Blockchain’s Impact On The Future Of Real Estate And Construction Companies

By David Butcher

For the real estate and construction industries, sensors, data and automation will increasingly define construction projects, as well as cityscapes. Illustrated by the fact that there are currently more than 1,000 on-going smart city projects around the world.

The emergence of the connected city leads to many new possibilities—and challenges—for the real estate and construction industries. For example, how to integrate and leverage smart features, how to safeguard personal data and how to create a seamless interaction between various systems, including individual buildings and city infrastructure like transport and energy systems.

I advise several blockchain companies and follow the evolving ecosystem closely. From personal experience it is clear that blockchain is about much more than cryptocurrencies and payment services. By 2020, there will be 600 recognised smart cities around the world and blockchain can underpin many, if not most, of the processes that will make those cityscapes smart.

The question becomes: if blockchain is going to be the foundation of smart cities, what does that mean for construction and real estate companies?

The Growing City-Scape

More than half the world’s population now lives in cities. Before the middle of the century, that number will jump to two-thirds.

While cities account for the bulk of many countries’ economies, they also present administrative, organisational, logistical, social and environmental challenges.

Smart cities that involve the use of Information and Communication Technologies (ICT) as well as Internet of Things (IoT) and other related technologies has been heralded as the way to mitigate at least some of these issues.

However, smart city technologies like ICT and IoT come with their own conundrums. For example, how the various systems that ‘live’ within a smart city environment interact with each other and individuals. How does a smart building, for example, ‘talk’ with a driverless car, know you, the passenger, has the right to enter and let the vehicle through the outer gates? Or how does one automate and democratise the use of energy in a building, so that inhabitants can choose if they only want to use locally produced renewable energy?

The answer is that without efficient, protected data transfer and proper use of data, most smart city initiatives and technologies will fall short.

Blockchain to the Rescue

All of which brings us to blockchain. For the smart city revolution to reach its potential, it needs horizontal integration of individual services that is a) highly automated, b) highly secure and c) allows for streamlined, accountable transmission of data. Using buildings as an example, they need to be able to collect data as well as exchange it with other buildings, power delivery systems, driverless vehicles, weather forecast systems and vice versa. Some of this data will be personally sensitive, some financial, and some business-related.

One possible solution is for individuals to have a blockchain-based ‘self-sovereign identity’ (SSI) – a consolidated digital identity. The goal is to provide individuals with a wholly unique and safe ID also helps store data, in place of the fragments that each of us currently have scattered across different pulci and private organisations, applications, and websites, with little to no control over their storage, updating, or sharing. Not to mention the risk of losing control of data to hackers.

Without delving too deeply into the technology, blockchain’s decentralised Distributed Ledger Technology (DLT), distributed key management and peer-to-peer encryption technology is regarded as about the closest to unhackable we know today. It also enables the use of smart contracts with an IF/THEN structure (If A happens THEN B happens automatically). In other words, blockchain could potentially automate many of the processes and interactions between systems that smart cities will rely on. Simultaneously, it could allow for secure logging of data and data transfers within and between systems.

While still in the early stages, the potential is underscored by the fact that large corporations are engaged in developing these aspects of smart cities. For example the Chinese e-commerce giant JD, who has opened a dedicated smart city research centre with a focus on blockchain and AI.

Country and city governments are also backing the technology. Sweden, the UK, USA, UAE, to name but a few. Perhaps the best illustration of the potential public organisations see in blockchain-driven smart cities comes from China. The country, which has been solidly against cryptocurrencies, looks set to integrate blockchain in many smart city projects, including the $380 billion development of Xiongan.

The Many Uses of Blockchain

While some of the above is a glance into the crystal ball at what the future may hold, the construction industry need not wait with integrating/trialling blockchain technology. It already has several uses that can alleviate current bottlenecks and inefficiencies.

During construction projects, blockchain can add transparency and efficiency. This is doubly the case for the construction supply chain. Blockchain also shows potential in areas such as logistics and storage, paymentscontracts, and fleet management.

Logistics and storage aspects of construction projects alone could see savings in six or seven figure range by using blockchain solutions, depending on the size of the specific project, while making the whole process completely transparent to all stakeholders.

Real estate companies can employ blockchain-based building maintenancemanagement, streamline contract processes and manage land registries. The latter is currently being tested in Georgia.

From Tenant to User?

For both real estate and construction companies, it is perhaps worth looking at the emergence of smart cities and new, disruptive technologies from a bird’s eye view. They, along with changing customer demands, indicate that both industries are on the cusp of profound changes.

In the previous century construction projects and the finished product were, while not completely cut off from their surroundings, not nearly as integrated with other systems as is the case today. Furthermore, the tenants were generally less concerned with or interested in knowing how a project was completed and the number of systems within, for example, a newly constructed building, they could interact with and manipulate was rather limited.

Today that is changing. Tenants increasingly want flexibility, control and transparency without sacrificing ease-of-use. To meet changing demands, construction and real estate companies may need to rethink how they view their customers. Instead of as tenants, they are end-users—similar to the business-customer relationship found in the technology industry. As is generally the case within the technology sector, long-term future success in smart city environments relies not only on your products (buildings/infrastructure projects), but also how they can be integrated with other systems and on your subsequent use of the data that your solutions generate to gain insights and identify new business opportunities.

Data is ‘the new oil,’ and construction and real estate companies are sitting on what is the equivalent of a sizeable chunk of the world’s resources. Historically, they have struggled to make full use of that resource, and perhaps blockchain’s biggest future boom for both industries is how it can allow those companies to collect and process data in new ways to boost innovation and drive new solutions.

Are Grants Subject To Revenue Recognition?

By Lee Klumpp, CPA, CGMA

The FASB clarifies longstanding question for nonprofits.

Nonprofits received long-awaited clarification on a key accounting question from the Financial Accounting Standards Board. As discussed in the article on page 1, the FASB released a final accounting standards update (ASU), Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The ASU aims to standardize how grants and other contracts are classified across the sector, as either an exchange transaction or a contribution.

Classifying grants as either a contribution or exchange transaction is the first step in implementing revenue recognition. The clarified guidance in ASU 2018-08 aims to help nonprofits complete that first step in a consistent way across the sector.

This article outlines a practical example of the process to evaluate a grant under the new ASU.

Practical Example: How to evaluate a grant under the new guidance

Description of ‘Nonprofit A’:  A large research association that specializes in space exploration. Its mission is advancing scientific discoveries and supporting the advancement of new technology. The organization receives funding from various individuals, corporations and governments to support its efforts.

Description of the grant: Nonprofit A received a $15 million grant from the federal government to finance the costs of a research initiative to test the effectiveness of newly developed technology.

How should Nonprofit A classify the $15 million grant? This grant could be classified as either an exchange transaction or a contribution, depending on the exact parameters of the funding. Let’s examine both scenarios:

  Classify the grant as an
exchange transaction if:
Classify the grant as a
contribution if:
Specific provisions of the grant The resources are paid by the federal government as the work is incurred (cost reimbursement) and request for payment is submitted. The federal government specifies the protocol of the testing, material the technology is made of, and the type and duration of testing that must take place.

The federal government requires a detailed report of the test outcome within two months of its conclusion and any intellectual property (IP) as a result of the grant belongs to the federal government.

Nonprofit A makes all decisions about research protocol, material the technology is made of, and the type and duration of testing that must take place.

In addition, the nonprofit retains all the commercial rights for any IP that is developed as a result of the research. Nonprofit A still has to produce the detailed report of the test outcome within two months.

Deciding factor: Reason for classifying the grant as an exchange transaction or contribution This example would be an exchange transaction because of how prescriptive the grant is, and because the government owns the IP. Therefore, in this case the federal government is receiving something of commensurate value. In this scenario, the transaction would be considered a contribution because there is no commensurate value being exchanged.

Even though Nonprofit A is expected to produce a report, the FASB does not consider this an equal exchange of value. The ASU deems filing this type of specified report to be administrative in nature and not a performance standard.

Is the grant
subject to the new revenue recognition standard?
Yes. All exchange transactions are subject to Accounting Standards Codification Topic 606, Revenue Recognition from Contracts with Customers. No. The above scenario is a conditional contribution, which is not subject to revenue recognition. The condition is met as the work is incurred in accordance with the grant agreement.

Determining whether a grant is conditional or unconditional can be difficult. The ASU states that determining if a donor-imposed condition exists is the key to determining when the contribution can be recognized as revenue. The first consideration is whether the grant agreement has a right-of-return requirement in which the grantee must return to the promisor (grantor) assets transferred as part of the agreement or a right to release of the promisor from its obligation to transfer assets. The scenario in the above does not meet any of these requirements.

Additionally, the ASU has provided the following indicators that  could create a barrier and make the grant conditional:

  • The inclusion of a measurable performance-related barrier or other measurable barrier.
  • Whether a stipulation is related to the purpose of the agreement.
  • The extent to which a stipulation limits discretion by the recipient.

Disclaimer: These examples are for illustrative purposes only. Changing even one fact in the example could significantly change the accounting treatment.

What types of organizations need to take action?

  • Grantees: All nonprofits that receive grants from foundations, governments or other funding entities will need to assess how they are accounting for contributions. Colleges, universities, research institutions and social services organizations that rely heavily on grants and contracts could see the greatest impact.
  • Grantors: Non-governmental organizations like public and private foundations, as well as for-profit entities that issue grants to nonprofits, will need to think about how they write their grants and contracts.

What organizations will not experience a significant impact?

  • Public charities: As organizations that derive the bulk of their funding from individual contributions, they will be less impacted by this guidance.
  • Local, state and federal governments: Nonprofits will still need to assess how they classify federal and state funding, but governmental bodies are not within the FASB’s scope and do not need to comply with this guidance. Governments are subject to standards issued by the Governmental Accounting Standards Board.

What’s next for nonprofits?

Accounting changes are like a relay race. Today, the FASB handed off clarified guidance on accounting for contributions and answered a long-standing question for the sector. And now it’s up to nonprofits to apply it to their own books and run the rest of the race to implement revenue recognition and finish strong.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2018). Copyright © 2018 BDO USA, LLP. All rights reserved.

Investing In “Opportunity Zones” While Deferring Taxes

The IRS defines an opportunity zone as an “economically distressed community where new investments may be eligible for preferential tax treatment.” The Treasury has certified nearly 9,000 of these districts across all U.S. states and its territories, including the entire island of Puerto Rico. An opportunity zone designation has the potential to trigger a rush of investment activity and is intended to help revitalize neglected areas.

A qualified opportunity zone fund is an investment vehicle that must invest at least 90 percent of its assets in businesses that operate in a ”qualified opportunity zone”, either by acquiring stock or a partnership interest. The fund can also make direct investments in properties and real estate located within a qualified opportunity zone. REITs and other operators are forming opportunity zone funds to access the capital expected to be generated by this program to acquire and develop properties.


Taxpayers can defer taxes by reinvesting capital gains from an asset sale into a qualified opportunity fund. The capital gains will be tax-free until the fund is divested or the end of 2026, whichever occurs first. The investment in the fund will have a zero-tax basis. If the investment is held for five years, there is a 10 percent step-up in basis and a 15 percent step-up if held for seven years. If the investment is held in the opportunity fund for at least 10 years, those capital gains would be permanently exempt from taxes.


While opportunity zones offer enticing benefits, tax savings should not be the only factor influencing the decision to invest or break ground on a new development. A bad deal is still a bad deal, and not all qualified investments are worth pursuing. As investors scope out opportunity zones, they should assess the potential investment with the same level of due diligence they would use for any other deal. Questions to consider include: Are the area’s property values and income levels likely to grow? Does the developer or business have an established track record?

Investments in opportunity zones also have associated risks, just like any other investment. Larger qualified opportunity zone funds and ones established by experienced real estate owners and developers like REITs will have an advantage in this arena.


Investors should look out for additional IRS guidance on opportunity zones in the new year. One of the remaining questions relates to “churning” investments, or the time period investors have to reinvest capital gains in a qualified opportunity zone after recognizing the gains from the sale of another qualified opportunity zone asset. The proposed regulation suggests this will be a 180-day period, but confirmation is still pending and could influence investors’ next steps.

To maximize the potential benefits, taxpayers must invest in a qualified opportunity fund before Dec. 31, 2019. While investors shouldn’t blindly rush into opportunity zones, the clock is ticking to take full advantage of the tax savings.

The New and Exciting 20% QBI Deduction

When President Trump signed into law the Tax Cuts and Jobs Act (TCJA) in December 2017, much was made of the dramatic cut in corporate tax rates. But the TCJA also includes a generous deduction for smaller businesses that operate as pass-through entities, with income that is “passed-through” to owners and taxed as individual income.

The IRS issued proposed regulations for the qualified business income (QBI), or Section 199A, deduction in August 2018. Now, it has released final regulations and additional guidance, just before the first tax season in which taxpayers can claim the deduction. Among other things, the guidance provides clarity on who qualifies for the QBI deduction and how to calculate the deduction amount.

QBI deduction in action

The QBI deduction generally allows partnerships, limited liability companies, S corporations and sole proprietorships to deduct up to 20% of QBI received. QBI is the net amount of income, gains, deductions and losses (excluding reasonable compensation, certain investment items and payments to partners) for services rendered. The calculation is performed for each qualified business and aggregated. (If the net amount is below zero, it’s treated as a loss for the following year, reducing that year’s QBI deduction.)

If a taxpayer’s taxable income exceeds $157,500 for single filers or $315,000 for joint filers, a wage limit begins phasing in. Under the limit, the deduction can’t exceed the greater of 1) 50% of the business’s W-2 wages or 2) 25% of the W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified business property (QBP).

For a partnership or S corporation, each partner or shareholder is treated as having paid W-2 wages for the tax year in an amount equal to his or her allocable share of the W-2 wages paid by the entity for the tax year. The UBIA of qualified property generally is the purchase price of tangible depreciable property held at the end of the tax year.

The application of the limit is phased in for individuals with taxable income exceeding the threshold amount, over the next $100,000 of taxable income for married individuals filing jointly or the next $50,000 for single filers. The limit phases in completely when taxable income exceeds $415,000 for joint filers and $207,500 for single filers.

The amount of the deduction generally can’t exceed 20% of the taxable income less any net capital gains. So, for example, let’s say a married couple owns a business. If their QBI with no net capital gains is $400,000 and their taxable income is $300,000, the deduction is limited to 20% of $300,000, or $60,000.

The QBI deduction is further limited for specified service trades or businesses (SSTBs). SSTBs include, among others, businesses involving law, financial, health, brokerage and consulting services, as well as any business (other than engineering and architecture) where the principal asset is the reputation or skill of an employee or owner. The QBI deduction for SSTBs begins to phase out at $315,000 in taxable income for married taxpayers filing jointly and $157,500 for single filers, and phases out completely at $415,000 and $207,500, respectively (the same thresholds at which the wage limit phases in).

The QBI deduction applies to taxable income and doesn’t come into play when computing adjusted gross income (AGI). It’s available to taxpayers who itemize deductions, as well as those who don’t itemize, and to those paying the alternative minimum tax.

Rental real estate owners

One of the lingering questions related to the QBI deduction was whether it was available for owners of rental real estate. The latest guidance (found in IRS Notice 2019-07) includes a proposed safe harbor that allows certain real estate enterprises to qualify as a business for purposes of the deduction. Taxpayers can rely on the safe harbor until a final rule is issued.

Generally, individuals and entities that own rental real estate directly or through disregarded entities (entities that aren’t considered separate from their owners for income tax purposes, such as single-member LLCs) can claim the deduction if:

  • Separate books and records are kept for each rental real estate enterprise,
  • For taxable years through 2022, at least 250 hours of services are performed each year for the enterprise, and
  • For tax years after 2018, the taxpayer maintains contemporaneous records showing the hours of all services performed, the services performed, the dates they were performed and who performed them.

The 250 hours of services may be performed by owners, employees or contractors. Time spent on maintenance, repairs, rent collection, expense payment, provision of services to tenants and rental efforts counts toward the 250 hours. Investment-related activities, such as arranging financing, procuring property and reviewing financial statements, do not.

Be aware that rental real estate used by a taxpayer as a residence for any part of the year isn’t eligible for the safe harbor.

This safe harbor also isn’t available for property leased under a triple net lease that requires the tenant to pay all or some of the real estate taxes, maintenance, and building insurance and fees, or for property used by the taxpayer as a residence for any part of the year.


Aggregation of multiple businesses

It’s not unusual for small business owners to operate more than one business. The proposed regs include rules allowing an individual to aggregate multiple businesses that are owned and operated as part of a larger, integrated business for purposes of the W-2 wages and UBIA of qualified property limitations, thereby maximizing the deduction. The final regs retain these rules with some modifications.

For example, the proposed rules allow a taxpayer to aggregate trades or businesses based on a 50% ownership test, which must be maintained for a majority of the taxable year. The final regulations clarify that the majority of the taxable year must include the last day of the taxable year.

The final regs also allow a “relevant pass-through entity” — such as a partnership or S corporation — to aggregate businesses it operates directly or through lower-tier pass-through entities to calculate its QBI deduction, assuming it meets the ownership test and other tests. (The proposed regs allow these entities to aggregate only at the individual-owner level.) Where aggregation is chosen, the entity and its owners must report the combined QBI, wages and UBIA of qualified property figures.

A taxpayer who doesn’t aggregate in one year can still choose to do so in a future year. Once aggregation is chosen, though, the taxpayer must continue to aggregate in future years unless there’s a significant change in circumstances.

The final regs generally don’t allow an initial aggregation of businesses to be done on an amended return, but the IRS recognizes that many taxpayers may be unaware of the aggregation rules when filing their 2018 tax returns. Therefore, it will permit taxpayers to make initial aggregations on amended returns for 2018.


UBIA in qualified property

The final regs also make some changes regarding the determination of UBIA in qualified property. The proposed regs adjust UBIA for nonrecognition transactions (where the entity doesn’t recognize a gain or loss on a contribution in exchange for an interest or share), like-kind exchanges and involuntary conversions.

Under the final regs, UBIA of qualified property generally remains unadjusted as a result of these transactions. Property contributed to a partnership or S corporation in a nonrecognition transaction usually will retain its UBIA on the date it was first placed in service by the contributing partner or shareholder. The UBIA of property received in a like-kind exchange is generally the same as the UBIA of the relinquished property. The same rule applies for property acquired as part of an involuntary conversion.

SSTB limitations

Many of the comments the IRS received after publishing the proposed regs sought further guidance on whether specific types of businesses are SSTBs. The IRS, however, found such analysis beyond the scope of the new guidance. It pointed out that the determination of whether a particular business is an SSTB often depends on its individual facts and circumstances.

Nonetheless, the IRS did establish rules regarding certain kinds of businesses. For example, it states that veterinarians provide health services (which means that they’re subject to the SSTB limits), but real estate and insurance agents and brokers don’t provide brokerage services (so they aren’t subject to the limits).

The final regs retain the proposed rule limiting the meaning of the “reputation or skill” clause, also known as the “catch-all.” The clause applies only to cases where an individual or a relevant pass-through entity is engaged in the business of receiving income from endorsements, the licensing of an individual’s likeness or features, or appearance fees.

The IRS also uses the final regs to put a lid on the so-called “crack and pack” strategy, which has been floated as a way to minimize the negative impact of the SSTB limit. The strategy would have allowed entities to split their non-SSTB components into separate entities that charged the SSTBs fees.

The proposed regs generally treat a business that provides more than 80% of its property or services to an SSTB as an SSTB if the businesses share more than 50% common ownership. The final regs eliminate the 80% rule. As a result, when a business provides property or services to an SSTB with 50% or more common ownership, the portion of that business providing property or services to the SSTB will be treated as a separate SSTB.

The final regs also remove the “incidental to an SSTB” rule. The proposed rule requires businesses with at least 50% common ownership and shared expenses with an SSTB to be considered part of the same business for purposes of the deduction if the business’s gross receipts represent 5% or less of the total combined receipts of the business and the SSTB.

Note, though, that businesses with some income that qualifies for the deduction and some that doesn’t can still separate the different activities by keeping separate books to claim the deduction on the eligible income. For example, banking activities (taking deposits, making loans) qualify for the deduction, but wealth management and similar advisory services don’t, so a financial services business could separate the bookkeeping for these functions and claim the deduction on the qualifying income.

REIT investments

The TCJA allows individuals a deduction of up to 20% of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income, including dividends and income earned through pass-through entities. The new guidance clarifies that shareholders of mutual funds with REIT investments can apply the deduction. The IRS is still considering whether PTP investments held via mutual funds qualify.

Proceed with caution

The tax code imposes a penalty for underpayments of income tax that exceed the greater of 10% of the correct amount of tax or $5,000. But the TCJA leaves less room for error by taxpayers claiming the QBI deduction: It lowers the threshold for the underpayment penalty for such taxpayers to 5%. We can help you avoid such penalties and answer all of your questions regarding the QBI deduction.



It Is Time We Look At The New Tax Law Changes That Will Impact You And Your Business!

Who will be affected? 

If you own a business, pay state and local taxes, have entered into a new mortgage, purchased  property plant & equipment for your business, incurred losses at the business level or through a pass through entity or have carried forward losses from a prior year, incurred business interest expense at either the entity or individual level, are in the midst of planning to minimize estate taxes, incurred meals and entertainment expense, in the process of determining what type of entity (corporation, S corporation or partnership . . ) to utilize for your next business venture, or just filing an individual tax return that includes rental real estate; you are about to encounter new tax law changes that will affect your tax return preparation and tax liability when compared to prior years.                                                                   

Will you qualify for the new QBI deduction?

One key component of the new tax law is determining if your business qualifies for the new Internal Revenue Code Section 199A Qualified Business Income Deduction:

  • The QBI deduction could reduce your overall tax liability by up to 20%!
  • The QBI deduction calculation includes approximately 10 new steps that will be required at the entity and individual tax return levels that must be completed in order take advantage of this valuable new deduction.

The following is a summary of the many new tax law changes that templeton will be reviewing with you over the coming months. 


  • Retains seven brackets, but at reduced rates, including a top marginal rate of 37 percent. The current tax rates of 10%, 15%, 25%, 28%, 33%, 35%, 39.6% rates would be replaced with tax rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Provisions sunset at end of 2025.
  • Increases the standard deduction to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers, while eliminating the additional standard deduction and the personal exemption. Provisions sunset at the end of 2025.
  • Retains the charitable contribution deduction
  • Retains the mortgage interest deduction for acquisition, but limited (for new purchases) to $750,000 in mortgage debt, while eliminating the deduction for equity debt. Reverts back to $1 million 1/1/26, regardless of when debt occurred. Available for second homes.
  • Caps the state and local tax deduction at $10,000 (property plus choice of income or sales taxes, as under current law), except for taxes paid or accrued in carrying on a trade or business.
  • Medical expense deduction – applies to expenses that exceed 7.5% of AGI in 2017 and 2018, and expenses that exceed 10% of AGI thereafter. The medical expense deduction threshold is lowered to 7.5 percent for 2018, and reverts to 10 percent thereafter. Eliminates other itemized deductions.
  • Increases the child tax credit to $2,000. Of this, $1,400 would be refundable, with the refundable portion indexed to inflation. All dependents ineligible for the child tax credit are eligible for a new $500 per-person family tax credit. Provisions begin to phase out at $400,000 ($200,000 for single filers). Social Security Numbers required for portions of the above. All provisions sunset at the end of 2025.
  • Retains alternative minimum tax (AMT) – Increases the exemption to $70,300 single/$109,400 MFJ) and raises the phaseout threshold to $500,000 single/$1 million for joint filers. (Other exemptions and phaseout thresholds exist for single filers and married filing separately, and are also adjusted.)
  • Expands the use of 529 accounts to cover tuition for students in K-12 private. Allows distributions of up to $10,000 per student tax-free from 529 accounts to be used for elementary, secondary and higher tuition.
  • Retains retirement savings options such as 401(k)s and IRAs
  • Net capital gains and qualified dividends would continue to be taxed at the current 0%, 15%, 20% rates and also would continue to be subject to the 3.8% net investment tax
  • Repeals the moving expense deduction (except for active duty military personnel) and eliminates the alimony deduction effective 2019 for divorce agreements executed after December 31, 2018 (though those receiving alimony no longer count it as income). Retains other above-the-line deductions, including educator expenses and student loan interest. Graduate student tuition waivers also remain in place.
  • Repeals all itemized deductions subject to the 2% floor (home office, license and regulatory fees, professional dues)
  • Retains adoption credit
  • Retains current law ownership period for the exclusion of gain from the sale of a principal residence
  • Continues to allow graduate students to exclude the value of reduced tuition from taxes
  • Continues to allow deductions for student loan interest and for qualified tuition and related expenses

Individual Mandate Penalty

  • Reduces the individual mandate penalty to $0 in 2019, effectively repealing it

Businesses (in general)

  • C corporate tax rate 21% (effective January 1, 2018)
  • Fiscal year end filers may have blended rate for 2018
  • Corporate alternative minimum tax (AMT) is repealed for tax years beginning after December 31, 2017
  • Dividends Received Deduction – Reduces the deduction for dividends received from other than certain small businesses or those treated as “qualifying dividends” from 70% to 50%. Reduces dividends received from 20% owned corporations from 80% to 65%
  • Capital investment – Allows full (100 percent) expensing of short-lived capital investment, such as machinery and equipment, for five years, then phases out the provision over the subsequent five, and raises Section 179 small business expensing cap to $1 million with a phaseout starting at $2.5 million. Allows immediate write-off of qualified property placed in service after 9/27/17 and before 2023. The increased expensing would phase-down starting in 2023 by 20 percentage points for each of the five following years. Eliminates original use requirement. Qualified property excludes certain public utility property and floor plan financing property. Taxpayers may elect to apply 50% expensing for the first tax year ending after 9/27/17
  • 179 – Expands “qualified property” to include certain depreciable personal property used to furnish lodging, and improvements to nonresidential real property (such as roofs, heating, and property protection systems)
  • Interest Expenses – Caps net interest deduction at 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) for four years, and 30 percent of earnings before interest and taxes (EBIT) thereafter. Limits deduction to net interest expense that exceeds 30% of adjusted taxable income (ATI). Initially, ATI computed without regard to depreciation, amortization, or depletion. Beginning in 2022, ATI would be decreased by those items. Regulated utilities are generally excepted.
  • NOLS – Eliminates net operating loss carrybacks while providing indefinite net operating loss carryforwards, limited to 80 percent of taxable income. Limits NOLs to 80% of taxable income for losses arising in tax years beginning after 2017. Repeals carryback provisions, except for certain farm and property and casualty losses; allows NOLs to be carried forward indefinitely
  • Repeals like-kind exchanges except for real property
  • Contributions to Capital (Sec. 118) – Retains Section 118; clarifies that such contributions do not include any contribution in aid of construction, any other contribution made by non-shareholders and any contribution made by any governmental entity or civic group. Clarification would generally apply to contributions made after the date of enactment
  • Research and Experiment expenses – domestic research expenses required to be amortized over 5 years; foreign research expenses required to be amortized over a 15 year period;
  • Business Credits – modifies, but does not eliminate, the rehabilitation credit and the orphan drug credit, while limiting the deduction for FDIC premiums. Research and development credit is retained without modification from current law.
  • Modifies rehabilitation credit to provide 20% historic credit ratably over 5 years, repeals credit for pre-1936 property
  • Work Opportunity Tax Credit, New Markets Tax Credit, Low Income Housing Tax Credit – Retains current law for WOTC, NMTC, and LIHTC, however, modifies rehabilitation credits for old and/or historic buildings
  • Orphan drug credit survived, but modified – Reduces credit to 25% and generally would need to exceed 50% of the average expenses over a three-year period. Reduced credit applies to amounts paid or incurred in tax years beginning after 12/31/17
  • “OLD” 9% Domestic Production Deduction (Sec. 199) repealed for tax years after 2017 (see new QBI deduction)
  • Limits meals and entertainment expenses, including meals for the convenience of the employer
  • Repeals deduction for qualified transportation fringes, including commuting except as necessary for employee’s safety
  • Cash method of accounting – Increases eligibility to businesses with up to $25 million in income; taxpayers that meet the new $25 million threshold are also not required to account for inventories under Sec. 471 or apply 263A; Accounting method changes may be treated as initiated by the taxpayer and made with the consent of the Secretary.
  • Energy provisions – Does not repeal any conventional energy tax credits and leaves untouched the deductibility of intangible drilling costs, taxpayers’ eligibility to take percentage depletion and the designation of certain natural resource related activities as generating qualifying income under the publicly traded partnership rules
  • Provides tax credit to certain employers who provide family and medical leave (sunsets 12/31/19)
  • Executive compensation changes
    • Expands the Section 162(m) $1 million deduction limit that applies to compensation paid top executives of publicly held companies for TY beginning after 12/31/17
    • Covered employees would to include the CFO and all executives once identified
    • Eliminates the performance-based compensation exceptions and extends deduction limitation to deferred compensation paid to executives who previously held a covered employee position
  • Expands applicability of the deduction limitation to certain foreign private issuers and private companies that have publicly traded debt
  • Provides a transition rule for compensation paid pursuant to a plan under a written binding contract that is in effect on 11/2/17 and is not materially modified thereafter
  • Eliminates deduction for certain fringe benefit expenses
  • Business entertainment activities and membership dues; transportation or commuting expenses are not excludable from income or deductible by the employer
  • Employee achievement awards may not be deducted or excluded from income if the award is paid in cash, gift cards, meals, lodging, tickets, securities, or other similar items
  • No longer exempts employer-provided eating facilities from 50% deduction limitation; in 2026, deductions are completely disallowed for employer-provided eating facilities and meals provided for the convenience of the employer
  • Adds a new income inclusion deferral election allowing deferral of tax for options and restricted stock units issued to qualified employees of private companies; applies on or after 12/31/17

Pass-Through Entities (rules specifically for pass-through entities)

  • Pass-through Income – 20% deduction for pass-through income limited to the greater of (a) 50 percent of wage income or (b) 25 percent of wage income plus 2.5 percent of the cost of tangible depreciable property for qualifying businesses, including publicly traded partnerships but not including certain service providers. Limitations (both caps and exclusions) do not apply for those with taxable incomes below $315,000 (joint) and $157,500 (single), and phase out over a $100,000 range.
    • Allows individual taxpayers to deduct 20% of domestic “qualified business income” (QBI) from a partnership, S corporation, or sole proprietorship (“qualified businesses”) subject to certain limitations and thresholds. Trusts and estates may take the deduction. Effective for tax years beginning after 12/31/17 and before 1/1/26
    • QBI for a tax year means the net amount of domestic qualified items of income, gain, deduction, and loss with respect to a taxpayer’s qualified businesses. “Qualified businesses” does not include specified services trades or businesses such as accounting, law, health, several other professions, service businesses related to investing, but does include engineering and architecture trades
    • Deduction is limited for individual taxpayers with taxable income above $315,000 (mfj) and $157,500 (sf) to the greater of 50% of the W-2 wages, or the sum of 25% of the W-2 wages plus 2.5% of the unadjusted basis of all qualified property.
  • Other key changes include repeal of partnership technical termination rules; a rule imposing a three-year holding period to treat capital gain as long-term capital gain for certain partnership interests held in connection with the performance of certain services; a rule limiting taxpayers (other than C corporations) ability to deduct business losses for tax years beginning after 12/31/17 and before 1/1/26, with excess business losses carried forward
  • Disallows active pass-through losses in excess of $500,000 for joint filers; $250,000 for all others (sunsets 12/31/25)
  • Tax gain on sale of a partnership interest on look-thru basis
  • Charitable contributions and foreign taxes taken into account in determining limitation on allowance of partner’s share of loss
  • Expands the definition of substantial built-in loss for purposes of partnership loss transfers
  • Modifies treatment of S corporation conversions into C corporations
  • Recharacterization of certain gains on property held for fewer than 3 years in the case of partnership profits interest held in connection with performance of investment services

International Income

  • Moves to a territorial system with anti-abuse rules and a base erosion anti-abuse tax (BEAT) at a standard rate of 5 percent of modified taxable income over an amount equal to regular tax liability for the first year, then 10 percent through 2025 and 12.5 percent thereafter, with higher rates for banks.
  • GILT (global intangible low taxed income (minimum tax on foreign earnings)
  • Foreign derived intangible income (formula) (not just a patent box)
  • Domestic corporations allowed a 100% deduction for the foreign-source portion of dividends received from 10% owned (vote or value) foreign subsidiaries. (Deduction not available for capital gains or directly-earned foreign income)
  • One-time transition tax on post-1986 earnings of 10% owned foreign subsidiaries accumulated in periods of 10% US corporate shareholder ownership. 15.5% rate on cash and cash equivalents, and 8% rate on the remainder
  • Mandatory annual inclusion of “global intangible low-taxed income” (GILTI) determined on an aggregate basis for all controlled foreign corporations owned by the same US shareholder. Partial credits for foreign taxes properly attributable to the GILTI amount
  • Domestic corporations allowed a deduction against foreign-derived intangible income (37.5% deduction initially, reduced to 21.875% for tax years beginning after 12/31/25) and mandatory GILTI inclusion (50% deduction initially, reduced to 37% for tax years beginning after 12/31/25)
  • No deduction for certain related party payments made pursuant to a hybrid transaction or entity
  • If certain thresholds are met, a “base erosion minimum tax” levied on an applicable taxpayer’s taxable income determined without regard to certain deductible amounts paid or accrued to foreign related persons; depreciation or amortization on property purchased from foreign related persons; and certain reinsurance payments to foreign related persons. Generally 10% rate for tax years beginning before 12/31/25, and 12.5% thereafter, but 11% and 13.5% for banks and registered securities dealers
  • Deemed repatriation – Enacts deemed repatriation of currently deferred foreign profits at a rate of 15.5 percent for liquid assets and 8.0 percent for illiquid assets.

Estate Taxes

  • Doubles the estate tax exemption in 2018 (would continue to be adjusted for inflation)

Exempt Organizations

  • 21% excise tax on excess tax-exempt organization executive compensation (certain exceptions provided to non-highly compensated employees and for certain medical services)
  • Unrelated business income separately computed for each trade or business activity
  • Charitable deduction not allowed for amounts paid in exchange for college athletic event seating rights
  • Creates excise tax based on investment income of private colleges and universities with endowment per student of at least $500,000
  • Repeals the substantiation exception for certain contributions
Note: As a general rule; many of the individual tax law changes are temporary while many of the corporate changes in the tax law changes are permanent. Although the House passed the latest tax reform package in late September that would have made the individual tax cuts permanent, the new Democrat-led House puts GOP tax cuts in jeopardy.


Single-Family Rentals: From Crisis‑Era Bargains to Thriving Market

By Stuart Eisenberg

Ten years removed from the financial crisis, the single-family rental (SFR) market has seen explosive growth. With mortgages at the center of the crisis, the resulting spike in foreclosure rates and housing prices challenged homeownership as the status quo. The crash brought an outpouring of demand into the rental markets. From 2005 to 2015, more than 8 million new rental housing units were built to accommodate that demand, according to Harvard University’s Joint Center for Housing Studies.

Real Estate Investment Trusts (REITs) and other institutional investors first entered the SFR arena during the heart of the crisis. The business strategy at the onset was simple: Purchase distressed assets and wait for the prices to increase, converting properties into rentals to supply the newly ignited demand in the meantime.

As the housing market recovers, demand for rental properties has not subsided. Riding the wave of that demand, SFR REITs have built a sustainable business model. Smaller landlords still outnumber corporate SFR investors by a wide margin, but REITs have carved out a small share of the market. According to Seeking Alpha, 130,000 of the 16 million SFR units are REIT-owned.

The SFR market comprises a small, but mighty and expanding, segment of today’s overall REIT landscape. Blackstone’s successful debut of Invitation Homes in 2017 granted further legitimacy to a REIT sector still in its infancy. As the fifth-listed SFR REIT, Invitation Homes raised $1.54 billion—the largest raised by a REIT across all sectors in three years. With rental demand forecasted to continue, SFR REITs are well-positioned for the future.

What’s tipping the scales from homeownership to rentals?

Millennials are often identified as key drivers in the shift from owning to renting, and the data supports that claim: nearly two-thirds of millennials lived in rental properties in 2016. However, a strictly generational-lens obscures the full story. Many of those younger renters reside in apartments in large cities versus single-family rental homes more commonly found in markets like Atlanta, the outskirts of Los Angeles, and Phoenix.

A recent analysis published in Seeking Alpha reveals that the majority (58 percent) of SFR tenants are between 35-64 years old—predominantly Generation Xers. Additional research suggests income levels might be the common variable. A U.S. Census survey reveals that about half of American renters are cost-burdened—rent accounts for more than 30 percent of their income.

The path forward for SFR REITs

With just a fraction of the nation’s SFR homes under institutional investors’ ownership, opportunities for REITs to further expand into this space are vast. In their early years, SFR REITs prioritized growth, primarily through acquisitions of pools of foreclosed properties and consolidation. Invitation Homes became the largest SFR company following a 2017 merger with Starwood Waypoint Homes—a REIT already the product of a merger two years earlier.

While juggling the day-to-day balance of keeping vacancies low and rents competitive, some players in the SFR space are expanding their purview beyond property management. American Homes for Rent, for instance, is actively engaged in bringing new supply online through partnerships and subsidiaries with developers specialized in ‘build-to-rent’ properties. Overall new ‘build-to-rent’ properties increased by six percent between 2016 and 2017, according to the National Real Estate Investor, a gesture to market confidence in future demand.

What’s next for corporate SFR investors? REITs are emerging from their growth-phase and breaking new ground to cement their place in the SFR industry.

This article originally appeared in BDO USA, LLP’s “BDO Real Estate and Construction Monitor” (Summer 2018). Copyright © 2018 BDO USA, LLP. All rights reserved.

Final ASU 2018-08 Issued On Guidance For Contributions

By Lee Klumpp, CPA, CGMA

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made in June 2018 to clarify the accounting guidance related to contributions made or received. This ASU applies to all entities (including business entities) that make or receive contributions of cash and other assets, including promises to give and grants. The final ASU can be accessed here.


The purpose of the ASU is to address long-standing diversity in practice and the difficulties in determining whether grants and similar contracts are exchange transactions or contributions. In addition, the ASU addresses the evaluation of whether a contribution is conditional or unconditional, which affects the timing of the revenue recognition. And finally, the ASU addresses the issue of when a contribution is restricted.

As we discussed in our Spring 2018 newsletter in the article entitled, Updates to FASB Proposed Guidance for Contributions, the introduction of the new revenue recognition standard also made it imperative for the diversity in practice to be addressed. The distinction between contributions and exchange transactions is important because it determines whether an entity should follow the guidance in Accounting Standards Codification (ASC) 988-605, Not-for-Profit Entities – Revenue Recognition, if the transaction is deemed to be a contribution, or the guidance in ASC Topic 606, Revenue from Contracts with Customers, if deemed to be an exchange transaction. Contributions are scoped out of Topic 606.

Main Provisions

Characterizing Grants and Similar Contracts in Reciprocal Exchanges or Contributions

The ASU clarifies and improves the scope and accounting guidance for both contributions received and made to assist all entities in evaluating whether a transaction should be accounted for as a contribution or an exchange transaction. The ASU provides sample indicators of a contribution and exchange transaction to assist entities in making this determination.

The amendments in the ASU clarify how an entity determines whether a resource provider is participating in an exchange transaction by evaluating whether the resource provider is receiving commensurate value in return for the resources transferred or on the basis of the following:

  • The resource provider is not one and the same with the general public. Benefits received by the public as a result of the assets transferred is not equivalent to comparable value received by the resource provider.
  • Exercise of the resource provider’s mission or the positive sentiment from acting as a donor doesn’t constitute comparable value received by the resource provider for purposes of determining whether the transfer of assets is a contribution or an exchange.

If the resource provider itself is not receiving comparable value for the resources provided, an entity must determine whether a transfer of assets represents a payment from a third-party payer on behalf of an existing exchange transaction between the recipient and an identified customer. If this is the case, this should be accounted for under Topic 606 or other guidance that applies.

In completing this analysis, the type of resource provider should not factor into the determination.

See ASC 958-605-15-6 for specific transactions that should be excluded from this analysis of contribution versus exchange.

Determining Whether a Contribution is Conditional

The ASU amendments require an entity to determine whether a contribution is conditional based on whether an agreement includes a barrier that must be overcome and either a right of return of assets transferred or a right of release of a promisor’s obligation to transfer assets. If the agreement includes both of these, it is deemed to be conditional, and the recipient is not entitled to the transferred assets until it has overcome the barriers in the agreement.

The amendments include the following indicators to determine whether an agreement contains a barrier:

  • The inclusion of a measurable performance-related barrier or other measurable barrier.
  • The extent to which a stipulation limits discretion by the recipient on the conduct of an activity.
  • Whether a stipulation is related to the purpose of the agreement.

A probability assessment about the likelihood of the recipient meeting the stipulation is not a factor in determining if there is a barrier.

Examples of barriers are provided in the amendments.  Depending on the facts and circumstances some indicators may be more significant than others, but no single indicator is determinative.

The right of return or right of release must be determinable from the agreement or another document referenced in the agreement.  The agreement does not have to specifically include the phrases “right of return“ or “release from obligations“; however, the agreements should be sufficiently clear to be able to support a reasonable conclusion about whether the recipient would be entitled to the transfer of assets or release of obligation. In the absence of any apparent indication that a recipient is only entitled to the transferred assets if it has overcome a barrier, the transaction should be deemed a contribution without donor-imposed conditions.

In the case of ambiguous donor stipulations, a contribution containing stipulations that are not clearly unconditional should be presumed to be a conditional contribution.

If a contribution has been deemed to be unconditional, the entity should then consider whether the contribution is restricted on the basis of the existing definition of the term “donor-imposed restriction.” The definition of a donor-imposed restriction includes a consideration of how broad or how narrow the purpose of the agreement is, and whether the resources are available for use only after a specified date.

Simultaneous Release Option

The ASU provides a nonprofit entity with the ability to elect a policy to report donor-restricted contributions whose restrictions are met in the same reporting period as the revenue is recognized as support within net assets without donor restrictions. To do this the entity must have a similar policy for reporting investment gains and income, report consistently from period to period and disclose its accounting policy. If this policy is elected for donor-restricted contributions that were initially conditional contributions, they may do so without electing this for other donor-restricted contributions.  The election of this policy has to be used consistently from year to year and be disclosed.


The amendments in the ASU should be applied on a modified prospective basis; however, retrospective application is permitted as well.

In the financial statements in the year of adopting the ASU under the modified prospective basis the amendments should be applied to all agreements that are either not completed as of the effective date or entered into after the effective date. A completed agreement is an agreement for which all revenue (of a recipient) or expense (of a resource provider) has been recognized before the effective date under the current guidance. The amendments in the ASU should be applied only to the portion of revenue or expense that has not yet been recognized under current guidance before the effective date of the ASU. No prior period statements should be restated and there should be no cumulative effect to opening net assets or retained earnings balances at the beginning of the year of adoption. Standard disclosures for the accounting change should be included in the footnotes in the year of adoption. The ASU contains additional clarifying transition guidance to assist entities if they choose this adoption basis.

Effective Date

The effective dates vary depending on whether you are a resource recipient or resource provider and the nature of the entity as outlined below. The effective dates for resource recipients were established so that the effective date of the ASU would align with the effective date of ASC Topic 606. The effective dates for resource providers was delayed by one year. Early adoption of the ASU is permitted.

Resource Recipient

Public business entities and nonprofits that have issued, or are a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or over-the-counter market should apply the amendments in the ASU on contributions received to annual periods beginning after June 15, 2018.

All others should apply the amendments for transactions in which the entity serves as a resource recipient to annual periods after Dec. 15, 2018.

Resource Provider

Public business entities and nonprofits that have issued, or are a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or over-the-counter market should apply the amendments in the ASU for transactions in which the entity serves as a resource provider to annual periods beginning after Dec. 15, 2018.

All other entities should apply the ASU for transactions in which the entity serves as the resource provider to annual periods beginning after Dec. 15, 2019.


The ASU contains implementation guidance and practical illustrations to assist with the implementation.

The ASU will likely result in more grants and contracts being accounted for as unconditional or conditional contributions rather than exchange transactions compared to current guidance.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2018). Copyright © 2018 BDO USA, LLP. All rights reserved.

Tariffs Spark Fears of Rising Construction Costs: Could Investment in Technology be the Answer?

By Ian Shapiro

As U.S. trade policy decisions continue to dominate headlines, the uncertain future of high-demand import prices has business leaders and lawmakers anxious. Earlier this year, President Trump announced a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports that took effect on March 23. While the European Union (EU), Canada, and Mexico were granted a temporary reprieve, Trump declined to extend their exemption.

China was the first to implement retaliatory tariffs on U.S. exports, such as soybeans, planes, and cars. Since then, the U.S. has been in talks with China to de-escalate the situation, but no permanent solution has been reached. After their exemption expired, Mexico announced $3 billion in tariffs against U.S. exports, including: pork, apples, potatoes, and bourbon. Canada and the EU both issued retaliatory tariffs as well.

While the stated objective of this trade policy is to “level the playing field” for American manufacturers—and many trade experts believe cheap imports have hurt the domestic steel industry—tariffs may have undesirable and unintended consequences that extend far beyond manufacturing. Many U.S. contractors rely on products comprised of foreign steel and aluminum, which are shipped in from all around the world.

Amid already rising material prices and skilled labor shortages, the tariffs could exacerbate existing unfavorable conditions in the construction sector. Despite these persistent issues, however, demand for new construction is high, as is the need to repair roads, bridges, pipelines, and other vitally important infrastructure. Addressing workforce challenges and minimizing costs is an important step for the construction sector to take full advantage of the potential offered by high demand for new projects.

Prevailing Winds in Construction

Over the past year, costs have steadily risen steadily for contractors but haven’t yet been passed along to their customers. More specifically, the producer price index for construction inputs rose 6.4 percent over the last 12 months, while the producer price index for what contractors charge has risen just 4.2 percent. Rising input costs and resulting higher prices will delay new infrastructure and development projects, as well as limit construction companies’ ability to expand, hire and retain personnel, and make vital investments in new technologies and tools.

Contractors are already feeling the tariffs’ effects, as their suppliers aren’t sure how to hedge against the unpredictability of future prices. The outcome of renegotiated trade agreements, such as NAFTA, and other geopolitical events may also add to the uncertainty.

Labor Shortages

For years, the construction industry has warned that skilled labor shortages are hindering productivity despite an otherwise positive industry outlook. In fact, the sector lost 2.3 million jobs between 2006 and 2011.

While the demand for skilled craftspeople has continually increased, fewer young people are entering the industry. Potential recruits just don’t see it as an attractive and viable career option, especially when other sectors are better known for being tech-savvy and offer perks that appeal to millennial workers.

Clearly, construction companies need to address the skilled-labor gap, and soon. Luckily, now is the perfect time to invest, and the two places to make these investments are clear: tech and people.

Why Tech?

New technologies, such as 3D modeling, virtual reality, machine monitoring, big data and analytics, robotics, and artificial intelligence can provide significant value to construction sector.

The confluence of these innovations—otherwise called the fourth industrial revolution—have the potential to streamline operations and decrease costs from the blueprint to the final product.

For instance, 3D modeling and virtual reality can be deployed to ensure crystal-clear communication between architects, engineers, and project managers. Self-driving and operating machinery could allow projects to continue work overnight with limited human oversight and remove workers from otherwise dangerous jobs. There have even been trial productions of 3D-printed homes, which were created in just 24 hours.

The long term and practical applications of 3D printing in residential construction remain to be seen, but the possibilities are clear. Components previously imported from around the world can now be produced domestically, even on site. These printed materials might be a way to minimize the financial impact in the event future tariffs are enacted.

Such innovations could at least partially alleviate the skilled-labor and costly material woes of the sector, but technology only goes so far.

Why People?

Skilled workers will always be in high-demand, but autonomous machinery can augment human labor to increase safety, speed and efficiency. Construction companies need to ensure that they match their investments in technology with investment in their own workforce. The construction industry has a workforce that skews older, so retraining initiatives will likely take first priority. The key to any digital transformation initiative is organizational buy-in. Companies need to foster cultures of continuous improvement, experimentation, and willingness to fail-fast to take full advantage of new technologies and make discoveries.

Aside from internal education and retraining, the key to a sustainable business is a strong talent pipeline. Construction companies need to make a compelling case for more people to pursue careers in the sector and demonstrating a commitment to new technology and innovation is central to attracting the next generation of workers.

Why Now?

With building material costs on the rise and tariffs sparking fears of further increases, contractors that harness new technology will be better positioned to take advantage of the high demand for new construction projects.

Tax reform also presents key opportunities for the sector. Companies need to undertake a thorough study of the new rules and of their own accounting and business strategies to determine what changes need to be made. Most notably, the reduction in the corporate tax rate will free up much-needed capital that companies should choose to invest where it counts.

This article originally appeared in BDO USA, LLP’s “BDO Real Estate and Construction Monitor” (Summer 2018). Copyright © 2018 BDO USA, LLP. All rights reserved.


10 Things Keeping Internal Audit Up At Night

By Ken Eye and Andrea Wilson

The internal audit (IA) function is vital to the health of any nonprofit, regardless of mission or scope. The audit committee and its individual members are crucial partners in safeguarding the integrity, purpose and, ultimately, the success of organizations.

But, they often face challenges navigating a strained regulatory environment, all while trying to do more with less. Adjusting to these new realities means that proper management is more important than ever. This article outlines the top 10 challenges keeping internal auditors up at night, and providing remedies to help them continue their critical work.


For most nonprofit organizations, change is inevitable. As the needs of communities, internal dynamics, priorities and leadership transform, nonprofits adjust their mission and strategies. While this dynamism is essential for organizations to further their work, change can create strain for internal auditors. Whether its expanding operations to a new location, working with new donors or rolling out a new organizational structure, internal auditors are often left scrambling to ensure compliance.

THE REMEDY: Change is unavoidable, but compliance headaches don’t have to be. Nonprofits should be proactive about integrating internal audit into large scale organizational changes. This means allocating IA resources to evaluate emerging compliance and legal requirements, incorporating IA into the strategic decision-making process at the outset, revising policies and procedures with the new compliance environment, and developing succession plans to facilitate smooth personnel changes. And, IA should not just be involved in the change process—organizations should allow internal auditors to conduct post-implementation assessments to ensure ongoing compliance.


The organizational culture of nonprofit organizations usually centers on a mission that employees are passionate about. This passion attracts staff personally motivated to help the overall organization succeed, but can come at the cost of internal controls. For nonprofits, “the cause” can often be promoted at any cost. Mid-level management professionals can be highly skilled in technical areas, but may lack knowledge in compliance, financial accountability and oversight. A lack of interactive communication between key administrative and program units within the organization can result in insufficient internal controls.

THE REMEDY: To balance maintaining organizational culture with proper operational management, communication is essential. Nonprofits should develop a sound communication strategy that brings the internal audit and compliance functions in regular contact with the rest of the staff. During these interactions, IA professionals should be sure to communicate how risk management practices align with overall organizational strategy and mission objectives. Bringing people together in this way helps make IA an integral part of an organization, rather than an afterthought.

Even when strong communications are in place, breakdowns are sometimes inevitable. Organizations should conduct regular assessments of business processes to determine where breakdowns in communication between business units occur. These assessments should help identify gaps that could pose significant risks to the organization.

Based on the results of these assessments, organizations should design and implement remediation plans, including scheduling necessary trainings for all employees and rolling out new process flows and accountability points to close any gaps.


Technological advances help organizations store and share data, but new technology is often implemented without the knowledge or involvement of the internal audit function, to potentially disastrous and costly results. Ideally, internal auditors should assess new technology well before it’s utilized to review issues like control over sensitive data, continuity of the technologies between offices, and adherence to compliance and regulatory requirements. Without this review, nonprofits leave themselves open to a number of risky consequences, as well as operational inefficiencies.

THE REMEDY: Technology can be a huge boon to nonprofit organizations, but only when it’s used wisely. IA should work with nonprofit leaders to first assess technology currently being used organization-wide, and then identify what the organization still needs to address. Internal auditors can assist with researching and proposing approved technologies for organization-wide usage, to facilitate cohesion and compliance and to help management improve system efficiencies.

Organizations also need to implement proper internal controls to ensure they’re mitigating technology risk as much as possible. IA can conduct a risk assessment of each technology used and implement policies to restrict or prevent the use of high-risk programs or devices. Organizations should also require similar checks and risk assessments for all new technology prior to usage.


With new technologies exploding in popularity, cybersecurity risks abound. Nonprofit organizations often mistakenly believe they aren’t of interest to cyber criminals, but the amount of personal data they store from donors and employees, and the tendency to underinvest in cybersecurity measures, make them an ideal target. It can be difficult for nonprofits to maintain up-to-date technology and hardware, keep pace with technological changes and navigate the shifting regulatory landscape with their limited funding. Nonprofits also frequently partner with technology suppliers and other contractors that leave them open to third-party cyber risks.

THE REMEDY: The first step to mitigating cyber risk is to conduct an organization-wide cybersecurity risk assessment that includes partner, contractor and technology supplier cybersecurity as part of the due diligence process. This assessment should shed light on where internal and external gaps exist. Following the assessment, organizations should implement additional controls by updating policies, procedures and internal controls to address identified gaps.

A startling number of cyber incidents arise from employees unknowingly exposing the organization to bad actors. Training staff to recognize these exposures is fundamental to their prevention. Nonprofits need to regularly communicate risks to employees and vendors to ensure everyone is adhering to established policies.

Monitoring cyber risk needs to be an ongoing effort. Nonprofits should develop a risk assessment schedule to examine internal partner, contractor and technology supplier cybersecurity on a quarterly or annual basis. Internal audit can assist with implementing these assessments.


Nonprofit organizations often have the unique challenge of negotiating compliance requirements across multiple funding sources including government entities, individuals, private foundations or other organizations. This challenge is only growing as budget cuts force organizations to focus on diversifying revenue streams and expanding donor pools, and with a recent increase in donor audits of specific grant activity at the materiality level. Further complicating the matter is a growing emphasis on international accounting standards (as opposed to relying on U.S. generally accepted accounting principles).

THE REMEDY: To clarify exactly what funding requirements an organization faces, it should conduct a compliance assessment, comparing requirements across all donor agreements to determine areas of overlap and areas of discontinuity. These agreements should then be compared against written policies and current practices to identify gaps.

Remediation plans can amend policies and procedures, and staff trainings should be conducted to ensure all levels and functions understand their role in maintaining compliance with funding requirements.

Staying current is critical. Nonprofits should develop a compliance assessment schedule, and IA and compliance departments need to stay on top of new funding streams and emerging trends so they can pivot when necessary.


Even though nonprofits are motivated by making an impact rather than money, organizations still face a host of hurdles when it comes to financial management. Many international nonprofits operate in countries with cash-based economies, making it tough to maintain adequate control of funds and sufficient supporting documentation. And new payment technologies, while enabling new and widespread operational tools, are often accompanied by verification and other control challenges. Nonprofits also face resource constraints and may have a limited number of finance staff to oversee financial management processes, which can be manual and prone to human error. For organizations with several offices, branches often operate with little to no centralized oversight over their accounting and cash management procedures.

THE REMEDY: Nonprofits should review cash management procedures and evaluate typical expenditure cycles to identify potential risk areas across the entirety of an organization. Internal audit is central in assisting management in testing cash management controls.

  • Organizations can then implement additional controls in keeping with best practices, like limiting cash handling or volume of cash transactions where possible. Nonprofit managers should consider investing in technologies and resources that limit high risk processes.

Standardizing procedures will help cut down on variance of practices between offices. All branches should centralize accounting and reporting procedures. At a minimum, each location should maintain copies of supporting documentation of all expenditures and financial reporting and should regularly review them with staff.


Vendor actions can create extremely adverse consequences for nonprofit organizations. Concerns range from reputation damage to the vendor’s illegal acts being attributed to the nonprofit organization. This risk applies to all types of organizational relationships with vendors and nonprofits, especially those administering federal grant programs given increased subrecipient monitoring and due diligence requirements.

Despite the risks, most nonprofits rely on partners or contractors for critical program functions. This makes it difficult to conduct due diligence reviews and monitoring activities, particularly when the partners/contractors are numerous, geographically dispersed or operating overseas. Partners are normally tasked with self-reporting, meaning frauds like ghost employee payments are easily hidden. Contractors also usually have access to organizational networks and information, creating an additional layer of risk.

THE REMEDY: Organizations should review current policies and procedures to ensure robust due diligence and monitoring processes are in place for all third-party relationships. This should include an assessment of partner/contractor access to project data, systems and networks, and the limitation of access where possible.

Nonprofits need to implement additional monitoring and verification processes, including:

  • Conducting regular spot reviews or investigations of reported data
  • Requiring partners and contractors to certify financial and programmatic assertions
  • Verifying number of partner/contractor staff and salary payment amounts
  • Conducting unannounced site visits
  • Considering third-party verification systems

These processes should be re-evaluated on a regular basis to ensure their effectiveness.


Nonprofit organizations rely heavily on non-competitive procurement processes due to several reasons. Often, procurement procedures, selection criteria and selection decisions are inadequately documented, leaving organizations unable to show that there was no bias in the selection process. Preferred vendor lists are rarely updated, and control of vendor solicitation, selection and site visits is often left with just a few individuals.

THE REMEDY: IA should review current procurement procedures against industry standards and donor requirements. They should also be transparent about their procurement policies including:

  • Publicly announcing tenders as much as possible
  • Updating vendor lists through open competition as frequently as possible
  • Verifying vendors and prices through in-person or third-party checks
  • Comparing bids against market prices
  • Documenting criteria and selection procedures to bid samples with procurement files
  • Ensuring procurement/selection committees are rotated on a regular basis

For organizations that distribute goods, inventory management and oversight can prove to be major sources of stress for internal auditors. Often, nonprofits have difficulties verifying receipt of goods or services by their intended beneficiary, and confirming the goods provided are in the same quality and quantity as what was purchased. Diversion, theft and product substitution are especially difficult to identify. Despite resource and capacity issues, recent increased scrutiny of internal controls and supply chain management means that organizations need to address these issues sooner rather than later.

THE REMEDY: To help combat issues in the distribution chain, organizations need to shore up monitoring procedures by:

  • Establishing monitoring teams for critical points along the supply chain
  • Implementing two-step or three-step verification procedures at each critical stage
  • Hiring a third party to conduct site visits and monitor transportation and distribution
  • Using technology to assist in tracking and monitoring, including unique identifiers on products for inventory and tracking purposes and requiring distributors to take time-stamped photos/videos of deliveries
  • Another effective risk mitigation strategy is to communicate directly with beneficiaries. Organizations can hold pre-distribution meetings with communities to review any past issues or concerns. Detailed packing lists and/or photographs of parcel contents should be inside packages. Nonprofits can include in the contract clauses with distributors to withhold payments to distributors until delivery is confirmed. This further ensures the distributor is holding up its end of the agreement.

It’s the job of the internal audit function to uncover fraud, waste and abuse in nonprofit organizations, but often they are set up for failure. Due to a lack of communication between functional and program units within organizations, increased used of third parties, outdated systems, increased regulations (and the list goes on…), the opportunity to exploit a nonprofit’s controls is growing at a time when IA resources are shrinking and reputational risk for organizations is at an all-time high.

THE REMEDY: Preventing fraud starts within an organization itself. Stakeholders should evaluate current fraud prevention, detection and investigation measures against regulatory requirements and develop a plan to remediate any identified gaps. They should also be sure to provide accessible fraud reporting mechanisms for all employees, partners, grantees/beneficiaries and stakeholders.

  • Despite resource constraints, organizations need to ensure IA has the appropriate level of resources to detect and investigate potential cases of fraud. Funds should also be set aside for visits to third parties and office locations and the establishment of a fraud hotline. Put a process in place to notify any impacted funders in a timely manner and in line with donor requirements to prevent exacerbating the impact when fraud does occur.

It’s also key to establish a fraud prevention and detection assessment schedule so practices can stay up-to-date and make sure nothing falls through the cracks.

Internal auditors at nonprofits have a tough, but essential job that’s key to keeping the organization focused on mission fulfillment. By assessing current practices, developing action plans and regularly monitoring activities, organizations can mitigate risk and serve their beneficiaries more effectively.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2018). Copyright © 2018 BDO USA, LLP. All rights reserved.

Mall Reit M&A Could Accelerate

By Stuart Eisenberg

On the heels of Brookfield Property Partners’ acquisition of GGP, BDO USA Partner Stuart Eisenberg posits that retail REITs may have a bumpy road ahead. The second-largest U.S. mall operator, Brookfield Property Partners, is poised to expand its portfolio with the acquisition of retail REIT GGP, pending final shareholder approval. After rejecting an earlier bid, the GGP board approved a second bid by Brookfield for a total of about $15.3 billion in a combination of cash and stock priced at $23.50 per share, Reuters reported.

Many analysts say the deal significantly undervalues GGP’s assets. Markets did not appear to view the deal favorably, and mall REITs’ stocks slid the day after the announcement. Widespread investor skepticism towards retail may be to blame for GGP’s willingness to accept the deal. Announcement of nationwide store closings from name-brand operators and retailers may have created popular sentiment that all retailers and retail operators are suffering. For instance, after Macy’s announced more than 100 store closings last year, GGP’s stock fell despite none of the closures taking place in a GGP mall.

E-commerce’s rise, changing consumer tastes and the proliferation of mega-stores have contributed to malls’ nationwide decline. Retailers with many brick-and-mortar locations have struggled to compete against their competitors’ increased convenience and lower cost.

In 2017, a slew of major retailers including Sears, Macy’s, RadioShack and Sports Authority announced nationwide store closings while more than 20 other retailers filed for bankruptcy, according to the BDO Biannual Bankruptcy Update. Retailers haven’t fared much better in 2018. By the end of the first quarter, more than 70 million square feet of retail space was already set to shutter, according to CoStar.


Recent years have hit Class B and C malls the hardest, but even retail operators of Class A malls, like GGP, have faced their fair share of difficulties. Given the constant stream of bad news for retail, why might Brookfield and other buyers believe malls to be a viable investment, even at a bargain?

Mall owners and buyers might see an opportunity to repurpose and reposition their beleaguered mall assets to better fit current consumer tastes. This may involve adding new lifestyle amenities, such as upscale dining options and gyms, or allocating space for offices and even residential property.

The Independence Mall in North Carolina recently announced plans that take this approach towards repositioning a property. The mall will demolish the former Sears location, and among other additions, build a hotel and residential spaces. Since the mall is only 7 miles from the Atlantic Ocean, the owners believe the mall has unrealized value that the changes will unlock.

Owners may also seek to capitalize on the recent coworking boom. For example, Hudson Bay Co. recently opted to sell Lord & Taylor’s flagship Fifth Avenue location to WeWork. Other property owners may follow suit or choose to convert and lease their holdings to coworking spaces, which may be a particularly popular choice in gateway markets. Alternatively, if the property is in proximity to a large population center outside an urban area, owners may choose to convert to distribution centers or other kinds of mixed-use spaces for a steady stream of income.

We’ll have to wait and see which specific kinds of repositioned spaces succeed, as rapidly changing consumer tastes and technology may further disrupt mall repositioning initiatives in ways no one’s even dreamed.

As the GGP deal demonstrates, the road ahead is unclear when it comes to large retail locations. Mall owners, including retail REITs, may have to accept a lower price than they might like for their assets in the current climate, or move to repurpose their properties to fit new consumer tastes.

This article originally appeared in BDO USA, LLP’s “BDO Real Estate and Construction Monitor” (Summer 2018). Copyright © 2018 BDO USA, LLP. All rights reserved.