Accounting Policy and Tax Law Updates to Examine in 2017

There are a number of changes to accounting policies and tax laws for 2017.  While a comprehensive list is beyond the scope of this article, there are three areas business owners and managers may want to examine for 2017.

The R&D Tax Credit

Initially enacted in 1981 as a temporary provision, it was expanded for tax years beginning in 2016 by the Protecting America from Tax Hikes Act of 2015, or PATH Act, with over 100 provisions.  This has made permanent what was previously a series of temporary extensions, which makes tax planning more certain.  Here is a selection of the provisions applicable to Small to Medium Businesses (SMB’s):

  • Section 179 expensing limit permanently set to $500,000, indexed for inflation starting in 2016.  This should allow more comprehensive capital equipment purchasing plans
  • Depreciation for autos and trucks increased by $8,000 for year 1
  • Qualified Small Business C Corp Stock tax-free sale or exchange made permanent
  • Improvements to qualified real property increased to $500,000
  • Work opportunity tax credit, allows employers of targeted groups such as veterans, welfare recipients, and other groups to take a tax credit has been extended through 2019
  • Eligible small businesses can use the R&D tax credit to offset both regular tax and AMT liabilities, as well as payroll taxes

Consult your tax professional to ensure you take advantage of all of these new tax saving opportunities.

Revenue Recognition Changes for 2018 Need Attention in 2017

The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) 2014-09 Revenue from Contracts with Customers, and is applicable (in general) for annual periods beginning on or after January 1, 2018, and applies to sale contracts.  It creates a five-step model to be applied to determine revenue recognition and will require extensive disclosures in the footnotes of the financial statements regarding the estimates used.  The five steps include:

  • Identify contracts with customers, including written, verbal or implied
  • Identify the discrete obligations included in the contract
  • Calculate the transaction price
  • Allocate the transaction price to the discrete obligations
  • Recognize revenue when the discrete obligations are satisfied

There may be significant work to be done to comply with these new standards and may justify modification of contracts with customers to ensure accurate revenue recognition.  Items such as right of return, price concessions, volume discounts, refund liability, and noncash considerations may play a significant role in determining revenue recognition. Reporting systems may need to be modified to generate the level of detail needed to determine the five steps, and that may take a large amount of time and resources.

Your first sale of January 2018 will need to be reported under these new rules – make sure you are ready for it.

New Lease Accounting Standard

Somewhat related to the above revenue recognition standard is FASB ASU 2016-02, Leases.  It seeks to align many of the underlying principles of ASU 2014-09 with accounting for leases.  Under the new standard, most leases will need to be recognized on the balance sheet, which may be a significant change from how they are accounted for now.  This standard applies to public companies for January 1, 2019, and nonpublic entities will have an additional year to comply.  While these dates are far away, the standard applies retrospectively to each prior year presented in the financial statements, meaning that 2018 balance sheets presented in the 2019 financials will be required to present leases based on the new standard.  Like the revenue recognition rule, this may present significant challenges to existing reporting systems, and they may need time and resources to modify

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