Revenue From Contracts with Customers: What Software Companies Need to Know

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 establishes comprehensive accounting guidance for revenue recognition and will replace substantially all existing U.S. GAAP on this topic. ASU 2014-09 is converged with IFRS 15, the comparable new standard issued by the IASB.

The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It utilizes the transfer of control between the parties to determine the pattern of revenue recognition based on the consideration to which the vendor is entitled.

To accomplish this objective, the standard requires five basic steps:

  1. Identify the contract with the customer.
  2. Identify the performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations in the contract.
  5. Recognize revenue when (or as) the entity satisfies a performance obligation.

Most software entities adopting the new standard will experience a change in the timing and manner of revenue recognition.

Some of the more significant potential changes for software companies include:

  • The requirement for Vendor Specific Objective Evidence (VeSOE) is eliminated.
  • Payments from customer which extend beyond one year will no longer automatically preclude revenue recognition.
  • For many software companies, the changes could be significant and will require careful planning.

BDO has published a Revenue Recognition Resource Center, which includes an in-depth publication with examples and practical considerations for your business.

Talk with your BMSS CPA about how these new standards will affect your company.

*By Hank Galligan. This article originally appeared in BDO USA, LLP’s “BDO TECH” newsletter (Winter 2014). Copyright ©2014 BDO USA, LLP. All rights reserved. BMSS is an independent member firm of the BDO Alliance USA.

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Are Software Companies Missing Out on Section 199 Deductions?

Section 199, also known as the Domestic Production Activities Deduction (DPAD) or the Domestic Manufacturing Deduction, is centered on production and manufacturing activities. The deduction is, however, also applicable to many other activities, including software development. With the proper knowledge and understanding of its intricacies, determining this deduction can be worthwhile and provide substantial benefits for software companies.

BACKGROUND

DPAD provides a tax deduction for production within the United States and was enacted with the intent to reward and enhance job growth and competitiveness. DPAD generally gives a deduction equal to 9 percent of income from qualifying domestic production activities.

Businesses that operate in the following industries may be eligible: manufacturing tangible property, computer software, sound recordings, construction, engineering or architectural services, qualified film or the production of electricity, natural gas or potable water.

The deduction is allowed for both regular and the alternative minimum tax for corporations – both C and S corporations – individuals, partnerships and limited liability companies. Under a “safe harbor” rule, companies can claim the deduction even if their production activities are  only partially produced in the U.S., as long as its domestic labor and overhead related to production activity account for at least 20 percent of its total cost of goods sold (COGS).

Although the benefit was designed to incentivize U.S. production, its limitations, complex rules and potentially onerous compliance requirements have deterred some taxpayers from claiming the deduction. Still, with its many attractive characteristics, companies should seek to claim these benefits and enlist the help of tax professionals, if necessary.

SOFTWARE CONSIDERATIONS
A company producing computer software within the U.S. should consider its eligibility for this deduction. Computer software includes code for video games, equipment that is an integral part of other property, typewriters, calculators, adding and accounting machines, copiers, duplicating equipment and similar equipment. This category further includes any incidental and ancillary rights necessary to effect the acquisition of title to or right to use the software.

With this broad definition, software businesses are well-positioned to take advantage of the DPAD. Treasury has, however, somewhat limited the ability of these businesses to claim the deduction by excluding gross receipts derived solely from online software or software as a service (SaaS) delivery models.

With companies offering more and more software exclusively online, it may be more difficult for them to claim this deduction. Thankfully, there are two exceptions to this general rule:

  • The first exception applies if a company generates gross receipts from software provided in a tangible or downloadable form that is nearly identical to the online software in question.
  • The second exception applies when an unrelated party offers software in a tangible or downloadable form that is substantially identical to the online software.
  • Thus, as long as either the company or a third party offers substantially identical software to the online software and offers it in a tangible or downloadable form, then the online software may also be eligible for the deduction.

In 2012, the IRS released a memorandum addressing whether certain third-party computer software products were equivalent to a taxpayer’s online software in order to meet this second exception. The outcome is that a company cannot aggregate multiple software programs in order to meet the exception. Fortunately, components of the online software can be used if a company can identify other businesses that offer substantially identical features offline.

Furthermore, on Nov. 7, 2014, the IRS National Office released in a Technical Advice Memorandum that a taxpayerconducted qualifying activity from licensing customized software to contracting parties that then used their own data in conjunction with the licensed computer software to provide services to end users.

In addition to the pure software development opportunity, there is also an exception for software that is part of a hardware product. If the software development takes place in the U.S. and the cost of the software development is 20 percent or more of the total COGS of the product, the entire product is eligible for the DPAD regardless of the manufacturing location. This is a significant opportunity for companies that write software for hardware products that may be manufactured offshore.

CONCLUSION
The DPAD provides software companies an attractive opportunity to effectively lower their tax rate by approximately three percentage points. The Joint Committee on Taxation estimates that the DPAD will cost $78.2 billion in foregone revenue from 2013 through 2017. With this sizable expected benefit and the chance to lower tax rates, software businesses that are not already claiming this deduction should consider reassessing their activities to determine whether or not they are leaving generous benefits on the table.

Talk with your BMSS CPA or one of our Technology professionals about your specific situation.

*By Chai Hoang and Jonathan Forman. This article originally appeared in BDO USA, LLP’s “BDO TECH” newsletter (Winter 2014). Copyright ©2014 BDO USA, LLP. All rights reserved. BMSS is an independent member firm of the BDO Alliance USA.

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Alabama Launchpad Accounting Compliance Awards

I am proud and excited to announce that BMSS is participating in the Alabama Launchpad’s Accounting Compliance awards.  Myself and others at BMSS will provide  consulting to the award winners to help with setting up appropriate federal grant compliance accounting systems.

Program Overview:

Alabama Launchpad’s Phase 0 program provides Alabama-based, early stage technology companies and Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) winners with the tools and technical assistance needed to commercialize their innovation, grow their business and create quality jobs. The Phase 0 program is designed to give Phase I and Phase II proposals a greater rate of success by providing expert review and financial support.

REQUIREMENTS & INSTRUCTIONS

Applicant must complete the application process through Alabama Launchpad’s SBIR/STTR Assistance Program. Email Addie Mancuso at amancuso@edpa.org to fill out an application.

Phase 0 Support Grant Requirements:

  • Applicant must be an Alabama Company
  • Applicant must meet all federal SBIR/STTR program eligibility requirements that are applicable to the relevant federal solicitation

All SBIR/STTR Phase 0 proposals must be assembled in the following sequence:

  • Email Addie Mancuso at amancuso@edpa.org
  • Create FluidReview account
  • Complete pre-screen questionnaire
  • Complete Phase 0 application
  • Pay the $150 application fee

Award and Reporting Requirements:

Applicants will receive notice of SBIR/STTR Phase 0 award/declination via email. Any and all documentation (required documentation varies on the award sought) requested by Alabama Launchpad must be returned within 21 days of the request or the award will be forfeited.

Award recipients are required to provide Alabama Launchpad with project data for evaluation and reporting purposes. Further instructions for the preparation and submission of progress reports will be sent to the awardee within 30 days after the expiration of the award.

The Economic Development Partnership of Alabama Foundation reserves the right to prioritize funds to companies with less than $500,000 in Phase I and $1,000,000 in Phase II.

Failure to provide any requested materials for award or evaluation purposes will constitute default under this program. In such cases, Alabama Launchpad reserves the right to recover all previously expended funds issued under the related SBIR/STTR Phase 0 Award and the right to refuse any future SBIR/STTR Phase 0 proposals for consideration of funding.

Requirements for Accounting Compliance Awards

Applicant must be SBIR/STTR Phase I or Phase II award winner (notice of award proof must be provided).

Applicants must schedule an initial meeting with their preferred vendor of choice (see list of vendors) no later than 30 days after receiving the notification of the Phase 0 award. The determined accounting services must be completed within 90 days of the agreed upon start date based on the letter of acknowledgement.

The Phase 0 program will not cover additional costs outside of the determined services. A copy of the invoice to be reimbursed must be submitted to ALP, as a precondition to receiving the Phase 0 award funds. Applicants must notify Alabama Launchpad of award or decline of their Phase 0 award. Businesses can only receive Phase 0 funding once within the calendar year.

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Get Started on Those Positive Resolutions – Join TechBirmingham Before the End of 2014!

The mission of TechBirmingham is to strengthen and promote Birmingham’s technology ecosystem by highlighting tech companies in the region, helping to recruit and retain technologists and entrepreneurs, and providing technical training and education.

Get started on those resolutions now and become a member of TechBirmingham today!

Learn more about TechBirmingham…

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Tax Increase Prevention Act of 2014: Act NOW to Take Advantage of Extensions

During the late hours of Tuesday, December 16, 2014, Congress passed the Tax Increase Prevention Act of 2014. President Obama has indicated that he will sign the bill as soon as it reaches his desk. This bill extends through 2014 many tax incentives that expired on December 31, 2013.

Taxpayers will have to act quickly and may need to revisit year-end tax planning discussions that have already taken place.

Some of the more popular tax extenders affecting individuals and businesses are below.

Business Tax Extenders:

  • Bonus depreciation (50% bonus depreciation on qualified property)
  • Enhanced Code Section 179 expensing ($500,000 dollar limit with a $2 million overall investment limit)
  • Research Tax Credit
  • Work Opportunity Tax Credit
  • 100% Exclusion for gain on qualified small business stock

Individual Tax Extenders:

  • State and local sales tax deduction
  • Higher education deduction
  • Teacher’s classroom expense deduction
  • Mortgage debt exclusion
  • Mortgage insurance premium deduction
  • Charitable distributions from IRAs

Please also see the attached Tax Briefing for a more in-depth look at this bill.

Contact me at technology@bmss.com or call (205) 982-5500 if you have any questions regarding the opportunities presented or would like a more customized analysis of steps you or your business may take to minimize taxes and maximize overall tax opportunities.

At BMSS, we also take this opportunity to provide a holistic planning/strategy session for you and your business beyond just tax planning.  The BMSS Tax Planning Professionals are able to work with you on your unique situation.

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BMSS Sponsors Venture Club Luncheon – Join Us!

Barfield, Murphy, Shank & Smith is once again sponsoring the Birmingham Venture Club’s Annual Meeting.  The luncheon will be held on Thursday, December 11th at the Sheraton.

I invite my blog readers and friends to join us at our table.  Email me at technology@bmss.com if you would like to attend.

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Jack Knight to Retire from BMSS – Great Reminder to Consider Your Succession Planning

One of the members at BMSS is retiring this year (announcement at end).  This is a great reminder to always take into consideration your company’s succession planning.  If you have multiple owners you need to look into a buy-sell agreement.  If your family is involved – either children, grandchildren or spouse, there are numerous complex issues that arise.

Don’t let retirement or succession planning sneak up on you, let BMSS work with you to help you leave your legacy the way you intended it.

Jack Knight to Retire December 31, 2014

Barfield, Murphy, Shank & Smith is both proud and saddened to announce that A. Jackson (Jack) Knight, CPA, CVA will be retiring on December 31, 2014.

Jack joined Barfield, Murphy, Shank & Smith in 2000 and has over 40 years of public accounting experience. He served as the team leader for the Financial Services Practice Group focused on providing assurance and consulting services to credit unions, community banks and insurance carriers, as well as not-for-profit organizations and churches.

As a Certified Valuation Analyst (CVA), Jack performed business valuation services which are commonly required in conjunction with the purchase or sale of a business, succession planning, estate and gift taxes and initial public offerings.  He was a frequent speaker to credit unions and not-for-profit organizations on accounting and fraud prevention topics and was actively involved with the League of Southeastern Credit Unions.

Active in the community, Jack serves as Past-President for the Arc of Jefferson County and was named “2011 Volunteer of the Year” from the Arc of Alabama. He also serves as a Habitat for Humanity volunteer and participates in numerous ministries and global mission trips with Dawson Memorial Baptist Church.

Jack and his wife, Sallie, have two sons, David and John, and three grandchildren with a fourth grandchild being welcomed in early 2015.

 

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New Taxpayer Identification Program from Department of Revenue

The Alabama Department of Revenue (ADOR) has implemented a new program to protect taxpayers from criminals who use stolen information to file fraudulent tax returns. In 2013, over 1.6 million Alabamians were victims of identity theft and tax refund crimes.

Selected taxpayers will receive a letter from the ADOR asking them to complete a short confirmation quiz (either online or by phone). The request does not mean the individual is suspected of identity theft but is used to confirm the person’s identity. Once the quiz has been completed, the tax return will be processed.

If you receive a letter from the ADOR, please do not hesitate to contact me or one of our State & Local Tax professionals. Read a sample letter from the ADOR…

BMSS sister company, Abacus IT Solutions, can work with you to establish firewalls for your office computers and provide solutions such as network monitoring.

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Reminder About Tax on Holiday Online Purchases

If you’re one of the many shoppers who will be using your computer to “click” your way through your holiday gift list this year, don’t forget the tax. The Alabama Department of Revenue (ADOR) reminds Alabamians shopping the Internet, TV home-shopping networks, or catalog sales to report and pay use tax on their purchases if no tax has been collected by the online or catalog retailer.

Shoppers owe a 4% state use tax on their out-of-state purchases if no tax has been collected by the out-of-state seller. Local taxes also apply if you live in a city or county that levies a local sales or use tax.

If your purchase receipt shows that you have paid a sales tax to another state equal to the Alabama tax rate, you will not be taxed again.

The state use tax rate is 4%, the same as the state sales tax rate. Like the sales tax, the 4% use tax is primarily earmarked for the state’s Education Trust Fund. The use tax is not a new tax; it has been a part of the Alabama tax system as long as the state sales tax. The use tax is a complementary tax to the state sales tax and prevents Alabama merchants from being placed at an unfair competitive disadvantage to out-of-state online or catalog merchants who may not be required to collect tax on sales to Alabama residents.

Items subject to use tax are the same items that would be subject to sales tax if purchased in Alabama, such as computers, books, electronic equipment, toys, games, furniture, jewelry, clothing, etc.

Alabama taxpayers can pay their use tax at the time they file their Alabama individual income tax return by entering the amount of use tax owed on a line item included on the Alabama individual income tax return. By doing this, the taxpayer simply either increases their balance due or decreases their income tax refund by the amount of the use tax owed.

For more information concerning Alabama’s consumer use tax reporting requirements, contact the ADOR Sales and Use Tax Division.

If you have any questions, please one of our State & Local Tax Services professionals or call our office at (205) 982-5500.

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2014 Year-End Tax Planning

As 2014 draws to a close, year-end tax planning considerations should be starting to take shape.

We are still awaiting legislation regarding the possible renewal of fifty-seven individual and business tax provisions that expired at the end of 2013. These popular tax breaks were last extended by the American Taxpayer Relief Act of 2012. New legislation that would extend expired individual and business tax breaks has yet to be passed, making it more difficult to plan than in previous years. If negotiations break down between now and the end of the year, we may not have clarity until the new Congress convenes in January.

BMSS can help you navigate through the uncertainties of changing legislation and plan a year-end strategy that incorporates traditional and newer strategies to possibly help minimize your federal tax liability. We understand that the complexity of the law can make year-end tax planning overwhelming, but it is a necessity.

This letter covered some of the year-end planning opportunities and challenges for individuals and businesses regarding federal tax, but there are many more strategies that can possibly help reduce your tax liability over a period of time.  Also, state taxes should also be considered since the tax laws of many states do not follow the federal tax laws.

Based upon all that is new and all that expired in 2013, most businesses and individuals can benefit from a fresh assessment of how year-end tax planning can help reduce their overall tax liability for 2014.

Contact me at technology@bmss.com or (205) 982-5511 if you have any questions regarding the opportunities presented in this letter or would like a more customized analysis of steps you or your business may take to minimize taxes and maximize overall tax opportunities. At BMSS, we also take this opportunity to provide a holistic planning/strategy session for you and your business beyond just tax planning.

We look forward to serving you in the future and discussing your year-end planning.

Read the 2014 Year-End Tax Planning Letter...

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