Following are a few important issues our accounting professionals wanted to briefly share with you. As always, should you desire more in-depth information please feel free to contact us.
NO SUCH THING AS A (TAX) FREE LUNCH
In an increasingly popular practice, many high-tech companies of Silicon Valley are offering a tasty perk to their employees: three square meals a day provided for free. Companies have found that offering such benefits keeps lunch hours lean and productive. They say it facilitates greater collaboration among workers who eat together, and it eliminates the drive-time to off-site eateries. Employees have welcomed the perk, coming as it does with Red Bull on-tap and unlimited amounts of not-so-lean Doritos.
The practice, however, has attracted the attention of the Internal Revenue Service. In its release of the 2014-2015 Priority Guidance Plan, the IRS has identified employer-provided meals as a priority topic to address this year.
Hungrily eyeing the potential revenues if these employer-provided meals are classified as taxable income, the IRS seems poised to invite itself to the table and start a food fight.
Current IRS guidance (Publication 15-B) allows certain employer-provided meals-such as those that are infrequent or of little value-without triggering income or payroll tax. For example, meals provided at the occasional company picnic are not considered a taxable benefit to the employee. Also, specific carve-outs exist for employer-provided soft-drinks, coffee and donuts. (Donut holes qualifying as a carve-out? Maybe the IRS does have a sense of humor.)
Current guidance also indicates that company cafeterias do not typically generate a tax liability. If a meal is provided for a “substantial business reason” other than to provide the employee with additional monetary benefit, the IRS has been content to glaze over the issue.
Simply stated so far, but let’s examine Internal Revenue Code Section 119:
Internal Revenue Code Section 119 excludes from an employee’s taxable income the value of meals if they are provided for the convenience of the employer and furnished on the business premises. The IRS considers a meal as furnished for the employer’s convenience only if the company provided it for a substantial non-compensatory business reason. Such reasons include when the employee must be restricted to a short meal period and could not be expected to eat elsewhere in such a short time and because the employee could not otherwise secure proper meals within a reasonable meal period, such as when there are not sufficient eating facilities nearby. All meals furnished to employees on its business premises are treated as furnished for the convenience of the employer if more than half the employees to whom such meals are furnished receive them for the employer’s convenience.
The Wall Street Journal reports that IRS auditors are already flagging companies engaged in the free meal practice, in some cases demanding back taxes of up to 30% on the fair market value of the meals.
As the IRS bellies up to the lunch buffet, it appears determined to put a new twist on an old adage, says Weinberg’s Director of Tax, Jeffrey Engler, “Even if there was such a thing as a free lunch, there certainly ain’t no such thing as a tax-free lunch!”
NEW GUIDANCE – GOING CONCERN DISCLOSURES
Newly released guidance by the Financial Accounting Standards Board (FASB) will make it easier for stakeholders to evaluate whether a company is at risk of continuing as a going concern.
In Accounting Standards Update No. 2014-15, Presentation of Financial Statements – Going Concern, the FASB will impose new disclosure requirements on company management to better help stakeholders evaluate whether a company is at substantial risk of continuing as a going concern.
The update is the FASB’s response to stakeholders who had complained about the lack of GAAP guidance on when and how management should disclose going concern issues. Differing views about when substantial doubt exists about an entity’s ability to continue as a going concern has resulted in diversity in whether, when, and how an entity discloses the relevant conditions and events in its footnotes.
The update clarifies that management is responsible for evaluating and disclosing those conditions and events and has provided additional guidance on how management should evaluate and disclose such events.The new guidance will provide management with principles for evaluating whether there is substantial doubt by:
*Providing a definition of the term “substantial doubt” and related guidance
*Requiring an evaluation every reporting period, including interim periods
*Providing principles for considering the mitigating effect of management’s plans
Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). Once the organization identifies conditions or events that raise substantial doubt, it then will be able to consider whether management’s plans can alleviate substantial doubt by mitigating the underlying conditions and events. If not, the organization must include a footnote indicating management’s substantial doubt in the company’s ability to continue as a going concern in the year after the financial statements are issued. In the above case, the organization must also disclose which conditions or events have raised the substantial doubt, management’s evaluation of the significance of those conditions, and management’s plans to mitigate those conditions or events. Even in those cases where management believes its actions will alleviate substantial doubt, the company must still disclose the conditions, their impact on the company, and how it plans to alleviate the substantial doubt about the business’ ability to continue as a going concern. “This will not be a major change to the readers of financial statements, as the concept of ‘going concern’ has always been reflected in financial reporting, except such guidance was embedded in the auditing standards,” said Weinberg Managing Partner Corey Fischer. “The FASB has done both investors and company management a service by more clearly defining the appropriate response to ‘going concern’ issues. The guidance clarifies management’s responsibility to its stakeholders.” The update will take effect in the annual period ending after December 15, 2016.
With much political furor in Washington focused on the practice of tax inversions (by which a company avoids the U.S. corporate tax rate by shifting its headquarters to a lower-tax locale), a lesser known strategy has largely flown under-the-radar: re-domiciling via a private equity buyout.
In such cases, which recently have included New York retailer Michael Kors Holdings Ltd. and California health supplement maker Herbalife Ltd., a buyout fund will typically set up a foreign shell company which then acquires the target. This maneuver effectively relocates the business’ tax headquarters to a lower-tax regime, such as the Cayman Islands (Herbalife’s new tax domicile), or the British Virgin Islands (Michael Kors).
The practice, which Bloomberg estimates has been used in at least fourteen cases since 1990, has attracted less attention because it tends to occur in the private equity sphere, with acquired companies beyond the reach of many SEC reporting requirements.
Meanwhile, anti-inversion legislation continues to be drafted in Congress. And, the Treasury Department announced that it will take steps to curb corporate tax inversions. The anti-inversion measures just announced are aimed at making the practice more difficult and less profitable.
Treasury Secretary Jacob Lew hailed his department’s actions as “first steps in making substantial progress in constraining the creative techniques used to avoid U.S. taxes.”
Weinberg’s Tax Director Jeffrey Engler remarked, “Stand-alone anti-inversion legislation or departmental regulations can only go so far. It ignores the underlying problem: the U.S. corporate tax rate is the highest in the developed world and in the absence of a broad-based corporate tax overhaul, companies will continue to seek ways to legally minimize their tax liability.”
REDEEMING “THANK YOU” POINTS? THE IRS THANKS YOU, TOO
In a recent decision (Shankar v. Commissioner, 143 T.C. No. 5), the Tax Court ruled that the value of airline tickets received in redemption of award points must be included in gross income.
The petitioner, Mr. Shankar opened a bank account with Citibank. The bank was running a promotion that awarded customers “Thank-you” points for opening accounts. The cumulative points could be redeemed for airline tickets, and that is exactly what Mr. Shankar did in 2009.
He was surprised at year end to receive a Citibank-issued 1099-MISC reporting $668 which represented the fair market value of an airline ticket that Mr. Shankar received in redemption of his 50,000 “Thank-you” points.
Citibank was able to produce records detailing the redemption of the 50,000 points for an airline ticket, as well as documentation of the ticket’s $668 fair market value.
Because the awarded points were given to Shankar as a noncash award for opening a bank account, the court ruled that it was “something in exchange for the use (deposit) of Mr. Shankar’s money; i.e., something in the nature of interest.” And, like interest, decided it rightly should have been reported as gross income.
It is not clear whether Mr. Shankar has commented on the adverse ruling, but we suspect that any such remarks would not have ended with Thank You.
CONSULTING PRACTICE EXPANDS
Maintaining regulatory compliant practices and procedures in a world of rapidly changing rules and regulations can present challenges for the best of CFOs.”We have responded,” said Weinberg Managing Partner Corey Fischer, “by expanding our Consulting practice group. We have assembled high-level professionals-former Big 4 partners and Managers-who have worked extensively with public companies and private funds. They possess the education and experience to address the most difficult and complicated accounting, auditing, controls and financial issues.”Whether it involves framing a response to an SEC comment letter, analyzing the effect of new accounting pronouncements, developing an accounting policy, or writing position papers for your auditors, “our consultants will assist you in determining the right answer and guide your company to a successful solution.”Consulting services include:
* SEC Advisory
* IPO Prep
* Revenue Recognition
* Acquisition Accounting
* Debt/Equity Transactions
* Embedded Derivatives
* Variable Interest Entities
* Impairment Analysis of Intangibles and Goodwill
* Stock Option Planning
* SOX Controls – implementation and testing
* Lender Services
* Litigation Support
* International and Cross-border Transactions
* General Financial Consulting
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Weinberg & Company is a leading, international, full service, multi-office CPA firm serving clients throughout the United States and the Pacific Rim. Founded over two decades ago, the practice groups include: Assurance and Audit, Tax and Accounting, and Advisory Services. Weinberg has a depth of knowledge and experience to meet the needs of both public and privately held companies, high net worth individuals, entrepreneurs, family offices, and can provide customized business management services. www.weinbergla.com
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