OFF I C I AL PUBL I CAT I ON OF THE NEBRASKA SOC I ETY OF CPAs ISSUE 6, 2022 WAGE &HOUR UPDATE: THREE THINGS TO KNOW
BOARD OF DIRECTORS LORRAINE A. EGGER CHAIRMAN (402) 965-0328 CyncHealth La Vista KELLY J. MARTINSON CHAIRMAN-ELECT (402) 827-2054 Lutz Omaha JODI M. ECKHOUT SECRETARY (308) 995-6151 Woods & Durham Chartered Holdrege DAVID E. SWAN TREASURER (402) 420-7758 SP Group, PC Lincoln GRANT H. BUCKLEY DIRECTOR (402) 444-1872 Buckley & Sitzman LLP Lincoln MEGAN C. HOLT DIRECTOR (402) 342-7600 Mutual of Omaha Insurance Co. Omaha BRIAN M. KLINTWORTH DIRECTOR (402) 423-4343 HBE LLP Lincoln SHARI A. MUNRO AICPA ELECTED REPRESENTATIVE (402) 963-4316 Frankel Zacharia LLC Omaha ERICA R. PARKS IMMEDIATE PAST CHAIRMAN (402) 431-9805 FORVIS LLP Omaha DR. THOMAS J. PURCELL, III DIRECTOR (402) 280-2062 Creighton University Omaha LINDA M. SCHOLTING DIRECTOR (402) 826-6777 Doane University Crete JESSICA L. WATTS DIRECTOR (402) 216-6116 Rehmann Omaha 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 MEMBERSHIP & CPE 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 3 nebraska society of cpas W W W . N E S C P A . O R G
26 16 C O N T E N T S 8 ©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. ISSUE 6, 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: GROWING THE PROFESSION BY JONI SUNDQUIST, NEBRASKA SOCIETY OF CPAs 8 COUNSELOR’S CORNER: WAGE & HOUR UPDATE: THREE THINGS TO KNOW BY ERIN SCHROEDER, KOLEY JESSEN 9 CLASSIFIED ADS 10 STATE BOARD REPORT: NEW STATE BOARD MEMBERS GET RAMPED UP! BY DAN SWEETWOOD, NEBRASKA BOARD OF PUBLIC ACCOUNTANCY 12 TAKING ADVANTAGE OF THE SECTION 1202 GAIN EXCLUSION BY HANNAH FISCHER FREY, JESSE D. SITZ & CARRIE SCHWAB, BAIRD HOLM LLP 16 AVOIDING SUBSTANDARD AUDIT REPORTS BY PAUL H. KOEHLER, CPA, GOVERNMENT/NONPROFIT SERVICES SPECIALIST 20 STATE TAX BRIEFING: NEBRASKA STATE TAXES: 2022 YEAR IN REVIEW BY NICK NIEMANN & MATT OTTEMANN, McGRATH NORTH LAW FIRM 25 COMMON MISCONCEPTIONS IN SELLING A PRACTICE BY ACCOUNTING PRACTICE SALES 26 SOCIETY FOUNDATION AWARDS SCHOLARSHIPS 27 NESCPA SCHOLARSHIP RECIPIENTS, 2022-2023 32 HONOR ROLL FOR THE FOUNDATION OF THE NEBRASKA SOCIETY OF CPAs 34 WELCOME NEW SOCIETY MEMBERS! 35 IN MEMORIAM I S S U E 6 , 2 0 2 2
BY JONI SUNDQUIST, NEBRASKA SOCIETY OF CPAs Recruiting and retaining top talent remains a priority as 2022 draws to an end and the new year begins. SINCE 1976, THE FOUNDATION OF THE NEBRASKA SOCIETY OF CPAs has been committed to helping Nebraska college and university accounting students become future Nebraska CPAs. For the 2022-2023 school year, the Foundation Board of Trustees approved a total of $99,000 in scholarships to 76 accounting students at 14 Nebraska colleges and universities. Distributed to accounting students across Nebraska who are in their junior, senior, and graduate years of college, these scholarships are made possible by a transfer of funds from the Society to the Foundation as approved by the Society Board of Directors as well as through generous donations from many of our members. You will find a list of the Foundation Board of Trustees, photos of all scholarship recipients, and an honor roll of contributors starting on page 26 of this issue. Hyping Accounting Careers In addition, the Society’s Accounting Careers Committee, led by Society Past Chairman Ryan Burger, continues to expand its outreach to high schools and colleges throughout the state. In November, the Nebraska Society joined the AICPA and 34 other state CPA societies to launch the first-ever Accounting Opportunities Week, which added to the momentum of the committee’s ongoing efforts. In all, committee members gave approximately 25 presentations to more than 500 high school students and five presentations to nearly 300 college students in 2022. You’ll find a list of committee members on the Society website at www.nescpa.org/commit tees. You can “Join a Committee” from this page as well—just click on the link, complete the form, and return it to society@nescpa.org. Intern Nebraska Did you know the state of Nebraska offers a grant program that provides financial assistance to businesses that create new internships in the state? Through the Nebraska Department of Economic Development, for-profit and non-profit businesses can offset up to 50% of intern wages, up to $5,000 per internship. Internships create last ing connect ions between students, businesses, and regions; more than half of young people who participate in an internship become full-time employees where they intern. Applications for the program are due March 15. You’ll find a link with more information on the Society website at www.nescpa.org/careers/recruiting. P R E S I D E N T ’ S M E S S A G E GROWING THE PR I S S U E 6 , 2 0 2 2 6 nebraska cpas
2023 Conferences Scheduled The Society has scheduled the following conferences for the coming year. Please mark your calendars and plan to attend in person. BUSINESS & INDUSTRY CONFERENCE Tuesday, April 25 | Hillcrest Country Club, Lincoln NOT-FOR-PROFIT & GOVERNMENTAL ACCOUNTING CONFERENCE Wednesday-Thursday, June 14-15 | Innovation Campus, Lincoln WOMEN IN ACCOUNTING SUMMIT Wednesday, August 30 | Riverview Lodge, Mahoney State Park, Ashland FALL CONFERENCE & ANNUAL MEETING Thursday-Friday, October 26-27 | TBD, Omaha TAX CONFERENCE Monday-Tuesday, December 4-5 | TBD, Omaha 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. We know you have many choices for CPE and are grateful for your par t icipat ion in Society conferences and courses. Thank you for supporting your profession and the Nebraska Society of CPAs! If you have questions regarding CPE or suggestions regarding future courses or speakers, please do not hesitate to contact Society Vice President Kelly Ebert at kelly@nescpa.org. Nebraska Legislature Convenes January 4 The Fi rst Session of the 108th Nebraska Leg i s lat ure i s schedu led to convene on Wednesday, Jan. 4, 2023, with 26 new and returning state senators taking the oath of office. Although the political makeup of the body is not changing, whether newly elected or appointed, the level of legislative experience will be significant. This lack of institutional knowledge and experience is likely to create challenges; however, with so many new leaders in the body and a newly elected governor, it’s also an exciting time for our state. 2023 will be a “long session,” whereby the Nebraska Constitution requires the Legislature to meet for no more than 90 legislative days. (No more than 60 legislative days are required in even years.) Presently, the session is expected to last until the second week of June. The only item state senators are required to complete is the budget, but the list of issues that legislators wish to address is long and includes tax reform, K-12 school funding, criminal justice reform, ARPA funding, guns/constitutional carry, and abortion. Through our lobbying team at Radcliffe, Gilbertson, and Brady, the Society will be keeping a close eye on any and all issues that could affect the accounting profession, including licensing reform and the taxation of accounting services. Stay tuned. Thank You! Thank you for your membership and loyal support of the Nebraska Society of CPAs. We look forward to serving you throughout 2023 and the years to come! PROFESSION 7 nebraska society of cpas W W W . N E S C P A . O R G
C O U N S E L O R ’ S C O R N E R WAGE & HOUR UPDATE: THREE THINGS TO KNOW BY ERIN SCHROEDER, KOLEY JESSEN IT WAS A BUSY YEAR FOR LABOR AND EMPLOYMENT lawmakers. The U.S. Department of Labor (DOL) continues to roll back regulations, such as the independent contractor rule, implemented by the prior administration. The DOL promised to revisit the Fair Labor Standards Act (FLSA) regulations as well, announcing a Notice of Proposed Rulemaking (NPRM) in its spring regulatory agenda for 2022. The anticipated NPRM could potentially increase the minimum salary for exempt white-collar workers for the first time in nearly three years. Meanwhile, state and local lawmakers have set their sights on pay transparency. The mandatory publication of compensation ranges in job postings is intended to close the wage gap that impacts women and minorities. With the prevalence of remote work in a post-COVID world, many businesses are now relying on a workfrom-home (WFH) workforce across the nation, or even the globe. This leaves management professionals to navigate laws in places where they previously had no legal obligations. Here are three things to know about the current wage and hour updates from 2022: 1. FLSA executive, administrative, and professional employee exemption is scheduled to get a refresh. The Wage and Hour Division has not published the proposed rule yet, but this new regulation could include a change to the salary basis level (currently $684 per week, or $35,568 annualized), automatic increases to the salary basis level, or revision of the duties tests. The last major update to this regulation was in 2020, when the salary basis was raised for the first time since 2004. In 2016, the DOL increased the standard salary level from $455 weekly, or $23,660 annualized, to $913 weekly, or $47,476 annualized. Enforcement of that rule was stayed due to legal challenges. Even though enforcement of the 2016 rule stalled out, many employers raised employee salaries in anticipation of the new rule’s impact on exempt workers. Employers of exempt executive, administrative, and professional employees should stay tuned for updates, as salary or duties adjustments may be required tomaintain employees’ exempt status from the overtime requirements of the FLSA. 2. DOL seeks to leave the old independent contractor rule in 2021. The reliance on independent contractor workers, particularly in the expanding “gig economy,” has steadily increased over the past decade. The question of whether a worker is an employee or independent contractor is determined on a case-by-case basis, using a multi-factor test. That is, it did until the DOL published the 2021 Independent Contractor Rule at the very end of the Trump administration. The 2021 rule made it easier to classify a worker as an independent contractor, prescribing only two “key” factors to consider, with lesser consideration given to other, additional factors. On Oct. 13, 2022, the DOL published an NPRM to restore the old “economic realities test,” which gives equal weight to each part of the multi-factor test, making it arguably harder to classify a worker as an independent contractor. I S S U E 6 , 2 0 2 2 8 nebraska cpas
The comment period for the most recent NPRMhas been extended until Dec. 13, 2022. 3. States push for pay transparency. California most recently joined Washington, Colorado, and New York City in mandating employer transparency regarding pay. Multistate employers will want to proactively monitor these laws to ensure compliance and avoid penalties. These initiatives stem from an effort to narrow the gender wage gap and encourage pay transparency. Covered Employers: Generally speaking, the laws apply to employers with a threshold number of employees working in the jurisdiction. For instance, the New York City pay transparency law applies to employers with four or more workers or one or more domestic workers in New York City. All four workers do not need to work in New York City or the same location for an employer to be covered. Employers are covered as long as one of the employees works in New York City. Requirements: These laws generally require employers to advertise a job, promotion, or transfer opportunity with a disclosure of the minimum and maximum annual salary or hourly wage for the position in the advertisement. Generally, if the wage range is not certain, a reasonable, good-faith estimate will suffice. However, the range cannot be open-ended (e.g., “hourly compensation starts at $15 per hour” is not enough information). Remote Workers: Each law differs on application to job postings for remote workers. For instance, the Colorado law applies to any posting by a covered employer for either work tied to Colorado locations or remote work performable anywhere, but not work performable only at non-Colorado worksites. Therefore, a remote job posting, even if it states that the employer will not accept Colorado applicants, remains covered by the act’s transparency requirements. Multistate employers with a presence in any of the above-referenced jurisdictions should take a keen eye to the pay transparency laws that may apply to their job postings. Erin Schroeder is an attorney in Koley Jessen’s Employment, Labor, and Employee Benefits Practice Group. She has been with the firm since 2020 and currently advises clients with HR consulting and employment litigation needs. For more information, contact her at (402) 343‑3892 or erin.schroeder@koleyjessen.com. Omaha CPA firm is looking for a CPA or accountant with 1-7 years of experience with a small or medium-sized CPA firm who will be trained to competently provide accounting, bookkeeping, consulting, payroll, and tax services to our clients. Communication skills and strong computer skills are necessary. Buy-in or purchase options are available in the future. In addition, an association with another firm is desired. Please contact Tony Buda at (402) 330-9927 or tony@tbudapc.omhcoxmail.com. TONY D. BUDA, P.C. CERTIFIED PUBLIC ACCOUNTANT Classified Ads Nebraska Practices for Sale: Gross Shown • Lincoln, NE CPA $500K • Columbus, NE CPA $525K • Central Nebraska Tax and Accounting $1.05M New listings coming soon! For more information, call (800) 397-0249 or visit www.APS.net. THINKING OF SELLING? Accounting Practice Sales is the leading marketer of accounting and tax practices in North America. To learn more about our risk-free & confidential services, call Trent Holmes at (800) 397-0249 or email trent@apsholmesgroup.com. Classified Ad 9 nebraska society of cpas W W W . N E S C P A . O R G
S TAT E B O A R D R E P O R T NEW STATE BOARD MEMBERS GET RAMPED UP! BY DAN SWEETWOOD, NEBRASKA BOARD OF PUBLIC ACCOUNTANCY I S S U E 6 , 2 0 2 2 10 nebraska cpas
STATE BOARD CHAIRMANMELISSA RUFF, CPA, of Deloitte, State Board Secretary Christi Olsen, CPA, of Circle CPA, and State Board member Drew Blossom, CPA, of KMPG LLP recently joined State Board Administrator Kristen VanWinkle at the 114th Annual Meet ing of the Nat ional Association of State Boards of Accountancy (NASBA) in San Diego, Oct. 30 through Nov. 2. This event was a great opportunity for our newly elec ted cha i rman and members to get “ramped up” on recent national developments. It also provided these individuals with the opportunity to hear from national speakers and interact with other board members from across the country. Upon joining the State Board, I remind members that one of the greatest opportunities afforded them is the chance to interact and meet members from other boards, especially those from surrounding states within the NASBA Central Region. Throughout my long career, I have had the pleasure of witnessing the development of numerous lifelong friendships among members from various states. In addition, attending these national meetings creates strong bonds among the members from Nebraska as they learn and socialize together. In turn, this has created a more positive environment within the State Board, particularly during times when deep discussions must be had and difficult decisions must be made. Of course, when members volunteer their valuable time to attend national meetings, their commitment to the State Board and its mission increases in correlation. Usually, three to four members attend these meetings along with a State Board staff member, allowing different members to attend if they choose. Members who are unable or choose not to travel are able to receive updates from those who attend and from virtual opportunities provided by NASBA staff. Apart from the NASBA Annual Meeting, newly elected State Board Education and Examination Chairman Sarah Borchers, DBA, CPA, who is an assistant professor of accounting at the University of Nebraska at Kearney, joined me recently for a visit to NASBA/CPA Exam Services (CPAES) headquar ters in Nashvi l le, Tenn. Pat Har tman, director of cl ient services at NASBA, hosted us for an overview of CPAES and its comprehensive array of services to state boards of accountancy. Through a contractual agreement with the State Board, CPAES is responsible for processing the applications of Nebraska candidates sitting for the Uniform CPA Examination. Because of our visit to CPAES headquarters, Borchers was able to witness the work of CPAES onsite and ask questions. As chairman of the important Education and Examination (EE) Committee, she oversees ef for ts to ensure CPAES is providing appropr iate ser vices to our Nebraska candidates and to the State Board. The good news is that CPAES has provided excellent service over the years, as indicated through internal and external surveys. However, this does not mean every applicant has a great application experience. The State Board staff is able to provide assistance at times, and the EE Committee remains active and aware of CPAES’ activities, with the Nebraska coordinator attending all CPAES meetings to answer questions and update the EE Committee. Although some might question the travel costs associated with attending national meetings and getting “ramped up,” I can assure you this is money well spent as our Nebraska members remain engaged and active on the national stage! Melissa Ruff State Board Chairman Christi Olsen State Board Secretary Drew Blossom State Board Member Sarah Borchers State Board Education & Examination Chairman If you have any questions or concerns, do not hesitate to contact State Board Executive Director Dan Sweetwood or Administrator Kristen VanWinkle at (402) 471-3595 or at dan.sweetwood@nebraska.gov or kristen.vanwinkle@nebraska.gov, respectively. 11 nebraska society of cpas W W W . N E S C P A . O R G
TAKING ADVANTAGE OF THE SECTION 1202 GAIN EXCLUSION BY HANNAH FISCHER FREY, JESSE D. SITZ & CARRIE SCHWAB, BAIRD HOLM LLP WHILE THE SALE OF A BUSINESS CAN RESULT IN A HEALTHY lump sum for successful founders and their shareholders, the sale often results in recognition of gain, which is subject to taxation. The potential tax liability on gain recognition is where Section 1202 steps in as a beneficial tax planning tool. Section 1202 allows eligible, non-corporate taxpayers who own qualified small business stock (QSBS) for more than five years to exclude up to 100% of the taxable gain recognized by the sale of QSBS. Section 1202 was enacted in 1993 to incentivize small business growth. However, in its initial iteration, the statute only allowed for 50% of QSBS gain exclusion, and the non-excludable portion of gain was taxed at 28%, resulting in a similar tax rate as the standard long-term capital gain rate. The Small Business Jobs Act amended Section 1202 in 2010 to allow for the 100% exclusion of gain, which led to increased interest from business owners and private equity groups. With that said, Section 1202 is often overlooked and plays a significant role in negotiating the sale of any business that qualifies. Certain qualifications must be met to take advantage of Section 1202 gain exclusion. This article details what qualifies as small business stock and how business owners and investors can best take advantage of Section 1202. A. QSBS Requirements Stock qualifies as QSBS where (1) as of the date of issuance, the corporation was a “qualified small business”; (2) the stock was acquired by the taxpayer at its original issue in exchange for money, property, or services; and (3) during substantially all of the taxpayer’s holding period of such stock, the corporation meets the “active business” requirements and is a C corporation. 1. Qualified Small Business A “qualified small business” for the purposes of Section 1202 means a domestic C corporation for which: a.The gross assets donot exceed (andhavenever exceeded) $50MM on the date of the stock issue; b. Immediately after the issuance, the gross assets do not exceed $50MM; and c.The corporation agrees to submit reports to the IRS and its shareholders, as may be required by the IRS. The requirement that a C corporation is the issuer of QSBS results in tricky issues for existing S corporations and partnerships. However, mechanisms are available under Sections 368 and 351 that allow an S corporation to convert into a C corporation or to contribute assets to a newly formed C corporation. I S S U E 6 , 2 0 2 2 12 nebraska cpas
While a pass-through entity itself cannot take advantage of Section 1202, the shareholders of the pass-through entity may take advantage of the exclusion upon the disposition of QSBS owned by the entity, if the pass-through entity meets certain requirements. The exclusion is only available to the gain attributable to the interest that the taxpayer owned in the passthrough entity on the date the QSBS was acquired. Therefore, if Owner A has a 25% interest in ABC partnership on Jan. 1, 2015, when ABC partnership purchases QSBS for $1MM, then Owner A would only be entitled to 25% of that $1MM, even if ABC partnership purchases more QSBS after Jan. 1, 2015. 2. Original Issuance A corporation must have issued the stock after Aug. 10, 1993, and in exchange for money, property, or services but not in exchange for stock. The prohibition against acquiring QSBS through the exchange of stock is an issue when a corporation engages in a recapitalization or reorganization. However, Section 1202 allows for the preservation of QSBS status through certain Section 368 or Section 351 transactions. Likewise, the holding period for QSBS received upon a transfer by gift, at death, or from a partnership to a partner will be tacked onto the newly acquired QSBS. A similar result occurs upon the exercise of convertible stock. 3. Active Business The active business requirement specifies that the corporation must (i) have been a C corporation during substantially all of the taxpayer’s holding period of the stock for which the taxpayer is claiming the exclusion; (ii) use at least 80% of its assets, measured by value, in the active conduct of one or more qualified trades or businesses; and (iii) be an eligible corporation. A qualified trade or business does not include: a.A business involving the performance of certain professional services; b.Any banking, insurance, financing, leasing, investing, or similar business; c.Any farming business; d.Any business involving the production or extraction of products like oil and gas; or e.Any business operating a hotel, motel, restaurant, or similar business. Continued on page 14 13 nebraska society of cpas W W W . N E S C P A . O R G
An eligible corporation does not include: a.A domestic international sales corporation (DISC) or former DISC; b.A regulated investment company, real estate investment trust, or real estate mortgage investment conduit (REMIC); c.A cooperative; d.A corporation where more than 10% of the value of its assets consist of stock or securities in other corporations which are not subsidiaries; or e.A corporation where more than 10% of the total value of assets consist of real property. B. Maximizing the Gain Exclusion The available gain exclusion for QSBS depends on the date of issuance and whether the gain exceeds the dollar limitation that applies to each taxpayer individually. 1. Percentage Limitation The maximum gain exclusion percentages, ranging from 50% to 100%, depend on the date of issuance. For example, stock that qualifies as QSBS acquired on July 1, 2001, will only be eligible for 50% gain exclusion upon disposition, whereas stock acquired on July 1, 2011, will be eligible for 100% gain exclusion. Accordingly, any analysis must closely track the date of issuance and incorporate the applicable exclusion percentage. 2. Dollar Limitation In addition to the percentage limitations, Section 1202 also provides for a dollar limitation on the amount of gain that may be excluded. Gain excluded in a year by a taxpayer from the sale of QSBS cannot exceed the greater of: a.$10MM reduced by the aggregate amount of eligible gain taken into account by the taxpayer. This limitation is a lifetime, per-taxpayer, per-QSBS limitation. This limitation is also a per-issuer limitation; or b.10 times the aggregate adjusted bases of QSBS issued by such corporation and disposed of by the taxpayer during the taxable year. C. Potential Disqualification Missteps There are several easy-to-overlook missteps that may result in the disqualification of QSBS treatment, including (1) disqualifying redemptions by the issuing corporation; (2) inadver tent ly exceeding the gross asset cap of the issuing corporation; and (3) failing to continually meet the active business requirement. Each of these rules should be closely examined as part of the deal analysis to ensure compliance both during negotiations and until the deal has closed. D. Rollover Equity Transactions and Section 1202 Rollover equity transactions became increasingly popular during the COVID-19 pandemic as a way for private equity firms to reduce their initial equity investment during uncertain economic times. Rollover equity acts as seller financing, and rollover equity helps ensure that interests are aligned between rollover participants and the target’s buyers. Structuring a rollover equity transaction involves interesting tax planning hurdles where QSBS is involved. In a typical rollover equity transaction, structuring the transaction to ensure equity rolls over on a tax-free or deferred basis is essential. The initial tax on the rollover equity is deferred until the target company resells. Tax is avoided in these situations by not triggering a sale. However, where QSBS is involved, structuring the rollover as a sale instead of a tax-free transaction results in two benefits: (1) QSBS holders cashing out can avoid tax on gain resulting from the sale, and (2) rollover participants can claim the gain exclusion and receive a step up in basis on the replacement equity. To defer the gain exclusion in a rollover equity transaction, rollover participants must make a timely Section 1045 election. There are three ways to trigger a taxable rollover: (1) a sale, (2) redemption for cash (that satisfies the redemption requirements above), or (3) a taxable exchange of QSBS for buyer equity. The transaction must also be structured in a manner that does not inadvertently qualify for tax-free treatment, such as under Section 351 or Section 368. E. Choice of Entity Considerations In 2018, the Tax Cuts and Jobs Act (TCJA) reduced the corporate tax rate to 21% and eliminated the corporate alternative minimum tax (AMT). The TCJA changes and the growing interest in Section 1202 have resulted in a newfound popularity for C corporations; therefore, a growing number of taxpayers are looking to take advantage of Section 1202 benefits. Whether advising a startup or venture capitalist, Section 1202 is a helpful tool for practitioners and is growing in use. Keeping an eye out for potential missteps and following the requirements above will assist in achieving compliance with Section 1202. Hannah Fischer Frey and Jesse Sitz are partners at Baird Holm LLP, focusing their law practices in the areas of federal and state income tax law and business succession planning. Fischer Frey and Sitz work closely with other tax practitioners and preparers to document and structure deals for their clients in a tax-efficient manner. Carrie Schwab is a summer associate at the firm and is a JD candidate at the University of Nebraska College of Law. For more information, you may contact Fischer Frey or Sitz at hfrey@bairdholm.com or jsitz@bairdholm.com, respectively. Continued from page 13 I S S U E 6 , 2 0 2 2 14 nebraska cpas
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Avoiding Substandard Audit Reports BY PAUL H. KOEHLER, CPA, GOVERNMENT/NONPROFIT SERVICES SPECIALIST THE PURPOSE OF AN AUDIT IS TO PROVIDE FINANCIAL statement 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, which enhances the degree of confidence that intended users can place in the financial statements (AU-C 200.03). An audit conducted in accordance with Generally Accepted Auditing Standards (GAAS) and relevant ethical requirements enables the auditor to form that opinion. Auditors are to obtain sufficient appropriate audit evidence to reduce audit risk (that is the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated) to an acceptably low level (AU-C 200.05). According to newly effective AICPA SAS No. 138, misstatements, including omissions, are consideredmaterial if there is a substantial likelihood that, individually or in the aggregate, they would inf luence the judgement made by a reasonable user based on the financial statements. And it only takes one material misstatement to render a set of financial statements to be materially misstated. High quality audit reports are critical to serving the public interest, as discussed in SASNo. 146, paragraph 6. SASNo. 134, as amended by SAS No. 41, addresses audit reporting and was effective for periods ended on or after Dec. 15, 2021. Paragraph 20 of AU-C 200 states that “the auditor not represent compliance with GAAS unless the auditor has complied with all of the AU-C sections relevant to the audit.” (NOTE: This concept never involves the notion of materiality—just relevance or “applicability.”) In other words, auditing standards, including those dealing with reporting, are either relevant or not. SAS No. 134, paragraph .09, indicates the objectives of the auditor are to: a. Form an opinion on the financial statements; and b. Express clearly the opinion through a written report. For purposes of this report, an audit report will be considered “substandard” if it does not meet the above objectives or departs from a relevant audit standard including: Making false statements regarding audit scope, Generally Accepted Accounting Principles (GAAP), audit finding, or any other statement of substance; Failing to include required content specified by SAS No. 134 or other relevant standard, including content sequencing (for example, paragraph .24 of SAS No. 134 says the first section of the auditor’s report should include the auditor’s opinion and should have the heading “Opinion”; paragraph .28 requires the I S S U E 6 , 2 0 2 2 16 nebraska cpas
Basis for Opinion section, appropriately headed, to directly follow the “Opinion” section); Failing to express an appropriate opinion (the auditor incurs the “audit risk”). Per SAS No. 134, opinions are either unmodified, or modified (qualified, adverse, or disclaimer). • Of course, an auditor’s opinion is based on their professional judgement, which can vary among different professionals. AU-C 200 .A27 contains a very important observation in this regard: - The di s t ingui shing feat ure of professiona l judgement expected of an auditor is that such judgement is exercised based on competencies necessary to achieve reasonable (emphasis added) judgements, developed by the auditor through relevant training, knowledge, and experience. • Fur thermore, SAS No. 134, paragraph .A45, acknowledges that “there is an unavoidable risk that some material misstatements of the financial statements may not be detected even though the audit is properly planned and performed in accordance with GAAS. Accordingly, the subsequent discovery of a material misstatement of the financial statements resulting from fraud or error does not by itself indicate a failure to conduct an audit in accordance with GAAS.” • It follows, then, that auditors would be well-served to document all misstatements (as defined by AU-C 450, along with examples thereof ) noted during a GAAS audit and their evaluation regarding materiality. (An unnoted misstatement would never be a material misstatement that could affect the auditor’s opinion.) • Finally, amaterialmisstatement that goes undiscovered, even in a properly conducted GAAS audit, results in an inappropriate opinion that fails to serve the public interest. The SAS No. 134 objective regarding clearly expressing the auditor’s opinion is challenging to evaluate achievement thereof due to an apparent absence of a definition or practical criteria. (What is “clear”?) For example, some opinions include an update to a prior year opinion along with the current year opinion, and properly refer to “audits” plural, when other paragraphs of the same auditor’s report inappropriately refer to the “audit” singular. While awkward and potentially unclear, this report does not consider a substandard auditor’s report to have been issued, just because of this plural/singular issue. Reasonable readers may not be impacted. On the other hand, in an auditor’s report on a state or local government set of financial statements where auditors are to opine onmultiple opinion units separately (versus having only one opinion unit, or one overall opinion in certain special circumstances), an auditor’s failure to consistently refer to plural opinions versus a singular opinion may lack sufficient clarity so as to qualify as a substandard audit report. For purposes of this report, any auditor’s report that is not “substandard” is considered “standard.” Standard audit reports Continued on page 18 • Business succession and exit planning • Partnership taxation structuring and compliance • Tax credit, tax incentives, and alternative financing • Tax-free and tax-deferred acquisitions, mergers, and reorganizations • Tax-deferred Section 1031 exchanges • Wealth transfer planning, including trust and estate taxation • Nonprofit formation and tax-exempt qualification and compliance • Audit response and representation before the IRS, state, and local taxing authorities LET OUR EXPERIENCE WORK FOR YOU 1700 Farnam Street, Suite 1500 Omaha, NE 68102 www.bairdholm.com 17 nebraska society of cpas W W W . N E S C P A . O R G
can potentially depart from specific language available to auditors in illustrations or examples, or include unfortunate typographical, spelling, or grammatical errors. Audit report content, including the appropriateness of the auditor’s opinion(s) is what is critical to serving the public interest. Below are examples of actual auditor’s reports read by the author in recent years, issued by firms of all sizes, all of which were signed and dated, representing to have conducted their audit(s) in accordance with GAAS. Many of these reports contained multiple substandard characteristics, and all opinions were unmodified, unless otherwise noted. Making false statements An auditor who prepared and presented (an independence issue) comparative (two-year) cash basis financial statements on part of a nonprofit organization (NPO), but had only audited the current year, stated in the auditor’s report that the auditor had audited both years. (The auditor also failed to mention that the NPOwas a component unit of a government and that the basis of accounting used was inappropriate for the government’s GAAP basis financial statements.) An auditor reporting on a city’s financial statements under SASNo. 134 in the “going concern” paragraph referred to both Financial Accounting Standards Board (FASB) alternatives for defining the “reasonable period of time” management is to use for their evaluation of “substantial doubt” rather than the appropriate Governmental Accounting Standards Board (GASB) definition (see SAS No. 132). An auditor’s Yellow Book report in a Single Audit indicated there were reportable findings, but neither that report nor the accompanying Schedule of Findings and Questioned Costs reported any. That same auditor’s Single Audit compliance report indicated that the auditee’s major federal programs were identified in the Schedule of Findings and Questioned Costs. They were not. Neither of these auditor’s reports were subsequently recalled and corrected. Failing to include required content An auditor reporting on a Dec. 31, 2021, set of GAAP financial statements failed to follow SAS No. 134 with all its new required content and sequencing. An auditor reporting on a June 30, 2021, set of GAAP financial statements under SAS No. 134 (early application is permitted by SAS No. 141’s amendment) failed to: • opine on the entity’s change in financial position; • include a Basis for Opinion section; and, • report on Other Information presented with the financial statements. An auditor reporting on a city’s Dec. 31, 2020, financial statements under SAS No. 134 failed to use the heading “Opinions” as required by paragraph .24 thereof. (The plural form of that word would have been appropriate since there were multiple opinion units, but no heading at all was used.) Despite basing their opinions on “our audit and the report of other auditors,” the auditor failed to indicate anywhere in the audit report what was audited by the other auditors, whose report did not accompany theirs. An auditor’s adverse opinion on a local government’s financial statements prepared by the auditor failed to include all the material misstatements that would have resulted in the adverse opinion (see AU-C 705, paragraph .28). There were numerous additional GASB 34 material misstatements besides the one that was cited (lack of government-wide financial statements), including overstatement of assets on one line itemof $1.2MM, inclusion of account groups (superseded by GASB 34) in the basic financial statements, failure to report bymajor fund (not by fund type), and numerous footnote omissions. Auditors of numerous local government financial statements over multiple years failed to properly identify the individual opinion units in the financial statements subject to the respective audits. In general, auditors are to opine on a reporting entity’s financial position and changes therein and cash flows, not individual financial statements. One auditor recently opined on an entity’s “statements of functional expenses“ inappropriately, as well as causing additional confusion by then not listing the other individual statements presented therewith. Failing to express an appropriate opinion An auditor failed to modify their opinion on a set of financial statements they prepared for a special-purpose government engaged only in business-type activities for numerousmaterial GAAP departures (see GASB 34), including: • balance sheet not in “classified” format; • statement of revenues and expenses did not distinguish between operating and nonoperating items; • reporting capital assets previously disposed; • failure to report a very significant capital asset received previously from another government; and • several footnote disclosures needed for fair presentation. Continued from page 17 I S S U E 6 , 2 0 2 2 18 nebraska cpas
An auditor failed to modify their opinion for material misstatements in the comparative Statements of Activities of a not-for-profit (NFP) foundation that underreported fundraising and general and administrative costs resulting in part from intermixing natural and functional expenses in the total operating expense amount. Program expenses were presented outside of operating expenses. Most of these errors were corrected in the comparative presentation in the following year’s comparative financial statements, but withno acknowledgment of the correction of these errors. The same auditor failed to modify their opinion in that following year’s audit. An auditor’s report was not modified on a set of NFP comparative financial statements where two-thirds of its net assets were improperly identified as donor restricted in perpetuity versus not in perpetuity. Detail footnote totals did not articulate with the amounts on the Statement of Financial Position. Neither the financial statements nor the auditor’s report were recalled and reissued. The subsequent year’s auditor’s report was notmodified for the correction of this error. Recently issued SAS No. 146, QualityManagement for an Engagement Conducted in accordance with GAAS, paragraph 6, states, “The public interest is served by the consistent performance of quality audit engagements that achieve the objective(s) of this SAS and other AU-C sections.” Appropriate audit opinions matter, especially in this time in our country’s history when it is often challenging to knowwhat to believe and trust in. Users of auditor’s reports should never have reason to question their veracity. 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. HBE LLP is pleased to announce that for the eighth consecutive year, they have been named to the Accounting MOVE Project’s 2022 Best Firms for Equity Leadership and 2022 Best Firms for Women. With women leading 42% of the firm, HBE is one of the 15 firms awarded with these honors nationwide. The MOVE methodology investigates the factors proven to be essential for career success: Money, Opportunity, Vital supports, and Entrepreneurship. HBE emphasizes employment programs proven to retain midcareer women, including phased return to work for new parents, remote-work opportunities, worklife supports for the busy season, and coaching to help managers lead teams based on productivity, not face time. “We are committed to fostering an environment where all of our associates, regardless of gender, age, race, or other diversity, are able to thrive within the profession,” stated Scott Becker, Managing Partner of HBE. “Through our core values centered on integrity, respect, and teamwork, we will continue to support and advance flexible leadership pathways built upon unique contributions and talents.” www. hbecpa.com 19 nebraska society of cpas W W W . N E S C P A . O R G
S TAT E TA X B R I E F I N G 2022 BROUGHT SEVERAL SIGNIFICANT NEBRASKA STATE AND local tax developments that are likely to affect many of your clients. We’ve highlighted some key statutory changes and case developments you will want to know. Income Tax Social Security Income Exemption. In 2021, Nebraska passed a bill that would exempt a portion of the Social Security benefits received by Nebraska seniors. The exemption percentage would increase through 2025, until 50% of those benefits were exempt from Nebraska tax. In 2022, the Legislature stepped up that exemption, so that 100% of Social Security benefits would be exempt fromNebraska income tax by 2025. Individual Income Tax Rate Reductions. In 2022, the Legislature acted to gradually reduce the top income tax rates paid by individuals and fiduciaries. For individuals and fiduciaries, the top rate will be decreased from its current 6.84% to 5.84% for 2027 and later years, via an annual reduction of 0.2% beginning in 2023. Corporate Income Tax Rate Reductions. The Legislature also acted to gradually reduce the top income tax rates paid by corporations. For corporations, the top rate will be decreased from its current 7.81% to 5.84% via a series of annual reductions beginning in 2023. Military Retirement Income. In an attempt to incent retired military members to stay in Nebraska, the Legislature acted to exempt 100% of military retirement benefits from Nebraska income tax. Department of Revenue Residency Challenges. The Nebraska Department of Revenue has continued to focus on the tax residency of persons who maintain homes in multiple states. In the Dec. 9, 2022, decision in Acklie v. Department of Revenue, the Nebraska Supreme Court decided the Acklies remained Nebraska residents for tax purposes for several reasons, including their travel schedule. In the Acklie decision, the Nebraska Supreme Court declined to review, and thus did not overturn, a Department of Revenue test for determining the number of days spent in a location when a person is traveling. This leaves undecided how the Department of Revenue should count partial days. We like to use a “Declaration of Abandonment” in pre-planning when a client decides to change residency. Foreign Income. The Department has continued to press its position, which is an outlier among states, that Nebraska should be able to tax a percentage of income earned by an international company’s foreign subsidiaries (so-called 965 income and GILTI income). The Department’s position is being challenged in a case filed in 2022: Precision Castparts Corp. v. Department of Revenue. Nebraska State Taxes: 2022 Year In Review BY NICK NIEMANN & MATT OTTEMANN, MCGRATH NORTH LAW FIRM I S S U E 6 , 2 0 2 2 20 nebraska cpas
E-Verify. In 2022, the Department began to issue proposed assessments (60-day letters) to companies that have utilized Nebraska incentives and R&D credits, on the grounds that they failed to fully E-Verify every new employees’ work status. There are a number of legal grounds being overlooked in defending against the Department’s position, which we believe should be amended into existing protests or included in new protests. Property Tax Funding for Existing Property Tax Credit. In 2022, the Legislature locked in the funding for the existing Real Property Tax Credit, which was funded at $548 million in 2022 but was scheduled to be reduced to $375 million in 2024. The Legislature kept the $548 million funding for 2022, increased this to $560 million in 2023, and then increased the funding by up to 5% annually for later years. Additional Property Tax Credit. In 2022, the Legislature also created a second refundable credit to refund a part of the community college property taxes paid by Nebraska landowners. This credit would be funded with $50 million in 2022, but that would increase to $195 million for 2026. For later years, that credit would be increased up to 5% annually. Significant Failure to Claim These Credits. Unfortunately, a signif icant percentage of these credits are not claimed by Nebraska landowners. In September 2022, the state estimated that approximately 40% of the available credits were unclaimed— meaning the state was keeping about $200 million of the $500 million available. Isolated Mistake Is Not an Equalization Violation. There are normally two ways to challenge a property tax assessment: actual value and equalization. In Lancaster Cty. Bd. of Equalization v. Moser, the Mosers owned irrigated agricultural land in Lancaster County. The land was valued as irrigated land. However, the neighboring land was also irrigated, but that land was mistakenly not valued as irrigated. The Mosers thus challenged the value of their property for property tax purposes, claiming their land value was not equalized with their neighbor’s property. The Nebraska Supreme Court rejected this argument, finding that an isolated error in the valuation of one property need not be replicated through the equalization process. Sales Tax While the Legislature did not make signif icant changes to Nebraska’s sales tax statutes in 2022, there were a few sales and use tax court decisions of importance. Continued on page 22 21 nebraska society of cpas W W W . N E S C P A . O R G
Potential Corporate Officer Liability. In the case Crow v. Department of Revenue, a company was assessed Nebraska use tax on its purchase of items used in its business. The assessment was protested. After the date of protest, the company went out of business and did not keep money sufficient to pay the assessment. The Department then issued a Demand for Payment to an officer of that company, alleging that the officer was personally liable for the tax at issue because the officer paid other creditors of the company while the assessment was still under protest. The Department alleged this was willful nonpayment of taxes, even though the Department’s assessment was still under protest. This matter is still under consideration by the Lancaster County District Court. However, if the Department’s position is upheld, this could create significant personal risk for responsible officers of companies. Those officers could be held personally liable for a company’s tax if they simply knew about the assessment, even though it was under protest, and paid other creditors instead of the Department of Revenue. Effect of Prior Guidance From NDOR. The case NPPD v. Department of Revenue involved a narrow issue regarding the classification of certain electric distribution systems as real versus personal property. The tax commissioner held that the systems constituted personal property, so the lease of those systems was taxable. The bigger issue for most taxpayers was the Department’s treatment of its prior guidance to NPPD. The Department had previously treated the systems at issue as real property and reversed its position in this assessment. The commissioner did not require the Department to follow its prior guidance. Instead, the commissioner simply found that NPPD did not need to pay penalties on the transaction because the Department changed its position. This was appealed to the District Court, which has not yet ruled. We’ve seen a number of times in which the Department’s current legal staff has decided to reverse the Department’s prior positions on certain matters. While results of a legal challenge vary based on specific facts of a situation, there can be a number of legal defenses that can apply in those cases. Procedure and Practice Standard of Review. The Acklie decision also highlighted another important legal principle—that theNebraskaSupremeCourtwill givea certain amount of deference to theDistrict Courts, which in turn gives a certain amount of deference to the tax commissioner. So, to win or reach an optimal settlement, it’s critical that the legal positions and legal defenses be fully and properly expressed as early in the process as possible. Where this hasn’t been done in pending audits, claims, and appeals, the protest or refund claim should be amended to cover this. Looking Ahead As we move to 2023, expect to see the Department of Revenue, and possibly the Nebraska Legislature, further addressing remote workforce issues. 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. See their websites at www.NebraskaStateTax. com and www.NebraskaIncentives.com for more information. 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 them at (402) 341-3070 or at nniemann@mcgrathnorth.com or mottemann@mcgrathnorth.com, respectively. Continued from page 21 I S S U E 6 , 2 0 2 2 22 nebraska cpas
www.thenewslinkgroup.orgRkJQdWJsaXNoZXIy ODQxMjUw