AZ CPA Sept. 2019

AZ CPA September 2019

2019 Legislative and PAC Reports IRS Comes Down on Partners As Employees Should You Use the Internet in Business Valuation?

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AZ CPA SEPTEMBER 2019

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SEPTEMBER 2019 AZ CPA

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AZ CPA The Arizona Society of Certified Public Accountants President & CEO Editor Advertising

Cindie Hubiak Patricia Gannon Heidi Frei

Board of Directors Chair Jared Van Arsdale Chair-Elect Ginny DeSanto Secretary/Treasurer Tom Duensing Directors

Rachael Bertrandt

Keith Cowan

Kelly Damron

Paul Evans

Ross Grainger

Tim Hansen

Jessica Iennarella

Andrea Levy

Anthony Lorenzo

Vanessa Makridis

Karen McCloskey

Sami Raynes-Houseknecht

Immediate Past Chair Mike Allen AICPA Council Members Rob Dubberly

Greg Nelson Chapter Presidents Southern Chapter Cathy Kinzer Northern Chapter James Shankland Southwest Chapter Helen Greenwell North-Central Chapter Gidget Schutte AZ CPA is published by the Arizona Society

Behind the Scenes at Ballet Arizona Sept. 18 11:30 a.m. – 1:30 p.m.

Join your fellow CPAs as we go Behind the Scenes at Ballet Arizona!

Take a look behind the curtain at the ballet and hear an interesting presentation from a few members of their team, including Executive Director Samantha Turner. We will have an opportunity to peek in on a rehearsal as we tour their facility. This is an exciting and rare opportunity to visit and learn more about the inner workings of Ballet Arizona.

Lunch will be provided.

www.ascpa.com/ballet

of Certified Public Accountants (ASCPA) to provide information, news and trends to the accounting profession. It is distributed 10 times a year as a regular service to ASCPA members. The ASCPA, its members, board of directors and administrative staff assume no responsibility for advertisements herein.

The ASCPA and the above people also assume no liability for business decisions made by readers in reference to statements and/or claims in articles or advertisements within this publication. Opinions expressed by contributors are not necessarily those of the ASCPA.

Arizona Society of CPAs 4801 E. Washington St., Suite 180 Phoenix, AZ 85034-2040 Telephone (602) 252-4144 AZ Toll-Free (888) 237-0700 www.ascpa.com

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AZ CPA SEPTEMBER 2019

Volume 35 Number 7

AZ CPA

September 2019

Features

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Playing Chess in an Earthquake The 2019 ASCPA Legislative Report Politics are a little like playing chess in an earthquake ...

by Ryan DeMenna

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2018/19 PAC Report

15

Tales From the Trenches

Columns & Departments

Thanks to all the ASCPA members who collectively contributed more than $59,000 last fiscal year to our PAC.

The author discusses the merits and demerits of using the internet in business valuation.

by Robert K. Kleeman, CPA (in CO)

Chair’s Message by Jared Van Arsdale, CPA

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Member News

7

A Dash of SALT by James G. Busby, Jr., CPA

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Board of Director Highlights

10

Quick Quiz

21

Classifieds 22

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IRS Comes Down on Partners As Employees The IRS made their views clear on the fact that partners cannot be put on the payroll as employees in these finalized released regulations and chief counsel advice.

by Edward K. Zollars, CPA

Arizona Society of Certified Public Accountants 4801 E. Washington St., Suite 180 Phoenix, Arizona 85034-2040 www.ascpa.com

SEPTEMBER 2019 AZ CPA

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ASCPA Chair’s Message

Occupational Licensing Legislation One of Calvin Coolidge’s more well-known quotes is “The chief business of the American people is business.” As CPAs, we may all agree with the past president in some fashion. Possibly channeling his inner-Calvin, Arizona’s 2019 legislative session caught national headlines when Governor Ducey leapt from a U-Haul moving truck to declare that Arizona was “Open for Opportunity,” following his signing of H.B. 2569, occupational licensing; reciprocity. This bill was signed into law in April 2019, making Arizona the first state in the nation to establish universal recognition of occupational licenses for new residents.

by Jared Van Arsdale, CPA Occupational licensing is an ever-increasing topic of conversation across the nation, and we are likely to see Arizona continuing to lead reform efforts.

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AZ CPA SEPTEMBER 2019

The regulation of occupations has developed in a piecemeal fashion over a long period in our state’s history, based on the economy and perceived needs of our citizenry. The Arizona State Board of Accountancy was founded in 1919 to protect the public interest by certifying qualified professionals and regulating their practice within the state Regulation of the CPA profession by the Arizona State Board of Accountancy (the Board) provides assurance to the public that the CPA profession in Arizona operates at the highest level of professional competence. The Board approaches this task by verifying educational and experience requirements, monitoring the requirements for continuing education and investigating consumer complaints.

Like any laws, occupational regulation is subject to change. There is a growing narrative, supported by both Republicans and Democrats, that believes there is too much regulation in today’s largely service-based economy and that regulation creates expensive barriers to entry, in addition to reducing worker mobility. The Brookings Institution published its findings in a 2015 report, noting the number of licensed workers has increased over the last 60 years from five to 30%.

The efforts of pro-reform organizations have resulted in occupational licensing legislation being introduced in 27 states in 2019 alone. Although these bills are not aimed directly at the accounting profession, we can be challenged by unintended consequences from the broadly written language.

To support the efforts to educate lawmakers and the public, the AICPA and NASBA (National Association of State Boards of Accounting) are two of the founding members of the Alliance for Responsible Professional Licensing (ARPL) – a coalition of national associations that represents highly complex, technical professions and their national licensing boards.

ARPL has been created to ensure that a unified voice for the advanced professions is present and heard in the growing debate around the appropriate level of licensure for professions and occupations. You can visit the new ARPL website at www.ResponsibleLicensing.org.

Your team at the ASCPA acts on legislation impacting our profession in Arizona and closely follows licensing reform activity in other states. If you have questions or concerns about this issue, or other legislation that may impact the CPA profession, please reach out to the Society. Occupational licensing is an ever-increasing topic of conversation across the nation, and we are likely to see Arizona continuing to lead reform efforts. n

Member News After nearly 20 years, the executive director and CEO of Ronald McDonald House Charities of Central and Northern Arizona, Nancy Roach, is retiring. Roach is a past chair of the ASCPA. Congratulations to James Sean McGettigan, CPA, and Eugene Park, CPA, from Arizona who were selected to the 2019 class of the AICPA Leadership Academy.

Sara B. Nance, CPA, of Wallace Plese + Dreher, was recognized as one of the most influential women in Arizona business by AZ Business magazine.

Scottsdale-based Harkins Theatres has named longtime Vice President and CFO Greta J. Sesaye Newell, CPA, as vice president and treasurer.

Replacing Newell as CFO is former executive vice president Tyler S. Cooper, CPA. Cooper will expand his current responsibilities to oversee the accounting department and the company’s financial performance.

Financial Literacy Task Force In an effort to help residents of Arizona attain a better understanding of personal finance life skills, Arizona State Treasurer Kimberly Yee recently created the first statewide Financial Literacy Task Force. The Financial Literacy Task Force will examine the landscape of financial literacy across Arizona’s communities and identify opportunities for improvement.

“Arizona and the nation are facing alarming negative trends in the area of personal money management and this needs to be reversed.

There are dangers to the downward spiral of debt and it directly affects our economy,” said Yee. The 17-member Financial Literacy Task Force, chaired by Yee, includes two ASCPA members – Michael T. Allen, CPA, audit &

Deloitte has been named a “Best P l a c e t o Wo r k f o r D i s a b i l i t y Inclusion,” having received a top score of 100 percent on the Disability Equality Index® (DEI).

assurance principal at REDW LLC, and Curt Krizan, CPA, chief financial officer at the Fiesta Bowl.

Wallace Plese + Dreher named Leslie Prichard, CPA, and Allison Lynn Dozbaba, CPA, as partners.

Watch for the ASCPA’s new brand coming soon!

SEPTEMBER 2019 AZ CPA

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DON FARMER Oct. 25

Scottsdale Resort at McCormick Ranch or Webcast Due to major changes under the Tax Cuts and Jobs Act (TCJA), the 2019 tax season was one of the most challenging in recent memory. But those challenges did not end with the 2019 tax season. The IRS continues to release significant guidance on many of TCJA’s key provisions. This seminar will review the latest developments and guidance on critically important TCJA provisions, such as the: final § 199A 20% deduction regulations which are binding for 2019; 100% § 68(k) depreciation deduction; expanded §179 deduction; limitation on business interest expense; disallowance of entertainment expenses; deductibility of business meals; accounting method changes for small businesses; individual excess loss provisions; disallowance of miscellaneous itemized deductions; modifications to home mortgage interest deduction; and more. This seminar will also provide a review of any other significant 2019 tax legislation, as well as new tax cases, rulings, and regulations expected to have the most significant impact on individuals and businesses, including the new centralized partnership audit rules (CPAR).

Suggested 8 Hours of CPE Credit

Register at www.ascpa.com/donfarmer19

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AZ CPA SEPTEMBER 2019

A Dash of SALT

Arizona’s Response to Wayfair Eliminates Municipal Retail Tax Codes In this month’s state and local tax (SALT) column, Busby highlights the provisions of H.B. 2757 that relate to Arizona’s new economic nexus standards for remote sellers and marketplace facilitators; addresses the state’s efforts to simplify its sales tax structure; and highlights some ongoing challenges for remote sellers. This is the first in a series of three articles addressing Arizona’s response to the Wayfair decision.

As predicted, in a move that may increase state and local sales tax collections by as much as $293 million annually, Arizona’s Legislature amended the state tax code to require remote sellers to remit sales tax on proceeds from sales to customers in the state based on economic nexus standards.

The Legislature also adopted marketplace facilitator provisions and preempted cities and towns from imposing retail sales taxes under their own tax codes.

These changes will go into effect on October 1, 2019.

Arizona’s Economic Nexus Standards for Remote Sellers Arizona’s economic nexus standard for remote sellers applies: • for calendar year 2019, when gross retail sales to customers in the state not facilitated by a marketplace facilitator exceed $200,000 in the previous or current calendar year; • for calendar year 2020, when gross retail sales to customers in the state not facilitated by a marketplace facilitator exceed $150,000 in the previous or current calendar year; and • for calendar year 2021 and for each year thereafter, when gross retail sales to customers in the state not facilitated by a marketplace facilitator exceed $100,000 in the previous or current calendar year.

Sales by all affiliated parties are aggregated for purposes of determining whether remote sellers satisfy these criteria.

Arizona’s economic nexus standards do not take into consideration the number of annual transactions a remote seller may have with customers in the state.

by James G. Busby, Jr., CPA

James G. Busby, Jr., CPA, is a state and local tax attorney at The Cavanagh Law Firm. Busby previously worked in the SALT departments at Arthur Andersen and Deloitte & Touche. Before entering private practice, Busby was in charge of all transaction privilege (sales) tax audits at the Arizona Department of Revenue.

If you have any questions, please contact the author. He can be reached at (602) 322-4146 or JBusby@CavanaghLaw.com.

Economic Nexus Standard for Marketplace Facilitators Arizona’s economic nexus standard for marketplace facilitators applies if the gross retail sales to customers in the state in the current or previous calendar year by the marketplace facilitator on its own behalf or on behalf of at least one marketplace seller exceed $100,000. Sales by all affiliated parties are aggregated for purposes of determining whether marketplace facilitators satisfy these criteria.

Marketplace facilitators may report tax due for transactions facilitated on behalf of marketplace sellers either with tax collected for transactions made directly by the

SEPTEMBER 2019 AZ CPA

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Highlights of July Board of Directors Meeting Among other actions at its July 24, 2019 meeting, the ASCPA Board of Directors reviewed the following: Auditor Report The 2018-2019 financial report was given by the independent firm of Mayer Hoffman McCann P.C. An unqualified audit report was issued.

AICPA Board Liaison Dialogue on CPA Evolution, etc.

Anita Baker, the Society’s AICPA liaison, shared information on CPA Evolution, a combined NASBA-AICPA effort aimed at evolving CPA licensure. The board provided comments for Cindie to submit to the AICPA.

Consent Agenda The consent agenda, which included the board minutes and financial statements, was approved.

Conflict of Interest Policy Board members reviewed and signed the conflict of interest policy as part of the annual process.

Nominating Committee Report The board approved the following names as members of the nominating committee: Ginny DeSanto (committee chair), Anita Baker, Mike Krysik, Andrea Levy and Ryan Littleton.

Branding

marketplace facilitator on a combined return or on a separate return.

All Retail Sales Taxes to be Imposed Via the State Tax Code In an effort to dramatically simplify the state’s sales tax structure, Arizona’s Legislature preempted cities and towns from imposing retail sales taxes under their own tax codes. Thus, effective October 1, 2019, all state and local retail sales taxes will be imposed via the state tax code rather than under the state tax code and up to 91 separate municipal tax codes. However, as we will explore in a future column, there still will be several differences between the state tax base and the tax bases for various cities and towns in Arizona.

Ongoing Challenges for Remote Sellers In addition to perpetuating some differences between state and local tax bases, Arizona still has not adopted the Streamlined Sales and Use Tax Agreement or many of its features that were designed to reduce administrative and compliance costs for taxpayers. For instance, as we will explore in a future column, Arizona’s sourcing provisions require remote sellers to apply up to 91 different municipal tax rates and up to 15 different county tax rates. n

Cindie and Heidi provided an update on the Society’s branding project. The board provided input on a variety of matters.

Strategic Plan Update Cindie provided an update on the Society, including advocacy activities, Accountancy Board actions and membership renewals.

A Day in the Life Vanessa Makridis and Jessica Iennarella each shared a view of the challenges and joys they experience in their life and job.

Other Business No other business was conducted.

If you have questions or would like additional information, please contact Cindie Hubiak at (602) 324-2888; AZ toll free at (888) 237-0700, ext. 203; or chubiak@ ascpa.com.

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AZ CPA SEPTEMBER 2019

ASCPA Hiring Director of Finance & Administration If you’re interested in working for the Society, please review the job description at www.ascpa.com/controller and contact hr@ascpa.com.

2019 ASCPA LEGISLATIVE REPORT

Playing Chess in an Earthquake

by Ryan DeMenna

Metaphors are commonplace in politics. In fact, “plain speak” is often pretty hard to come by in the political arena. My favorite metaphor, however, is that politics are like playing chess in an earthquake.

Those who engage in the political chess match need to be prepared for the individual chess pieces, and sometimes the entire chessboard, to change.

For example, every two years the makeup of Arizona’s Legislature changes dramatically.

State lawmakers are elected or reelected by voters in the fall of even-numbered years to serve their district for two legislative sessions, and then the process starts all over again. Every two years, roughly one-third of Arizona’s 90 lawmakers are brand new to the Legislature.

This degree of turnover produces changes at every level of the process, from those elected to serve as President of the Senate and Speaker of the House to legislative parking assignments. The level of difficulty only increases when you consider the possibility of legislative expulsions and resignations, which have been a more frequent occurrence as of late.

The political chessboard and the pieces that occupy it change on a regular basis, which is one of the many reasons it is critical to have an established presence at the Arizona State Capitol, much like the Arizona Society of Certified Public Accountants (ASCPA).

The ASCPA is the posterchild for best practices when it comes to working with Arizona lawmakers. The ASCPA brand is well-known in the political arena, and lawmakers have a sincere appreciation for the profession’s straightforward approach to policymaking.

For decades, the ASCPA has been a trusted voice at the Arizona capitol, advocating for taxpayers, the profession and tax policy done right.

The 2019 legislative session is a particularly shining example of how the ASCPA, through its longstanding presence at the capitol, is well equipped to work with Arizona policymakers to tackle the known and the unknown.

SEPTEMBER 2019 AZ CPA

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2019 ASCPA LEGISLATIVE REPORT The Known – Mandatory Audit Firm Rotation It is well known in ASCPA circles that mandatory audit firm rotation may sound appealing, but in reality, it puts an entity at more risk of fraud, can lead to lower audit quality and is more costly in the long run.

Lawmakers have actually enacted mandatory audit firm rotation requirements in the past, and after the ASCPA educated policymakers on the realities of mandating firm rotation, those requirements were subsequently reversed.

The ever-changing political chessboard, however, can often produce familiar legislative “solutions” that have been debunked in the past.

This was the case in 2018, when lawmakers included a provision in the state budget requiring Arizona school districts to rotate auditors every three years.

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AZ CPA SEPTEMBER 2019

Legislators who demanded the inclusion of the rotation requirements were attempting to address what is known as the “familiarity threat.” In other words, mandatory audit firm rotation attempts to address the perceived threat that a long-term professional relationship between an auditor and their client will result in the auditor becoming too accepting of the client’s work or explanations.

The ASCPA and its team worked tirelessly to educate all 90 members of the Legislature that the opposite holds true. A long-term professional relationship is more likely to increase auditor skepticism, and the institutional knowledge that comes with a long-term professional relationship contributes significantly to audit quality. It was made clear that an objective, independent auditor is critical to ensuring a quality audit, but simply

changing auditors will not ensure that this is the case.

SB 1256, introduced by Senate Majority Leader Rick Gray and signed into law by Governor Doug Ducey, repealed this requirement.

Gray’s willingness to sponsor this legislation and push back against the narrative promoted by many of his peers speaks to the ASCPA’s reputation amongst policymakers. He knew the ASCPA would not be advocating to reverse the requirement unless it had been thoroughly vetted by the profession.

The journey to the governor’s desk also speaks to the success of the multifaceted legislative effort deployed by the ASCPA, which included one-on-one discussions with legislators and leaders in the profession, CPAs attending legislative hearings and testifying in support of the bill, ongoing outreach to all 90 legislators and more.

2019 ASCPA LEGISLATIVE REPORT The Unknown – Internal Revenue Code Conformity An annual exercise for the ASCPA is to ensure that the Legislature conforms to changes made to the Internal Revenue Code (IRC) in the prior tax year.

But the Tax Cuts and Jobs Act (TCJA) passed in 2017 complicated this legislative exercise.

Conflicting reports of the TCJA’s impact on taxpayers left state policymakers concerned that conforming to the federal overhaul would negatively impact Arizona taxpayers. These concerns were bolstered by estimates produced by legislative budget analysts that pegged the increase to the state’s General Fund anywhere from $100 million to $250 million.

In 2018, lawmakers conformed to the IRC in effect on Jan. 1, 2017, but the majority of the TCJA took effect on Jan. 1, 2018. This meant that unless lawmakers acted quickly at the onset of the 2019 legislative session, millions of Arizona taxpayers would be forced to calculate their 2018 Arizona income tax liability using a dramatically different base than they used to calculate their federal income tax liability.

In other words, the federal tax overhaul quickly thrust a well-known legislative issue into the realm of the unknown.

In the months leading up to the 2019 legislative session, the ASCPA communicated the importance of conformity to lawmakers, including polling commissioned by the ASCPA indicating strong support for full conformity amongst Arizona voters.

At the onset of the session, three schools of thought emerged on how to handle conformity: Governor Ducey urged full conformity and believed that the resulting revenue should be used to bolster the state’s Rainy Day Fund. Some lawmakers wanted to conform and use the revenue to boost education spending, while others believed that the state should “conform and reform,” meaning the state should conform and enact statutory changes that would render the federal overhaul revenue neutral in Arizona.

The 2019 legislative session is a particularly shining example of how the ASCPA, through its longstanding presence at the capitol, is well equipped to work with Arizona policymakers to tackle the known and the unknown.

Lawmakers authored a number of different proposals to deal with conformity, and a conformity bill that landed on the governor’s desk before the Executive had reached a deal with legislative leaders was vetoed. In the months that followed, the ASCPA and its team urged policymakers and the governor’s office to come to a consensus in order to mitigate the unnecessary costs and added complexities that Arizona taxpayers were already facing.

After a great deal of negotiating, and some shuttle diplomacy on the part of the ASCPA, lawmakers reached a deal with the Governor.

The ASCPA immediately communicated its support for the swift passage of conformity to all 90 legislators, while making it clear that the ASCPA does not have a position on the “reform” elements of the negotiated tax package.

The conformity provisions were included in this year’s state budget, which was signed into law by Governor Ducey on May 31, reinforcing the ASCPA’s ability to address both the known and unknown in Arizona’s every-changing political process.

Looking Ahead Every legislative session, the ASCPA tracks and engages on hundreds of

pieces of legislation on topics ranging from professional regulation to obscure aspects of Arizona tax law. The ASCPA monitors every bill with a possible impact on the profession or Arizona taxes, and every piece of legislation that is introduced is read and analyzed by leaders in the profession.

These accomplishments at the Arizona State Capitol in 2019 occurred for a variety of reasons, but especially because of the experience and leadership of Cindie Hubiak and her dedicated team. The energy behind the ASCPA’s advocacy efforts that comes from leaders in the profession is invaluable. These are the CPAs who take the time to visit the Capitol to meet with lawmakers, attend legislative hearings, analyze legislative proposals, and offer up their technical expertise to state legislators.

Advocacy at the legislature is more important than ever, and members of the ASCPA can rest easy knowing that they have a team in place prepared to address both the known and the unknown in a process that’s a lot like playing chess in an earthquake. n Ryan DeMenna is with DeMenna Public Affairs, the ASCPA’s lobbying firm.

For more information, contact www. demenna.com.

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2018/19 PAC Report The ASCPA PAC is the voice of the CPA profession in Arizona. Lawmakers listen to what we have to say! The ASCPA PAC and ASCPA leaders contribute money to a wide variety of candidates, current lawmakers and both major political parties. We make sure those who impact the CPA profession know we represent CPAs who care about their credential and Arizona. Thank you to the ASCPA members who contributed more than $59,000 last fiscal year to open doors, share ideas and make sure the CPA voice was heard. Please make sure this continues by contributing to the PAC today at www.ascpa.com/pac.

Total PAC Contributions for FY 2018-19:

$59,262 Total Contributed to Candidates/Causes:

$49,366 2018-2019 PAC Contributors ($250 or more) Sandra A. Abalos Michael T. Allen Cord D. Armstrong Susan A. Armstrong Corey Arvizu Steven E. Bandler James I. Barash Donald R. Bays Bruce D. Beach Lawrence C. Bello Rachael A. Bertrandt Glenn A. Bier Gregory R. Blake Francis J. Brady James F. Brewer Christine Brueser Jay L. Buck James J. Buhr Ronald Butler, Jr. Donald Butler, II Debra A. Callicutt Kevin F. Camberg Brian J. Campbell Joy C. Cervantes David J. Cohen George M. Cohen Andreas D. Coumides, Jr. Regina R. Curry David M. Damron Virginia E. DeSanto Craig Desnoyer Bradley S. Dimond Michael C. Drexler

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Robert E. Dubberly Thomas F. Duensing Richard B. Eggleston Paul Evans Matthew O. Everroad Evan C. Feldhausen Lawrence Field Michael T. Finnegan Marc D. Fleischman Randy G. Fletchall Kristen French Barry R. Friefield Thomas L. Friend Anthony R. Gerlach Rufus Glasper Alan Gold Richard H. Goldenson Charles H. Goodmiller Christopher J. Gracey Ross M. Grainger Aaron J. Grant Jacob P. Gregory Brent A. Hagerman Anthony M. Hakes Tim Hansen Stephen T. Harris Victoria C. Harris Joshua P. Hayes Christopher W. Heinfeld George Henderson Jeremy S. Henson William J. Hodges, Jr. Michael A. Hoerig

AZ CPA SEPTEMBER 2019

Herbert J. Hoffman Cindie Hubiak Daniel B. Hughes Terri M. Hulse David M. Iaconis Charles J. Inderieden Michael B. Jacobson Colette Kamps Sara Kirk Evelyn A. Kleinhans Julie S. Klewer Allan C. Klose Joel B. Kramer Richard C. Kudzmas Jeffrey E. Kuhlin Adam D. Kunkin Mark L. Landy Donna H. Laubscher Michael L. Lauzon David E. Lopez-Monroy Vanessa R. Makridis Eric B. Maneval Johannes J. Marais Alexander T. Marr Karen Mattull Marilyn M. Mays Karen K. McCloskey Phillip R. McCollum, Jr. Kevin W. McHolland Charles A. McLane George H. McNamara Norman R. Mendoza, II David G. Miller, Jr. Molly E. Montgomery

John M. Murdough Dan Nahom Allen L. Nahrwold Ralph G. Nefdt Melinda K. Nelson W. Gregory Nelson Bruce J. Nordstrom Zandra L. O’Keefe Amy O. O’Loughlin Randall L. Ottaway Brent Papek Jay Z. Parke David P. Phillips Alice H. Pope Jonathan M. Poppel Bradley J. Preber Sami K. Raynes-Houseknecht Mackenzie J. Rentschler Christina C. Roderick Stephen J. Rodis Jay R. Rold Eric S. Rudner LeAnn M. Rudolph John P. Russo Steven Rutti Stephen J. Schiltz Richard R. Schultz Stella M. Shanovich Jill A. Shaw Jennifer L. Shields Layne R. Simmons Jeffrey Z. Singleton Jeremy A. Smith Karin Smith Todd D. Sorenson Andrew M. Spillum Leslie B. Stackpole Adam Stafford Michael E. Straneva Eric S. Taylor Laurie A. Taylor Philip W. Taylor Chad A Thurston Candace B. Tooke Christopher W. Tyhurst Peggy H. Ullmann Jared Van Arsdale Nicole K. Vogt Carlos E. Wagner Jason E. Washo Brooke M. Westemeier Pamela D. Wheeler Cale L. Whittington Corrine G. Wilson G. J. Wright Robert Wyndelts Mary T. Yaconiello Edward K. Zollars

Tales From the Trenches The Internet May Be Right, But It May Also Be Wrong!

by Robert E. Kleeman Jr., CPA (in CO)/ABV, ASA Business valuation today is a lot more complex than it was years ago. One of the dangers of this is that we can get lost in the complexity and lose sight of some of the fundamentals. One of these fundamentals is that the appraiser must have a very good understanding of the operations of the underlying business they are valuing. There are many ways to gain information on your subject company, including a site visit, interviews with management, as well as general industry data. Data on the internet also might be of value to the appraiser. However, relying simply on the internet for your company knowledge can lead to disaster.

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Case in point. I was engaged to do a valuation of a 100-year-old-plus privately held company that produced well-known food products. Although the subject company has a national reputation, it is very small in relation to the many very large, publicly traded entities with which it competes. There was also the issue that the physical location of the company was hundreds of miles from the jurisdiction of the lawsuit that triggered the valuation.

During the engagement, it became clear that several issues were the basis for the significant difference between my valuation and the opposing expert’s valuation. Some of those issues included rent paid to a related entity, maintenance costs and a question of whether all the space was necessary for the operations of the company.

In deference to my opposing expert, his client would not incur the cost of a site visit and related interviews with management, so they relied only on data that were derived from searches

production floor and fresh product storage, which was maintained at a constant temperature from 35 degrees to 37 degrees and a humidity level of in excess of 85 percent. The other area, the freezer storage area, was maintained at a temperature of 20 degrees below zero with a humidity level of five percent or less. This meant that all the electrical equipment used in the food production arena was subject to severe wear and tear. The internet indicated that the useful life of electric motors used to run the production equipment and the electric forklifts were far greater than the actual life span of that equipment when used in the operating environment that existed in the subject company.

Lastly, as to the excess space, there were many thousands of square feet of space in the original 100-year-old-plus buildings. However, during the site visit, I learned from management that, due to a flood control project that the city conducted several years before the valuation date, the 100-year-old-plus

of the internet, including the subject company’s internet selling site.

Big differences. So how did the discrepancies play out? The first significant issue was the rent being paid on the new manufacturing facility. The internet indicated that a building was available in the same vicinity for as low as $8 per square foot per year. The actual rent being paid was more than $30 per square foot per year. When we visited the plant, we could see that the FDA requirements that had to be added to the new manufacturing facility included stainless steel plumbing, wall coverings and special floor construction to prevent bacterial infection of the food product produced. The cost per square foot recognized these additional costs of construction and was apparent during the visit, while the internet only provided “comparable” size buildings that were not suitable for food production.

As to maintenance costs, we quickly learned that the company had two work environments. The first was the

The Keys to Selling an Accounting/Tax Practice 15 years of Unequaled Success vs. Doing it Yourself Visit our website at www.ableta.com Gary W. Hankins, CPA* hankins@ableta.com (817) 738-3287 Serving NV, AZ & TX *Licensed in Texas

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Keys to Success

Able Practice Sales

Buyers in Contacts

Several Hundred

I play golf with three CPAs

Financing

SBA lenders contact us

All credit cards are paid up!

Sales Agreements

We draft and recommend legal alternatives

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We have 100’s of alternative buyers

What does my spouse think?

Client Announcements

We guide Buyer and Sellers Announcements

Make sure AR is paid-up?

Confidentiality

Our most important objective

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AZ CPA SEPTEMBER 2019

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buildings had been negatively impacted and could no longer support a usable load to allow for the space to be used for anything but storage of very low weight materials. Obviously, this fact was not apparent to anyone during an internet search.

Case settles. In the end, the case settled because the judge indicated that he was going to disregard the opposing expert’s report due to the lack of understanding of the operations of the subject company.

Of course, my case is not unique and published cases address this fundamental issue. For example, in the Kohler1 estate tax case, the judge made it a point to criticize the expert for the IRS for not understanding the business and spending only two and a half hours meeting with management. One of the experts for the taxpayer spent three and a half days at the company. This was one reason why the Kohler case was a total victory for the taxpayer.

Final thought. In my opinion, the internet is not now—and most likely will not be in the future—a significant

source of information to replace an appraiser’s responsibility to understand the actual operations of the subject company. I can only think of a very few situations where a site visit and an in-depth discussion of operations of the company with management are not an integral part of the appraisal process.

For more information on this topic, two of the business valuation profession’s authoritative texts discuss site visits. Shannon Pratt’s Valuing a Business2 has a chapter devoted to the topic. Understanding Business Valuation3 by Gary Trugman has a section on the on-site interview that includes a list of questions to ask. n Robert E. Kleeman Jr., CPA (in CO)/ ABV, ASA, is managing director of OnPointe Financial Valuation Group LLC based in Englewood, Colorado. Kleeman has more than 40 years’ experience as a CPA in Colorado and in the valuation of business interests, including both publicly and closely held businesses and intangibles.

He also has extensive experience as an expert witness and has provided testimony

regarding business valuation and commercial damage issues. This article was originally published in the August 2019 issue of Business Valuation Update by Business Valuation Resources (bvresources.com). All rights reserved. Reprinted with permission.

Endnotes: 1. Kohler et al. v. Commissioner of Internal Revenue, 2006 Tax Ct. Memo LEXIS 156 (July 25, 2006); available at BVLaw (bvresources.com/products/bvlaw).

2. bvresources.com/products/valuing-abusiness-the-analysis-and-appraisal-ofclosely-held-companies-5th-ed.

3. bvresources.com/products/understanding-business-valuation-a-practicalguide-to-valuing-small-to-mediumsized-businesses-5th-edition.

Kleeman will present at the Business Valuation & Forensic Litigation Services Conference on Dec. 18. Register at www.ascpa.com/bvflc19

SEPTEMBER 2019 AZ CPA

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These are just some of the reasons why the ASCPA selected CAMICO as the Society’s preferred provider of Professional Liability insurance.

Harris Hauptman Senior Account Executive T: 800.652.1772 Ext. 6727 E: hhauptman@camico.com W: www.camico.com

Accountants Professional Liability Insurance may be underwritten by CAMICO Mutual Insurance Company or through CAMICO Insurance Services by one or more insurance company subsidiaries of W. R. Berkley Corporation. Not all products and services are available in every jurisdiction, and the precise coverage afforded by any insurer is subject to the actual terms and conditions of the policies as issued. ©CAMICO Services, dba CAMICO Insurance Services. All Rights Reserved.

18 AZ CPA Inc., SEPTEMBER 2019

IRS Comes Down on Partners As Employees

by Edward K. Zollars, CPA CPAs often run into clients operating as partnerships where the individual partners want to be put on the payroll as employees. It may be because the partners just don’t like making estimated income tax payments and prefer withholding, or it can be to attempt to qualify for pre-tax benefits either not available to self-employed individuals or available under less favorable terms to such individuals.

But giving in to the client’s wishes and advising that it’s fine to put the partner on the payroll is a problem for the CPA. The IRS made their views clear years ago that partners cannot be employees and, in the past year, have released finalized regulations and a chief counsel advice that make clear the agency does not believe that partners can ever be employees.

IRS Historical Guidance The IRS belief that partners cannot be employees for tax purposes is nothing new—the primary guidance in this area goes back decades.

• S.S.T. 23, C.B. XV-2, 405 (1936) – the IRS ruled that partners were not employees of the partnership for FICA purposes.

• Revenue Ruling 69-184 – The IRS updated the 1936 ruling to bring it under the current version of the Internal Revenue Code, but the conclusion remained the same—partners are never employees.

• Revenue Ruling 72-596 – Ruled that a worker’s compensation premium for partners was not deductible since partners could not be employees.

Nevertheless, some advisers still held out hope that partners could be employees—and a few court cases suggested that it might be possible—the Fifth Circuit in Armstrong v. Phinney, 394 F.2d, 661 (CA5, 1968) ruled that a §119 exclusion for employer-provided housing was available for a partner since a person could be both a partner and an employee. But additional cases indicating a partner could be an employee were few and far between.

Disregarded Entities to Employee Partners With the creation of single-member LLCs, some advisers believed they had found a solution by making partners employees of an LLC owned by the partnership.

After all, for payroll tax purposes the LLC wasn’t disregarded.

However, in 2016 the IRS released proposed regulations that begged to disagree and, in June of 2019, the IRS finalized these regulations. Reg. §301.7701-2(c)(2) (iv)(C)(2) provides: (2) Paragraph (c)(2)(i) of this section applies to taxes imposed under subtitle A of the Code, including Chapter 2 — Tax on Self-Employment Income. Thus, an entity that is treated in the same manner as a sole proprietorship under paragraph (a) of this section is not treated as a corporation for purposes of employing its

owner; instead, the entity is disregarded as an entity separate from its owner for this purpose and is not the employer of its owner. The owner will be subject to self-employment tax on self-employment income with respect to the entity’s activities. Also, if a partnership is the owner of an entity that is disregarded as an entity separate from its owner for any purpose under this section, the entity is not treated as a corporation for purposes of employing a partner of the partnership that owns the entity; instead, the entity is disregarded as an entity separate from the partnership for this purpose and is not the employer of any partner of the partnership that owns the entity.

A partner of a partnership that owns an entity that is disregarded as an entity separate from its owner for any purpose under this section is subject to the same self-employment tax rules as a partner of a partnership that does not own an entity that is disregarded as an entity separate from its owner for any purpose under this section.

In the preamble to the 2016 proposed regulations, the IRS specifically mentioned the regulation was being revised to make it clear that Revenue Ruling 69-184 controlled in this situation—the partners were still partners, not treated as employees of the singlemember LLC. These regulations were finalized on June 28, 2019, without any significant changes.

Professional Employer Organizations Employing Partners Other advisers decided that perhaps using a professional employer organization (PEO) was the solution to getting a partner on the payroll, but in an emailed chief counsel advice (ECC 201916004), while such advice is not binding on taxpayers or the IRS, seems consistent with the view the IRS is likely to take in challenges — and the agency again cites back to the 1969 Revenue Ruling.

The email specifically refers to certified professional employer organization (CPEO) proposed regulations, but the logic would apply to any PEOs that may

SEPTEMBER 2019 AZ CPA

19

Arizona Federal Tax Institute Conference Nov. 7-8 Desert Willow Conference Center 8 a.m. to 4:30 p.m.

Now Also Offered as a Webcast

Get the most up-to-date information on this year’s biggest tax topics.

Day 1 Arizona and Phoenix Metro Economic Update International Tax, The Least You Need to Know State Taxation of Trust Income Section 199A: Applications and Challenges Taxation in the Cannabis and Hemp Industry

not have decided to obtain certification.

The issue arose where some advisers were looking at language in the preamble to those regulations to argue they allowed for a partner to be an employee.

Specifically, the advice notes that the language being referenced describes a very unusual situation, requiring receiving payments in two separate activities such as where an employee of a company also has a janitorial service sole proprietorship.

But the advice holds that “any payment made by a CPEO to a partner in a partnership under a contract between the partnership and the CPEO must always be treated as a payment to a self-employed individual and reported as such under section 6041.”

The advice continues: So whether an individual partner in a partnership is receiving payments from the CPEO for services performed in the conduct of the trade or business of the partnership, or receiving payments from the CPEO for services performed as an independent contractor of the partnership, the payments are payments to a self-employed individual and should be treated as such for reporting purposes as provided by section 6041.

Thus, the IRS yet again goes back to its view that Revenue Procedure 69-184 will block any attempt to treat a partner as an employee.

Conclusion

Day 2 Another Year: More Ethics Lessons Learned Retirement Impact of the SECURE Act Penalty Box Games: Reducing IRS Penalties Practical IT Practices for Tax Firms Tax Developments in 2019 - What’s New Thank you to Gold Sponsors: Catholic Charities Community Services Institute for Better Education Catholic Education Arizona

Learn more at www.ascpa.com/tic19

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AZ CPA SEPTEMBER 2019

Certain partners will continue to want to be treated as employees of the partnership for various reasons. While there may be a way to do this that would survive a court challenge, CPAs need to counsel the clients that the position is one the IRS has consistently argued cannot be supported. n Edward K. Zollars, CPA, is an instructor with Kaplan Professional Education/ Thomas, and a partner with Zollars & Lynch, Ltd. He is a member of the ASCPA and will be speaking at the Arizona Federal Tax Institute Conference on November 7-8. For more information, go to www.ascpa.com/tic19.

AZ CPA Quick Quiz You’ve Read It, Now Get Credit Take this quiz on AZ CPA content online or submit this hard copy.

Receive a score of 70 percent or more and earn one hour of CPE credit in specialized knowledge. It’s that easy!

Fees: Members: $25 Nonmembers: $40 Online Access Go to www.ascpa.com/quickquiz to access links to all active quizzes. Once a quiz is purchased, a link and password will be emailed to you. Your results will be sent immediately after completion, and certificates are emailed within two business days.

Hard Copy Please select one answer for each question. Fill out registration/payment information below and mail or fax to the Society office. Quiz results and certificates will be emailed to the address provided on the registration form. *This quiz will be available until September 2020. Please note that users have three attempts to pass the quiz with at least a 70 percent score.

September 2019 Issue of AZ CPA* 1. In the Chair’s message, who was quoted as saying, “The chief business of the American people is business”? m Shawn Corey Carter m Donald Trump m Calvin Coolidge

5. It is well known in ASCPA circles that mandatory audit firm rotation may sound appealing, but in reality, it puts an entity at more risk of fraud, can lead to lower audit quality and is more costly in the long run. m True m False

2. Arizona State Treasurer Kimberly Yee recently created what statewide taskforce? m The Lower Taxation Taskforce m The Financial Literacy Taskforce m The Debt Relief Taskforce

6. Leading up to the 2019 legislative session, the ASCPA communicated the importance of conformity to lawmakers, including polling commissioned by the ASCPA indicating:

3. Arizona’s Legislature preempted cities and towns from imposing retail sales taxes under their own tax codes. This goes into effect: m Oct. 1, 2019 m Oct. 1, 2020 m Jan. 1, 2020

Quick Quiz Registration

4. Who was the Society’s AICPA liaison who shared information on CPA Evolution, an effort aimed at evolving CPA licensure at the ASCPA Board meeting? m Joe Biden m Anita Baker m Mike Allen

m

m

m

That voters didn’t support taxes in general There was little understanding of conformity That there was strong support for full conformity amongst Arizona voters

7. The ASCPA PAC and ASCPA leaders contribute money to: m both major political parties m candidates who support the views of the ASCPA only m only Republican candidates 8. In the article, “Tales From the Trenches,” author Kleeman believes that relying on the internet for company knowledge is crucial. m True m False 9. What two business valuation authoritative texts listed in the above article discuss site visits? m Valuating Businesses and Estimation of Value m Valuating A Business and Un d e r s ta n d i n g Bu s i n e s s Valuation m Internet Usage in Business Valuation and BV for Experts

10. What IRS Procedure blocks any attempt to treat a partner as an employee? m Revenue Procedure 69-184 m Revenue Procedure 69-190 m Revenue Procedure 69-200

Name: ____________________________________________________ Email:_____________________________________________________ Telephone: _________________________________________________

Payment

m Member: $25 m Nonmember: $40 Checks: Please make payable to: The Arizona Society of CPAs Credit Card:

m Visa m MasterCard m American Express

Credit Card #: _______________________________________________ Expiration Date: _____________________________________________ Name on Card. _____________________________________________ Mail to: ASCPA, 4801 E. Washington St. Suite 180, Phoenix, AZ 85034-2040; fax to (602) 252-1511 scan and send to ASCPACPE@ascpa.com.

SEPTEMBER 2019 AZ CPA

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Classifieds Business Opportunities ACCOUNTING BIZ BROKERS — Ready to Sell Your Firm? Selling your firm is complex. We can make it easy!

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AZ CPA SEPTEMBER 2019

to start a practice, as well as existing practice owners looking to grow to the next level. To learn more, send email to CalvinBrown@GrowthSolutionz.com.

Employment MANAGER POSITION WITH GROWING LOCAL CPA FIRM — We have professional opportunities for senior audit and tax managers with 7-10 years experience to join our firm at a management level for near term equity participation. Must be expert in GAAP, GAAS for audit or EA/CPA with IRS representation experience and able to manage audit or tax practice areas. Competitive compensation and benefits with flexible hours. Located in central Phoenix near Biltmore area.

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TAX PREPARER — NORTH SCOTTSDALE CPA FIRM is seeking a parttime (retired) Senior Tax reviewer during peak season. Must have seasoned tax review experience with updated knowledge of tax law and paperless systems. Larry@partridgecpas.com.

TAX MANAGER, SENIOR AND STAFF — This progressive and growing Central Phoenix Tax and Wealth Advisory firm has Tax Manager, Tax Senior and Tax Staff Accountant positions available for professionals with a minimum of five years recent CPA firm experience. Compensation and benefits include group health, 401(k) with match, seven paid holidays, paid sick and vacation time, “flex-time,” and reimbursement for all professional designation expenses. You will also have the opportunity to work “normal” hours outside of the Feb-Apr tax season rush.

Apply now by sending your resume and salary requirements to taxandwealthfirm@gmail.com.

SENIOR TAX MANAGER — TAX MANAGER — TAX STAFF OPPORTUNITIES — REDW, one of the Southwest’s 10 largest accounting and business consulting firms, has oppor-

tunities for talented tax professionals at all levels for our growing practice. With offices in Phoenix and Albuquerque, we have been serving our clients for more than 60 years. REDW provides tax and accounting services to family owned businesses, closely held and multi-state companies, trusts and estates, and individuals. Ready to take your career to the next level and join an organization with an impressive culture, benefits and compensation package? Learn more at www.redw.com/careers.

STEVEN M. VOGT, CPA, EA OF CHANDLER, AZ is looking to hire a full-time EXPERIENCED Tax Professional to join our firm. We offer competitive pay, benefits, opportunities for advancement and a great collaborative team spirit. Qualified candidates will have experience in: • preparing individual, S corporation, and partnership returns • responding to IRS and state notices • preparing an error-free tax return from start to finish • understanding, reading, and preparing financial statements • Understanding of how to prepare year-end AJE’s and closing entries • Lacerte software experience is a plus. Please email resumes to infodeskch@stevevogtcpa.com.

Office Space EXECUTIVE OFFICE SPACES FOR LEASE — Beautiful garden-style office complex in a great office environment located in north Phoenix. Easy access to SR 51 and SR 101 just north of NWC of Tatum and Shea Blvd. Executive office $800, interior office $650. Ample parking, beautiful conference rooms, seminar room and copier, telephone and internet ready. Includes Receptionist to greet your clients. Contact Julie at (602) 953-5000.

OFFICE SPACE IN BEAUTIFUL SEDONA! — Well established Sedona CPA is leaving the area. Approximately 600 square feet available to share with attorney in Village of Oak Creek, Sedona. Call (928) 284 2190 (office) or (928) 300 6096 (cell).

2019 CPE CALENDAR SEPTEMBER

OCTOBER

21

17

Phoenix Tax Workshop (9 a.m.-noon)

Construction Contractors Advanced Issues Stephen Renberg

CPE: 3

Field of Study: TX

CPE: 8

23 Professional Ethics Update for Arizona CPAs – Including Revised AICPA Code (8-11:30 a.m.)

Gilbert B. Blumenthal CPE: 4

Field of Study: ET

24 Accounting and Auditing Update for Small Businesses Summer Taylor CPE: 8

Field of Study: AA

25 Internal Control and COSO Essentials for Financial Managers, Accountants and Auditors Summer Taylor CPE: 8

Field of Study: AA

26 Basis Calculations & Distributions for Pass-Through Entity Owners – Schedule K-1 Analysis Pat Garverick CPE: 8

Field of Study: TX

27 Passive Activities & Rental Real Estate Income Tax Issues Pat Garverick CPE: 8

Field of Study: TX

Field of Study: AA

18 Slashing Taxes for Your Small Business Clients: Corporations, Partnerships & LLCs Stephen Renberg CPE: 8

Field of Study: TX

19 Phoenix Tax Workshop (9 a.m.-noon) CPE: 3

Field of Study: TX

21

Field of Study: AA

22 Understanding and Creating an Internal Control Structure Karl Egnatoff CPE: 8

CPE: 8

Field of Study: TX

28 Professional Ethics Update for Arizona CPAs – Including Revised AICPA Code (8-11:30 a.m.)

Gilbert B. Blumenthal CPE: 4

Field of Study: ET

29 Preparation, Compilation and Review Standards: The Best Annual Update and Review of the SSARS Walter Haig Field of Study: AA

30 Accounting Standards for Small- and Medium-Sized Business: The Best Annual Update of GAAP, Tax and Cash Financial Reporting Walter Haig CPE: 8

Field of Study: AA

31

Advanced Excel® Topics for Spreadsheet Power Users Karl Egnatoff Field of Study: IT

24 Form 990: Exploring the Form’s Complex Schedules Brenda Blunt CPE: 8

Don Farmer’s Tax Update Don Farmer

Field of Study: AA

23

CPE: 8

25

CPE: 8

Internal and External Fraud: Understanding It and Working to Control It Karl Egnatoff CPE: 8

www.ascpa.com

Field of Study: AA

Personal Financial Health Checkup: A Process on How to Become Financially SelfSufficient Walter Haig CPE: 8

Field of Study: AA

Go to

www.ascpa.com for more information SEPTEMBER 2019 AZ CPA

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Arizona Society of CPAs 4801 E. Washington St., Suite 180 Phoenix, AZ 85034-2040

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