PKF Texas - The Entrepreneur's Playbook®

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Miriam Rouziek, an audit manager and a member of the PKF Texas SEC team. Miriam, welcome back to The Playbook.

Miriam: Thanks, Jen, I’m glad to be back.

Jen: So, last time we talked about the SEC; this time I think we want to talk a little bit about the PCAOB and how some of their inspection trends are going to be changing. What do we need to know?

Miriam: Right. The PCAOB is more focused on your audit firm, so they’re not going to be coming and asking you questions. They’ll be coming to us and your other audit firms, asking us questions about your financial statements, how we audited them and where we focused our audit testing on. So, similar to the SEC, the PCAOB is going to be focused on the new revenue recognition guidance, as well as the upcoming lease guidance standards, so we’re going to be looking more in depth on those as part of our audit.

Jen: Perfect. Now, is there anything else public companies need to know about what the PCAOB is going to be looking for?

Miriam: The PCAOB is going to be looking into our audit procedures to see how we changed our audit procedures and whether or not they were sufficient in addressing the new revenue recognition guidance and looking forward to the new lease standard guidance. So, we may have more questions for our clients about what’s going to happen with their financial statements, how we’re going to get comfortable with those issues.

Jen: Are they going to focus on any specific areas beyond the revenue recognition and lease accounting?

Miriam: The PCAOB is focused on audit quality. They’re going to be looking at all areas of our audits, but they’re going to be focusing on areas that have significant accounting judgement. So, this is going to be things like significant estimates that the company comes up with for their financial statements. This may include the estimates regarding your leases, estimates regarding revenue that’s estimated at year end for contracts that cover both December and January, for example, or that are in process at the end of the year that revenue may be recognized at the beginning of next year. They’re also going to be looking at things like impairment of goodwill and other intangible assets; basically, anything that the company is going to have significant accounting judgement.

Jen: Interesting, perfect. Well, it sounds like we’ll be working with our clients through the audit process to make sure that we meet all these requirements.

Miriam: Sure, absolutely. And just remember the PCAOB isn’t going to call you – they’re going to call us.

Jen: All right, perfect. For more about this topic, visit PKFTexas.com/SECDesk. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m here with Miriam Rouziek, an Audit Manager and a member of the PKF Texas SEC team. Miriam, welcome to the Playbook.

Miriam: Thank you for having me, Jen.

Jen: As a member of the SEC team I know you handle comment letters for our clients and work with them on those. What trends are you seeing coming from the SEC in regard to those letters?

Miriam: We’ve noticed a steady decline in SEC comment letters over the years. Since 2018, there’s been a steady decline of about 25%, which is comparable to the decline we saw in 2017. The comment letters are going to be focused on revenue recognition, coming up soon, since the new guidance has been implemented for about a year with the SEC companies.

The majority of comment letters are still going to be focused on larger companies, usually with a market cap of $700,000,000 or more. Those are your larger and more highly accelerated filers who have an accelerated due date – usually in February. These companies are going to have the majority of comment letters. Smaller companies, like the ones PKF handles, are usually going to have a smaller portion of the comment letters, and especially in more technical areas, they’re not going to see as many comment letters on those.

Jen: If a company receives one of these comment letters, they should call you guys, right?

Miriam: Correct. Usually, they should call us or call their attorney, who handles their SEC filings. We can have meetings with the SEC attorney and with the client, and we will be able to talk them through the process, talk them through the comments that the SEC has and any issues they have with the process, helping them figure out what they need to do. Most companies think that the first thing they need to do is call the SEC and have a restatement of their financial statements, but that’s not actually true. Most of the SEC comments are usually geared towards requesting more information, walking the SEC through the disclosures and the thought process of the company.

Jen: Perfect. Well, I think we’ll have to get you back to talk a little bit more. Can we get you back?

Miriam: Absolutely.

Jen: Awesome. For more about this topic, visit pkftexas.com/SECDesk. This has been another Thought Leader Production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Frank Landreneau, one of our international tax directors. Frank, welcome back to the Playbook.

Frank: Well, thank you, Jen. It’s great to be back.

Jen: I’ve heard some headlines about transfer pricing. Can you give our viewers a little bit of an overview of what that actually is?

Frank: Yes, essentially when a multinational company is organized in a number of jurisdictions. So, for example – a simple example would be a company based in the U.S. with a U.K. subsidiary. It’s common for those entities to buy and sell goods from each other or perform services on behalf of one another. And so, it really is a concept to capture the arm’s length price of those transactions as if those transactions were taking place with a third-party as opposed to related parties.

Jen: Interesting. So, now we’ve talked about tax reform in previous segments; how is tax reform affecting transfer pricing?

Frank: There were a few additions in the Tax Jobs Act – otherwise known as Tax Reform – that impacted transfer pricing. Probably the most important was expanding the definition of intangible property so that the emotional thing of intangible property as IP or intellectual property developed from R&D activities for example. But there’s also intellectual property developed from things such as goodwill, customer base or a force in play.

Jen: Interesting.

Frank: So, for example, if you have a company that is – the synergies it has with its workforce, the training, the goodwill of the company – that’s also intellectual property.

Jen: Interesting.

Frank: And they include it in that definition.

Jen: Okay, so it really expanded the scope a little bit.

Frank: That’s right.

Jen: Now, how does transfer pricing affect some of the other international things we’ve talked about in other segments?

Frank: The definition of transfer pricing and some specifics within transfer pricing didn’t change per se, but there are some concepts that we’ve talked about that really kind of play towards some of that. For example, some of the provisions we’ve talked about, like GILTI – that’s the global taxed intangible income – uses concepts in transfer pricing, such as residual or routine activities and non-routine activities to perform computations. So, there is a little bit of a linkage with some of those tax reforms along with transfer pricing.

Jen: Great, well, we’ll get you back to talk some more about some international tax matters.

Frank: Thank you. I would love to come back.

Jen: Perfect. To learn more about other international topics, visit PKFTexas.com/internationaldesk. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m here today with Ryan Istre, an Audit Director and a member of the PKF Texas SEC team. Ryan, welcome back to The Playbook.

Ryan: Thanks for having me, Jen.

Jen: So, with the revenue recognition rules for ASC 606 that have come out and were applicable as of January 1, 2018, what do we need to know about that?

Ryan: That’s a good question, Jen. So, the SEC hasn’t had a whole lot of new comment letters come out about ASC 606. We do probably expect a lot of those to come out right around February and March of next year, because that’s when the companies will have a full cycle of revenue recognition under their belt for the full year.

Jen: So, do you expect them to come out with anything else?

Ryan: Again, they haven’t ever said officially. We’ve just sat through forums and a lot of CPE updates, and what we’ve heard to this point is that the SEC is suggesting that while most of the companies that they’ve been reviewing have been meeting the minimum requirements, they are suggesting that there are still a few more quarters that are available for the rest of the year for them to actually beef up their disclosures. So, we’re thinking they might believe a little deficiency is there but probably not enough to issue a formal comment letter so far.

Jen: Now, are there things in the disclosures that you’re recommending be enhanced based on that?

Ryan: Yes. So, what we’ve heard is that they’re recommending enhanced disclosures around what constitutes a specific performance obligation and what management is determining is the actual point in time in which the companies are meeting those performance obligations.

Jen: Okay, so it sounds like there’s definitely more information to come and that they should if they’re looking at it at all they need to contact someone like you so that we can give them guidance on what to do.

Ryan: Exactly. That would be a good idea; definitely contact the auditors, contact us. What we’ve heard in recent forums is that the Office of the Chief Accountant will continue to respect companies’ disclosure practices and procedures if those disclosures are well-grounded and based upon the principles of the new revenue recognition guide. So, I guess we’ll have to wait and see.

Jen: Yeah, so, let’s get some real-world application and see if it makes common sense maybe?

Ryan: Common sense, principles-based – it’s a toss-up, but only time will tell.

Jen: Perfect. Well, we’ll get you back once we know more information.

Ryan: Definitely.

Jen: Thank you. For more about this topic, visit our Revenue Recognition Central page on PKFTexas.com. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Annjeanette Yglesias, one of our tax managers and a member of our not-for-profit team. Annjeanette, welcome back to the playbook.

Annjeanette: Hi, Jen, it’s nice to be here.

Jen: So, we’ve talked a lot about different not-for-profit topics, and what are some options for families that are looking to invest?

Annjeanette: Family philanthropy is a really hot topic, especially here in Houston with all the opportunities and wealth in the city. Typically, when we talk about family philanthropy, two things come up: private foundations and donor advised funds.

Jen: Is there a difference between the two, I’m assuming? And what is that difference?

Annjeanette: A private foundation is a separate legal entity. It’s a 501(c)(3) organization that has its own tax filings and its own set up process, etc. But a donor advised fund is just an account that is set up at a 501(c)(3) organization that a donor can contribute to and then suggest grants be made out of.

Jen: How would a family decide which option is best for them?

Annjeanette: There’s a lot of things to consider when deciding which vehicle is the best. Is a private foundation the best for a certain family to use or is a donor advised fund the best?

There are several considerations, but one of the most important considerations is the administrative tasks that go into maintaining each of these types of vehicles. A private foundation is going to be more responsibility on the donor family, because they’ll have to maintain the accounting records, make sure that tax filings are made and, most importantly, administer the grant programs. With a donor advised fund, on the other hand, all the donor family does is contribute money to the donor advised fund, and the sponsoring organization takes care of the rest. It takes care of maintaining the funds, filing the appropriate forms, things like that. So that’s definitely one consideration.

Another consideration is setup time. A private foundation has to be established as a legal entity first, and then get its 501(c)(3) status from the IRS, and then it can go forth and start doing grant programs. That process can take up to six months—maybe a year—depending on how fast the paperwork gets through the system, but a donor advised fund can be set up within a week. It’s basically minimal paperwork, because the entity itself—the 501(c)(3)—is already created. You’re just setting up a donor advised fund, which is an account within that organization.

Jen: Perfect. It sounds like they need to talk with you if they need some advice on which would be best to meet their goals, right?

Annjeanette: Exactly. It’s important to have a conversation with a tax advisor, because families have different goals, charitable goals and family goals. There’s different succession planning that has to be discussed, and also, most importantly, is what assets are going to be used to fund these vehicles. Those are the types of things that we can help clients with.

Jen: Perfect. We will get you back to talk about a little bit more.

Annjeanette: That sounds good.

Jen: To learn more about how PKF Texas can help your not-for-profit organization, visit PKFTexas.com/NotForProfit. This has been another Thought Leader Production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m here again with Ryan Istre, one of our audit directors here at PKF Texas. Ryan, welcome back to the Playbook.

Ryan: Thanks for having me, Jen.

Jen: So, how has the process of the PCAOB inspections of auditors of broker dealers impacted us and what we’re doing with our broker dealer clients?

Ryan: That’s a good question. About four years ago, the PCAOB began inspecting auditors of broker dealers. What that means for us is that there’s a new level of rules that we have to play by, however, if you were a client of ours, you would probably not even know the difference. Over all of the previous years that we’ve been doing audits, we’ve been under inspections for AICPA rules, PCAOB rules and various other organizations that ensure our audit quality is up to par. So, from a client’s perspective, you probably wouldn’t even notice a difference.

Jen: So, has anything changed at all then?

Ryan: There are a few changes that have happened. With the PCAOB being the official body over this inspection process for broker dealers, one of the rules has been changed recently is that there’s a concept of what’s called an “engagement quality reviewer.” That is not the lead partner on an engagement, but it’s the second partner to ensure quality control. The PCAOB rules specifically disallow partners who’ve participated in the previous two engagements as the lead partner from turning into that engagement quality reviewer. So, that basically allows for new sets of eyes to happen with regard to the quality controls over the audit.

Jen: So, does any other information come out of the PCAOB’s inspection process?

Ryan: There’s been some good information that’s come out of it. PCAOB is in what they consider their interim inspection period right now. So, while they’re not posting auditor-specific reports as they do with their normal public companies, they’re going to be posting general guidance around what they’ve learned from the inspection process. Unfortunately, there’s been several deficiencies that they’ve found in their audit inspection process – probably higher than I’d like to let onto – but it’s going to be a good thing, because a lot of the infractions that they’ve noticed probably were fairly minor. But there have been some that have been more serious, such as independence infractions and partner rotation rules for some of the smaller firms that may not have been super familiar with the PCAOB’s rules.

Jen: Well, good. And I know our audit team really sticks on to those PCAOB rules.

Ryan: Absolutely. You have to, you have to.

Jen: Perfect. Well, we’ll get you back to talk a little bit more.

Ryan: Yep, sounds good.

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

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Annjeanette Yglesias, one of our tax managers and a member of our not-for-profit team. Annjeanette, welcome back to The Playbook.

Annjeanette: Thanks, Jen. It’s good to be here.

Jen: So, tax manager, tax reform is a hot topic this year. How has it impacted not-for-profit organizations?

Annjeanette: It’s interesting, because tax reform has been a hot topic, and the tax reform has some direct impacts for nonprofit organizations, as well as some indirect impacts, because a lot of nonprofit organizations receive their funding from the general public.

Jen: So, what are some of the direct impacts not-for-profits have seen?

Annjeanette: Well, tax reform affected nonprofit organizations in several ways. First of all, with unrelated business income, or UBI. UBI activities were previously allowed to offset each other. The losses from one could offset the income from another, and so you had a netting effect.

But now with tax reform, the IRS is requiring that all UBI activities must be reported individually. So that benefit – there is no longer available. Also, under tax reform, the UBI tax rate has been lowered to 21%. Previously it was a graduated scale with the highest tax bracket being 35%.

Jen: Oh my gosh. So that’s a good thing?

Annjeanette: Absolutely a good thing. But there are also some more negative things that came out of tax reform as well. For example, the IRS is now imposing a 21% excise tax on compensation of covered employees over $1 million.

Jen: Oh my gosh.

Annjeanette: So basically, that portion of an employee’s compensation that exceeds $1 million, the nonprofit organization will have to pay a 21% excise tax on that.

Jen: Oh my gosh.

Annjeanette: In addition, there’s a 1.4% net investment income tax now imposed on certain educational institutions, like private colleges and universities. So, that’s something else to think about.

Jen: Now, are there any indirect aspects? You mentioned that earlier.

Annjeanette: Yes, absolutely. Because of the nature of nonprofit organizations, how they receive a lot of their funds from the general public, there are several provisions in tax reform that affected the general public – namely individuals. So, individuals now have a little bit of a decreased incentive to donate to nonprofit organizations, because even though the individual income-based limitation increased to 60%, the standard deduction has now doubled. So, the incentive for an individual to make a donation to a nonprofit organization has been substantially reduced.

Jen: Well, great. Well, we’ll get you to talk some more about tax reform and not-for-profits, and we’ll have you back again.

Annjeanette: Sounds good.

Jen: To learn more about how PKF Texas can help your not-for-profit organization, visit PKFTexas.com/notforprofit. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Annjeanette Yglesias, one of our tax managers and a member of our not-for-profit team. Annjeanette, welcome back to the Playbook.

Annjeanette: Thanks, Jen. It’s good to be here.

Jen: So, not-for-profit… you work with different organizations, and I think the most popular type of not-for-profit organization is 501(c)(3), correct?

Annjeanette: Yes, that’s correct. There are over 30 different types of nonprofit organizations, according to the internal revenue code, and 501(c)(3) organizations are definitely the most popular. Those organizations have purposes for educational, scientific, religious, prevention of cruelty to animals—those types of organizations fall within 501(c)(3).

Jen: So, are there any limitations that we need to be aware of for not-for-profit organizations?

Annjeanette: Well, that really depends. 501(c)(3) organizations can fall into two categories: either a public charity or a private foundation. Private foundations definitely have more restrictions associated with them than public charities do.

Jen: So, there’s different tax rules for each type of entity, correct?

Annjeanette: That’s correct, and the tax rules depend on whether the 501(c)(3) is a public charity or a private foundation, because private foundations have more restrictive activity rules than public charities do.

Jen: And what type of restrictions are there?

Annjeanette: For example, the IRS requires that private foundations distribute a certain amount of their funds annually, and, also, private foundations are subject to a 1% to 2% excise tax on their net investment income. Those two rules are not applicable to public charities. Also, private foundations are restricted in the amount of voting stock that they can hold in a private company, as well as there are several rules that the IRS imposes regarding self-dealing and self-dealing really deals with substantial contributors and any interested persons of the organization.

Jen: So, does the 990 come into play? I would assume that they know the different limitations, but that’s where they call you, right?

Annjeanette: That’s right. If any organization has a question on if they have to follow any of these restrictions, they can certainly call us, and we can walk them through it.

Jen: Perfect. Well, it sounds like there’s a lot more to talk about, and we’ll get you back.

Annjeanette: Sounds good.

Jen: To learn more about how PKF Texas can help your not-for-profit organization, visit PKFTexas.com/notforprofit. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m here with Martin Euson, a director on our tax team. Martin, welcome back to the Playbook.

Martin: Thanks, Jen. I’m glad to be here.

Jen: So, I’ve heard a little bit about the Opportunity Zone Program. What is it?

Martin: The Opportunity Zone Program is a new program that was created as a result of the Tax Cuts and Jobs Act that, as we know, was signed into law last December, and the program is really aimed at encouraging private investment and development into areas that are historically distressed communities or low-income communities across the United States. And in exchange for that, investors are given some pretty significant tax benefits.

Jen: We’re in Houston – are there areas where we can feel the impact locally?

Martin: Oh, absolutely. In Houston, alone, there are more than 100 Opportunity Zone designations. If you look at a map of inside the Beltway, most of Downtown Houston has the Opportunity Zone designation and much of the area to the east of Downtown. So, more than 100 areas inside of Houston, across the state of Texas more than 600 areas were designated Opportunity Zones, and so, it should have a very significant impact at the local level.

Jen: So, Martin, what kind of incentives exist for investment in these Opportunity Zones?

Martin: So, the incentive, Jen, really is a tax incentive. Investors who invest in Opportunity Zones can benefit from three different types of tax incentives:

  • The first one being deferral of gain from a recent sale or exchange transaction when that gain is reinvested into an Opportunity Zone area. And that gain can be deferred as long as December 31 of 2026, and so, that’s a pretty significant deferral just that length of time.
  • The second tax benefit comes from investors being able to eliminate up to 15% of the gain on the investment or the gain that they’re reinvesting into a qualified Opportunity Zone.
  • And the third tax benefit that investors can receive is avoiding tax on the gain associate with the investment in the Opportunity Zone and avoid paying tax all together if the investment’s held for at least 10 years.

Jen: So where can our viewers find out more information about where these Opportunity Zones are?

Martin: The IRS website has put together a very comprehensive FAQ section that addresses a lot of questions associated with the program. There’s also a map of the United States, and it can be scaled down to Texas and down to Houston.

Jen: Okay, perfect.

Martin: That provides a lot of good information, and as always viewers can go to the PKF Texas website for more information or connect with me directly on LinkedIn.

Jen: Sounds good. Now is there any specific industry that this impacts, or it’s pretty much anybody can invest in these Opportunity Zones?

Martin: There are some prohibited investments when you get into recreation and entertainment, things like that, and there are a lot of nuances that go along with it from a tax perspective and from the type of investment perspective. So, the best thing to do would be either to check out the FAQ sections or to consult with your PKF tax advisor.

Jen: Come talk to you. All right, perfect. We’ll get you back to talk a little bit more about it, sound good?

Martin: All right, thanks, Jen.

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

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back with Ryan Istre, an Audit Director and a member of the PKF Texas SEC team. Ryan, welcome back to the Playbook.

Ryan: Thanks for having me, Jen.

Jen: So, I’ve heard that the SEC has made some amendments about the definition of a smaller reporting company. What do these companies need to know?

Ryan: The SEC is in process of expanding the definition of what a small reporting company is. The way a public company determines whether it’s a smaller reporting company is at June 30th of each year, it has to calculate its public float. Public float means how many common shares does the company have outstanding multiplied by the trading price of the shares on that date. Historically $75 million was the cutoff, so if a company’s public float was less than $75 million, it was considered a smaller reporting company. So, the changes that the SEC has made has increased the amount of public float to $250 million, so a lot more companies are going to fall under the definition of a smaller reporting company.

Jen: So, if they’re not actively traded, what if there’s no public float? How do they determine that?

Ryan: That’s a good question. The SEC has also included in the definition of a smaller company a smaller reporting company with no public float annual revenues less than $100 million.

Jen: Okay. Are there any benefits to this to smaller reporting companies?

Ryan: Definitely. In normal public company filings for accelerated filers, you have to include three years of historical financial statement – two years of balance sheets, three years of income statements. And in smaller reporting company rules, you only have to include two years of historical income statements. That doesn’t sound like a lot that they’re dropping off from the requirements, however, in each of the financial statement footnotes and all of the sections of the NDNA, for example, anything under 10 K, because of the amount of disclosures necessary for public companies, dropping off an entire year is actually…

Jen: That’s huge.

Ryan: Definitely, definitely. It’s a big help. The SEC staff actually assumed that about 960 filers will be able to benefit from these expanded rules of smaller reporting companies.

Jen: That’s great. We’ll get you back to talk about it a little bit more.

Ryan: Sure.

Jen: Thank you. For more about this topic, visit PKFTexas.com/SECdesk. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.