BROADBAND ACCOUNTING FOR SEPARATE VENTURES

Transcription

1 2018 Tax, Finance & Accounting Conference for Cooperatives Austin, Texas August 6, 2018 BROADBAND ACCOUNTING FOR SEPARATE VENTURES Presented by: Bill Miller, CPA Bolinger, Segars, Gilbert & Moss LLP Chad Moore, CPA BKD, LLP

2 Introduction Propane and Other Diversification of the 1990s Focus on: Federal Tax Law Considerations Accounting & Regulatory Considerations 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 2

3 Two Basic Structures Multi-divisional Cooperative Exempt activity on a patronage basis; Unrelated business activity on a nonpatronage basis; or Patronage basis to members (exempt) and nonpatronage basis to nonmembers (unrelated). Can be done with or without the use of a disregarded entity. Separate Taxable Entity 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 3

4 Multi-Divisional Cooperative: Exempt Activity on Patronage Basis Like Organization Activity What qualifies (Appendix A)? Who will be the members? Who will be the patrons? How to Expand Exemption? 85% Member Income Test (Appendix B) Allocation Units & Pre-existing Obligation Unrelated Business Income Tax 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 4

5 Multi-Divisional Cooperative: Exempt Activity on Patronage Basis Members Electric Cooperative, Inc. Electricity & Related Distribution (Exempt Like Activity) Broadband & Internet Services (Exempt - Like Activity) (With or Without a Disregarded Entity) Nonoperating (Interest & Other) Retail sales to all electric consumers on patronage basis Allocate and retire margins separately to patrons of division; Gains and losses are also handled on a divisional basis. IRUs to third party telecom providers for use of fiber on nonmember, nonpatronage basis Retail sales to member and nonmember broadband subscribers on a patronage basis Allocate and retire margins separately to patrons of division; Gains and losses are also handled on a divisional basis. Allocate or retain as unallocated pursuant to bylaws Management services and other cost sharing, leases, loans, etc. accrual and advances; Eliminated from Test Management services and other cost sharing, leases, loans, etc. charges and reimbursements; Eliminated from Test 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 5

6 Multi-Divisional Cooperative: Unrelated Activity on Nonpatronage Basis Disregarded Entity Structure through Use of Single Member Limited Liability Company 85% Member Income Test (Appendix B) Unrelated Business Income Tax Capital Credit Allocation Considerations 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 6

7 Multi-Divisional Cooperative: Unrelated Activity on Nonpatronage Basis Members Electric Cooperative, Inc. Electricity & Related Distribution (Exempt Activity - Patronage Basis) Broadband & Internet Services (Unrelated Activity Nonpatronage Basis) (With or Without a Disregarded Entity) Nonoperating (Interest & Other) Retail sales to all electric consumers on patronage basis Allocate and retire margins separately to patrons of division. Gains and losses are also handled on a divisional basis. Retail sales to member and nonmember broadband subscribers on a nonpatronage basis All broadband sales are considered nonmember. Report as unrelated business income (Form 990-T; NOL considerations & UBIT). Structure bylaws to retain after-tax margins; impacts what happens if sold. Allocate or retain as unallocated pursuant to bylaws Management services and other cost sharing, leases, loans, etc. accrual and advances; Eliminated from Test Management services and other cost sharing, leases, loans, etc. charges and reimbursements; Eliminated from Test 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 7

8 Multi-Divisional Cooperative: Member Patrons & Nonmember Nonpatrons Members Electric Cooperative, Inc. Electricity & Related Distribution (Exempt Activity - Patronage Basis) Broadband & Internet Services (Unrelated Activity Nonpatronage Basis) (With or Without a Disregarded Entity) Nonoperating (Interest & Other) Retail sales to all electric consumers on patronage basis Allocate and retire margins separately to patrons of division. Gains and losses are also handled on a divisional basis. Management services and other cost sharing, leases, loans, etc. accrual and advances; Eliminated from Test Retail sales to member broadband subscribers on a patronage basis and nonmember broadband subscribers on a nonpatronage basis Allocate and retire patronage capital for member patrons. Only broadband sales made on nonpatronage basis are considered nonmember. Report nonpatronage activity as unrelated business income (Form 990-T; NOL considerations & UBIT). Structure bylaws to retain after-tax margins; impacts what happens if sold. Management services and other cost sharing, leases, loans, etc. charges and reimbursements; Eliminated from Test Allocate or retain as unallocated pursuant to bylaws 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 8

9 Separate Taxable Entity Separate Tax Return Filings Cooperative s 85% Member Income Test (Appendix C) Qualified Pole Rental Unrelated Business Income Tax Capital Credit Allocation Considerations 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 9

10 Separate Taxable Entity: Wholly-Owned Subsidiary Corporation Electricity & Related Distribution Electric Cooperative, Inc. Nonoperating Record equity method earnings as non-operating and allocate or retain as provided for in bylaws. Dividends paid result in nonmember income in the Test. Retail sales of electricity Capitalize in exchange for 100% ownership. Execute management services and related agreement. Execute fiber lease agreement. Newco, Inc. (Newco, LLC if electing taxation as a corporation) IRUs to third party telecom providers for use of fiber on nonmember, nonpatronage basis Broadband Subscribers 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 10

11 Funding Considerations Debt External directly to Subsidiary Potential UBIT issues External to Co-op and then internal to Subsidiary or division. Internal from Co-op loan or working capital advance. Equity Thin vs large initial capitalization Majority vs minority ownership 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 11

12 Accounting Considerations The following factors influence the accounting system and account structure utilized. Regulatory FCC jurisdiction? Rate base? Lender RUS electric or telecom program? Grant awards? Intercompany agreements loans, services, leases? Member and nonmember sales? Unrelated business income tax? Number of capital credit allocation units? Board expectations? 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 12

13 Accounting Considerations Regardless of legal and tax structure chosen, the following accounting issues must be addressed: Trial balance & chart of account modification; Required to use FCC Part 32? If not required, then consider familiarity with existing chart of accounts and capabilities of accounting software. Consider detail required for financial statements. Also driven by need for cost allocation. 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 13

14 Accounting Considerations Regardless of legal and tax structure chosen, the following accounting issues must be addressed: Financial statement preparation; Divisional Separate balance sheet and income statement or separate income statement only? Separate Entity Separate set of financial statements; combine and then consolidate. Ability to identify eliminations. Determine Form 7 reporting. 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 14

15 Accounting Considerations Regardless of legal and tax structure chosen, the following accounting issues must be addressed: Proper capitalization (Appendix D) and depreciation methods and rates. This is essential due to the fact future generation of services will run over the fiber network. Utilization of the work order system. Properly record contributions in aid of construction and grants. Consider capitalization limits industry, FCC, and tax law. Determine when depreciation should begin and at what rate. 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 15

16 Accounting Considerations Regardless of legal and tax structure chosen, the following accounting issues must be addressed: Cost allocation for regulatory purposes. Fiber backbone and joint use assets Consider ownership and structure of leases. Determine portion used in electric operations. Drives allocation of debt and interest expense. Regulated and non-regulated activities: Definitions may vary between industries. Consider type and use of equipment, including location (on or off of customer premises). 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 16

17 Accounting Considerations Regardless of legal and tax structure chosen, the following accounting issues must be addressed: Timesheet modification & proper allocation of overhead; Essential for compliance and cost allocation. Consider impact on clearing accounts. Other. 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 17

18 Accounting Considerations Fiber Network 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 18

19 Accounting Considerations Plant Components 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 19

20 Accounting Considerations Plant Components for CPE 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 20

21 Accounting Considerations Work Orders vs Job Orders Work orders / Job orders Allows for pooling of costs for construction based activities. Allows for Capitalization when a project is completed vs. when costs are incurred. Allows for pooling of costs for longer term construction projects. Used for larger scale projects Initial Buildout and extension of networks Upgrading & installing new services, etc. 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 21

22 Accounting Considerations Work Orders vs. Job Orders Work orders / Job orders Allows for pooling of costs for shorter term projects to be capitalized. Smaller installation jobs Fiber Drops Small Scale Customer Installations after buildout 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 22

23 Accounting Considerations Work Orders vs. Job Orders 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 23

24 Questions & Closing Comments 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 24

25 Disclaimer Unless otherwise stated, the statements and advice provided herein represent general information only, are based on limited facts and circumstances and are not intended to constitute written tax advice. 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 25

26 Contact Information Chad Moore, CPA Audit Partner BKD, LLP (405) ; Bill Miller, CPA Tax Partner Bolinger, Segars, Gilbert & Moss, LLP (806) ; 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 26

27 Appendix Appendix A Communications Related Activities Appendix B 85/15 Test Considerations for the Multi-divisional Cooperative Appendix C Test Considerations for Co-op with Wholly Owned Subsidiary Appendix D Plant Accounting & Fiberto-the-Home 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 27

28 Appendix A Communications Related Like Activities Type Authority Cable Television Rev. Rul ; PLR Cellular Phone IRM (08/09/06); IRS Pub. No. 557, page 54 High Speed Broadband/ Telecommunications Services Internet Service, Including Satellite PLR PLR ; PLR ; PLR ; PLR IRM (08/09/2006) Paging IRM (08/09/2006) Satellite Television PLR Security and Similar Monitoring IRM (08/09/2006) 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 28

29 Appendix B Test Considerations for the Multi-divisional Cooperative Type of Income Sales to member without both the right to vote and receive capital credit allocations Nonrefundable Contributions in Aid of Construction (CIAC) Nonmember Classification Member if received from member Nonmember if received from nonmember Broadband Grants Nonmember; After 12/31/2017 no longer excluded as non-shareholder contribution to capital without legislative fix Connect America Funding Potentially excluded as performance of nonmember communication services for benefit of members Indefeasible Rights to Use Fiber (IRU) Potentially excluded as qualified pole rental Sale of Assets Nonmember if gain Excluded if loss 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 29

30 Appendix C Test Considerations for Co-op with a Wholly-Owned Subsidiary Corporation Type of Income Classification Revenue and Income of Subsidiary Excluded not attributed to the parent co-op if subsidiary has valid business reason for existing IRU or Lease of Fiber Attached to Poles Dividends, Interest, Annuity, Royalty & Rents received from Subsidiary Maybe qualified pole rental income and excluded; otherwise non-member Nonmember Management Fee from Subsidiary Nonmember Gain from Sale of Stock Nonmember 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 30

31 Plant Accounting & Fiber-to-the-Home FCC Part 32 Capitalize vs Expense Work order vs Job order When should a project be capitalized? Fiber-to-the-Home Nonregulated 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 31

32 Part 32 FCC USOC Part 32 Guideline for Recording & Reporting all operations of a Telecomm Entity Contains General Concepts as well as Detailed Descriptions of Plant Accounts 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 32

33 Key Concepts Account 2001 Appendix D Part 32 (cont.) Does Not Require Physical Sub-Accounting Allows for detail to be kept in your Continuing Property Records (CPR s) Not Recommended by BKD, LLP 2000 Accounts Plant Accounts are grouped into functional type for sub accounting 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 33

34 Plant Sub Account Examples 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 34

35 Plant Sub Account Examples 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 35

36 Part 32 (cont.) Key Concepts (cont.) Capitalization Threshold Enables Companies to set a threshold for capitalization. IRS & RUS rules also apply Work orders Allows for pooling of costs for longer term construction projects. Capitalization or Closing occurs when project is completed vs. When costs are incurred. 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 36

37 Capitalize vs. Expense FCC USOC Part (a)4 The cost of individual items of.costing $2,000 or less or having a life less than one year shall be charged to the applicable Plant Specific Operations Expense accounts. RUS Threshold Up to $2,000 IRS Threshold De Minimus Expensing Policy 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 37

38 Capitalize vs. Expense (cont.) New Purchases Ex. Wireless Internet Routers $50/ea. Bulk order could be over threshold Concept of Individually / in aggregate The threshold all depends on the size and activities of your Company. Costs under threshold can still be capitalized. Be consistent on all fronts, but leave room for judgment. 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 38

39 Capitalize vs. Expense (cont.) Problems arise when determining between Repairs/Maintenance and Re-Installation. Ex. Roof on Remote Central Office Building If Originally capitalized with the building construction, should we retire and recapitalize? Historic Records and Detailed CPR s are a must. 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 39

40 Capitalize vs. Expense (cont.) Uniform Capitalization Rules The cost of an asset may include not only the cost to acquire the asset, but also the expenditures necessary to prepare the asset for it s intended use. Freight, installation, interest expense, initial testing and calibration 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 40

41 Work Orders vs. Job Orders Work orders / Job orders Allows for pooling of costs for construction based activities. Allows for Capitalization when a project is completed vs. when costs are incurred. Allows for pooling of costs for longer term construction projects. Used for larger scale projects Initial Buildout s and Extension of Networks Upgrading & Installing New Services, etc. 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 41

42 Work Orders vs. Job Orders Job orders Allows for pooling of costs for shorter term projects to be capitalized. Consider smaller installation jobs. Fiber Drops Small Scale Customer Installations after buildout 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 42

43 Summary of Work Order Process 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 43

44 When Should I Capitalize? One of the Hardest Areas to Determine Are the assets functioning for intended use? Revenue Ready Concept Creating sub-phases allows for quicker capitalization Can capitalize areas within a town NE, SW, N, E, etc. 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 44

45 When Should I Capitalize? Is One Customer generating revenue? Is the project substantially complete? Percentage Complete 85% of homes are cutover, Close 85% of costs 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 45

46 Fiber-To-The-Home (FTTH) 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 46

47 FTTH Plant Components Switch / Central Office Equipment Circuit Equipment CPE Regulated CPE Nonregulated Fiber Optic Cable Engineering 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 47

48 FTTH Plant Components - CPE Optical Network Terminal (ONT) Battery Backup Electric Service Fiber Strand Ethernet into House 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 48

49 FTTH Plant Components - CPE 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 49

50 FTTH Plant Components - CPE 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 50

51 Regulated vs. Nonregulated Which parts are Nonregulated?? Ethernet into House Anything inside the house What Portion is Regulated?? None Joint Use Optical Network Terminal (ONT) Battery Backup Electric Service Fiber Strand 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 51

52 Work Order Setup Option 1 - Phases of Construction # FTTH Phase 1 City 1 & City 2 # FTTH Phase 2 City 3 # FTTH Phase 3 City 4, 5 & 6 Option 2 Phases & Types of Construction # FTTH Phase 1 Fiber # FTTH Phase 1 Switch # FTTH Phase 1 Circuit # FTTH Phase 1 CPE 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 52

53 Work Order Setup (cont.) Contract(s) can include: Fiber Construction Circuit Equipment Cutover & Installation Customer Premise Installation & Cutover Contracts depend on how the project was bid by the engineers. 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 53

54 Work Order Closings No matter how the contract(s) are bid segregate the costs to allow for proper accounting & recovery. Use of existing accounts Analog vs. Digital Switching and Circuit Equipment Copper vs. Fiber Aerial and Buried Cable CPR detail Segregate FTTH Costs from other costs Needed for joint use purposes 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 54

55 Work Order Closings (cont.) New Accounts Part 32 allows, can be cleaner Examples: Switching Equipment - FTTH Circuit Equipment FTTH Circuit Equipment ONT s Buried Fiber Cable FTTH 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 55

56 Work Order Closings (cont.) Final allocation of costs within a contract are never immediately available. Using estimates is encouraged. Fiber and Circuit in 1 Contract. Circuit is usually 5% or less Rule of Thumb 95% Fiber / 5% Circuit 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 56

57 Nonregulated Services Customer Premise Equipment Internet-Copper Internet-Wireless Internet-Fiber Cable TV Coax IPTV Over-The-Top-Video 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 57

58 Customer Premise Equipment (CPE) Capitalize vs. Expense $$$ Threshold ex. DSL Modems Serial Number Tracking ex. CATV / IPTV Boxes Problems Salvage Back to Inventory 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 58

59 Customer Premise Equipment (CPE) (cont.) FCC USOC Part 32 Account 1406 Nonregulated Investments Allows for Capitalization Depreciable Allows for Retirements when faulty or obsolete vs. Salvage to Inventory 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 59

60 Internet-Copper Regulated and Nonregulated Central Office Plant DSLAM DSL Cards Circuit Equipment Fiber Nonregulated Customer Premise Equipment DSL Modems 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 60

61 Internet-Wireless Regulated to Tower Central Office Plant Circuit Equipment Fiber Nonregulated Circuit Equipment Access Points and Backhaul Customer Premise Equipment Antennas and Modems 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 61

62 Internet-Fiber Regulated and Nonregulated Central Office Plant Circuit Equipment ONT Nonregulated Inside Wiring Customer Premise Equipment Router 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 62

63 Head End Central Office Dishes, etc. Appendix D Cable TV Coax Based Circuit Equipment Coax Copper Cable Customer Premise Equipment Set Top Boxes 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 63

64 IPTV Runs on the Nonregulated side of the Fiber Plant Central Office IPTV Conversion Equipment Coax Retransmission Equipment IPTV Customer Premise Equipment Set Top Boxes 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 64

65 Over-The-Top-Video Runs Through the Existing Internet Connection of the Customer No Specific Accounting Necessary Customer Premise Equipment Roku, Kindle Fire TV, Apple TV, Google Chromecast 08/06/18 Tax, Finance & Accounting Conference for Cooperatives 65