PKF Texas - The Entrepreneur's Playbook®

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.

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, Jen. Appreciate it.

Jen: So, I’ve heard FASB is making some changes to share-based payment accounting. What do public companies need to know about this?

Ryan: Changes to the share-based payment accounting is happening pretty soon. A lot of companies will issue share-based payments to some of their employees, sometimes they’ll issue it to some of their consultants, and in the past, the accounting for those two may differ significantly.

Jen: It seems like that would be a little bit confusing to companies.

Ryan: It could be. The FASB issued this new standard to try to simplify the problem of divergent accounting. Now, one of the items, for example, that’s going to change with the new rules is that the point in time when you have to measure and the amount that you have to measure the compensation at, was different if it was a non-employee versus an employee. And historically it was at the commitment date, and now it’s going to be at the grant date of the actual share-based payment, so that’s going to bring the two in line and make it a little bit simpler for companies to apply.

Jen: Sounds good. Now when is this actually going to be effective?

Ryan: For most public companies, it’s going to be effective starting January 1, 2019, but an earlier option is permitted.

Jen: And what do they need to do to get ready for that?

Ryan: They just need to assess how much share-based payments they issue to non-employees and determine whether it benefits them to early adopt or to wait until the normal adoption date.

Jen: Perfect, sounds good. Well, we’ll get you back to talk about some public company information.

Ryan: Sure.

Jen: 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 once 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 nice to be here.

Jen: So, we’ve talked before about the Donor Bill of Rights and how it really wasn’t a legal thing for nonprofits to follow, but I know there’s organizations out there that are considered “watchdogs.” Can you tell us a little bit about some charity watchdogs?

Annjeanette: Charity watchdog organizations are out there, and they’re basically on the Internet and such. And they’re out there to provide donors information. A lot of nonprofit organizations have tax filings and financial information that’s already made available to the public, and these watchdog organizations basically make that information available in one spot for donors to look at.

Jen: So, kind of like a search engine for charities?

Annjeanette: Basically yes.

Jen: What are the main charity watchdogs that people typically go to?

Annjeanette: There’s three that come to mind. So, first of all, there is Charity Navigator, and Charity Navigator is pretty popular. They basically collect tax returns, copy of tax returns and financial information, as well as annual reports that nonprofit organizations might have on their websites. And what they do is they take that information, analyze it and provide a star rating. So, they have a star rating system, and they have a formula that goes behind their star rating system.

And then there’s Charity Watch; Charity Watch is very similar. They get financial information, tax return information that’s already out there to the public collected, and they have their own method of rating organizations and they provide a letter rating A through F.

And then there’s GuideStar; GuideStar doesn’t necessarily analyze a nonprofit organization’s performance. What they do is they’re just a repository for information: the tax returns, financial reports, annual reports, things like that. But what they do have is a seal of transparency rating that they provide each organization based on how much information the organization itself voluntarily provides to customers.

Jen: So, you’ll want to kind of maybe look at all three but then also do your own due diligence as just part of when you’re making a decision whether or not to contribute to a not-for-profit.

Annjeanette: That’s correct. The important thing for nonprofit organizations to know is that these watchdog organizations are out there, and so, it’s important for the nonprofits to understand what they’re looking at, what the grading methodology is and what the donors are seeing from that aspect of it. That way when they field questions from potential donors, potential supporters they’re aware of what’s out there, and they can respond appropriately.

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

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 back again with Annjeanette Yglesias, one of our tax managers and a member of the PKF Texas Not-for-Profit team. Annjeanette, welcome back to the Playbook.

Annjeanette: Hey, Jen. It’s nice to be here.

Jen: So, I’ve heard about this thing called a Donor Bill of Rights. Can you tell me what that is, and what people need to know about it?

Annjeanette: Sure. The Donor Bill of Rights was created by the Association of Fund Raising Professionals about 25 years ago. Basically, it’s a blueprint – a set of best practices that organizations can use to maintain their donor relationships.

Jen: So, what are some key things that are in the Donor Bill of Rights?

Annjeanette: The Donor Bill of Rights actually is made up of 10 tenants, so to speak, and they all center around transparency. For example, the Donor Bill of Rights states that donors have the right to know who the organization’s leadership is and have access to them to ask any questions that they would like and also receive prompt, transparent responses from those in leadership positions. Also, the Donor Bill of Rights states that donors have the right to know their resources are being used.

Jen: That’s key.

Annjeanette: Exactly – to fund the mission and also that donors have a right to see financial information. Some of that financial information is already made available to the public via Form 1099, the annual tax filing that a nonprofit organization would have out there anyway, but also with other financial information. So really the Donor Bill of Rights centers around transparency and around what the nonprofit organizations – what kind of information they should be giving their donors to give them confidence that their funds are being stewarded properly.

Jen: Well, it sounds like this is something that pretty much all not-for-profits should adhere to.

Annjeanette: Right. It’s definitely – the Bill of Rights is definitely something that every organization should consider. However, it should be noted that the Donor Bill of Rights is not an enforceable set of rules.

Jen: It’s not like a legal requirement.

Annjeanette: Exactly. There’s no regulatory agency out there making sure that all nonprofits adhere to it. But each organization should definitely consider what the tenants are and should implement it in its own way. Organizations have to consider their tradable mission, their resources and especially their donor base in considering what facets of the Bill of Rights they want to embrace.

Jen: That makes a lot of sense. Well, great. We’ll get you back to talk about some more not-for-profit topics soon.

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 back again with Frank Landreneau, one of our international tax directors. Frank, welcome back to the Playbook.

Frank: Well, thanks for having me back.

Jen: So, we’ve been covering international tax reform. What else do people need to know? What haven’t we covered yet?

Frank: I think other than the Toll Tax, which is getting more immediate attention because of the timing of it, there’s also other aspects of international tax reform that tax payers need to be aware of.

For example, that there’s disparate treatment between individuals and corporate tax payers when it comes to certain provisions, such as GILTI, and we’ve talked about FDII in previous segments – the Foreign Derived Intangible Income. And so, with respect to GILTI, for example, the top individual rate is 37%, and if there’s any amount to be included from a foreign corporation that’s taxed immediately as GILTI, that’s also taxed at 37%. However, for corporate tax payers any income inclusions from GILTI is taxed at 10.5%. That’s quite a rate differential between the two.

Jen: Wow, that’s huge. I know we’ve also talked about middle market entrepreneurs. Should they stop doing business as flow-through entities? We’ve talked about that in several different videos.

Frank: That’s a great question. In fact, that’s a big question that you see the international tax community or the tax community as a whole should ask, “Is this the death of limited liability companies?” And I think the answer is, I think, companies need to really start to think about where do they want their cash; do they want it back home? Do they want to keep it offshore? Where do they need it for their operational needs?

Once you determine that then you can kind of say then maybe we can do some things like some structuring options, like doing business as a C corporation for international operations, but not for your domestic operations. I think we talked a little bit about that in previous segments. That way you can minimize the GILTI tax and also take advantage of the special 13.125% of FDII. So, those are the kinds of things tax payers need to be aware of.

Jen: Okay. Now is there an advantage though to still being an LLC at all?

Frank: There is. For domestic business the tax law does provide for LLCs – taxes, partnerships – this 20% deduction, which kind of gets individual tax payers closer to a corporate tax rate – not entirely. And then, of course, passers still avoid double taxation once the funds are admitted to the ultimate owners. So, I wouldn’t give up on your LLC yet, just examine what operations are done under the LLC and what might need to be done in another way.

Jen: Sounds good. Well, we’ll get you back to talk a little bit more about that.

Frank: Thank you. Appreciate it.

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 back again with Frank Landreneau, one of our international tax directors. Frank, welcome back to the Playbook.

Frank: Thanks, Jen. Great to be back.

Jen: So, last time we talked about the toll tax. Can you give us a little bit of an overview; are there some specifics in the regulations that middle market entrepreneurs need to know about?

Frank: For the most part it really goes over all the things that we knew earlier this year through all the notices that were issued by the IRS through the spring time and early summer. But one of the things that it really kind of confirmed that we weren’t quite sure about is that upon the repatriation of the toll tax amount…

So, first of all, the entrepreneurs is taxed on this repatriation amount, but it’s not necessarily distributed; it’s deemed distributed. And once the amounts are distributed, then passive owners of float-through entities would be taxed on the net investment income tax at 3.8% for the full inclusion amount, and it’s not subject to installments like the toll tax is.

So, that was something that was clarified and we weren’t quite sure about that may come up to be a surprise to some entrepreneurs.

Jen: Now, is this toll tax going to affect different industries, or is it kind of across the board if you’ve got a pass-through entity?

Frank: I think it’s affecting industries all across the board. I think the real issues become, “Where do you want your cash at the end of the day,” – and we’ll talk a little bit about that more in subsequent segments – but also, “Are you doing business in high tax jurisdictions?”

There are certain things that are available under the law such as a Section 962 election, which allows an individual to be taxed like a corporation, which can be favorable, however there’s a downside that upon repatriation you’re taxed a second time to the extent you were taxed the first time. It gets rather convoluted and complicated, so we would need to have someone sit in and have a consultation with us to learn more.

Jen: Definitely. Well, we’ll get you back to talk a little bit more about the toll tax and some other things for international entrepreneurs.

Frank: Thank you very much. Appreciate it.

Jen: Perfect, thanks. 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.