November 26, 2019

SOC Reports: What Are They and Why Do They Matter to My Business?

In today’s connected and digital business world, more and more companies are relying on service providers to help achieve their business objectives. Because of this, SOC (System and Organization Control for Service Organizations) reports are gaining more importance. SOC reports are designed to help companies get a handle on the internal controls and cybersecurity of their service providers.

The Purpose of SOC Reports

SOC reports are produced by service organizations that provide services to other entities. The intent of a SOC report is to provide an understanding into the relevant controls in place related to the service provided. SOC reports are key inputs for developing trust as the functioning of the controls is tested by an independent CPA firm, similar to a financial statement audit. Each variant of SOC report is designed to help service organizations meet specific user needs.

Unfortunately, the fundamental concepts and naming of SOC reports are inherently confusing. This post will help you understand the basics of SOC reports and how they can be used in your business.

SOC 1 vs. SOC 2

There are two main categories of SOC reports:


A SOC 1 report is appropriate when a company has outsourced a key business process to an external service provider. This report focuses on internal controls around transaction processing at the service provider. The service organization producing the SOC 1 report can tailor the contents of its report to the key risks and controls that are important to its customers. The report is generally considered an ‘auditor to auditor’ communication, as the external auditor of the customer will need to understand the operating effectiveness of controls put in place by the service provider in order to complete its financial statement audit.


A SOC 2 report is perfect for when a business needs to understand the cybersecurity and technology controls in place at a service provider. This report always has cybersecurity at its core but also can include other control areas like privacy or availability. The SOC 2 report is intended for management of its customers to provide them with assurance regarding key cyber risks and controls. The content of SOC 2 reports is pre-defined by the American Institute of Certified Public Accountants (AICPA).

There are significant similarities between SOC 1 and SOC 2 reports. Generally, SOC 1 reports contain similar cyber controls as a SOC 2 report but also include other controls relevant to the outsourced business process. In some circumstances, a business might determine that a combination of both SOC 1 and SOC 2 are necessary to ensure the internal controls at their service provider are operating effectively.

Type I vs. Type II

As if that isn’t confusing enough, for both types of SOC reports, SOC 1 and SOC 2, there are two different ‘flavors’ of SOC reports:

Type I

A Type I report is not as desirable as a Type II report. A Type I report indicates the design of the controls is adequate, but the specific controls are not actually tested. A Type I report is issued as of a specific date.

In formal terms, a Type I reports on the “fairness of the presentation of management’s description of the service organization’s system and the suitability of the design of the controls to achieve the related control objectives included in the description as of a specified date.”

Type II

Regardless of whether it’s a SOC 1 or a SOC 2 report, the Type II report is what you want to see. A Type II report not only indicates the design of the controls is adequate, but the specific controls are tested by the independent CPA firm to verify they are operating effectively. These controls are tested over a period of time, generally one year but could be shorter.

In formal terms, a Type II reports on the “fairness of the presentation of management’s description of the service organization’s system and the suitability of the design and operating effectiveness of the controls to achieve the related control objectives included in the description throughout a specified period.”

Why You Would Need a SOC Report

If you outsource a key business process to a third-party service provider, then you can use a SOC 1 report to ensure the internal controls at the service provider are actually in place and working.

If your business shares sensitive or private information with a service provider, a SOC 2 report can be obtained to verify the service provider has adequate cyber controls in place.

In both cases, SOC 1 and SOC 2, you want to verify the report is a Type II report, indicating the controls have been tested. If there are exceptions noted in the tests performed by the independent CPA firm, this could reveal a weakness in an internal control environment and a disconnect from your expectations of the service provider.

Deciding Between SOC 1 or SOC 2

Ultimately, whether you request a SOC 1 or SOC 2 report will depend on each entity’s specific situation. For example, if you are publicly traded and outsource a key business process to a third-party service provider, then Sarbanes-Oxley (SOX) already requires you to obtain a SOC 1. However, if you are a privately held startup which relies on outsourced technology infrastructure to conduct your business, then SOC 2 might be the better route for you to take, as a SOC 2 report will focus on security and availability to ensure that everything is secure and always up as you focus on growth and seek private investors.

If you outsource any key business process, you need to start thinking about obtaining a SOC report from your service provider.

How to Produce a SOC Report

If your company provides important business services to other businesses, or if you have access to sensitive information from your customers, you need to start preparing to produce a SOC report.

A great place to begin is with a SOC Readiness Assessment. As part of this process, a SOC specialist, generally a CPA firm, will begin by understanding your business and the requirements which are driving you to consider producing a SOC report. Then the SOC specialist will help facilitate a gap assessment to identify where your internal controls may not be sufficient to successfully produce a SOC report. The process may indicate where internal controls are needed but not in place, but can also identify areas where evidence of the control operating is insufficient or not being maintained. The SOC specialist can also help you mitigate risk by identifying opportunities to adopt leading practices or ways to improve controls by leveraging technologies such as workflow.

Once the gaps are identified, you can begin to build a plan to successfully produce a SOC report. It is critical to start the SOC Readiness Assessment effort as soon as possible so that your business has ample time to implement the new or upgraded controls. Organizational change is difficult and should not be rushed.

Anders can help companies identify SOC report needs and facilitate a SOC Readiness Assessment. If you have questions about if, why and what type of SOC report your business may need, contact an Anders advisor.

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November 25, 2019

IRS Confirms No Clawback for Gift and Estate Tax Exclusion – Act Now for the Biggest Benefit

The Treasury Department and the Internal Revenue Service (IRS) recently issued final regulations around the increased gift and estate tax exclusion amounts in effect from 2018-2025. The final regs confirm that individuals who take advantage of the increased gift and estate tax exclusion amounts will not be adversely impacted after 2025 when the exclusion levels are scheduled to drop to pre-2018 levels.

History of the Estate and Gift Tax Exemption Increase

The Tax Cuts and Jobs Act of 2017 doubled the estate and gift tax exemption, raising the base amount of $5 million to $10 million per person. This amount is how much an individual can give away tax-free, avoiding the estate tax rate of 40%. With inflation adjustments, the current estate tax exemption amount is $11.4 million per person. But the estate tax bump is temporarily scheduled to decrease after 2025. The question that was brought up frequently was whether gifts would be taxed later when the exemption fell. The proposed rules issued last year said no, however, there was no certainty and still many questions.

With the Treasury and IRS now issuing IR-2019-189, this now confirms that individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025, will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels. According to the IRS, individuals planning to make large gifts between 2018 and 2025 can now do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.

Benefits for Year-End Tax Planning

So, what does this mean for year-end tax planning? The regulations confirm that there will be no clawback for huge wealth transfers made under the Trump tax law. Although this is really no big surprise, as they follow the proposed rules that were issued a year ago. However, these final regulations provide finality and certainty—a reason for you and your estate lawyers to act and make gifts now, worry-free.

For example, in 2019, say that you put $10 million in a trust for your heirs, and you die in 2026 when the estate tax exemption possibly reverts to $5 million. Your estate wouldn’t have to pay tax on that extra $5 million gift. Instead, under the new regulations, the IRS says that the full $10 million in this example would be exempt forever.

The final regulation addresses concerns that were raised in public comments and includes several examples that show how these calculations work. It remains a complicated area with a lot to understand, such as the basic exclusion amount (BEA), the deceased spousal unused exclusion (DSUE), and the generation-skipping transfer (GST).

Note that the IRS stresses this only works if you make gifts during the 2018-2025 time period. The regulation examples make it clear that gift-givers get the benefit of inflation adjustments. Since this benefit is “use it or lose it”, the time to act is now. The Anders Family Wealth and Estate Planning Services Group can help determine the best utilization for your situation. Contact an Anders advisor for more information. Read the full rule in the Federal Register.

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November 19, 2019

Can You Use the QBI Deduction for a Trust?

The Qualified Business Income (QBI) Deduction has been a popular incentive for businesses and their owners following the Tax Cuts and Jobs Act. One question that many people ask is, can the QBI deduction be used for trusts? We’ve been analyzing businesses and individuals to see how to maximize the deduction, and below we dive into how trusts can utilize the QBI deduction.

Treatment of Trusts and QBI

Typically, a trust will function the same as a business with QBI. Any ordinary income will be defined as “qualified income” or “service business income”, and flow through to the individual, or be taxed at the trust level. However, trusts have their own special rules under the QBI. Under the anti-abuse rules, if a trust is formed for the sole purpose of receiving a QBI deduction, the deduction will be disallowed and aggregated with the funding entity.

To help avoid abuse of the QBI deduction for trusts, two or more trusts will be treated as one if the trusts have substantially the same grantors or primary beneficiaries and the principal purpose of the trust is to avoid income tax. There would need to be a significant non-tax purpose to separate the trusts, in order to prove income tax avoidance wasn’t the purpose of the trust.

Planning Opportunities to Utilize the QBI Deduction for a Trust

Under the new increased trust tax rates as of 2018, a 20% QBI deduction is extremely beneficial at the trust level. However, the rules above limit individuals from breaking up trusts in order to stay below the income threshold of $207,500.

Income Distribution Deduction

The income distribution deduction will reduce trust income to get below the income threshold. This is important to note, so at year-end the trust is examined to make sure they have distributed enough to be below the income thresholds and able to utilize the full 20% deduction.

Treatment by Type of Trust

Grantor trusts are more popular for QBI as all of the income will flow through to the individual. This is beneficial if the grantor is married because their deduction is increased to $415,000. Electing small business trusts do qualify for the QBI deduction, so all S Corporation income will be reduced by the QBI deduction before tax is paid at the trust level.

Determining if and how to use the QBI deduction for trusts can be complicated. The Anders Family Wealth and Estate Planning Services Group can help. If you have any questions related to trusts or QBI, please contact an Anders advisor.

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November 14, 2019

Missouri Announces Individual Income Tax Changes for 2019 Tax Returns

The Missouri Department of Revenue has announced the 2019 individual income tax year changes, effective for the tax year beginning January 1, 2019, which will be reflected on 2019 Missouri individual income tax returns.

Income Tax Brackets

The income tax brackets for the 2019 tax year are below.

If Missouri taxable income is:

  • $0 to $104, tax is $0
  • $105 – $1,053, tax is 1.5% of the Missouri taxable income
  • $1,053 – $2,106, tax is $16 plus 2% of excess over $1,053
  • $2,106 – $3,159, tax is $37 plus 2.5% of excess over $2,106
  • $3,159 – $4,212, tax is $63 plus 3% of excess over $3,159
  • $4,212 – $5,265, tax is $95 plus 3.5% of excess over $4,212
  • $5,265 – $6,318, tax is $132 plus 4% of excess over $5,265
  • $6,318 – $7,371, tax is $174 plus 4.5% of excess over $6,318
  • $7,371 – $8,424, tax is $221 plus 5% of excess over $7,371
  • Over $8,424, tax is $274 plus 5.4% of excess over $8,424

Federal Tax Deduction

There are also changes involving the federal tax deduction. Starting with the 2019 tax year, the federal tax deduction for individuals is reduced by a percentage, based on the Missouri adjusted gross income.

If Missouri adjusted gross income is:

  • $25,000 or less, the federal tax deduction is multiplied by 35%
  • $25,001 – $50,000, the federal tax deduction is multiplied by 25%
  • $50,001 – $100,000, the federal tax deduction is multiplied by 15%
  • $100,001 – $125,000, the federal tax deduction is multiplied by 5%
  • $125,001 or more, the federal tax deduction is multiplied by 0%

The overall limit to the deduction remains at $5,000 and $10,000 for married filing combined returns.

New and Updated Tax Credits

Two new tax credits for 2019 are available to taxpayers:

Diaper Bank Credit

Taxpayers are allowed an income tax credit for 50% of contributions to an entity established for collecting or purchasing disposable diapers or other hygiene products. Certification of this credit is performed by the Department of Social Services.

Unmet Health, Hunger, and Hygiene Needs of Children in School Tax Credit

Taxpayers are allowed an income tax credit for 50% of contributions to an organization providing funding for unmet health and hygiene needs of children in school.  Certification of this credit is performed by the Department of Social Services.

The following current tax credits have been revised:

Food Pantry Tax Credit

Taxpayers now can include donations of food or cash to local food pantries, local soup kitchens or local homeless shelters, unless the food is donated after the food’s expiration date. A taxpayer will not be allowed to claim more than one credit for a single donation.

Champion for Children Tax Credit

The cap on the cumulative amount of the credit that can be redeemed was increased from $1 million to $1.5 million for fiscal years beginning on or after July 1, 2019.  The credit cannot be assigned, transferred or sold.

Maternity Home Tax Credit

The term “maternity home” under Mo. Rev. Stat. §135.600 was redefined. The option to carry the tax credit forward was reduced from four years to one year. The cap on the cumulative amount of credit that can be claimed was increased to $3.5 million beginning on or after July 1, 2019. If the amounts of credits redeemed in the fiscal year is less than the cumulative amount authorized, the difference will be carried forward to the subsequent fiscal year and added to that year’s cumulative amount. The credit cannot be assigned, transferred or sold.

Pregnancy Resource Center Tax Credit

The option to carry the tax credit forward was reduced from four years to one year. The cap on the cumulative amount of credit that can be claimed was increased to $3.5 million beginning on or after July 1, 2019. If the amounts of credits redeemed in the fiscal year is less than the cumulative amount authorized, the difference will be carried forward to the subsequent fiscal year and added to that year’s cumulative amount. The credit cannot be assigned, transferred or sold.

Other Incentive Updates

First-Time Home Buyer Deduction

Missouri passed a new deduction for first-time home buyers. Starting with the 2019 tax year, a deduction for 50% of a contribution to a First-Time Home Buyer Bank account is allowed. The amount of contribution deduction to the first-time home buyer account(s) cannot exceed $800 ($1,600 for married filing combined returns). The bank account must be established solely for the purpose of paying the expenses related to a beneficiary’s purchase of a first home. Interest accruing on the amount in the account is also exempt from Missouri income tax.

Federal Reserve Bank Interest

Starting with the 2019 tax year, a subtraction is allowed from federal adjusted gross income for the interest accrued from deposits held in a Federal Reserve Bank.

New Fund Contribution Options

Beginning with the 2019 tax year, taxpayers will have the option of contributing a minimum of $1, $2 on a married filing combined return, to the Kansas City Regional Law Enforcement Memorial Foundation Fund and the Soldiers Memorial Military Museum in St. Louis Fund.

Contact an Anders advisor to discuss your specific tax situation.

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November 12, 2019

Downtown St. Louis Construction Update: What’s New at Laclede’s Landing?

As the oldest district in St. Louis, Laclede’s Landing is also home to some of the city’s oldest buildings. From warehouses to saloons to markets to factories, Laclede’s Landing has been the home of thousands of businesses over the past 250 years. With the Anders office being in downtown St. Louis, we always like to have a pulse on what is happening in our community.

New Life at Laclede’s Landing

With the Gateway Arch and Jefferson National Expansion Memorial project being completed in the last year, Laclede’s Landing has had new life brought back to it with new developments.  The removal of The Arch parking garage has visually reconnected the Landing to the Arch grounds.

Mixed- Use Space at Peper Lofts

The Christian Peper building on 1st Street has been transformed by Advantes Development from Bi-State Development’s former headquarters building to a mixed-use development under the name Peper Lofts LLC. The development includes ground floor retail, second floor office space created for Abstrakt Marketing and 49 apartments on the upper floors. Perceived largely as an entertainment district, Laclede’s Landing has long lacked a residential component, and this development is helping to bring the work, play, AND live to Laclede’s Landing. Advantes Development has two more structures on 2nd Street, the former Hoffman Building and the Greeley Building, that they are looking to redevelop for mixed-use, residential-retail.

Event and Restaurant Space in the Cutlery Building

The Cutlery building on 2nd Street has also been rehabilitated. SO Hospitality Group redeveloped the 50,000-square-foot building with three event spaces, a fast-casual restaurant called Kimchi Guys, a coffee shop called Miss Java and about 16,000 square feet of office space. VUE is the name of the event space on the fifth floor, and certainly lives up to its name with view of the riverfront and Arch grounds.

Witte Hardware Building Revamp

Drury Development invested more than $2 million in the 64,000-square-foot historic Witte Hardware Building, which includes five floors of loft-style exposed structure office space and 6,500 square feet of vacant ground floor restaurant or retail space. The improvements focus on meeting needs of the office tenants and attracting new creative and technology-driven tenants.

Paving the Way

More recently, the Lucas Avenue Project has wrapped up. This project created vehicular access to the Landing’s south end and features pedestrian friendly sidewalks with trees and lighting. John Clark, president of the Laclede’s Landing Community Improvement District, said the $350,000 infrastructural project creates a new main artery access point to the Landing connecting Lucas Avenue from Leonor K. Sullivan Boulevard to Lumiere Boulevard on 3rd Street. Clark said the newly rebuilt section literally paves the way for the growing amount of residential development there.

The Anders Construction Group stays up to date on the latest projects in our own backyard. Stay tuned for more details on upcoming St. Louis construction projects.

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November 5, 2019

4 Ways to Build Value in Your Business by Protecting Your Turf

Business owners always need to keep an eye on their competition and strategic moves they’re making. Large companies lock out their competitors by out-doing them in capital infrastructure investments, but smaller businesses must be smarter about how they defend their turf. Below we dive into four ways to build value around your business.


Is there a certification program, a special license or a unique service that could help differentiate your business? Being able to differentiate in the marketplace helps build your credibility and trust, which in return will build value.


Ecstatic customers act as defenders against other competitors entering your market. Make sure to be in touch with your client base. Understand why they are purchasing your products or services. Make sure your customers are happy in order to assistance in defending your turf.


Is there a way you can get your customers to integrate your product or service into their operations? Try hosting workshops to train customers on how to use what you are selling in their everyday life. This makes your product or service more integrated and more difficult to switch in the future.

Become a Verb

Think back to the last time you looked for a recipe. You probably “Googled” it.  Part of Google’s competitive shield is that the company name has become a verb. Now every time someone refers to searching for something online, it reinforces the competitive position of a single company. Is there a way you could control the vocabulary people use to refer to your category or specialty?

Protecting your business’ turf is a virtuous cycle: differentiation leads to having control over your pricing, which allows for healthier margins, which in turn lead to greater profitability and the cash to further differentiate your offerings. The Anders Business Transition Planning Services Group can work with you on a personalized plan to help build your company value. Contact an Anders advisor to start the process.

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November 1, 2019

How the Construction Industry Can Prepare for the New Lease Guidance

New guidance on lease recognition has been released by the Financial Accounting Standards Board in ASU 2016-02. The guidance will affect privately-held companies with fiscal years beginning after December 15, 2020. Construction contractors will be impacted, specifically those with a large fleet of leased vehicles. Now is the time to start preparing for the new requirements and adjust the balance sheet before they go into effect.

Prior Guidance

Under the current guidance, lessees do not record an asset or liability on the balance sheet for items under operating leases. Instead, rent expense is recorded when payments are due. Some argued that this treatment did not give users of the financial statements a clear representation of the company’s financial position. As a result, the new guidance uses the “right-of-use” model.

New Guidance

This new lease guidance requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for leases previously classified as operating leases. This is similar to the current treatment of capital leases. There has been a lot of speculation in the last couple of years regarding how ASU 2016-02 will affect accounting for construction contractors.  Contractors with a large fleet of leased vehicles are likely to be significantly affected by the new lease standard, especially if they have to meet certain debt covenants.

The “right-of-use” model adopted reflects that a lessee has an obligation to make payments to the lessor, but at the same time has the right to use the asset over the length of the lease term, thus the need to record an asset and a liability.

Steps to Take to Determine Recognition Under the New Guidance

First, the entity should classify their leases as either capital or operating. Capital lease classification, called “finance lease” under the new guidance, rules have changed under the newly created Accounting Standards Codification (ASC) 842.  Specific criteria are outlined in ASC 842. If the lease meets any of the four following criteria, it is considered a finance lease if:

  • The lease term is for a major part of the remaining economic life of the asset
  • The present value of the sum of the future minimum lease payments exceeds “substantially all” of the fair value of the asset
  • The lease transfers ownership to the lessee at the end of the lease term
  • The lease has an option for the lessee to purchase the asset that the lessee is reasonably certain to exercise
  • The asset is specialized to the extent that it is only useful to the lessee

For all operating leases, the company should determine whether the lease is considered a long-term lease or a short-term lease.

  • Generally, a lease is considered short-term if its length is less than or equal to 12 months and there is no option for the lessee to purchase the asset at the end of the lease term.
  • If the lease is deemed a short-term lease, the lessee may recognize payments over the lease term on a straight-line basis without having to include it on the balance sheet.
  • If the operating lease is considered long-term, the company will need to measure the right-of-use asset. This is generally calculated as the present value of future lease payments, including variable payments. The asset and liability should be presented as separate line items on the balance sheet or disclosed in the notes to the financial statements.

Other Impacts Beyond the Balance Sheet

In addition to the balance sheet impact of the new guidance, construction companies should consider the potential impact on their debt covenants. The construction industry uses a variety of financial ratios for various reporting purposes. Many construction companies have entered into loan agreements that require maintenance of certain debt-to-equity ratios. As a result of the new guidance, companies will be recognizing a liability that could significantly skew their debt-equity-ratio depending on the volume or size of the lease(s). This should be taken into consideration when entering into new leases or debt agreements. Contractors may also want to discuss this impact directly with debtholders prior to the first reporting period under the new guidance.

Contact an Anders advisor with questions on how the new lease guidance will affect you, or learn more about how we help construction companies.

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