indiana is a buyer-based sales tax liability state, with the retailer merely acting as an agent for the state to collect the tax on their behalf, for federal income tax purposes the corporation would simply report the sale as $200 in gross receipts on the 1120 return with no corresponding reporting in either gross income or in the deductions
section for the $14 received from the customer for the sales tax.
For financial accounting purposes, if the sale is reported simply as $200 in revenues, with the $14 showing up purely on the balance sheet, no M-1 or M-3 would be needed on the federal tax return. On the other hand, if for book purposes they include the $14 of sales tax collected from the customer in revenues as well as an expense item, then a M-1 or M-3 adjustment would be required on the federal income tax return, with a reduction of both gross income and deductions (as compared to book revenues and expenses) by the same $14.
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On the other hand, if the sales tax collections are properly reported as taxable gross receipts on its 1120 return and also deducted on the 1120 for the same year, it will still have $28,120,00 of taxable income for each year. However, with the sales tax properly included in gross receipts, the annual taxable gross receipts on the 1120 for each year will be $30,784,000 (296,000 x ($100 sales price - $5 cost of goods sold + $9 in sales tax reimbursements), which pushes their three-year prior average gross receipts for the 2024 tax year above the $30 million threshold, making Acme subject to, among other requirements, the
Get ready for tax season with TXCPA’s tax update courses. Go to the Education area of the website and search on “federal tax” and “state tax.”
After going through these two examples, one may think that it is no big deal if $9 or $14 shows up as gross receipts with a corresponding deduction on the federal income tax return or it is simply left off the taxable income calculation altogether. After all, in either event, the taxable income from each sale will always be the same pre-sales tax price (before any cost of goods deduction). Well, to help illustrate the potential significant federal income tax impact to a taxpayer, let’s take the example to a fuller level.
Example #3. Going back to Acme Corporation, let’s assume that its total sales for the year are comprised entirely of those hot-selling widgets and it sells 296,000 widgets, all in California, every year for the past three tax years (2021, 2022 and 2023) – with each widget having a $100 base sale price, $5 cost of goods sold and $9 of applicable sales tax, which is collected from its customers on all of their sales.
If Acme’s tax department is unaware of the applicable sales tax liability system in California, the federal income tax rules on sales tax collections and/or how the sales tax collections have been reported for book purposes, and the sales taxes collected end up not showing up in either the gross receipts or deduction sections of their 1120, the return will show $28,120,000 of both gross income and taxable income each year (296,000 x ($100 sales price - $5 cost of goods sold)).
mandatory use of the accrual method and the §163(j) interest expense deduction limitation.
Please see this article on the TXCPA website for other state-based taxes that will impact federal gross receipts reporting on federal income tax returns.
IMPORTANT TAKEAWAYS
The following are important items for tax practitioners to have down to properly report sales taxes collections on their federal income tax return:
•. Keep track of state and local sales tax liability rules on a regular basis – not only for income tax purposes, but also in the event of a sales tax audit in a particular state.
•. The federal income tax team needs to work closely with the SALT and financial accounting departments to coordinate reporting matters and make, when necessary, the appropriate M-1 or M-3 adjustments and properly report taxable gross receipts.
•. A best practice is to have sales tax collections treated the same way for both financial accounting and federal income tax purposes, to avoid the need for the book-to-tax adjustments on the income tax return.
•. For financial accounting purposes, subsidiary ledger accounts should be used for the profit and loss and/ or the balance sheet statements if any book-to-tax differences could
exist related to sales tax collections from customers.
For example, if the financial reporting team wants to treat all sales in California that are subject to California’s sales tax as a pure balance sheet item, without including it on the profit and loss statement, they can use a subsidiary ledger on the balance sheet liability account for these sales tax liabilities, so the income tax department can more easily track, capture and report this amount to the M-1/M-3 and the gross receipts and deduction section of the federal income tax return.
If the total in this subsidiary account is say $75,000 for the year, the tax department will take this amount and add it to the book revenues to arrive at taxable gross receipts and then take a corresponding $75,000 tax deduction beyond the amount expensed per books.
Footnotes
1 Rev. Proc. 2023-34, §3.31
2 Treas. Reg. §1.448-2(c)(2)(iv)
3 IRC §163(j)(3)
4 IRC §263A(i)
5 For purposes of this article, we will refer to the District of Columbia as a state.
6 A number of cities and boroughs in Alaska have a locally based sales tax. This list summary excludes these locally based sales taxes in Alaska.
Please see the TXCPA website for the tax statutory and regulatory citations for each state.
Joel M. Busch, CPA, JD, MST, is an Associate Professor at San Jose State University where he teaches tax courses at both the graduate and undergraduate levels at the Lucas College and Graduate School of Business. He may be contacted at joel.busch@sjsu.edu.
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COMMUNICATING with Senior Clients
Tips Acquired with Age, Experience and Science
BY SUSAN SORENSEN, PH.D., CPA, AND LIMIN “PRISCILLA” ZHU, DBA, MBA, CPA
Understanding normal, age-related changes and adjusting a few minor things can help CPAs improve communication with senior clients. The suggestions included in this article are based on research combined with years of experience in professional practice and experience as a senior.
Not all communication differences are related to a person’s generation category. Some differences are natural, age-related changes that will occur to every generation as they age. Just like computers, our brains have basic memory functions like encoding, storing and retrieving information.
Unlike computers with fixed capabilities, research on the human brain addresses average changes observed and acknowledges there is a lot of diversity between individuals of the same chronological age. Changes, not related to serious medical conditions, do not make clients less competent, but they can appear that way to others.
Many changes occur slowly over time and individuals may not be consciously aware of them. For example, the common perception that time passes faster and faster as we age. One hypothesis being studied is that perception of time is related to the speed at which our eyes take in mental images. There is evidence that the rate gradually decreases as adults age. If perception of time is affected by the number of images per minute, clock time would be perceived to go faster as we age. Understanding processes like this provides valuable insights into changes that come with aging.
SUGGESTIONS FOR COMMUNICATION ADJUSTMENTS
George Bernard Shaw is reported to have said that the “single biggest problem in communication is the illusion that it has taken place.” Understanding and making minor adjustments when communicating with senior clients can compensate for many of these changes. Following are eight tips.
1. Consider adapting the pace of communication. Communicating too fast can reduce the amount of information being processed and retained by the senior listener. However, communicating too slowly can seem patronizing. Awareness can help us “read the room” and adjust. Consider an old technique where teachers were encouraged to count seconds to become aware of how long even five seconds can seem when waiting for a response.
2. Incorporate more visual elements during discussions. Consider putting things in checklists and/or providing takeaway points in writing to provide an additional avenue for clarification and understanding. By implementing these visual and written aids, it can assure a more effective communication environment.
3. Encourage notetaking by providing paper and time for the client to take notes. This is beneficial for anyone, at any age, when they do not have a context in which to understand new material being presented. This may be especially helpful for seniors who may have less contextual knowledge, especially in areas like technology.
4. Allow ample time for decision making. Research indicates that information processing time increases with age. Again, it is easy to overestimate the length of a pause; therefore, if possible,
provide resources so the senior clients can study at their own pace before a decision needs to be made. Be aware that asking for advice does not mean asking someone else to make your decision. If you believe that an older person needs more help, you may unintentionally push harder for your opinion to be accepted.
5. Be respectful that senior clients may be reluctant to change, including adopting new technology. Be understanding that change, even positive change, may induce stress. Everyone makes mistakes, but seniors may be more risk averse and prefer safety over saving time.
6. Understand trust as a multifaceted concept. Research has shown that trust is a complex thing and aspects of being able to decide who to trust may be affected by age. Seniors are targeted by all kinds of scams and need to be continuously vigilant. Our ethics and internal control training teaches us that no one should be blindly trusted, so be aware that when you ask seniors to blindly trust you, you may be teaching them to blindly trust others.
7. Avoid speaking softly, turning away or having a conversation with background noise. Avoid putting the other person in a situation where they may be embarrassed to admit that they missed something and feel the need to guess what was said. Be mindful that having excellent hearing for a 70-year-old is not the same as excellent hearing for a 35-year-old. Despite the advancements in hearing aids, it is essential to understand that they do not compensate for all age-related changes. Try speaking in a deeper voice, which is often easier to understand given the normal changes in the auditory range over time.
8. Unless you have knowledge and evidence of a medical issue, avoid unconsciously using “elderspeak.”
memories vary based on our experiences. Research indicates that procedural memory often remains stable or may even improve with age unless there are age-related health issues such as a stroke.
Episodic Memory. Episodic memory is what is commonly thought of as memory. It includes remembering current and past personal experiences. Research indicates that this type of memory tends to decline with age.
Prospective Memory. Prospective memory refers to remembering to perform intended tasks in the future without an explicit reminder. It includes remembering to interrupt current activities to perform a pre-planned task at a certain time. For CPA firm clients, this could include actions like paying estimated tax payments on a specific date in the future. Research indicates that age-related changes in prospective memory can occur.
Visual Memory. Visual memory refers to the ability to recall images after you have seen the image. It includes the retention and retrieval of information gathered visually. Research has shown that visual working memory declines as adults age.
Echoic Memory. Echoic memory stores auditory information (sound). When listening to a conversation, especially new or difficult material, the information must be stored and processed to be understood. The ability to take in auditory information can be affected by the pace of the speaker, as well as factors such as the frequency of the sound. Research indicates this ability to store sound declines with age, along with a reduction in the range of frequencies that can be heard.
Understanding age-related changes in memory and perception can help CPAs build stronger, more respectful relationships with senior clients.
Elderspeak has been defined as an inappropriate, simplified speech register that often sounds like the voice many people unconsciously use when talking to a baby or small child. Concerns about the negative effect of inappropriate communication have been addressed by organizations like the National Institute of Health.
Keep in mind that aging and the related changes can be a delicate subject. If CPAs are impatient and insist on communicating the same with everyone, they may perceive a lack of cognitive abilities that does not exist. The perception of being treated differently can make a senior defensive and affect the professional relationship.
SOME OF THE SCIENCE BEHIND THE SUGGESTIONS - TYPES OF MEMORY AND AGE-RELATED CHANGES
The following brief definitions are not a comprehensive list. This list is intended as an introduction to support the recommendations. More extensive definitions are available on medical research websites.
Semantic Memory. Semantic memory refers to the general knowledge accumulated over time and includes our existing knowledge of facts. It can be referred to as our long-term store of knowledge. It accumulates over time and can be used to help learn new information. Research indicates that this type of memory may be resistant to aging.
Procedural Memory. Procedural memory may also be called implicit memory. It is a type of long-term memory that allows us to perform many types of activities without having to consciously control each required action. Driving a car is a common example. While the driver must remain alert to what is going on, the driver does not need to consciously think about each body movement required to slow down and turn a corner. Types of procedural
Working Memory. Working memory is the amount of information that can be held in the mind and used at any given time to facilitate planning, comprehension and problem-solving. Research indicates that working memory may decline since it involves temporarily holding and processing information when completing cognitive tasks. Working memory, like RAM in a computer, is said to be limited for everyone and those limitations, on average, increase with age. A decline in working memory can make it more difficult to quickly learn and process new information.
SUMMARY
It can be difficult to judge how to adapt communication for senior clients because, unlike judging a child’s abilities by chronological age, white hair and wrinkles are not the best indicator of cognitive abilities. Understanding normal changes that occur can help CPAs to adapt their communications with senior clients.
Susan Sorensen, Ph.D., CPA, is associate professor at the University of HoustonClear Lake. Contact her at sorensen@uhcl.edu.
Limin “Priscilla” Zhu, DBA, MBA, CPA, is professor of practice at the University of Houston C. T. Bauer College of Business.
CURRICULUM:
Accounting and Auditing; Management
LEVEL:
Basic
DESIGNED FOR:
CPAs in business and industry and public practice
OBJECTIVES:
To describe and explain FASB’s definition of goodwill and the alternatives available to assign acquired goodwill to different “units of accounting” within an organization
KEY TOPICS:
Unit of accounting; pushdown accounting; subsidiary acquisitions; tax implications; goodwill impairment; and disposal of unit of accounting
PREREQUISITES:
None
ADVANCED PREPARATION:
None
BY JOSEF RASHTY
. Goodwill and Unit of Accounting
BY JOSEF RASHTY
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ASC 350, Intangibles–Goodwill and Other, defines goodwill as “an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized.” In other words, goodwill is the excess amount that an acquirer is willing to pay over the fair value of the acquired reporting unit (acquiree) from the perspective of an appropriate market participant.
The following is an excerpt from Microsoft’s Form 10-Q for the quarterly period ended March 31, 2023:
“Goodwill was assigned to our Intelligent Cloud segment and was primarily attributed to increased synergies that are expected to be achieved from the integration of Nuance. None of the goodwill is expected to be deductible for income tax purposes.”
This excerpt refers to “increased synergies” and Microsoft claims that it plans to achieve this synergy through its business combination. If it fails to do so, the recorded goodwill may be subject to impairment.
This article expounds on FASB’s definition of goodwill and the alternatives companies may have on assigning their acquired goodwill to different “units of accounting” within
their organization. The unit of accounting impacts goodwill impairment and has tax implications.
UNIT OF ACCOUNTING
FASB defines the unit of accounting as follows:
all goodwill acquired in a business combination shall be assigned to one or more reporting units as of the acquisition date. Goodwill shall be assigned to reporting units of the acquired entity that are expected to benefit from the synergies of the combination even though other assets or liabilities of the acquired entity may not be assigned to that unit. The total amount of acquired goodwill may be divided among a number of reporting units. (ASC 35020-35-41)
If a company, as a result of an acquisition, assigns the goodwill to more than one reporting unit, ASC 350-20 requires that it uses a supportable and consistent methodology for the allocation of goodwill to different units of accounting.
Companies may also recognize goodwill as a whole instead of particular reporting units. Under this circumstance, the excess of the fair value of the net assets of the reporting units over their reporting net assets comprises the entity-level goodwill.
Goodwill is the excess amount that an acquirer is willing to pay over the fair value of the acquired reporting unit (acquiree) from the perspective of an appropriate market participant.
Entity R (the acquirer) acquires Entity E (the acquiree) through a business combination and creates $100 goodwill. If Entity E consists of two independent units of E1 and E2, Entity R may allocate the $100 goodwill under either of the following scenarios:
1. Entity R reflects the entire $100 as an entity-level goodwill at Entity R books.
2. Entity R elects to pushdown the $100 goodwill (in 1 above) to Entity E’s books.
3. Entity R reflects the $100 as Entity E goodwill.
4. Entity E, in turn, elects to pushdown the goodwill (in 3 above) to entities E1 and E2 books, if the circumstances permit.
5. Finally, Entity R identifies and assigns $70 goodwill with Entity E1, and the remaining $30 with Entity E2.
After recording goodwill as part of a business combination, public business entities (PBEs) test goodwill, at least annually, at a reporting unit level for any impairment.
PUSHDOWN ACCOUNTING
Pushdown accounting requires that acquirees adjust the carrying amounts of the assets and liabilities in their financial statements to reflect the acquisition fair value adjustments that the acquirer has reflected
in its consolidated financial statements as of the date that it has obtained the control of the acquiree. Pushdown accounting implies replacing the historical basis of accounting in the predecessor’s books with the new fair value basis in the successor’s books; thus, the acquiree cannot combine before and after the date of pushdown. The successor financial statements reflect the predecessor’s retained earnings account into its additional paid-in capital (APIC).
Acquirees elect pushdown accounting for various reasons, such as spin-offs, regulatory requirements or compliance with debt covenants. It may also be advantageous to apply pushdown accounting for tax purposes, depending upon the tax jurisdiction of the acquiree.
An acquiree recognizes goodwill due to a change in control and application of pushdown accounting. If the acquirer recognizes any bargain purchase gains, the acquiree reflects it as an adjustment to additional paidin-capital rather than a bargain purchase gain. If the acquiree is a PBE, the goodwill is subject to an annual impairment test under ASC 350-20 at a reporting unit level.
However, private companies and notfor-profit acquirees can elect an alternative to amortize goodwill on a straight-line basis over 10 years or less if another useful life is more appropriate (ASC 350-20-35-63).
When there is a change-in-control event, an acquiree has the option to apply pushdown accounting. The acquiree must make the election to apply pushdown accounting before issuing its financial statements (for SEC registrants) or when the financial statements are available (for non-registrants).
If the acquiree elects to apply the pushdown accounting option, it should do so as of the acquisition date (ASC 805-50-25- 6).
Any subsidiary of an acquiree is also eligible to apply pushdown accounting, irrespective of the acquiree’s decision to elect pushdown accounting (ASC 805-50-25-8). However, once the acquiree or its subsidiaries adopt the pushdown accounting option, the election they have made is irrevocable.
The following example clarifies the pushdown goodwill.
reflect a goodwill of $100 in its separate financial statements. Entity A reflects this goodwill in its consolidated financial statements even though goodwill is in Entity E’s separate financial statement. Entity E also reflects any goodwill impairment charges related to this acquisition in its books and these charges also appear in the consolidated financial statements of Entity A.
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Entity R acquires Entity E for $1,000 and reflects $100 as goodwill. Entity E elects pushdown accounting. Table 1 reflects the financial statements of Entity E before and after pushdown accounting.
SUBSIDIARIES’ ACQUISITIONS
A company’s consolidated subsidiary may acquire another entity in a business combination. If so, the subsidiary should reflect all the goodwill resulting from the acquisition in its separate financial statements, regardless of the amount of the goodwill the parent company assigns to the reporting unit.
For example, in the earlier illustration, Entity E may acquire another entity and
TAX IMPLICATIONS OF GOODWILL ACQUISITION
The income tax consequences of a business combination follow one of three patterns:
• A taxable transaction, where the acquirer takes a fair value tax basis in the net assets acquired;
• A nontaxable transaction, where the acquirer takes a carryover basis in the net assets but a fair value basis in any acquired stock;
• A nontaxable exchange, where the acquirer takes a carryover basis in both the net assets and the acquired stock. The tax treatment of an acquisition may directly or indirectly affect the price of the transaction, and thus, the amount of
goodwill and its future possible impairment, since an acquirer might be willing to pay more for an acquisition in a taxable transaction if such transaction can provide a step-up in the tax basis of the acquired net assets. Furthermore, the structure of an acquisition also dictates whether an acquirer can benefit from the existing tax attributes (e.g., tax credit carryforwards and net operating loss) of an acquiree.
GOODWILL IMPAIRMENT
In January 2017, FASB issued Accounting Standards Update (ASU) 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This guidance simplified the goodwill accounting compared to its predecessor standard.
ASU 2017-04 eliminated the calculation of implied goodwill fair value by abolishing the earlier two-step impairment testing process; instead, under this ASU, companies record impairment charges based on the excess of a reporting unit’s carrying amount over its fair value. Thus, companies record goodwill impairment charges if, and only if, a reporting unit’s carrying value exceeds its fair value.
Companies must perform the simultaneous impairment test of their goodwill and other long-lived assets (held and used) in a particular order.
If goodwill and another asset (or asset group) of a reporting unit are tested for impairment at the same time, the other asset (or asset group) shall be tested for impairment before goodwill. For example, if a significant asset group is to be tested for impairment under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 (thus potentially requiring a goodwill impairment test), the impairment test for the significant asset group would be performed before the goodwill impairment test. If the asset group was impaired, the impairment loss would be recognized prior to goodwill being tested for impairment. (ASC 350-20-35-31)
In June 2022, FASB halted a four-year effort to revamp how companies account for goodwill, with some board members
indicating that the case made for a revision was not strong enough to justify an overhaul.
Companies that do not meet the definition of PBEs, ASU (2013-12), Definition of a Public Business Entity, can potentially amortize their goodwill on a straight-line basis over 10 years or less. The guidance eliminates the test for goodwill impairment annually by requiring the test only when an event or circumstance indicates that the fair value of the entity (or reporting unit) may be less than the carrying value.
Companies must perform the simultaneous impairment test of their goodwill and other long-lived assets (held and used) in a particular order. For example, before testing of goodwill for impairment, companies should test other assets in an order: accounts receivable, inventory and indefinitelived intangible assets, then longlived assets (including definite-lived intangible assets), and finally, goodwill. They should record any impairment for each group of assets before proceeding to the next test. (ASC 350-20-35-31)
TAX IMPLICATIONS OF GOODWILL IMPAIRMENT
Cost of goodwill impairment (for PBEs) or amortization (for private companies) for financial accounting purposes may exceed cost of goodwill amortization for tax purposes. If so, they may increase their deferred tax assets (DTAs) or decrease their deferred tax liabilities (DTLs) related to their tax-deductible goodwill.
Under ASU 2017-04, companies recognize an impairment charge to the extent that the carrying value of a reporting unit exceeds its fair value (not to exceed the carrying value of goodwill). To determine the unit’s fair value, companies determine whether the hypothetical sale has occurred in a taxable or nontaxable transaction. This determination affects the unit’s fair value and any future goodwill impairment charges.
Table 2
Table 3
Table 4
In certain jurisdictions, goodwill amortization and write-downs are tax deductible. If a company or reporting unit operates in these jurisdictions, goodwill impairment charges may decrease its DTL or increase its DTA. A decrease in DTL or an increase in DTA causes an immediate increase in the carrying value of the reporting unit that may cause additional impairment charges (ASC 350-20-35-20 & 21 and ASC 850-740-25).
ASU 2017-04 addressed this issue and requires an entity to calculate the impairment charge and the deferred tax effect simultaneously (similar to how an entity calculates goodwill and the related
Identifying goodwill’s unit of accounting may impact the tax position and goodwill impairment charges and require significant management judgment.
DTAs in a business combination).
For example, if a company has goodwill impairment charges of $1,000 (the excess of the carrying amount of reporting unit over its fair value) and its effective tax rate is 20%, the result of impairment on the carrying value of goodwill is $200 [$1000 − ($1000 × 20%)]. However, if this company uses simultaneous equations (based on the new guidance), the result of impairment on the carrying value of goodwill is $250 [20% divided by (1 – 20%)] × $1,000] (ASC 350-2055-23 C & D).
Table 2 reflects the impairment of tax-deductible goodwill prior to simultaneous calculation.
In Table 2, the carrying value of the reporting unit (57,050) does not reflect the full impact of the $1,000 impairment.
Table 3, on the other hand, reflects the impact of goodwill impairment on
the carrying value of reporting unit according to ASU 2017-04 simultaneous calculation.
Table 4 reflects the carrying value of goodwill and reporting unit when goodwill assigned to the reporting unit is not tax deductible.
Thus, the excess tax deduction over financial reporting deduction generally results from lower tax liability. The difference in the basis creates temporary difference that results in DTL.
DISPOSAL OF UNIT OF ACCOUNTING
When an entity disposes of its entire unit of accounting, it includes in the reporting unit’s carrying amount the goodwill of that unit of accounting in determining the gain or loss on disposal. When an entity disposes some, but not all, of a reporting unit, the accounting for that reporting unit’s goodwill will depend on whether the net assets of the disposed unit constitute a business. If the unit sold is not a business, the entity does not attribute goodwill to it.
If, on the other hand, the disposed net assets constitute a business, the entity should attribute a portion of the reporting unit’s goodwill to that business in determining the gain or loss on the disposal of the business. According to ASC 350-20-40-3, the entity attributes the amount of goodwill based on the relative fair values of (1) that business and (2) the portion of the reporting unit it retains.
FINAL REMARKS
Companies assign the acquired goodwill to specific units of accounting for purposes of the annual or interim impairment assessment; therefore, identification of entity’s units of accounting, the determination of the amount of goodwill, and the method of the goodwill impairment testing or amortization may have significant financial impact.
An acquiree may recognize goodwill due to a change in control and application of pushdown accounting. Pushdown accounting is irreversible and exposes the company to goodwill impairment if the fair value of the unit that reflects
goodwill falls beyond a certain threshold.
The tax treatment of an acquisition may directly or indirectly affect the price of the transaction and thus, the amount of goodwill and its future possible impairment. The tax jurisdiction of goodwill’s unit of accounting may also have an impact on its impairment and tax calculation (including the amount of DTA and DTL).
In summary, identifying goodwill’s unit of accounting may impact the tax position and goodwill impairment charges and require significant management judgment. The author recommends that companies work with their tax professionals at the early stages of each acquisition to structure the formation of any goodwill acquisition. The tax department often needs to maintain a different set of books to reflect goodwill, goodwill amortization, DTAs, and DTLs. Tax professionals should weigh in on the taxability of the jurisdictions, the tax rates and ultimately financial impacts. In March 2024, the SEC promulgated its new climate-related disclosure rules for PBEs. Companies may incur significant expenses and capital expenditures to control greenhouse emissions in their business units. These expenses may adversely affect the fair value of some of their units of accounting and
Josef Rashty, CPA, Ph.D. (Candidate), is a member of the Texas Society of CPAs. He provides consulting services and serves as a faculty member at several institutions and universities in Silicon Valley, California. He can be reached at j_rashty@yahoo.com
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CLARUS PARTNERS - NATIONAL SALES TAX COMPLIANCE AND ADVISORY FIRM
Do you have questions about sales tax? Need help with multistate compliance after Wayfair? Taxability issues? Audit defense? Refunds? Business registration and licensing compliance? Voluntary disclosure?
Let us be a resource for your firm and your clients. Clarus Partners is a national sales tax compliance and advisory firm. With offices across the U.S., our four partners have a combined 100+ years of experience in this arena.
Let us know any way we can help.
Steve Hanebutt, CPA
Clarus Partners | This firm is not a CPA firm 972-422-4530 | claruspartners.com | stevehanebutt@claruspartners.com
MICHAEL J. ROBERTSON, CPA
Texas Sales and Mixed Beverage Tax Solutions
Client audited, liability, needs a review, we have found errors and changed the liability. Does your client have a compliance issue or general question about sales tax? Call our team of sales tax experts. Our team provides over 100 years of experience with the Comptroller of Public Accounts as former auditors and supervisors. We work to ensure a fair audit. Should your client need a payment plan, we’ll negotiate with the Comptroller of Public Accounts.
Call 817-478-5788 or 214-415-4333
Texas Sales and Mixed Beverage Tax Solutions
preparation and write-up. 1 FT office assistant. Office space is owner-occupied, seller is open to selling or leasing space to new practice owner. Owners are looking forward to retirement after long, successful careers. Owners anticipate assisting buyer through an appropriate transition period to maximize knowledge transfer and client retention. TXW5320
$153,000 gross. NW Houston CPA audit practice. Transitional assistance available from owner. This is primarily an audit practice that caters to small-medium sized organizations. Great cash flow with engagement letters in place through 2025. Buyer will need to be able to visit client locations in the greater Houston and Dallas area. Turn-key opportunity for an individual looking to start with a wonderful book of business. TXS5263
ACCOUNTING PRACTICE SALES
For more information, call toll free 1-800-397-0249 See full listing details and inquire/register for free at www.APS.net