OFF I C I AL PUBL I CAT I ON OF THE NEBRASKA SOC I ETY OF CPAs JANUARY/FEBRUARY 2022 NEBRASKA PAGE 14 HOW TO BUILD A CLIENT BASE YOU LOVE: TAKE THESE FOUR STEPS TO BUILD A CLIENT BASE THAT YOU LOVE WORKING WITH AND THAT APPRECIATES YOU DEEPLY AS WELL
Koley Jessen’s tax counsel has the experience to understand potential risks and opportunities, helping our clients navigate complex tax environments. When you are ready for this kind of insight, contact us. u Corporate Taxation u Partnership/LLC/Sub-S Entities u Estate & Gift Taxation u State & Local Taxation u Mergers & Acquisitions u Bankruptcy, Reorganizations & Restructuring u Tax Protests, Disputes & Litigation u Real Estate u Individual Taxation u Charitable Planning u Nonprofit Organizations u Employee Benefits & Executive Compensation 402.390.9500 | koleyjessen.com/services-tax thinking ahead In tax law, you should always be...
3 nebraska society of cpas W W W . N E S C P A . O R G BOARD OF DIRECTORS ERICA R. PARKS NESCPA CHAIRMAN (402) 431-9805 BKD LLP Omaha LORRAINE A. EGGER NESCPA CHAIRMAN-ELECT (402) 965-0328 CyncHealth La Vista NEAL D. LYONS NESCPA SECRETARY (402) 434-7203 UNICO Group Inc. Lincoln DAVID E. SWAN NESCPA TREASURER (402) 420-7758 SP Group, PC Lincoln RYAN L. BURGER NESCPA PAST CHAIRMAN (402) 643-4557 Gabriel, Burger & Else, CPA, PC Seward JODI M. ECKHOUT NESCPA DIRECTOR (308) 995-6151 Woods & Durham, CPA Holdrege MEGAN C. HOLT NESCPA DIRECTOR (402) 342-7600 Mutual of Omaha Insurance Co. Omaha PATRICK A. MEYER PAST CHAIRMAN & AICPA ELECTED REPRESENTATIVE (402) 261-9622 HBE LLP Lincoln SHARI A. MUNRO PAST CHAIRMAN & AICPA ELECTED REPRESENTATIVE (402) 963-4316 Frankel Zacharia LLC Omaha DR. THOMAS J. PURCELL III NESCPA DIRECTOR (402) 280-2062 Creighton University Omaha LINDA M. SCHOLTING NESCPA DIRECTOR (402) 826-6777 Doane University Crete JESSICA L. WATTS NESCPA DIRECTOR (402) 330-2660 Seim Johnson LLP Elkhorn DANA J. WEBER WEST NEBRASKA CHAPTER PRESIDENT (308) 635-3008 Dana J. Weber, CPA Scottsbluff JONI SUNDQUIST NESCPA PRESIDENT & EXECUTIVE DIRECTOR joni@nescpa.org KELLY EBERT VICE PRESIDENT kelly@nescpa.org MICHELLE LYONS STAFF ACCOUNTANT & OFFICE MANAGER michelle@nescpa.org LORI VODICKA EXECUTIVE ASSISTANT lori@nescpa.org OFFICERS BOARD MEMBERS NESCPA STAFF IPE 1031 | 888.226.0400 | WWW.IPE1031.COM | INFO@IPE1031.COM EXPERTISE From a Respected Industry Leader THE PREMIER SPECIALIST FOR SECTION 1031 EXCHANGES SECTION 1031 EXCHANGE
J A N U A R Y / F E B R U A R Y 2 0 2 2 4 nebraska cpas 16 12 C O N T E N T S 10 ©2022 Nebraska Society of Certified Public Accountants | The newsLINK Group, LLC. All rights reserved. The Nebraska CPA is published six times each year by The newsLINK Group, LLC for the Nebraska Society of Certified Public Accountants and is the official publication for this society. The information contained in this publication is intended to provide general information for review, consideration and education. The contents do not constitute legal advice and should not be relied on as such. If you need legal advice or assistance, it is strongly recommended that you contact an attorney as to your circumstances. The statements and opinions expressed in this publication are those of the individual authors and do not necessarily represent the views of the Nebraska Society of Certified Public Accountants, its board of directors, or the publisher. Likewise, the appearance of advertisements within this publication does not constitute an endorsement or recommendation of any product or service advertised. Nebraska CPA is a collective work and as such some articles are submitted by authors who are independent of the Nebraska Society of Certified Public Accountants. While the Nebraska CPA encourages a first-print policy, in cases where this is not possible, every effort has been made to comply with any known reprint guidelines or restrictions. Content may not be reproduced or reprinted without prior written permission. For further information, please contact the publisher at: 855.747.4003. JANUARY/FEBRUARY 2022 EDITORIAL: The Nebraska Society of CPAs seeks to reflect news and relevant information to Nebraska and other news and information of direct interest to members of the Nebraska Society of CPAs. Statement of fact and opinion are made on the responsibility of the authors alone and do not represent the opinion or endorsement of the Nebraska Society of CPAs. Articles may be reproduced with written permission only. ADVERTISEMENTS: The publication of advertisements does not necessarily represent endorsement of those products or services by the Nebraska Society of CPAs. The editor reserves the right to refuse any advertisement. SUBSCRIPTION: Subscription to the magazine, a bi-monthly publication, is included in membership fees to the Nebraska Society of CPAs. 6 PRESIDENT’S MESSAGE: WELCOME TO A NEW YEAR BY JONI SUNDQUIST, NEBRASKA SOCIETY OF CPAS 9 2022 CONFERENCES 10 STATE BOARD REPORT: CPE AUDIT: ARE YOU READY? BY HEATHER MYERS, NEBRASKA BOARD OF PUBLIC ACCOUNTANCY 12 COUNSELOR’S CORNER: NEBRASKA WILL FOLLOW FEDERAL TAX TREATMENT OF LIMITED LIABILITY COMPANIES BY JEFF SCHAFFART, KOLEY JESSEN 14 HOW TO BUILD A CLIENT BASE YOU LOVE BY ART KUESEL, KUESEL CONSULTING 16 STATE TAX BRIEFING: CHANGING BUSINESS MODELS LEADS TO CHANGING TAX RESULTS: ARE YOUR CLIENTS PREPARED? BY NICK NIEMANN AND MATT OTTEMANN, MCGRATH NORTH LAW FIRM 18 AUDITING DISCLOSURES IN GOVERNMENTAL & NOTFOR-PROFIT FINANCIAL STATEMENTS: ARE MATERIAL MISSTATEMENTS HIDING IN PLAIN SIGHT? BY PAUL H. KOEHLER, CPA, GOVERNMENT/NONPROFIT SERVICES SPECIALIST 21 MEMBER SPOTLIGHT: FRED A. LOCKWOOD 23 MEMBERS IN THE NEWS 25 IN MEMORIAM 28 VOLUNTEER TODAY! 30 WELCOME NEW SOCIETY MEMBERS!
Collaborating with Companies and CPA Firms on: State Tax Audits State Tax Appeals State Tax Planning State Tax Incentives State Business Incentives Site Development Incentives Property Tax Appeals McGrath North First National Tower, Suite 3700 1601 Dodge Street Omaha, NE 68102 www.mcgrathnorth.com www.nebraskastatetax.com www.nebraskaincentives.com Matt Ottemann, JD, LLM State & Local Tax & Incentives Attorney Partner, McGrath North 402-633-9571 mottemann@mcgrathnorth.com Nick Niemann, JD State & Local Tax & Incentives Attorney Partner, McGrath North 402-633-1489 nniemann@mcgrathnorth.com For over 60 years we have been working with our nation’s food companies, restaurants, farmers and ranchers to feed people better. We have been working with contractors and companies to build better and more affordable homes and new business facilities. We have been working with technology companies to develop new ideas that improve lives. We have been working with inventors, startup companies and health care providers to develop patented medical devices, leadership teams and joint ventures that save lives. We have been working with energy companies to help fuel our homes and the businesses we all rely on. We have been working with bankers, key partners, manufacturers, distributors, retailers and transportation companies to finance, produce and deliver better products and services to communities around the world. We have been working with family business pioneers and their other trusted advisors to transform, grow, carry on and transition the family business dream, the backbone of our great country. We have been working with our community leaders to improve our cities and our schools. We have been working with our elected leaders to improve the business climate to create and attract new and better jobs for families. For over 60 years, this has been the McGrath North Law Firm. Working quietly behind the scenes closely with the talented leaders of great organizations around the world to make lives better. Working together. Working stronger. Working faster. Working better. Overcoming Roadblocks. Avoiding Train Wrecks. Inspired by Excellence. Committed to your Success. Our diverse team isn’t waiting for the future. We are helping to produce new, incredible, sustainable results right now. We invite you to join us as we move quickly ahead towards the next 60 years.
J A N U A R Y / F E B R U A R Y 2 0 2 2 6 nebraska cpas PRESIDENT’S MESSAGE BY JONI SUNDQUIST, NEBRASKA SOCIETY OF CPAS WELCOME TO A NEW YEAR! The hopes and opportunities that lie ahead for the profession and our organizations are exciting. Achieving success in 2022 will again take focus, f lexibility, and creative solutions to both known and unknown challenges. As Tony Robbins said, “Stay committed to your decisions, but stay f lexible in your approach.” The Nebraska Society of CPAs remains committed to the CPA profession—we are here to support you with education, advocacy, and leadership that will help you best serve your clients and communities. And we’re also staying f lexible—shifting our plans and strategies as needed but not changing our vision and our mission for the Society. Board Kicks Off 2022 The Society Board of Directors held its first meeting of 2022 on January 4, with Society Chairman Erica Parks presiding. The board reviewed the approximately $1.2 million Society budget for 2022-2023, which includes a slight increase in dues for the coming year. The last dues increase occurred in 2018. Registration fees for Society Continuing Professional Education (CPE) will remain consistent. In anticipation of the new fiscal year, which begins April 1, data profiles have been mailed to all members. Please be sure to send any address changes and other updates for your firm or yourself to society@nescpa.org or mail your form to the Society office as soon as possible. The following list highlights some of the additional information and actions taken at the January 4 meeting: • The Society Board approved 30 applications for membership, including nine CPA memberships, one Exam-Qualif ied Affiliatemembership, two Professional Affiliatememberships, and 18 Student Affiliate memberships. Total membership now stands at 2,569 individuals. • Society Vice President Kelly Ebert presented a report on the results of the Society’s 2021 CPE programs, which had a total of 2,824 registrants. This included registrations for both NESCPA courses and partner courses. Vice President Ebert stated that the Society plans to hold approximately 30 courses in person in 2022, while continuing to provide numerous Society courses online. This is in addition to the thousands of online courses that will continue to be available at www.nescpa.org/cpe. Ebert also presented the 2022 conference schedule to the board—see page 9 for the dates. • Following a request for audit proposals to the full membership last fall, the Society Board voted to approve the Audit Bids Committee’s recommendation to retainGrafton &Associates, PC, of Lincoln to provide professional accounting and tax services to the Society, its Foundation, and the Political Education Committee for the next five years. • The Society Board approved the recommendations of the Awards Selection Committee to honor four outstanding Society members during the 2022 Annual Meeting. • Board member Tom Purcell presented a brief report regarding the Rules of Professional Conduct Task Force, led by the Nebraska Board of Public Accountancy. The task force consisted of members of both the State Board and the Nebraska Society of CPAs, andwas formed to reviewChapter 5, the Rules of Professional Conduct, adopted pursuant to the provisions of Section 1-112 of the Nebraska Board of Public Accountancy Act, Title 288. Purcell reported that the recommendation of the task force to the State Board will be to adopt parts of the AICPA’s Code of Conduct as guidance documents rather than pursuing rule changes.
7 nebraska society of cpas W W W . N E S C P A . O R G The Nebraska Society of CPAs remains committed to the CPA profession— we are here to support you with education, advocacy, and leadership that will help you best serve your clients and communities. Event Held to Honor State Senators Following the board meeting on January 4, the annual State Senators’ Reception and Dinner was held at The Cornhusker Marriott, Renaissance Room, in Lincoln, with about 45 people attending, including 20 state senators. After cancellation of last year’s event, this long-standing tradition provided a welcome opportunity for CPAs to connect with state senators and for senators to reconnect with one another prior to the start of the second session of the 107th Legislature on January 5. Photos of the event are included in this article. Legislation Review Meeting Society lobbyist Korby Gilbertson of Radcliffe, Gilbertson &Brady led a review of proposed state legislation of potential interest to the profession on January 24. Members of the Society Board, Political Education Committee, Legislation Committee, and Taxation Committee participated in the discussion to help determine the Society’s positions on various bills and to bring awareness to various tax, employment, and licensing bills that were introduced during the first 10 days of the Legislature. A total of 587 new bills have been introduced this session. In a short, 60-day session, things move quickly—f loor debate started January 10 and public hearings began January 18. On January 24, Society Past Chairman Ryan Burger presented testimony before the Nebraska Legislature’s Banking, Commerce, and Insurance Committee in support of LB894. The bill was introduced by State Sen. Matt Williams (Dist. 36) of Gothenburg on behalf of State Sen. John Stinner (Dist. 48) of Gering, who was unable to attend as he was conducting the Appropriations Committee’s hearing on the Governor’s recommendations for funds available to the state through the American Rescue Plan Act (ARPA). Recognizing the many challenges for owners of small CPA firms, particularly those located in our state’s numerous rural communities and small towns, the Society worked closely with the Nebraska Board of Public Accountancy in the drafting of LB894. The Society Board and the State Board explored solutions to the barriers established by our present law, created a joint task force, and carefully reviewed Nebraska’s laws and regulations to determine the best approach to small CPA firm ownership challenges. The result was LB894. LB894 will allowwhat the majority of other states already permit: that a simple majority of the ownership of a firm, in terms of financial interests and voting rights, belongs to a licensed CPA. LB894 removes the “head count” requirement so that a CPA firm may be owned by one CPA and one or more non-CPAs—as long as the CPA or group of CPAs hold at least 51% equity ownership of the CPA firm. The bill is non-controversial and will likely be combined with other such non-controversial bills in order to cross the finish line. Legislative priority areas for the Society include: • Promoting consistency in the administration and enforcement of Nebraska statutes and rules related to the Nebraska Public Accountancy Act and the practice of accountancy for licensed CPAs. • Gauging the effect of legislative proposals on the CPA profession, supporting those solutions that create a favorable environment for the profession and opposing those that do not. • Opposing the taxation of professional services. • Opposing irresponsible licensing reform that would negatively affect the CPA profession. Stay posted on legislative news at www.nescpa.org/advocacy/news. Helping to Grow the Pipeline Your Society continues to seek new and innovative ways to help grow the CPA pipeline through outreach efforts to Nebraska high school students. Thank you to the following firms for their significant support of the following events, which are provided at no cost to students: • On February 9, Lutz and Seim Johnson will be sponsoring the f irst “Economics & Accounting Day” for Nebraska high school students at the University of Nebraska-Lincoln College of Business, planned and hosted by the Nebraska Society Past Chairman Ryan Burger presents testimony before the Nebraska Legislature's Banking, Commerce & Insurance Committee in support of LB894.
J A N U A R Y / F E B R U A R Y 2 0 2 2 8 nebraska cpas Joni Sundquist is president and executive director of the Nebraska Society of CPAs. You may contact her at (402) 476-8482 or joni@nescpa.org. Counci l on Economic Educat ion. The program wi l l cover accounting, economics, and personal finance while exposing students to different areas of business and handson activities. Eight Nebraska high schools and 149 students have registered to participate in this event. Learn more at https://bit.ly/NCEE-EconAcctDay. • Due to the overwhelming response by students and teachers, a second “Economics & Accounting Day” has been scheduled at UNL for February 23, with KPMG LLP serving as the sponsor. Five schools and 100 students have registered for this event. • On June 1-3, Deloit te wi l l sponsor transpor tat ion for students to attend UNL’s Discover Accounting program. This free pre-college program provides high school students with the opportunity to meet industry professionals and tour workplaces, compete to create solutions to a business problem, experience living on campus by staying in a university residence hall, and learn how to prepare and pay for college. You are encouraged to nominate one or more students you think would be a good candidate for this program at https://bit.ly/DiscoverAccting. Additional sponsorship opportunities will be available in the future. Please let us know if your firm is interested in getting involved and sponsoring these types of outreach efforts. The next Nebraska Society of CPAs Board of Directors meeting will take place May 4. Please feel free to contact me or any member of the Society Board with suggestions or comments prior to the next meeting. And remember, as you embark on the 2022 busy season, stay committed but stay f lexible! t
9 nebraska society of cpas W W W . N E S C P A . O R G 2022 CONFERENCES 4TH ANNUAL BUSINESS & INDUSTRY CONFERENCE Wednesday, April 20 Hillcrest Country Club, Lincoln 26TH ANNUAL NOT-FOR-PROFIT CONFERENCE Tuesday, June 7 Hillcrest Country Club, Lincoln 41ST ANNUAL NEBRASKA GOVERNMENTAL ACCOUNTING & AUDITING CONFERENCE Wednesday-Thursday, June 8-9 Hillcrest Country Club, Lincoln WOMEN IN ACCOUNTING SUMMIT Friday, August 26 TBD 22ND ANNUAL FALL CPE CONFERENCE & ANNUAL MEETING Thursday-Friday, October 27-28 Embassy Suites, La Vista TAX CONFERENCE Thursday-Friday, December 1-2 Embassy Suites, La Vista
J A N U A R Y / F E B R U A R Y 2 0 2 2 10 nebraska cpas S TAT E B O A R D R E P O R T CPE AUDIT: ARE YOU READY? BY HEATHER MYERS, NEBRASKA BOARD OF PUBLIC ACCOUNTANCY Husker fans have football season. Sneezers have allergy season. Outdoor enthusiasts get hunting and fishing seasons. What do CPAs get? CPE audit season. Not quite as fun, we know. But important? You bet! Ever y yea r, t he Nebraska Boa rd of Public Accountancy (NBPA) conducts a continuing professional education (CPE) audit. Will 2022 be the year you’re chosen? Thanks to the NBPA’s random selection process, you never know. Play it safe by understanding the process in case your number is called. Who’s impacted? Historically, the NBPA has audited 2% of Nebraska’s CPAs each year. What is a CPE audit? The CPE audit ensures CPAs are complying with continuing professional education rules. This, in turn, protects both the profession and the public it serves. Why are CPE audits necessary? It’s the NBPA’s way of ensuring CPAs stay abreast of the rules and regulations vital to their roles in firms and companies. How are CPAs chosen for the CPE audit? Each year a percentage of our active CPAs are selected at random. CPAs selected for a CPE audit receive a letter from the State Board via regular mail. They have until June 1 to submit the required material. What do I need to submit to the State Board? Certificates of completion for each CPE course taken during the audit period. What are some common errors to avoid? The most efficient way to comply with a CPE audit is by providing the correct
11 nebraska society of cpas W W W . N E S C P A . O R G The Nebraska Board of Public Accountancy administers public accountancy law in Nebraska. If you have questions regarding the CPE audit process or CPE reporting overall, please contact Nebraska Board of Public Accountancy CPE Coordinator Heather Myers at (402) 471-3595 or heather.myers@nebraska.gov, or refer to the CPE Guidelines on the NBPA’s website at https://nbpa.nebraska.gov. NESCPA - Half Page Ad.indd 1 10/26/21 4:33 PM documentation in a timely manner. However, mistakes happen. Here are some common errors to watch for: • Reporting undocumented learning activities • Reporting CPE credits in the wrong year • Failing to retain appropriate documentation • Submitting documentation that does not meet the State Board’s CPE requirements (i.e., certificates of completion, sign-in sheets, agendas) What happens if I cannot provide appropriate documentation? Failure to respond or provide appropriate CPE documentation is handled by the State Board’s enforcement committee. Be prepared—always! The scouts are on to something. Be ready for anything by always following CPE documentation best practices. Save all supporting CPE documentation for six years. t The CPE audit ensures CPAs are complying with continuing professional education rules. This, in turn, protects both the profession and the public it serves.
J A N U A R Y / F E B R U A R Y 2 0 2 2 12 nebraska cpas NEBRASKA WILL FOLLOW FEDERAL TAX TREATMENT OF LIMITED LIABILITY COMPANIES BY JEFF SCHAFFART, KOLEY JESSEN C O U N S E L O R ’ S C O R N E R
13 nebraska society of cpas W W W . N E S C P A . O R G For more information, contact Jeff Schaffart at Koley Jessen at jeff.schaffart@koleyjessen.com. Schaffart solves complex tax and legal issues by providing timely, pragmatic advice to private equity sponsors, general counsel, management teams, and business owners. The Nebraska Uniform Limited Liability Company Act, Neb. Rev. Stat. § 21-104(d), provides that a limited liability company is classified for Nebraska income tax purposes in the same manner as it is classified for federal income tax purposes. InRevenueRuling25-21-1, theNebraskaDepartment of Revenue addressed the issue of how limited liability companies are treated for Nebraska income tax purposes. In this ruling, the Nebraska Department of Revenue confirmed that limited liability companies will be treated for Nebraska income tax purposes in the same manner as they are for federal income tax purposes. Federal Income Tax Treatment of Limited LLCs For federal income tax purposes, a limited liability company can be treated as a partnership, part of its owner (a “disregarded entity”), or an “association” that is taxable as a corporation. Under the IRS’ default rules, a domestic limited liability company with at least two members is classified as a partnership for federal income tax purposes unless it files IRS Form 8832 (or IRS Form 2553 to be a subchapter S corporation) and affirmatively elects to be treated as a corporation. In addition, under the IRS’ default rules, a limited liability company with only one member is treated as an entity disregarded as separate from its owner, unless it files IRS Form 8832 (or IRS Form 2553 to be a subchapter S corporation) and affirmatively elects to be treated as a corporation. Revenue Ruling 25-21-1’s Analysis and Holding Revenue Ruling 25-21-1 notes that under Neb. Rev. Stat. § 77-2714 any terms used in §§ 77-2714 to 77-27,123 have the same meaning as those used in a comparable context in the laws of the United States relating to federal income tax, unless a different meaning is clearly required. A federal classification of an entity for federal income tax purposes is the conclusive determination of the entity’s classification for Nebraska purposes. The Nebraska Uniform Limited Liability Company Act, Neb. Rev. Stat. § 21-104(d), provides that a limited liability company is classified for Nebraska income tax purposes in the same manner as it is classified for federal income tax purposes. Based on this, Revenue Ruling 25-21-1 concludes that (1) a limited liability company treated as a partnership for federal income tax purposes will be treated as a partnership for Nebraska income tax purposes and will file a Nebraska Return of Partnership Income, Form 1065N; (2) a limited liability company treated as a corporation for federal income tax purposes will be treated as a corporation for Nebraska income tax purposes and will file a Nebraska Corporation Income Tax Return, Form 1120N; and (3) a single member limited liability company treated as a disregarded entity for federal income tax purposes will be treated as a disregarded entity for Nebraska income tax purposes with the income of the disregarded entity being reported on the income tax return of its sole member. Significance of Revenue Ruling 25-21-1 In a past audit that Koley Jessen was involved in, the Nebraska Department of Revenue took the position that limited liability company interests of a limited liability company that was taxed as a subchapter S corporation for federal income tax purposes were not “capital stock” for purposes of Nebraska’s special capital gains exclusion and attempted to deny the exclusion. Although we were able to secure the exclusion for our client on this audit, there was still uncertainty regarding whether limited liability company interests of a limited liability company that is taxed as a corporation for federal income tax purposes would be treated as capital stock for purposes of the exclusion. Nebraska’s special capital gains exclusion was adopted in 1987 as part of the Employment and Investment Growth Act, which is commonly known as LB775. The special gains exclusion allows a Nebraska taxpayer to make a one-time election during his or her lifetime to exclude from Nebraska income capital gains from the sale of capital stock of a corporation acquired by the individual (1) on account of employment by such corporation or (2) while employed by such corporation and avoid paying 6.84% Nebraska income tax on the excluded gain. As Revenue Ruling 25-21-1 confirms that a limited liability company treated as a corporation for federal income tax purposes will be treated as a corporation for Nebraska income tax purposes, the Nebraska Department of Revenue should be unable to assert that limited liability company interests of a limited liability company that is treated as a corporation for federal income tax purposes are not “capital stock” for purposes of Nebraska’s special capital gains exclusion. This is a taxpayer favorable development that brings welcome certainty regarding the availability of Nebraska’s special capital gains exclusion for Nebraska residents who own limited liability companies that are taxed as corporations for federal income tax purposes. t
J A N U A R Y / F E B R U A R Y 2 0 2 2 14 nebraska cpas HOW TO BUILD A CLIENT BASE YOU LOVE TAKE THESE FOUR STEPS TO BUILD A CLIENT BASE THAT YOU LOVE WORKING WITH AND THAT APPRECIATES YOU DEEPLY AS WELL. BY ART KUESEL, KUESEL CONSULTING Last I checked, we all have a say in the clients we choose to work with. We all have the right to serve clients that respect us, listen to our advice, are prepared when we need them to be, and pay us on time. But this should be the bare minimum: We should also seek out clients that allow us to grow and develop our expertise in targeted areas, which in turn increases our value to them. I know that some clients don’t check all these boxes, and sadly some check very few. It’s these clients that hold us back from finding and serving those who do check all the boxes. Additionally, this kind Serving a client base that you love and that loves you back is every practitioner’s dream. But it doesn’t have to be a dream—you can make it a reality.
15 nebraska society of cpas W W W . N E S C P A . O R G Learn more about Ar t Kuesel and Kuesel Consulting at www.kueselconsulting.com. Reprinted courtesy of Insight, the magazine of the Illinois CPA Society. of nonideal client base exacerbates the effects of fatigue, burning out, and potentially driving out the very team we’ve worked so hard to hire and retain. Bottom line: We are not, cannot be, and should not feel as if we are a victim of our client base. It’s time to do something about it. Here are four simple steps to build a client base you love: 1. Evaluate your client base. Set up a matrix of criteria, including minimum fees, realization rate, referral generation, within your sweet spot of services or preferred industry, timeliness with payments and requests, number of services used, and more. Remember that every dollar of revenue is not created equal. A client that pays you $5,000 and checks all the boxes is worth more than five $1,000 clients who don’t. And make sure to bring your staff in on this exercise. Why? You’ll undoubtedly have a fewmore excuses for your clients’ behavior than your staff who interact directly with them. 2. Determine who’ll be cut from the firm and how. Some clients will simply need to go due to chronic bad behavior (these are the easiest to spot). The next tier of clients may simply be too small to effectively service, or the fee too low to be worthwhile. Perhaps you refer these out to a smaller practitioner. Remember though, it’s probably not enough just to raise fees until your clients leave, because some nonideal clients will simply stay and pay more. Further, don’t use a hatchet with this exercise—use a scalpel and make precise and deliberate moves to cut the client roster. 3. Establish a new filter to prevent this from happening again. If you don’t actuallymake changes to what clients you choose to work with, you’ll end up with the exact same problem a few months or years down the road. Implement a new, higher minimum fee and number of services used requirement each new client must meet to ensure you only serve your defined ideal client. Your billing rates should keep up with your staff raises and overhead costs. A good target is three to five times compensation and overhead. This will enable you to capture the true cost of serving each client, help to purify your realization rate, and make sure you’ll love serving each and every one of these new clients! 4. Repeat annually. You should see immediate results, and you’ll love more and more of your client base every year. A final note: Don’t fear a revenue decrease. In fact, in the worstcase scenario, expect revenue to remain f lat. But more often, you’ll see your revenue increase. The time you free up by ejecting nonideal clients can be redeployed toward your ideal clients and can result in additional projects that offer more value and greater goodwill (which often includes referrals of other ideal clients). And by creating more room on your plate, you’ll have the capacity to serve those new ideal clients when they come your way. Bottom line: Serving a client base that you love and that loves you back is every practitioner’s dream. But it doesn’t have to be a dream—you can make it a reality. While not necessarily an easy exercise, the outcome of cutting your client base can be significant. And you, your staff, your firm, and your dream clients will all be the beneficiaries of the outcome. t The time you free up by ejecting nonideal clients can be redeployed toward your ideal clients and can result in additional projects that offer more value and greater goodwill (which often includes referrals of other ideal clients). Need health insurance? I know health insurance and can help you evaluate your options. Give me a call today to discuss your health insurance needs! Melissa Wheeler 249 Cherry Hill Blvd, Ste 2 Lincoln, NE 402.484.0303 agentmelissawheeler.com/ Securities & services offered through FBL Marketing Services, LLC, 5400 University Ave, West Des Moines, IA 50266, 877/860-2904, Member SIPC, Affiliate Farm Bureau Financial Services. PR-H-F (4-21)
J A N U A R Y / F E B R U A R Y 2 0 2 2 16 nebraska cpas S TAT E TA X B R I E F I N G Business owners know that what worked five years ago will not necessarily work today. The challenge for any business is to adapt its business model and its products and services to current and expected realities to pivot, grow, and maintain a thriving business. If a business doesn’t do so, it will fail. Jeff Bezos, Amazon’s founder, confirmed this when he stated: “Amazon is not too big to fail. . . . In fact, I predict one day Amazon will fail. Amazon will go bankrupt. If you look at large companies, their lifespans tend to be 30-plus years, not a hundred-plus years. If we start to focus on ourselves, instead of focusing on our customers, that will be the beginning of the end.” These changing business models and offerings have implications in many areas, including state and local taxes. For companies that provide a combination of services and tangible products (including the use of tangible products), a change in business model or product lines can have a significant difference in tax results. A key consideration for sales and income taxes is whether a company is selling a tangible product or a service. Often company products are a combination of the sale of services and tangible products. From a state tax perspective, a determination needs to be made as to what type of sale it is, because it normally won’t be considered as both. BY NICK NIEMANN AND MATT OTTEMANN, MCGRATH NORTH LAW FIRM CHANGING BUSINESS MODELS LEADS TO CHANGING TAX RESULTS: ARE YOUR CLIENTS PREPARED?
17 nebraska society of cpas W W W . N E S C P A . O R G Nick Niemann and Matt Ottemann are partners with McGrath North Law Firm. As state and local tax and incentives attorneys, they collaborate with CPAs to help clients and companies evaluate, defend, and resolve tax matters and obtain various business expansion incentives. For more information, visit www.NebraskaStateTax.com and www.NebraskaIncentives.com. For a copy of their full publication, The Anatomy of Resolving State Tax Matters, or their Nebraska Business Expansion Decision Guide, please visit their websites or contact Nick or Matt at (402) 341-3070 or nniemann@mcgrathnorth.com or mottemann@mcgrathnorth.com, respectively. A key consideration for sales and income taxes is whether a company is selling a tangible product or a service. Often company products are a combination of the sale of services and tangible products. From a state tax perspective, a determination needs to be made as to what type of sale it is, because it normally won’t be considered as both. Since the taxation of the sale of tangible products is normally much different from the sale of services, the tax impact can be significant. Department of Revenue Guidance Distinguishes Sales of Services From Sales of Tangible Products. There is significant caselaw across the country dedicated to distinguishing the sale of services from the sale of tangible products. A common test used by state courts for this purpose is the “true object” test. Using this test, courts try to determine whether the true object of a mixed transaction, in which both property and services are provided, is the sale of property or services. Courts may also use the test to classify transactions in which multiple types of property are sold (one of which is taxable and the other exempt) or transactions in which multiple types of services are sold (again one of which is taxable and the other exempt). In Rev. Rul. 1-08-6, the Nebraska Department of Revenue announced it would apply a similar test to evaluate mixed transactions, which it labelled as the “incidental-to-service” test. This test is intended to look objectively at the entire transaction in determining whether a transaction is principally the provision of a service or the transfer of tangible personal property. If the rendition of services is the principal object of the transaction, then any tangible personal property transferred is deemed to be incidental to the services provided. Consideration is given to the following six factors: 1. The object sought by the buyer; 2. The seller’s type of business; 3. Whether the tangible personal property was provided as a retail enterprise with a profit-making motive; 4. Whether the tangible personal property could be sold without the service; 5. The extent the services have contributed to the value of the tangible items transferred; and 6. Any other factors relevant to the particular transaction. Department of Revenue May Combine Sales of Related Products or Services—Even If Separate Prices Exist for Each. Business owners also need to be aware of the potential that sales of related products or services at the same time could be treated as one product or service by the Department of Revenue—and taxed accordingly. Consider the recent decision by the Lancaster County District Court in Enterprise Rent-A-Car v. Nebraska Department of Revenue. In addition to simply renting cars, a rental car agency allowed customers to purchase insurance and fuel. While the agency collected sales tax on the car rental fees themselves, it did not collect tax on the charges for insurance and fuel. The agency believed that those transactions were separate transactions, not subject to sales tax. A Nebraska court, at the urging of the Department of Revenue, disagreed. That court reasoned that the insurance and fuel were necessary parts of renting a car. One could not operate a car without insurance and fuel. Therefore, even though there were separate charges for the insurance and fuel, the agency should have collected sales tax on the insurance and fuel charges. This was in spite of the fact that insurance and fuel were not subject to tax when purchased on their own. Conclusion As companies look at the tax implications of their existing offerings or develop new business offerings, it is crucial to make sure these offerings are correctly classified for both income and sales tax purposes. In our practice, we see these questions arrive both in the planning phase and during Nebraska tax audits and appeals, where the Department of Revenue may challenge a company’s tax practices and seek to impose retroactive taxation. In certain circumstances, it may be advantageous to request a ruling from the Department of Revenue on the implications of a business offering. t
J A N U A R Y / F E B R U A R Y 2 0 2 2 18 nebraska cpas AUDITING DISCLOSURES IN GOVERNMENTAL & NOT-FOR-PROFIT FINANCIAL STATEMENTS: ARE MATERIAL MISSTATEMENTS HIDING IN PLAIN SIGHT? BY PAUL H. KOEHLER, CPA, GOVERNMENT/NONPROFIT SERVICES SPECIALIST The purpose of an audit is to provide financial users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework. It only takes one material misstatement for a set of financial statements to be materially misstated and, thus, if not ultimately adjusted by management, result in a modified audit opinion. The “Accounting Principles Rule,” as cited in paragraph 1.14 of the AICPA Guide, State and Local Governments (AICPA SLG Guide), prohibits an auditor from expressing an unmodified opinion if the financial statements contain a material U.S. generally accepted accounting principles (U.S. GAAP) departure. Paragraph A7 of AU-C 705, Modifications to the Opinion in the Independent Auditor’s Report, indicates that material misstatements of the financial statements may arise when the disclosures in the f inancial statements are not presented in accordance with the applicable financial reporting framework. Also, paragraph A1 of AU-C 450, Evaluation of Misstatements Identified During the Audit, indicates that misstatements may result from: • Inadequate or incomplete disclosures and omission of those disclosures required to meet disclosure objectives of certain financial reporting frameworks as applicable. • The omission of a disclosure necessary for the financial statements to achieve fair presentation beyond disclosures specifically required by the framework. Our experience conf irms that, not uncommonly, material misstatements appear in SLG and not-for-profit (NFP) financial statement notes (disclosures), with no modification of the auditor’s opinion. As noted in our report, More Than Just the Audit Opinion: SAS 134 Significant Changes Unrelated to the Auditor’s Report, disclosure and presentation within financial statements are not held to the same level of rigor as recognition and measurement in the financial statements. In examining the Peer Review database of Matters for Further Consideration (MFCs), we noted numerous recent MFCs related to financial statement disclosures. Examples of Matters for Further Consideration Disclosures were omitted for the operating lease and capital stock including the number of shares issued, authorized, and outstanding. The required disclosures were omitted from the financial statements. Standard subsequent events disclosures are missing. The total of long-termdebt maturities presented in the financial statement disclosures does not tie to the face of the financial statements. The required disclosures were omitted from the financial statements—for example, missing disclosures on variable interest entities (VIEs); mi ssing di sclosures on a mult iemployer pension plan; missing disclosure of f iveyear minimum lease payments adjusted to present value; and capital lease and operating lease f ive-year minimum lease payments co-mingled together.
19 nebraska society of cpas W W W . N E S C P A . O R G We remind auditors of their responsibility to dedicate appropriate attention to assertions about presentation and disclosure in financial statements, such as whether all disclosures that should have been included in the financial statements have been included (completeness) and whether disclosures are clearly expressed (understandabi lity). Auditors should obtain suff icient and appropriate audit evidence related to the disclosures made in the notes to the financial statements. Required Disclosures and Materiality Yes, omissions are misstatements; however, immaterial disclosures are not required. A “required disclosure” should be understood as shorthand for “required for fair presentation in all material respects in accordance with the applicable financial reporting framework.” Further, paragraph 67 of GASB Statement No. 38, Certain Financial Statement Note Disclosures, and paragraph 6 of National Council on Governmental Accounting (NCGA) Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements, indicate that the notes to the financial statements should not be cluttered with unnecessary and immaterial disclosures. Attendant circumstances and materiality must be considered in assessing the propriety of the notes to the financial statements. Statement on Auditing Standards (SAS) 138 provides guidance on evaluating materiality in the GAAS audit context. Concept of Materiality and SAS 138 SAS 138, Amendments to the Description of the Concept of Materiality, aligns the concept of materiality in AICPA professional standards with the descriptions used in the U.S. judicial system, Public Company Accounting Oversight Board (PCAOB), Securities and Exchange Commission (SEC), and Financial Accounting Standards Board (FASB) standards. The following describes the difference between the legacy guidance and revised description of materiality (emphasis added): Legacy Description • Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users made on the basis of the financial statements. Revised Description • Misstatements, including omissions, are considered to be material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. We feel that a “substantial likelihood they would inf luence” threshold for materiality is a higher hurdle than “could reasonably be expected to inf luence” threshold. This higher threshold could be beneficial in evaluating the significance of omitted disclosures which have been a source of numerous Matters for Further Consideration in peer review. Practice Note: SAS 134, Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial GASB & FASB GAAP GASB GAAP GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, identif ies two authoritative sources of SLG GAAP categorized as “level A” and “level B”, and has a third level of GAAP a reporting entity may consider, consisting of nonauthoritative literature, including FASB pronouncements. FASB Concepts Statements contain many terms also used by GASB entities, along with their definitions. GAAP financial statements’ use of GAAP terminology would appear to consistently serve the public interest. FASB GAAP FASB Accounting Standards Codification (FASB ASC) 105, Generally Accepted Accounting Principles, specifically FASB ASC 105-10-051, indicates that the FASB ASC is the source of authoritative GAAP to be applied by nongovernmental entities. FASB ASC 10510-05-2 goes on to indicate that an entity shall first consider accounting principles ... within a source of authoritative GAAP for that entity and then consider nonauthoritative guidance from other sources, including, for example, FASB Concepts Statements, per FASB ASC 105-10-05-3. One of the most relevant FASB Concepts St atement s i s St atement of Fi nanc ia l Accounting Concepts No. 6, Elements of Financial Statements (SFAC No. 6). Statements, changes the auditor’s responsibilities related to addressing disclosures in the financial statements and makes extensive changes throughout the professional auditing literature related to an auditor’s responsibilities related to financial statement notes. Our report on SAS 134 addresses those changes. Common Terminology Issues in SLG and NFP Financial Statement Notes Below are some common and persistent terminology issues noted in both SLG and NFP financial statement disclosures. We believe users would benefit from clear and consistent terminology in SLG and NFP financial statement disclosures. Misunderstanding Basis of Accounting Issue 1: Occurrence Vs. Earning Some entities present a financial statement note that reads, “The entity follows accrual accounting. Under accrual accounting,
J A N U A R Y / F E B R U A R Y 2 0 2 2 20 nebraska cpas Paul H. Koehler, CPA, is a sole practitioner in Lincoln, Neb. He has more than 45 years experience in auditing, training, and consulting, specializing in nonprofit organization and state and local governments. You may contact him at (402) 488-1578. This article was originally published by the Center for Plain English Accounting (CPEA), which provides non-authoritative guidance on accounting, auditing, attestation, and SSARS standards. Learn more at aicpa.org/CPEA. © 2021 Association of International Certified Professional Accountants. All rights reserved. Reprinted with permission. Paragraph 139 of SFAC No. 6 indicates that accrual accounting attempts to record transactions, events, and circumstances when they occur. revenues are recognized when earned, and expenses when a liability has been incurred.” Paragraph 139 of SFAC No. 6 indicates that accrual accounting attempts to record transactions, events, and circumstances when they occur. Thus, it’s the occurrence concept that triggers accrual accounting recognition, not the “earning” concept, which applies essentially to exchange or reciprocal transactions (per paragraph 150 of SFAC No. 6). Most SLGs and NFPs have significant nonreciprocal transactions like various tax and contribution revenues that seldom involve a matching of revenues and expenses simultaneously from the same transaction and, thus, don’t result in “earnings” (or loss). Additionally, upon adoption of FASB ASC 606, Revenue From Contracts With Customers, the word “earning” is no longer used. Finally, expenses only would result in a liability if not simultaneously paid when incurred. Issue 2: Misunderstanding Accruals and Deferrals Paragraph 141 of SFAC No. 6 indicates that accrual accounting involves not only accruals but also deferrals, including allocations and amortizations. Accrual is concerned with expected future cash receipts and payments (transaction occurrence precedes cash f low). Deferral is concerned with past cash receipts and payments (cash f low precedes transaction occurrence). Common deferrals include prepaid insurance and unearned subscriptions. Entity management should use these terms in accordance with relevant U.S. GAAP. This is especially true for SLGs, for which GASB 65, Items Previously Reported as Assets and Liabilities, indicates the use of the term “deferred” should be limited to items reported as deferred outf lows of resources or deferred inf lows of resources. Issue 3: Misuse of U.S. GAAP Resource Outflow Terminology Some entities fail to understand the differences between types of resource outf lows and misuse the terminology in the financial statement notes. “Expenses” are an accrual basis concept. They are expired costs. “Expenditures” are modified accrual basis, used by general funds of governments. They are decreases in current financial resources. “Disbursements” are cash basis. Don’t intermix these fundamental terms. Anecdotally, I recall a memorable financial statement note that was seven words long and intermixed three bases of accounting: “Expenses are reported as expenditures when paid.” Misunderstanding of the Terms “Transactions” and “Events” • Numerous SLG and NFP financial statement notes present paragraph headings labeled “Internal Transactions” or “Interfund Transactions.” • Both SLG and NFP financial statement notes sometimes refer to “transactions and events.” Paragraph 137 of SFAC No. 6 indicates that a transaction is a particular kind of external event. Paragraph 138 suggests the term “internal transaction” is essentially contradictory. Paragraph 135 of SFAC No. 6 defines an event as a happening of consequence to an entity. It may be an internal event, or it may be an external event such as a transaction with another entity. Thus, a transaction is a type (subset) of an event. A note like the one cited above is not appropriate and clear (it’s like writing the words “cars and vehicles”). Appropriate terminology to use in notes could be “transactions and other events” or just “events.” Specific SLG Financial Statement Note Reminders The Center for Plain English Accounting (CPEA) report, State and Local Government Financial Statements: Common Auditing & Financial Reporting Deficiencies, provides reminders related to frequent disclosure misstatements including: • Omission of disclosure/inclusion of government foundations in the reporting entity. • Reporting entity notes still referring to “oversight authority” and other outdated terms. • Omitting special items or extraordinary items. • Still referring to “fixed assets,” not capital assets (a two-decade outdated term). • Omitted related party disclosures. • Omitted presentations of corrections of errors. t
www.thenewslinkgroup.orgRkJQdWJsaXNoZXIy MTIyNDg2OA==