Weaver: Beyond the Numbers

In this episode of Location Cubed, Hosts Rob Nowak, Tax Partner with Weaver, and Howard Altshuler, Partner-in-Charge of Real Estate Services, discuss the impact of the supply chain on the recent spike in residential home prices.

Pre-covid, everything was moving along fairly smoothly for the supply chain; however, COVID-19 brought restrictions, lockdowns, and an unknown future. “It kind of started to gum up the supply chain,” Altshuler said. “Traffic internationally started slowing down, and it's almost like it comes to a stop, and then it takes a while to start up.”

According to statistics, if you were to shut down the supply chain for a year, it takes about three to five years to set it back up to full capacity from both a production and logistics standpoint. “That's a lot of what we are dealing with from a standpoint of materials in any type of stuff,” Altshuler said.

Not surprisingly, this relates to the recent spike in residential home prices. “Building material prices are way higher if you can get them. That's obviously turning into higher home prices,” Altshuler said. Demand is the second component of this. Months of inventory fell to 1.4 months as active listings remained retracted while demands skyrocket, according to data from the Texas A&M’s Texas Real Estate Research Center.

The two discussed alternatives to homeownership, including the build-to-rent model being a remedy for the home supply shortages and the sustainability of positive growth rates in non-metro areas compared to negative rates for metro areas as remote work persists.

Government Industry Partners, Jennifer Ripka, CPA, and Jackie Gonzalez, CPA, discuss single audits and the challenges many government entities face with the influx of federal financial assistance received over the last two years. The Business of Government host, Adam Jones, points out, “There’s never been a year quite like the last couple of years in government assurance. We’ve seen a deluge of federal funds and it’s put a lot of government and not-for-profit agencies in a category they haven’t been in before – one that is required to have a single audit.”

The Single Audit Act was passed in 1984. It’s essentially an audit of federal financial assistance. The audit is triggered by spending $750,000 or more on federal awards in a single year.

The Journal of Accountancy reports, “More than 30,000 entities — primarily state, local, and tribal governments — have received funding as part of Treasury's $350 billion Coronavirus State and Local Fiscal Recovery Funds (CSLFRF) program. Recipients that spend $750,000 or more in such aid in a given year are normally subject to a single audit. However, many CSLFRF funding recipients are very small local governments that may previously have had little to no experience with single audits.”

Ripka advises that identifying grants and federal funding is key to understanding if they have to adhere to single-audit rules. Some federal funds are exempt and it can be difficult to recognize what compliance measures are necessary. “It can be challenging to understand the agreements, and yes that identification piece is really, really important,” Ripka urges. Gonzalez adds, “Understanding what is allowable under a grant is most important for compliance.”

Finally, accepting funding from grants also means that the entity must execute clear communication and transparency within its agency. Ripka warns that without it, entities could end up in “a situation where you are spending funds that finance doesn't know about, and revenue recognition isn’t lining up.” For the longevity of the entity, funding needs to be optimized between what’s allowable and the entity’s needs. This requires strategy and understanding of where the funds can be spent.

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Shehan Chandrasekera, Head of Tax Strategy at CoinTracker, is a subject matter expert in cryptocurrency taxation. Like many who first experience crypto, Chandrasekera saw the potential of cryptoassets, but realized transacting and investing in these assets presented an enormous administrative burden. With few professionals and CPAs skilled in the industry, Shehan set out to build a solution.

“CoinTracker is a software that connects with your wallets and exchanges and automatically reconciles your capital gains and capital losses,” Shehan said. “Especially if you have multiple wallets and exchanges, it’s really hard for you to reconcile those numbers manually, and we do that automatically. You can download the tax report and share those tax reports with your accountant or file using software like TurboTax or any other tax software.”

With U.S. tax laws, tracking cryptocurrency transactions isn’t as easy as with other forms of assets, and there are no reporting requirements from service providers or cryptocurrency exchanges. Finding a solution to help maintain them and provide visibility to the taxpayer is critical. “People can get into a lot of trouble if they don’t know about the tax implications related to cryptocurrency.”

In typical stock trading, at the end of the year, people download a 1099-B form which provides a complete summary of information related to the stock purchases and sales, losses, and gains made during the year. “In the crypto space, that doesn’t happen,” says Shehan. “The typical crypto user has three-to-five wallets and exchanges. Some of these crypto exchanges don’t have any 1099 reporting obligations. Therefore, you don’t get any tax forms.” It is the individual’s responsibility to reconcile these transactions.

Tim and Shehan are hopeful that documentation processes and information provided by exchanges will become more robust soon. Per Tim, “there is talk about a new 1099 form for digital asset transactions. I think this will greatly aid in reducing administrative burden and helping taxpayers report more accurately.”

Understanding the world of cryptocurrency is essential for all financial advisors today. Adam Blumberg, co-founder at Interaxis, helps educate investors and financial professionals about blockchain, cryptocurrency, and digital assets.

After going down the crypto rabbit hole and immersing himself in understanding cryptocurrency, Adam quickly realized these new financial instruments and services developed around them would change the financial services industry. While the financial world is beginning to accept cryptocurrencies on a wider basis, decentralized finance (defi) is still unfamiliar to many. So, what is defi exactly? “Decentralized finance is essentially the ability for you and me to interact financially without asking permission from the bank or the government,” Adam says. At it’s core, defi is the disintermediation of financial activities, allowing people to transact, spend, borrow, and invest at a direct, peer-to-peer level.

Decentralized finance is no longer a speculative venture; it's a natural evolution of cryptocurrency and blockchain technology. Although exciting, it is still early days for the defi world, and a lot of infrastructure and is needed for applications to function at scale. "For the last few years, the narrative around crypto has been driven by the price," Adam explains. “Similar to the early days of the internet, when price drove the conversation, it will be the technology and the innovations to come that will be the true importance of decentralized finance. For right now, it's very important to help people understand this and why it's important."

For this discussion on motor fuels taxation issues, Beyond the Numbers sits with two of Weaver’s industry leaders, Emilda Santiesteban and Leanne Sobel, J.D., both Directors of Motor Fuels and Excise Tax Services. They join host, Tyler Kern, to explore motor fuel taxation dynamics and offer their insights on a constitutional challenge to the federal oil spill liability tax.

Sobel discusses the four main areas taxed under the oil spill liability tax, which levies a barrel tax on oil and petroleum products. These taxes get placed on both crude oil and petroleum products imported into the United States. Domestic crude oil received at a refinery also gets taxed, and lastly, there is a provision in the statute to impose the oil spill tax on crude oil exported from the United States if previously untaxed.

On March 24, 2022, the Fifth Circuit Court of Appeals found the federal oil spill tax under IRC Section 4611(b) unconstitutional when imposed on exports of crude oil from the United States; a ruling that will require the government to refund $4.5 million of previously collected oil spill excise tax. The ruling indicates taxes levied on crude oil exports were unconstitutional under the U.S. constitution’s export clause. Sobel and Santiesteban explain that prior to 2016 strict controls existed on oil exports from the United States. However, export restrictions were lifted after 2016 which led to an uptick in export taxes on crude oil. The constitutionality of these taxes has come into question, and the courts ultimately agreed with an earlier decision that found export fees to be unconstitutional.

The United States has not filed an appeal to the Supreme Court in this matter. “With regards to taxpayers and industry participants, it is time to consider how to proceed if the case stands. What does that mean for tax they have already paid into the treasury for exports of crude oil?” Sobel said.

An organization’s intellectual property, trade secrets, and any proprietary information that requires protection are considered crown jewel data. Managing this data can be as crucial to the organization as the data itself. Trip Hillman, Director of Cybersecurity Services at Weaver, and Hunter Sundbeck, a Privacy Lead for IT Advisory Services at Weaver, checked in with Beyond the Number’s Tyler Kern to provide insights and strategies for managing essential company data.

“Often, an organization doesn’t know what it has,” Hillman said. “So, for these types of data, this crown jewel data, the key that we’re looking at, the valuable sense of this data, we want to make sure we have a method to protect it.” Companies must create a plan to identify the data and assign the proper security for data access.

Recognizing the need to manage data and robust data management is different. One of the challenges for organizations is properly defining their data into the proper classifications. Sundbeck said companies must identify what those crown jewel data assets are, which are top secret, and what data people can access. “I’ve done a couple of discovery audits where we’re figuring out what exactly you have, what your key processes are, what data feeds those key processes, and how that data is protected.”

Through this discovery process, companies may realize they have hidden or ‘dark’ data they’d forgotten. Some of this data could be critical or not. “There is a point where maybe you’re collecting data you don’t need,” Sundbeck said. Identifying valued data from bad helps companies put security and controls around the right data sets and clean up the rest.

David Kerr, Principal at Cowrie, has ten years of experience in tax strategy, financial accounting, anti-money laundering, international tax compliance, and risk consulting across the gaming, telecommunications, technology, and digital asset industries. He is an expert in decentralized autonomous organizations and advises on structuring for legal and tax purposes.

DAOs are represented by rules that are transparent, controlled by the members, and not influenced by a central authority or leadership. Without clear legal status, the determination of DAO regulations is widely uncertain. DAOs are also not structured as standard business entities since they are global and transcend borders. This makes them extremely difficult to define and therefore regulate at federal, state, and even local levels.

While there are more questions than answers at the moment, decentralized entities are forming their identities and developing a variety of use cases. Thousands of people across the globe have formed web-based communities and have utilized DAO structures to invest in common interests and govern real world assets. Will decentralized entities be around in the future, and if so, how will they impact the world of business and finance at larger scale?

With a flood of federal funds available for capital projects today, The Business of Government discusses the risks involved with such projects and offers strategies for mitigating those risks. Daniel Graves, Partner, Risk Advisory Services at Weaver, provides crucial insights and best practices for those in the government sector considering capital projects.

Graves has already seen an increase in construction activity from municipalities and other government entities. Much of the uptick is tied to infrastructure improvements as organizations have received new funding through the Infrastructure Investments and Jobs Act passed in November 2021. This is in addition to COVID relief funding that many organizations received in 2020 to upgrade facility and technology systems such as HVAC improvements and broadband networks.

“I think one of the biggest overtones to the current construction expansion has a lot to do with labor,” Graves said. “There are many shovel-ready projects, however, finding the labor and planning for the associated labor costs is a challenge when managing the risks associated with a capital project.”

Graves cautions project owners to be aware of reputational risks when using public funds for capital projects. Public-facing projects which use public funds can, and often do, come with public scrutiny. Fund management and a proper project strategy are critical. “No one wants to be on the side of a press release that says a taxpayer-funded project is over budget and behind schedule.”

Mitigating risk and eliminating fraud in a capital project is paramount. Still, human error can occur. Proper planning and bringing in the audit and engineering teams early in the process helps to maintain a smooth-running project, mitigate the opportunity for fraud and catch mistakes before they become costly errors.

Bitcoin is considered its own standalone asset class because features set it apart from others. Answering those benefits and more is Lee Bratcher, founder and president of Texas Blockchain Council (TBC), on this episode of Weaver’s On-Chain podcast episode with host Tim Savage.

Lee’s interest in blockchain peaked about six years ago while researching property rights as an academic. Since then, he has been actively working with Texas legislators to advocate for beneficial blockchain policy and business development through the TBC.

Tim and Lee focus on the importance blockchain technology solving consensus and double-spend issues that arise from decentralized network environments and how bitcoin was created to be a monetary good. With a inherently scarce denomination of 21 million bitcoins, the bitcoin network offers perfect scarcity as a digital monetary asset. It is further secured and given value through the conversion of energy through the bitcoin mining process, as miners consume energy to solve complex cryptographic puzzles to mint blocks on the proof of work blockchain network.

The conversation shifts focus to the ethereum 2.0 network as they discuss proof of work vs. proof of stake algorithms and turing-complete vs. slower moving architecture in monetary and blockchain computing systems. Are bitcoin and ethereum comparable, or are these really fundamentally different systems with different purposes?