Qualified Opportunity Zones: What to Know Before You Invest

September 19, 2019 By JAK + CO.

Since early 2018, much has been said about the opportunity zone provisions that were enacted as part of the Tax Cuts and Jobs Act (TCJA). Designed to spur economic growth in select low-income communities across the U.S., the provisions designate more than 8,700 such communities as qualified opportunity zones (QOZs). Taxpayers who invest in businesses or property within QOZs may be eligible for federal tax incentives.

The IRS guidance surrounding QOZs was initially quite vague. To alleviate confusion, the IRS issued proposed regulations in October 2018. Although the regulations clarified certain aspects of the provisions, much remains unclear. Nevertheless, this is certain: When leveraged correctly, QOZs have the potential to provide investors with significant tax benefits.

If you’re considering a QOZ investment, here are a few things you should know first.

Are you eligible?

According to the TCJA, any taxpayer who realizes eligible gain for federal tax purposes may elect to defer the gain—as long as the taxpayer meets certain requirements. A taxpayer could be an individual, C corporation, partnership, S corporation, trust, or estate.

What are the requirements?

To invest in a QOZ, a taxpayer must realize eligible gain, reinvest the gain within 180 days into a qualified opportunity fund (QOF), and then defer the gain for the year of sale. Before taking advantage of the associated tax benefits, a taxpayer must satisfy several requirements, including a specific process, critical definitions, deadlines, and quantitative tests. Also, at least 90% of the assets held by the QOF must be within the QOZ.

What are the tax benefits?

Taxpayers who invest in a QOZ and meet the necessary requirements may take advantage of the following tax benefits:

Temporary deferral of capital gains reinvested in a QOF
Partial exclusion of previously deferred gains from gross income when the QOF is held for at least five years
Permanent exclusions of post-acquisition gains from the sale of an investment in a QOF held longer than 10 years

Is it a good investment?

Just because a business or property is in a QOZ does not make it a good investment, despite its tax benefits. Think of the potential for tax benefits as icing on the cake—they shouldn’t make the deal.

When should you take action?

The opportunity zone provisions won’t be around forever. In fact, a portion of the potential tax benefits will expire as early as 2020, and QOZs will disappear at the end of 2028. In order to take full advantage of the tax benefits, it’s important to act quickly. To qualify for the full exclusion of gains, investors will need to complete a deal by the end of 2019. But if you don’t make this deadline, don’t worry—you can still defer a portion of your gains up to 2026 and qualify for the permanent gain exclusion.

Look before you leap.

Although the benefits associated with QOZ investments may sound enticing, it’s important to fully understand the IRS requirements, potential tax benefits, and, of course, the viability of the investment itself before you move forward. If you have questions about the tax implications associated with QOZs, the JAK team can help. We can also guide you through setting up the appropriate entity for investing in a QOF and provide an overall analysis of the investment. Contact us today to learn more about how the opportunity zone provisions could benefit you.

Top 5 Ways the New Revenue Recognition Standard Will Impact the Construction Industry

October 3, 2018 By JAK + CO.

By Kyla Hansen, CPA

There’s been a lot of talk about the new revenue recognition standard and the effect it could have on the construction industry. Although the standard, known as Accounting Standards Update (ASU) 2014-09, was first issued by the Financial Accounting Standards Board (FASB) in 2014, it goes into effect for privately held companies—for periods beginning after December 15, 2018, to be exact.

This means that if you are a privately held company with a December 31 year-end, this change will impact your 2019 financial statements. The good news is percentage of completion isn’t going away! However, there are several nuances that will need to be considered.

Here are five changes you should be aware of:

1 – Combination and segregation of jobs will be based upon performance obligations

Contracts will now be defined and tracked by performance obligations—i.e., the underlying deliverables. This concept may cause certain contracts that have one shared performance obligation to be combined, even if they were previously considered separate. Additionally, this concept may also cause a contract to be segregated into separate pieces based on the number of performance obligations it includes. Going forward, each contract will need to be closely evaluated to identify performance obligations.
Change orders will also be impacted by this concept. Some change orders may create a new performance obligation, resulting in an additional job that would have to be tracked separately on the contract schedule, while others may not.

2 – Front-loaded costs will no longer recognize early profit

Significant costs incurred after a contract is obtained but before goods or services are transferred will need to be capitalized and amortized over the life of the contract. These costs include items such as mobilization and bond costs, and do not include bid, proposal, and selling or marketing expenses. This treatment applies only if all of the following criteria are met:
The cost directly relates to a specific contract
The cost generates or enhances resources that will be used in satisfying the performance obligation(s) in the future
The cost is expected to be recovered (directly or indirectly)

3 – The transaction price might not be the stated value on the contract

When determining a transaction price, the new standards leave room for more judgment regarding the circumstances surrounding a contract and also allow for greater reliance on historical experiences. For example, if the contract is for time and material, the transaction price will represent the amount you anticipate the job to require. In addition, contracts will need to be evaluated if there are variable items such as contingent income or damage provisions. The new standards allow for several methods to evaluate the contract value. We expect the most commonly used methods to be the following:

Most likely value method: Used when there are only two possible values. You select the value that is most likely to occur.
Expected value method: Used when there is a range of possible amounts; each scenario is weighted based upon probability of occurrence. This determines the transaction price that you will use on your job schedule as the contract amount.

4 – Anticipate changes to your financial statements

Your balance sheets will include new items and names.
Contract assets: This will include costs in excess of billings, unbilled receivables, contract adjustments for variable consideration, and capitalization of costs to fulfill a contract such as mobilization and bonds. As I mentioned previously, these costs will be amortized over the life of the contract.
Contract liabilities: This will include billings in excess of costs, accrued warranty, refundable consideration, and customer deposits.
Retained earnings adjustment: If you adopt the new standard ahead of time, you will need to adjust your retained earnings to account for open contracts at the end of 2018 or restate your 2017 amounts in order to comply.
Additional footnote disclosures: There is a considerable amount of additional footnote disclosures that explain your policies and methods for determining contract prices and related revenue recognition.

5 – Understand the impact on your ratios

In light of the new standard, you may need to discuss modifying metrics used to determine items such as loan covenants or bonding capacity. For example, a lending agent might not give credit for a variable consideration contract asset.

Don’t get caught off guard.

The new revenue recognition standard will go into effect in less than two months, which means now is the time to get ready for the changes I’ve listed here—and the others I haven’t. Don’t forget: Team at JAK can help you pinpoint the ways your business will be affected, so you can prepare with efficiency. If you have questions, please please contact our St. Paul office today.

States Respond to Supreme Court Sales Tax Decision

July 19, 2018 By JAK + CO.

By Todd J. Koch, CPA, MBT, CFP®

Since the decision in the South Dakota v. Wayfair case, states are continuing to determine their position. Many states already had economic laws in place and others introduced hard to understand requirements which includes noncompliance penalties. There are several different factors states are considering and it is important that a business understands individual states’ standards.

For South Dakota v. Wayfair, South Dakota’s economic nexus law comes into play for out-of-state sellers making more than $100,000 in sales or services or engaging in 200 plus separate sales of goods or services delivered to South Dakota.

States will continue to respond one by one upon review of the Wayfair decision and will provide guidance to affected sellers.

Here are some answers to some of the questions you may have:

Does this mean I have to collect sales tax from every state?
There are exceptions for small sellers. The definition of small is not consistent between states.

Are there consistent rules for what is taxable between states?
You have to follow each state’s rules.

Are the laws retroactive?
Most states are looking at this prospectively. Some from the date of the decision and others on a specific date – for example Wisconsin is beginning October 1, 2018.

Have all the states decided what they will do?
Guidance is coming out weekly from different states. Some have called special sessions to deal with this issue.

We are monitoring this issue and will let you know more as information becomes available.

If you have any questions, please let us know.

5 Simple Accounting Tips for Small and Midsize Businesses

June 20, 2018 By JAK + CO.

By Kelli Lind, CPA

If you’re the owner of a small or midsize business, your to-do list never ends. There are customers to serve, projects to navigate, and employees to manage. And that’s just the tip of the iceberg.

There’s another checklist to think about, too—the one that includes everything you have to do to keep the financial side of your business in order.

Dealing with your financials on top of everything else can be particularly wearisome, even if you’re a rock star at multitasking. To help you get (and stay) ahead of the game on your bills, invoices, and the like, here are five simple accounting tips to consider.

5 Important Accounting Tips

Choose accounting software that is right for your business.

Most businesses start out with basic accounting software, which typically works just fine. But when a business outgrows its software, inefficiencies can quickly crop up. If your accounting software isn’t giving you what you need, don’t settle. You want software that can deliver the level of support you need—whether that’s data analysis or an industry-specific function—today and tomorrow.

Before you choose accounting software for your business, make sure you’re aware of its capabilities. Don’t skip the training, either. Knowing what an accounting software platform is—and isn’t—capable of can help you determine if it’s truly right for you.

Keep your records accurate and organized.

When the demands of your business are in full swing, it can be easy to let your records fall into disarray. If this happens, you could find yourself stuck with an expensive and time-consuming cleanup when December rolls around. Developing a filing system, implementing record-retention guidelines, and backing up your files are all good strategies for keeping your records accurate and organized—and helping you avoid an end-of-the-year headache.

Develop a month-end closing process.

Timely financial information allows you to make better business decisions, which is why it’s good practice to reconcile your bank accounts, monitor your cash flow, and review your accounting records on a monthly basis. Setting a date to close the previous month by can help you stay on track with these tasks. Whether your month-end close date is the 5^th, 15^th, or 30^th, it will hold you accountable, and give you valuable insight into what’s really happening in your business.

Consider outsourcing certain business functions.

Outsourcing can free you up to focus on managing your business and the initiatives that matter most to you. Many small and mid-size businesses choose to outsource payroll processing and information technology (IT) services. Several companies exist that handle a range of payroll processing needs at inexpensive rates, and, given the relatively recent rise of cyber criminals, strong IT controls are a must.

Surround yourself with a solid network of professionals.

Trying to do it all can be overwhelming. Your CPA, banker, insurance agent, and other professional advisors can offer valuable support in running a successful business. Of course, choosing a professional advisor requires careful consideration. Not sure where to start? Your CPA, being familiar with your financial situation, can refer you to professional advisors who are best suited to your needs.

Following these five accounting tips can help you better manage—and perhaps even shorten—your lengthy to-do list. If you have questions about how any of these best practices could streamline your small or midsize business, please give me a call.

3 Simple Ways to Make Life Easier During Your Next Audit

May 16, 2018 By JAK + CO.

By Nate Graf, CPA

“I can’t wait for our audit!”—said no one ever. Yes, as auditors, we get it: an independent audit of your organization’s financial statements is probably not an event you anticipate with glee. But with a little preparation, the audit process can be—dare we say—downright painless. Here are three simple things you can do to make life easier during your next audit:

Establish an organized filing system.

While an auditor won’t look at every transaction, they could look at any transaction. Preparing for your audit begins with keeping organized accounting records throughout the year. If your accounting records are unorganized (e.g., stashed in a box) or impossible to find, it won’t be a quick and easy process. At a minimum, neatly file away documentation of expenses, revenues, and significant agreements such as leases and loans. Also, be sure to document any internal approval processes you have in place so the auditors can verify the transaction was approved. For example: a manager initials all the invoices they approve.

Reconcile accounts soon after year-end.

When it comes to reconciling accounts, it pays to be proactive. Preparing detailed schedules of all balance sheet accounts will help you catch potential errors. You can also give these schedules to the auditors to support your account balances. If you’re not sure about an account, or if you’re unable to reconcile it, ask your auditor for guidance before they show up.

Complete your auditor’s checklist.

Prior to your audit (usually around year-end), your auditor will provide a detailed list of exactly what he or she needs to complete it. Although it may be tempting to set it and forget it, don’t. Regardless of how organized your filing system or accounts are, you will need time to pull together schedules and find the necessary source documents. Completing as much of the auditor’s checklist as you can—as soon as possible—can help to prevent a stressful rush later.

You can never be too prepared.

Checking these three practices off of your to-do list is a great way to prepare for your next audit—if you don’t leave them until the last minute, that is. The more prepared you are, the more efficient your auditors will be, allowing your audit to be as quick and painless as possible. If you have questions about this topic or are feeling overwhelmed at the thought of preparing for your auditor, please don’t hesitate to give us a call.