*This is the first in a series of articles addressing the impact of the TCJA on the Manufacturing industry.

TCJA: A Recap

The Tax Cuts and Jobs Act (TCJA) that was signed into law in December 2017 introduced changes to the Internal Revenue Code (IRC) the likes of which have not been seen since the Tax Reform Act of 1986. Many of these new or altered provisions directly affect manufacturers, and in this and subsequent articles of a series of articles, Monitoring Manufacturing: Effects of the New Tax Code, I’ll address those likely to have the most impact on our industry.

Pros & Cons of Cash Basis Accounting

One of the most beneficial additions to the IRC resulting from the TCJA is the opportunity for some manufacturers to switch to a cash basis method of accounting. Under prior law, businesses with inventories were typically required to use the accrual method, which generally requires income to be recognized when it is earned and expenses to be recognized when they are incurred.

The major pitfall to the accrual method of accounting is that it often accelerates the recognition of income and the related tax payments. That can create a cash flow problem. Under the cash basis of accounting, income is recognized when the money is received and expenses are deducted when they are paid. Improved cash flow is just one benefit associated with cash accounting; for example, the business can accelerate tax deductions by paying expenses prior to the end of its tax year.

Who is eligible?

The TCJA allows businesses with average annual gross receipts of less than $25 million – based on their previous three tax years – to adopt a cash accounting method and thereby potentially defer the recognition of income to future tax years. In addition, businesses under that $25 million threshold are no longer required to account for their cost of goods sold using inventories.

Instead, they can use a method of accounting that treats inventories as non-incidental materials and supplies or that mimics their financial accounting treatment of inventories. As such, the business can expense inventory as it is actually paid for, rather than being required to capitalize it – that is, not expense it. It is a very favorable change in that it will add to the business’s deduction for cost of goods sold. Treating inventories as non-incidental materials and supplies also exempts the business from applying Section 263A, which requires certain costs ordinarily expensed to be capitalized as part of inventory for tax purposes. Combining these opportunities could yield considerable benefits.

The TCJA expands the pool of businesses that are eligible to use the cash method of accounting. It is likely that many manufacturers previously prohibited from using the cash basis method of accounting will now be eligible. Nonetheless, it is imperative to conduct a thorough analysis of your specific circumstances.

For questions or to arrange a study of the potential opportunities for your company, contact a member of the HBK CPAs & Consultants’ Manufacturing team at (330) 758-8613.

HBK CPAs & Consultants (HBK) announced the signing of a conclusive merger agreement with the Spire Group of Clark, New Jersey. The merger gives HBK its northernmost office and the newest office in its mid-Atlantic region, which is comprised of Princeton and Cherry Hill in New Jersey and Blue Bell, Pennsylvania.

“We are pleased to welcome the Spire Group team to HBK,” noted HBK Mid-Atlantic Principal-in-Charge, Jim Bartolomei, who made the announcement. “They are a group of outstanding and accomplished professionals who will strengthen our position in the region.”

The Spire Group is comprised of 50 team members, five of whom are joining HBK as Principals. The firm has operated as the Spire Group since 2012 with the merger of two of the region’s leading full-service CPA and consulting firms, SGA Group of Clark, and Carr Daley Sullivan & Weir of Livingston, New Jersey.

“The Spire Group was built on the pillars of client service, entrepreneurship and a culture that is centered around our team members’ success,” noted Spire Managing Principal Tom Angelo. “We found those same pillars in the HBK family. We are excited to be able to bring our talents and expertise to scale collectively with the breadth and depth of HBK. Together, we will bring tremendous opportunities to our clients and our team members in the years to come.”

The Spire Group was recognized as one of the “Top 50 Best Workplaces of 2017” by Inc. magazine, was a “Best Firms to Work For” selection for the past four years by Accounting Today, and was chosen as one of the “Best Places to Work” for the past four years by NJBIZ.

In addition to its tax, advisory and assurance practice, Spire operates Spire IT. Spire IT was founded in 2010 to provide businesses reliable technology and consulting services.

“We are excited to welcome these proven leaders to our growing team,” said Christopher M. Allegretti, CPA, CEO and Managing Principal of HBK. “The Spire Group has succeeded at building an award-winning culture and growing a highly-respected office in a very competitive market. And their successful IT practice is proof of their innovative and entrepreneurial practice style.”

HBK CPAs & Consultants has been named the 2018 Best Place to Work in Sarasota-Manatee. The award is the result of an annual survey conducted by the Sarasota Herald-Tribune and the Best Companies Group.

The survey ranks companies in Sarasota and Manatee counties based on their workplace policies, practices, demographics and employee opinions. The list includes 27 businesses and will be featured in the November 11 issue of the Sarasota Herald-Tribune, which readers can also access at www.HeraldTribune.com.

A company’s eligibility for consideration includes:

• The business must be a publicly or privately-held company.
• The company must be a for-profit or not-for-profit business or a government entity.
• The business must operate a facility in Sarasota County and/or Manatee County, Florida.
• The company must employee at least 15 full-time or part-time employees working from an office location in Sarasota and/or Manatee Counties in Florida.
• The company must have been operational for at least one year at the time of the survey.

Christopher M. Allegretti, CPA and Managing Principal/CEO of HBK credits the leadership in the Sarasota office with the accomplishment. “Craig Steinhoff has continued the longstanding practice in Sarasota to make team engagement a top priority. He, and all of us here at the firm, see it as one of fundamental tenets for delivering top notch client care.”

Steinhoff, who is also leads the firm’s Non-Profit Services and Client Accounting and Advisory Services industry groups, credits his team members.

“This is a testament to the professionalism and passion of our team. Every member is actively involved in our efforts, from client-facing responsibilities to community services. I could not be more proud of them collectively and individually,” Steinhoff said.

Canfield, Ohio – Clinton A. Smith, CPA, CCIFP has been promoted to Principal in the Sarasota, Fla., office of HBK CPAs & Consultants (HBK). Mr. Smith joined the HBK office in Naples, Florida in October of 2007 after earning his B.S. in Accounting from Youngstown State University. In 2009, he moved to the HBK office in Sarasota, Fla. He is a Certified Public Accountant, a Certified Construction Industry Financial Professional (CCIFP) and a member of the American Institute of Certified Pubic Accountants.

“Clint has been an integral part of the growth of this office since his arrival here,” said Craig Steinhoff, Principal-in-Charge of the Sarasota office. “He has shown determination and skill in directing internal education and training, improving our collective technical skills by leading our Audit Specialists and Accounting and Auditing Team Level Training.”

Clint is a member of the firm’s Quality Control team and its Assurance Practice Committee. He works predominantly with Assurance Services, auditing construction and manufacturing companies and non-profit organizations. He also provides audit services to businesses on their Employee Benefit Plans.

HBK CEO and Managing Principal Christopher M. Allegretti, CPA, praised Smith as a consummate professional and leader. “Clint’s passion for teaching others and helping them grow and advance is indicative of the type of firm leader who will guide us into our next generation of service.”

Mr. Allegretti also recognized the following team members on their promotions:

Promoted to Senior Director:
Sandy Stewart in Pittsburgh, Pennsylvania

Promoted to Senior Manager:
Matt Fabian in Hermitage, Pennsylvania
Nick Walters in Meadville, Pennsylvania
Elena Ramos in Naples, Florida
Matt Schiavone in Pittsburgh, Pennsylvania
Robert Zahner (Valuation, Litigation and Forensics) in Pittsburgh, Pennsylvania
Michael Byrwa in Princeton, New Jersey
Ed Williams (Dealership Industry Group) in Youngstown, Ohio
Stephen Horne in Youngstown, Ohio
Kyle Melewski in Youngstown, Ohio

Promoted to Manager:
Michael Gill in Blue Bell, Pennsylvania
Patrick Higgins in Blue Bell, Pennsylvania
Jessica Donor in Meadville, Pennsylvania
Brandon Dougherty in Naples, Florida
Lusy Garcia in Naples, Florida
Ashlynn Reeder in Naples, Florida
Maria Battaglia in Princeton, New Jersey
Andrew Cooke in Princeton, New Jersey

Promoted to Senior Associate:
Matthew Carroll in Blue Bell, Pennsylvania
Michael Pastore in Cherry Hill, Pennsylvania
Allie Dempsey in Erie, Pennsylvania
Michael Baker in Erie, Pennsylvania
Steven Brown in Ft. Myers, Florida
Matt Orr in Meadville, Pennsylvania
Larissa Lutz in Meadville, Pennsylvania
Casey Baker in Meadville, Pennsylvania
Ty Sheehan in Meadville, Pennsylvania
Jamie Dwyer in Pittsburgh, Pennsylvania
Laurie Rossi in Pittsburgh, Pennsylvania
Christopher Raykowski in Princeton, New Jersey
Frederick McQuade in Princeton, New Jersey
Zachary Sadusky in Princeton, New Jersey
Tyler Bounassi in Princeton, New Jersey
Megan Brocker in Youngstown, Ohio

Overview

The Tax Cuts and Jobs Act (the Act) created a new Business Interest Deduction limitation, effective for tax years starting after December 31, 2017. This new provision limits the deduction for business interest for all businesses, though an exception to the limitation applies for businesses who meet the gross receipts test, discussed below.

What is the Business Interest Deduction?

Businesses are allowed to deduct any interest paid or accrued on debt that is properly allocable to a trade or business, and is not considered investment income. Historically, this interest deduction has not been subject to many limitations.

Scope: Then and Now

Internal Revenue Code (IRC) Section 163(j) is the code section that provides for a limitation on the deduction for business interest. Prior to the Act, this provision had a limited application and only applied to U.S. corporations or U.S. branches of foreign corporations to prevent businesses from stripping earnings and avoiding U.S. taxation. The Act changed this code section to apply to all taxpayers and all debt, even if the debt arises from a related-party transaction.

The Limitation

The deduction is limited to the sum of business interest income, 30 percent of adjusted taxable income (ATI), and floor plan financing interest. ATI is generally taxable income, computed without regard to:

• activity that is not allocable to the trade or business;
• business interest expense or business interest income;
• depreciation, amortization, or depletion (for tax years beginning before January 1, 2022);
• net operating losses under Section 172; or
• the new 20% qualified business income deduction under Section 199A.

Floor plan financing interest is generally defined as interest paid or accrued on debt used to finance the acquisition of motor vehicles held for sale or lease, and which is secured by the inventory acquired.

If the limitation applies, the disallowed business interest will carry forward to the succeeding taxable year.

Gross Receipts Test Exemption – Small Businesses

There is an exemption from the limitation for small businesses with average annual gross receipts for the three taxable years ending prior to the taxable year at hand that is less than $25,000,000. However, taxpayers in controlled groups and partnerships may be required to aggregate gross receipts, so this should be considered when calculating whether or not the limitation should apply.

Carve Outs

Farming, real estate businesses, dealerships and certain public utility businesses successfully lobbied to avoid the application of this limitation. For dealerships, floor plan financing is fully deductible without limitation. However, these dealerships are excluded from 100% bonus depreciation on any of their assets.

Farming and real estate businesses may elect out of the new 30% limitation, but they will be required to use the Alternative Depreciation System (“ADS”) to depreciate their depreciable assets. Businesses using ADS are not eligible for 100% bonus depreciation. If the election is made, it is irrevocable, and ADS treatment will apply to all depreciable assets that are already owned or will be purchased in the future.

Real Property Business – Election Comparison

So, How does it Work?

Let’s use a hypothetical company, ABC Corporation, and assume it exceeds the small business exemption. ABC Corporation is in the business of residential rental property and, for illustration purposes, will not elect out of the business interest limitation. For the taxable year, ABC Corporation has the following income statement:

ABC Corporation can only deduct $30,000,000 of its $49,000,000 of net interest expense. The remaining $19,000,000 of disallowed interest expense will carry forward until used in a future year. The $19,000,000 disallowance is calculated as follows:

$50,000,000 interest expense – $1,000,000 interest income = $49,000,000 net interest expense

$49,000,000 net interest expense – $30,000,000 interest expense limitation = $19,000,000 disallowance

ABC Corporation will have taxable income of $45,500,000 if they do not elect out, but will have taxable income of $25,500,000 if they do elect out. Therefore, the election out is most beneficial in the current year where there is high business interest expense. However, electing out will likely decrease the depreciation deduction for the current year and future years, thus slightly increasing taxable income. The decision of whether or not an election out should be made should therefore take into account the impact on current and future depreciation.

Effect of Depreciation, Amortization, and Depletion on ATI and the Deduction

The larger the ATI, the larger the deduction. Starting in 2022, ATI will be reduced by depreciation, amortization, and depletion. Therefore, the deduction will likely decrease for many businesses at that point. Looking at our example above, if depreciation and amortization were included in the calculation of ATI, ABC corporation would have $52,150,000 of taxable income. The following shows this calculation:

ATI would be $74,500,000 because depreciation and amortization amount are not added back. ATI of $74,500,000 is then multiplied by 30%, which results in a limitation for business interest in the amount of $22,350,000. Taxable income ($74,500,000) is then reduced by the limitation amount ($22,350,000) to equal $52,150,000 of taxable income.

Conclusion

The new business interest expense limitation can be complicated, depending on the type of business and the business’s average gross receipts. For businesses that qualify to elect out of the limitation, it is important to compare the effects of the deduction limitation and the depreciation adjustments on overall taxable income for the current and future years. For businesses that will be subject to the limitation, planning should focus on the method of providing future financing since the limitation may restrict cash flow.

Please consult your tax advisor or a member of the HBK Tax Advisory Group to determine whether or not this limitation applies to your business.

The Supreme Court’s decision on May 14, 2018 in the Murphy v. NCAA case struck down the Professional and Amateur Sports Protection Act (PASPA), which prohibited states from authorizing sports gambling within their borders. PASPA banned states from legalizing sports betting after its enactment in 1992, unless a state had already legalized sports betting prior to PASPA’s enactment. PASPA also contained a provision allowing for states to legalize sports betting if done so within one year of PASPA’s passage. The process of permission on such provisions is known as “grandfathering.”

The Garden State Looks for an Exemption

New Jersey attempted to take advantage of this carve-out, however it wasn’t until 2012 that New Jersey passed a law legalizing sports betting. In 2012 New Jersey’s law was challenged by the National Collegiate Athletic Association along with the four major professional sports leagues, until the case reached the Supreme Court in May of 2018.

The Supreme Court agreed to consider whether PASPA violated the Constitution, allowing not only New Jersey to enact their sports betting law, but to open the door for all states to authorize and legalize sports betting if they so chose. The Supreme Court ruled in a majority decision that PASPA violated the 10th Amendment of Constitution, specifically the “Commandeering Clause.”

The Commandeering Clause

The core principal of the Commandeering Clause is that the federal government cannot force state or local governments to implement laws; therefore states cannot be forced to act against their will. Not only will this decision allow New Jersey (which has been waiting six years to legalize sports betting) to potentially do so before the 2018 football season kicks off in the fall, but it will clear that path for the nearly two dozen other states considering legalizing sports betting, as well.

Sports Betting Brings in Big Bucks

The economic impact of this decision should not be dismissed. Nevada (which was grandfathered into PASPA) makes over $5 billion in revenue each year in sports betting. Not only do states have an interest in this monumental decision but the IRS will be particularly interested in taxing any gambling winnings of those engaged in legalized sports betting. Any gambling winnings, less any losses, will be included in a taxpayer’s ordinary income. The American Gaming Association estimates that Americans spend around $150 billion on illegal sports wagers each year, which, if now legalized across the states could provide $3.4 billion of taxable income to state and local governments and billions more of taxable income for the IRS.

Offsetting Betting Losses

While the current tax law allows taxpayers to deduct their gambling losses up to the amount of their gambling income (so long as they itemize their deductions), the rules are different for professional gamblers. For tax years 2018 through 2025, professional gamblers must add any expenses, such as travel back and forth from casinos, to their gambling losses when calculating the amount of any deduction they can take instead of being permitted to separately write them off, as they could do previously.

The Long Road in PA

For most states, it could take between three and five years to enact laws allowing for the legalization and regulation of sports betting. Pennsylvania’s current sports gambling law, however, places them in a unique position. Pennsylvania’s law allows for the legalization of sports betting when the federal prohibition on sports betting has ended. This law, which was enacted in October of 2017 also imposes a 36% tax rate on any legalized sports gambling that occurs. This is an exceptionally high tax rate. For instance, Nevada only taxes sports betting at 6.5%, and New Jersey proposed a rate of 8%.

The Commonwealth would also require casino operators in Pennsylvania to pay a $10 million licensing fee in order to engage in sports betting under this law. For states like Pennsylvania, many speculate that illegal sports gambling will continue to thrive due to the increased tax burden on gamblers and Casino.

The Buckeye and Sunshine States May Follow Suit

Unlike Pennsylvania, Ohio may face additional hurdles if they ultimately choose to legalize sports betting. Several Ohio lawmakers say they intend to push new legislation, however this could lead to an amendment to the Ohio Constitution. Many Ohio lawmakers are particularly concerned with the impact sports betting will have on small businesses, notably, the benefits that small businesses would receive if sports bets were allowed in local bars. There is thought to be a $3 billion illegal betting industry located in Ohio alone, and lawmakers seem open to legalizing sports betting if the public shows interest in obliging.

Though both Pennsylvania and Ohio seem open to the prospect of legalizing sports betting within their borders, Florida lawmakers are taking more of a wait-and-see approach. Florida will be looking to other states to see if the potential benefits outweigh any risk. The earliest you can see any movement from Florida in this area would be November, where an amendment on the ballot could potentially move the decision about sports betting into the hands of voters. It is unlikely you will see any changes coming from Florida lawmakers concerning sports betting anytime soon.

New Decision, New Course for Some States

The decision in Murphy has provided the states with a new source of revenue, so it is more likely that the states will work with casinos to set fees and rates that benefit both parties. States like New York, New Jersey, and Pennsylvania are expected to take full advantage of this ruling and push sports betting laws forward as soon as possible. In the meantime, we will have to wait and see if Congress decides to take any action on this matter, or if legalized sports betting is here to stay.

Please contact a member of our Tax Advisory Group at 330-758-8613 if you have questions related to taxes on sports betting.

Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

• Electronically file 2017 Form 1096, Form 1098, Form 1099 (except if an earlier deadline applies) and Form W-2G.

• If a calendar-year C corporation, file a 2017 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2017 contributions to pension and profit-sharing plans.

• If a calendar-year C corporation, pay the first installment of 2018 estimated income taxes.

• Report income tax withholding and FICA taxes for first quarter 2018 (Form 941), and pay any tax due. (See exception below under “May 10.”)

• Report income tax withholding and FICA taxes for first quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.

• If a calendar-year C corporation, pay the second installment of 2018 estimated income taxes.

Youngstown, Ohio – HBK CPAs & Consultants (HBK) is again among the Top 100 Accounting Firms in the U.S., according to the latest rankings by Accounting Today magazine. The recently released 2018 study lists HBK as the 56th largest firm, up from 62nd largest in the previous year’s study. The Accounting Today ranking is based on information compiled through benchmarking data and independent research as well as recommendations from the most successful firms in the industry.

HBK has been included in the Accounting Today Top 100 for more than a decade. Additionally, the firm was named among Accounting Today’s 25 Fastest Growing CPA firms for 2017, a distinction the firm also earned in 2014.

HBK CEO and Managing Principal Christopher Allegretti, CPA, attributes the accomplishments to concentrated team efforts to work collaboratively across service lines and geographic regions.

“We are focused on working together,” he said, “calling on the full breadth and depth of our resources, that is, the collective expertise of hundreds professionals. That allows us to not only develop comprehensive solutions for our clients but also to proactively address their situations, so they have the financial support they need to reach their life’s goals and objectives. That’s the key to our success and growth.”

Whether you had a child in college (or graduate school) last year or were a student yourself, you may be eligible for some valuable tax breaks on your 2017 return. One such break that had expired December 31, 2016, was just extended under the recently passed Bipartisan Budget Act of 2018: the tuition and fees deduction.

But a couple of tax credits are also available. Tax credits can be especially valuable because they reduce taxes dollar-for-dollar; deductions reduce only the amount of income that’s taxed.

Higher Education Breaks 101

While multiple higher-education breaks are available, a taxpayer isn’t allowed to claim all of them. In most cases you can take only one break per student, and, for some breaks, only one per tax return. So first you need to see which breaks you’re eligible for. Then you need to determine which one will provide the greatest benefit.

Also keep in mind that you generally can’t claim deductions or credits for expenses that were paid for with distributions from tax-advantaged accounts, such as 529 plans or Coverdell Education Savings Accounts.

Credits

Two credits are available for higher education expenses:

1. The American Opportunity credit — up to $2,500 per year per student for qualifying expenses for the first four years of postsecondary education.
2. The Lifetime Learning credit — up to $2,000 per tax return for postsecondary education expenses, even beyond the first four years.

But income-based phaseouts apply to these credits.

If you’re eligible for the American Opportunity credit, it will likely provide the most tax savings. If you’re not, consider claiming the Lifetime Learning credit. But first determine if the tuition and fees deduction might provide more tax savings.

Deductions

Despite the dollar-for-dollar tax savings credits offer, you might be better off deducting up to $4,000 of qualified higher education tuition and fees. Because it’s an above-the-line deduction, it reduces your adjusted gross income, which could provide additional tax benefits. But income-based limits also apply to the tuition and fees deduction.

Be aware that the tuition and fees deduction was extended only through December 31, 2017. So it won’t be available on your 2018 return unless Congress extends it again or makes it permanent.

Maximizing your savings

If you don’t qualify for breaks for your child’s higher education expenses because your income is too high, your child might. Many additional rules and limits apply to the credits and deduction, however. To learn which breaks your family might be eligible for on your 2017 tax returns — and which will provide the greatest tax savings — please contact your HBK representative.

As we enter the income tax filing season, the HBK Dealership Industry Group would like to remind dealers, owners/operators of dealerships and their employees to be on the lookout for tax scams in 2018.

Cybercriminals use various techniques such as email phishing schemes (deceptive emails) and phone scams to obtain private information. This activity is typically at its peak at the beginning of the year. The purpose of these scams is to obtain and access personal information so as to have the ability to file income tax returns and fraudulently claim refunds using the victim’s identity. Often, the criminals try to intimidate a taxpayer by claiming they are government employees and asserting that a taxpayer owes the government tax money that must be paid immediately.

If you are aware of these potential scams and are vigilant in protecting against them, you are less likely to fall victim to cybercriminals. Please remember that both the IRS and state departments of revenue initiate all communication with you via the U.S. postal service. Accordingly, please be aware of these red flags if someone claiming to work for the government:

1. Initiates a phone call or email asking for personal information;
2. Threatens to immediately bring in local police to have you arrested;
3. Calls or emails you to demand immediate payment using a specific payment method;
4. Demands that taxes be paid without giving you an opportunity to question or appeal the amount owed; or
5. Asks for your credit or debit card numbers over the phone.

Also, be aware that these criminals often alter their phone numbers in order to manipulate the caller ID system and/or use false email addresses to make it look like a governmental entity is contacting you. Although a scammer may look or sound official, be careful not to fall for a scheme.

If you suspect that you have been contacted by a scammer, you should immediately hang up on the caller or delete the email. If you have a concern, please contact a member of the HBK Dealership Industry Group at 317-886-1624 or rcollins@hbkcpa.com, the System and Organization Controls (SOC) team at 724-934-5300 or mschiavone@hbkcpa.com or the Cyber Security Team at 614-228-4000 or sfranckhauser@hbkcpa.com.