Cooperatives Articles
Experiences in Grain Inventory Measurement
By: Dennis Gardiner, Partner | email
As you all are aware of by now, with OSHA’s increased oversight on grain bins, we have not been entering the bins as we have in the past. Even if we wanted to enter the bins, you have done a good job of recognizing the necessity of complying with the OSHA standards. Neither of us want an accident or a fine for violating the rules. They are not cheap.
Unfortunately, not entering a bin includes sticking our head into the hatch opening, as the rule is written. In some instances during this summer’s inventories, we were not allowed to walk on the grain in flat storage bins. Some clients would not allow us to use the rope-lifts on some of the older wood houses. In many cases we were given hard hats, safety goggles and bright colored vests to wear.
With these restrictions on our past measuring practices, our confidence in and precision of the measure is less than before. We will become more dependent on your location grain staff to assist us with the measuring. Therefore, your preparation in advance is more important than ever. It will make any measurement discrepancy issues easier to resolve if your staff have all bins measured in advance of our arrival. Additionally, flat storage facilities and quonsets could be drawn up, if you are comfortable doing this. We will place reliance on your staff to tell us how the grain is laying in the bin. That is to say, coned-up, coned-down, a particular slope, high side, low side, etc. This is nearly impossible to ascertain from 50-60 feet up when we can’t get on the ladder to look in or even stick our heads into the hatch opening.
Some suggestions we may make or work with you on in the coming year are:
- Putting more holes (measuring points) in the bins.
- Spray painting point of reference in flats. Or providing more of a schematic layout of the flat.
- Encouraging a better job of consolidating grain at year-end. Bin bottoms are the worst to measure!
With the restrictions, and considering the size of your organizations, now is a perfect time for you to develop good measuring skills and establish routine measurements, at least monthly. You will want to make sure that measures make sense from one month to the next and to our last measurement, or the examiner’s last measures. We would be available to assist in training your staff on measuring, developing these practices, or drafting grain measurement policies.
It seems to be a change in the times….but, perhaps it is time. These new bins are higher, wider and hold a lot more bushels than the bins of the past, creating an even more dangerous situation if someone were to become entrapped.
Have a safe and bountiful harvest!
1099 Reporting Update
By: Charles L. Telk Jr., CPA, Partner | email
With the recent “relaxation” of the new tougher 1099 reporting requirements, there seems to be a misconception that 1099’s are no longer required. This misconception could prove costly to you and your organization. Make no mistake about it – 1099’s are still required in certain circumstances. Improperly reporting 1099’s to the IRS can cost your organization thousands of dollars in penalties and professional fees.
Several of our clients have recently received penalty notices from the IRS regarding incorrect taxpayer identification numbers. Issues range from names not matching the FEIN, erroneous FEIN’s, missing FEIN’s, etc. The IRS assess a $50 penalty per occurrence and the sum of the penalties in several cases approached $8,000.
This type of IRS action is increasing as the IRS looks for proper reporting and additional revenue.
Therefore, it remains important for your accounting department to have a current, signed and legible W-9 form on hand for all members as well as for any non-employee who receives a check from you. Of course, you should also have a current, signed and legible W-4 form for all employees. An illegible W-9 form can cause an error on form 1099 which can trigger a penalty. We recommend that you update your files on an annual basis to ensure you have the appropriate W-9 form on hand, without exception.
We realize that obtaining these forms can be problematic. I’ve heard every excuse in the book as to why a W-9 form is not required, such as: “We’re a non-profit,” “We’re a corporation,” “We’re a trust,” “We’re a governmental entity,” etc. But the bottom line is this: If you are issuing a check to a non-employee, you should have a current, signed and legible W-9 form on hand without exception. This is not to say that everyone who receives a check from you will also receive a 1099. But by having the W-9 on hand, you will have the information necessary to issue a 1099 should it be required.
This is an important issue that will continue to receive IRS attention. We are available to answer your questions regarding form W-9 and 1099 reporting. Please call me in the Des Moines office at 515-270-1446 should you have any questions or concerns.
Fixed Assets and Depreciation
By: Dave Thomsen, Partner | email
Over the past few years or so, issues have arisen in our world of accounting for cooperatives that have brought the way we historically looked at property, plant and equipment, and the depreciation of those assets, under question. The first issue came about a few years ago when the loan commitments required to finance cooperative operations became so large that your lender saw it necessary to share some of the risk involved in certain loan packages. Thus, fixed asset appraisals became the norm in many cases. A second issue has occurred with new accounting standards related to mergers and the requirement to recognize business combinations at fair value.
Textbook Depreciation: Most accountants were taught in school to compute depreciation in the following manner: “Asset Cost” less “Salvage Value” divided by the “Useful Life of the Asset.” For example, a steel grain bin built for a cost of $500,000 with a scrap value of $25,000 that will be used for 25 years would have an annual depreciation expense of $19,000 and would have at least some book value for 25 years. However, in most cases today, salvage value is routinely ignored and the estimated useful life is based more on acceptable IRS tables than on the actual life the asset is used to produce income.
Actual Practice: Most of our cooperative audit clients take a “conservative” approach to depreciating their fixed assets. In the example above, the salvage value would be ignored and the $500,000 bin would depreciated over 10 years based on the IRS class life tables amounting to annual depreciation of $50,000. The asset is fully depreciated after 10 years and for book purposes has no value for more than half of its actual useful life.
Why do we do this? The accelerated depreciation expense lowers the bottom line thereby reducing income and income available for patronage dividend allocations, saving the cooperative cash. However, this conservative approach may be distorting the real value of the balance sheet by recognizing no or less than actual value of assets the company owns. Depending on the circumstances, appraisals may be necessary to give companies credit for the unrecognized value of those assets, or major adjustments will be required under the new fair value requirements in accounting for future mergers.
Maybe its time to re-think this process as we look at ways to further strengthen balance sheets and search for the right mix of allocated and unallocated members’ equity. We can still use these conservative ideas for tax purposes, but we must also consider alternatives to bring book balance sheets more in line with actual values. We are available if you would like to discuss this issue further and will be encouraging this debate as we begin our upcoming audit engagements.
Filing Requirements and Sales/Use Tax
By: Chris Coldiron, CPA, Tax Manager | email
Recent surveys indicate that individuals and businesses purchasing goods over the internet are not properly remitting sales or use tax, many times in violation of state law (the estimated non-compliance rate in California was greater than 98%). With states becoming more desperate for revenue sources to offset record deficits, this area becomes an easy target for state auditors. If you are unsure of your state’s laws regarding the payment of sales or use tax for internet purchases, please contact us so that we may research the matter and advise you accordingly.
State auditors are also on the lookout for businesses that might have a filing requirement in their state that is not being met. If your business engages in transactions outside your home state and you are unsure if this activity generates additional filing requirements, please contact us so that we may help you make that determination.
1099 Reporting Changes, Again
By: Chris Coldiron, CPA, Tax Manager | email
As you may have heard, H.R. 4, the “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011” repealed all new 1099 reporting requirements that were set to take effect January 1, 2012. The Act was signed into law by President Obama on April 15th. Basically, 1099 reporting requirements will continue to be the same as they’ve always been. This change will significantly decrease the compliance burden small businesses were anticipating. However, this recent change does not do away with the requirement that payers obtain and retain a form W-9, Request for Taxpayer Identification Number and Certification, for all payees. This requirement applies even to governmental agencies and corporations, although these entities are typically exempt from the 1099 reporting requirement. Absent obtaining a W-9 that either documents an exemption to the 1099 reporting requirement or provides the necessary information for that reporting, backup withholding at a rate of 28% is mandatory.
Section 199 Amended Returns
By: Chris Coldiron, CPA, Tax Manager | email
The case for Section 199 amended returns continues! The first pre-settlement appeals conference with the IRS Appeals Office is scheduled for August 8th and 9th. Please be aware that if you filed an amended return to claim an enhanced Section 199 deduction and have not heard from the IRS, please contact us so that we may follow up on and track the status of your amended return.
Cooperatives and Current Year Earnings
By: Dennis Gardiner, Partner | email
What are you going to do with this year’s earnings?
We continue to have discussions, at all levels, with our cooperative clients on how to handle current year earnings. We have been attempting to have these discussions long before fiscal year-ends so that management has some direction from the board on how they would like to see it handled.
We have been laying out some of the options available to cooperatives at the end of the year. These include:
• Qualified patronage allocations
• Non-qualified patronage allocations
• Keeping or allocating the benefits of Section 199
• Using bonus depreciation, or not.
Any one, or any combination of these, can be used at year-end to distribute earnings or to mitigate tax liabilities. In fact, the number of options can be confusing, and require analysis as to the impact on current and future year decisions.
Our main focus has been the built-up retained earnings that so many of our cooperative clients have. As we have asked before, how much is too much? Unfortunately, we have not answered that question yet. Obviously, every coop is going to be different.
The dilemma is that Section 199 and bonus depreciation are effective ways to mitigate taxes, but they tilt the imbalance in member’s equity further towards retained earnings. We are trying to address this with our coop clients so that decisions are made with an understanding of how they affect members in the current and future years.
Furthermore, we are exploring ways to address one of the central concerns we have heard, which is, “what happens if the coop were to be sold, or some company were to come in to try to buy the coop?” The solution to this may take revisiting articles of incorporation and by-laws, working with legal counsel and analyzing how retained earnings has grown to today’s levels.
Please contact us at your convenience to discuss what options your coop has, how to present the choices the board will have at year-end, and the effects of those choices.
Recent Tax Legislation Changes for 2011 and 2012
By: Chris Coldiron, CPA, Tax Manager | email
In addition to the changes made for Bonus Depreciation and 1099 reporting, several other items of interest were changed by the recent legislation for 2011 and 2012:
- Section 179 expense limits have been changed. For 2011, the maximum expense is $500,000, and the maximum amount of property that may be placed in service before the deduction becomes limited is $2,000,000. For 2012, those figures are reduced to $125,000 and $500,000, respectively.
- A payroll tax “holiday” was added for 2011 only. Employees will see their FICA tax reduced by 2% to 4.2%. Self-employed individuals will enjoy the same reduction, with their FICA rate set at 10.4%.
- The maximum tax bracket for individuals, as well as corporations, will remain at 35% for 2011 and 2012.
- The maximum individual capital gain tax rate of 15% remains in effect for both years, as does the application of this rate to “qualified dividends.” These preferential rates will not be “phased out” for higher income individuals as was reported in the popular press prior to enactment of the law. As the market continues to improve and profitable corporations begin issuing dividends, this change should result in substantial tax savings to many taxpayers.
- Itemized deductions and personal exemptions will not be subject to phase-out for high-income individuals through 2012.
- Individuals will be able to continue using nonrefundable personal credits to offset Alternative Minimum Tax for 2011.
- The standard mileage rate, used in lieu of actual expenses and depreciation, has been set at $.51 per mile for 2011.
- Under the new legislation, executors for decedents dying in 2010 have two options:
1. Apply the 2010 rules that were in effect at the decedent’s time of death.
2. Apply the new 2011 rules retroactively.
Most executors will find the election to retroactively apply 2011 rules beneficial as the gift and estate taxes have again been unified in 2011 and 2012 with a $5 million exclusion equivalent. In English, that means the estates of decedents dying from 2010 – 2012 will be able to enjoy the traditional “step-up” in basis of all estate assets, with the first $5 million exempt from tax. It also means that gifts up to this amount will also be exempt from tax. This $5 million will be inflation-adjusted for 2012.
Tax Law Changes for Bonus Depreciation
By: Charles L. Telk Jr., CPA, Partner | email
The latest tax law changes passed in 2010 enhanced available bonus depreciation from 50% to 100% for property placed into service between September 9, 2010 and December 31, 2011. Generally, the following rules apply:
1. The property must be MACRS property with a class life of 20 years or less. This includes qualified leasehold improvements (15 years) and “off the shelf” software (3 years).
2. The property’s original use must begin with the taxpayer, so used assets do not qualify. While there isn’t much guidance in this area, 168(k) has historically applied to property with a placed-in-service date during the applicable time-frame.
While we wait for the IRS to clarify the rules, RIA has issued guidance stating that property under a binding contract for purchase entered into after December 31, 2007 will qualify for the 100% bonus depreciation if it is placed in service during the dates mentioned earlier in this article.
50% bonus depreciation can’t be elected in lieu of 100%. The election to take bonus depreciation applies to each class life, not each asset.
The deduction drops back to 50% for assets placed in service after December 31, 2011 but before January 1, 2013.
1099 PATR Reporting for Calendar Year 2010
By: Charles L. Telk Jr., CPA, Partner | email
January is the month that 1099’s are prepared and distributed. As a cooperative, the form 1099 PATR is used to report information to your patrons. The following are items typically associated with cooperatives and should be reported as described:
Box 1 – Patronage Dividends: Report the total amount of qualified patronage to each member in this box.
Box 3 – Per-Unit Retain Allocations: Report the total amount of per-unit retain allocations paid to each member during calendar year 2010 in this box. Per-unit retain allocations include amounts paid to patrons for grain. We suggest that you report the gross amount prior to deductions for storage, drying, etc. Remember that even if your cooperative has a fiscal year, you report the total paid during calendar year 2010.
Box 6 – Domestic Production Activities Deduction: Report the amount of section 199 domestic production activities deduction that you have distributed to your patrons during the 2010 calendar year in box 6.