IRS makes statements on CARES Act Employee Retention Tax Credit risks

On Oct. 19, 2022 the IRS issued a news release warning employers to be wary of third parties who have ramped up campaigns to try and get employers to claim the CARES Act Employee Retention Tax Credit (ERTC) when they may not actually qualify.

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IRS makes statements on CARES Act Employee Retention Tax Credit risks

TAX ALERT | October 31, 2022 | Authored by RSM US LLP

Executive summary: IRS statements on employee retention credit

The IRS has recently warned employers of some third parties promoting the CARES Act Employee Retention Tax Credit claims that may be improper.  The IRS warning also indicated that IRS examinations of such credits are underway.

Public statements made on employee retention credit

On Oct. 19, 2022 the IRS issued a news release warning employers to be wary of third parties who have ramped up campaigns to try and get employers to claim the Employee Retention Tax Credit (ERTC) when they may not actually qualify. Businesses are encouraged to be cautious of advertised schemes and direct solicitations promising tax savings from the ERTC that sound too good to be true. Often, these parties make money by charging large up-front fees or taking a contingent fee based on the credit amount. The third parties are not necessarily advising employers that wage deductions claimed on the business’s federal income tax return must be reduced by the amount of the credit. The IRS reminds taxpayers that ultimately, the taxpayer is responsible for the information reported on their tax return and improperly claiming the ERTC could result in the taxpayer being required to repay the credit along with penalties and interest.

In addition, the IRS is actively ramping up enforcement of ERTC refund claims. The IRS has stated publicly that the Small Business/Self-Employed Division of the IRS has trained 300 auditors to examine claims involving the ERTC. The IRS fully expects an influx of ERTC claims as it continues to catch up on pandemic-induced backlogs and is considering a soft letter campaign or voluntary disclosure practice for the ERTC. Taxpayers should have their substantiation documentation for the ERTC prepped and ready to submit in the event they are asked to provide it to the IRS.

Employee retention credit background

The ERTC is a refundable payroll tax credit that was enacted as part of the CARES Act in March 2020. The credit from the CARES Act is equal to 50% of payroll-related costs over the eligible period up to a maximum credit of $5,000 per employee for 2020. Later legislation expanded the ERTC through Sept. 30, 2021 with several changes, including allowing companies that obtained PPP loans to benefit from the ERTC. Additionally, for 2021, the definition of a small employer was expanded from 100 or fewer employees to 500 or fewer employees; the credit as a percentage of qualified wages increased from 50% to 70%, resulting in a credit up to a maximum of $7,000 per employee for each of three quarters in 2021. In order to qualify for the ERTC, a company must have experienced a significant decline in gross receipts for a quarter as compared to the same quarter in 2019 or have been fully or partially impacted by government orders imposed on commerce, travel, or group meetings. 

For additional details and FAQs on the ERTC see: Game-changing updates to the Employee Retention Credit  & Employee Retention Credit: Answers to frequently asked questions 

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This article was written by Anne Bushman and originally appeared on 2022-10-31.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2022/irs-makes-statements-on-cares-act-employee-retention-tax-credit-risks.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

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(541) 773-6633

Idaho Office:
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Electric vehicle infrastructure creates opportunities for real estate

The adoption of electric vehicles has grown tremendously over the past year and a half. The trend will accelerate as consumer demand, which is being fueled by higher gasoline prices, tax incentives, funding from the Inflation Reduction Act and the increased desire for environmental sustainability, continues to rise.

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Electric vehicle infrastructure creates opportunities for real estate

REAL ECONOMY BLOG | October 24, 2022 | Authored by RSM US LLP

The adoption of electric vehicles has grown tremendously over the past year and a half. The trend will accelerate as consumer demand, which is being fueled by higher gasoline prices, tax incentives, funding from the Inflation Reduction Act, and the increased desire for environmental sustainability, continues to rise. For commercial real estate, the boost in electric vehicle use will create immense opportunities, as EV charging stations become sought-after additions to properties ranging from multifamily dwellings to retail centers.

An exponentially growing market

America now has 1.6 million electric vehicles on the road, but the electric vehicle charger infrastructure has lagged. There are currently just over 50,000 public charging sites equipped with barely 125,000 ports, according to the U.S. Department of Energy.

America now has 1.6 million electric vehicles on the road, but the electric vehicle charger infrastructure has lagged.

The number of electric vehicles on U.S. roads is projected to reach 26.4 million by 2030, comprising nearly 10% of cars and light trucks, according to a June 2022 report from the Edison Electric Institute. Unit sales of electric vehicles nearly doubled to over 600,000 from 2020 to 2021 and are projected to soar to 5.6 million annually by 2030. Based on these forecasts, nearly 12.9 million charging ports would be needed—more than 100 times the current amount—to support the number of electric vehicles on U.S. roads, according to data from the same report.

Ramping up a public charging infrastructure will be critical over the next few years to support this growing segment.

How real estate can benefit

Using the gas-and-convenience store model, which has been around for decades, the retail real estate sector is ideally positioned to capitalize on EV charging station growth.

The gas-and-convenience store model focuses on upselling to customers arriving for a fill-up, but comes with significant limitations to the retailer, the biggest being the relatively short time it takes to refuel a car with gasoline, which doesn’t leave much time to shop. Also, the convenience of paying at the pump frequently keeps customers from walking into the store. In addition, the highly flammable nature of gasoline limits the ability to put a gas pump just anywhere.

Unlike gas pumps, EV charging stations require the vehicle to charge for a minimum of 15 to 20 minutes, leaving more time for the customer to take advantage of adjacent retail. This includes locations ranging from gas-and-convenience stores to shopping centers, restaurants and movie theaters. They can be installed virtually anywhere, giving retailers an opportunity to draw more foot traffic and increase time spent on site. In addition, the installation of EV charging stations can help attract more upscale customers; the income of an electric vehicle owner is more than twice the national average, according to data from the Fuels Institute. That individual is also more likely to support shopping centers and vendors that support environmental sustainability.

The limited number of charging stations appears to be holding back growth in electric vehicle sales, another reason real estate could help fill the void.

The limited number of charging stations appears to be holding back growth in electric vehicle sales, another reason real estate could help fill the void. According to J.D. Power research released in August, customer satisfaction with Public Level 2 charging stations fell to 633 on a 1,000-point scale from 643 a year earlier.

“This lack of progress points to the need for improvement as EVs gain wider consumer acceptance because the shortage of public charging availability is the number one reason vehicle shoppers reject EVs,” J.D. Power said in a press release announcing the study.

As electric vehicles are more widely adopted, other real estate spaces, including multifamily dwellings, commercial offices, industrial spaces and hotels will need to be equipped with charging ports to remain competitive.

Source: Edison Electric Institute, RSM US

In addition, as real estate firms look to align with their environmental, social and governance (ESG) objectives and reporting requirements, they will also want to accurately measure the environmental impact of implementing charging stations.

A jumpstart from incentives and legislation

One of the barriers to the development of a widespread charging infrastructure is the expense, which includes costs for equipment, ongoing operations and maintenance, as well as for the installation needed to get power to the charging station site from the electric grid. Much of these costs to date have been paid for by the customer or organization hosting the charging equipment. This has limited the adoption of new chargers due to the difficultly in justifying the cost, given that electric vehicles now only make up less than 1% of cars on the road. However, as this number grows rapidly, an electric vehicle infrastructure will be critical to support this growth.

The Alternative Fuel Vehicle Refueling Property Credit, which provides a credit for up to 30% of the cost of equipment and installation, helps to offset a considerable portion of the costs. As real estate companies look to modernize their existing properties or to develop new commercial spaces that include EV charging stations, they can take advantage of this tax incentive.

In addition, the Infrastructure Investment and Jobs Act, which includes $7.5 billion to build a network of chargers nationwide, will help provide a much-needed jumpstart to ramp up the public and commercial charging infrastructure.

The takeaway

The exponentially growing electric vehicle market will provide significant opportunities for commercial real estate, while helping to support the country’s transition to carbon neutrality. It will be critical for real estate companies to invest in infrastructure for this growing segment to remain competitive and maximize profits.

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Call us at (541) 773-6633 (Oregon), (208) 373-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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This article was written by Crystal Sunbury, James Ward and originally appeared on 2022-10-24.
2022 RSM US LLP. All rights reserved.
https://realeconomy.rsmus.com/electric-vehicle-infrastructure-creates-opportunities-for-real-estate/

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

IRS releases required minimum distribution (RMD) guidance

Notice 2022-53 announced the IRS’s intent to publish final regulations addressing required minimum distributions (RMDs) from certain plans.

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IRS releases required minimum distribution (RMD) guidance

TAX ALERT | October 21, 2022 | Authored by RSM US LLP

Executive summary: IRS issues transition guidance with final RMD regulations approaching

The IRS released Notice 2022-53 on Oct.7, 2022, announcing that final regulations for required minimum distributions (RMDs) under section 401(a)(9) will be effective no earlier than the 2023 distribution calendar year. Even more welcome was transition relief provided for taxpayers whose interpretation of the changes to IRC section 401(a)(9) made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act differed from the proposed regulations issued by the IRS in Feb. 24, 2022. 

Background

Section 401(a)(9) addresses rules regarding the timing and calculation of RMDs from qualified retirement plans (such as 401(k), 403(b) and 457(b) plans) and IRAs (collectively referred to as Plans/IRAs) during and after an account holder’s lifetime. Specifically, section 401(a)(9)(H) was added to the Internal Revenue Code in 2019 by the SECURE Act and introduced a new 10-year rule for inherited Plans/IRAs. 

Different rules apply depending on whether an individual dies before or after their required beginning date (RBD). Before the SECURE Act, if an individual were to die prior to their RBD, then the Plan/IRA balance must be distributed within five years of death or over the life expectancy of their designated beneficiary. If an employee died after their RBD, then the distribution method used must be at least as rapid as the decedent’s distribution method.

Taxpayers may be subject to a 50% excise tax on the RMD amount, or any portion thereof, if it is not issued timely.

New rule

The SECURE Act added IRC section 401(a)(9)(H), which provides a new 10-year rule for individuals who died after Dec. 31, 2019. The new rule requires an individual’s Plan/IRA balance to be distributed within 10 years from their date of death, regardless of whether they die before or after their RBD. This removed the ability to extend RMDs over the life expectancy of the beneficiary, except when the designated beneficiary is an eligible designated beneficiary (EDB). EDB was a new term added by the SECURE Act that refers to the individual’s beneficiary who is their surviving spouse, their minor child, a disabled or chronically ill person, or not more than 10 years younger than the individual. 

The lag between the signing of the SECURE Act and the issuance of the proposed regulations required practitioners and individuals to make a good faith interpretation of the new rule. Many interpreted the new rule to be the same as the old 5-year rule, which provided that the Plan/IRA balance be fully paid out within 5 years of death, but did not require RMDs be paid annually. However, Treasury interpreted the SECURE Act changes as only impacting the life expectancy payout, and not repealing the at least as rapidly requirement. The proposed regulations require not just that the Plan/IRA balance be fully paid within 10 years of death, but that annual RMDs continue if the decedent had reached their RBD. The result has been RMDs either not issued in 2021 and 2022 or perhaps issued for an incorrect amount.

Public commentary on the proposed regulations was extensive and much of the discussion centered around the different interpretation, as well as the need for the IRS to not penalize taxpayers for making reasonable interpretations of the change in law. 

These new rules were summarized in Prop. Reg. section 1.401(a)(9)-1 and were expected to become effective for the 2022 distribution calendar year. However, Notice 2022-53 announced that the IRS will finalize the regulations, factoring in the public comments received, and will apply the rules beginning no earlier than in the 2023 distribution calendar year. The IRS also has provided some relief for taxpayers.

Transition relief for 2021 and 2022 tax years

In Notice 2022-53, the IRS provided relief to taxpayers who did not receive a “specified RMD” for tax years 2021 or 2022. Generally, a “specified RMD” is an RMD that would be required for 2021 or 2022 under the proposed regulations’ interpretation of  Section 401(a)(9)(H) for an individual who died in 2020 or 2021 after their RBD. Under this relief: 

  1. A Plan/IRA will not be deemed to have incurred a failure.
  2. The IRS will not assess an excise tax for failures to take RMDs or for failures to take RMDs in the correct amount.
  3. Taxpayers who paid excise taxes in 2021 or 2022 for failures to take RMDs can request a refund of the excise tax.

Takeaway

The RMD rules modified by the SECURE Act were interpreted by many taxpayers and advisors differently than the IRS did in the proposed regulations. Multiple comments were submitted to the IRS about the different interpretation and the need for relief for those who acted in good faith based on the SECURE Act changes. The IRS has not stated when the final section 401(a)(9) regulations will be issued, but the certainty of the transition relief is welcome. Taxpayers, retirement plan sponsors, and IRA custodians should continue to apply the rules of the proposed regulations until such time as the final regulations are released.

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Call us at (541) 773-6633 (Oregon), (208) 373-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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This article was written by Lauren Sanchez, Christy Fillingame, Tandilyn Cain and originally appeared on 2022-10-21.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2022/irs-releases-required-minimum-distribution-guidance.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

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New IRS draft forms reflect broader digital asset enforcement

The IRS changed “virtual currency” to “digital asset” in new draft forms, signaling enforcement efforts toward digital assets, including NFTs.

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New IRS draft forms reflect broader digital asset enforcement

TAX ALERT | October 20, 2022 | Authored by RSM US LLP

Executive summary: Cryptocurrency terminology updated

In recently released drafts of next year’s Form 1040 and instructions, the IRS changed the term “virtual currency” to “digital asset,” signaling the agency’s growing enforcement efforts toward evolving digital assets, including non-fungible tokens (NFTs). The tax return instructions continue to provide examples of when taxpayers should check the “Yes” box in response to the question of whether they engaged in digital asset activity. 

IRS inclusive term of digital assets

The IRS changed the term “virtual currency” to “digital asset” in a draft of the Form 1040 instructions it released on Oct. 17, 2022. This follows a similar change made on a draft Form 1040 for 2022 released by the IRS in September. This change continues to signal the agency’s growing enforcement efforts toward all forms of digital assets, including non-fungible tokens (NFTs). Indeed, for the first time, the IRS instructions specifically mention NFTs.

A virtual currency question first appeared on Form 1040 (Schedule 1) in 2019. Since then, the IRS has moved this question to the first page of the Form 1040 and slightly modified it every year. Aside from these annual updates, the IRS has released very little formal guidance about the tax treatment of digital assets. Experienced practitioners in this field will not be surprised by this year’s tax form change since virtual currency is also a form of a digital asset. The IRS previously stated that regardless of the label applied, if a particular asset has the characteristics of virtual currency, it will be treated as such for federal income tax purposes.

While IRS forms and instructions are helpful to understanding the law and often signal key IRS enforcement priorities, they do not have the effect of law. One unanswered question involves the receipt of new digital assets as a result of mining, staking and similar activities. The instructions are clear that a taxpayer engaging in staking activity should check “Yes” to this question. However, there is currently a debate about whether the mere receipt of assets from staking activity needs to be reported anywhere else on the tax return. 

In a lawsuit filed in the U.S. District Court for the Middle District of Tennessee, a taxpayer claimed that his receipt of staking reward assets was not taxable income and sued for a refund (Jarrett v. United States, Case. No. 3:21-cv-00419). Instead of defending the lawsuit, the Department of Justice authorized a refund to the taxpayer and mooted the case.

Taxpayers with significant digital asset activity should continue to consult with experienced practitioners and not rely solely on tax forms and instructions.

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This article was written by Jay Schulman, John Cardone, Kimberly Thomas and originally appeared on 2022-10-20.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2022/new-irs-draft-forms-reflect-broader-digital-asset-enforcement.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

As the U.S. dollar surges, the potential for a currency crisis grows

As central bankers and fiscal authorities seek to balance growth, inflation and financial stability, there is a growing possibility that we are walking into another financial crisis.

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As the U.S. dollar surges, the potential for a currency crisis grows

REAL ECONOMY BLOG | October 14, 2022 | Authored by RSM US LLP

The liquidity crunch driving the withdrawal of bond purchases by global central banks is creating the conditions of a classic policy quandary that is stoking international financial instability.

There is a growing possibility that we are walking into another financial crisis.

The challenge in balancing growth, inflation and financial stability is now being exacerbated by interest rate differentials that are causing the American dollar to soar against major trading currencies.

As central bankers and fiscal authorities seek to balance those three policy objectives, there is a growing possibility that we are walking into another financial crisis.

The problems in the United Kingdom, which are linked to inconsistency between fiscal and monetary policy along with financial instability, are the most trenchant signs of growing problems in global financial markets.

But given the fact that dollar appreciation is driven by differentials in interest rates, growth, energy supplies and the safe-haven move into dollar-denominated assets, we think that the more probable site of global financial instability will be in emerging markets, especially Asia.

With the dollar rising to new highs, the United States is exporting inflation through international oil markets—oil is priced in American dollars—by making dollar-denominated debt that much more expensive.

These factors all prompt a question: Will the soaring dollar result in a replay of the Asian currency crisis of 1997?

We would argue that is most likely not the case. Still, the broad depreciation of the major Asian currencies against the dollar will create collateral damage in the region that will most likely result in demand for financial assistance from the International Monetary Fund.

In our estimation, the G-7 fiscal and monetary authorities will have to cooperate if they are to avoid even a modest replay of the Asian currency crisis. Absent such cooperation, fissures within the global financial system could spill over into the global real economy.

Already, financial markets are sending signals that the policy quandary needs to be solved quickly. Consider what has already happened:

  • The Japanese yen has lost more than 25% of its value versus the dollar through the middle of October, largely due to sluggish growth in Japan and its near-zero interest rate policy. The Bank of Japan’s recent intervention to prop up the yen has failed and the yen is now trading above 146 to the dollar which is where the Bank of Japan has traditionally threatened further intervention into currency markets.
  • The euro and British pound have each lost nearly 20% of their value as the Russia-Ukraine war threatens to turn an energy and inflation crisis into a full-blown recession.
  • Other Asian currencies have plunged as well. The Korean won has lost 20% of its value versus the dollar, the Philippine peso 15%, the Thai baht 14% and the Indian rupee 11%.

The Singapore dollar is the exception, losing less than 7% versus the dollar as it strengthens against the currencies of other trading partners. But that’s because of Singapore’s position along the global supply chain and because of its dependence on imports. In addition, the policy tool of choice of the Monetary Authority of Singapore is management of its exchange rate.

So the strength of the dollar is testing the limits of global financial and economic stability. Yet we need to recognize that there are mitigating circumstances.

Since the Asian currency crisis of the 1990s, the emerging-market economies have not stood still. And the monetary authorities among the developed economies have gained experience with each crisis, developing new tools to stabilize the markets and the economy.

Let’s start with the risk of another Asian debt crisis.

Local currency bond markets

After the Asian currency crisis, there was a concerted effort to reduce Asia’s reliance on cheap dollar funding, which puts local government finances at risk during episodes of dollar strength.

If funding is in U.S. dollars, then the cost of paying down that debt would increase when the dollar strengthens. Minimizing this currency risk entailed the development of local currency bond markets in Asia and the increased ability to fund in local-currency terms.

As of last year, Asean-5 local currency bond markets had grown tenfold since 2000, from $200 billion to $2 trillion, according to an analysis by Asian Bonds Online.

While bond market growth of 11% per year is certainly not a panacea for all the world’s troubles, the likelihood of a catalyst for a global recession developing out of insufficiencies in the Asian debt markets has been reduced.

ASEAN local currency

Foreign exchange holdings

At the core of the global supply chain has been the stability and financing of the U.S. dollar. The dollar dominates worldwide commercial activity, and in particular the pricing of energy and food. If a country is buying oil or wheat, then it will need to convert its local currency into dollars. If the dollar is soaring, then the cost of oil and wheat will also soar, hurting the local economy.

Each of the central banks has holdings of currencies of other countries, with those reserves acting as an insurance policy, should the value of their domestic currency collapse.

As we saw with the Asian debt crisis, this is particularly important if government debt is payable in dollars and the dollar’s soaring value strains the ability to cover those liabilities.

A study by the Federal Reserve discusses the dominant role of the dollar as a medium of exchange.

About 60% of international and foreign currency liabilities (primarily deposits) and claims (primarily loans) are denominated in U.S. dollars. This share has remained relatively stable since 2000 and is well above that for the euro (about 20%).

It seems obvious then that the majority of worldwide reserve holdings would be in U.S. dollars.

As of June, those dollar reserves totaled nearly $6.7 trillion, comprising nearly 60% of all allocated reserves, according to data from the International Monetary Fund.

Reserve holdings of euros were $2.2 trillion in dollar terms, which is 20% of all allocated reserves.

Among the two remaining major currencies, reserve holdings of Japanese yen were $579 billion and British pound holdings were $545 billion in U.S. dollar terms, with each accounting for 5% of total reserves.

Foreign exchange reserves

FX reserves and percentage of total allocated reserves

The growth and diversification of reserves

What is encouraging is the growth of currency reserves since 2000. Total allocated reserves have grown at an average pace of 10% per year, with dollar reserves growing at 9.7% per year and euro reserves at 10.2% per year.

And there has been a diversification of holdings. An analysis by the IMF in 2020 noted the decline in reserve holdings of dollars since the euro’s advent in 2000, with the euro becoming the dominant currency vehicle for African economies as well as within Europe.

And we note the increase growth of “other currency” holdings, which are approaching holdings of the yen and pound. That may represent what will be a maturation of other economies and further diversification of financial centers.

FX reserves by major currency

The takeaway

As in past crises, there is the danger of a financial upheaval in one country spilling over into another.

Like the spread of infection during a health crisis, monetary authorities need to react quickly to the risks of contagion, which can result in lack of liquidity in the financial markets and an economic collapse.

If the currency markets were to come under attack, as they were during the Asian currency crisis, then the monetary authorities would need sufficient foreign currency holdings to cover their liabilities. China is far and away the largest holder of foreign exchange reserves, followed by Japan, Korea and Singapore.

Among the Western economies and those most affected by the cutoff of Russian energy supplies, the euro area has amassed the most reserves, but that is only a fraction of those held by Asian governments.

If the governments in the West were to conduct currency intervention programs, it would require the cooperation of all the authorities.

FX holdings of economies

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 373-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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This article was written by Joseph Brusuelas and originally appeared on 2022-10-14.
2022 RSM US LLP. All rights reserved.
https://realeconomy.rsmus.com/avoiding-a-currency-crisis-amid-a-surging-dollar/

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

Is your managed service provider as secure as you think?

Key steps to take when assessing how much protection your managed service provider is providing your organization from cyberthreats.

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Is your managed service provider as secure as you think?

ARTICLE | October 13, 2022 | Authored by RSM US LLP

It doesn’t matter what industry you are in, or how big your company is—the attacks never stop. Cyberthreats are constant, and they include everything from hackers trying to take over your systems through ransomware attacks to scam artists sending phishing emails.

Many companies hire managed service providers (MSPs) to handle their IT needs, but just because you have an MSP doesn’t mean that your security needs are covered. It is imperative to verify that your MSP is doing all it can to prevent a catastrophic attack on your IT system by taking a security-first mindset. Here are key steps to take and important factors to keep in mind when assessing how much protection your MSP is providing for your organization.

A dangerous assumption

Just a few years ago, cybersecurity for most companies consisted of little more than antivirus software and a basic firewall. Today, companies need a much stronger defense. As cyberattacks have increased in both frequency and sophistication, organizations can no longer sit back and hope that no one gains unauthorized access into their IT environment to unleash havoc. However, many companies simply do not have the internal resources to set up and maintain a powerful cybersecurity platform. Hiring and retaining a staff of qualified security professionals who will focus on cyberthreats is beyond the reach of most organizations.

An upsetting shock awaits those companies that just assume their MSP is handling their cybersecurity. The truth is that some MSPs focus only on IT operations. They work to support the users, make necessary upgrades, ensure the operability of the technology and, in general, keep the lights on. They may not view it as their job to monitor threats, identify gaps in protection or prevent attacks.

It’s important to verify that your contract with your MSP includes cybersecurity, and that you’ve defined what that protection looks like. You can start by asking if your MSP has top-tier cybersecurity professionals who offer security services, take a proactive approach to identifying security threats, and can respond quickly if necessary.

Take action: Watch our 2022 cybersecurity update on key trends in an evolving landscape

Do you need a managed security service provider (MSSP)?

If your MSP does not handle cybersecurity, you may need to consider hiring a managed security services provider (MSSP). These organizations specialize in security and provide 24/7 cybersecurity services.

Working with a MSSP could be the right solution, but some companies balk at the cost of hiring and managing another provider. While budgetary concerns are always relevant, it’s important to keep in mind that a serious data breach can be costly to repair and can irrevocably damage a company’s reputation. Regardless of whether you have one provider or two, the principles of cybersecurity are the same.

Take action: Compare your cyber risk with our two-minute cybersecurity benchmarking assessment

What about cyber insurance?

Some organizations may argue that obtaining cyber liability insurance is all the protection that they require. However, while cyber insurance can be a vital part of a company’s overall strategy, it is not a sufficient defense by itself. That’s like refusing to wear your seat belt and driving through red lights at top speed because you have car insurance.

Furthermore, cyber insurance is difficult to obtain in the first place if you are not taking well-established, documented steps to secure your environment and your users. Cyber liability insurance carriers are creating more requirements and conducting more thorough reviews of organizations before offering coverage. They want to make sure, understandably, that an organization is taking the necessary precautions to decrease the odds of a big claim being filed.

For all these reasons, many companies benefit from hiring an experienced provider that can focus on their cybersecurity needs.

Take action: Find out if your company is eligible for cyber insurance

Do your research

It’s one thing for your MSP to offer cybersecurity services. It’s another for your provider to actually deliver.

To verify that your MSP is itself secure, ask to see the firm’s latest SOC-2 audit. This report details organizational controls related to security, availability, confidentiality, and other important functions. In addition, make sure that your MSP has policies and procedures that protect the operational aspect of their services. These include third-party certifications and details about how the MSP ensures the quality of its work.

Once you are satisfied that your MSP can handle your cybersecurity needs, the next step is to confirm your requirements. Perform a thorough gap analysis or, at the very least, undertake a one-time security baseline assessment. Your MSP should be skilled at identifying solutions for your situation.

Workflows and written procedures are essential, of course, but there are always intangibles that will decide if the engagement is a successful one. Foremost among these is good communication. An effective MSP should be in regular contact regarding the state of your IT environment, possible challenges, and technological innovations. Your MSP should make you aware of any potential security gaps and have a plan for addressing them.

Take action: Read our latest Cybersecurity Special Report to understand why cybersecurity continues to be a top concern for companies

The best defense is a strong offense

It is not enough for your MSP to simply monitor the cyber landscape. A provider that is not actively working to thwart cyberattacks could be putting your organization at risk.

In recent years, many companies have suffered major breaches that originated with their providers. Third-party cyber incidents have become both more common and more severe. Therefore, it is your responsibility to engage with your provider to identify how the MSP is part of the solution and not part of the problem.

At a minimum, your provider must ensure that your IT system’s most critical components are taken care of. Achieving that goal includes answering the following:

  • Are software patches being applied?
  • Is the company’s backup environment protected?
  • Is the system set up to recover crucial data and functions if there is a breach?
  • What about important concepts such as multifactor authentication, endpoint detection and response, unsupported software in your environment, and end-of-life software?
  • Has there been a firewall rule review to make sure that all devices configure properly?
  • Is there risky ingress traffic from the internet?
  • Are there unsupported systems?
  • Is active directory hygiene being done?
  • Has the company moved to the cloud to reduce its attack surface?
  • Have you established formal governance—written information security policy, incident response plans, and so on?
  • Have the recommended EDR solutions been discussed?

Those are just some of the key concepts that your MSP should be discussing with you during regular communications. If your MSP isn’t at least broaching those conversations, it could be time to find a provider that will be proactive about keeping your company safe.

Take action: Learn 10 key steps to reduce the impact of cyberattacks

The human element

No matter how good your MSP is, there will always be one aspect beyond its direct control: your staff members. The number one threat vector is an employee who clicks on a malicious link in their email or web browser. All the technological barriers and advanced controls in the world will fail if an employee unwittingly introduces a virus or gives an intruder access to the system.

While your MSP can’t hover over staff members to prevent them from clicking on the wrong link, your provider can definitely provide training to minimize the chances of a breach. Your MSP should be willing to educate your employees on best practices and provide real-world examples of do’s and don’ts when it comes to cybersecurity.

In the end, the most critical piece of any organization’s security posture is the human firewall. Your MSP should be more than just a behind-the-scenes firm that handles tech issues. Your provider needs to be an effective collaborator in ensuring that your company stays safe in the cyberworld.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 373-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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This article was written by Corey Weeklund, Braden Daniels and originally appeared on Oct 13, 2022.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/managed-services/is-your-managed-service-provider-as-secure-as-you-think.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

Economic headwinds: Law firms

Without making significant progress on improving productivity, firms in all sectors risk a sharp decline in profits.

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Economic headwinds: Law firms

ARTICLE | October 12, 2022 | Authored by RSM US LLP

The professional services industry has experienced a luxury that many others throughout the pandemic have not—stability. However, now that the U.S. economy contracted in each of the first two quarters of 2022, the warning signs are clear: Without making significant progress on improving productivity, firms in all sectors risk a sharp decline in profits in 2022 amid the increase of direct expenses and inflation.

By the numbers

Looking specifically at the law firms sector, firms usually take a hit in three key areas during an economic downturn: demand, rate growth, and productivity.

In Q2 2022, law firms saw a 0.5% decline in demand from the previous year. That drop followed a 2.7% increase in Q1.

Historically, there is a close correlation between GDP growth and growth in demand for law firm services. As you can see in the chart below, GDP and law services each dropped sharply in 2008 as part of the Great Recession. However, law services demand continued to fall during 2009, even after a recovery in GDP.

Law demand eventually returned at the same scale, but not until a year later. This same pattern repeated in 2012 and 2015: simultaneous decline, then a delayed recovery of law services demand approximately one year after a rebound in GDP.

gdp-growth-as-indicator-of-demand-chart

As GDP recovers after an economic decline, mergers and acquisitions activity tends to follow in step. In turn, demand for law services supporting M&A and real estate tend to be among the highest growth areas—as seen in data showing demand growth by segment. This tends to happen in a cadence, however, which helps explain the delay in recovery in law services.

The top challenge for the law firms sector in a slowing economy is productivity

Productivity is key to protecting profit margins in a tight labor market and with elevated direct expenses.

In times of economic decline, attorney productivity historically has fallen. For example, in Q1 2009, attorney productivity decreased year-over-year by 11.5%, according to the Hildebrandt International Peer Monitor Index. So far in 2022, law firms’ productivity dropped 1.1% in Q1 and 3.5% in Q2, according to Thomson Reuters’ Law Firm Financial Index.

Law firms commonly measure productivity by billable hours and utilization of billable employees. Metrics for both have trended positively over the last 15 years. However, in the past five years, utilization growth has stagnated around 71%, according to the 2022 Professional Services Maturity Benchmark report by SPI Research. This suggests firms might have hit the ceiling for the number of billable hours a professional services employee can work in a year. To relieve this squeeze on profitability, firms must enable their employees to do more during those hours.

Billing rates represent an additional challenge to the sector

Billing rate growth is critical as persistent inflation eats into profit margins. Of course, rate growth as a path to profitability becomes less viable as demand for services recedes.

For example, following an 8% drop in demand for legal services in Q1 2009, firms raised their billing rates by only 3%—less than half of the average year-over-year increase of 7%, according to the Hildebrandt International Peer Monitor Index.

So far in 2022, billing rates have grown by 5% and 4.7% year-over-year in Q1 and Q2, respectively, according to Thomson Reuters.

Professional services firms are mitigating these challenges by investing in technology

Effective use of technology enables firms to minimize administrative tasks and to work smarter. Automation, integrated workflows and approvals, knowledge-sharing technologies, and virtual communication tools have allowed professional services professionals to multitask with several projects and clients at once.

The average law firm in Q2 of 2022 increased its year-over-year spending on technology by 10.5%, the fastest pace in eight years, according to Thomson Reuters. That surge followed an 8% annual increase in Q1. The acceleration reflects a subsector with its eyes on long-term success in the face of more immediate threats to profitability. However, it remains a question how steadfastly firms can continue to afford to focus on that big picture.

Among professional services firms that are proceeding with investments in digital solutions, we are seeing a key trend toward single solutions that can do more under a simplified workflow with minimal integration complexities. Firms are turning to these single solutions to standardize and simplify IT architecture instead of just adding new technology to an existing suite of applications.

Other top considerations to offset the impact of headwinds facing the professional services industry

  • Off-site delivery of professional services

    Professional service professionals have proven during the pandemic they can remain productive while off-site and are now set up with the technology to maintain that capability.

  • Employee retention

    As demand cools, so will the need to hire more staff. Firms should prioritize retaining current staff over trying to hire.

  • Productivity through technology

    Investing in technology that helps automate repetitive and manual tasks and streamline workflows and approvals needs to be prioritized to drive productivity gains.

  • Client value

    Ensuring clients understand the value they are receiving for fees is critical to client retention.

Opportunity

There is one area of law services that has grown in past economic downturns: bankruptcy law. In Q1 2009, demand for bankruptcy attorneys increased 15% year-over-year, according to FindLaw.

It is also important to note that some legal matters do not simply go away during a recession, and law services are a necessity in many situations. During a recession, clients are more cost-conscious, though, and some will find themselves shopping the middle market firms for services that are more rate-friendly than big law firms.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 373-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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This article was written by Sonya King and originally appeared on Oct 12, 2022.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/industries/professional-services/economic-headwinds-law-firms.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

Strategies for going public

What are the advantages, disadvantages and options for accessing capital by going public? RSM has answers to some common questions for business leaders.

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Strategies for going public

ARTICLE | October 06, 2022 | Authored by RSM US LLP

What are the advantages and disadvantages of going public?

The process of going public has a significant impact on any company and its employees. It is transformative for companies and should be considered holistically to determine if it is the right strategy for the company. Below we provide our perspective and observations for management’s consideration in the process.

Advantages

  • Access to public capital markets and funding
  • Greater appeal to senior-level talent
  • More transparency to investors and customers
  • Increased public awareness

Disadvantages

  • Costly process (in dollars and time)
  • Increased reporting and regulatory requirements
  • Loss of control
  • Market pressures

RSM’s weighing the advantages and disadvantages of going public checklist provides more detail around these key considerations.

How much does it cost to go public?

The process of going public can be costly, in terms of both dollars and time. It requires the attention and heavy involvement of the most senior levels of management, which can distract from normal business operations.

The most significant financial cost is typically associated with the engagement of investment bankers to assist and advise in the transaction, the compensation for which is often a percentage of the proceeds or deal funding. To assist in the process, the company will often also need to engage external advisors in the legal, HR, tax, accounting, and IT fields.

Going public may result in significant one-time or nonrecurring costs for these advisors, all of which may fluctuate due to the size and complexity of both the company and the deal itself. These costs include approximately 6% to 8% of the total deal value for underwriter fees, 1% to 2% for legal fees, 0.5% to 1.5% for accounting fees, and an additional 0.5% to 1.5% for other fees (printing, SEC registration, etc.).  In addition, management will need to consider increases in recurring costs that may result from higher compliance costs, both internally (e.g., for internal audits) and externally (e.g., for Public Company Accounting Oversight Board audits), additional legal fees, directors, and officers insurance, and more. 

Going public may result in significant one-time or nonrecurring costs for these advisors, all of which may fluctuate due to the size and complexity of both the company and the deal itself. These costs include approximately:

6% to 8%

of the total deal value for underwriter fees

0.5% to 1.5%

for accounting fees

also, 0.5% to 1.5%

for other fees (printing, SEC registration, etc.).

In addition, management will need to consider increases in recurring costs that may result from higher compliance costs, both internally (e.g., for internal audits) and externally (e.g., for Public Company Accounting Oversight Board audits), additional legal fees, directors, and officers insurance, and more.

What should be considered before you go public?

Going public involves more than simply filing a registration statement with the SEC and listing on an exchange. The effects will be felt throughout the organization, so the decision requires careful consideration of a number of important areas, including:

  • Process and controls – Management will be required to certify the company’s reporting and disclosure controls and demonstrate establishment of an effective control environment that will be subject to internal and external examination and testing.
  • Information technology – Public investor reporting requirements often demand that the company’s enterprise reporting system and general IT environment and controls meet future-state requirements.
  • Tax – Restructuring activities may be required to ensure the current company owners receive the maximum tax advantages during this process. In addition, management must ensure the company has accounted for any potential tax exposures or obligations that may affect its financial position.
  • Human resources/capital – For a public company, a more robust talent management and development program, as well as an executive compensation plan, may be required. Increased efforts to integrate the HR function throughout the organization may also be necessary.
  • Financial reporting and accounting – Financial statements included in or incorporated by reference into SEC registration statements must be audited in accordance with PCAOB auditing standards, which typically require additional supporting documentation and analysis as compared to generally accepted auditing standards. Management is responsible for preparing any additional information required.
  • Financial planning and analysis – The company will be expected to have a process in place for development of budgets and financial projections to provide earnings guidance to the public. Engagement of experienced professionals who can evaluate the company’s financial strategy will also be required.
  • Corporate governance and compliance – The company will be required to establish a board of directors and form committees focused on areas such as audit and compensation. It must also establish a code of conduct and an ethics and whistleblower program.

How long does the going-public process take?

The timeline can vary by the type of transaction—initial public offering (IPO), acquisition by a special purchase acquisition company (SPAC), reverse merger, or direct listing. In each case, the process is complex and requires significant time to plan and execute to ensure success.

  • From initial exploration to preparation and execution to active trading, an IPO can take 12 to 18 months.
  • For a de-SPAC transaction—in which a private company is acquired by a SPAC, or blank check, company, resulting in the private company becoming publicly traded—timing varies widely and is generally dependent on the readiness of the private company to issue SEC-compliant financial statements. However, a de-SPAC transaction typically has a shorter turnaround than a traditional IPO—generally three to six months, depending on the timeliness of SEC review during the comment process.
  • A reverse merger, in which a public company merges with a private operating company and the private operating company is determined to be the accounting acquirer, resulting in the private operating company subsequently becoming a publicly traded company, has a similarly wide range of timing and dependency on the readiness of the private company to issue SEC-compliant financial statements. A reverse merger is similarly expected to have a shorter turnaround than a traditional IPO.
  • Direct listings, also known as direct placement or direct public offerings, do not involve the creation of new shares; only existing, outstanding shares of a company are sold, with no underwriters involved. Direct listings will require the same filing and reporting requirements of an IPO but, without the need for intermediate underwriting and marketing, may be completed faster than a traditional IPO.

How will going public affect my company?

The company’s access to public funding and financing can unlock and enhance strategic options to build and grow the business. Having the appropriate infrastructure in place—including enhanced financial reporting requirements and IT system capabilities, additional human capital and talent, and increased focus on internal processes and controls—is paramount. The decision to go public requires careful consideration of the investments in the process and the cost of ongoing compliance versus the advantages of being publicly traded.

IPOs, SPACs, reverse mergers, and direct listings

What are the requirements for an IPO or direct listing?

Various SEC rules and regulations need to be adhered to when preparing for an IPO, involving both legal and financial aspects. A company that elects to pursue a direct listing is required to adhere to these same guidelines. The key difference in a direct listing is that an investment banker isn’t involved in the offering process.

An entity making an offering of securities registered with the SEC under the Securities Act of 1933 must file a registration statement and distribute a prospectus in connection with the offering. The registration statement and prospectus must contain financial statements and other information regarding the financial condition of the company and its operating results. The SEC has specific, complex rules regarding the financial statements and other financial information that must be presented in a registration statement for an IPO. The nature and extent of financial statement information that will be necessary requires analysis and confirmation with counsel and auditors and will vary depending on the size of the company, timing of the filing, and a number of other factors.

In addition to fulfilling the SEC requirements, to have its shares traded on a stock exchange a company must meet certain liquidity and financial requirements, which involves evaluation of tangible net worth, historical profitability, and minimum IPO market value. Each stock exchange, including the NYSE and Nasdaq, has its own initial and ongoing listing requirements, some more stringent than others.

Prior to embarking on an IPO, a company should consult with an investment banker, SEC counsel, an external auditor, and IPO advisors.

How does going public through a SPAC differ from a traditional IPO or direct listing?

A traditional IPO or direct listing involves the listing on a public exchange of a company’s newly constituted stock or existing corporate stock. A SPAC transaction involves a blank check company acquiring a private operating company with issuance of existing stock or with cash, at which point the private company becomes the public operating company registered on the exchange. Another difference relates to the evaluation of the newly public company’s status as an emerging growth company and smaller growth company, which may be affected when considering the SPAC entity in the analysis. Choosing the path that best fits your company’s strategy and organization requires careful consideration.

How can my company prepare to be acquired by a SPAC?

To gauge readiness to be acquired by a SPAC, we recommend that each company evaluate important changes that may be required throughout their organizations, including in accounting and finance, tax, IT, and HR. In these areas, management should carefully consider whether the target company’s internal resources, processes and reporting, and existing or available data will be sufficient to meet the expectations and requirements for a public company. Often, a key first step for a company looking to be acquired by a SPAC is engaging financial advisors to assist with the marketing and evaluation of options along with the appropriate advisors to help management determine the necessary organizational changes.

What is the process to go public through a reverse merger?

A reverse merger is one in which the legal acquirer, often a SPAC or public operating company, acquires a private company, the legal acquiree; however, the business combination agreement deems the private company the accounting acquirer (usually with the private company obtaining a controlling stake in the public company post-merger). In a reverse merger the accounting considerations, particularly purchase accounting, can change, and it is important to carefully analyze the facts to ensure the transaction is presented and recognized appropriately.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 373-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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This article was written by RSM US LLP and originally appeared on Oct 06, 2022.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/financial-management/strategies-for-going-public.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

ASC 740: Q3 2022 provision considerations

A roundup of global income tax considerations and changes in tax law for corporations preparing income tax provisions under ASC 740 for the third quarter of 2022.

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ASC 740 Q3 2022 provision considerations

TAX ALERT | October 02, 2022 | Authored by RSM US LLP

Executive summary

The third quarter of 2022 is always a busy time for corporate tax departments and professionals as interim financial statements and extended tax return due dates collide. While the US did pass legislation including tax law changes, the changes in the Inflation Reduction Act will largely not come into play until 2023 and at that time will impact a relatively small set of corporations. The third quarter also brought some enacted changes and proposed laws from various US states and foreign jurisdictions. The following update provides insights on federal and international tax laws that may impact a company’s third quarter provision for 2022. Read more about state and local tax considerations in our companion alert: State tax law changes for the third quarter of 2022.

Inflation Reduction Act

President Biden signed the Inflation Reduction Act (IRA) into law on Aug. 16, 2022. The IRA includes a corporate minimum tax that applies to certain applicable corporations with average financial statement income in excess of $1 billion and U.S. corporations with foreign parents that have over $1 billion in financial statement income, that have at least $100 million in financial statement income. While only a small number of corporations are expected to owe tax under the new minimum tax, many more companies may have to go through calculations to evaluate whether they are subject to the tax. 

There are a substantial number of questions regarding the calculation of the book minimum tax, including the various adjustments allowable to book income. The tax first applies to tax years beginning in 2023, so while companies may not have to file a tax return reflecting the minimum tax for a while, companies preparing quarterly provisions will need to begin evaluating the expected impact of the minimum tax on their income tax provision, keeping an eye out for new guidance as it becomes available and revising any estimates as necessary based on available guidance. Read more about the corporate minimum tax in RSM’s tax alert: The new corporate minimum tax: overview and highlights.

Another tax related item included in the Inflation Reduction Act is a new tax on publicly traded corporations that repurchase their stock. The tax on share repurchases is not an income tax accounted for under ASC 740 but likely accounted for in equity as part of the cost of repurchasing stock. Read more about the tax and various questions surrounding the impact of the tax in RSM’s alert: New tax on publicly traded corporations that repurchase their stock. There were also various clean energy incentives included in the bill, which you can read more about in RSM’s alert: Clean fuel incentives in the Inflation Reduction Act of 2022.

Section 174 required capitalization now effective

One of the hoped-for tax law changes that was not included in the Inflation Reduction Act was a delay in the effective date of required capitalization of specified research and experimental expenditures. The capitalization requirement, included as part of the Tax Cuts and Jobs Act (TCJA), is effective for tax years beginning after Dec. 31, 2021. Section 174 requires that companies capitalize and amortize domestic research and experimental expenditures over five years and foreign expenditures over 15 years. As companies continue to assess the impact of section 174 on their income tax return and provision, revisions to the forecasted annual effective tax rate used for interim provision calculations may be necessary. Companies should continue to evaluate the impact of section 174 with the possibility that the delay of required capitalization will not occur before year-end.

Changes in estimate

The fast-approaching corporate tax return deadline for extended calendar year returns also means it is time to revisit any changes in estimate from the related provision. Under ASC 250-10-45-17, changes in estimates, are accounted for prospectively in the period of change. As companies finalize their calculation of taxable income for return purposes, return-to-provision adjustments should be reflected in the period they are known. While companies may have identified return-to-provision adjustments that are appropriate to include in the third quarter as discrete adjustments, there may be other effects of individual adjustments, such as impacts on interest expense limitations and state taxes, that may support waiting until the fourth quarter to record these changes in estimate. 

Updates from the Financial Accounting Standards Board (FASB)

FASB issued one accounting standards updates (ASU) during the third quarter of 2022 related to disclosure of supplier finance program obligations and has issued four ASUs year-to-date.

The Board issued a proposed ASU that would expand the applicability of the proportional amortization method available to companies that invest in certain tax credit structures. Previously, the proportional amortization method was only available to investments in Low-Income Housing Tax Credit structures. The proposed ASU would allow companies to use the proportional amortization method to account for investments in other tax credit programs provided certain criteria outlined in the guidance are met. 

The Board continues to discuss the proposed accounting standards update for enhancements to income tax disclosures. The FASB revised the scope and objective of the project scope during the first quarter of 2022 and has been seeking feedback from stakeholders on the revised scope. The Board’s objective for the project is to improve the transparency and decision usefulness of income tax disclosures. The targeted improvements include proposals to require additional information around cash taxes paid by jurisdiction and additional information around the rate reconciliation, including additional detail on the impacts of various jurisdictions on the rate.

State tax

Pennsylvania enacted corporate rate reductions along with other corporate tax changes on July 8, 2022. The new law reduces the corporate tax rate from 9.99% to 4.99% under a phased approach, with the 4.99% rate applying to years beginning Jan. 1, 2031. Companies with material Pennsylvania activity should assess the impact of the tax rate reduction on their deferred taxes and reflect any benefit or expense as a discrete item in the quarter that includes the enactment date. Due to the phase in of the rate over a number of years, companies may need to consider scheduling the reversal of deferred tax items to appropriately quantify the impact of the tax rate reduction. Read more about Pennsylvania’s corporate tax changes and other state and local tax considerations in our companion alert: State tax law changes for the third quarter of 2022.

International tax

Australia

The Australian Commissioner of Taxation has released an updated ruling on the effective lives of depreciating assets. This ruling is issued annually. New effective life determinations have been issued for assets used in clothing manufacturing, wooden furniture and upholstered seat manufacturing, salt manufacturing and refining, and casino operations.

The Australian Commissioner of Taxation has released a Taxation Determination in relation to the interaction of Australia’s hybrid mismatch rules and the US GILTI rules. In the Commissioner’s opinion, income taxed in the US under the GILTI provisions is not dual inclusion income and therefore has no effect on whether a deduction/non-inclusion outcome arises under Australia’s hybrid mismatch rules. Read more from RSM Australia in ATO provides guidance on hybrid mismatch rules

The Australian Government has passed legislation to reduce the reporting threshold for corporate tax entities to A$100 million. In essence, where a company has a total income of A$100 million or more for an income year, the Australian Commissioner of Taxation is required to publish information about the entity. This includes the entity’s name, Australian Business Number, total income, taxable income and tax payable. This applies to Australian resident companies, members of wholly owned foreign groups, and companies that are more than 50% owned by foreign entities.

Ireland

On Sept. 27, 2022, the Irish Minister for Finance presented Ireland’s Budget 2023 proposals. The Minister’s Budget speech highlighted that work was continuing to give effect to the OCED Pillar Two minimum effective corporate tax rate. The Minister noted the continuing importance of Ireland’s corporation tax regime as a core element of Ireland’s economic policy. Ireland’s headline corporate tax rate remains unchanged at 12.5%.  This is in the context of Ireland securing an agreement in October 2021 with the EU and OECD to a 15% global minimum level of taxation for multinational groups.

The Knowledge Development Box (KDB) is an intellectual property (IP) regime which provides for an effective 6.25% rate of corporation tax on certain income from qualifying IP assets. The KDB is being extended a further 4 years, to allow the relief to be available for accounting periods commencing before Jan. 1, 2027. The KDB will be impacted by changes in the international tax environment, specifically the Subject to Tax Rule (STTR), which is part of the OECD Pillar Two agreement. To prepare for implementation of the agreement, legislation for an increase in the effective rate of the KDB to 10% is being introduced. The intention is that it will be brought into effect by Ministerial commencement order once agreement is reached at the OECD/G20 Inclusive Framework on STTR implementation.

The Research and Development (R&D) tax credit provides a 25% tax credit for all qualifying R&D expenditures. To align with new norms in international tax, a number of changes to the operation of the R&D tax credit regime were announced. These changes are all adjustments to the timing of payment of the credit. No changes are being made to the quantum of credit that a company may receive. Currently, R&D tax credits may be offset against corporate tax liabilities and payable in installments over three years. This is being changed to a new fixed three-year payment system. A company will have an option to call for payment of their eligible R&D tax credit or to request for it to be offset against other tax liabilities, and existing caps on the payable element of the credit are being removed. The first €25,000 of a claim will now be payable in the first year, to provide a cash-flow benefit for smaller research and development projects and to encourage more companies to engage with the regime. Transitional measures will be in place for one year, to smooth the transition to the new payment system for companies that are already engaged in research and development activities.

Netherlands

In late September, the Netherlands released proposed legislation via the Dutch Budget Day. The proposed legislation would increase the 15% corporate income tax rate to 19% and reduce the threshold for the first income tax bracket beginning on Jan. 1, 2023. The 15% rate currently applies to the first bracket of taxable income up to EUR 395,000. This first bracket will also be lowered from EUR 395,000 to EUR 200,000. In summary, per Jan. 1, 2023 the brackets will be:

  • 19% on income between €0 – €200,000
  • 25.8% on income in excess of €200,000

Additionally, the Dutch government has announced that it is contemplating a change to the fiscal investment institution regime. The Dutch fiscal investment institution regime allows for a 0% tax rate when certain conditions are met. The proposed change would result in businesses operating through a Dutch legal entity in the Dutch real estate market no longer being eligible for the regime from Jan. 1, 2024.

A noteworthy absence is a legislative proposal in relation to the 15% global minimum taxation (Pillar 2). A draft European Union directive was published in December 2021 but no unanimity was reached among member states. In response, the Netherlands and several other EU jurisdictions published a joint statement on Sept. 9, 2022 stating a commitment to implement Pillar 2 in 2023, even without unanimity on an EU level. On Sept. 20, 2022 however, a legislative proposal was absent. Pillar 2 is another important movement within a wider trend of the Dutch government’s commitment to counteract harmful tax practices.

The legislative proposals above are still subject to parliamentary debate and are expected to be enacted during the fourth quarter of 2022.

United Kingdom

During the new Chancellor of the Exchequer’s fiscal event on Sept. 23, 2022, dubbed his ‘Growth Plan 2022’, Kwasi Kwarteng announced that he intends to cancel the scheduled increase of the main rate of UK corporation tax from the current rate of 19% to 25%. This change is due to take effect on April 1, 2023. The Government commands a majority in the legislature and therefore the Chancellor’s changes are expected to pass into law in due course, albeit the timetable for the enactment and substantive enactment of such legislation is currently unclear. The scheduled increase was enacted into UK law in Finance Act (FA) 2021 and, at the time of writing, further legislation to repeal the relevant clauses of FA 2021 has not yet been enacted or substantively enacted, and therefore the necessary criteria to reflect this change for tax accounting purposes under relevant UK, international or US accounting standards have not been met. 

Further commentary from RSM UK on the proposed changes to corporation tax rates and other tax measures, including a permanent increase to £1m in the annual investment allowance for capital expenditure on qualifying plant and machinery, announced in Growth Plan 2022 is available in the alert: Mini-Budget: The Growth Plan announcements 2022 – a summary.

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This article was written by Al Cappelloni, Darian A. Harnish, Rocky Stout and originally appeared on Oct 02, 2022.
2022 RSM US LLP. All rights reserved.
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