COCPA NewsAccount - 2015 - September/October Issue by Colorado Society of Certified Public Accountants

NewsAccount Sept/Oct 2015

Colorado Society of CPAs

The Downside of Cheap Oil

Contents Features

Paving the Way for Service & Sustainability Check out the COCPA's five new strategic initiatives now under construction.

CPAs and the New CAM Rules

Surviving in the Cheap Oil Environment

Invest in the Profession's Future CPAs

New in 2015: Colorado Tax Law Changes

GASB 67 & 68 Reporting for Pension Plans

As a CPA, you may be subject to the new Community Association Manager licensing requirements.

With oil prices forecast to remain low, those in the oil and gas industry must plan for the long haul.

Consider supporting aspiring CPAs as a matching donor on Colorado Gives Day 2015.

The General Assembly passed five bills for refunds and credits — still no business personal property tax relief.

FPPA-affiliated old hire pension plans should no longer be reported as fiduciary funds.

Departments

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Chair Column Movers & Shakers Classifieds

Sept/Oct 2015 • www.cocpa.org •

Chair Column

NewsAccount A bi-monthly publication of the Colorado Society of Certified Public Accountants Vol. 61, No. 3 September | October 2015 Board of Directors Steven R. Corder Chair Mark T. Solomon, Vice Chair Tawnya R. Ramirez, Treasurer Sheila M. Balzer , Immediate Past Chair Mary E. Medley, Secretary Directors Victor A. Amaya, Craig A. Arfsten, Christine Benero, Kelly G. Boggs, Ann E. Hinkins, Dan W. Soukup Editorial Board Jack Allgood, Kay R. Dragon, Patrick A. Lytle, Georgia Z. Phillips, Lori Anne Reinwald, Laura J. Theiss, Barbara J. Tedesko, R. Stephen Van Meter, Michael D. West Mary E. Medley, President/CEO Elizabeth M. Julin, Deputy Director Krista Flynt, Editor/Publisher Natalie G. Rooney, Contributing Writer NewsAccount (ISSN #10899952) is published bimonthly by the Colorado Society of Certified Public Accountants, 7887 E. Belleview Ave., Suite 200, Englewood, CO 80111. NewsAccount is published in January, March, May, July, September, and November and reports information, news, and trends in the accounting profession. The Colorado Society of CPAs assumes no liability for readers’ business decisions in reference to advertisements or other information included in this publication. Membership dues include a $9.90 one-year subscription to NewsAccount. Periodical postage paid in Denver, CO, and additional mailing offices. POSTMASTER: Send address changes to NewsAccount, Colorado Society of Certified Public Accountants 7887 E. Belleview Ave., Suite 200 Englewood, CO 80111 Net press run = 8,550 copies; sales through dealers and carriers, street vendors, and counter sales = 0; paid or requested mail subscription = 8,450; free distribution by mail = 50; free distribution outside the mail = 0; total free distribution = 50; total distribution = 8,500; office use, leftovers, spoiled = 350; returns from news agents = 0; total sum = 8,850; percent paid and/or requested circulation = 99%.

303-773-2877 • 800-523-9082 Fax: 303-773-6344 • cpa-staff@cocpa.org NewsAccount is available online at www.cocpa.org.

• NewsAccount • Sept/Oct 2015

What’s On Your Minds BY STEVE R. CORDER, CPA, CGMA

his past summer, I had the privilege of visiting COCPA members across our beautiful state with CEO Mary Medley and Membership Development Coordinator Leslie O’Donnell. Day trips took us to Boulder, Loveland, Colorado Springs, Pueblo, and Sterling. Over four days in late July, we traveled to Aspen, Grand Junction, Montrose, Durango, and Alamosa. At each stop, I talked about what’s going on in the profession locally and nationally and heard what’s on members’ minds. Thanks to all of you who met with us. Each visit included the opportunity to talk one-on-one, and some of those informal conversations focused on succession planning issues – with young professionals. I wasn’t expecting that. But these individuals are big thinkers. They know they want to spend their lives in the profession, and they want to know how they can do that successfully. It’s gratifying to know that they’re around to stay. I’d like to give a special shout out to Kyle Green and John Holman who are resurrecting the San Luis Valley Chapter after more than 20 years of dormancy. They represent the future of our profession, and meeting them assures me that our profession is in good hands. They’re young, capable, and they really care. These young professionals are creating opportunities to bring people together and advance the profession – great to witness. Another common refrain I heard concerns the IRS’s poor customer service, especially during this past tax filing season. Many of you shared stories about long hold times, disconnected calls, or finally reaching someone only to find out the representative couldn’t answer your questions. During visits with Colorado members of Congress and their key staffers this past May in Washington, DC, we discussed these issues and emphasized the need for major reforms. What we’re fac-

ing now with the IRS reminds me of the challenges Colorado practitioners and taxpayers have faced with the Colorado Department of Revenue (CDOR) over the past few years. Thanks to concerted, continuing efforts between the Society and the Department, you have a problem resolution resource through your membership in the COCPA. The AICPA is working diligently to achieve significant improvements with the IRS, too. As I’ve traveled across Colorado, I’ve covered the following key issues.

State Legislation and Regulation The COCPA is ever-vigilant in protecting you from potential bad legislation. For example, in the 2015 legislative session, a bill that would have required CPAs to report elder abuse never made it through committee because your COCPA legislative team – especially member Pamela M. Feely, CPA – worked behind the scenes to keep CPAs from being scoped into the bill. Certainly protecting the elderly is a noble cause, however CPAs not only aren’t trained to identify elder abuse but also are constrained by the responsibility to

uphold confidentiality and accountant/client privilege.

Colorado State Board of Accountancy Colorado is one of the last licensing jurisdictions to implement the 150-hour rule, effective, July 1, 2015. It requires individuals to complete 150 semester hours (or the equivalent quarter hours) of college education, including a baccalaureate degree, before they can be licensed as a CPA. We continue to work with the State Board, Colorado colleges and universities, and others to assist candidates and their employers in understanding and meeting the new requirement.

At the AICPA Improving audit quality currently is the AICPA’s primary initiative. You may recall that the U.S. Department of Labor report on employee benefit plan audit deficiencies was released in May and showed an overall 39 percent failure rate in the audits examined. Immediately before the DOL report was published, the AICPA announced its six-point plan to improve audit quality. I have no doubt there are some growing pains and spirited discussions ahead, but it’s a wake-up call that if we’re going to do audits, we need to do them well.

I’ve been to three AICPA Council meetings and can confidently say that the COCPA is on the cutting edge of change relative to other state societies. Our next phase of development is moving from “nouns to verbs” – putting actions to our ideas. It is an exciting time, and I welcome your feedback on our efforts.

It Only Takes An Email If you need assistance with a Colorado Department of Revenue-related matter, email the following information to COCPA CEO Mary E. Medley at mmedley@ cocpa.org: • Taxpayer Name(s) • Colorado Account Number(s) or last four digits of the SSN(s) • Brief Summary of the Issue(s) • CDOR notice in pdf format, attached

• Whether you have a Power of Attorney on file or are the Third Party Designee on the return – if yes, you’ll be contacted directly. If no, the CDOR will contact you to let you know a representative will contact your client. Medley will forward your email and attachment(s) to the COCPA’s contact at the Department for assistance. Also, make note of the CDOR Tax Practitioner’s Helpline, 303-232-2419, which is reserved for tax professionals. Department staff answer calls, Monday through Friday, 8 am to 4:30 pm. As we move forward in these unpredictable times of rapid change and increasing complexity, remember the COCPA has your back. If you have a problem you can’t resolve or require a resource, please be in touch. s Email your comments and questions to Steve Corder at scorder@kcedenver.com.

COCPA Strategy Initiatives Since mid-January 2015, we’ve been working with Tom Hood, president and CEO of the Maryland Association of CPAs, and his colleagues to change the way the COCPA does business. We are redesigning our business model to ensure the COCPA will be the professional home for you and those who will follow you for years to come. See the related article on page 4 for more details. The five strategic themes are:

San Luis Valley - Alamosa

• Content management and delivery • Leadership development • Innovation culture and competency • Member and customer service • Sustainable revenue streams

Boulder/Longmont Sept/Oct 2015 • www.cocpa.org •

Strategic Planning

Paving the Way for Service and Sustainability In January 2015, the COCPA Board of Directors, staff, and member volunteers began a new strategic effort to position the COCPA – your professional home – for sustainability into the future. Maryland Association of CPAs President and CEO Tom Hood, CPA, CGMA, along with his colleagues facilitated a two-day retreat for the group, and follow-up planning days were held with COCPA staff in February and April. In May, the Board of Directors and 2020 Committee (the COCPA’s strategic planning group) met to review the staff’s work. And, on June 24, the Leadership Council weighed in, as well.

Five strategic themes have been identified, along with short-term priorities to be addressed in the next 12 to 18 months. Leadership Council and strategy retreat participants have been invited to serve on advisory groups, and work in all areas already is underway. Of course, you can count on receiving the member service you expect, day to day, as this work moves forward. And, you’re encouraged to be in touch with Chair Steve Corder, scorder@kcedenver. com, and CEO Mary Medley, mmedley@cocpa.org, with your thoughts, suggestions, and questions.

Content Management and Delivery – Deliver content CPAs

Innovation Culture and Competency – Anticipate and

Sustainable Revenue Streams – Create multiple revenue streams in

need in the ways they want.

respond to member needs in a continuously changing world by developing staff leadership and a culture of innovation.

order to be sustainable and grow, and to engage members.

• Explore new/diverse continuing professional education (CPE) delivery platforms. • Pursue regulatory advocacy for 10-15 minute CPE credit (nano-learning). • Create certificate programs. • Create an online library of CPE programs. • Convert webcasts to on-demand products. • Explore CPE bundled pricing and subscription models. • Develop the Colorado author/ instructor talent pool.

Leadership Development – Create sustainability for the profession and the COCPA through expanded leadership development initiatives. • Expand the LeadFit program to the 40+ age group. • Increase participation in LeadFit for young professionals. • Create the Young Professionals Council. • Explore LeadFit for non-CPAs.

• NewsAccount • Sept/Oct 2015

• Develop staff leadership. • Assess training needs. • Undertake succession planning to ensure continuity of knowledge. • Establish an innovation team, and foster an innovation culture. • Develop competitive intelligence.

Member/Customer Service – Improve and enhance the member/ customer experience through technology. • Address issues with the COCPA’s association management software (AMS) platform. • Address issues with the COCPA website. • Engage a consultant to assess needs and explore AMS alternatives. • Improve member touch points and personalization. • Improve new member communications. • Improve member profile data capture.

• Develop strategic partnerships with other professional organizations. • Cultivate sponsorship and affinity program partners. • Explore new membership models. • Add/expand membership categories for non-CPAs. • Explore auto-renewal of dues, multiyear dues, CPE subscription with dues.s

In Memoriam

Arthur F. Shenkin, CPA 1932-2015 On June 24, Grand Lake Yacht Club Commodore Jay O’Neall emailed the following message to members: It is with deep sorrow that I relate to you the passing of Art Shenkin on June 23rd. Art was a wonderful family man, a great friend, and tremendous sailor. Art and Gerre have been cherished and valued members of the Club for many years, and Art will be greatly missed. Art’s legacy will live on through the generous donation of his Flying Scot, the “La-hi-em,” to the Grand Lake Sailing Foundation’s Adaptive Sailing program. Our prayers are with Gerre and the family at this difficult time. COCPA president in 19711972, Art was the consummate CPA and an avid sailor, among many other passions. He and former COCPA Executive Director Gordon Scheer shared not only in the challenges and achievements of the Colorado accounting profession over decades but also in the joys of winning many a sailing competition together on Grand Lake, widely known as Colorado’s largest natural lake – and the world’s highest registered yacht club at 8,366 feet. Gordon put it this way: Art was one of Colorado’s outstanding tax specialists and was always willing to help others. A teacher, actor, and loyal friend, he was compassionate and generous. Art had a wide range of interests including sailing. As a member of the Grand Lake Yacht Club, he not only dreamed about it and worked diligently to achieve it but also accomplished his goal of winning the coveted Lipton Cup, the grand prize trophy awarded to the

Save the Date

winner of the Yacht Club’s annual week-long regatta – and donated more than 100 years ago by British tea merchant and yachtsman Sir Thomas J. Lipton. Everyone who knew Art remembers his seemingly constant, engaging smile and his commitment to healthy living through diet and exercise, long before it was in vogue. Born in Jersey City, NJ, Art grew up in The Bronx, NY. He met his future wife, Gerre Willard, while attending the University of Colorado, Boulder. After graduation, Art served in the U.S. Army as an accountant. Upon completing his military service, he began work as a CPA and founded Denver CPA firm Shenkin Kurtz Baker & Co. In addition to his leadership of the COCPA, Art served as president and treasurer of many other organizations. The Shenkins celebrated their love of the outdoors for more than 50 years at Grand Lake with their family and friends. Art is survived by Gerre, his wife of 61 years, their three daughters, 15 grandchildren, and 25 great-grandchildren. Contributions may be made to Ascent of Zefat, Israel, 383 Kingston Ave., Brooklyn, NY 11213. s

CPAs Make a Difference Celebration Nov. 11, 2015 Grand Hyatt Downtown 1750 Welton St., Denver Silent Auction to Benefit The Educational Foundation of the COCPA Each and every day, away from the headlines, in businesses large and small across Colorado, and in others’ lives, CPAs make a difference. Join your colleagues to celebrate the 2015 Everyday Heroes and Heroines, welcome the new CPAs, and enjoy nationally recognized "complete entertainer" Jolly Demis. Check him out at www.jollydemis.com.

Cost: $100/Person — $25 for New CPAs $1500/Supporter Table — $1000/Patron Table Contact: Susan Vachereau at svachereau@cocpa.org, 303-741-8612, or 800-523-9082, ext. 112, for details. Sponsored by

Sept/Oct 2015 • www.cocpa.org •

Colorado Department of Revenue

Survey Says: More Improvement Needed

hings have changed in three years, according to the results of a July/August 2015 email survey of COCPA members’ experiences with the Colorado Department of Revenue (CDOR). First conducted in summer 2012, the 2015 survey repeated the questions asked previously. While the numbers have improved in almost all areas, the general comments from the 332 who completed the 2015 survey echo the frustrations 320 respondents expressed in 2012. Here’s how the answers compare. • 78% said they or their clients had received notices from the Department in the past three months compared to 95% in 2012. • 36% said they’ve received more notices than in previous years compared to 68% in 2012. • 62% said the typical notice asked for additional documentation compared to 74% in 2012. • 42% said the documentation requested had been sent in for previous years compared to 62% in 2012. • 48% said the documentation requested had been sent in for the current year compared to 61% in 2012. • The top areas generating notices include estimated tax payments not applied (47% in 2015/53% in 2012); enterprise zone credits (37% in 2015/48% in 2012); W-2 credits incorrectly applied (24% in 2015/42% in 2012; and withholding paid to other states (24% in 2015/38% in 2012). “Other” generated responses from 27% compared to 41% in 2012. • 45% handle a notice-related issue less than once a week – the same percentage as in 2012 – with 23% handling a notice-related issue just once a week, down from 31% in 2012. • 22% noted it takes 2-3 months to resolve a specific taxpayer matter compared to 33% in 2012. 17% said resolution is accomplished within a month compared to 19% in 2012. One respondent captured the essence of

• NewsAccount • Sept/Oct 2015

many comments: “Difficult to answer because the CDOR often does not send a notice of resolution.” • 25% said their interactions with the CDOR since the previous tax season were “about the same – neutral” compared to 21% in 2012 while 21% said interaction was “about the same – negative” compared to 26% in 2012. 16% combined said their interactions were “about the same – positive” (9%) or “improved” (7%). • Mail continues to be the primary method of interaction at 41% — down significantly from 68% in 2012. And, 22% now use Revenue Online as the primary method compared to 7% in 2012. 16% use the call center. • 59% use Revenue Online generally – up from 51% in 2012. 25% do not use it compared to 46% in 2012.

servation easements, child care), taxes paid to other states, and estimated tax payments being applied correctly; frustration with the time needed to resolve issues; and the "cumbersome" Revenue Online system. Several respondents noted that the COCPA’s efforts have helped resolve specific problems. A few respondents are having a completely different experience from many: “The DOR has always been very helpful and pleasant to work with — keep up the great work!” Another gives props to Deputy Director of Taxation Paul Northrup for resolving issues quickly. The majority still want to see significant improvements in systems and service. The COCPA continues to work with the CDOR on practitioner issues, including those noted by survey respondents, through the joint task force created in May 2011. If you would like to participate in that effort, email COCPA CEO Mary E. Medley at mmedley@cocpa.org. Also, email Medley if you need assistance with a specific client matter. Include the taxpayer name, the Colorado Account Number or last four digits of the SSN, a brief description of the issue(s), and attach a pdf of any recent notice. She will forward your email to the COCPA’s contact at the Department for resolution.s

• 39% of respondents are partners or principals in a local CPA firm compared to 45% in 2012. 35% are sole practitioners – the same as in 2012. • 54% live in the Denver metropolitan area compared to 47% in 2012. 63% have worked in tax for 20 years or more compared to 68% in 2012. Issues cited in 2012 continue to be reflected in comments from 2015 respondents: notice language that’s “hard to understand,” “aggressive,” “incomplete,” and “unnecessarily negative in tone”; difficulty in reaching CDOR staff by phone; repeated problems with credits (enterprise zones, con-

CPA License Renewal Coming Soon If you're a licensed Colorado CPA, you're up for renewal in November 2015. The CPE reporting period is Jan. 1, 2014 to Dec. 31, 2015. Watch your inbox and mailbox for renewal details from the Colorado State Board of Accountancy.

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Practice Management

Talent A Key Concern For CPA Firms

nce again, CPA firms are feeling the pressure to hire and retain highquality professionals. That’s one of the most striking findings of the 2015 AICPA Private Companies Practice Section (PCPS) CPA Firm Top Issues Survey. Reviewing the results, it’s reasonable to conclude that factors such as steady demand for CPA services, continuing workload compression issues, and concerns about the ongoing retirement of Baby Boom-generation partners have motivated firms to focus on their most important assets. “Staffing has clearly reemerged as a significant challenge for firms,” says COCPA Chair Steven R. Corder, CPA, CGMA. “Firms didn’t emphasize staff recruitment and retention during the recession, as they focused their energies on client retention. Now, with firms returning to a growth environment, we’re seeing them face new opportunities and challenges.” Conducted every two years, the PCPS survey spotlights the main challenges facing practitioners. Responses are categorized by firm size, with top-five lists released for sole practitioners, firms with two to five, six to ten, 11 to 20, and 21 or more professionals. Overall, the survey offers a unique overview of firms’ most pressing concerns.

Putting People First All firms with two or more professionals identified finding quality talent as one of their top concerns, and all practices with six or more CPAs also cited staff retention as a challenge. Staffing had long been a top issue in previous surveys, but that changed in 2009, the first survey conducted after the 2008 economic recession. The uncertain economy put client retention and related issues on the top of the list for every firm size for subsequent years—until now. Practice growth, a concern during the recession, did remain an issue on some firms’ radar screens, cited as a top issue by sole practitioners and firms with 11 or more professionals.

• NewsAccount • Sept/Oct 2015

The Next Generation Succession planning is a top-five issue for firms of all sizes this year, even among sole practitioners, who had not cited this as a chief concern in recent surveys. With the Baby Boomers now ranging in age from 50 to 69, firms may feel greater incentive to focus on the transition to a new generation of leaders which, for firms with two or more professionals, will include finding and grooming staff members with leadership

The Top Five Issues Facing CPA Firms Sole Practitioners • Keeping up with changes and complexity of tax laws • Seasonality/workload compression • The effect on firms caused by new federal and state regulations • Succession planning • Bringing in new clients Firms with 2 to 5 Professionals • Finding qualified staff • Keeping up with changes and complexity of the tax laws • Succession planning • Seasonality/workload compression • The effect on firms caused by new federal and state regulations Firms with 6 to 10 Professionals • Finding qualified staff • Succession planning • Seasonality/workload compression • Retaining qualified staff • Aging of owners/partners Firms with 11 to 20 Professionals • Retaining qualified staff • Finding qualified staff • Succession planning • Bringing in new clients • Seasonality/workload compression Firms with 21 or More Professionals • Retaining qualified staff • Finding qualified staff • Owner/partner accountability/unity • Seasonality/workload compression • Bringing in new clients (tied with) • Succession planning

potential. For sole practitioners, this will include developing a practice continuation agreement with another practitioner, ensuring that clients would have somewhere to go if something were to happen to their CPA.

Workload and Complexity Another hot topic is seasonality/workload compression. While this has often been a top-five issue for smaller firms in past surveys, it made the list for firms of all sizes this year, perhaps reflecting ongoing challenges with frequent or late changes in tax laws and the late arrival of K-1s and Form 1099s. Service problems at the Internal Revenue Service (IRS) have exacerbated the situation. The survey findings suggest that seasonality has evolved from a fact of doing business into a significant challenge for firms all year long. And whether firms need more people to deal with workload compression or fear losing them because of the stress it causes, it’s reasonable to think that it fuels firms’ staffing worries. In addition, since part of the challenge of workload compression involves maintaining up-to-date knowledge of current regulations, it was not too surprising that firms with five or fewer professionals picked keeping up with changes and complexity of tax law changes as one of their top two issues. These firms also named the effect on firms caused by state and federal regulations to their top five lists.

Possible Solutions So many recurring, familiar challenges suggest it may be time to consider solutions firms might not have implemented previously such as shedding difficult clients or ones who don’t quite fit the firm’s practice mix or focusing on service opportunities that can be performed during current slow periods. And, with so many firms vying for top talent, working smarter with the professionals on hand may be the best answer. s

Regulatory Update

CPAs and the New CAM Rules: What You Need to Know

f you’re managing one or more Colorado community or homeowners associations, you may need to become licensed as a Community Association Manager (CAM) through the Colorado Division of Real Estate. Check out the following information, and consider whether the regulations and requirements apply to you.

The History In 2013, the Colorado General Assembly enacted HB 13-1277, which requires community association managers and executives of management companies who directly supervise managers to be licensed by the Colorado Division of Real Estate (DRE). In 2015, the General Assembly enacted HB 15-1343, concerning a streamlined process to simplify the licensure of persons who manage the affairs of common interest communities under the “Colorado Common Interest Ownership Act.” It also clarified the practices related to management of a common interest community “at the direction or on behalf of its executive board.” The 2015 legislation removed language previously adopted which could have required Colorado CPAs providing profes-

sional services to their clients to become licensed as a CAM because a CAM was defined, in part, as anyone “receiving, depositing, controlling, or disbursing funds of the common interest community, preparing budgets, or preparing other financial documents.” However, new language was added to the statute clarifying that “Community Association Management does not mean the performance of any clerical, ministerial, accounting, or maintenance function.”

The Outcome In early summer, COCPA member Carl B. Linnecke, CPA, Aspen, contacted Mary E. Medley, COCPA CEO, because he’d heard about the new licensing requirements and the rule-making hearing the Division of Real Estate had scheduled for July 22, 2015, in Denver. The question: Did Linnecke, as a properly licensed CPA, regulated by the Colorado State Board of Accountancy, by providing services to his community association clients, fall under the new CAM rules? COCPA legislative counsel Robert M. Ferm, Esq., and Daniel Furman, Esq., of Hall & Evans LLC, Denver, reached

out to the DRE informally to confirm the interpretation that CPAs, properly licensed and regulated by the Colorado State Board of Accountancy, would not be required to become licensed under the CAM rules as long as they are performing typical professional services, such as accounting services, for their community association clients. Medley also testified at the July 22 rulemaking hearing to confirm the same interpretation “on the record.” Division Director Marcia Waters agreed formally that as long as CPAs are performing services for their clients, they are not scoped into the new rules. A Cautionary Note: If you are, in fact, working as a community association manager – or you have staff who are serving in this capacity – the CAM rules likely will apply. You should review the requirements and determine whether you should be licensed. For complete details, go to the Colorado Division of Real Estate, www.colorado. gov/pacific/dora/node/97716. Also, check out the information available from the Community Associations Institute (CAI) at www.caionline.org/govt/managerlicensing/ Pages/Manager_CO.aspx. s

Learning to Lead: Introducing the 2015 Class Now in its fourth year, LeadFit is designed for CPAs and CPA-track accountants looking to grow professionally and personally. Facilitated by Lorrie Tietze, Interface Consulting, LLC, the program includes two full days and two half days of content delivered over five months, individual coaching, and networking events. The 2015 class already has worked on developing effective listening skills, relationship building, and conflict resolution. Participation is limited to maximize the educational experience. The 2015 LeadFit Class from lower left to upper right: Erin McCorkle, SM Energy; Stacey Roberts, Eide Bailly LLP; Claire Woodard, Grant Thornton LLP; Kristen Calder, Kundinger, Corder & Engle PC; Audra Dixon, Seigneur Gustafson LLP; Robbin Mekelburg, SM Energy; Mellissa Reimer, Eide Bailly LLP; Shelly Arbaugh, The Seff Group; Robin McCaffery, Trimble Weist Dye & Ezra; Tonya Devers, Smith, Brooks, Bolshoun & Co.; Jenny Mattie, Hein & Associates LLP; Diane West, SM Energy; Toby Clary, Soukup Bush & Associates PC; and Kathie Moeller, Ryan, Gunsauls & O’Donnell. For information on how you or a colleague can apply for the 2016 LeadFit program, contact Terry Cervi at tcervi@cocpa.org. s

Sept/Oct 2015 • www.cocpa.org •

Economy

Colorado’s Oil & Gas Industry: Surviving in the Cheap Oil Environment BY NATALIE ROONEY

f you own a car, oil at $50 a barrel or less is great news. However, it’s not such great news if you’re in the oil and gas industry. With oil prices forecast to remain low for the long term, oil and gas companies – and the service companies that support them – must make plans for the long haul. The international headlines tell the story: “Oil price: Shell says downturn could last ‘years’ as it slashes jobs” “U.S. crude settles 81 cents higher at $48.79 per barrel” “Oil prices have plunged nearly 20% this month” Colorado-specific news isn’t much different: “Texas company to sell 640,000 acres of Colorado oil and gas leases” “Oil and gas office closures continue in Denver” “Nine big Colorado oil, gas drillers reel in spending, steady production” The descent was swift. Crude plunged from $107 a barrel in June 2014 to as low as $43.46 in March 2015. The number of oil rigs in Colorado dropped by a third from September 2014 to the end of February 2015, from 76 down to 44. What is the impact for companies with drilling operations and offices in Colorado? “There’s no doubt that low prices benefit the consumer,” says Pat Lytle, CPA, director – financial planning and reporting at SM Energy Company (SME), Denver. SME doesn’t drill in Colorado, but with offices in the state and drilling operations in many other states, it’s feeling the effects. “Commodity prices are down significantly from just a year ago, resulting in cheaper energy, including cheaper prices at the pump for gasoline consumers,” Lytle says. “Our costs to explore and produce gas have started to come down, but we’re running fewer drilling rigs than last year, and we’re focused on cutting costs. We’re unsure about how long commodity prices will be in this depressed environment.”

• NewsAccount • Sept/Oct 2015

While many companies are laying off employees, SME has not to date. Lytle says the company is finding other ways to keep people for the long term “because we expect it to bounce back at some point.” Brent Jensen, CPA, vice president, finance, and treasurer for Whiting Petroleum Corporation and its subsidiary Whiting Oil and Gas Corporation in Denver, says it’s difficult to manage a business when you can’t set the price for the product you produce. “We don’t get to set our prices, and revenue can be subject to volatility because of swings in commodity pricing,” he says. “You’re producing the same quantity one year and then the next year, you’re producing the same quantity, but your revenue is cut in half. Those are the cards we’re dealt in a commodity industry.” Jensen says Whiting is working to rein in its capital expenditures. With its revenue base down 50%, cash flows are impacted by the same magnitude. In response, Whiting is laying down drilling rigs and slowing down its rate of drilling new wells. “We’ve also looked at our cost structure,” Jensen says, adding that it becomes necessary to exert leverage on suppliers, vendors, and service providers. “Everyone is well aware that the commodity price environment has changed,” he says. Whiting also has renegotiated contracts with vendors. “We ask them to reduce their costs and prices to us. If they don’t come down, we go to a competitor to get a better deal. They know they need to revisit their cost structures as well.” Quality over quantity is another costsaving strategy. Jensen says the company is focusing on its most profitable wells. “When you reduce the quantity of your drilling, you want to focus on the quality of your drilling,” he says. “You want to be drilling only your most profitable wells to reduce your fixed costs.” Jensen says most companies in Whiting’s sector are shoring up their balance sheets,

raising capital, and digging in for the long haul, taking the view that prices will be low for the next three to five years. Whiting reduced its rig count from more than 20 to 11. Hedging is also part of the equation. Jensen says most companies hedge 12 months out for 50% of their production. Every company has a different philosophy, but typically, 30% of production is hedged 12 to 24 months out. Only 10-15% of production is hedged three years out. The key zones are 12, 18, and 24 months. “It’s hard to be a fortune teller beyond that, and hedge contracts can impact your revenue stream,” Jensen explains. “You don’t want to lock in too far in advance.” At $90-$100/barrel, Jensen says there is more margin for error. “At fifty to sixty dollars a barrel, you have to be more vigilant. There’s no margin for error,” he says. “There’s an increased focus and emphasis on the hedging program at those prices.” Lytle says the industry catchphrase right now is “lower for longer. We’ve slowed down drilling, and we should see production slow and less commodity supply coming in,” he says. “We thought we’d see it by now but haven’t seen it yet. There is a lot of uncertainty.”

The Trickle-Down Effect Local, state, and federal governments have been happy beneficiaries of increased drilling operations over the course of the last three to four years. “Drilling happens on federal or state lands so governments had ownership in these wells,” Lytle explains. “They benefitted from the tax revenues they collected. Now, governments will be impacted by lower revenue as a result of decreasing commodity costs.” Other industries impacted by the domino effect of lower commodity prices include vendors which are rig contractors and other

service providers. “We’re doing less work and need fewer service providers,” Lytle says. “We’ve cut our spending which impacts the government and other businesses that support our activities.” Eric Lake, CPA, tax partner at Holben Hay Lake Balzer CPAs LLC, Denver, says that with the drop in prices and drilling, all service companies are being affected, right down to the trucks that bring water and fluid to drilling sites. “Those servicing companies have been significantly hurt,” he says.

Taking Advantage of Technology One way companies are creating efficiencies is through the use of technology. Old methods required three to four days to move a rig to a new location. Now, Lytle describes “walking rigs” which have the hydraulics and technology for the rig to “walk” to a new location. This cuts costs and minimizes the environmental impact by allowing a rig to drill multiple wells from one area. In addition, drilling used to be a vertical only operation. Drill down, move over, drill down, move over, etc. “Now we can drill many wells from one pad,” Lytle says. “We drill down a mile and then go horizontally for a mile in all different directions. We’re not disturbing as much land, and it’s more cost and time efficient because we’re not moving the rig.”

“We can’t necessarily help clients with regulatory matters, but we keep our ears open to figure out what’s going on so we can discuss the issues with them and what the monetary and tax effects will be as a result of the change,” Lake says. In the short term, clients are worried about oil prices. “They’re worried about keeping their ability to drill wells or produce wells,” Lake says. “With lower prices, they have to reduce personnel and equipment. It’s a prime time for larger oil companies to come in and buy producing wells. There is a lot of consolidation on the horizon.” The smart companies are those which started hedging their oil 12 to 18 months ago, Lake says. Until now, they’ve been getting higher prices because of their hedged contracts. But now, these companies are starting to see the downside of lower oil prices. Rowena Cipriano-Reyes, CPA, who leads PricewaterhouseCoopers LLP’s oil and gas assurance practice in the Rockies (Denver and Salt Lake City combined), says that in the short term, the firm has been focusing on how to help companies manage through the difficult pricing environment. For the medium- and long-term, it’s about capital efficiency, making smart decisions, and examining which proper-

ties to develop. “Is the organization ready to have the foresight and agility?” she asks. “Companies are being forced to do more due diligence in how they prioritize. You have to focus on areas that are more economical with these low prices. The lower the costs, the better off the clients are.” The attention is on research and the ground. Are clients putting in the right technology and being cost effective? Cipriano-Reyes says she has seen significant property and goodwill impairments taken as a result of lower prices. “It will continue to happen,” she adds. And while merger and acquisition activity is down, there are still a lot of ongoing discussions. “Just as in any significant decline in prices, there are opportunities for deals.” In Colorado, M&A’s are a mixed bag. “There are some mega deals and also foreign deals,” she says. “Colorado is very diverse in terms of company size. We’re seeing multibillion dollar deals all the way down to below fifty million.” “The million dollar question is, how long will this pricing last?” Cipriano-Reyes says. “We’re trying to be proactive to plan, deploy, and operate in this weak pricing environment. At the end of the day, most clients are going through a portfolio analysis to see what they need to do to maximize their asset performance.” s

What Oil & Gas Clients Are Doing Lake is watching industry developments carefully to advise his oil and gas clients. “From a tax perspective, there is always the issue of whether Congress will change the laws to make it harder for oil companies to deduct drilling costs,” he says. “There’s a lot of concern that companies will sink all this money and then the incentives to drill will dry up. It changes the economics of our clients’ programs.” A fracking ban is one example. Lake says clients are allowed to drill, but not frack, when it’s fracking that makes a lot of the wells economical. Sept/Oct 2015 • www.cocpa.org •

Accounting Careers

Educational Foundation Awards $95,000 in Accounting Scholarships

hanks to the generosity of those in the Colorado CPA profession, the path to an accounting degree will be much easier for 38 Colorado students this fall. Selected by the trustees of the Educational Foundation of the COCPA from among 73 eligible applicants at 12 Colorado colleges and universities, each will receive a $2,500 scholarship. Congratulations to these deserving recipients: Anton Collins Mitchell LLP Scholarship – Reanna Hodgin, University of Northern Colorado Eide Bailly LLP Scholarship – Zachary Lynch, Regis University EKS&H LLLP Scholarships – Ziba Cooper, University of Colorado Denver; Patricia Dennis, Regis University; Christa Silverlake, Regis University; Sara Swaney, Colorado Mesa University; Jenna Vandenbark, University of Northern Colorado Ernst & Young LLP Scholarship – Anne Helene Cagney, Metropolitan State University of Denver Crowe GHP Horwath P.C. Scholarship – Quyen Huynh, Regis University Gordon Scheer Scholarship – Rachel Firmin, University of Denver Hein & Associates LLP Scholarship – Samuel Hauschulz, University of Northern Colorado Holben Hay Lake Balzer CPAs LLC Scholarship – Gage Crispe, University of Denver Hugh C. Braly Scholarship – Christopher Battraw, Metropolitan State University of Denver KPMG LLP Scholarship – Jeffrey Cotton, Colorado State University Mark J. Smith Scholarships – Janet D’Aigle, DeVry University; Sarahbeth Rivera, Colorado Mesa University; Nallely Saenz, Adams State University Otto and Betty Butterly Scholarship – James Sanchez, University of Denver

• NewsAccount • Sept/Oct 2015

Past Presidents Scholarship – Travis Boyd, Metropolitan State University PricewaterhouseCoopers LLP Scholarship – Margot Newell, University of Denver RubinBrown Charitable Foundation Scholarship – Michael Montoya, Metropolitan State University of Denver Weatherwax & Associates, PC Scholarship – Mackenzi Steinert, University of Denver General Scholarships – Polina Avdonina, University of Colorado Denver; Tanner Bedsaul, University of Northern Colorado; Wesley Clayton, University of Colorado Denver; William Corey, Colorado Mesa University; Taylor Crowther, Adams State University; Quinn Foster, University of Denver; Tyler Gastineau, Colorado Mesa University; Joshua Hardin, Colorado Mesa University; Shan Jiang, University of Denver; My Thi Tra Mai, Metropolitan State University of Denver; Edit Maszlaver, Metropolitan State University of Denver; Andrew McClaskey, University of Denver; Rachael McKinney, University of Denver; Rachel Meek, University of Denver; Tyler Olson, Colorado State University; Dillon Washburn, Fort Lewis College s

Educational Foundation of the COCPA 2015-2016 Board of Trustees William C. Sanden, CPA, President SSA PC, Colorado Springs Stephanie E. Hernandez, CPA Vice President, KPMG LLP, Denver Alicia J. Gelinas, CPA, Treasurer WorldVenture, Littleton David M. Dirks, CPA, Past President Metropolitan State University of Denver, Denver Kristine Brands, CMA Regis University, Denver Brenda M. Clarke, CPA Seigneur Gustafson LLP, Lakewood Amy E. King, CPA The Business Manager LLC, Greenwood Village Sharon S. Lassar, PhD University of Denver, Denver G. Suzanne Lay, CPA Colorado Mesa University Allen W. McConnell, CPA University of Northern Colorado, Greeley Mary E. Medley Colorado Society of CPAs, Englewood Matthew O. Rolland, CPA Hein & Associates LLP, Denver Carol J. Cameron, CPA, CGMA Executive Director Colorado Society of CPAs, Englewood

Foundation Launches Matching Challenge BY CAROL J. CAMERON, CPA, CGMA

undreds of Colorado CPAs and friends of the profession give back to the profession every year. When they do, they want to know they made a difference. To that end, the Educational Foundation of the COCPA invites you to contribute to the Foundation’s support of accounting students through the 2015 Matching Challenge – a reprise of its wildly successful, and deeply rewarding, 2014 Colorado Gives Day campaign.

Colorado Gives Day Opportunity The Foundation participates in Colorado Gives Day, www.coloradogives.org, an annual statewide day of philanthropy through online giving. On Colorado Gives Day last year, donors contributed $43,125 to provide scholarships for Colorado accounting students. Five donors matched the first $5,000 in contributions, dollar for dollar.

Matching Donors Sought The Matching Challenge was inspired by a winning formula that brought CPAs together in 2014 to support Colorado accounting students in a big way. Those who pledged to match the first $5,000 raised on Colorado Gives Day incentivized others to take advantage of the match to leverage their own donations. The combination of large and small gifts added up. Regular donations increased five-fold with the promise of such a rich match, and as a result, every matching dollar pledged was collected. Now, the Foundation’s Trustees seek donors who pledge to match the first $5,000 raised on Colorado Gives Day 2015, once again creating an incentive for others to give and take advantage of the match. These donors can pledge their $5,000 incentive

beyond, contact Foundation Executive Director Carol J. Cameron at ccameron@ cocpa.org, 303-741-8624, or 800-5239082, ext. 124.

match for 2015 or plan ahead and commit to a future year. The Foundation’s philosophy: More firms and individuals can participate at the $5,000 level if they are only called upon every five or ten years. Rather than rely on the same donors every year, the Foundation wants to create a giving model that encourages more leaders in the Colorado CPA profession to share the investment in the CPAs of the future.

Scholarship Naming Privilege As a matching donor, you gain the satisfaction of knowing you made a difference for accounting students and inspired others to do the same. Not only will you be recognized as a matching donor on Colorado Gives Day, but also you will earn naming rights for one of the Foundation’s scholarships the following year. This special opportunity to name a scholarship for a business, an individual, or as a memorial, can be a gratifying legacy to the profession. The successful campaign of 2014 enabled the Foundation to award a record number of scholarships in 2015. In recognition of the generous matching donors who made such an impact by inspiring others, five 2015 scholarships were named in honor of Mark J. Smith, EKS&H LLLP, the RubinBrown Charitable Foundation, Holben Hay Lake Balzer CPAs LLC, and Weatherwax & Associates, PC. If you are interested in giving back to the profession as an Educational Foundation matching donor in December 2015 or

Donating to the Educational Foundation Contributions to the Educational Foundation of the COCPA can be made in cash, stock, securities, or real estate – online at www.cocpa.org, by check payable to Educational Foundation of the COCPA, and by credit card. You also can support the Foundation through the year-round Colorado Gives program at www.coloradogives.org, where you can make a one-time donation anytime or set up a recurring donation of $10 or more. Note that this year, Colorado Gives Day, when your gift is maximized through matching funds, is Dec. 8, 2015. A permanent scholarship may be established through a contribution of $50,000 or more and named for an individual, business, or as a memorial. It may be accomplished through a single gift or the pooling of many gifts, and it may be structured as a multiyear pledge. The first named scholarship is awarded when the pledge is completed. You may make a bequest as part of your estate plan, as well. For details and suggested language, contact Foundation Executive Director Carol J. Cameron at ccameron@cocpa.org, 303-741-8624, or 800-523-9082, ext. 124. For scholarship information and applications, go to www.cocpa.org or contact Amy Czulada at aczulada@cocpa.org, 303-7418613, or 800-523-9082, ext. 113. The Educational Foundation of the Colorado Society of Certified Public Accountants is a 501(c)(3) not-for-profit corporation, and contributions are tax deductible.s

Sept/Oct 2015 • www.cocpa.org •

State Taxation

Five Refund/Credit Opportunities Created and Another Ballot Initiative Ahead BY BRUCE M. NELSON, MA, CPA

or those of you who believe tax is everything (you know who you are), Colorado’s 2015 legislative session produced several disappointments. My favorite was the failure to recommend an amendment to the Colorado constitution to require all Colorado sales tax jurisdictions to use the same definitions for sales and use tax. The recommendation didn’t require everyone to tax or exempt the same things, simply to use the same definitions in doing so. Alas, it was too much to ask. In any case, despite the introduction of 682 bills, abundant media attention, controversy, and late-night committee meetings, very little tax legislation was enacted – and some of it narrow in application. Nevertheless, five bills passed that deserve your attention. HB 15-1180 — Sales and Use Tax Refund for Medical and Clean Technology reinstates and amends an expired sales and use tax refund for clean technology and medical device firms with 35 or fewer employees, headquartered in Colorado, and which conduct research and development in either clean or medical technology. The prior refund provision was available only when the state’s general fund revenues increased by at least 6%. That limitation was removed, and a company need not be headquartered in Colorado if more than 50% of its employees are in Colorado. The refund is for sales taxes paid on tangible personal property used in conducting research and development in either clean technology or medical technology and is limited to $50,000 per taxpayer per year. The refund is not limited to sales tax purchases on items such as equipment or machinery. It applies to any purchases of tangible personal property used in research and development including supplies, software, and even books and manuals. The legislation expands “clean technology” to include products and technologies that not only are used in renewable energy development and generation but also in the “extraction, collection, storage, distribution, production, or consumption of energy from any type of source.” "Medical technology” includes “therapeutic or diagnostic machines or tools used to improve” either human or animal health. If you or your clients work in this area, plan to spend some time during tax season 2016 on this because the refund must be claimed between January 1 and April 1 in the year following when the sales taxes were paid. HB 15-1219 — Enterprise Zone Investment Tax Credit (ITC) for Renewable Energy allows a taxpayer that has a renewable energy project in an Enterprise Zone an option to receive a refund of the credit. The amount of the refund is equal to 80 cents for every one dollar of ITC credit and is capped at $750,000 per tax year and taxpayer. The refund is available only for renewable energy investments completed on or after January 1, 2015.

• NewsAccount • Sept/Oct 2015

The legislation also expanded the definition of a renewable energy project to include any project that generates electricity that an electric utility may be able to use to meet the state’s renewable energy standard. Why would anyone want to give up 20% of the credit for cash in hand? At least two reasons: First, a company with no taxable income, which is running a loss, may not be able to use its credit immediately. Second, cash in hand may be more attractive given the credit’s annual limitation. HB 15-1366 — Expanded Job Growth Tax Credit: Colorado enacted its Job Growth Tax Incentive program in 2009. That legislation provided an income tax credit of up to 50% of a taxpayer’s FICA tax paid on the taxpayer’s net job growth and targeted companies either relocating to or expanding in Colorado. The 2015 legislation provides a rather narrow addition to the incentive by reducing the net growth in jobs from 20 to five for taxpayers who enter into a partnership with a state institution of higher education. A “qualified partnership” with a state institution of higher education means an agreement that aligns or furthers the academic mission of the institution and allows the taxpayer to use the institution’s “tangible intellectual property,” “academic knowledge,” “ expert skills,” and “any specialized equipment owned or developed” by the institution. In addition, to qualify for the incentive, the new jobs must be “on or within one mile” of the institution’s campus or other property. Albeit a narrow addition, it’s worth closer examination by those located near property owned by state institutions of higher education. SB 15-206 — Conservation Easement Credit Changes: The Colorado conservation easement credit program has been a benefit to some, a nightmare to others, and a source of ongoing controversy and litigation. Not surprisingly, then, the state legislature makes annual tweaks to the program. This year was no different. In the past, the credit was limited to 50% of the fair market value of the donated property with a cap of $375,000 for each donation. The 2015 legislation increases the credit to 75% of the first $100,000 of the donation’s fair market value and 50% of the balance. In

addition, the maximum credit that may be awarded to a donor for a single donation is increased to $1,500,000. The bill does not affect the annual cap, currently set at $45 million, on the total amount of annual credits that may be awarded under the program. According to the Colorado Department of Regulatory Agencies, total claims thus far are well below the annual cap. SB 15-282 — Jump Start Zones: Rural Colorado community and county representatives often complain they are neglected and overlooked when it comes to economic incentives and development. It is not clear whether the extremely narrow scope of SB 282 will do much to assuage those feelings. The legislation provides tax benefits to approved new businesses that locate inside a rural jump start zone and establish a relationship with a state institution of higher education, junior college, or an area vocational school. A rural jump start zone is an area within a distressed county that has a population under 250,000; a per capita income lower than the statewide average; unemployment higher than the state average; and has experienced a net loss of people of workforce age over the past five years. A new business is defined as one that is not operating in Colorado at the time of application; is not moving from some other area in the state to the zone; hires at least five new employees; exports its goods and services outside the distressed county; and is not similar to any current operations in Colorado nor competes with the core function of a business already doing business in the state. The Colorado Economic Development Commission is going to recognize only three zones for 2016. If you meet all the requirements and the Commission approves your application, you can receive income tax credits offsetting 100% of your income tax liability, sales and use tax refunds of purchases of tangible personal property used in the zone, and incentives including refunds, exemptions, or entire elimination of your business personal property taxes. The program is similar to one in the state of New York. While the hurdles to qualify are significant, the bill’s sponsors believe it can make a difference to Colorado rural areas. What did not pass this year: The Colorado General Assembly said no to sales and use tax refunds for data centers, recycling, and composting equipment, and an expansion of the state income tax credit for business personal property taxes. What’s coming in November: Once again, marijuana will be on the ballot, this time on what to do with the TABOR surplus. A “Yes” vote on Proposition BB will allow the state to keep the excess of $58 million in tax revenue, $40 million of which will go to schools and the balance to a variety of other areas including law enforcement, substance abuse and prevention, and youth services. A “No” vote means that $25 million will be refunded to taxpayers, about $20 million to marijuana cultivators, and the remainder through a temporary sales tax rate reduction on marijuana retail sales. Separate from the ballot issue, but because of the complexities of Colorado government funding and finance, the state’s 10% marijuana tax will be suspended for one day, September 16, an official tax holiday. s Bruce M. Nelson, MA, CPA, is a director in the EKS&H LLLP SALT group. Contact him at bnelson@eksh.com.

Mandated 1095 reporting is here. Are you ready?

HofgardBenefits has been a sponsored vendor and advisor to the COCPA for over 30 years. Our president, Jim Marsh, has been a featured speaker regarding health care legislation at several COCPA events. Our expertise has been hard earned, and we are eager to serve you. For educational resources or questions regarding the 1095 forms contact us at 303‐442‐1000 or email us at jmarsh@hofgard.com.

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Sept/Oct 2015 • www.cocpa.org •

Income and Sales Taxes

The Colorado Tax Environment For Legal Marijuana BY JIM MARTY, CPA, ABV, AND MARC A. RUBIN, CPA, CGMA

n 2012, Colorado became the first state to legalize adult use of marijuana with the passage of Amendment 64. The Centennial State has been in unchartered territory since then as regulators, legislators, and elected officials at all levels work through how to tax and control this product. This article looks at where Colorado stands today from the tax perspective.

A Brief History First, a little history: In November 2000, Colorado voters passed Amendment 20 to the state constitution allowing for medical marijuana use by patients suffering from certain serious illnesses. Subsequently, a few caregivers grew medical cannabis for a limited number of patients, but not much else happened. No retail establishments opened, and there were no large scale grow operations for fear of raids by federal and local law enforcement. Then in 2009 things changed. Retail stores began opening, and large cultivation operations started. In 2009, U.S. Deputy Attorney General David W. Ogden issued what is now known as the “Ogden Memo” stating the federal government would make a low enforcement priority marijuana businesses that complied with state law and followed eight other guidelines. Colorado has been on a wild ride ever since. In June 2010, the Colorado General Assembly passed and Governor John Hickenlooper signed into law HB 10-1284, comprehensive regulations for the medical marijuana industry. Notable among these regulations was the requirement that a medical marijuana business grow 70% of its own cannabis. Also, local communities could ban retail shops and grow operations if they chose. By September 2010, there were 736 dispensaries growing and selling marijuana across Colorado, with over 550 concentrated in the Denver-Boulder corridor.

• NewsAccount • Sept/Oct 2015

Legal Marijuana Sales and IRS Code Section 280E While an in-depth discussion of Sec. 280E and how it affects a cannabis business is beyond the scope of this article, in brief, under this code section, only the cost of goods sold is deductible. All retail costs such as retail rent, labor, and advertising are not. For a concise reading on the IRS’s current positon on Sec. 280E, see the IRS Chief Counsel’s Memorandum of January 2015. Understanding the IRS’s position on Sec. 280E is critical to understanding state taxation of dispensaries since many states, including Colorado, start with federal taxable income as a base for calculating state income tax.

Colorado Income Taxes Prior to tax year 2014, Sec. 280E indirectly applied in Colorado since calculation of taxable income in Colorado started with the federal amount. Colorado state auditors had no choice but to follow the results of IRS audits in applying Sec. 280E. Without a legislative fix, legal marijuana businesses faced a twofold problem of having deductions for ordinary and necessary business expenses disallowed at both the federal and state levels. Thus, since 2002, when medical marijuana began, through 2013, Colorado cannabis businesses were taxed on the higher federal amount. This situation was resolved in 2013 when Governor Hickenlooper signed into law HB 13-1042 which allows for any Sec. 280E deductions denied at the federal level to be taken into account when computing Colorado taxable income, effective for tax years beginning in 2014. A new line was added to the Colorado Individual Tax Form 104 to take the federally disallowed deductions. Considerable documentation must be submitted including pro forma federal tax returns showing what they would look like if

the deductions were allowed. An explanation can be found in the Colorado Income Tax Filing Guide for Line 16 of Form 104.

Colorado Sales Taxes To understand the Colorado sales tax landscape, the first thing to understand is that Colorado is a home rule state. This adds a level of complexity in the administration of local sales tax. Home rule cities administer and collect their own sales tax. In addition to the state tax, currently 2.9%, all cities and counties can levy their own local tax. Taxes are remitted directly to the home-rule jurisdiction. For cities and counties that choose not to be home rule, their sales tax is administered by the state. When 700+ dispensaries opened between 2009 and 2010, debate ensued over whether or not medical marijuana was subject to sales tax. In Colorado, prescriptions drugs are not subject to sales tax, but nutritional supplements such as vitamins are. It was determined at the regulatory level that since medical use is a doctor’s recommendation, not a prescription, it was more like a nutritional supplement. For the state and the cities and towns that participated in the medical marijuana regulatory framework, the sales tax of medical marijuana provided an immediate revenue stream.

Medical Marijuana Sale Taxes As noted, since 2009, all medical marijuana sales in Colorado have been subject to state and local sales taxes. The state sales tax is applied across the state where medical marijuana is sold. Colorado cities and counties can add their own local sales tax. In Denver, the sales tax is calculated as follows: • Colorado sales tax — 2.9% • Regional Transportation District tax (RTD) — 1.0% • Scientific and Cultural Facilities District tax (SCFD) — 0.1%

• City and County of Denver sales tax — 3.65% • Total sales tax — 7.65% Similar local sales taxes are applied on medical marijuana sales throughout the state. Because local communities can ban dispensaries, not all receive local tax revenue since no medical marijuana is sold in them. However, these communities still benefit from the state sales tax through various tax sharing programs at the state level as well as the overall increase in state tax revenues. From July 1, 2011 (the start of the state’s fiscal year) through April 2015, Colorado collected over $35 million in state sales tax revenue from the sale of medical marijuana. The County of Denver collected roughly 46% of that amount – totaling $16 million.

ijuana sales (based on 12.9% combined state and retail). The City and County of Denver, as in medical marijuana, accounted for roughly 45% of that amount – over $21.5 million. In less than one year, Colorado has collected more sales tax revenue on retail marijuana than medical marijuana has generated since 2011. The additional 10% sales tax levy on recreational marijuana has little effect on reducing demand.

Retail Marijuana Taxes Amendment 64 established sales and excise taxes on recreational (also known as adult use) marijuana transactions, formerly called retail marijuana. In Colorado, statewide, an additional sales tax of 10% was applied on retail transactions. Of this amount, 15% (1.5%) is divided among local governments based on the amounts collected within the boundaries of the towns or cities. Again, local cities and counties could add their own sales tax. The total sales tax applied on retail marijuana sales in Denver is 21.15%, applied as follows: • Colorado sales tax — 2.9% • Regional Transportation District tax (RTD) — 1.0% • Scientific and Cultural Facilities District tax (SCFD) — 0.1% • Colorado retail marijuana sales tax — 10% (8% starting in 2017) • City and County of Denver retail marijuana sales tax — 7.15% • Total retail marijuana sales tax in Denver — 21.15% From July 1, 2014 through April 2015, Colorado collected almost $48 million in state sales tax revenue from recreational mar-

• Retail Trim: $370 x 15% • Retail Immature Plant (Clone): $8 each Since July 1, 2014, Colorado has collected over $20 million in retail excise taxes.

Recent Colorado Sales Tax Collections Of the 64 counties in Colorado, 35 reporting medical marijuana sales provided the state with sales tax collections of $895,205 for April 2015. For recreational marijuana, 32 counties reporting sales provided the state with sales tax collections of $4,902,771. Annualized, Colorado could expect to generate almost $70 million dollars in sales tax revenue. This figure excludes the 1.5% of the retail marijuana tax that is not retained by the state and the excise tax. Also not included is the sales tax revenue generated at the county and municipal levels.

Retail Marijuana Excise Tax

Tax Revenue Outlook

Included in Amendment 64 was a 15% excise tax imposed on the producer of cannabis for retail sale. The first $40 million collected by this tax is earmarked for school construction. This tax became effective on Jan. 1, 2014, at the same time as legal retail sales of marijuana to adults 21 and over. In concept, the excise tax is simple: a 15% tax imposed on the transfer or sale of each pound of marijuana as it moves from grower to retailer. However, much of Colorado grow operations still operate as an integrated model where a single business both grows and sells cannabis. The legislature addressed this issue, and therefore state law applies the excise tax on the movement of marijuana (per pound) from the grow facility to the retail location even though no actual sale took place. The Colorado Department of Revenue sets the approximate wholesale value of marijuana twice a year, with rates for July 1, 2015 through Dec. 31, 2015 as follows:

If you divide the just over $2 million combined recreational and medical marijuana base sales tax collected for the month of April by the base sales tax rate of 2.9%, the result indicates sales of both medical and recreational marijuana for that month of $70 million. That number annualized is $862 million per year. Thus, the Colorado marijuana industry is approaching sales of $1 billion per year with related tax revenue and fees of well over $100 million annually.s Jim Marty, CPA, ABV, is Managing Partner of Bridge West CPAs and Consultants, LLC, jmarty@bridgewestcpas.com. Marc A. Rubin, CPA, CGMA, is a partner in Bridge West CPAs and Consultants, LLC and Managing Member of M.A. Rubin CPA, PLLC, in Florida. Contact him at mrubin@ bridgewestcpas.com or mr@rubin-cpa.com.

• Retail Flower Rate: $1,868 x 15%

CGMA

Factors That Set Apart Top-Performing Finance Teams

BY NEIL AMATO

he finance functions of top-performing organizations tend to be more costefficient than their peers and spend more time on analysis instead of data gathering. That’s one key conclusion resulting from PricewaterhouseCoopers LLP’s (PwC) annual finance function benchmarking survey. The global report showed that toptier finance functions are faster at delivering budgets and have the time to provide sharper insight. The top-quartile companies also prioritize people management, business partnering, and generating a return on technology investment. These points of emphasis represent the expanding role of finance in general and of CFOs in particular. Finance functions that don’t adapt quickly to rapid business changes, according to the report, could hold back organizations seeking growth. PwC, which surveyed more than 400 companies around the world, listed four factors that set apart top-performing finance functions: Cost efficiency: Through automation and more efficient use of capacity, shared services, or outsourcing, the cost of finance as a percentage of revenue is 40% lower among finance functions in top-quartile companies. Faster turnaround: Budgets are delivered earlier, unwieldy IT infrastructure is being replaced by more adaptable cloud-based platforms, and new systems are cheaper and easier to use. The report reveals that the budget cycle has dropped to 80 days for top-quartile companies, from 90 days the previous year. Companies below the top quartile also report a faster budget cycle than in previous years. Sharper insight: The proportion of finance staff in business partnering roles has remained steady, and those professionals are spending more time on analysis instead of data gathering. The percentage of time spent on analysis is 60%, compared with 47% the previous year, for top-quartile companies.

• NewsAccount • Sept/Oct 2015

This increase comes despite the percentage of finance employees in business partnering roles remaining steady. Leaner operations: Top performers see value in taking a lean approach to processes, looking beyond systems to foster better understanding of user needs and to reduce waste in the form of errors or duplicative work. Some organizations still spend too much time on billing and management reporting, for example – two areas that could be helped greatly by automation. The report listed six key goals finance teams must consider to remain relevant: • Excel at seeing the future.

• Determine how finance employees’ qualifications and experience need to change. • Have a diversity of people and ideas to understand, and access talent from, growth markets.

• Build relevant valuation assumptions that can measure social, environmental, and financial impact.

Carol Sawdye, CPA, and CFO of PwC U.S., says in the report that the challenges of fast-changing demographics and business technology are ones that CFOs must address. “It is critical that CFOs collaborate with HR and IT,” she notes. “The CFO needs to play a proactive role to push forward the business model and technology changes that are going to be required to increase operational effectiveness. CFOs need to push their C-suite colleagues by helping them see the financial impact of these accelerating demographic and technology trends.” s

• Get rid of legacy systems or other baggage that slows the ability to respond to change.

Neil Amato is a CGMA Magazine senior editor. Contact him at namato@aicpa.org.

• Have the systems, people, and decisionmaking influence to judge how business models (rather than budgets only) might need to change.

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GASB 67 & 68

Colorado Guidance on Pension Plan Reporting BY NATALIE ROONEY

n June 2012, the Governmental Accounting Standards Board (GASB) approved a pair of related statements which changed substantially the accounting and reporting procedures by pension plans and state and local governments which participate in such plans. Statement No. 67, Financial Reporting for Pension Plans, addresses financial reporting for state and local government pension plans. Statement No. 68, Accounting and Financial Reporting for Pensions, establishes new accounting and financial reporting requirements for governments which provide their employees with pensions. The most noteworthy changes relate to how the local government determines the collective pension expense and the related liabilities for a reporting period. GASB’s purpose for these changes is to improve the decision-usefulness of reported pension information and to increase the transparency, consistency, and comparability of pension information across governments. Statements 67 and 68 significantly impact the financial statements of volunteer fire, old hire, and cost sharing pension plans and their sponsoring local governments. GASB 67 is effective for fiscal years beginning after June 15, 2013, while GASB 68 is applicable for fiscal years beginning after June 15, 2014. Under the new rules, accounting and funding are officially separated. If a plan or employer fails to adopt GASB 67/68 reporting on the financial statements, it may trigger a qualified (modified) audit opinion. The COCPA Governmental Issues Forum, co-chaired by Cheryl Wallace, CPA, RubinBrown LLP, Denver, and Jim Rae, CPA, Poysti & Adams LLC, Denver, determined that GASB 67 and 68 and their effect on pension reporting are the most sensitive and important issues to address now. The groups’s work was triggered by a 2014 conference presentation where attendees were told that volunteer plans and the employers

• NewsAccount • Sept/Oct 2015

would not be affected by the implementation of GASB 67. “That sparked the question of where these plans should be reported,” Wallace explains. “Basically, the speakers told us that if you’re affiliated with the Fire and Police Pension Association of Colorado (FPPA), you don’t need to do anything. That generated more questions. If we’re reporting these as part of the financial statements, does that mean we don’t need to implement?”

“We, and most other practitioners, have been reporting firefighter volunteer pension plans in clients’ statements as a standalone fiduciary fund,” Rae adds. “Now, if a pension plan is affiliated with FPPA, it shouldn’t be reported as part of the local government.” Rae and Wallace discussed with forum members how, exactly, to report FPPA plans. Also, they contacted Crystal Dorsey, CPA, local government audit manager, Colorado Office of the State Auditor, who confirmed that FPPAs were being reported inconsistently. “We needed to figure this out,” Wallace says. The group and Dorsey researched how things should be reported under fiduciary funds. Their efforts led them to David R. Bean, CPA, GASB’s director of research and technical activities. “GASB realized clarification and guidance were needed on when activity should be reported in fiduciary funds,” Wallace notes. “It became apparent that all of the old hire plans should not be reported as fiduciary funds in the state and

local government as related to FPPA.” The Office of the State Auditor offered the following guidance: “The COCPA Governmental Issues Forum in conjunction with discussions with the Office of the State Auditor (OSA), concluded that FPPA-affiliated old hire pension plans should no longer be reported as fiduciary funds. As part of the OSA’s review of local government audits, the OSA has provided individual local governments comment letters to communicate the need to include applicable note disclosures as required by the GASB, but those governments should no longer report those FPPA affiliated plans as fiduciary funds.” Rae adds, “If it’s a volunteer plan not affiliated with FPPA, it should continue to report the pension plan in that government’s financial statements and should have implemented GASB 67. If the volunteer pension plan is no longer reported as part of the governmental entity, you need to implement GASB 68 in fiscal year 2015 and record an asset or liability depending on the long-term health of the plan.” Kevin Collins, CPA, partner with CliftonLarsonAllen LLP in Denver, says the most important point for COCPA members who have clients with volunteer pension funds and are associated with FPPA managing and paying their benefits, is that they no longer need to show the pension trust fund but do need to have footnote disclosures. “FPPA has taken care of the financial statement audit,” he says. If a plan isn’t affiliated with FPPA – a selfmanaged plan – you need to fully implement GASB 67 as of Dec. 31, 2014, Collins says. In addition, you need to fully implement GASB 68 for school districts, fire districts, and other government clients, effective June 30, 2015. “This is especially important for clients in rural areas,” he adds. s

Movers & Shakers

Classifieds

Bauerle & Company PC promoted Dan Brubaker, CPA, to partner; Cameron Schwehr, CPA, Derek Watada, CPA, and Daniel Hawkinson, CPA, to manager; Christine Nibbelink, CPA, Lisa Storey, CPA, and Sharon Dean, CPA, to supervisor; Jonathan Schmitz, CPA, to senior two; and Kari Lyche, CPA, and Anne Becker, CPA, to senior one.

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Brock and Company, CPAs, PC moved its Boulder office to 4949 Pearl East Circle, Ste. 200, Boulder, CO 80301. The phone numbers remain 303-444-2971 and fax 303-444-0869.

Fred Mehring, Select Business Group, Inc., specializes in the sale, merger, and acquisition of accounting and tax practices. Over 25 years of experience. Confidentiality stressed! Call Fred Mehring at 303-771-3100, fax 303-477-6010, or fmehring@selectbg.com.

Brock and Company promoted Larry Keppler, CPA, to senior accountant. Crowe GHP Horwath, P.C., moved its office to 1801 California St., Ste. 2200, Denver, CO 80202. The phone number remains the same, 303-831-5000; the fax number changed to 303-831-5001.

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RubinBrown LLP promoted Leslie Bittle, CPA, and Sheila Sharples, CPA, to manager. Dalby, Wendland & Co., P.C., promoted Michael B. West, CPA, to associate principal; Brittany A. Dreher, CPA, to tax accountant supervisor; Brooke A. Mulchin, CPA, to tax accountant supervisor; Jeff M. Wilson, CPA, to audit accountant supervisor; and James P. Heelan, CPA, Amanda E. Malinchak, CPA, and Gregory M. Ward, CPA, to senior tax accountant.

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BKD LLP CPAs & Advisors promoted Valeri Boswell, CPA, to senior managing consultant. Congratulations: On Aug. 10, former COCPA Digital Communications Coordinator Lauryn Wachs joined the Nature Conservancy, Boulder, Colo. On Sept. 2, Communications Coordinator Krista Flynt left the COCPA for a four-month adventure in Australia. Send questions and ad placements previously handled by Wachs and Flynt to info@cocpa.org for assistance.

Classified Ad Pricing $50 for 0-50 words, $100 for 51-100 words, $200 for 101-200 words, $300 for 201-300 words, $400 for 301-400 words.

In Memoriam

Getthe theFacts Facts Get

We regret the loss of the following COCPA members. We extend our sympathy to their families, colleagues, and friends.

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possibilities those exclusive credentials — ABV , additional additional salary the average possibilities awaitawait those who who exclusive credentials — ABV , salary is theis average ® ® ® practice in business valuation, for CPAs an advisory practice , CITP or PFS — from in business valuation, CFF ®CFF for CPAs who who havehave an advisory , CITP or PFS — from possibilities await those who exclusive credentials — ABV , salary is the average forensic accounting, information service credential versus the AICPA differentiate youadditional as CPAsCPAs the practice in businessforensic valuation,accounting, information , CITP differentiate or PFS — fromyou as for CPAs service CFFAICPA who havecredential an advisory versus management technology do not.* specialized knowledge and and technology who who doversus not.* having specialized knowledge forensic accounting,management information the having AICPA differentiate you as service credential CPAs management and technology having specialized knowledge who do not.* assurance, personal and expertise. assurance, and and personal and expertise. assurance, and personal and expertise. financial planning. financial planning. ™

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Now that you know, pursue a credential aicpa.org/credentials. that you know, pursue aat credential at aicpa.org/credentials. NowNow that you know, pursue a credential at aicpa.org/credentials. * 2013 AICPA Compensation Survey

Willis D. Walker Member since 1979 Centennial, Colo.

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George K. Skeff Member since 1971 Center, Colo.

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Get the Facts

ON AICPA ADVISORY SERVICE CREDENTIALS

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Conrad G. Keniston Member since 1978 Scottsdale, Ariz.

ON AICPA ADVISORY SERVICE CREDENTIALS ON AICPA ADVISORY SERVICE CREDENTIALS

2013 AICPA Compensation * 2013* AICPA Compensation SurveySurvey

Sept/Oct 2015 • www.cocpa.org •

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