The CPA Desk

A Thought Leader Production by PKFTexas

Preparing for an Audit with Your CPA

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, this week’s guest host, and I’m back with Chip Schweiger, one of our Audit Directors here at the firm.  Chip, welcome back to the Playbook.

Chip: Thanks, good to be here, Jen.

Jen: Now, if someone’s looking for an audit, take us through what that discussion would look like.  What types of things would you ask? How would you get that discussion started?

Chip: Sure, yeah. Normally somebody will reach out if they’re thinking about an audit. We’d encourage them to call PKF Texas, and we would come out and talk with them about their business; directionally, where is it going? But one of the most important questions that I ask prospective clients is, what do you want this business to be? Do you want to sell it to your children? Do you want to sell it to somebody else? Would you like to take it public? Or, would you like to get a private equity investor involved? That way, we can help calibrate our compliance services to also meet the needs directionally of where the company is going.

Jen: So, we’re really kind of co-developing a solution with them once we find out what their needs are.

Chip: Yeah. I like how you said that. It’s a great approach, and it really helps our clients, in the long run, get to where they want to be.

Jen: Now is there anything beyond that initial discussion they can expect once they decide, yes, I do need an audit?

Chip: We’re going to talk with them, certainly, about what the effort is involved, and which gets the fees. We’re going to talk with them about the service team, and the types of experts that we’re going to put on that engagement.

Jen: Perfect.  Well, thank you so much. I appreciate you being here.

Chip: Great.  Good to be here again.

Jen: This has been another Thought Leader production brought to you by the PKF Texas Entrepreneur’s Playbook.  Tune in next week for another chapter.

Do You Have to File a Gift Tax Return for 2016?

Last year you may have made significant gifts to your children, grandchildren or other heirs as part of your estate planning strategy. Or perhaps you just wanted to provide loved ones with some helpful financial support. Regardless of the reason for making a gift, it’s important to know under what circumstances you’re required to file a gift tax return.

Some transfers require a return even if you don’t owe tax. And sometimes it’s desirable to file a return even if it isn’t required.

When filing is required

Generally, you’ll need to file a gift tax return for 2016 if, during the tax year, you made gifts:

  • That exceeded the $14,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse),
  • That exceeded the $148,000 annual exclusion for gifts to a noncitizen spouse,
  • That you wish to split with your spouse to take advantage of your combined $28,000 annual exclusions,
  • To a Section 529 college savings plan for your child, grandchild or other loved one and wish to accelerate up to five years’ worth of annual exclusions ($70,000) into 2016,
  • Of future interests — such as remainder interests in a trust — regardless of the amount, or
  • Of jointly held or community property.

When filing isn’t required

No return is required if your gifts for the year consist solely of annual exclusion gifts, present interest gifts to a U.S. citizen spouse, qualifying educational or medical expenses paid directly to a school or health care provider, and political or charitable contributions.

If you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

Meeting the deadline

The gift tax return deadline is the same as the income tax filing deadline. For 2016 returns, it’s April 18, 2017 (or October 16 if you file for an extension). If you owe gift tax, the payment deadline is also April 18, regardless of whether you file for an extension.

Have questions about gift tax and the filing requirements? Contact us to learn more.

Houston Suburb Boasts Economic Growth, Great Quality of Life

Russ: This is the PKF Texas Entrepreneur’s Playbook. I’m Russ Capper, this week’s guest host, and I’m here once again with Rick Ellis, the Vice President of the Katy Area Economic Development Council. Welcome back to the Playbook, Rick.

Rick: Great to be here again, thanks.

Russ: You bet. You’ve been telling us about this growth, and it looks and sounds significant, but share some numbers with us.

Rick:  Well, growth in the Katy Area has just been phenomenal, and the Katy Area EDC follows the boundaries of KISD, which is 181 square miles, bigger than the city of Pittsburg. We are now home to 325,000 residents, with projections taking us to 370,000 by the year 2021. In the year 2000, the decade between 2000 and 2010, we saw 84% growth in our population; just crazy stuff. We have 10 master-planned communities, in 2015 there were over 3,500 home sales. So, why Katy?

Russ:  Right. Well, tell us then. What is the quality of life?

Rick:  Well, it’s the size, the location, the proximity to Houston. You’ve got amenities, but if you want sports teams you’re right down the road from Houston. You’ve got a great quality of life, master-planned communities, highly acclaimed educational offerings, great workforce, proximity to the energy and oil centers down the energy corridor. We’ve got attractions; we’ve got Typhoon Texas that just got built this summer, great water park, we’ve got an indoor trampoline park coming, indoor rock climbing, we are finishing up our second YMCA, and then the Katy Boardwalk is coming soon that is going to have offices and retail, and a conference center and a hotel. So, lots of growth.

Russ:  Sounds like the place to be.

Rick:  It is.

Russ:  Rick, thanks a lot.

Rick:  Great, thanks a bunch.

Russ:  You bet. And that concludes my discussion with Rick Ellis, the Vice President of the Katy Area EDC. This has been another Thought Leader Production, brought to you by PKF Texas Entrepreneur’s Playbook.

Helpful Tips for the Tax Treatment of Incentive Stock Options

Incentive stock options allow you to buy company stock in the future at a fixed price equal to or greater than the stock’s fair market value on the grant date. If the stock appreciates, you can buy shares at a price below what they’re then trading for. However, complex tax rules apply to this type of compensation.

Current tax treatment

ISOs must comply with many rules but receive tax-favored treatment:

  • You owe no tax when ISOs are granted.
  • You owe no regular income tax when you exercise ISOs, but there could be alternative minimum tax (AMT) consequences.
  • If you sell the stock after holding the shares at least one year from the exercise date and two years from the grant date, you pay tax on the sale at your long-term capital gains rate. You also may owe the 3.8% net investment income tax (NIIT).
  • If you sell the stock before long-term capital gains treatment applies, a “disqualifying disposition” occurs and any gain is taxed as compensation at ordinary-income rates.

So if you were granted ISOs in 2016, there likely isn’t any impact on your 2016 income tax return. But if in 2016 you exercised ISOs or you sold stock you’d acquired via exercising ISOs, then it could affect your 2016 tax liability. And it’s important to properly report the exercise or sale on your return to avoid potential interest and penalties for underpayment of tax.

Future exercises and stock sales

If you receive ISOs in 2017 or already hold ISOs that you haven’t yet exercised, plan carefully when to exercise them. Waiting to exercise ISOs until just before the expiration date (when the stock value may be the highest, assuming the stock is appreciating) may make sense. But exercising ISOs earlier can be advantageous in some situations.

Once you exercise ISOs, the question is whether to immediately sell the shares you receive or to hold on to them long enough to garner long-term capital gains treatment. The latter strategy often is beneficial from a tax perspective, but there’s also market risk to consider. For example, it may be better to sell the stock in a disqualifying disposition and pay the higher ordinary-income rate if it would avoid AMT on potentially disappearing appreciation.

The timing of the sale of stock acquired via an exercise could also positively or negatively affect your liability for higher ordinary-income tax rates, the top long-term capital gains rate and the NIIT.

Planning ahead

Keep in mind that the NIIT is part of the Affordable Care Act (ACA), and lawmakers in Washington are starting to take steps to repeal or replace the ACA. So the NIIT may not be a factor in the future. In addition, tax law changes are expected later this year that might include the elimination of the AMT and could reduce ordinary and long-term capital gains rates for some taxpayers. When changes might go into effect and exactly what they’ll be is still uncertain.

If you’ve received ISOs, contact us. We can help you ensure you’re reporting everything properly on your 2016 return and evaluate the risks and crunch the numbers to determine the best strategy for you going forward.

Three Steps to Take When Expanding Your Business

Jen:  This is the PKF Entrepreneur’s Playbook.  I’m Jen Lemanski, this week’s guest host, and I’m back here with Chip Schweiger, one of our audit directors at the firm.  Chip welcome back to the Playbook.

Chip:  Thanks Jen, good to be here.

Jen:  Houston is an international city; we’ve got a lot of businesses coming in, setting up shop here.  What do you recommend somebody do when they get here?

Chip:  I give folks three pieces of advice:

  • One, get a PEO or a payroll function in place right away.  You’ve got to pay your employees and it’s a lot more complicated than just writing a check.  There’s withholding, there’s quarterly filing statements and so it’s important to get a professional involved.
  • Secondly, get a good attorney and help get the articles of incorporation set up and get the organization set up to do business in Houston and in Texas.
  • And three, probably most importantly, get a good accountant to help you out, someone like PKF Texas; we can help you with taxes, we can help you with attest services and really help you get off to a good start with your business.

Jen:  That’s great, in fact we have a whole program called the International Healthy Start Program so we’d love to help out people with that.  Thanks so much for being here.

Chip:  Absolutely.

Jen:  Turn learn more about how we can help your international business visit  And this has been another Thought Leader Production brought to you by the PKF Texas Entrepreneur’s Playbook

FASB Clarifies the Definition of a Business

The Financial Accounting Standards Board (“FASB”) recently issued Accounting Standards Update (“ASU 2017-1”) that clarifies the definition of a business under Accounting Standards Codification Topic 805, Business Combinations, and affects all companies and other reporting organizations that must determine whether they have acquired or sold a business.

The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation.  The new standard is intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or of a business.

The amendments in ASU 2017-1 provide a more robust framework to use in determining when a set of assets and activities is a business.  They also provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable.  Specifically, ASU 2017-1 provides a “screen” to determine when a set of assets and activities is not a business.  The screen requires that when substantially all the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets and activities is not deemed a business.  This screen reduces the number of transactions that need to be further evaluated.  Under the ASU, if the screen is not met, the amendments: a) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output, and b) remove the evaluation of whether a market participant could replace missing elements.  The ASU also provides a framework to assist entities in evaluating whether both an input and a substantive process are present.

According to FASB Chairman Russell Golden, “Stakeholders expressed concerns that the definition of a business is applied too broadly and that many transactions recorded as business acquisitions are, in fact, more akin to asset acquisitions.”  Golden continued, “The new standard addresses this by clarifying the definition of a business while reducing the cost and complexity of analyzing these transactions.”

For public companies, ASU 2017-1 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods.  For all other companies and organizations, the ASU is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.  Early application of the ASU is allowed as follows:

  • For transactions for which the acquisition date occurs before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance
  • For transactions in which a subsidiary is de-consolidated or a group of assets is derecognized that occur before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance.

Details can be found at

Contact me at or any other member of your PKF Texas service team for more information.

2017 National Manufacturing Outlook and Insights

2017 National Manufacturing Cover

We are pleased to release the results from the 2017 Leading Edge Alliance (LEA Global) National Manufacturing Outlook Survey. This survey was conducted in association with leading accounting firms across the country and the report is a benefit to our clients as part of our efforts to help co-develop the client experience with us as trusted advisors.

With more than 250 participants, this survey report contains expectations and opinions of manufacturing executives in more than 20 states across the country producing a wide variety of products including industrial/machining, transportation/automotive, construction, food and beverage, and others.

Results from the survey include:

  • 74% of small manufacturers and 69% of large manufacturers expect revenue growth in 2017.
  • Manufacturers are more optimistic about their local/regional economies than the national or global economies.
  • The top priority for manufacturers in 2017 is “cutting operations costs”.
  • 67% expect labor costs to “increase” and an additional 7% expect labor costs to “increase significantly” in 2017.

You can access the report by visiting or clicking the photo above. Please feel free to contact our Director of Practice Growth, Karen Love ( or 713-860-1459), to discuss the findings of the survey.

Who is Eligible for the Section 199 Deduction?

The Section 199 deduction is intended to encourage domestic manufacturing. In fact, it’s often referred to as the “manufacturers’ deduction.” But this potentially valuable tax break can be used by many other types of businesses besides manufacturing companies.

Sec. 199 deduction 101

The Sec. 199 deduction, also called the “domestic production activities deduction,” is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts.

Yes, the deduction is available to traditional manufacturers. But businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing also may be eligible.

The deduction isn’t allowed in determining net self-employment earnings and generally can’t reduce net income below zero. But it can be used against the alternative minimum tax.

How income is calculated

To determine a company’s Sec. 199 deduction, its qualified production activities income must be calculated. This is the amount of domestic production gross receipts (DPGR) exceeding the cost of goods sold and other expenses allocable to that DPGR. Most companies will need to allocate receipts between those that qualify as DPGR and those that don’t — unless less than 5% of receipts aren’t attributable to DPGR.

DPGR can come from a number of activities, including the construction of real property in the United States, as well as engineering or architectural services performed stateside to construct real property. It also can result from the lease, rental, licensing or sale of qualifying production property, such as:

  • Tangible personal property (for example, machinery and office equipment),
  • Computer software, and
  • Master copies of sound recordings.

The property must have been manufactured, produced, grown or extracted in whole or “significantly” within the United States. While each situation is assessed on its merits, the IRS has said that, if the labor and overhead incurred in the United States accounted for at least 20% of the total cost of goods sold, the activity typically qualifies.

Contact us to learn whether this potentially powerful deduction could reduce your business’s tax liability when you file your 2016 return.

Job Growth and Development in Houston Suburb

Russ:  This is the PKF Texas Entrepreneur’s Playbook.  I’m Russ Capper, this week’s guest host and I’m here once again with Rick Ellis, the Vice President of the Katy Area Economic Development Council.  Welcome back to the Playbook Rick.

Rick:  Glad to be back.

Russ:  So last time you were here we talked about kind of the emerging education industry that’s taking place out in your area which is incredible, but what else is happening?

Rick:  Well, still some energy things. Speaking of job relocation and workforce moving, Shell is moving 3500 employees from the downtown area out to the Katy area, which is great for Katy, great for the overall community for sure.  We’re still seeing a lot of high tech manufacturing and distribution.  We have a new company coming in, a German company that manufactures electronic sensors, they’re bringing 100 jobs.  FedEx is building a huge 800,000 square foot facility out on 99 that’s going to create 500 jobs, ultimately 2500 jobs.  In the office we’re seeing Geico came out last year and created a facility that had 300 employees, they’ve already doubled their workforce and they’re going to double it again in the next 2 to 3 years.

Russ:  Geico?

Rick:  A lot of growth, a lot of growth going on.

Russ:  Wow, really cool.  So I wonder, I’ve never worked for an economic development council but do you compete with other cities I guess?

Rick:  We do, we do.

Russ:  And so you must even compete against Houston at times.

Rick:  We compete – actually Houston goes for the whole region, the Greater Houston Partnership helps out all the allies, but you know, you’re competing against Ft. Bend County and Waller and Tomball and Pearland and all of them.

Russ:  Alright.  Okay, well it sounds like you guys are doing particularly well.

Rick:  We’re doing great.

Russ:  All right Rick thanks once again, I appreciate it.

Rick:  Thank you.

Russ:  You bet.  And that wraps up my discussion with Rick Ellis, the Vice President of the Katy Area EDC.  And this has been another Thought Leader Production brought to you by PKF Texas Entrepreneur’s Playbook.

The Expense Deduction That is Less Beneficial Than You Think

Investment interest — interest on debt used to buy assets held for investment, such as margin debt used to buy securities — generally is deductible for both regular tax and alternative minimum tax purposes. But special rules apply that can make this itemized deduction less beneficial than you might think.

Limits on the deduction

First, you can’t deduct interest you incurred to produce tax-exempt income. For example, if you borrow money to invest in municipal bonds, which are exempt from federal income tax, you can’t deduct the interest.

Second, and perhaps more significant, your investment interest deduction is limited to your net investment income, which, for the purposes of this deduction, generally includes taxable interest, nonqualified dividends, and net short-term capital gains, reduced by other investment expenses. In other words, long-term capital gains and qualified dividends aren’t included.

However, any disallowed interest is carried forward. You can then deduct the disallowed interest in a later year if you have excess net investment income.

Changing the tax treatment

You may elect to treat net long-term capital gains or qualified dividends as investment income in order to deduct more of your investment interest. But if you do, that portion of the long-term capital gain or dividend will be taxed at ordinary-income rates.

If you’re wondering whether you can claim the investment interest expense deduction on your 2016 return, please contact us. We can run the numbers to calculate your potential deduction or to determine whether you could benefit from treating gains or dividends differently to maximize your deduction.