Davidson / Pargman and Company

Certified Public Accountants and Advisors

News

News

Strong controls over financial reporting are essential

Public companies are required to evaluate and report on internal controls over financial reporting using a recognized control framework under rules set forth by the Securities and Exchange Commission (SEC). However, private companies also need checks and balances to help ensure their financial statements are correct and reduce the risk of fraud. Additionally, transparent reporting about the control system can give lenders, investors and other stakeholders greater confidence in a business’s financial results.

Develop an auditor’s mindset 

The American Institute of Certified Public Accountants (AICPA) defines control activities as “steps put in place by the entity to ensure that the financial transactions are correctly recorded and reported.” AICPA auditing standards also require external auditors to evaluate their client’s internal controls as part of their audit risk assessment procedures. They routinely monitor the following three control features:

1. Physical restrictions. Employees should have access to only those assets necessary to perform their jobs. Locks and alarms are examples of ways to protect valuable tangible assets, including petty cash, inventory and equipment. But intangible assets — such as customer lists, lease agreements, patents and financial data — also require protection using passwords, access logs and appropriate legal paperwork.

2. Account reconciliation. Management should regularly analyze and confirm account balances. For example, bank statements should be reconciled monthly and inventory should be counted regularly.

Interim financial reports, such as weekly operating scorecards and quarterly financial statements, also keep management informed. However, reports are useful only if management finds time to review them and investigate anomalies. Supervisory oversight takes on many forms, including observation, test counts, inquiry and task replication.

3. Job descriptions. Another essential control is to have detailed job descriptions. Company policies should also call for job segregation, job duplication and mandatory vacations. For example, the person who receives customer payments should not also approve write-offs (job segregation). And two signatures should be required for checks above a prescribed dollar amount (job duplication).

Private company auditors tailor audit programs for potential risks of material misstatement. Still, they aren’t required to specifically perform procedures to identify control deficiencies unless they’re hired to perform a separate internal control study. 

Disclosures about the control system 

Audited financial statements may include footnote disclosures that describe the control environment, including policies and procedures for risk management, compliance and governance. These disclosures help build trust with stakeholders by providing insights into the company’s control environment and its effectiveness in ensuring accurate financial reporting.

Reporting on internal controls is an ongoing process, not a one-time assessment. Even if you’re not required to follow the SEC’s rules on evaluating internal controls, a thorough system of checks and balances will help your company achieve its goals.

We can help

Company insiders sometimes need more experience or objectivity to assess internal controls. Our auditors have seen the best — and worst — control systems and can help evaluate whether your controls are effective. Contact us for more information.

© 2024
TopLine Content Marketing Team

Understanding the $7,500 federal tax credit for buying an electric vehicle

Electric vehicles (EVs) have become increasingly popular. According to Kelley Blue Book estimates, the EV share of the vehicle market in the U.S. was 7.6% in 2023, up from 5.9% in 2022. To incentivize the purchase of EVs, there’s a federal tax credit of up to $7,500 for eligible vehicles.

The tax break for EVs and fuel cell vehicles is called the Clean Vehicle Tax Credit. The current version of the credit was created under the Inflation Reduction Act. Here are answers to some frequently asked questions.

Which vehicles qualify for the credit?

To qualify for the full $7,500, there are several requirements. For example:

  • The vehicle must be a new plug-in electric or fuel cell vehicle.
  • It must have a battery capacity of at least seven kilowatt hours.
  • It must meet critical mineral and battery component requirements for vehicles placed in service on or after April 18, 2023. (If the vehicle meets only one of the two requirements, the buyer is eligible for a $3,750 credit.)
  • The vehicle must undergo final assembly in North America and have a gross vehicle weight rating of less than 14,000 pounds.
  • It must be purchased for personal use (not for resale) and must be primarily used in the United States.

Are the most expensive EVs eligible for the credit?

No. The vehicle’s manufacturer suggested retail price (MSRP) can’t exceed:

  • $80,000 for vans, sport utility vehicles and pickup trucks, and
  • $55,000 for other vehicles.

Are there income limits for the buyer?

Yes. To qualify for the new vehicle credit, your modified adjusted gross income (MAGI) can’t exceed $300,000 for married couples filing jointly, $225,000 for taxpayers filing as heads of households or $150,000 for other filers.

How is the credit claimed?

There are two ways. When we prepare your tax return, we’ll file Form 8936 with it. Alternatively, beginning in 2024, you can choose to transfer the credit to an eligible dealer when you buy a vehicle, which will effectively reduce the vehicle’s purchase price by the credit amount. If you don’t transfer the credit, it’s “nonrefundable” so you can’t get back more on the credit than you owe in taxes. And you can’t apply any excess credit to future tax years.

Does a used EV qualify for a tax credit?

Yes, but it’s not worth as much as the credit for new vehicle and the income limits are lower. Beginning January 1, 2023, if you buy a qualified used EV or fuel cell vehicle from a licensed dealer for $25,000 or less, you may be eligible for a credit of up to $4,000. Your MAGI can’t exceed $150,000 for married couples filing jointly, $112,500 for taxpayers filing as heads of households or $75,000 for other filers.

Check before you buy

If you’re interested in purchasing an EV, the tax credit can be a powerful incentive. But before you buy, make sure you meet all the eligibility requirements so you’re not disappointed. Many taxpayers and vehicles don’t qualify. Contact us for assistance.

© 2024
TopLine Content Marketing Team

It’s time for your small business to think about year-end tax planning

With Labor Day in the rearview mirror, it’s time to take proactive steps that may help lower your small business’s taxes for this year and next. The strategy of deferring income and accelerating deductions to minimize taxes can be effective for most businesses, as is the approach of bunching deductible expenses into this year or next to maximize their tax value.

Do you expect to be in a higher tax bracket next year? If so, then opposite strategies may produce better results. For example, you could pull income into 2024 to be taxed at lower rates, and defer deductible expenses until 2025, when they can be claimed to offset higher-taxed income.

Here are some other ideas that may help you save tax dollars if you act soon.

Estimated taxes

Make sure you make the last two estimated tax payments to avoid penalties. The third quarter payment for 2024 is due on September 16, 2024, and the fourth quarter payment is due on January 15, 2025.

QBI deduction

Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (QBI). For 2024, if taxable income exceeds $383,900 for married couples filing jointly (half that amount for other taxpayers), the deduction may be limited based on whether the taxpayer is engaged in a service-type business (such as law, health or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in.

Taxpayers may be able to salvage some or all of the QBI deduction (or be subject to a smaller deduction phaseout) by deferring income or accelerating deductions to keep income under the dollar thresholds. You also may be able increase the deduction by increasing W-2 wages before year end. The rules are complex, so consult us before acting.

Cash vs. accrual accounting

More small businesses are able to use the cash (rather than the accrual) method of accounting for federal tax purposes than were allowed to do so in previous years. To qualify as a small business under current law, a taxpayer must (among other requirements) satisfy a gross receipts test. For 2024, it’s satisfied if, during the three prior tax years, average annual gross receipts don’t exceed $30 million. Cash method taxpayers may find it easier to defer income by holding off on billing until next year, paying bills early or making certain prepayments.

Section 179 deduction

Consider making expenditures that qualify for the Section 179 expensing option. For 2024, the expensing limit is $1.22 million, and the investment ceiling limit is $3.05 million. Expensing is generally available for most depreciable property (other than buildings) including equipment, off-the-shelf computer software, interior improvements to a building, HVAC and security systems.

The high dollar ceilings mean that many small and midsize businesses will be able to currently deduct most or all of their outlays for machinery and equipment. What’s more, the deduction isn’t prorated for the time an asset is in service during the year. Even if you place eligible property in service by the last days of 2024, you can claim a full deduction for the year.

Bonus depreciation

For 2024, businesses also can generally claim a 60% bonus first-year depreciation deduction for qualified improvement property and machinery and equipment bought new or used, if purchased and placed in service this year. As with the Sec. 179 deduction, the write-off is available even if qualifying assets are only in service for a few days in 2024.

Upcoming tax law changes

These are just some year-end strategies that may help you save taxes. Contact us to customize a plan that works for you. In addition, it’s important to stay informed about any changes that could affect your business’s taxes. In the next couple years, tax laws will be changing. Many tax breaks, including the QBI deduction, are scheduled to expire at the end of 2025. Plus, the outcome of the presidential and congressional elections could result in new or repealed tax breaks.

© 2024
TopLine Content Marketing Team

CFOs need more than accounting skills

Is your company planning to hire a new CFO? A recent survey found that hiring managers look for more than financial acumen when vetting CFO candidates. In fact, only 38.5% of CFOs at Fortune 500 and S&P 500 companies were licensed CPAs in 2023, according to executive recruiting firm Crist Kolder. What other skills may be needed to fill these shoes?

Financial know-how opens doors 

The Pennsylvania Institute of Certified Public Accountants recently surveyed over 320 hiring executives about what skills matter most for the CFO role. Not surprisingly, “2024 Corporate Finance Report: CPAs in the C-Suite” found that the top must-have for CFO candidates is the ability to manage the company’s finances effectively.

The top 10 financial skills identified in the survey include:

  1. Capital management and strategy,
  2. Financial forecasting,
  3. Operations and financial reporting,
  4. Critical thinking,
  5. Financial reporting compliance,
  6. Strategy creation,
  7. Industry/product forecast and outlook,
  8. Tax compliance,
  9. Accounts receivable, and
  10. Networking and industry relationships.

The survey draws two key findings. First, CPAs who aspire to become CFOs will need to expand their skill sets beyond traditional accounting to include strategic planning, risk management and technology oversight. Second, today’s CFOs must “strategize for growth and stability, not just report past results.”

Nonfinancial skills seal the deal 

Today’s hiring managers are looking for more than finance and accounting skills when filling CFO positions. They prefer candidates with the following general competencies, listed in order of importance:

  • Leadership/strategic aptitude to develop high-performing teams and strategic goals,
  • Compliance and regulatory expertise to ensure organizational adherence to laws, regulations and internal policies,
  • Technology and analytical proficiency to make data-driven decisions and use cutting-edge tools,
  • Industry-specific knowledge to understand market conditions and how they influence the organization, and
  • Communication skills to build effective relationships with internal and external stakeholders to maintain alignment with corporate strategy.

In addition, respondents emphasized the need for CFO candidates to possess “general business acumen” and “emotional intelligence.” However, the survey cautions that most hiring managers assume candidates who apply for executive positions have already mastered these general skills.

What’s the right fit for your executive team?

Finding the right person to head up your company’s finance and accounting department can be challenging in today’s tight labor market. The CFO’s main responsibility is to provide timely, relevant financial data to other departments — including information technology, operations, sales and supply chain logistics — to help improve how the business operates. He or she also must be able to drum up cross-departmental support for major initiatives. So, it’s important that you choose a candidate who’s a team player. You might even want to outsource the position to a skilled professional. Contact us for help evaluating CFO candidates to find the right mix of skills and experience for your company’s finance and accounting department.

© 2024
TopLine Content Marketing Team

Happy birthday, ERISA! An overview for employers

While America was celebrating Labor Day this year, another auspicious occasion was taking place that probably flew under most people’s radar: The Employee Retirement Income Security Act (ERISA) turned 50.

For employers, ERISA is a constant regulatory presence when choosing, launching and administering employee benefit plans. If you’ve been dealing with it for years, you might not recall or even know why the law came about or how it’s evolved. Let’s take a look. 

Brief history

The seeds of ERISA can be found in the Revenue Acts of 1921, 1926 and 1942. These laws addressed the growing trend of employer-sponsored pensions, also known as defined benefit plans.

The Revenue Acts established increasingly strict requirements — such as minimum employee coverage, employer contribution requirements and mandated disclosures — for the first qualified plans. Employers that met the qualifications for such plans could deduct pension contributions, while participants could accumulate tax-free savings and defer income taxes until taking distributions. The IRS was primarily tasked with enforcing the Revenue Acts.

In 1959, the federal government escalated its regulation of retirement plans with the Welfare and Pension Plans Disclosure Act, which was amended in 1962. It introduced the requirement that employers must file plan descriptions and annual reports. With this law, the U.S. Department of Labor (DOL) became the chief enforcer.

Yet, despite the passage of these laws, labor advocacy groups continued to decry the instability of pensions and the risks they posed to workers — many of whom depended on those funds for retirement only to see them vanish. And so, throughout the 1960s and early 1970s, the regulatory ideas that would eventually form the provisions of ERISA were developed. The law itself was finalized during the Ford administration and signed into law on Labor Day, 1974.

Purpose, titles and more 

According to the DOL’s website, “The goal of Title I of ERISA is to protect the interests of participants and their beneficiaries in employee benefit plans.” You may note the phrase “employee benefit plans,” not “employee pension plans,” in that sentence. Indeed, over time, ERISA has expanded to include both major types of retirement plans: defined benefit plans and defined contribution plans, such as 401(k)s, which are now much more widely sponsored than pensions. ERISA also covers certain health and welfare benefit plans.

In addition, you may note the reference to Title I. In fact, the law has four Titles:

  1. Title I, which generally includes the rules regarding plan reporting and disclosures, participation, vesting, accrual of benefits and funding,
  2. Title II, which covers the tax treatment of plans,
  3. Title III, which addresses jurisdiction, administration and enforcement, primarily assigning these responsibilities to the DOL and the U.S. Department of the Treasury, and
  4. Title IV, which established and sets forth the powers and rules of the Pension Benefit Guaranty Corporation, essentially a government insurer of pension plans.

Over the years, many of the most powerful and well-known laws related to employee benefits have been enacted under or in relation to ERISA. These include the Consolidated Omnibus Budget Reconciliation Act (popularly known as “COBRA”), the Health Insurance Portability and Accountability Act and the Affordable Care Act.

One important recent development is multistate employers’ concern about the erosion of ERISA’s “preemption.” ERISA has always preempted state and local laws related to employee benefit plans, and it continues to do so. But some states have been quietly challenging this long-standing legal principle. It’s something to keep an eye on if your organization could be adversely affected.

Fundamental mandate

Ultimately, ERISA’s fundamental mandate is fiduciary responsibility — that is, plan sponsors must always act in the best interests of participants when administrating plans and managing their assets. For questions about compliance, contact your attorney. And for help identifying and managing the costs and tax impact of your organization’s benefit plans, contact us.

© 2024
TopLine Content Marketing Team

Strong internal controls and audits can help safeguard against data breaches

The average cost of a data breach has reached $4.88 million, up 10% from last year, according to a recent report. As businesses increasingly rely on technology, cyberattacks are becoming more sophisticated and aggressive, and risks are increasing. What can your organization do to protect its profits and assets from cyberthreats?

Recent report 

In August 2024, IBM published “Cost of a Data Breach Report 2024.” The research, conducted independently by Ponemon Institute, covers 604 organizations that experienced data breaches between March 2023 and February 2024. It found that, of the 16 countries studied, the United States had the highest average data breach cost ($9.36 million).

The report breaks down the global average cost per breach ($4.88 million) into the following four components:

  1. $1.47 million for lost business (for example, revenue loss due to system downtime and costs related to lost customers, reputation damage and diminished goodwill),
  2. $1.63 million for detection and escalation (such as forensic and investigative activities, assessment and audit services, crisis management, and communications to executives and boards),
  3. $1.35 million for post-breach response (including product discounts, regulatory fines, legal fees, and costs related to setting up call centers and credit monitoring / identity protection services for breach victims), and
  4. $430,000 for notifying regulators, as well as individuals and organizations affected by the breach.

A silver lining from the report is that the average time to identify and contain a breach has fallen to 258 days from 277 days in the 2023 report, reaching a seven-year low. One key reason for faster detection and recovery is that organizations are giving more attention to cybersecurity measures.

Implementing cybersecurity protocols 

Cybersecurity is a process where internal controls are designed and implemented to:

  • Identify potential threats,
  • Protect systems and information from security events, and
  • Detect and respond to potential breaches.

The increasing number of employees working from home exposes their employers to greater cybersecurity risk. Many companies now have sensitive data stored in more places than ever before — including laptops, firm networks, cloud-based storage, email, portals, mobile devices and flash drives — providing many potential areas for unauthorized access.

Targeted data

When establishing new cybersecurity protocols and reviewing existing ones, it’s important to identify potential vulnerabilities. This starts by inventorying the types of employee and customer data that hackers might want to steal. This sensitive material may include:

  • Personally identifiable information, such as phone numbers, physical and email addresses and Social Security numbers,
  • Protected health information, such as test results and medical histories, and
  • Payment card data.

Companies need to have effective controls over this data to comply with their obligations under federal and state laws and industry standards.

Hackers may also try to access a company’s network to steal valuable intellectual property, such as customer lists, proprietary software, formulas, strategic business plans and financial data. These intangible assets may be sold or used by competitors to gain market share or competitive advantage.

Auditing cyber risks

No organization, large or small, is immune to cyberattacks. As the frequency and severity of data breaches continue to increase, cybersecurity has become a critical part of the audit risk assessment.

Audit firms provide varying levels of guidance, both when assessing risk at the start of the engagement and when uncovering a breach that happened during the period under audit or during audit fieldwork.

We can help

Contact us to discuss your organization’s vulnerabilities and the effectiveness of its existing controls over sensitive data. Additionally, if your company’s data is hacked, we can help you understand what happened, estimate and disclose the costs, and fortify your defenses going forward.

© 2024
TopLine Content Marketing Team