POSSIBILITIES INSIGHTS FOR BUSINESSES & INDIVIDUALS FEBRUARY 2016 What Is an Audit and How Does It Compare to Other Assurance Services? Accounting is the language of business, and financial statements are how companies talk to investors, lenders and other outside parties. From family-owned businesses to large corporations, financial reporting is necessary to communicate results to internal and external stakeholders. Accurate, understandable financial reporting is important, and so is having an accountant who can provide the services you need, from basic financial statement preparation to a financial statement audit. What Is an Audit? An audit is the highest level of assurance service offered by a public accounting firm. The purpose of an audit is to provide assurance (comfort) on the accuracy of an organization’s financial statements. In order to perform a financial statement audit, the auditor must be independent from the organization.

The auditor examines evidence, on a test basis, to obtain “reasonable assurance” about whether the amounts and disclosures in the organization’s financial statements are free from material misstatement. Audits are sometimes required by third parties such as lenders, bonding companies or regulatory agencies. However, there are other benefits of a financial statement audit, including:   •  roviding owners or the board of directors P with a higher level of financial reporting   •  stablishing a record of audited financial E results for the potential sale of the company   • Seeking outside investors What Is a Review? A review of financial statements includes performing inquiry and analytical procedures in order to express limited assurance that there are no material modifications that should be made to the financial statements. Similar to an audit, the What Is an Audit — continues on page 3 this issue 2 Business Intelligence in the Digital Age: The Intersection of the Internet of Things and Big Data 3 Is IRS going “Pay to Play”? 4 My Digital Estate? 5 Current Developments on Domestic Manufacturing Deduction 6 A New Holiday Tradition: December Means Tax Legislation 7 FASB Votes to Proceed with Final Standard on Lease Accounting Eide Bailly Adds New Firms, New State Reprinted with permission from the American Institute of Certified Public Accountants .

2 | POSSIBILITIES Business Intelligence in the Digital Age: The Intersection of the Internet of Things and Big Data There is often a lot of ambiguity surrounding the concept of the Internet of Things, but it all boils down to integration. This emerging technology trend refers to the connection of any powered device to the Internet, enabling interactive device-to-device and device-to-user communication and automating tasks for optimal efficiency and understanding; it is a catch all phrase for using device-driven data to create something useful. Often, the Internet of Things brings to mind very “techie” inventions such as smart home thermostats and wearable devices, and while these energy trackers are early growth areas for the industry, they are just scratching the surface of possibilities. Rather, these products demonstrate a major influencer of the Internet of Things trend that will have an enormous impact on the business sector—big data. An Endless Stream of Data You see, the Internet of Things is not evolving in isolation; it is maturing alongside another huge market changer. Our lives are driven by data.

In fact, big data is such a disrupting force in the marketplace that, by 2020, it is predicted to revolutionize 80 percent of business processes and products established in the past decade. Every interaction in our day creates an endless stream of data waiting to be transmitted, stored and analyzed to make our lives better, which is essentially what the Internet of Things is enabling. These two interconnected trends are shaping the market in vast ways. On its own, an electronic device with no storage or processing capacity would add little to our daily lives, but by backing it with the curation and correlation of high volumes and varieties of data, the outcome is utterly valuable convenience, optimization and efficiency. Empowering Your Decisions At the intersection of the Internet of Things and big data is true business intelligence. Improved customer experience, optimized processes, elevated business forecasting and empowered decision making are all enabled at the convergence of these trends to create competitive advantage.

Today’s valuable streams of data provide a literal window into your business, your customer, your market and your industry, and the Internet of Things integrations, both professional and personal, are endless. That could be your car syncing with your work calendar, road conditions, traffic live stream and nearest available parking detectors to provide you with the ideal morning commute, or the ability to live-track your business’s inventory shipments for quality control, maximum agility and consumer transparency. Change is Coming We are in the midst of a Digital Age, and it will impact every aspect of your business, from financials, operations and interactions to overall business planning. At the forefront of this impact are your systems—the platforms from which your entire organization functions—and trending technologies leveraged alongside optimized systems will generate unprecedented growth opportunities for your business. Recognizing the need to manage and make sense of your business’s data is an essential first step in realizing this market opportunity.

It is not as simple as cuffing a wearable on your wrist, though “wearables” for office equipment to auto-manage supplies and self-diagnose issues is fast becoming a reality. Industries will be disrupted, markets will evolve and security will become more crucial than ever as connected technologies become more prevalent in the marketplace. If your business is ready for the cutting edge of business intelligence, consider integrating your business with an innovative cloud-based business plan, updating your infrastructure, network capacity and technology solutions to facilitate ubiquitous connectivity, and investing in high-quality, scalable data security practices to ensure the continued protection of your valuable data. A world of interconnectivity is upon us; is your business prepared? n C O N TA C T Scott Kost Principal 701.476.8304 skost@eidebailly.com . Businesses & Individuals | 3 What Is an Audit — continued from page 1 accountant must be independent to perform a review. However, a review does not include obtaining an understanding of the company’s internal controls, assessing fraud risk, examining audit evidence, or testing accounting records through inspection, observation or outside confirmation. A review may be necessary for a growing business requiring new financing. It may also be useful to business owners seeking greater confidence in financial reporting to evaluate results or make decisions. What Is a Compilation? A compilation includes presenting, in the form of financial statements, information that represents management without expressing any assurance on the financial statements. An accountant is not required to be independent to prepare compiled financial statements, however if the accountant is not independent, that fact must be disclosed in the compilation report.

A compilation involves reading the financial statements to consider whether they appear appropriate in form and are free from obvious material misstatements. While a compilation is not an assurance service, compiled financial statements may meet the reporting requirements of some third parties. A compiled financial statement may also help owners and management evaluate financial results. Basic Financial Statement Preparation Preparation of financial statements is a service intended primarily for management’s or owner’s use in managing a business.

This service is comparable to what an internal controller might provide to management, and does not include the issuance of a formal report on the financial statements. This service may be performed along with bookkeeping or transaction processing on a monthly, quarterly or annual basis. Financial statements are prepared in accordance with an acceptable financial reporting framework, and on each page the accountant includes a notice that “no assurance is provided” on the financial statements. To view a more detailed chart of the differences between an audit, review, compilation and financial statement preparation, visit www.eidebailly.com/ AuditExplained.

Contact your Eide Bailly professional if you need help determining what type of service is best for your organization. n C O N TA C T Rachael Thomsen National Assurance Senior Manager 775.337.3939 rthomsen@eidebailly.com Brian Bluhm Partner, National Assurance Office 612.253.6590 bbluhm@eidebailly.com Is IRS Going “Pay to Play”? Nina E. Olson, the National Taxpayer Advocate, is concerned that the IRS may be dramatically scaling back on telephone and face-to-face services provided in the past to the 161 million taxpayers that may ask the IRS for assistance in complying with their tax obligation, according to the recent annual report she is required to file with Congress. Since 2014, the IRS has invested substantial resources and several million dollars to develop a “Future State” plan.

The Future State plan could transform the role the IRS has long played in helping taxpayers with tax compliance, according to Olson, who also called for the IRS to release the Future State plan, which they have thus far chosen not to make public. Implicit in the plan is the reduction of telephone and face-to-face interaction, Olson said. Olson characterized the combination of reductions in personal service and the IRS’ plans to direct taxpayers with questions to preparers and other third parties, along with expanding user fees for specialized service, as creating a “pay to play” tax system, where only taxpayers who can afford to pay for tax advice will receive personal service, while others will be struggling for themselves. “We believe it is critical that the IRS share its plans in detail with Congress and outside stakeholders and then engage in a dialogue about the extent to which it intends to curtail or eliminate various categories of telephone service and face-to-face service, whether it will provide sufficient support for taxpayers … and whether it has an adequate ‘Plan B’ if taxpayer demand … remains higher than the IRS anticipates,” Olson said in her summary statement. . 4 | POSSIBILITIES My Digital Estate? A few weeks ago, I was having a cup of morning coffee with friends and discussing the usual sports, weather and political topics when someone mentioned seeing a short video on what they said was a “digital estate.” They went on to explain that it referred to the social media accounts, computer documents and picture files everyone seems to have these days. We, mostly of the baby boomer generation, laughed about how only a few years ago most of the things that might be included in a digital estate probably didn’t exist. And, after enjoying the various jokes created by the agerelated discussions, we moved on to hash out other topics of the day. However, later that same day, I couldn’t stop thinking about what my digital estate might look like. I started thinking about the various items I touched on a daily basis that relied upon some type of electronic system to be created or maintained.

In a short period of time, I had a sizable list. My list included investment accounts, business agreements, retail accounts, flash drives, email accounts, investment documents, tax files, domain names and many more. After making my list, my curiosity started to turn to concern; concern that I hadn’t considered these items in any of my planning, apparently thinking they would just be included in my other estate assets. But I now knew I had to learn more.

Here’s a sampling of some thoughts I had on my digital estate and what I discovered. Who Knows How to Get In? While I know the access codes, user names and passwords for my digital assets, when the time comes to deal with them, the person handling my estate won’t, unless I somehow tell them. Such digital access information would not be suitable to include in a will, which becomes a public document. This necessary information needs to be recorded and then either provided to someone of trust and confidence to hold, like your attorney, or placed in a private locked storage area, such as a safe deposit box. Because the password information should be changing regularly, access for making changes is critical. Once the filing system and location are determined, the location and means to access the information should be made known, again only to a trusted person. Where Do My Digital Assets and Business Meet? Although a lot of digital assets are more socially oriented, some others may have a connection to a business or revenue source and could cause financial damage if mishandled. If digital assets, like domain names, trademarks or copyrighted materials, are owned by an individual, but used in a business, provision needs to be made for how those digital assets will be dealt with on death.

Are costs to maintain a business domain name personally owned and being paid for by personal credit card? If the executor cancels the card, it could also cancel payment for the business domain name. This question and other similar ones need to be thought through and a decision made concerning the current use and structure of business-related digital assets. What Happens to The Digital Me? I may want some of my digital assets, primarily social media accounts and particularly personal electronic journals, to be destroyed upon my death, not wanting personal thoughts and comments to be shared among family members. This becomes a highly personal decision, but unless you provide direction on how these things will be handled, information you have otherwise held closely could be unknowingly shared with the wrong people. These directions can become part of the information the executor uses to administer your estate and can be filed in the same location and with the same person utilized to store your digital access codes discussed above. Do I Have a Digital Archive Somewhere? Computer hardware, whatever type, needs to be dealt with, even old obsolete systems sitting in storage, because they probably hold personal or business data. My Digital Estate? — continues on page 8 .

Businesses & Individuals | 5 Current Developments on Domestic Manufacturing Deduction Section 199 of the Internal Revenue Code was enacted in 2004 to provide a tax benefit to businesses engaged in domestic production activities. Section 199 provides qualifying taxpayers with a tax deduction equal to a specified percentage (generally 9 percent) of their income from domestic production activities. The definition of qualifying production activities for purposes of Section 199 is fairly wide, and the types of taxpayers taking advantage of the Section 199 deduction is much broader than traditional manufacturers. Taxpayers engaged in agriculture, software development, utilities, film production, construction and engineering businesses have all realized significant tax benefits from this provision. Recent Developments Even though the Section 199 deduction has been in existence for more than a decade, several recent developments have caused taxpayers to reassess their Section 199 calculations. Taxpayers have prevailed in two recent court decisions that could expand the scope of activities qualifying as production activities for purposes of Section 199.

Additionally, the IRS issued both proposed and temporary regulations in August 2015 that addressed a wide range of issues under Section 199. Some of the new provisions in the regulations will impact all taxpayers claiming the Section 199 deduction, while other provisions are focused on specific industries and activities. The industryspecific provisions in these regulations are most likely to impact taxpayers in the construction, oil and gas, and film industries. Most Significant Change The most significant change in the regulations impacts taxpayers engaged in “contract manufacturing arrangements.” Contract manufacturing arrangements are quite common in some industries and arise where one party hires another party to produce something on their behalf.

For example, Retailer A pays Manufacturer B to produce private label clothing that will be sold exclusively in Retailer A’s stores. The issue in these situations is determining whether Retailer A or Manufacturer B is entitled to the Section 199 deduction for the produced clothing. The regulations propose to simplify the existing facts and circumstances analysis for identifying the taxpayer eligible for the deduction by always awarding the Section 199 deduction to the party physically performing the manufacturing activities.

While this new standard would make the analysis much more straightforward and reduce controversy between taxpayers and the IRS, some taxpayers’ Section 199 benefit may be significantly reduced or eliminated under the proposed rule. Defining Non-Qualifying Production The regulations also attempt to provide guidance in defining activities that are not qualifying production activities. While the definition of production activities is broad, certain activities are specifically excluded as non-production activities. Non-production activities include packaging, re-packaging, labelling and minor assembly.

However, in recent court decisions, taxpayers have successfully argued that their activities constituted production rather than nonqualifying packaging or re-packaging activities. As a result of these taxpayer victories, other taxpayers whose activities are similar to packaging, repackaging and assembly may benefit by reviewing their activities to determine if any additional activities could be treated as production activities. The IRS responded to the beneficial court decisions in the regulations. The IRS included an example mirroring the facts in one of the court decisions, but stating that the activities constituted non-qualifying packaging and re-packaging.

The IRS also requested comments from taxpayers on quantitative and qualitative standards that could be used to define nonqualifying minor assembly activities. The regulations covering these provisions are still in proposed form and will not be effective until finalized. As a result, taxpayers still have an opportunity to provide comments and feedback to the IRS on these issues. What Should You Do? Many taxpayers set up their Section 199 calculation procedures when Section 199 was first enacted and may not have revisited those procedures for several years.

The newly issued guidance provides an excellent opportunity for taxpayers to re-assess their Section 199 calculations to determine if any adjustments can be made to maximize their benefit. Additionally, taxpayers with activities potentially affected by the regulations should consider the possible impact of these provisions on their future Section 199 deductions. n C O N TA C T Andrea Mouw National Tax Senior Manager 612.253.6730 amouw@eidebailly.com . 6 | POSSIBILITIES A New Holiday Tradition: December Means Tax Legislation Over the last five to 10 years, December has been the month for meaningful tax legislation to be passed. Usually, it involves the biannual ritual of retroactively passing what has become known as the “tax extenders.” But this past December, the now traditional rush to pass retroactive tax extender legislation before Congress and the president leave D.C. for the holidays created not only legislation with the accustomed two-year tax extensions, but tax permanency for certain business and individual items previously on the two-year extension cycle. Also included was legislation related to health care reform delays, lifting of the 40-year-old oil export ban, plus extension of wind and solar tax credits. All said, the 2015 December legislation seemed to provide a little something for everyone. Getting Things Done Throughout 2015, there was talk about tax reform, but any efforts to create such legislation could gain no traction. As the year eroded, other things seemed to keep moving to a level of higher priority than tax extender legislation—until December, when Congress, not wanting to have taxpayers once again suffer through a late start to tax filing season, decided to get something done. However, there was another issue that would frame how the new tax legislation would be passed: The funding of the U.S.

government through September 30, 2016, also needed to be passed. A Matter of Time If changes—essentially new costs added to the budget—were to be included in the new tax legislation, then those costs would need to be addressed in the government funding legislation. Therefore, the new tax legislation had to be agreed to, and passed through the House and the Senate, before the appropriations legislation could be completed and sent to the president for signature. Time was running out for the appropriations legislation to be passed before the government would be said to shut down, but not everyone was happy with the legislation, and there were items of importance within the Republican and Democrat parties that still needed to be resolved. However, with the pressure of needing the appropriations legislation passed, they found room to compromise on various issues.

With what had to be record speed in the final drafting of both the tax and appropriations legislation, and precise timing of the tax and appropriations legislation as it moved rapidly through Congress, the House and the Senate came to pass both pieces of legislation and sent them to the president for signature. On the afternoon of December 18, President Obama signed into law the government funding bill called the Consolidated Appropriations Act, 2016, and as part of that action, signed into law the Protecting Americans from Tax Hikes Act (PATH Act). PATH Act The PATH Act is the legislative vehicle for passing the tax extenders, those 50-60 various tax provisions that have lapsed, only to be extended, many times again. However, this time, several tax extenders gained permanent extension. There were special provisions included in this legislation that dealt with IRS administration reforms, family tax relief credits, tax program integrity and accessing the Tax Court. Items of particular interest in the PATH Act are tax extender items for depreciation related to Section 179, enhancements to the usability of R&D tax credits by defined small businesses, enhancements to the child tax credit, the American Opportunity tax credit, the Earned Income Credit, charitable donations deduction for 70 ½ IRA distributions, the deduction for state and local sales taxes, and the five-year extended phase-out of 50 percent bonus depreciation.

For more information on what was in the PATH Act, read our article “Tax Extenders and More Become Law” at www.eidebailly.com/extenders. Appropriations Act While the PATH Act contained most of the tax changes, the Consolidated Appropriations Act, 2016 also contained tax provisions related to a five-year phase-out of wind and solar tax credit extensions and changes for small crude oil refiners’ domestic production activities income. There was also a two-year delay in the implementation of the “Cadillac Health Plans” excise tax and a one-year moratorium on the medical device tax. The Affordable Care Act (ACA) provision that made the Cadillac excise tax nondeductible was repealed, the 40-year-old oil export ban was lifted and the ACA Health Insurance Provider fee was given a one-year moratorium for 2017.

For more information, see our article “Tax Items in the Appropriations Act 2016” at www.eidebailly.com/ PATHAct. A Quieter Year? Don’t look for much in the way of tax legislation during 2016; lawmaker’s thoughts will be on the November presidential election and will not make any moves that could damage the results they will be forecasting. But, if tradition holds true, December 2017 could once again be the bearer of awaited tax legislation. n C O N TA C T Laura Hartwig Tax Manager 208.383.4781 lhartwig@eidebailly.com .

Businesses & Individuals | 7 FASB Votes to Proceed with Final Standard on Lease Accounting The Financial Accounting Standards Board (FASB) voted on November 11, 2015, to proceed with a new accounting standard that would require companies and other organizations to include lease obligations on their balance sheets. The final Accounting Standards Update is expected to be published early this year. Effective Dates FASB decided that for public companies, the upcoming standard will be effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2018. For private companies, the standard will be effective for annual periods beginning after December 15, 2019. Early adoption will be permitted for all companies and organizations upon issuance of the standard. Details of the New Standard Generally speaking, the new standard will require leases with a term of greater than one year to be reflected on an entity’s balance sheet, with a “right-of-use” asset and a lease liability equal to the present value of the future lease payments.

The right-of-use asset will be amortized over the term of the related lease arrangement, while the lease liability will be reduced as lease payments are made, with a corresponding charge to interest expense similar to debt financing. The proposed standard also significantly increases disclosure requirements related to leasing activities. Review Existing Agreements In addition to the challenge of planning for the implementation of the new standard, entities should review their existing loan agreements to determine whether or not these changes to their financial statements may also impact loan covenant requirements, such as debt-to-equity and debt service ratio calculations and limitations on new indebtedness. For more information on the proposed changes, please contact your Eide Bailly representative. n C O N TA C T Brian Bluhm Partner, National Assurance Office 612.253.6590 bbluhm@eidebailly.com Eide Bailly Adds New Firms, New State We recently expanded our presence in Arizona, Colorado and Montana, as well as added Oregon to our list of states with a local office. Most recently, R.

Waidler & Associates, P.C. of Boulder, Colorado, joined Eide Bailly on Feb. 1.

Other additions in the fall and earlier this year included Beckman and Kunkin, P.C. of Scottsdale, Arizona, on Nov. 2; Schafer & Associates P.C. of Billings, Montana, on Dec. 14; and Edison, Perry & Co.

of Enterprise, Oregon, on Jan. 11. The unions raise our total office count to 29 offices in 13 states. All four firms expressed similar sentiments as to why they joined Eide Bailly: more time for client service, expanded resources for clients and improved career opportunities for staff. “These firms help us continue our goal of expanding west of the Mississippi River and finding opportunities to expand our expertise to serve clients better,” said Eide Bailly Managing Partner/CEO Dave Stende.

“We’re always interested in adding talented firms when it means we strengthen not only our existing practice, but also the ability for local businesses to succeed.” . 4310 17th Ave S PO Box 2545 Fargo ND 58108-2545 This publication is produced and published by Eide Bailly and distributed with the understanding that the information contained does not constitute legal, accounting or other professional advice. It is not intended to be responsive to any individual situation or concerns as the contents of the publication are intended for general informational purposes only. Readers are urged not to act upon the information contained in this publication without first consulting competent legal, accounting or other professional advice regarding implications of a particular factual situation. Questions and information for publication can be submitted to your Eide Bailly representative. To request reprints of this publication, send a written request to RequestReprints@eidebailly.com. © 2016 Eide Bailly LLP. To view this and previous issues of POSSIBILITIES, visit www.eidebailly.com/publications Managing Editor: Liz Stabenow Assistant Editor: Clinton Larson Send comments to: possibilities@eidebailly.com An Independent Member Firm of HLB International My Digital Estate? — continued from page 4 Is your computer used in a business operation that would suffer if the information on your computer was not available to the business? Do you have unpublished manuscripts, technical or other proprietary information on your computer that could have value? Do you store critical information, personal or business, on flashdrives that no one knows about or where they are located? How do you want your computer hardware to be handled on your death? These are the types questions that need to be resolved in your digital estate planning. Am I Talking to the Right People? And lastly, but with high importance, am I confident the person that will be my executor or personal representative is knowledgeable about digital assets? The person that I have chosen to be my estate executor/personal representative, in my opinion, would not have the knowledge to understand and deal with my digital estate. Therefore, I will be suggesting that my executor utilize a person that I am confident has such digital knowledge, or that the executor employ a person with such knowledge to assist in the administration of www.eidebailly.com my estate.

It is a personal decision you must also consider. Each state has specific laws for the administration of an estate. Depending on your state of residence, the information and instructions suggested above may or may not be binding on an executor; that is for you and your attorney to discuss and decide upon. But, unless you provide the information related to your digital estate assets, regardless of legal requirement to follow them, your executor will not know your feelings and concerns and will not be able to consider such in the administration of your estate.

n C O N TA C T Larry Evans NTO Resource Leader 405.858.5508 levans@eidebailly.com .