july 2015 october 2015 october 2015

LEDGER

WeiserMazars LLPisisan an independentmember member firmofofMazars Mazars Group. WeiserMazars WeiserMazars LLP LLP is an independent independent member firm firm of Mazars Group. Group.

OCTOBER 2015 OCTOBER JULY 2015

CONTENTS

OCTOBER 2015 - ISSUE 10 3 | Record-Setting Aerospace Mergers Point to High Production Activity

20 | Health Savings Accounts: What to Consider

in the Sector 22 | The First Steps to Starting an LLC 4 | 7 Things Mid-Size Companies Can Do To Avoid Data Breaches 24 | The Top Three Dos and Don’ts When Starting a Small Business 6 | Aggressive State Tax Enforcement 25 | FASB Exposure Draft on Change to Presentation of Financial 8 | Equity Based Compensation: Balancing Finances and Talent

10 | Sourcing Products and the Benefits of First Sale Customs Valuation

28 | TTIP: Does it benefit German Mittelstand?

11 | Video: From Technology to Talent

30 | European Audit Reform

12 | The Food Saftey Modernization Act - The Future is Now

32 | 7 Ways Same-Sex Couples Can Plan Their Financial and Tax Affairs

14 | Enterprise Risk Management - Critical for the Water Industry

34 | What to Consider When Changing your Plan’s Trustee

16 | Transforming Tax Process Is No Longer a Good Idea - The Costs at

36 | WeiserMazars Tax Alerts

Statements for Not-for-Profits

Stake Make it a Survival Tactic 44 | WeiserMazars Not-For-Profit Alert

18 | Money/Trees: Timber Land as an Alternative Investment

The WeiserMazars Ledger contains articles and alerts published from Jun. 1 - Sep. 30, 2015. 2 | WeiserMazars Ledger

TRANSPORTATION & LOGISTICS

RECORD-SETTING AEROSPACE TRANSACTIONS POINT TO HIGH PRODUCTION ACTIVITY IN THE SECTOR “Global mergers and acquisitions are on pace this year to hit the highest level on record, thanks to a buying spree from companies on the hunt for growth,” claims an August 10, 2015 Wall Street Journal article by Dana Mattioli and Dan Strumpf. The aerospace industry is a significant driver of this trend. by Jason Slivka In July 2015, Lockheed Martin acquired Silkorsky Aircraft for $9B and in August 2015, Berkshire Hathaway acquired Precision Castparts for $37.2B. The two deals have combined to make Q3 2015 one of the most active periods of mergers and acquisitions in the history of the aerospace industry, on a dollar for dollar basis. As commercial airlines continue to post record profits, new aircraft purchases are becoming so common that the two main original equipment manufacturers in the commercial aerospace industry, Boeing and Airbus, continue to hold record backlogs that have created steady production projections over the next few years. In fact, these backlogs have allowed both Boeing and Airbus to announce increases to their production rates, especially the 737 and A320 model families. This trend will also be pushed further down the supply chain to tier 1, 2 and 3 suppliers. The higher level of production activity and the greater stability it will create throughout the supply chain may also lead to increased, more profitable M&A activity as companies take advantage of the relative ease of income/cash flow projections over the intermediate future. In any transaction, the first step is to understand the risks associated with the prospect. Creating reasonable pricing expectations is key, as is maintaining objectivity in the face of competition over

a particular acquisition. If objectivity is lost and a bidding war ensues, the ultimate, overinflated price can create significant problems for the “winning” bidder, resulting in a real loss after the transaction is made. In such a complex economy, the due diligence that follows the risk assessment must be robust. Clearly understanding the prospect’s financial information and controls is imperative to ensure that your organization has a full view of their operations and can realistically achieve the synergies identified during the risk assessment. After performing due diligence and accepting the terms of a transaction, your organization must then be ready for post-transaction integration. The addition (or subtraction) of assets, people, etc. will ultimately have a significant effect on your organization. WeiserMazars can help your organization throughout the transaction process. Our dedicated team of consultants, auditors, and advisors has great experience in assessing risk, understanding financial information and controls, and helping you complete transactions in a way that will allow your organization to meet and exceed the original expectations. Jason is a Manager in our New York Practice. He can be reached at 646.435.1573 or at [email protected].

October 2015 | 3

CONSUMER PRODUCTS

7 THINGS MID-SIZE COMPANIES CAN DO TO AVOID DATA BREACHES By Stuart Nussbaum and Michael Pinna Millions of government personnel files were recently compromised as part of a malicious hacking of the federal government’s Office of Personnel Management (“OPM”) and the Interior Department. As the human resources department for the federal government, the OPM maintains personnel files on all employees and also issues security clearances, which makes this cybersecurity breach particularly damaging. While the federal government is a likely target for malicious hacking, the most common targets historically have been retailers and other companies that maintain databases of credit card information. One of the most notable breaches of the last few years was the massive 2013 compromise of Target’s systems, which affected as many as 110 million customers during the year’s busiest shopping season. From November 27th until mid-December, hackers accessed customer names, mailing addresses, phone numbers, email addresses and credit card information. By December 15th, Target had a third party forensic team in place and the attack mitigated. On December 18th, the story broke as a result of a posting by a security blogger. Finally, Target informed the affected credit/debit card wielding shoppers, who had made purchases at one of the company’s stores during the attack, that their personal and financial information had been compromised. The event also led to the eventual resignation of the CEO in 2014. As a result of the breach, Target improved cybersecurity – their corporate website describes various changes made by the company to security procedures and protocols, including improved monitoring, firewalls and password usage. Many experts have analyzed how the breach happened and evaluated Target’s response, and have identified several steps that companies, regardless of their size, can take to better protect themselves. Remember- aside from any payments resulting from trial judgments or settlements with plaintiffs, as well as significant fees and penalties, a business can lose significant revenue due to reputational damage.

4 | WeiserMazars Ledger

1. Appoint a Chief Information Security Officer to Oversee the Information Security Program Having an officer knowledgeable in data security best practices will enable the company to develop a plan on how to best protect itself from a data hack, including by establishing security awareness training programs and implementing security related technology. Designating a Chief Information Security Officer also shows the rest of the organization that the company views data security seriously and helps support a culture sensitive to the protection of data.

breach at all costs. This is the correct approach for the technical team, however, others within the company need to simultaneously begin considering how the breach will be communicated to the public and those affected, as well as creating a response plan to mitigate any negative fallout. The plan needs to address the actions to be taken throughout the company in areas outside of IT, including human resources, legal, customer service, executive management, and corporate/investor relations. Many Target customers wanted to talk to someone at the company about the breach, but couldn’t get through, which compounded the existing damage.

2. Implement Updated Security Technology Updating technology is often a cost benefit decision. Industry experts have pointed out that most companies, and the U.S. as a country, use antiquated data and credit card security technology. For example, chip card technology in credit cards is used in Europe, but will not be fully implemented in the U.S. for another few years.

6. Communicate a Problem Right Away Although the timing of the data breach was not under Target’s control and occurred at the worst time of year, Target did have full control over when and how to break the news to the public. Target waited days after discovering the problem before alerting customers. A company should be willing to disclose problems like this right away to control the flow of information and ensure that the correct information is being disseminated on a timely basis.

“THE INCREASING NUMBER OF DATA BREACHES SHOWS THE CURRENT VALUE OF CREDIT CARD DATA IN THE CRIMINAL MARKETPLACE.” 3. Periodic Security Audits A security audit is a measurable assessment of a company’s security policies. After the Target attack, the company admitted it had missed certain warning signs about potential security gaps, which could have been turned up in a security audit. Many companies have frequent audits listed as one of their information and security procedures, but do not actually conduct. While a detailed security audit should be performed periodically, all internet-facing systems should undergo a vulnerability scan at least quarterly to identify any threats or updates that need to be applied. Software to perform such vulnerability scans is readily available in the marketplace. 4. Establish a “Clean Desk” Policy All employees in an organization should be cognizant of making sure that they do not leave sensitive or confidential information in any location that could be accessed by unauthorized people. This includes paper data that can be left in a conference room or office as well as electronic files that may be left on a network, unprotected computer or in an email box. Establishing password protection protocols with mandatory, frequent password changes and a security awareness program should be a part of every company’s data security initiative. 5. Establish an Incident Response Plan After a breach is discovered, the top priority is usually fixing the

7. Extend Security Practices to Customers and Vendors A company can have the best security practices in the world but if it shares data with customers and/or vendors through its systems, a weakness in the vendors’/customers’ systems or processes could inadvertently find its way back into the company’s systems. It is critical that companies develop some type of vendor/customer management processes that monitors compliance of those vendors/customers that share electronic data with basic security parameters. While it is difficult to control systems maintained by an outside party, a company can at least understand the risks and take any necessary actions to mitigate them. The hackers who attacked Target demonstrated extraordinary capabilities in successfully orchestrating the 2013 data breach. The increasing number of data breaches shows the current value of credit card data in the criminal marketplace. Having your company be cognizant of the importance of data security best practices and implementing proper security measures will help keep your company from becoming the next victim. Stuart is a Partner in our New York Practice. He can be reached at 212.375.6828 or Stuart.Nussbaum @WeiserMazars.com. Michael is a Senior Managing in our New Jersey Practice. He can be reached at 732.475.2198 or Michael.Pinna @WeiserMazars.com.

October 2015 | 5

TRANSPORTATION & LOGISTICS

AGGRESSIVE STATE TAX ENFORCEMENT TACTICS “SEIZE” OPPORTUNITY TO CATCH NON-FILERS By Harold Hecht, Michael Rofman and Seth Rabe States have become increasingly aggressive in enforcing their tax codes as they seek to increase revenue and close budget shortfalls. As competition across sectors increases, it is more crucial than ever to consider the importance of multistate nexus issues in order to protect narrowing profit margins, prevent noncompliance and be fully prepared for your business’s tax burden.


New Jersey is just one of many states getting creative in their efforts to enforce nexus on out-of-state companies. It is common for New Jersey State Troopers to pull over trucks with out-ofstate addresses on the cab at truck rest stops, weigh stations, and highways crossing the border to a neighboring state. The state police coordinate with the Division of Taxation in determining whether the business is registered and properly paying New Jersey taxes. Detaining a truck driver working for a company that may have outstanding tax liabilities causes a lot of pain for businesses of all sizes. Trucks may be seized, cargo detained and customers may not receive their delivery. The New Jersey Division of Taxation requires vehicles or goods to be held once it determines that a delinquent tax liability may exist. An estimated assessment is then issued and the release of the vehicle is only allowed once funds are wired to the state. The company’s only recourse is to challenge the assessment in the event of overpayment. Penalties can be significant, with the state’s taxing methodology dictating the amount of potential liability. If you operate an independent trucking company, or your own captive trucking company, you should be aware that fuel tax reports are filed under the International Fuel Tax Agreement (IFTA) to all the states your truck drives and passes through, making the state aware of your presence and, potentially, that of the affiliate

outside the state. Although there is no definition of “solicitation” provided in P.L. 86-272, solicitation generally includes speech and conduct intended to induce a sale. Companies that exceed the protection outlined above are said to have “nexus” in a state. Examples of unprotected P.L. 86-272 activities include a salesman approving orders, making repairs and investigating credit worthiness. States are split on the issue of whether delivery in company owned trucks creates nexus, with some states, such as California, Massachusetts, New York and Virginia, treating this as a protected activity while other states, such as Florida, New Jersey and Pennsylvania do not. States are also split on whether other transportation-related activities, such as delivery in returnable containers and backhauling constitute protected activities. It is important to note that P.L. 86-272 only protects a taxpayer from net income tax nexus. For example, California, similar to New Jersey, levies an income tax with a minimum tax requirement. California and New Jersey taxpayers are protected by P.L. 86-272, but are still required to file a return and pay the minimum tax. Gross receipts taxes and other taxes not based upon net income, such as those levied in Ohio, Texas and Washington, and sales and use taxes, are similarly not protected.

State and local tax complexities sometimes cause even the most sophisticated taxpayer to overlook “STATE AND LOCAL TAX COMPLEXITIES SOMETIMES CAUSE EVEN THE MOST filing state tax returns. Many SOPHISTICATED TAXPAYER TO OVERLOOK FILING STATE TAX RETURNS. MANY states offer voluntary disclosure STATES OFFER VOLUNTARY DISCLOSURE OR TAX AMNESTY PROGRAMS THAT ALLOW or tax amnesty programs that COMPANIES TO ENTER INTO AN AGREEMENT TO FILE PAST DUE TAX RETURNS.” allow companies to enter into an agreement to file past due of the captive selling its goods. The establishment of nexus is tax returns. Such programs often require the company to pay not necessarily created where your customer is located or the the outstanding tax liability with interest, and the state agrees shipment’s final destination. Depending on the state, merely to waive non-filing penalties. Qualification for tax amnesty or passing through may create nexus. If nexus has been established, voluntary disclosure requires applying to a state before they your company should consider filing state tax returns. identify you as a non-filer. Public Law 86-272 is of key importance, particularly where manufacturing and sales of tangible property are concerned. This federal statute limits a state’s ability to impose income taxes on out-of-state entities. Although it does not protect service business, such as trucking companies, understanding this restriction is crucial to companies selling tangible personal property. Under this law, states, and their political jurisdictions, cannot impose a net income tax on the income derived from interstate commerce provided the only business activities within such state are the solicitation of orders by such person, or his representatives for sales of tangible personal property. In addition, the orders must be sent outside the state for approval or rejection, and fulfilled by shipment or delivery from a point

Nexus issues are complicated and highly fact specific. Similar situations yield different results in different states. Please contact one of our tax professionals or a member of our transportation and logistics sector to discuss your specific situation. Harold is a Director in our New York Practice. He can be reached at 646.225.5953 or at Harold.Hecht @WeiserMazars.com. Michael is a Senior Manager in our New Jersey Practice. He can be reached at 732.475.2195 or at Michael.Rofman @WeiserMazars.com. Seth is a Senior Manager in our New York Practice. He can be reached at 212.375.6877 or at [email protected].

October 2015 | 7

TECHNOLOGY

EQUITY BASED COMPENSATION: BALANCING FINANCES AND TALENT Many C suite executives at earlystage companies with limited financial resources face the difficult decision of how to adequately compensate their top employees. One solution is equity based compensation, which comes in many forms including stock options, restricted stock and stock appreciation rights. This causes no immediate cash impact, while providing an employee with ownership, an enhanced commitment to the company and an incentive to grow with the company while sharing in its success. However, the administrative and financial statement impact of issuing such equity based compensation is often overlooked. by Stephen Saluccio Stock options are contractual agreements which provide employees the ability to purchase stock at a fixed strike price through the expiration date. They may be exercised once they are vested, which can be based on the number of years of service or other performance-based milestones. Further, there are two types: incentive stock options (“ISO”) and non-qualified stock options (“NSO”), each with advantages and disadvantages for the grantee from a tax perspective. Restricted stock entitles the employee to receive stock in the company once they achieve certain vesting conditions, such as years of service, product milestones or financial targets. When the restricted stock vests, it automatically converts to fully transferable shares of stock in the company.


Stock appreciation rights (“SAR”) provide an employee with the right to receive stock or cash based on an increase in value of the company’s stock. It can also be based on the company achieving a triggering event, such as successfully raising capital, or a liquidation event. While equity based compensation provides companies with non-cash alternatives to rewarding their people, these options can be burdensome from an administration and recordkeeping perspective. A formal compensation plan should be established along with an agreement which outline the specifics of the equity based compensation awards. This typically requires the involvement of the company’s legal counsel and the plan needs to be adopted by the board of directors. In conjunction with this, stock is allocated and, if needed, authorized for inclusion in the plan, which may require an amendment to the company’s

organization documents. Grantees should be provided copies of the plan agreement and fully executed documentation for the equity based compensation they received. Equity based compensation may add a further layer of complexity to the company’s capitalization table and will require the maintenance of a detailed history of all stock awards granted, exercised and forfeited. Generally, equity based compensation will dilute existing shareholders’ ownership percentages in the company, unless existing shareholders are holding a different class of stock with preferential treatment upon liquidation. A company will also be required to determine the fair market value of their stock, whether for the purpose of determining the strike price of an option or the compensation expense to be reflected in a U.S. GAAP financial statement. In a non-public environment this can prove difficult and costly, particularly if outside valuation experts are consulted. Valuation methodologies such as multiple benchmarking or discounted cash flows are acceptable. To determine the fair value of stock options the BlackScholes pricing model is commonly used, requiring the following inputs: §§ Exercise or Strike Price – Price at which the option owner can purchase the underlying security. §§ Fair Value – The amount at which the underlying stock could be bought or sold in a transaction between willing parties, other than a forced liquidation sale.” §§ Expected Life – Expected period during which the holder is to perform service in exchange for the option, which is based on historical data. §§ Volatility – Measure of the amount by which a price has fluctuated (historical) or is expected to fluctuate during a period (calculated value). §§ Risk Free Rate of Return – Represents the opportunity cost of the investment. §§ Forfeiture Rate – Estimated amount of equity instruments granted that are not expected to vest. The two most difficult inputs for non-public companies are determining the fair value and volatility of the stock. A commonly used approach to determine volatility is to find comparable publicly traded companies that are in a similar industry at a relatively comparable size and obtain the volatility of these benchmark companies’ stock to use in the pricing model. Compensation expense, equal to the fair value of the equity based compensation, is generally recognized over the grantee’s performance period. The recognition of equity based compensation will typically increase financial statement audit fees due to additional required procedures performed on the stock’s fair value calculations, footnote disclosures, and review of the relevant agreements. Many C suite executives use equity based compensation to balance their capital resources and talent pool. However, there are related compliance and administrative considerations to keep in mind when making this choice. If used properly, equity based compensation can be a winning strategy leading to great economic success for the company in the present and future. Stephen is a Manager in our New Jersey Practice. He can be reached at 732.475.2191 or at [email protected].

October 2015 | 9

CONSUMER PRODUCTS

SOURCING PRODUCTS AND THE BENEFITS OF FIRST SALE CUSTOMS VALUATION

Each year companies create new and exciting fashion designs which must be transformed into product that can be shipped and sold to customers throughout the world. Going from drawing board to tangible product can be a difficult path, but with a well-structured supply chain, that path is manageable. by Ira Cooperman The first step for many people is an internet search for suppliers. While online reviews and ratings are useful, speaking directly to a supplier or a sourcing company can give additional insight and build a stronger relationship. One great opportunity to meet face to face is the MAGIC tradeshow - a massive, Las Vegasspanning semi-annual event that takes place each February and August. While MAGIC started out as a menswear trade show, it now has sections devoted to menswear, ladieswear, swimwear, footwear, and bags and accessories. MAGIC also has a sourcing section which focuses on the global supply chain, offering individuals the chance to meet directly with global suppliers and sourcing companies with good reputations, and learn about their companies,


products, production capacity and quality control procedures. This helps buyers feel more comfortable having met a representative of the company, without the need to travel to multiple locations in the United States or to China, India, and other sourcing countries. A full listing of exhibitors, including a map, is available online before the show. To maximize productivity, meetings with important vendors should be scheduled ahead of time. The tradeshow also provides attendees with information about the newest trends in strategic sourcing and supply. For example, the current movement towards sustainable sourcing sees suppliers decreasing their impact on the environment and improving working conditions

at factories. In response to public outcry, major retail stores are requiring their suppliers to meet standards addressing overcrowding, child labor, and overall working conditions. There are severe ramifications for the suppliers if code violations are discovered including the loss of all sourcing to the supplier. These upgraded standards may increase costs, but the public demands transparency in how companies source their products and to whom.

§§ There must be two bona fide sales in order for the transaction to qualify. A middleman serves as a buyer in the first sale and then as a seller in the subsequent sale of goods that are exported to the United States. §§ The goods must be destined for export to the United States at the time of the first sale. §§ The middleman buyer and the factory must not be related, and must negotiate at arm’s length.

Another trend in strategic sourcing and supply is implementation of a first sale program. As companies face an increase in production costs overseas, they are employing strategies to minimize these expenses. These include legally lowering the landed costs of goods when they enter the United States. Sourcing transactions often include multiple layers of activity by third party middlemen and agents that build in a profit at each layer. Therefore, the importer typically pays the customs duties for the production process plus the profit margins of the individuals along the way. A concept known as “first sale” allows an importer to declare the value of the goods on the first layer of a layered transaction. As such, the import value is reduced and customs duties similarly reduced.

There needs to be a very good working relationship with the vendor as the vendor has to provide detailed documents for a first sale transaction to work properly. These documents include the vendor’s profit margins, which can cause reluctance on the part of some vendors. WeiserMazars’ clients have benefited from taking advantage of the first sale concept for a number of years. The key to success is getting the right professional involved at the start in order to help plan and implement a process that is both compliant with all regulations and achieves lower overall costs. If you would like to discuss these topics in greater detail, our team of professionals would be pleased to assist you.

Certain considerations must be taken into account for the first sale concept to work:

Ira is a Senior Manager n our Long Island Practice. He can be reached at 516.282.7269 or at [email protected].

FEATURED VIDEO From Technology to Talent We asked our experts for their top three pieces of advice for fast-growing businesses and they answered. In this video, WeiserMazars Consulting Partner, Michael Flagiello, discusses the important of a technology strategy, recruiting top talent, and surrounding yourself with talent. Scan the barcode below to watch the video and learn more!

October 2015 | 11

FOOD & BEVERAGE

THE FOOD SAFETY MODERNIZATION ACT THE FUTURE IS NOW by Howard Dorman Congress passed the Food & Safety Modernization Act (“FSMA”) a little over four years ago, we all knew it was going to be a big deal. After years of import safety problems and market disruptions that shook consumer confidence, Congress established a modern system of food safety protection based on preventing such failures from happening in the first place, rather than simply reacting to problems. The overarching goal is to achieve better food safety — fewer illnesses, stronger consumer confidence in the system of protection, and a level playing field in which foreign food companies are held to the same scrutiny as Americans businesses. With broad input and support from industry and consumers alike, Congress has crafted a strong vision to reach a food safety system fit for the 21st century. This system must be built on how to make food safe, manage global supply chains, and have buy-in from all affected stakeholders — public and private, domestic and foreign. Only with this foundation will we be able to ensure that practical, effective, preventive measures are consistently followed. FSMA is about far more than new rules. It’s about fundamental changes to the FDA’s approach to implementing food safety rules, including the way it works with other governments and the food industry to achieve food safety. The FDA has devoted a huge amount of effort over the past two years to rethinking every aspect of what will go into achieving high rates of compliance with the FSMA rules — for both home-grown and imported food — creating a healthier food environment and the level playing field on food safety that American industry demands. The FSMA is very focused when it comes to imported food. The volume of imports is vast and growing, and the number of foreign manufacturing facilities registered to sell food in the United States is greater than the number of U.S. facilities. Safety problems with imported foods were one of the main drivers of FSMA’s enactment. Congress recognized that the old system of relying almost entirely on FDA inspectors to detect and correct food safety problems by examining food at the border is drastically outmoded. Congress thus mandated a new import safety system that harnesses the ability of importers to manage their supply chains, giving them responsibility over ensuring imports meet the new standards. It has also directed the FDA to increase its foreign presence through more foreign inspections and more engagement with foreign governments to similarly leverage their food safety efforts.


Finally, and crucially, the FDA’s 2016 budget request reflects the unavoidable fact that the future is now when it comes to FSMA implementation. By the end of 2016, we will begin to see the FSMA rules go into effect through legally mandated FSMA inspections of food facilities. Those inspections will happen. In terms of preparing for effective and efficient FSMA implementation, if we invest properly in 2016 to prepare the FDA and the industry for success, the result will be better food safety, stronger public confidence, and a level playing field for U.S. farmers

and food companies. If we don’t invest properly in 2016, food safety will suffer. People will get sick who wouldn’t otherwise, and the food industry will be disrupted — large and small operators alike — due to both lack of guidance and technical assistance at the industry level and lack of consistent, technically wellsupported inspection by the FDA and the states.

“WITH BROAD INPUT AND SUPPORT FROM INDUSTRY AND CONSUMERS ALIKE, CONGRESS HAS CRAFTED A STRONG VISION TO REACH A FOOD SAFETY SYSTEM FIT FOR THE 21ST CENTURY. ”

Howard is a Partner in our New Jersey Practice. He can be reached at 732.205.2040 or at [email protected].

October 2015 | 13

WATER & UTILITIES

ENTERPRISE RISK MANAGEMENT – CRITICAL FOR THE WATER INDUSTRY By Chase Drossos

In today’s dynamic business environment, management must precisely navigate a plethora of obstacles in controlling a company’s exposure to risk so as to develop a clear path for success. The water industry is particularly burdened by risk from a variety of sources including regulatory changes, supply sourcing, and personnel changes. An Enterprise Risk Management (‘ERM’) program is an extremely valuable tool for risk management. ERM is defined by the Institute of Internal Auditors as “a structured, consistent and continuous process across the whole organization for identifying, assessing, and deciding on responses to and reporting on opportunities and threats that affect the achievement of its objectives.” An ERM program is typically the overall set of systems and processes organized and implemented by management throughout the organization to synchronize and align company objectives.


The 2015 WeiserMazars U.S. Water Industry Outlook, polled water industry management regarding their ERM status.

CHALLENGES FACING THE INDUSTRY Indicate the most significant challenges facing the U.S. water industry:

What would you deem the status of your company’s current enterprise risk management program?

More than 2/3rds of the surveyed companies did not yet have a fully implemented ERM program in place. Generally, the private sector had more established ERM policies than the municipal sector, but we expect that over the near to mid-term, municipal entities will begin to catch up. Common reasons to avoid putting ERM in place include time and resource restraints or misunderstanding of its purpose or value. Regardless of the size or complexity of a company, an ERM program can be critical to the achievement of objectives. An ERM program is necessary for all businesses due to the various benefits derived from an effective process, including: §§ Organization of company objectives into an executable format with benchmarks and a roadmap to achievement. §§ Shared understanding and acknowledgement of company risks, providing clarity and foresight for management. §§ Enhanced transparency and accountability throughout the organizational structure. §§ Improved budgeting and cost control. §§ Increased stakeholder confidence and value. Risk identification for ERM should be a mix of company specific items and general industry risks refined to fit the situation of the organization. For example, in the water industry one key challenge identified by U.S. Water Industry Outlook respondents was aging infrastructure. This is an industry-wide risk that should be refined for each

individual water company when creating an ERM plan, based on the current age and condition of the specific systems in place. Within an ERM plan, the discussion of the timeline to replace aging infrastructure would be based on financing or capital funding options available, acceptable level of loss of water due to aged pipes (non-revenue water loss), labor resource restriction, etc. The long term nature of this risk would also require discussion and strategic planning centered on expected future market changes. Each company’s risk profile is different, even within an industry; therefore the management of risks will greatly depend on the objectives and vision of the company. When developing an ERM program, industry experts should be utilized to assist by obtaining insight into key risks, recommendations on best practices, and advice on the creation of a sustainable strategic plan. One of the top misconceptions about an ERM program is that it is

October 2015 | 15

WATER & UTILITIES too large of a task to take on. This can become an implementation barrier in itself. It should be understood that the goal of an ERM tool is not to eliminate risk, but rather to identify and mitigate key risks to reduce their impact on the company or even to allow the company to turn those risks to its advantage. The process of building an ERM tool facilitates open discussion among management, resulting in shared understanding of core risks, clarity and a unified vision. The benefits of unifying management under a common purpose are exponential. Their vision will trickle down to each department and the individual employee, creating a homogeneous environment with all parties working toward achievement of company objectives. However, the initial implementation of an ERM tool is only the start. Once the tool is in place, it requires frequent review and updating as company and industry changes occur. At least annual maintenance is required to maintain effectiveness and ensure the appropriate risks are identified and addressed. For example, in a growing company, the initial management objective might be to create critical mass by placing emphasis on

gross revenues. However, once that objective has been achieved, a second focus on improving the bottom line and creating efficiencies could be desired. It is critical for an ERM program to overhaul and adapt as necessary for these shifts in focus and determine the potential impacts of key risks that could stop a company from meeting its objectives. Continuous and timely updating of an ERM tool can provide proper navigation of current and expected risks, resulting in market leadership. The investment in an ERM tool can pale in comparison to the potential benefits received from its success. Design, implementation, and maintenance of a company ERM program can result in a stronger overall company with a better bottom line and promote or sustain brand recognition in the marketplace, all in addition to the assurance that your company is operating safely, achieving key goals and objectives and increasing shareholder value. Chase is a Manager in our New York Practice. He can be reached at 646.225.59397 or [email protected].

TRANSFORMING TAX PROCESS IS NO LONGER A GOOD IDEA – THE COSTS AT STAKE MAKE IT A SURVIVAL TACTIC By Alex Unterkoefler, Michael Flagiello, Robert Cummings and Bill Mellon

WeiserMazars works with Tax executives to transform tax operations across the entire Tax Value Chain. Our focus is to drive our clients towards achieving a Target Operating Model that aligns people, process and technology. We drive high performance by §§ improving effective tax rates and cash flow §§ eliminating siloed processes §§ leveraging technology advances §§ assisting tax executives drive change through structured change management.

§§ Dashboards to provide a one-stop-shop for all tax information §§ Workflow integrates management of all tax value chain activities while instituting process standardization §§ Maintain integration with spreadsheets as analysis tool – not calculation engine

Case Study - Tax Transformation for a Global Insurance/Reinsurance We help organizations quickly realize their tax transformation goals by deploying a tailored combination of functional and technical expertise. Here’s what’s possible! §§ Commercial tools exist today to achieve a fully integrated tax environment §§ Over 80% provision automation can be reached with simple outof-box configuration §§ Data is readily available in a fully auditable fashion §§ Calculation engines and algorithms ensure consistently correct and complete tax accounting information 16 | WeiserMazars Ledger

Challenges Resource constrained tax department operating a highly manual, spreadsheet intensive, processes that were jurisdictionally siloed. The department lacked sufficient tools to manage tax value chain creating further process inconsistencies and introduced operational risks. Solution Developed a multi-phased / multi-year tax target operating model (TOM) to manage all tax value chain components, starting with the

CONSULTING implementation of a provision technology solution. The solution leveraged out-of-the-box tax provision technology processes to consolidate and standardize jurisdictional processes and eliminated manual process risks. The solution also automated complex insurance specific treatments such as double taxation, SSAP101, and Statutory tax accounting. The TOM also provided a roadmap for subsequent transformation initiatives and the method by which to implement them.

Solution Developed a custom, multi-user, tax provision software capable of addressing multiple basis of accounting including GAAP, IFRS, and Solvency II. The solution also addressed complex insurance specific treatments such as Irish branches double taxation on a pooling basis. The solution provided consolidated reporting packages with global, regional, and entity level views of provision data.

Impact The overall implementation took six months due to adoption of out-of-the-box processes and aligned all resources by operating on a single technology platform. As a result of the solution, the tax department automated 95% of their provision process which significantly reduced data collection and provision preparation time during financial close. The multi-phased approach also aligned provision technology to interface with compliance technologies, introduced a business process management (BPM) solution to manage tax processes centrally, and executive dashboards to serve as a single source of tax data delivery.

Impact Due to the immaturity of tax technologies in the marketplace, the solution positioned the client to be ahead of its competitors in achieving a robust platform that eliminated existing spreadsheets, and implemented a controlled framework for all tax provisioning and reporting activities. This technology also allowed the client to establish a virtual center of excellence to drive its otherwise geographically dispersed tax resources.

Case Study - Custom Tax Provisioning System for a Top 5 Global Reinsurance Company

Michael is a Partner in our New York Practice. He can be reached at 212.375.6639 or at [email protected] .

Challenges Lack of marketplace solutions forced the tax department to operate under a spreadsheet intensive provision process, across multiple basis of accounting, managed by a resource constrained tax department.

Alex is a Partner in our New York Practice. He can be reached at 212.375.6690 or at [email protected].

Robert is a Partner in our New Jersey Practice. He can be reached at 732.205.2011 or at [email protected]. Bill is a Partner in our Pennsylvania Practice. He can be reached at 267.532.4328 or at [email protected].

UPCOMING WEBCASTS OCTOBER 2015 Food & Beverage – TBD Date & Time: October 28th, 2015

We are pleased to announce the launch of our WeiserMazars Online Insights webcasts! These informative sessions, led by our service line and industry segment leaders, are designed to educate our connections on the latest developments in the accounting industry and the technical resources needed in today’s business environment. Scan the barcode below to view the 2015 schedule and register!

October 2015 | 17

PRIVATE CLIENT SERVICES

MONEY/TREES: TIMBER LAND AS AN ALTERNATIVE INVESTMENT By James Toto

With a volatile stock market and low yields on fixed income, many high net worth individuals are looking for alternative investments. One alternative is nontraditional real estate investments such as farm property or timber land. However, the tax rules relating to timber can be extraordinarily complex for those lacking experience in the area. 18 | WeiserMazars Ledger

A few basic distinctions determine the basic tax treatment of the various revenue streams that can occur when investing in timber property. Such property can be classified as personal property, incomeproducing/investment property, or business property. This determination is based on facts and circumstances including the purpose of ownership of the property, the use of the property and the activities that take place on the property. If the property is mainly used recreationally (camping, hunting, etc.), it is considered personal property and treated like a vacation

Further, if a timber activity is construed as a business, the passive activity rules will apply, so unless the taxpayer materially participates in the activity, the timber business will be subject to that regime. The sale of cut timber is more complex than the sale of standing timber and requires the use of Form T (Forest Activities Schedule). The sale of cut timber involves two parts assuming the election described below is made. First is the deemed disposal of standing timber and second is the sale of the cut timber. Generally, these sales are treated as ordinary income, unless an election is made under Section 631(a) of the Internal Revenue Code. The election is made on Form T and is available if the taxpayer owned the standing timber for one year before it was cut. Under the election, the capital gain amount is the difference between the value of the timber on the first day of the tax year and its basis (this is the gain from the deemed disposal of the standing timber). Any sales proceeds (net of cut and haul expenses) in excess of the value on the first day of the year is treated as ordinary income.

“WHEN USING THE 631(A) ELECTION, IT IS IMPERATIVE TO HAVE COMPLETE AND ACCURATE COST BASIS RECORDS. WHEN TIMBER PROPERTY IS ACQUIRED, THE PURCHASE MUST BE DOCUMENTED ON FORM T. PROPERLY RECORDING THE BASIS CAN NOT ONLY REDUCE THE TAXABLE GAIN UPON SALE, IT IS ESSENTIAL FOR PROVIDING TIMBER OWNERS THE ABILITY TO RECOVER THE COSTS OF REFORESTATION THAT OCCUR AFTER THE CUT.” home. As such, real estate taxes will be deductible on Schedule A and any gain on the sale of the property will be a capital gain. Losses from the sale of the property will not be deductible and treated as a personal loss. If the timber land is used to generate a profit relatively infrequently, it is considered income-producing or investment property. As such, the sale of standing timber is eligible for capital gain treatment. Here, the expenses for maintaining the property are treated as miscellaneous itemized deductions, subject to the 2% adjusted gross income floor. Real estate taxes are not subject to the 2% floor. Many high-income taxpayers do not gain a tax benefit from these expenses due to the floor. As a result, this can be a significant tax disadvantage. The property is used as a business, if there is a rotational harvest whereby the owner receives regular, ongoing revenue. One of the distinctions between investment property and business property is that business properties are usually larger and have more frequent transactions than properties held for investment, with the implication that business activity is continuous. Timber owners whose property is classified as a business may also get long-term capital gain treatment on sales of standing timber under Internal Revenue Code Section 1231.

When using the 631(a) election, it is imperative to have complete and accurate cost basis records. When timber property is acquired, the purchase must be documented on Form T. Properly recording the basis can not only reduce the taxable gain upon sale, it is essential for providing timber owners the ability to recover the costs of reforestation that occur after the cut. Form T requires great detail and a large quantity of information with respect to the purchase of timber, so it is important to establish basis in the year of purchase. Investing in timber property can be complex, and investors need to consider the best way to approach this three-category system before putting capital into timber land. James is a Partner in our New Jersey Practice. He can be reached at 732.205.2014 or [email protected].

October 2015 | 19

PRIVATE CLIENT SERVICES

HEALTH SAVINGS ACCOUNTS: WHAT TO CONSIDER By Lauren Reo and Richard Tannenbaum

With all the changes in the health care arena over the past several years, the use of Health Savings Accounts (HSAs) is on the rise. The number of accounts has risen from 6.1 million as of January 2008 to an estimated 13.8 million at the end of 2014. These accounts generally operate as a savings/investment account that can only be used to pay for medical expenses on a pre-tax basis. However, there are many questions that remain about the impact HSAs have in terms of how they work, how they affect one’s health care, income taxes, how they compare to Flexible Savings Accounts and so on. The driving force behind the increased use of HSAs is that many employers are transitioning from traditional health plans into high-deductible health plans (HDHP). In comparison to traditional health plans, HDHPs have lower premiums and higher deductibles (for 2015, at least $1,300 for single and $2,600 for family). An individual must be covered by an HDHP in order to participate in a Health Savings Account. Additionally, one cannot have other health coverage (limited exceptions), cannot be enrolled in Medicare and cannot be claimed as a dependent on another tax return. HSAs give individuals the opportunity for tax-preferred treatment on money saved for medical care and are available to both employees and self-employed individuals. If you are an employee, you and/or your employer can make contributions. 20 | WeiserMazars Ledger

The annual limits for contributions vary depending on the type of HDHP coverage, age, date eligible and date you cease to be eligible. For 2015 the contribution limits are $3,350 for self-only and $6,650 for family (with an additional $1,000 for individuals who reach age 55 by the end of the year). Any contribution made by an employer reduces the amount that the employee can contribute personally. Contributions for the calendar year can be made up until April 15th of the following year. HSA contributions made by an individual’s employer or contributions made by an employee through a salary reduction are treated the same as a cafeteria plan contribution and are not includible in income. Therefore contributions are made with pre-tax dollars. Medical expenses paid out of the HSA are not tax deductible. Contributions by self-employed individuals or those which are not contributed through a salary reduction are treated as an adjustment to adjusted gross income on the tax return. Contributions made by a partnership or S corporation to a partner’s or shareholder’s HSA are generally treated as compensation includible in income. However, any contributions are deductible by the partner or shareholder as an adjustment to adjusted gross income. Excess contributions are generally subject to a 6% excise tax and are includible in gross income. The excise tax may be avoided if, in the same calendar year, the excess contribution and any income earned on the excess contribution is withdrawn prior to the timely filing of your tax return.

“UNLIKE A FLEXIBLE SAVINGS ACCOUNT, THERE IS NO LIMIT AS TO THE AMOUNT OF FUNDS THAT CAN REMAIN IN THE ACCOUNT FROM YEAR TO YEAR.” Distributions from HSAs can only be used to pay for qualified medical expenses and only those incurred after the plan has been established. Qualified medical expenses are any medical expenses that would otherwise be an itemized deduction including doctors, dentists, prescriptions, vision care, and hospital and lab fees. An exhaustive list can be found in IRS Publication 502, Medical and Dental Expenses. For good recordkeeping, individuals should retain support for any distributions taken from the HSA in the event that they are challenged by the Internal Revenue Service. Distributions not used for qualified medical expenses are includible in income and subject to a 20% additional tax, unless made after the beneficiary turns 65, dies, or becomes disabled. Unlike a Flexible Savings Account, there is no limit as to the amount of funds that can remain in the account from year to year. The funds can be used or accumulate over time. Another

advantage of the HSA when compared to a Flexible Savings Account, is that the account holder has the flexibility and control of investing the funds in the account. Therefore funds not used for medical expenses can be invested similar to any tax deferred account. As part of a yearly review, individuals should examine the balance in their existing HSA account and estimate next year’s medical expenses to help determine what their following year contributions to the plan should be, while being mindful of the annual contribution limits. With a limited exception, an individual may make a once-in-alifetime qualified HSA distribution directly from his or her IRA to his or her HSA. The amount is subject to the annual maximum HSA contribution limits. The IRA distribution is not taxable and can be applied toward the individual’s required annual IRA minimum distribution amount. The amount contributed would not be deductible as an HSA contribution. If you participate in a Health Savings Account, Form 8889 will need to be completed as part of your federal tax return each year. This form summarizes: §§ §§ §§ §§ §§ §§ §§

Type of plan Contributions made o Employer/salary reduction o Employee o Catch-up Excess contributions Total distributions Qualified medical expenses Taxable distributions Any additional taxes

Health Savings Accounts give individuals more responsibility in monitoring and maintaining their health care coverage. Individuals should carefully consider the use of HSAs based on their particular situations. They offer tax advantages as well as substantially reduced insurance premiums, but are subject to high out-of-pocket costs before reaching annual deductibles. There are many issues to consider when instituting a Health Savings Account. Lauren is a Manager in our New Jersey Practice. She can be reached at 732.475.2145 or [email protected]. Richard is a Partner in our New York Practice. He can be reached at 212.375.6545 or [email protected].

October 2015 | 21

ENTREPRENEURIAL BUSINESS GROUP

THE FIRST STEPS TO STARTING AN LLC

by Lauren Reo and Ryan Pederson

Starting a business sounds simple – take your idea, get a federal ID number and a bank account, and you’re ready to go. Unfortunately, that level of simplicity is a myth. There are many complexities and nuances when creating a business at the federal, state, and local levels. Each state has its own set of rules and regulations and no two are alike. Noncompliance can saddle the new business owner with fees and penalties that could have been avoided with knowledge of the requirements. In this article, we offer insight on the varying regulations throughout New Jersey, New York, New York City, Pennsylvania, and Philadelphia with a focus on the limited liability company (LLC) structure. The first things a prospective business owner needs to do is apply for a federal identification number using form SS-4, file Articles of Organization with the Department of State and comply with any required employment tax return filings. If you’re going to create a multimember LLC, having an Operating Agreement drawn up is also strongly recommended. 22 | WeiserMazars Ledger

This internal document lays out the rights, duties, liabilities and obligations between the members and the LLC – a very important item to have. New Jersey All limited liability companies formed in New Jersey, or filing to do business in New Jersey, must first determine if the business name is available and then file formation documents to register and receive a Certificate of Formation. To register for tax and employer purposes a NJ-REG must be completed and, to ensure the continued use of your business name, an annual report filing must be completed for a small fee. Income taxes will be reported on your individual tax return whether you are a single or multimember LLC, but there is an additional filing of Form 1065 if you are a multi-member LLC. If you employ at least one individual, you will need to review the requirements for employer and workers’ compensation insurance. Depending on where in the state your business is located and what type of industry you are in, there could be additional local permits, business licenses, certificates, registrations and/or sales and use tax filings to comply with. New York To form an LLC in New York you need to be a New York resident and/or have a business entity in New York State and file Articles of Organization with the Department of State. New York LLCs are also required to update their contact information every two years by filing a Biennial Statement with the New York Department of State. Income tax treatment is similar to that of New Jersey, being reported on your personal tax return with an additional filing of Form IT-204 if you are a multi-member LLC. If you have employees, the business will need to register with the New York Department of Labor and be mindful of any filings and/or payments for withholding taxes and wage reporting as well as unemployment, workers’ compensation, disability and health insurance. Depending on the type of business, you may be required to register as a New York State Sales Tax Vendor, apply to the New York Department of Taxation and Finance for a sales tax Certificate of Authority, and comply with any required sales tax filings. New York has a voluminous list of business types that are required to apply for additional licenses and/or permits, which all new business owners should review. New York City business owners beware – the city may have separate registrations for these items! Additionally, if you conduct business in NYC you may be subject to the New York City Unincorporated Business Tax which is filed on Form NYC-202 along with your personal tax return. Pennsylvania An LLC operating in the state of Pennsylvania must file Form 8913 – Organization Domestic Limited Liability Company and Docketing

Statement with the state. LLCs must register under a business name that is not already in use, and determine whether or not the name of the business is considered a fictitious name. A fictitious name can be registered by completing Form 311 – Application for Registration of Fictitious Name; the name is required to be advertised in a newspaper of general circulation in the county in which the business will be located. A newly formed LLC is required to complete the Pennsylvania Enterprise Registration Form (PA-100) and file with the Pennsylvania Department of Revenue, which will allow the entity to establish employer withholding, unemployment compensation insurance, and sales and use tax accounts. The state of Pennsylvania has a 6% sales and use tax rate, and there is an additional 2% local sales and use tax for purchases made in Philadelphia and a similar local tax of 1% for Allegheny County. Use tax liabilities are reported on the PA-1 Use Tax Return. An LLC reporting as a partnership is required to file a PA-20S/PA-65 Information Return, and provide each resident and non-resident member with a PA Schedule RK-1 or NRK-1 in order to report income taxes on their individual tax returns. Additionally, LLCs doing business in the state of Pennsylvania are subject to a capital stock/foreign franchise tax. Philadelphia Businesses operating in the City of Philadelphia are required to obtain a Commercial Activity License from the Department of Licenses and Inspections. In order to obtain the Commercial Activity License, a business must first obtain a City of Philadelphia Tax Account Number, which requires a Federal EIN and Pennsylvania State Sales & Use Tax Number, both of which are also prerequisites for obtaining a Commercial Activity License. An LLC doing business in the City of Philadelphia is required to file a Business Income & Receipts Tax (BIRT) Return, which is computed based on the gross receipts and net income, and a Net Profit Tax Return. In addition to State and Federal payroll withholding, an employer who pays wages to residents of the city of Philadelphia, or a non-resident working in the city, must withhold and remit a City Wage Tax. Based on the location and industry in which the business operates, there are various state and local business licenses and permits which must also be obtained. In conclusion, one should seek competent tax advice to stay in compliance with the laws that govern their business in the states in which they will operate. Lauren is a Manager in our NewJersey Practice. She can be reached at 732.475.2145 or at [email protected]. Ryan is an Audit Senior in our New Jersey Practice. He can be reached at 732.475.2137 or at [email protected].

October 2015 | 23

ENTREPRENEURIAL BUSINESS GROUP

THE TOP THREE DO’S AND DON’TS WHEN STARTING A SMALL BUSINESS by Paula Ferreira, Theodore Westhelle and David Rim Starting a new business can be a very exciting and stressful time. The decisions you make early in the process can be the deciding factor of whether your business succeeds or fails. There a few sure fire things you can do and/or avoid doing that will give your business a much better chance to succeed. DO §§ Seek input from trusted advisors - Selecting the right professionals to assist you in your business is critical. Your accountant, lawyer, banker and insurance professional can all have a big impact on your business. Use them as a resource. Their experience with similar businesses can be a great asset in guiding you. Some of the decisions which will need to be made include: the type of entity structure and accounting method which is appropriate for your business; the type of lease you should enter into; and the type of insurance and amount of financing your business will need.

DON’T §§ Borrow from the government – Always pay your payroll taxes timely. This is extremely important because not only does the government charge a much higher rate of interest than banks, but you are also personally liable for these taxes. Payroll taxes are considered trust funds and the owner’s personal assets can be used to satisfy this responsibility if the business cannot. §§ Undervalue your employees – One successful person does not make a successful business. Surround yourself with a good team. Pay them fairly and hold them accountable. Trying to save a few dollars on pay for a good employee and losing them could end up costing you greatly in the long run. Retraining is significantly more expensive than retaining your valuable employees. §§

§§ Know your numbers – You should monitor your margins and profitability. A small change in gross profits can be the difference between being profitable and losing money. Keep close tabs on your costs and adjust your pricing accordingly. If your costs increase, you will likely have to raise your prices to offset them. Ask if you can receive discounts for buying in larger quantities or for paying your suppliers early. §§ Develop strong relationships – Satisfied customers pay their bills and happy vendors can help in many ways. It may lead to more favorable payment terms or discounts. They can also provide you with valuable advice on trends within the industry or insight into what your competitors are doing.


Accept the status quo – Don’t be stagnant. Monitor your business and adapt to market trends. Grow at a healthy pace. Don’t over-expand and don’t assume things will always be consistent. Adapt to the environment in order to succeed. Although there is no magic formula, following these tips will put you on the way to having a successful small business.

Paula is a Partner in our New Jersey Practice. She can be reached at 732.475.2193 or [email protected]. Theodore is a Senior Tax Manager in our New Jersey Practice. He can be reached at 732.475.2117 or [email protected]. David is an Audit Senior in our New Jersey Practice. He can be reached at 732.475.2160 or [email protected].

NOT-FOR-PROFIT

FASB EXPOSURE DRAFT ON CHANGE TO PRESENTATION OF FINANCIAL STATEMENTS FOR NOT-FOR-PROFITS This is a follow-up to our earlier Alert on this topic which has already been the focus of much attention and the source of so much commentary, positive and negative, directed at the FASB. WeiserMazars has submitted a comment letter on this exposure draft. No doubt, based on the volume of response from both the not-for-profit industry and the accounting profession, the exposure draft will continue to be discussed, reviewed and additional changes considered. by Bruce Lev, Edward Knice and PJ Manchanda

Based on the existing proposal, we have summarized the major changes to our readers’ financial statements in the unlikely event there is no revision to the current document. This overview is being presented to give you a basic understanding of the key provisions so that you also have an opportunity to comment on them. Even though the comment period ended on August 20, 2015, on numerous occasions the FASB has indicated they will continue to accept feedback on their proposals. Our comment letter to the FASB, as well as all others, are posted on the FASB’s website and are included in the public record. The most significant proposed changes are as follows:

§§ Net Asset Classification The net asset classification will be revised from three to two classifications: net assets without donor restrictions and net assets with donor restrictions. (see Diagram A)

October 2015 | 25

NOT-FOR-PROFIT §§ Liquidity and Financial Availability The use of more explicit notes to the financial statements is being suggested to help make the nature and degree of liquidity and fiscal strength more visible. (see Diagram B) §§ Financial Performance: Operating vs. Non-Operating Measurement These items will be better described in the statement of activities in addition to the use of management transfers of funds, so as to better justify operations before and after such transfers. (see Diagram C)

§§ Change to the Statement of Cash Flows FASB proposes to require the Direct method for reporting operating cash flows, rather than the traditional Indirect method and recategorize certain items to better align operating cash flows with operating measures. (see Diagram D) §§ Suggested Use of Functional Allocation of Expense This would be a change to all not-for-profit financial statements presentations and could be as a separate statement accompanying the statement of activities or as a separate statement but part of the financial statement package. (see Diagram E)


To give more detail at this time would be superfluous. Stay tuned for further information - there will be much dialogue on these issues throughout the industry over the next several months. Ron is a Partner in our New York Practice. He can be reached at 212.375.6782 or at [email protected]. Denise is a Senior Manager in our New York Practice. She can be reached at 646.225.5913 or at [email protected].

October 2015 | 27

INTERNATIONAL SERVICES

TTIP: DOES IT BENEFIT THE GERMAN MITTELSTAND? On June 24, 2015, the United States Congress gave President Barack Obama the authority to conclude the 12 country Trans-Pacific Partnership (TPP), and move forward with the Transatlantic Trade and Investment Partnership (“TTIP”).

TTIP aims to reduce regulatory barriers and improve the exchange of goods and (EU), mainly by harmonizing standards, simplifying customs clearance and eliminating tariffs. Public opinion in both Germany and Europe has turned against TTIP, with only large public companies appearing to support the agreement. Is TTIP only relevant and beneficial to large companies? By Pierre Francois and Kristin Johannimloh TTIP – Designed for large exporters only? The Mittelstand refers to small and medium-sized enterprises (SMEs) 95% of which are family-owned businesses. It is the backbone of the German economy and a significant contributor to German exports overall. A study performed by KfW in late 2012 found out that 64% of Mittelstand companies are looking to increase their exports in 2015.2 Existing challenges to exports include non-tariff barriers, administrative burden when developing an export business, lack of a free trade deal, as well as high safety requirements in international trade of goods. Should TTIP be implemented, Mittelstand companies willing to increase exports to the US would be able to do so under a simpler, more favorable regulatory framework, which should result in lower costs to companies operating in both the EU and the US.

Easing the Establishment of a US Presence Although not as favored as exports, the development of on-site production capabilities in the US is an alternate solution available


to Mittelstand companies. Major hurdles to investing abroad include high capital expenditure, the identification and employment of skilled local management, dealing with legal jurisdictions in different states, exchange rate fluctuations, and increased legal exposure. These all come at a higher cost than merely exporting, and may make a direct investment in the US unviable for Mittelstand companies, who often do not have the financial and human resources required. TTIP would alleviate many of these burdens and increase direct investment by lowering barriers to entry and putting in place a more favorable regulatory framework, thereby f acilitating the establishment of a US presence.

TTIP Benefits to the Mittelstand Vary Case by Case Despite the apparent TTIP benefits, a recent study by Commerzbank found that only 15% of the Mittelstand believe that the trade agreement will have a positive impact on their business. Damon V. Pike, President of The Pike Law Firm and internationally recognized trade law expert, illustrates the areas which may be of concern.

“TTIP could also create customer relationship and pricing issues between Mittelstand exporters and their U.S. customers. ”

Elimination of tariffs Tariffs between the EU and the US are relatively low by global standards. For manufactured products, they average 1.7 % in the US and 2.3 % in the EU. To claim duty-free entry under TTIP, companies will have to implement a compliance and recordkeeping process to ensure that the specific rules of origin for each and every product are met. Pike notes that this additional cost to companies may outweigh the benefits from the elimination of customs duties. Each Mittelstand company will therefore need to perform their own analysis. Companies exporting products subject to higher customs duties (such as textiles, footwear, chemicals) and companies who sell products in large volumes or with high profit margins would likely be well placed to absorb the additional fixed cost of the administrative burden. Customer Relationship and Pricing Issues TTIP could also create customer relationship and pricing issues between Mittelstand exporters and their U.S. customers. Pike explains that, under the North American Free Trade Agreement (NAFTA), the importing jurisdiction was able to conduct audits of the exporter in a foreign country. The current TTIP proposal is also drafted along these lines. This naturally led to problems as most companies are not keen on foreign governments auditing their records. Thus, under all U.S. Free Trade Agreements subsequent to NAFTA, the importer is now the party audited – but the audit is based on information and records supplied by the exporter/seller. As a result, many importers demand meticulously detailed supporting documentation from the

exporter to claim duty-free entry prior to accepting the order. Mittelstand companies must therefore be prepared to be fully compliant and support this additional cost. Non-tariff barriers, compliance requirements and manufacturing processes Any potential positive or negative effect of TTIP on the manufacturing sector will also greatly depend on the degree to which non-tariff trade barriers are adjusted. Pike comments that, where common quality and safety standards are achieved and testing processes are harmonized, exports will likely increase as they grant companies direct access to a broader market for those products that could not previously be exported. However, this comes at a cost as companies may need to change their processes to comply with differing standards. This also increases risks as, in the current TTIP form, non-compliance may result in costly arbitration procedures under the Investor State Dispute Settlement mechanism.

Beneficial to the German Mittelstand, Beneficial to Germany? The German Mittelstand is well placed to benefit in a number of ways from TTIP, but this will require each company to perform their own analysis to determine the scale of the associated benefits and costs, which will depend on their industry, products and processes. Where benefits outweigh costs, TTIP will give Mittelstand companies access to an increased client base, potential for growth and resilience to competition in the global economy, thereby further expanding the success of Mittelstand companies beyond Germany’s borders. Pierre is a Senior Manager in our New York Practice. He can be reached at 646.225.5926 or [email protected]. Kristin is a Senior in our New York Practice. She can be reached at 646.435.1623 or [email protected]. 1

2

Companies will therefore need to keep abreast of amended or harmonized regulations and assess their impact on their manufacturing process on a product by product basis, a costly exercise which may be a deterrent to Mittelstand companies. However, as Pike points out, some industries with more stringent specifications and processes are already aligned, including the hightech, automated industrial machinery companies, a segment in which the Mittelstand is particularly strong.

The German definition of SMEs is up to 500

employees and up to €50m annual turnover https://www.kfw.de/Download-Center/

Konzernthemen/Research/Research-englisch/PDFDateien-Paper-and-Proceedings/Internationalisationin-Germanys-SME-sector.pdf

3

http://www.spiegel.de/wirtschaft/unternehmen/

ttip-mittelstand-setzt-kaum-hoffnung-infreihandelsabkommen-a-968383.html, (05/06/2015). TNS Infratest questioned 4025 companies with

minimum annual sales of 2.5MEuro.

October 2015 | 29

INTERNATIONAL SERVICES

EUROPEAN AUDIT REFORM

By Fatemeh Jailani and Louis Osmont

Chief Financial Officers take heed: the European Audit Reform (EAR), expected to be adopted by all European Union Member States by June 17, 2016, affects American companies with a presence in, or with subsidiaries doing business across, the EU. The reform requires that publically traded subsidiaries on an EU Member State stock exchange and registered in an EU Member State conform to new audit rotation rules and restrictions on non-audit services. They must also verify that their audit firms are adhering to EU independence requirements. American companies must anticipate sweeping changes and coordinate with their European subsidiaries, as well as getting professional guidance from an accounting firm with EAR experience. It is widely held that the primary responsibility for the 2008 Financial Crisis rested with bankers who packaged and sold subprime mortgages and the ratings agencies who sanctioned their creditworthiness. Subsequently, there was a perception that auditors had some culpability, too, by failing to identify going concern issues. In response, the European Commission (EC) launched a consultation that paralleled those of the UK Financial Reporting Council and the Competition and Markets Authority, resulting in changes in audit firms’ service terms and limits on the services they can provide. 30 | WeiserMazars Ledger

In its review, the EC found that overconcentration among the larger, more well-known firms created adverse consequences from their dominant position and, in some cases, may have compromised the quality of audits. For example, some firms were tarred with scandal when Enron and WorldCom went bankrupt. Investigations revealed that audit firms failed to report auditing errors, and passed on limited, and sometimes unreliable, information to investors. Also, because these firms offered other services that generated more revenue than the audit, it was argued that the integrity of the audit was compromised. They tended to operate with the goal of reducing costs and avoiding legal proceedings at the expense of relaying accurate data so that investors could make informed decisions. The EC recognized that change was needed to ensure auditors were independent, objective, and committed to a relationship grounded in trust. They also noted the need for an integrated, sizable, and multi-player stable of auditors in the marketplace. After more than four years of legislative discussions, this expansive reform will ultimately affect all corporations domiciled in the European Union (EU) and American companies with subsidiaries that do business there. The overarching goals are to strengthen the independence of audit firms, make the audit report more informative, and improve audit supervision throughout the EU. These changes are an important first step in establishing a competitive audit framework by introducing more players into the marketplace, and working towards reestablishing trust in financial reporting, enhancing audit quality, and encouraging a multi-player audit market. First and foremost, the EU proposes that auditors be rotated after 10 years for all public interest entities (PIEs). At the end of that 10-year term, if a company issues a tender (request for proposal), that results in the original auditing firm being selected, then its engagement may be extended an additional 10 years, but not to exceed a total of 20 years. If a joint audit is adopted, then the audit firm may be retained for an additional 14 years, for a total 24-year

engagement. However, individual Member States may enact even more rigorous rotation rules. Another component of the regulation is limitations on non-audit services. For example, fees for non-audit services may not exceed 70% of the average total statutory audit fees paid during the last three fiscal years. As with the rules governing audit rotation, individual Member States may impose stricter requirements by adding additional prohibited services and/or raising the bar for those that are permitted. The reform may also be construed as an endorsement of the concept of joint audit, and provides advantages to those companies that employ two auditors: joint auditors may remain engaged for a total of 24 years, without the obligation to tender. The EAR also includes elements expanding the role of the Audit Committee and making the actual audit report more informative. At the same time, there are provisions for increasing supervision and promoting cooperation among entities who oversee audits by creating a Committee of European Audit Oversight Bodies (CEAOB). Though the EAR has not yet been fully adopted at Member State level in the EU, other non-European countries are nevertheless keeping a close eye on its future success as it could possibly serve as an alternative model for others to follow. Change management is required for listed companies, financial institutions and insurance companies. CFOs need to know the requirements and the proper steps to achieve compliance. In this transition it is important to seek professional advice from an accounting firm with demonstrated expertise on this important EU-wide change. Fatemeh is a Director at Mazars France. She can be reached at +33 6 67 67 25 48 or [email protected]. Louis is a Partner in our New York Practice. He can be reached at 212.375.6944 or [email protected].

UPCOMING EVENTS 9th Annual Hedge Fund General Counsel Summit | November 19-20, 2015 | New York

Now in its ninth year, Corporate Counsel’s Annual Hedge Fund General Counsel Summit provides cutting-edge insights into the latest legal, regulatory and compliance opportunities and challenges faced by hedge fund managers and investors. Don’t miss this opportunity to earn CLE/CPE credits while networking with fellow GCs and CCOs. Scan barcode for more information on this event and past events!

October 2015 | 31

TAX

7 WAYS SAME-SEX COUPLES CAN PLAN THEIR FINANCIAL AND TAX AFFAIRS By Richard Bloom, Jonah Gruda and Cathy Green

On June 26, the US Supreme Court ruled 5-4 on a series of consolidated cases known as Obergefell v. Hodges, that the 14th Amendment guarantees the right of same-sex couples to marry. The landmark ruling found that states are required to issue marriage licenses to same-sex couples and must recognize same-sex marriages performed in other states. In United States v. Windsor, a 2013 Supreme Court decision, the court mandated federal recognition of same-sex marriage, but it did not require states to follow suit. 32 | WeiserMazars Ledger

“Same-sex married couples who previously filed as single individuals for state tax purposes will now have the ability to file amended state income tax returns as married filing jointly.”

Subsequent to the Windsor decision, more states, but not all, established legislation granting state legal protection and recognition for same-sex marriages. While the impact of Obergefell is on the state level, it also creates opportunities for same-sex marriages for those previously unwilling to marry out of state by creating the assurance of universal recognition. Obergefell will also likely affect the way same-sex couples plan their financial and tax affairs moving forward, including the following seven areas: §§ Amended income tax returns. Same-sex married couples who previously filed as single individuals for state tax purposes will now have the ability to file amended state income tax returns as married filing jointly. Joint filings may result in higher tax liabilities, so tax projections would need to be prepared as part of the decision process. States may issue guidance regarding how and when taxpayers might file amended tax returns and whether retroactive filings are required. §§ Retroactive claims for state estate or inheritance taxes. States that impose a separate estate or inheritance tax and previously denied same-sex married couples the use of spousal benefits, such as the unlimited marital deduction, should now allow retroactive claims. §§ Review of healthcare proxies. A same-sex spouse may want to be added to a healthcare proxy, if previously prohibited under state law.

same-sex marriages may automatically be the participant’s primary beneficiary unless a waiver is obtained. Previous designations naming others may not be upheld. §§ Unlimited spousal gift tax exclusion. Residents of a state that imposes a gift tax may consider filing amended gift tax returns because transfers between spouses are generally not subject to gift tax. §§ Divorce filings. If the resident state now recognizes samesex marriages, these couples are also able to divorce. The Windsor and Obergefell decisions have dramatically changed the financial-planning environment for same-sex couples. Samesex couples are now equal to opposite-sex couples at the federal and state levels. Therefore, in addition to the areas listed above, same-sex couples can benefit from the full range of income and estate tax-planning techniques that opposite-sex couples have employed over the years. Taxpayers who may be impacted by the Windsor and Obergefell decisions should reach out to their tax advisor for guidance. Richard is a Partner in our New Jersey Practice. He can be reached at 732.475.2146 or at [email protected]. Jonah is a Senior Manager in our New York Practice. He can be reached at 212.375.6819 or at [email protected]. Cathy is a Senior Manager in our Pennsylvania Practice. She can be reached at 267.532.4441 or at [email protected].

§§ Review of life insurance. Life insurance policies purchased to alleviate the estate tax burden at the death of the first partner may no longer be needed. Second-to-die policies should now be considered when evaluating life insurance needs. §§ Employee benefit and retirement plans. Employers with fully insured health and welfare plans issued in states that previously banned same-sex marriage will now be required to recognize and offer coverage to same-sex spouses. Spouses of a participant in a qualified retirement plan due to recent

October 2015 | 33

EMPLOYEE BENEFITS

What to Consider When Changing Your Plan’s Trustee By Adam Yanasak and Logan Shalett

There are many reasons a plan sponsor may choose to change their trustee or record keeper. The plan sponsor may have gone through an acquisition and is preparing to merge plans to simplify administration. The investment committee may not be pleased with the fees or investment offerings available to participants. Or they may not be pleased with the service or reporting functionality offered. Whatever the reason for the change, it is important to have a transition strategy in place to ensure a smooth transfer of assets and data. 34 | WeiserMazars Ledger

Define what you want out of the transition §§ If the decision to change service providers is fee related, make sure you have a clear understanding of all plan and participant related fees to best compare the trustees you are considering. With the publication of the final regulations on fee disclosures, ERISA Section 408(b)(2), greater comparisons and benchmarking are available for review and analysis by the plan sponsor. §§ Identify reports frequently used by payroll, human resources and finance. Ensure the new plan administrator has something similar available or discuss steps necessary to request the reports to be built.

Clear communication to plan participants §§ A letter explaining the change should be drafted and sent timely to participants. §§ This letter should include the old and new trustees’ names, the date of the transition, information on the blackout period, and a mapping of old funds to new funds.

Updating plan documentation §§ Make sure to update all references to the old trustee to refer to the new trustee in the Plan Document, Summary Plan Description, and other relevant documents. §§ The administrative committee’s meeting minutes should document the approval of the change in trustees. If the change is due to a plan merger the effective date of the merger should be documented as well.

§§ A mapping file for the settlement of funds at the former trustee should be obtained and agreed to the assets deposited at the new trustee. §§ Participant loans are administratively transferred differently than investments and a separate schedule should be obtained by participants, including the anticipated payoff date, for comparison before and after the transfer with documentation of any adjustments. §§ If the plan is subject to an audit requirement, consider involving your accountants and obtaining all files that will be required for the audit. The plan sponsor may lose access to that information after a period of time. Developing a comprehensive process early will result in a more seamless transition that will enable the administration of the plan to continue without any major issues. The plan should also leverage service providers as a resource during this change.

“CERTAIN TYPES OF INVESTMENTS MAY INCUR A FEE OR HAVE RESTRICTIONS ON REDEMPTION FOR CERTAIN PERIODS OF TIME.” Ensure the transfer of assets is accurate and documented §§ Certain types of investments may incur a fee or have restrictions on redemption for certain periods of time. Without sufficient planning, these assets may cause a delay in a transfer or create excessive fees or penalties for participants. Review the investments thoroughly prior to the transition. §§ Get IT involved in any process of software changeover, especially if there are automatic data feeds to or from the trustee. Some processes that may need to be tested or reviewed prior to implementation are the uploading of employee deferrals and demographic information maintained by human resources.

Adam is a Manager in our Chicago Practice. He can be reached at 312.863.2408 or at Adam.Yanasak@WeiserMazars. Logan is a Senior in our Chicago Practice. She can be reached at 312.863.2404 or at [email protected].

October 2015 | 35

TAX

by Harold Hecht, Seth Rabe and Matt Dopkin

TAX TL TE TR TT TS 36 | WeiserMazars Ledger

Significant tax reform measures have been signed into law in Connecticut, with the greatest impact expected to be from the mandatory combined filing for unitary groups of corporations. Due to an outcry by many major corporations headquartered in Connecticut, this combined filing provision has been deferred until tax years beginning on or after January 1, 2016, while all of the other changes have effective dates in 2015. We address the most pertinent changes below.

Connecticut Corporate Income Tax §§ Connecticut currently assesses a 20% surtax on the income and capital tax. This surtax will be extended for income years beginning prior to January 1, 2018. For years beginning on or after January 1, 2018 and before January 1, 2019, the surtax will be reduced to 10%. The surtax will apply to companies with gross income of at least $100,000,000, and all companies filing unitary returns. §§ Effective January 1, 2015, the amount of tax credit available for use is limited to 50.01% of the amount of tax due. §§ Effective January 1, 2015, net operating losses are limited to 50% of Connecticut income. §§ Combined returns are required for years beginning on or after January 1, 2016. o All entities with common ownership and engaged in a unitary business must be part of the combined return. o Unitary members with Connecticut members are referred to as taxable members and those without nexus are nontaxable members. o The combined group’s income is the aggregate income of all taxable and nontaxable members. o Dividends paid from one group member to another are eliminated. o Each taxable member determines its separate apportionment. o The Connecticut sales of nontaxable members must be reallocated to the numerators of the group’s taxable members. o Combined group net operating losses can be shared with other taxable members that were also members during the year in which the loss was incurred.

CONNECTICUT TAX REFORMS ENACTED

Published on July 27, 2015

o Financial services companies are subject to the $250 minimum capital base tax, but are not included in the unitary group’s capital base calculation or the capital base apportionment. o The aggregate capital base tax is capped at $1,000,000. o Tax credits can be shared with other members of the group, provided they were also members at the time the credit was earned. o The default unitary group uses water’s - edge reporting. However, an election can be made for filing on a federal affiliated group or worldwide basis. Such election is effective for 10 years. o The preference tax has been repealed effective for years beginning on or after January 1, 2015. The preference tax requires a combined group to add to its tax liability the difference between the total tax due, had the company filed separate returns, minus the total tax due on the combined return. The preference tax is capped at $500,000.

Connecticut Personal Income Tax §§ For years beginning on or after January 1, 2015, U.S. military retirement income is exempt from Connecticut tax. §§ Effective January 1, 2015, the top two marginal rates are increased to 6.9% and 6.99%. o The 6.9% tax rate applies to those individuals in the highest existing income tax bracket with Connecticut taxable income over $250,000, if filing Single or Married Filing Separately; $400,000 for Head of Household, and; $500,000 if the taxpayer is Married Filing Jointly. o The 6.99% rate applies to those individuals in the newly created highest tax bracket with Connecticut taxable income over $500,000, if filing Single or Married Filing Separately; $800,000 for Head of Household, and; $1,000,000 if the taxpayer is Married Filing Jointly. o The 6.99% rate also applies to trusts and estates. §§ The personal exemption for a year beginning on January 1, 2016 is $14,500, and increases to $15,000 for years beginning on or after January 1, 2017.

Connecticut Estate and Gift Tax §§ The combined estate and gift tax liability for decedents dying on or after January 1, 2016 is capped at $20,000,000. §§ The gift tax is also capped at $20,000,000 for gifts made on or after January 1, 2016. §§ The $20,000,000 estate tax is reduced by gift taxes paid on gifts included in the taxable estate that were made by the decedent or the decedent’s spouse subsequent to January 1, 2016.

Connecticut Sales and Use Tax §§ Effective July 1, 2015, the luxury sales and use tax rate increased from 7% to 7.75%. This tax applies to motor vehicles over $50,000, jewelry over $5,000 and clothing and footwear over $1,000. §§ Effective July 1, 2015, the definition of computer and data processing was expanded to include services rendered in connection with the creation, development, hosting and maintenance of a website. The tax rates for computer and data processing remains at 1%. §§ For periods ending on or after December 31, 2015, sales tax is due the last day of the succeeding month instead of on the 20th.

October 2015 | 37

TAX

SIGNIFICANT CHANGES TO TAX RETURN DUE DATES Published on August 11, 2015

by Steve Brecher, Ralph Loggia, Timothy Evans and Nathan Pliskin On July 31, 2015, President Obama signed the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (H.R. 3236) into law. Among other changes, the new law modifies the due dates for several common tax returns.


Due Date Modifications: New due dates exist for, among others, partnership returns, C corporation returns, the 990 series including 990-PFs and the FinCEN Form 114 (FBAR). Below is a summary of the new return dates:

Additionally, the due date has been shortened from 3 ½ months to 2 ½, following the close of the fiscal year for fiscal year partnership returns, and extended from 2 ½ months to 3 ½ for fiscal year corporations. The new due dates generally apply to returns for tax years beginning after Dec. 31, 2015. The law also introduces the following changes to the tax code: §§ 6 year statute of limitations for basis overstatements: Clarification that an overstatement of basis qualifies as an understatement of income resulting in an extended six year statute of limitations under Sec. 6501(e). This change overrules the Supreme Court’s decision in Home Concrete & Supply, 132 S. Ct. 1836 (2012) and is effective for all returns for which the normal assessment period remained open as of the date of enactment (July 31, 2015), and for returns filed after that date. §§ Consistent reporting of basis between an estate and its beneficiaries: Persons inheriting property from a decedent are prevented from treating the property as having a higher basis than that reported by the estate. Executors of estates large enough to require a federal estate tax return must also furnish a statement identifying the value of property interests acquired from the estate to the IRS and to recipients of property. Treasury is directed to issue regulations concerning the form and content of these statements. These requirements are effective for estate tax returns filed after July 31, 2015. §§ Additional information required on Mortgage Interest Statements: Mortgage Interest Statements due after Dec. 31, 2016 must report the address of the secured property, the mortgage origination date, and the outstanding principal balance.

TRADE AND HIGHWAY BILLS HOLD SURPRISES AND CHANGES Published on August 11, 2015

by Steve Brecher, Ralph Loggia, Timothy Evans and Nathan Pliskin The Trade Bill contains hidden surprises, including penalties for taxpayers who file incorrect information returns or furnish incorrect payee statements. On June 29, 2015, President Obama signed the Trade Preferences Extension Act of 2015 (P.L. 114-27) into law. This bill, which primarily deals with trade issues, also includes changes to the tax code that could prove costly for many businesses. Beginning in 2016, the law raises penalties for filing incorrect information returns and for furnishing incorrect payee statements, under Sec. 6721 and Sec. 6722: §§ The penalty for each individual violation increases from $100 to $250. §§ The cap on total annual penalties for each category doubles from $1.5 million to $3 million. §§ The penalty for returns corrected within 30 days is increasing from $30 to $50, with the maximum annual penalty cap is also increasing from $250,000 to $500,000. §§ The penalty for returns corrected by August 1 is increasing from $60 to $100, with the maximum annual penalty cap also increasing from $500,000 to $1.5 million. §§ For taxpayers whose average annual gross receipts do not exceed $5 million, the total annual cap on penalties is doubling from $500,000 to $1 million. Likewise, the penalty cap on returns corrected within 30 days is increasing from $75,000 to $175,000 and the penalty cap for returns corrected by August 1 is increasing from $200,000 to $500,000. §§ Where the penalty is imposed for intentional disregard, the penalty is increased from $250 to $500. These penalties will apply to numerous tax forms, including, but not limited to: §§ W2 §§ 1099 series §§ 1098 §§ 1094 and 1095 (for minimum essential coverage under the ACA) §§ 1042-S Businesses can quickly accrue substantial penalties if they are not following proper procedures for issuing and filing standard forms. Taxpayers also face a raft of new forms that could trigger penalties due to the reporting requirements under the ACA, FATCA, and section 6050W (for payment processors who must file 1099-Ks). Penalties can be assessed for erroneous monetary amounts, payee surnames, and TINs. Taxpayers facing penalties can seek abatements upon a showing of reasonable cause. However, businesses should review their procedures for complying with information reporting requirements before any penalties are assessed.

October 2015 | 39

TAX

PARTNER BEWARE: THE UNEXPECTED VIRTUE OF KNOWING NEW YORK SALES AND USE TAX LAW Published on August 12, 2015

by Harold Hecht, Seth Rabe and Matt Dopkin The last thing a partner or member of a limited liability company expects is to be assessed for the LLC or partnership’s failure to collect or pay sales and use tax. Although New York’s longstanding principle has been to collect sales tax from passive investors, a recent Tax Appeals Tribunal decision was particularly harsh.


Petitioners Eugene Boissiere and Jason Krystal were each members of Ask 244, LLC (“Ask 244”). New York assessed Ask 244 sales and use tax in the amount of $735,899.91. Presumably with no one else from whom to collect, the state directly assessed Messrs. Boissiere and Krystal. One undisputed fact from the decision states: “[n]either LLC member had managerial responsibility, the ability to hire and fire employees, knowledge of or control over the LLC’s financial affairs, nor did either petitioner have the authority to sign the LLC’s tax returns.” Further, the petitioners did not participate in the state’s original audit and did not even know how the assessment was calculated. In other words, the petitioners knew nothing about sales tax, nothing about the state’s original assessment, nothing about the LLC’s finances and could not sign tax returns. What does New York State have to say about such people? Pursuant to a 2011 memorandum describing department policy: “[t]he department recognizes that this situation can result in unfortunate consequences for certain partners and members who have no involvement or control of the business’s affair.” Why such harsh consequences? Quite simply, Tax Law § 1131(1) states that persons required to collect sales and use tax include: “any officer, director or employee of a corporation or of a dissolved corporation, any employee of a partnership, any employee or manager of a limited liability company, or any employee of an individual proprietorship who as such officer, director, employee or manager is under a duty to act for such corporation, partnership, limited liability company or individual proprietorship in complying with any requirement of this article; and any member of a partnership or limited liability company.” Unfortunately for Messrs. Boissiere and Krystal, they are persons required to collect sales and use tax as is “any member of a partnership or limited liability company.” Pursuant to Tax Law § 1133(a), persons required to collect sales and use tax “shall be personally liable for the tax imposed, collected or required to be collected…” Although the petitioners argued that New York LLC Law § 609(a) provides that members of an LLC are not liable for the company’s debts, the Tax Appeals Tribunal held that the text of Tax Law § 1131(1) is unambiguous. There is virtue in knowing New York Sales and Use Tax Law and ensuring that your partnership or LLC is compliant with it, or in engaging the services of a competent, thorough tax consultant.

RECENTLY ENACTED NEW YORK STATE ESTATE TAX AND PERSONAL INCOME TAX CHANGES Published on August 19, 2015

by Richard Bloom and Michael Rudegeair The New York State Department of Taxation and Finance recently issued Technical Memorandum TSB-M-15(3)M explaining 20152016 state budget legislative amendments which modified estate tax reforms that were enacted in 2014.

Estate Tax Rate Clarification New York’s 2014-2015 state budget enacted substantial changes to the New York estate tax, including increasing the estate tax exclusion from $1 million at the beginning of 2014, up to $5.25 million in 2018. As drafted, the estate tax rate table in the statute was effective only for estates of individuals dying on or after April 1, 2014 and before April 1, 2015; there was no rate table for estates of those who died after March 31, 2015. The recently enacted legislative amendments removed the dates from the statute so that the rate table is now effective for estates of individuals dying after March 31, 2015.

Deductions Related to Intangible Property for Non Residents The 2015-2016 budget made a technical correction to the computation of a decedent’s New York gross estate by prohibiting deductions related to intangible personal property of a nonresident that is not included in that decedent’s New York gross estate. This amendment applies to estates of nonresident individuals with dates of death on or after April 15, 2014.

Add Back of Taxable Gifts Last year’s state budget contained a provision requiring the inclusion of taxable gifts in the computation of a decedent’s New York gross estate (for certain gifts made within three years of death). As the statute was written, it appeared to overreach by subjecting all gifts made (within three years of death) to New York estate tax. Two issues arose as a result. First, gifts of non-New York real or tangible property by a New York resident were not specifically excluded from the gift add back provision, but this type of property is not subject to New York estate tax. Second, the gift add back provisions required add back of taxable gifts made within three years of death even after January 1, 2019 when the New York exclusion amount will be linked to the Federal exclusion amount.

The first issue was addressed by the New York State Department of Taxation and Finance last August when they issued a Technical Memorandum (TSB-M-14(6)M) to clarify that the gift of non-New York property by a New York resident would not be subject to New York estate tax. This position is now codified in the budget, and the law clarifies that only gifts of real property (or tangible personal property) having situs in New York will be included in a decedent’s gross estate. The second issue was clarified in the current legislative amendments, so that the add back of gifts does not apply to individuals dying on or after January 1, 2019.

Permanent Limitation on New York State Charitable Deductions for High Income Taxpayers Although not mentioned in the Technical Memorandum, the budget also extended the limitation on the deductibility of charitable contributions for high income taxpayers. In 2009, New York State added limitations to the amount of charitable contributions that high income taxpayers could deduct. For taxpayers with New York Adjusted Gross Income (NYAGI) above $1 million and no more than $10 million, the New York State charitable deduction is limited to 50% of the amount allowed on the federal return; beginning in 2010, taxpayers with NYAGI above $10 million are limited to 25% of the amount allowed on the federal return. When enacted, the 25% limitation was in effect for taxable years beginning after 2009 and before 2013. The expiration was extended in 2013 through taxable years beginning before 2016. The current budget further extends this limitation through 2017. Similar limitations for New York City residents with NYAGI above $10 million exist through 2017.

Conclusion Unlike last year’s overhaul of the state’s estate tax regime, this year’s budget contains relatively minor adjustments and technical corrections to existing law. The estate planning community has suggested a number of proposals for future improvements to the New York transfer tax system, and we will monitor and report as future changes are made.

October 2015 | 41

TAX

WHAT CAN WOODY HAYES TEACH US ABOUT TAX AMNESTY PROGRAMS?

Published on August 27, 2015

by Harold Hecht and Seth Rabe


States are getting more sophisticated in the ways they identify delinquent taxpayers. If a revenue department finds the taxpayer first, taxes are imposed (which often include all unfiled years with no limitation, no matter how far back), penalties are assessed, and interest accrued from the original filing due date. A little upfront work, however, may save a taxpayer thousands of dollars. State tax amnesty programs provide taxpayers an easy route to pay past due tax liabilities, of any type, and the states generally waive all or some of the interest and penalties. The following is a list of states with current/upcoming amnesty programs and the period of time during which the amnesty program is available: §§ §§ §§ §§ §§ §§

Arizona – September 1, 2015 – October 31, 2015 Indiana – September 15, 2015 – November 16, 2015 Kansas – September 1, 2015 – October 15, 2015 Maryland – September 1, 2015 – October 30, 2015 Missouri – September 1, 2015 – November 30, 2015 Oklahoma – September 14, 2015 – November 13, 2015

If taxpayers have outstanding liabilities in any of the above-mentioned states, they should consider availing themselves of the applicable tax amnesty program. If a taxpayer’s facts do not permit them to enter into an amnesty program, potential liabilities go back more than 3-4 years, or their liabilities involve a state or local jurisdiction not currently offering amnesty, voluntary disclosure agreements often prove helpful. Voluntary disclosure agreements offer a chance to file past due tax returns of any type. In return for voluntarily coming forward, the specific department of revenue typically agrees to limit the look-back period and abate penalties. Often, taxpayers are unsure which jurisdictions they should be filing in. If that is the case, a nexus study is an excellent way to determine where taxpayers owe tax and what tax type they should pay. WeiserMazars’ tax professionals can assist you in developing the best action plan to bring you into compliance with respect to your specific state tax liabilities. As the great Woody Hayes once said, “I may not be able to outsmart too many people, but I can outwork ‘em.” Not only was Coach Hayes providing insight into his success as a Buckeye football coach, he was also telling us to be proactive – such as by staying a step ahead of revenue departments and considering tax amnesty and voluntary disclosure programs.

WASHINGTON STATE ENACTS NEW NEXUS STANDARDS Published on September 4, 2015

by Harold Hecht and Seth Rabe With football season around the corner, the most important news to come out of Washington isn’t about the Seattle Seahawks, but the state’s new nexus standards for both the Sales Tax and the Business & Occupation Tax. Effective Sept. 1, 2015, economic nexus standards will now apply to most out-of-state businesses making wholesale sales into Washington. These entities will be subject to the wholesaling business and occupation (B&O) tax on wholesale sales delivered into the state for the current year if they met any of the following economic nexus thresholds during the prior calendar year: § § § §

More than $267,000 of gross income in Washington More than $53,000 of payroll in Washington More than $53,000 of property in Washington At least 25% of total property, payroll, or income in Washington

Under this legislation, wholesale businesses that lack physical nexus but exceed the $267,000 Washington gross income threshold in any calendar year will, for the first time, become subject to B&O tax on wholesale sales into the state. In determining whether a wholesaler exceeds the nexus threshold of $267,000, both apportionable income attributable to Washington (such as income from services or royalties) and wholesale sales delivered to the state are included.

There has also been a change in the sales tax treatment of outof-state sellers paying a commission or other type of payment to a Washington individual or business to promote their products. This issue can even arise from payments made to a Washington business for having a link on their website to an out-of-state company. When a customer clicks on the link, and a sale is made, a commission paid to the website in Washington will create “click-through nexus” issues and the out-of-state company could be required to collect Washington retail sales tax beginning September 1, 2015 if certain parameters are met. Although this does not meet the traditional definition of physical nexus required for sales tax, it is similar to laws enacted, and in some cases upheld, in other states. Under these provisions, out-ofstate retailers are presumed to have the necessary nexus with Washington, and will be required to collect sales tax if they: § Enter into agreements with Washington residents and pay a commission or other consideration for referrals (such as linking on a website), and § Grossed more than $10,000 in sales into Washington state during the prior calendar year under this type of agreement. Please contact your WeiserMazars tax professional for more information. Please see our March 28, 2014 Alert regarding the Amazon case in New York for a more detailed description of click-through nexus.

TAX PRACTICE BOARD Stephen Brecher 646.225.5921 [email protected]

Howard Landsberg 212.375.6604 or 516.282.7209 [email protected]

Jeffrey Katz 212.375.6816 [email protected]

James Toto 732.205.2014 [email protected]

October 2015 | 43

NOT-FOR-PROFIT

BENEFICIAL CHANGES TO FORMS 990 AND 5500 DUE DATES

NFP A L E R T 44 | WeiserMazars Ledger

Published on August 27, 2015

by Israel Tannenbaum and Mitch Lewis Exciting news for not-for-profit organizations! For the second time in 2015, tax and information reporting agencies have simplified reporting obligations for the sector, greatly easing the administrative burden on virtually all tax-exempt organizations. We are very pleased to report that on July 31, 2015, President Obama signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (H.R. 3236 full text can be found here), which contains provisions granting Form 990 (series) an automatic 6-month extension ending on November 15 for calendar year filers. Currently only a 3 month automatic extension with an option to request a second 3 month extension exists. With the new regulation in place, organizations will only need to file one automatic request for extension, which will presumably not require a signature, thereby easing the administrative burden. As an active member of the New York State Society of CPA’s (NYSSCPA) Exempt Organization’s Committee, WeiserMazars LLP helped draft the Society’s submission of a comment letter several months ago requesting this exact change. The bill also contains exciting news for Employee Benefit Plans! Form 5500 will now be granted an automatic 3½-month extension period, ending on November 15 for calendar year plans (currently only a 2½ month period). These changes apply to taxable years beginning after December 31, 2015. As such, they will generally apply to returns for the 2016 tax year (which will be filed in 2017) for most taxpayers. Additionally, in March of 2015 the New York State Charities Bureau eliminated the formal extension process for Form CHAR500. Please see our March 24, 2015 Non-Profit Alert for more details. Please do not hesitate to reach out to our experts with any questions you may have.

NOT-FOR-PROFIT GROUP Mitch Lewis 212.375.6723 [email protected] Ron Ries 212.375.6782 [email protected]

Howard Cohen 212.375.6587 [email protected]

Ethan Kahn 212.375.6794 [email protected]

Avi Lazerowitz 212.375.6959 [email protected]

Scan the barcode below to subscribe to the WeiserMazars Ledger!

October 2015 | 45

ACCO U N TI N G

|

TA X

|

A DV I S O RY

SUCCESS COMES FROM SPOTTING OPPORTUNITIES FIRST THE EAGLE’S EYESIGHT IS AMONG THE SHARPEST IN THE ANIMAL KINGDOM. IT CAN EASILY SPOT ITS TARGET FROM MILES AWAY.

WeiserMazars creates conditions that are exactly right. We deliver the technical skill, hands-on service and global resources that enable your company to succeed in any business environment. Our expertise helps you spot opportunities before your competitors do, giving you a strategic advantage.

PLEASE CONTACT: Victor Wahba / Chief Executive Officer 646.402.5799 / www.WMexactlyright.com [email protected]

WeiserMazars LLP is an independent member firm of Mazars Group. WeiserMazars LLP is an independent member firm of Mazars Group.

Exactly Right.