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What are the filing deadlines for federal income tax returns for 2016?

The deadline for individual tax returns (Forms 1040, 1040NR, 1040A, and 1040EZ) is April 17, 2017.  You may request a six-month extension which will extend the filing deadline to October 16, 2017.  Extensions apply only to filing deadlines.  All tax payments due to the IRS are due April 17, 2017.

Trust and Estate income tax returns (Form 1041) are due April 17, 2017.  Trusts and Estates can request a five and half month filing extension.  The extended deadline is October 2, 2017.

S Corporations (Form 1120S) have an initial filing deadline of March 15, 2017.  The corporation my file a request to extend the deadline to September 15, 2017. S Corporations with a fiscal year end other than a calendar year must file by the 15th day of the third month following the end of the corporation’s fiscal year.

During 2016, Congress passed the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015.  As part of the Act, the filing deadlines for partnerships and C Corporations were changed.  The change in filing deadlines takes place beginning with the December 31, 2016 tax year.

As part of the change, Partnership returns (Form 1065) are now due March 15, 2017.  You may file a six-month extension request and extend the filing deadline to September 15, 2017.

C Corporations (Form 1120) tax returns are initially due April 17, 2017.  The corporation may request a six-month extension and extend the filing deadline to October 16, 2017.  As noted for the individual extensions, tax payments cannot be extended and must be made by April 17, 2017.

C Corporations with a fiscal year end other than a calendar year must file by the 15th day of the fourth month following the end of the corporation’s fiscal year. A six month extension may be requested.

*There is an exception for corporations with a fiscal year from July 1 to June 30 whose initial filing deadline with remain September 15th, with an option of a five month extension to February 15.  Beginning July 1, 2027, the filing deadline will be October 15, with an option to file a six-month extension until April 15th.

How long should I keep my tax records?

Generally, tax records related to federal income taxes should be kept for three years from the date you filed your tax return.  The IRS requirements for record keeping are listed below:

  • If you owe additional tax and situations (marked by * below) do not apply to you; keep records for 3 years.
  • * If you do not report income that you should report, and it is more than 25 percent of the gross income shown on your return; keep records for 6 years.
  • * If you file a fraudulent return; keep records indefinitely.
  • * If you do not file a return; keep records indefinitely.
  • If you file a claim for credit or refund after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
  • If you file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
  • Employment tax records should be maintained for at least four years after the date that the tax becomes due or is paid, whichever is later.

What is Qualified Production Activities Deduction (QPAD)?

The QPAD is a deduction from the gross receipts of a taxpayer who has “qualifying activities,” which includes construction performed in the U.S. The QPAD is computed as a percentage of income (9%) from qualifying activities (subject to certain limitations). Contractors can benefit from the QPAD regardless of the form of organization. As such, C corporations, S corporations, partnerships and individuals can all benefit from the QPAD.

What is Section 179 and Bonus Depreciation?

The section 179 deduction is an election to recover all or part of the cost of certain qualifying property, up to $500,000, in the year the property is placed in to service. You can elect the section 179 deduction instead of recovering the cost by taking annual depreciation deductions. Section 179 is permanent at the $500,000 level. However, businesses exceeding a total of $2 million of purchases in qualifying equipment have the Section 179 deduction phase-out dollar-for-dollar and the election is completely eliminated if total purchases exceed $2.5 million.

Bonus Depreciation allows you to elect to expense up to 50% of the cost of new equipment in the 2016 and 2017 tax year. In order to qualify for bonus depreciation the equipment must be purchased new, used equipment is not eligible. Bonus depreciation will decrease to 40% in 2018 and 30% in 2019.

How much can you contribute annually to an IRA? Are my contributions deductible?

The annual contribution limit for 2016 is $5,500, or $6,500 if you’re age 50 or older. Your Roth IRA contributions may also be limited based on your filing status and income.

Traditional IRA contributions may be deductible on your tax return. If neither you nor your spouse is covered by a retirement plan at work, your deduction is allowed in full. ROTH contributions are not deductible.

What are self-employment taxes?

Self-employment tax is a social security and Medicare tax primarily for self-employed individuals.  Individuals who are self-employed and earn over $400 during the year are subject to the self-employment tax.  Income up to $118,500 is taxed at a rate of 15.3% (12.4% Social Security tax and 2.9% Medicare tax).  Income over $118,500 is taxed at the 2.9% Medicare tax rate.  One-half of your self-employment taxes are deductible from your adjusted gross income on your tax return. Your self-employment tax payments contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

Will I be subject to the additional Medicare tax?

You are liable for Additional Medicare Tax if your wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual’s filing status.  For those with a filing status of married filing jointly the threshold amount is $250,000 (married filing separately is $125,000). The threshold is $200,000 for those filing as single, head-of-household, or qualifying widow(er) with a dependent child. If wages are paid to you (including your spouse income if filing a joint return) in excess of the threshold amounts than you are subject to the Additional Medicare tax.  The Additional Medicare tax is .9%. 

What is the Net Investment Income Tax?

Taxpayers whose income is greater than the established threshold amounts are subject to a 3.8% tax on certain types of investment income. Generally, investment income includes interest, dividends, capital gains, rental and royalty income, non-qualified annuities and income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the taxpayer.

For those with a filing status of married filing jointly the income threshold amount is $250,000 (married filing separately is $125,000). The threshold is $200,000 for those filing as single, head-of-household, or qualifying widow(er) with a dependent child.

Who qualifies as my dependent?

The IRS identifies two types of dependents and they are each subject to their own rules.  The first is a qualifying child and the second is a qualifying relative.  See below for the rules for each type of dependent.

Qualifying Child:

  • Are they related to you? The child can be your son, daughter, stepchild, eligible foster child, brother, sister, half brother, half sister, stepbrother, stepsister, adopted child or an offspring of any of them.
  • Do they meet the age requirement? Your child must be under age 19 or, if a full-time student, under age 24. There is no age limit if your child is permanently and totally disabled.
  • Do they live with you? Your child must live with you for more than half the year, but several exceptions apply.
  • Do you financially support them? Your child may have a job, but that job cannot provide more than half of her support.
  • Are you the only person claiming them? This requirement commonly applies to children of divorced parents.
  • Qualifying Relative:
  • Do they live with you? Your relative must live at your residence all year or be on the list of “relatives who do not live with you” in Publication 501. About 30 types of relatives are on this list.
  • Do they make less than $4,000? Your relative cannot have a gross income of more than $4,000 and be claimed by you as a dependent.
  • Do you financially support them? You must provide more than half of your relative’s total support each year.
  • Are you the only person claiming them? This means you can’t claim the same person twice, once as a qualifying relative and again as a qualifying child. It also means you can’t claim a relative—say a cousin—if someone else, such as his parents, also claim him.

 

What are some of the types of assurance services you offer?

We offer a variety of assurance services including audit, review and compilation of business and personal financial statements. We can also perform audits of 401 (k)/qualified retirement plans, and perform agreed-upon procedures.

What is the difference between an audit and a review?

There are significant differences between an audit and a review.

An audit requires substantially more testing of accounting records and procedures than a review.  Additional procedures such as third party confirmation of cash and construction contracts as well as testing of internal controls and documentation require substantially more time than a review.

Because a review is substantially less in scope than an audit,  review procedures can be streamlined and tailored toward specific areas (i.e. construction contracts and collectability of accounts receivable).  The focus just as in the case of an audit is always on striving for accuracy and proper presentation.  However, the scope of documentation and testing can make the overall engagement less time consuming.

How do I know if I should get an audit or review of the financial statements?

The level of service is most often determined by the user of the financial statements.  The majority of private companies choose compiled or reviewed statements, however, creditors, investors, and bonding companies may require an audit.  We will typically talk a contractor out of doing an audit and instead performing a review if one is not required by their bonding company or the licensing board.  The typical level that we have seen bonding companies push for obtaining an audit rather than a review is an aggregate bonding program exceeding $30 million.  Certain regulatory agencies, such as the Tennessee Board of Contractors also have requirements for the level of service (see below for the Board of Contractors requirements). 

What is a Compilation?

Unlike in an audit or review, a compilation does not include performing any procedures to verify accuracy and completeness of the financial statements.  Management (or the individual if it is a personal financial statement) takes complete responsibility for the financial statements.  The client represents the information to us and we assemble the financial information in the proper format.  It is rare for a bonding company to accept a compilation at year end.  However, sometimes in smaller bonding programs they can and do accept compiled financial statements. 

Which type of financial statement is required by the Tennessee Board for Licensing Contractors?

The type of financial statement you need for a TN Contractors License application, renewal and/or monetary limit increase request depends mainly on the monetary limit of the license.  Financial statements presented to the Board must be less than 12 months old.

When you initially apply for a contractor’s license a review is required for a monetary limit request of $1,500,000 or less.  For limits over $1,500,000, an audit is required.

You must renew your TN Contractor’s license every two years.  If the existing monetary limit is $1,500,000 or less than you are only required to submit a compiled financial statement with the renewal form.  This can be prepared by either a CPA or you can internally compile the statement using the Board formatted financial statement found on their website.  If however your existing monetary limit is greater than $1,500,000 you must submit a reviewed financial statement with your renewal form every two years.  The review must be performed by a licensed CPA.

If you request an increase of the monetary limit on your existing contractor’s license, you must submit with the limit increase request audited statements for any request over $1,500,000 and a reviewed financial statement for requests of $1,500,000 or less.

What is an “agreed-upon procedure”?

An agreed-upon procedure is an engagement in which a client and/or other third party requests a specific test of certain business information and/or processes to be performed by an independent auditor.  The auditor does not offer an opinion as part of an agreed-upon engagement; they simply present the results of the procedure(s).  The end users then base their conclusions on the results of the tests run by the auditor. One of the most common agreed-upon procedures is the development of financial forecasts and projections.

How much will an audited or reviewed statement cost?

The higher the level of service required, the more time we will need to complete the engagement. Therefore, an audit, which requires substantially more procedures and documentation, is the more costly engagement.  Our fees will be at our regular hourly rates for the individuals’ involved.  Our initial proposal to a potential client will provide a range of anticipated fees based on the size and complexity of the Company as well as the level of service to be provided.

Why do I need to know the value of a business?

There are several situations that may require you to determine the value of a business, including:

  • Sale or purchase of a business
  • Debt financing support
  • Mergers and acquisitions
  • ESOPs
  • Estate and gift taxes
  • Liquidations
  • Buy-sell agreements
  • Property settlements in divorce
  • Stockholder or partner buyouts
  • Goodwill impairment

What types of business valuation are available?

There are two main types of business valuation engagements:

A Complete Valuation that results in an opinion of value that is admissible in court and is required for Federal estate and gift tax purposes. 

A Calculation of Value results in an estimation of value and is best suited for planning transactions (purchase/sale of business); strategic or estate planning; or in divorce situations where there is a reasonable likelihood that the parties may settle.  As a planning aid, a Calculation of Value, if needed, can be expanded into a Complete Valuation.

Is there a difference in cost between a Complete Valuation and a Calculation of Value?

Yes.  The steps required for a Complete Valuation are much more extensive than those performed for a Calculation of Value.  We work with you to assess the situation and scope our work to fit your needs and your budget.

What all is involved in a valuation?

A valuation requires considerable fact-finding related to the entity, including:

  • Personnel interviews and site visits
  • Review of the entity’s history and entity records
  • Analysis of the entity’s financial performance over several years
  • Analysis and comparison to similar companies
  • Analysis of the economic environment in which the entity operates and other factors.

How long a period is a valuation report valid?

A valuation report is typically valid for a maximum of one year.  After that, the report should be updated to reflect subsequent company performance and current economic/industry conditions.  However, there could be some extreme dominant factors, such as a natural disaster, which could invalidate a valuation report prepared prior to the occurrence of the extreme event.

Do you appraise real property?

No. Our valuation work applies only to ownership interests and intangible assets.  If your engagement requires an appraisal of real or tangible property, we will work with property appraisal professionals to develop our final opinion or calculation of value.

Do you comply with professional standards?

Yes.  Our firm is bound by the professional standards of the American Institute of Certified Public Accountants (AICPA)  and the Tennessee Society of Certified Public Accountants (TSCPA).  Our valuation services comply in all respects with the Statement of Standards for Valuation Services (SSVS) as promulgated by the AICPA.

What is forensic accounting?

Forensic accounting, also called investigative accounting, is a detailed examination and analysis of documents for use as evidence in a court of law.  The term “forensic accounting” can include the following areas:

  • Fraud detection, documentation, and presentation of report.
  • Calculation of economic damages.
  • Tracing income and assets, usually to find hidden assets or income (such as divorce and bankruptcy cases).
  • Reconstruction of financial statements that may have been destroyed or manipulated.

Who uses fraud and forensic services?

Forensic accountants are retained by law firms, corporations, banks, government agencies, insurance companies, and other organizations to analyze, interpret, summarize, and present complex financial and business related issues in an understandable manner.

Why would my accountant not discover fraud and financial manipulation when he prepares my year-end audited financial statements?

The difference between the public expectation of the purposes and objectives of an audit and the CPA’s responsibilities under Generally Accepted Auditing Standards (GAAS) is referred to as the “expectation gap.”  Audits of financial statements are not designed to detect fraud.  However, should fraud be discovered during the course of a financial statement audit, the CPA must notify the entity’s management of the findings.  The client engagement letter and opinion for a financial audit states that the object of the audit is to obtain reasonable assurance that the financial statements are free of material misstatement, not the detection of fraud.

What are some possible red flags that my business may be the subject of fraud?

In many cases, the business owner or management may have a suspicion or feeling that fraud or accounting irregularities are happening.  Some of the more frequent observations that lead to these “hunches” are:

  • There is no clear separation of accounting duties.
  • An employee with control or access to cash and accounting records does not take vacations or time-off.
  • There are significant transactions with related parties or suppliers who are unknown.
  • There is a distinct difference between an employee’s income and their lifestyle.
  • There are significant and frequent adjustments made to the accounting records.

Our firm can provide a review of your company’s internal controls in order to make changes that would lessen the opportunities for irregularities to occur.

What might be the cost for a forensic accounting or economic damages analysis?

Our fees are typically based on hourly rates.  The fees ultimately charged will depend upon variables such as the complexity of the case, the timing of the required analysis, and the purpose of the engagement.  In non-litigated engagements we can offer fixed-fee arrangements under certain circumstances.  Please contact our firm for specific information regarding our fee structure or to receive a proposal for a particular engagement.

Does a  FAR (Federal Acquisition Regulation) audit include an opinion on my complete financial statements?

No.  A FAR audit is designed to provide assurance that the indirect overhead is accurately computed.  The audit opinion scope is limited and restricted to users of the FAR audit.

Do I need a FAR audit for every state in which I perform work?

Generally no.  Usually the firm has a FAR audit performed for its home State DOT (Department of Transportation).  The home State DOT then issues a “cognizant letter” that is accepted by other states.  However, there are a few states, notably Florida, that do not recognize cognizant letters.

What is a “cognizant approved indirect cost rate”?

The term refers to the indirect cost rate established by an audit performed in accordance with GAGAS (Generally Accepted Government Auditing Standards) to test compliance with the FAR cost principles and accepted by a cognizant Federal or State agency such as the FHWA (Federal Highway Administration) or a State DOT.

What work should be performed by a State DOT to accept an audit performed by a CPA  to issue an approved cognizant letter?

The State DOT performs a review of the CPA’s workpapers using the Review Program for CPA audits of Consulting Engineers’ Indirect Cost Rates identified in Appendix A of the AAHSTO Uniform Audit & Accounting Guide.

How long is an audited indirect cost rate valid?

One-year.  The one-year applicable accounting period means the annual accounting period for which financial statements are regularly prepared for the consulting engineer firm.

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