Tag Archives | IRS

Employee Stock Ownership Plan (ESOP)

See Also:
Why Exit Planning
Cafeteria Plan
Evaluating and Renewing Employee Health Insurance Plan
Insulate Your Company from Rising Health Insurance Costs
How to Hire New Employees
PEO or Outsource Payroll
Budgeting 101: Creating Successful Budgets
How to Select a PEO

Employee Stock Ownership Plan (ESOP)

An employee stock ownership plan (ESOP) is a type of profit-sharing benefit plan that may be offered to employees by companies. Basically, the company gives the employee shares of the company’s stock.

This is supposed to align the employee’s motivation and incentives with the goals and objectives of the company. When the company does well and the stock price goes up, the company is worth more and the employee shares in the profits. Therefore, this type of incentive plans ideally makes employees behave in a manner that benefits the company or organization as a whole.

Employee stock ownership plans are qualified benefits according to the IRS. They offer tax benefits to the employer and the employee because the stock purchases are tax-deductible.

Considering ESOP and Business Valuation

If your company is considering an Employee Stock Ownership Plan (ESOP), then a critical consideration is a business valuation. When you need a business valuation due to ESOP, it is standard practice to consult with a valuation firm. Need help finding one? If you fill out the form below, then we will get you connected with one of our strategic partners for your valuation needs.

We will receive your information between 9-5 Monday through Friday. You can expect to hear back within 24 hours. We only use your information to contact you for the desired help.


Benefits are great, but they are only great when they are the right person. If you want to determine which candidates are the right fit for your company, then download and access your free white paper, 5 Guiding Principles For Recruiting a Star-Quality Team.

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Deferrals Definition

See Also:
Deferred Income Tax
Accrual Based Accounting
Accounting Principles
Generally Accepted Accounting Principles (GAAP)
Financial Accounting Standards Board (FASB)

Deferrals Definition

A deferral is used in accrual based accounting when an asset or liability has not been realized. It is recognized however because it will be recognized at a future date. Often times, a deferral refers to a revenue or expense.

Deferrals Meaning

There are generally two types of deferrals in accounting.

The first, deferred revenue, is considered a liability because usually a service needs to be performed or a product must be delivered before the amount can be realized. This would happen if a customer paid for a product upfront with the guarantee that the company will deliver in the future.

The second is a deferred expense. It is often considered a liability because it is considered cash in the company’s pocket that does not have to be paid yet. Often times this extra cash can be put into short term securities to earn extra for the company. The most common deferred expense though are deferred taxes. This is an amount owed to the IRS, but not for a while. Therefore the company can earn extra cash from interest until they need to pay the amount. The money-generating ability of these deferred expenses is what makes them a liability on the balance sheet.

Deferral Example

King Company is in the business of producing toy crowns. In mid-April, King Company received payment from one of its many toy retailer customers. King has set up a plan with its vendors to pay them on a quarterly basis for plastic and other materials. Therefore, King has decided to invest the amount in short term securities until the payment to its vendors comes due at the end of June. Thanks to the lag time in deferrals King company is able to make an extra almost free profit based off of interest rates for two and a half months before its payment at the end of June.

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Basis Definition

See Also:
Basis Points
Make or Buy Business Decision
Collateralized Debt Obligations
Carried Interests
Letter of Credit

Basis Definition

In accounting, the basis definition is the value of an asset for tax purposes. The basis of an asset is the cost of the asset reported to the Internal Revenue Service (IRS). It includes the original purchase price of the asset plus any acquisition expenses. The basis may increase by the value of any subsequent capital improvement in the asset. Or itt may decrease due to depreciation. Also, refer to basis as cost basis or tax basis.

The basis is also the amount used to calculate gains or losses if and when the asset is sold or scrapped.

Basis Examples

For example, if shares of common stock are purchased for $1,000 and sold three years later for $1,500, then the basis is still $1,000. As a result, the taxpayer would recordcapital gain of $500.

Likewise, if you purchase equipment for $1,000 with installation and shipping fees of $500, then the basis for that asset would be $1,500. If the equipment is depreciated down to $500 and then sell it for $300, then the taxpayer would record a loss of $200.

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Capital Expenditures

Capital Expenditures Definition

What are capital expenditures? What is CAPEX? Capital expenditures, or CAPEX, refer to spending used to purchase or improve long-term assets, such as buildings or equipment. CAPEX are in contrast to current expenditures, which refer to spending on short-term assets. Capitalize and amortize capital expenditures over their useful life. Whereas, you expense current expenditures in the period when incurred. Also refer to CAPEX as capital outlays or capital investments.

Capital Expenditures – Accounting Treatment

In accounting, treat CAPEX differently than other types of expenses. Because a capital expenditure represents a future benefit to the company – by way of acquiring or improving a long-term asset – these expenses are capitalized, or recorded as assets on the balance sheet, and then amortized over their useful life. Basically, if a capital outlay is invested in an asset that will last longer than one year, it is considered CAPEX, and if it is invested in an asset that will last less than one year, it is considered a current expenditure. The U.S. IRS Code 263 and 263A has outlined the rules and procedures for reporting CAPEX.

capital expenditures

See Also:
Depreciation
Balance Sheet
Capital Budgeting Methods
Capital Lease Agreement
Capitalization
Cash Flow After Tax
Cash Flow Statement
Cost of Capital

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Audit Scope Example

Audit Scope Example

Ely is an auditor for the IRS. His work, some of the most technical for any forensic accountant, involves looking deeply into a company to find errors which may lead to prosecution. By doing this, Ely is preventing the company from any financial foul-ups that could lead to fraudulent information being shared. He is now tasked with finding the reason for recent tax payments.

The company Ely is auditing is a major food processing plant. This food company has had a history in the past of financial record “mistakes,” which explains the reason for the IRS being quick to investigate a discrepancy. This company, paying much less than IRS estimated taxes, may face a penalty. Thus the company sends Ely to see the reason for this discrepancy.

As Ely is working he takes on massive amounts of documents. He will have to sift through countless financial statements, as well as procedural documents in order to draw a conclusion on a large auditing matter. For this project he will have a very deep audit scope: he must find the reason through almost any means necessary. Because federal taxes are taken very seriously in the United States, Ely is given the authority by the IRS to request any documents or evidence that could make his decision making process run more smoothly in a legal way.

Ely Finds Something

As he is working, one of Ely’s assistants finds something; an account which should have more money than it does. With large company’s this is not uncommon because large sums of money must be moved and transferred at a moment’s notice in order to retain balance in the company’s ledgers. However, Ely is not completely convinced that unintentional error is the cause for the discrepancy. Ely scales deeper to find the cause: a company employee has been stealing funds. Though the company itself is proven to be fully compliant their records have been altered by this corrupt worker. Ely is able to help the company recover the funds and see that the employee pays for his crime. Each party is pleased with the audit, except for the employee who caused the problem.

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Audit Scope

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Audit Scope

Audit Scope Definition

Audit scope, defined as the amount of time and documents which are involved in an audit, is an important factor in all auditing. The audit scope, ultimately, establishes how deeply an audit is performed. It can range from simple to complete, including all company documentsAudit scope limitations can result from the different purposes listed below.

Audit Scope Meaning

Audit scope means the depth of an audit performed. Audits are performed for several purposes: regular “checkups” of company records, to check for internal errors, for the purpose of finding fraud inside a company, for the purpose of finding fraud in another company, or even for the purpose of finding tax income and other offenses against IRS law. Due to this fact, audit scope and objectives have a different meaning depending on the person performing the audit as well as the reason behind the audit.

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If the audit is being performed for regular internal processing, then the audit will generally only have a scope which includes the latest period which has passed. This occurs because the company has probably already audited the previous period.

If An Audit Reveals Fraud

If the audit is being performed to find fraud, however, it will generally have a deeper audit scope. It may include records from years or even decades ago. This is due to the fact that, at the very least, a violation of company policy occurred. Dedicated auditors, either company employees or hired auditors, spend their entire career in this. They often spend much more time and look far deeper in this process.

IRS auditors may even look at documents which were created during the birth of a company. This is because they are trying to find errors which result in increased income for the government as well as civil or criminal charges. A company will want to keep pristine records to assure that the auditor does not look deeper than the audit scope documents which a company can support.

Manage the audit scope in your company. Download the free 7 Habits of Highly Effective CFOs to find out how you can become a more valuable financial leader.

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audit scope

See Also:
Audit Scope Example
Audit Committee
How to Choose An Independent CPA/Auditor
How to Control Annual Audit Fees
Managed Sales And Use Tax Audit Programs
Market Dynamics

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Cafeteria Plan

See Also:
Employee Stock Ownership Plan
Evaluating and Renewing Employee Health Insurance Plan
Insulate Your Company from Rising Health Insurance Costs
How to Hire New Employees
How to Run an Effective Meeting

Cafeteria Plan Definition

The cafeteria plan definition is a flexible employee benefit plan that allows employees to choose from a selection of fringe benefits. In a cafeteria, the customer chooses components of a meal from a selection of food items. Furthermore, in a cafeteria employee benefit plan, the same concept applies to selecting employee benefits from a menu of options. There are typically terms and limitations to a cafeteria employee benefit plan. The IRS Code Section 125 describes this plan.

Cafeteria Plan Advantages

Let’s look at cafeteria plan advantages! One key advantage of the cafeteria plan is the potential for tax savings. According to IRS Code Section 125, a cafeteria plan allows employees to choose certain pretax benefits. Furthermore, these are benefits excluded from the employee’s gross income. Another advantage is that it allows employees to select a package of fringe benefits based on what is most important to them, rather than having the benefits plan dictated to them by their employer.

Features

Cafeteria plans give the employee the option of selecting between taxable and non-taxable fringe benefits. Examples of benefits that may be offered in this plan include the following:

IRS Code Section 125

If you want a list of FAQs regarding IRS Code Section 125 Cafeteria Plans, then go to: www.irs.gov

cafeteria plan, Cafeteria Plan Advantages, Cafeteria Plan Definition

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