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Regulatory changes at the SEC and demands from large enterprise customers are requiring many small and midsized businesses (SMBs) to report the volume of their greenhouse gas emissions. Some customers are also requiring that these reports are then verified by independent third parties. The following are matters to consider during the process of greenhouse gas emissions (GHG) reporting and verification.

Selecting a GHG Reporting Framework

Similar to the decision a company makes on whether to report their finances on a cash or accrual basis or a US GAAP or IFRS basis, companies need to choose a framework for GHG reporting. The framework may be set by the regulator or enterprise customer requiring the reporting. Where a framework mandate does not exist, a company can choose its method.

The GHG Protocol, developed in the early 2000s by the World Resources Institute and the World Business Council for Sustainable Development, has become the prevalent reporting framework. ISO 14064 builds on the GHG Protocol and provides additional standards related to measuring and reporting emissions reductions, along with establishing a process for verification of GHG reporting.

Identifying a GHG Disclosure System

Also established in the early 2000s, CDP is a not-for-profit operating a global GHG disclosure system. Here, companies can post their GHG results, which investors, customers, and other stakeholders can then view. This system provides a convenient and well-known method for posting results. CDP also shares a host of resources to better understand the reported data and other aspects of sustainability.

Analyzing Your Company

Once the framework and disclosure systems have been identified, a company needs to analyze its organizational structure and determine which entities to include in its reporting. Generally, this analysis can follow a similar approach to deciding which subsidiaries to include in a company’s financial statements – via voting rights or by receiving a majority of the subsidiary’s financial benefits. By using this approach there is consistency in GHG and financial reporting, and the company is reporting for entities where it can also drive positive change in GHG emissions.

Determining Which Elements of the Framework to Analyze

Analyzed elements are often driven by customer-specific requirements. Some typical examples may include:

  • Scope 1: company generated emissions. For example, through use of natural gas, heating fuel oil, company-owned fleets and planes, and refrigerants
  • Scope 2: electricity used by the company
  • Scope 3 Category 1: purchased goods and services
  • Scope 3 Category 6: business travel
  • Scope 3 Category 7: employee commuting

Once this process has been followed, the company will be ready to start gathering appropriate data and factors to calculate their GHG emissions. We will cover more information about these data and factors in an upcoming release.

Clark Nuber can help your company meet the third-party verification requirements requested by larger enterprise companies. Contact us to start a conversation about your GHG needs.

© Clark Nuber PS and Developing News, 2022. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.

 

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Real Estate Investors: What to Ask Your CPA

With over 20 years of experience as a CPA, I have found the most successful client/CPA relationships are the ones where conversations occur throughout the year. Too often, people speak with their CPA only once a year, when it is time to provide the annual tax information. At that point though, it may be too late for effective tax planning and discussions. Maintaining a year-round relationship with your CPA is a great way to make sure you’re not leaving money on the table. It is easy to assume that your CPA knows all the applicable rules and is applying them correctly to your real estate business. However, tax law has become increasingly complex over the past several years. It can be difficult for CPAs to keep up, especially if they are generalists and do not specialize in a particular area of taxation. To help you navigate conversations with your CPA, I’ve put together the list of topics below that you should be discussing with your CPA on a regular basis.

Should I Get a Cost Segregation Study on My Property?

Cost segregation is an excellent tax planning strategy to accelerate deductions on real estate that has been purchased, constructed, or remodeled. Through a cost segregation study, you can break out Personal Property and Land Improvements, which will have a shorter life than the overall building structure. Personal Property has a tax life of five or seven years, while Land Improvements have a tax life of 15 years. In addition, with bonus depreciation, you can depreciate up to 80% of the asset in the first year if placed in service during 2023. However, under current law, bonus depreciation will reduce 20% per year until it sunsets in 2027. Cost segregation studies can even be performed on property that was purchased and placed into service in prior years. The difference in depreciation between what has been taken and what would have been taken if the shorter lives were used from the beginning is run through the current year return as a change in accounting method. Ask your CPA if a cost segregation study might be beneficial to your property.

Which Improvements to the Property Are Capitalized and Which Are Expensed?

In 2013 the IRS issued guidance that clarifies when expenditures should be capitalized as improvements or expensed as repairs. Under these rules, many items that would have been capitalized in the past can now be expensed in the current year as a repair. To properly analyze expenditures each year, your CPA should be having conversations with you to better understand this scope of work. A qualified CPA will ask questions and request information to expense items that are more accurately classified as repairs for tax purposes. Through this analysis, immediate deductions can be taken where appropriate. In addition, by expensing repairs rather than capitalizing them, you will not have depreciation recapture upon the sale of the property. This can reduce your taxes overall. Check in with your CPA regularly about which improvements can be capitalized and which can be expensed.

Is My Entity Subject to Business Interest Limitations?

In 2017, The Tax Cuts and Jobs Act included a change in the rules which places limitations on the ability to fully deduct interest for certain taxpayers after December 31, 2017. Prior to 2022, business interest expense was limited to 30% of Adjusted Taxable Income (ATI). ATI was, simply stated, your taxable income plus depreciation, amortization, and interest expense. Starting in 2022, you cannot addback depreciation and amortization in calculating ATI. Thus, ATI is expected to substantially decrease, resulting in your interest limitation increasing. Certain taxpayers are not subject to these rules. However, the determination of whether you are exempt from the rules is complex and I have found they are often misinterpreted. Taxpayers in the real estate industry need to have annual conversations with their CPAs to determine if these rules impact their business and decide on best recommendations.

Would a Like-Kind Exchange Help Diversify My Real Estate Portfolio?

Like-kind exchanges are a great tax planning strategy. These exchange tax rules have been around since The Revenue Act of 1921, although in practice farmers exchanged land and livestock well before then. The ability to sell a property and purchase another without paying tax is a valuable tax planning strategy. With the flexibility of the law, you could sell one property and buy more than one replacement property. In addition, there is no limit to the number of like-kind exchanges; thus, you can continually exchange properties over time. If you have a property that you are considering selling, talk with your CPA about the like-kind exchange rules and whether they would be a good tool in deferring taxes.

Are Net Losses from My Real Estate Activities Able to Offset Other Items of Income?

Taxpayers must pass several hurdles to deduct losses from real estate activities. First, you must have sufficient tax basis. In simple terms, basis is your cumulative investment plus any liability allocation, adjusted for cumulative income and deductions. Second, the basis must be at-risk. This means that you need to, essentially, be on the hook for any liabilities allocated to you. Third, you must determine if the loss is passive. Passive losses are generally limited to passive income. Once you have cleared the first three hurdles, you must jump the final hurdle of “excess business losses.” A fairly new rule, the excess business loss rule limits the loss from business income that you can take in a year. Any excess losses are carried over into future years as a net operating loss. In 2022, the limitation is $270,000 for single filers and $540,000 for joint filers. This amount is indexed for inflation each year. The rules determining ability to deduct losses are complex and specific to each taxpayer’s personal situation. Make sure you are discussing your activities and ability to take any losses with your CPA on an annual basis to ensure that losses are properly deducted.

Conclusion

Working with your CPA throughout the year, rather than just during tax season, can help you maximize the money saved in your wallet. Visualizing your tax responsibilities and assets earnings/losses may be daunting, but with these questions, you can build a stronger, more profitable relationship with your CPA. Keep an eye out for more “Ask Your CPA” articles coming this year! And send me an email if you'd like to discuss any of the topics above. © Clark Nuber PS, 2023. All Rights Reserved.

Quality of Earnings Report: Which Reporting Tool Is Best for You?

A Quality of Earnings (QoE) report is a common ingredient to a smooth and successful merger or acquisition transaction. This report is gaining a lot of traction in the mid-market, and while it creates a lot of value to the buyer and seller and is oftentimes necessary, our observation is that a full QoE may not be the most effective reporting tool for every case. Just like you would not pick up a jackhammer when a shovel would do, you may not need a full QoE report to accomplish your goals. The following are alternatives that can provide your audience with the exact information they need, all while leveraging a simplified and streamlined project management process:

Interested?

Click here to learn more about each of these services. If you would like to schedule a discussion, please contact us and we would be happy to help match you with the best approach for your business. Download the infographic here.
© Clark Nuber PS, 2023. All Rights Reserved.

Implementing the New FASB Lease Accounting Standard: Choosing the Right Software

The new leasing standard ASC Topic 842 Leases has been in the works for a number of years but is effective for private companies and certain not-for-profit organizations for annual periods beginning after December 15, 2021. This means, effectively, most private companies and not-for-profit organizations will need to implement the standard for the calendar year 2022. Many companies will want to consider using some type of leasing software. Over the past few years, as the standard was being developed and refined, many companies set out to create leasing software. Some software have been geared toward ASC 842 implementation and reporting; others designed to accommodate both ASC 842 reporting and lease management.

Lease Management Software vs Lease Compliance Software

When considering to invest in software, the first step is to assess your needs. If compliance with ASC 842 is your main focus, you will want to consider software geared towards this goal. If your company has a large volume of leases and/or if you don’t currently have a good system in place to track your leases, you may want to consider software that includes lease management functionality in addition to compliance with the new standard.

Lease Software Considerations

Even if your company has a relatively small lease portfolio, using lease software can greatly reduce the time and resource constraints ASC 842 implementation can cause. Software solutions can provide the journal entries needed to implement the standard and record ongoing lease activity, the amortization schedule(s), and the required quantitative footnote disclosures. As you are reviewing lease software options available, keep in mind the following factors.

Cost

  • Fee structure – Fee structure can vary greatly across software options. Fees can be assessed annually or monthly, and there may be a one-time initiation fee. Fees can be variable, such as based upon number of users and/or leases, or there could be a standard set fee. Consider your needs carefully to ensure the fee structure aligns with your organization.
  • Cost per user - Depending on the size of your company, this could cause pricing to jump significantly based on user count and/or future growth of the company.
  • Cost per lease - Overall cost could quickly become significant based on the number of leases and cost per lease.

Ease of Use

  • Training – When implementing a new software, it is important for your full staff to understand the intricacies of the systems. Consider how much time it takes to train on each software.
  • Technical support – Availability of support from the lease software company may vary. Some companies include support packages with the program, while others may come at an additional cost.
  • Delivery method – It is important to match your organization’s preferred delivery method with that of the software. For example, your organization may benefit more from a cloud-based software than a localized software.
Furthermore, consider asking these questions when narrowing down your ideal software options:

Security/Reliability

  • Has the software been thoroughly tested by a third party?
  • Did the company receive a SOC (Service Organization Controls) report from a reputable firm? If so, did the report identify any issues or deficiencies?
  • Is the software being continually updated by the provider?

Financial Reporting Requirements

  • What accounting standard does your company report under? For example, GASB (Governmental Accounting Standards Board) or IFRS (International Financial Reporting Standards)?

Lessor vs. Lessee

  • Will the software support the needs of both types of users, if that is important to you?

Lease Tool Takeaways

As you can see, there are several factors to take into consideration when thinking about ASC 842 implementation and lease software. Even if your lease portfolio is small, using lease software that will calculate the required journal entries and disclosures can make the investment worthwhile, regardless of number of leases. Clark Nuber has identified LeaseCrunch as a great option for many of our clients due to ease of use, affordable cost, the existence of a SOC report, the ability to repot under FASB, GASB or IFRS, and the support offered to users at no additional cost. Once leases are input into LeaseCrunch, users can run reports that will produce the amortization schedule(s), journal entries, and quantitative disclosures needed for compliance with ASC 842. The software can also be customized to set up different reporting entities, input your company’s specific general ledger account numbers and names to customize the journal entries, and take into account foreign currency translation issues. If you have questions regarding the new lease standard, or you are interested in using LeaseCrunch, send me an email and I’d be happy to help.   © Clark Nuber PS, 2023. All Rights Reserved.

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