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Leaving specific assets to specific heirs is an estate planning no-no

Posted by Admin Posted on June 22 2017

Planning your estate around specific assets is risky and, in most cases, should be avoided. If you leave specific assets — such as a home, a car or stock — to specific people, you could end up inadvertently disinheriting someone. 

Unintended consequences

Here’s an example that illustrates the problem: Kim has three children — Sarah, John and Matthew — and wishes to treat them equally in her estate plan. In her will, she leaves a $500,000 mutual fund to Sarah and her $500,000 home to John. She also names Matthew as beneficiary of a $500,000 life insurance policy.

By the time Kim dies, the mutual fund balance has grown to $750,000. In addition, she has sold the home for $750,000, invested the proceeds in the mutual fund and allowed the life insurance policy to lapse. She didn’t revise or revoke her will. The result? Sarah receives the mutual fund, with a balance of $1.5 million, and John and Matthew are disinherited.

Safer alternatives

To avoid this outcome, it’s generally preferable to divide your estate based on dollar values or percentages rather than specific assets. Kim, for example, could have placed the mutual fund, home and insurance policy in a trust and divided the value of the trust equally between her three children.

If it’s important to you that specific assets go to specific heirs — for example, because you want your oldest child to receive the family home or you want your family business to go to a child who works for the company — there are planning techniques you can use to help ensure that outcome while avoiding undesirable consequences. For example, your trust might provide for your assets to be divided equally but also for your children to receive specific assets at fair market value as part of their shares.

Please contact us for additional details on planning strategies that can help ensure your assets are distributed as you wish without causing unintentional consequences. 

© 2017

Seasonal business? Optimize your operating cycle

Posted by Admin Posted on June 21 2017

Every business has some degree of ups and downs during the year. But cash flow fluctuations are much more intense for seasonal businesses. So, if your company defines itself as such, it’s important to optimize your operating cycle to anticipate and minimize shortfalls.

A high-growth example

To illustrate: Consider a manufacturer and distributor of lawn-and-garden products such as topsoil, potting soil and ground cover. Its customers are lawn-and-garden retailers, hardware stores and mass merchants.

The company’s operating cycle starts when customers place orders in the fall — nine months ahead of its peak selling season. So the business begins amassing product in the fall, but curtails operations in the winter. In late February, product accumulation continues, with most shipments going out in April.

At this point, a lot of cash has flowed out of the company to pay operating expenses, such as utilities, salaries, raw materials costs and shipping expenses. But cash doesn’t start flowing into the company until customers pay their bills around June. Then, the company counts inventory, pays remaining expenses and starts preparing for the next year. Its strategic selling window — which will determine whether the business succeeds or fails — lasts a mere eight weeks.

The power of projections

Sound familiar? Ideally, a seasonal business such as this should stockpile cash received at the end of its operating cycle, and then use those cash reserves to finance the next operating cycle. But cash reserves may not be enough — especially for high-growth companies.

So, like many seasonal businesses, you might want to apply for a line of credit to avert potential shortfalls. To increase the chances of loan approval, compile a comprehensive loan package, including historical financial statements and tax returns, as well as marketing materials and supplier affidavits (if available).

More important, draft a formal business plan that includes financial projections for next year. Some companies even project financial results for three to five years into the future. Seasonal business owners can’t rely on gut instinct. You need to develop budgets, systems, processes and procedures ahead of the peak season to effectively manage your operating cycle.

Distinctive challenges

Seasonal businesses face many distinctive challenges. Please contact our firm for assistance overcoming these obstacles and strengthening your bottom line.

© 2017

Are income taxes taking a bite out of your trusts?

Posted by Admin Posted on June 20 2017

If your estate plan includes one or more trusts, review them in light of income taxes. For trusts, the income threshold is very low for triggering the:

  • Top income tax rate of 39.6%,
  • Top long-term capital gains rate of 20%, and
  •  Net investment income tax (NIIT) of 3.8%.

The threshold is only $12,500 for 2017. 

3 ways to soften the blow

Three strategies can help you soften the blow of higher taxes on trust income:

1. Use grantor trusts. An intentionally defective grantor trust (IDGT) is designed so that you, the grantor, are treated as the trust’s owner for income tax purposes — even though your contributions to the trust are considered “completed gifts” for estate- and gift-tax purposes. 

IDGTs offer significant advantages. The trust’s income is taxed to you, so the trust itself avoids taxation. This allows trust assets to grow tax-free, leaving more for your beneficiaries. And it reduces the size of your estate. Further, as the owner, you can sell assets to the trust or engage in other transactions without tax consequences.

Keep in mind that, if your personal income exceeds the applicable thresholds for your filing status, using an IDGT won’t avoid the tax rates described above. Still, the other benefits of these trusts make them attractive.

2. Change your investment strategy. Despite the advantages of grantor trusts, nongrantor trusts are sometimes desirable or necessary. At some point, for example, you may decide to convert a grantor trust to a nongrantor trust to relieve yourself of the burden of paying the trust’s taxes. Also, grantor trusts become nongrantor trusts after the grantor’s death.

One strategy for easing the tax burden on nongrantor trusts is for the trustee to shift investments into tax-exempt or tax-deferred investments.  

3. Distribute income. Generally, nongrantor trusts are subject to tax only to the extent they accumulate taxable income. When a trust makes distributions to a beneficiary, it passes along ordinary income (and, in some cases, capital gains), which are taxed at the beneficiary’s marginal rate. 

Thus, one strategy for minimizing taxes on trust income is to distribute the income to beneficiaries in lower tax brackets. The trustee might also consider distributing appreciated assets, rather than cash, to take advantage of a beneficiary’s lower capital gains rate.

Of course, this strategy may conflict with a trust’s purposes, such as providing incentives to beneficiaries, preserving assets for future generations and shielding assets from beneficiaries’ creditors.

If you’re concerned about income taxes on your trusts, contact us. We can review your estate plan to uncover opportunities to reduce your family’s tax burden. 

© 2017

2017 Q3 tax calendar: Key deadlines for businesses and other employers

Posted by Admin Posted on June 19 2017

Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements. 

July 31 

  • Report income tax withholding and FICA taxes for second quarter 2017 (Form 941), and pay any tax due. (See exception below.)
  • File a 2016 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10 

  • Report income tax withholding and FICA taxes for second quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 15

  • If a calendar-year C corporation, pay the third installment of 2017 estimated income taxes.
  • If a calendar-year S corporation or partnership that filed an automatic six-month extension:
  • File a 2016 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
  • Make contributions for 2016 to certain employer-sponsored retirement plans.

© 2017

Pro forma compilations look at how an alternative course of action would have affected financials

Posted by Admin Posted on June 19 2017

The American Institute of Certified Public Accountants (AICPA) has clarified its guidance on pro forma compilations. Here’s an explanation of when the new Statement on Standards for Accounting and Review Services (SSARS) applies and what your CPA now expects from you when performing these nontraditional attestation services. 

Overview

SSARS 22 applies when an accountant has been engaged to perform a compilation engagement on pro forma financial information. Unlike forecasts or projections that reflect prospective financial results, pro forma financial information shows what the historical financial statements would have looked like had a transaction or event — such as a business combination, disposition of a business line or change in capitalization — occurred at an earlier date. 

The new guidance explains that a compilation engagement on pro forma financial information is often undertaken as a separate engagement. But it can also be done in conjunction with a compilation, a review or an audit of financial statements. 

Expectations for clients

When compiling pro forma statements, what do we expect from you? Under SSARS 22, the company’s management must 1) provide written acknowledgment that it accepts full responsibility for the preparation and fair presentation of the pro forma financial information in accordance with the applicable financial reporting framework, and 2) include (or make readily available) the following in any document containing the pro forma financial information:

  • Your company’s financial statements for the most recent year,
  • A summary of significant assumptions,
  • Interim period historical financial information, if interim period pro forma financial information is presented, and
  • In the case of a business combination, the relevant historical financial information for the significant constituent parts of the combined entity.

Financial statements and historical interim financial information are deemed to be “readily available” if a third party can obtain them without any further action by the entity. For example, historical interim financial information on a company’s website may be considered readily available. However, information that’s available upon request isn’t considered readily available.

Additionally, pro forma financial information must be based on historical financial statements that have been compiled, reviewed or audited. Moreover, the new standard requires you to ask your CPA for permission before including the compilation report in any document containing pro forma financial information that indicates that a compilation has been performed on such information. 

Up and running

SSARS 22 is effective for compilation reports on pro forma financial information dated on or after May 1, 2017. We understand these fundamental changes and have updated our practices to comply with the new guidance. Contact us for help compiling your pro formas.

© 2017

Is now the time for a charitable lead trust?

Posted by Admin Posted on June 19 2017

Families who wish to give to charity while minimizing gift and estate taxes should consider a charitable lead trust (CLT). These trusts are most effective in a low-interest-rate environment, so conditions for taking advantage of a CLT currently are favorable. Although interest rates have crept up in recent years, they remain historically low.

2 types of CLTs

A CLT provides a regular income stream to one or more charities during the trust term, after which the remaining assets pass to your children or other noncharitable beneficiaries. If your beneficiaries are in a position to wait for several years (or even decades) before receiving their inheritance, a CLT may be an attractive planning tool. That’s because the charity’s upfront interest in the trust dramatically reduces the value of your beneficiaries’ interest for gift or estate tax purposes.

There are two types of CLTs: 1) a charitable lead annuity trust (CLAT), which makes annual payments to charity equal to a fixed dollar amount or a fixed percentage of the trust assets’ initial value, and 2) a charitable lead unitrust (CLUT), which pays out a set percentage of the trust assets’ value, recalculated annually. Most people prefer CLATs because they provide a better opportunity to maximize the amount received by one’s noncharitable beneficiaries.

Typically, people establish CLATs during their lives (known as “inter vivos” CLATs) because it allows them to lock in a favorable interest rate. Another option is a testamentary CLAT, or “T-CLAT,” which is established at death by one’s will or living trust. 

Another issue to consider is whether to design a CLAT as a grantor or nongrantor trust. Nongrantor CLATs are more common, primarily because the grantor avoids paying income taxes on the trust’s earnings. However, grantor CLATs also have advantages. For example, by paying income taxes, the grantor allows the trust to grow tax-free, enhancing the beneficiaries’ remainder interest. 

Interest matters

Here’s why CLATs are so effective when interest rates are low: When you fund a CLAT, you make a taxable gift equal to the initial value of the assets you contribute to the trust, less the value of all charitable interests. A charity’s interest is equal to the total payments it will receive over the trust term, discounted to present value using the Section 7520 rate, a conservative interest rate set monthly by the IRS. As of this writing, the Sec. 7520 rate has fluctuated between 2.35% and 2.55% so far this year.  

If trust assets outperform the applicable Sec. 7520 rate (that is, the rate published in the month the trust is established), the trust will produce wealth transfer benefits. For example, if the applicable Sec. 7520 rate is 2.5% and the trust assets actually grow at a 7% rate, your noncharitable beneficiaries will receive assets well in excess of the taxable gift you report when the trust is established.

If a CLAT appeals to you, the sooner you act, the better. In a low-interest-rate environment, outperforming the Sec. 7520 rate is relatively easy, so the prospects of transferring a significant amount of wealth tax-free are good. Contact us for more details.

© 2017

Videotaping your will signing may not produce the desired outcome

Posted by Admin Posted on June 19 2017

Some people make video recordings of their will signings in an effort to create evidence that they possess the requisite testamentary capacity. For some, this strategy may help stave off a will contest. But in most cases, the risk that the recording will provide ammunition to someone who wishes to challenge the will outweighs the potential benefits.

Assessing the downsides

Unless the person signing the will delivers a flawless, natural performance, a challenger will pounce on the slightest hesitation, apparent discomfort or momentary confusion as “proof” that the person lacked testamentary capacity. Even the sharpest among us occasionally forgets facts or mixes up our children’s or grandchildren’s names. And discomfort or nervousness with the recording process can easily be mistaken for confusion or duress.

You’re probably thinking, “Why can’t we just re-record portions of the video that don’t look good?” The problem with this approach is that a challenger’s attorney will likely ask how much editing was done and how many “takes” were used in the video and cite that as further evidence of lack of testamentary capacity.

Implementing alternative strategies

For most people, other strategies for avoiding a will contest are preferable to recording the will signing. These include having a medical practitioner examine you and attest to your capacity immediately before the signing. It can also involve choosing reliable witnesses, including a “no contest clause” in your will, and using a funded revocable trust, which avoids probate and, therefore, is more difficult and expensive to challenge. If you’d like more information on estate planning strategies, please contact us.

© 2017

Business owners: Put your successor in a position to succeed

Posted by Admin Posted on June 07 2017

When it comes time to transition your role as business owner to someone else, you’ll face many changes. One of them is becoming a mentor. As such, you’ll have to communicate clearly, show some patience and have a clear conception of what you want to accomplish before stepping down. Here are some tips on putting your successor in a position to succeed.

Key information

Find ways to continuously pass on your knowledge. Too often, vital business knowledge is lost when leadership or ownership changes — causing a difficult and chaotic transition for the successor. Although you can impart a great deal of expertise by mentoring your replacement, you need to do more. For instance, create procedures for you and other executives to share your wisdom.

Begin by documenting your business systems, processes and methods through a secure online employee information portal, which provides links to company databases. You also could set up a training program around core business methods and practices — workers could attend classes or complete computer-based courses. Then, you can create an annual benchmarking report of key activities and results for internal use.

New challenges

Prepare your company to adapt and grow. With customer needs and market factors continually changing, your successor will likely face challenges that are different from what you encountered.

To enable your company to adapt to an ever-changing business world, ensure your successor understands how each department works and knows the fundamentals of key areas, including customer service, marketing and accounting. One way is to have your successor work in each business area.

Outside help

Also have your successor join industry trade associations and community organizations to meet other executives and successors in diverse industries. In addition, require him or her to review and, if necessary, help update your company’s business plan.

To encourage your successor to develop relationships with key players inside and outside your company, include him or her in meetings with managers and trusted advisors, such as your accountant, lawyer, banker and insurance agent.

Fruitful future

Ideally, when you walk away from your company, your successor will feel completely comfortable and ready to guide the business into a fruitful future. Please contact our firm for more help maximizing the effectiveness of your succession plan.

© 2017

Coverdell ESAs: The tax-advantaged way to fund elementary and secondary school costs

Posted by Admin Posted on June 06 2017

With school letting out you might be focused on summer plans for your children (or grandchildren). But the end of the school year is also a good time to think about Coverdell Education Savings Accounts (ESAs) — especially if the children are in grade school or younger.

One major advantage of ESAs over another popular education saving tool, the Section 529 plan, is that tax-free ESA distributions aren’t limited to college expenses; they also can fund elementary and secondary school costs. That means you can use ESA funds to pay for such qualified expenses as tutoring and private school tuition.

Other benefits

Here are some other key ESA benefits:

  • Although contributions aren’t deductible, plan assets can grow tax-deferred.
  • You remain in control of the account — even after the child is of legal age.
  • You can make rollovers to another qualifying family member.

A sibling or first cousin is a typical example of a qualifying family member, if he or she is eligible to be an ESA beneficiary (that is, under age 18 or has special needs).

Limitations

The ESA annual contribution limit is $2,000 per beneficiary. The total contributions for a particular ESA beneficiary cannot be more than $2,000 in any year, no matter how many accounts have been established or how many people are contributing.

However, the ability to contribute is phased out based on income. The phaseout range is modified adjusted gross income (MAGI) of $190,000–$220,000 for married couples filing jointly and $95,000–$110,000 for other filers. You can make a partial contribution if your MAGI falls within the applicable range, and no contribution if it exceeds the top of the range.

If there is a balance in the ESA when the beneficiary reaches age 30 (unless the beneficiary is a special needs individual), it must generally be distributed within 30 days. The portion representing earnings on the account will be taxable and subject to a 10% penalty. But these taxes can be avoided by rolling over the full balance to another ESA for a qualifying family member.

Would you like more information about ESAs or other tax-advantaged ways to fund your child’s — or grandchild’s — education expenses? Contact us!

© 2017

Choosing the best way to reimburse employee travel expenses

Posted by Admin Posted on June 05 2017

If your employees incur work-related travel expenses, you can better attract and retain the best talent by reimbursing these expenses. But to secure tax-advantaged treatment for your business and your employees, it’s critical to comply with IRS rules.

Reasons to reimburse

While unreimbursed work-related travel expenses generally are deductible on a taxpayer’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction, many employees won’t be able to benefit from the deduction. Why?

It’s likely that some of your employees don’t itemize. Even those who do may not have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income floor. And only expenses in excess of the floor can actually be deducted.

On the other hand, reimbursements can provide tax benefits to both your business and the employee. Your business can deduct the reimbursements (also subject to a 50% limit for meals and entertainment), and they’re excluded from the employee’s taxable income — provided that the expenses are legitimate business expenses and the reimbursements comply with IRS rules. Compliance can be accomplished by using either the per diem method or an accountable plan.

Per diem method

The per diem method is simple: Instead of tracking each individual’s actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.)

The IRS per diem tables list localities here and abroad. They reflect seasonal cost variations as well as the varying costs of the locales themselves — so London’s rates will be higher than Little Rock’s. An even simpler option is to apply the “high-low” per diem method within the continental United States to reimburse employees up to $282 a day for high-cost localities and $189 for other localities.

You must be extremely careful to pay employees no more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely fail to do so.

Accountable plan

An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. To qualify as “accountable,” your plan must meet the following criteria:

  • It must pay expenses that would otherwise be deductible by the employee.
  • Payments must be for “ordinary and necessary” business expenses.
  • Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly.
  • Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days.

If you fail to meet these conditions, the IRS will treat your plan as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income taxes (employee) and employment taxes (employer and employee).

Whether you have questions about which reimbursement option is right for your business or the additional rules and limits that apply to each, contact us. We’d be pleased to help.

©2017

Put your income statement to good use

Posted by Admin Posted on June 02 2017

By midyear, most businesses that follow U.S. Generally Accepted Accounting Principles (GAAP) have issued their year-end financial statements. But how many have actually used them to improve their business operations in the future? Producing financial statements is more than a matter of compliance — owners and managers can use them to analyze performance and find ways to remedy inefficiencies and anomalies. How? Let’s start by looking at the income statement.

Benchmarking performance

Ratio analysis facilitates comparisons over time and against industry norms. Here are four ratios you can compute from income statement data:

1. Gross profit. This is profit after cost of goods sold divided by sales. This critical ratio indicates whether the company can operate profitably. It’s a good ratio to compare to industry statistics because it tends to be calculated on a consistent basis.

2. Net profit margin. This is calculated by dividing net income by sales and is the ultimate scorecard for management. If the margin is rising, the company must be doing something right. Often, this ratio is computed on a pretax basis to accommodate for differences in tax rates between pass-through entities and C corporations.

3. Return on assets. This is calculated by dividing net income by the company’s total assets. The return shows how efficiently management is using its assets.

4. Return on equity. This is calculated by dividing net profits by shareholders’ equity. The resulting figure tells how well the shareholders’ investment is performing compared to competing investment vehicles.

For all four profitability ratios, look at two key elements: changes between accounting periods and differences from industry averages.

Plugging profit drains

What if your company’s profitability ratios have deteriorated compared to last year or industry norms? Rather than overreacting to a decline, it’s important to find the cause. If the whole industry is suffering, the decline is likely part of a macroeconomic trend.

If the industry is healthy, yet a company’s margins are falling, management may need to take corrective measures, such as:

  • Reining in costs,
  • Investing in technology, and/or
  • Looking for signs of fraud.


For example, if an employee is colluding with a supplier in a kickback scam, direct materials costs may skyrocket, causing the company’s gross profit to fall.

Playing detective

For clues into what’s happening, study the main components of the income statement: gross sales, cost of sales, and selling and administrative costs. Determine if line items have fallen due to company-specific or industrywide trends by comparing them to public companies in the same industry. Also, monitor trade publications, trade associations and the Internet for information. Contact us to discuss possible causes and brainstorm ways to fix any problems.

© 2017

Are your retirement savings secure from creditors?

Posted by Admin Posted on June 01 2017

A primary goal of estate planning is asset protection. After all, no matter how well your estate plan is designed, it won’t do much good if you wind up with no wealth to share with your family.
If you have significant assets in employer-sponsored retirement plans or IRAs, it’s important to understand the extent to which those assets are protected against creditors’ claims and, if possible, to take steps to strengthen that protection.

Employer plans

Most qualified plans — such as pension, profit-sharing and 401(k) plans — are protected against creditors’ claims, both in and out of bankruptcy, by the Employee Retirement Income Security Act (ERISA). This protection also extends to 403(b) and 457 plans.

IRA-based employer plans — such as Simplified Employee Pension (SEP) plans and Savings Incentive Match Plans for Employees (SIMPLE) IRAs — are also protected in bankruptcy. But there’s some uncertainty over whether they’re protected outside of bankruptcy.

IRAs

The level of asset protection available for IRAs depends in part on whether the owner is involved in bankruptcy proceedings. In a bankruptcy context, creditor protection is governed by federal law. Under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), both traditional and Roth IRAs are exempt from creditors’ claims up to an inflation-adjusted $1 million.

The IRA limit doesn’t, however, apply to amounts rolled over from a qualified plan or a 403(b) or 457 plan — or to any earnings on those amounts. Suppose, for example, that you have $4 million invested in a 401(k) plan. If you roll it over into an IRA, the entire $4 million, plus all future earnings, will generally continue to be exempt from creditors’ claims in bankruptcy.

To ensure that rollover amounts are fully protected, keep those funds in separate IRAs rather than commingling them with any contributory IRAs you might own. Also, make sure the rollover is fully documented and the word “rollover” is part of its name. Bear in mind, too, that once a distribution is made from the IRA, it’s no longer protected.

Outside bankruptcy, the protection afforded an IRA depends on state law.

What about inherited IRAs?

Federal courts are divided on whether bankruptcy protection extends to inherited IRAs. In a nonbankruptcy context, some states expressly exempt inherited IRAs, while courts in other states are divided on the issue.

Protect yourself

If you’re concerned that your retirement savings are vulnerable to creditors’ claims, please contact us. The effectiveness of these strategies depends on factors such as whether future creditor claims arise in bankruptcy and what state law applies.

© 2017

4 digital marketing tips for every business

Posted by Admin Posted on June 01 2017

You’d be hard pressed to find a company not looking to generate more leads, boost sales and improve its profit margins. Fortunately, you can take advantage of the sales and marketing opportunities offered by today’s digital technologies to do so. Here are four digital marketing tips for every business:

1. Add quality content to your website. Few things disappoint and disinterest customers like an outdated or unchanging website. Review yours regularly to ensure it doesn’t look too old and consider a noticeable redesign every few years.

As far as content goes, think variety. Helpful blog posts, articles and even whitepapers can establish your business as a knowledge leader in your industry. And don’t forget videos: They’re a great way to showcase just about anything. Beware, however, that posting amateurish-looking videos could do more harm than good. If you don’t have professional video production capabilities, you may need to hire a professional.

2. Leverage social media. If you’re not using social media tools already, focus on a couple of popular social media outlets — perhaps Facebook and Twitter — and actively post content on them. Remember, with some social media platforms, you can create posts and tweets in advance and then schedule them for release over time.

3. Interact frequently. This applies to all of your online channels, including your website, social media platforms, email and online review sites. For example, be sure to respond promptly to any queries you receive on your site or via email, and be quick to reply to questions and comments posted on your social media pages.

4. Tie it all together. It’s easy to end up with a hodgepodge of different online marketing tools that are operating independently of one another. Integrate your online marketing initiatives so they all have a similar style and tone. Doing so helps reassure customers that your business is an organized entity focused on delivering a clear message — and quality products or services.

When it comes to marketing, you don’t want to swing and miss. Our firm can help you assess the financial impact of your efforts and budget the appropriate amount to boosting visibility.

© 2017

Donating a vehicle might not provide the tax deduction you expect

Posted by Admin Posted on May 30 2017

All charitable donations aren’t created equal — some provide larger deductions than others. And it isn’t necessarily just how much or even what you donate that matters. How the charity uses your donation might also affect your deduction.

Take vehicle donations, for example. If you donate your vehicle, the value of your deduction can vary greatly depending on what the charity does with it.

Determining your deduction

You can deduct the vehicle’s fair market value (FMV) if the charity:

  • Uses the vehicle for a significant charitable purpose (such as delivering meals-on-wheels to the elderly),
  • Sells the vehicle for substantially less than FMV in furtherance of a charitable purpose (such as a sale to a low-income person needing transportation), or
  • Makes “material improvements” to the vehicle.

But in most other circumstances, if the charity sells the vehicle, your deduction is limited to the amount of the sales proceeds.

Getting proper substantiation

You also must obtain proper substantiation from the charity, including a written acknowledgment that:

  • Certifies whether the charity sold the vehicle or retained it for use for a charitable purpose,
  •  Includes your name and tax identification number and the vehicle identification number, and
  • Reports, if applicable, details concerning the sale of the vehicle within 30 days of the sale.

For more information on these and other rules that apply to vehicle donation deductions — or deductions for other charitable gifts — please contact us.

© 2017

Consider the tax consequences before making an employee a partner

Posted by Admin Posted on May 30 2017

In today’s competitive environment, offering employees an equity interest in your business can be a powerful tool for attracting, retaining and motivating quality talent. If your business is organized as a partnership, however, there are some tax traps you should watch out for. Once an employee becomes a partner, you generally can no longer treat him or her as an employee for tax and benefits purposes, which has significant tax implications.

Employment taxes

Employees pay half of the Social Security and Medicare taxes on their wages, through withholdings from their paychecks. The employer pays the other half. Partners, on the other hand, are treated as being self-employed — they pay the full amount of “self-employment” taxes through quarterly estimates.

Often, when employees receive partnership interests, the partnership continues to treat them as employees for tax purposes, withholding employment taxes from their wages and paying the employer’s share. The problem with this practice is that, because a partner is responsible for the full amount of employment taxes, the partnership’s payment of a portion of those taxes will likely be treated as a guaranteed payment to the partner.

That payment would then be included in income and trigger additional employment taxes. Any employment taxes not paid by the partnership on a partner’s behalf are the partner’s responsibility.

Treating a partner as an employee can also result in overpayment of employment taxes. Suppose your partnership pays half of a partner’s employment taxes and the partner also has other self-employment activities — for example, interests in other partnerships or sole proprietorships. If those activities generate losses, the losses will offset the partner’s earnings from your partnership, reducing or even eliminating self-employment taxes.

Employee benefits

Partners and employees are treated differently for purposes of many benefit plans. For example, employees are entitled to exclude the value of certain employer-provided health, welfare and fringe benefits from income, while partners must include the value in their income (although they may be entitled to a self-employed health insurance deduction). And partners are prohibited from participating in a cafeteria plan.

Continuing to treat a partner as an employee for benefits purposes may trigger unwanted tax consequences. And it could disqualify a cafeteria plan.

Partnership alternatives

There are techniques that allow you to continue treating newly minted partners as employees for tax and benefits purposes. For example, you might create a tiered partnership structure and offer employees of a lower-tier partnership interests in an upper-tier partnership. Because these employees aren’t partners in the partnership that employs them, many of the problems discussed above will be avoided.

If your business is contemplating offering partnership interests to key employees, contact us for more information about the potential tax consequences and how to avoid any pitfalls.

© 2017

Employee share-based payments: FASB revises the reporting requirements

Posted by Admin Posted on May 26 2017

Think the rules for reporting employee stock options and restricted stock are too complicated? The Financial Accounting Standards Board (FASB) agrees — and it has simplified the rules starting in 2017 for public companies and 2018 for private companies. Here’s how.

Old rules

Under current U.S. Generally Accepted Accounting Principles (GAAP), for each share-based payment, employers must determine whether the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes results in either an excess tax benefit or a tax deficiency.

Currently, when the deduction for a share-based payment for income tax purposes exceeds the compensation cost for accounting purposes, the employer recognizes an excess tax benefit in additional paid-in capital, which is an equity account on the balance sheet. Conversely, tax deficiencies are recognized either as an offset to accumulated excess tax benefits, if any, or in the income statement. Excess tax benefits aren’t recognized until the deduction reduces taxes payable.

New rules

Accounting Standards Update (ASU) No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, moves all accounting for income tax consequences of share-based payments to the income statement. Under the simplified rules:

  • All excess tax benefits and tax deficiencies will be recognized as income tax expense or benefit,
  • The tax effects of exercised or vested awards will be treated as discrete items in the reporting Employers will recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period.

The new standard also calls for excess tax benefits to be classified on the statement of cash flows as an operating activity with other income tax cash flows. Under current GAAP, employers are required to separate excess tax benefits from other income tax cash flows and classify them as financing activities.

Alternative for private companies

Many people forget that private companies also may award stock options and restricted shares to employees. However, it’s more challenging to value share-based awards for private companies, because their shares don’t trade in the public markets.

The updated guidance provides a simplified formula for estimating the expected term for nonpublic entities that issue share-based payments based on a service or performance condition. Under this optional practical expedient, the expected term of a share-based payment will generally be the midpoint between the requisite service period and the contractual term of the award, if vesting is dependent only on a service condition. That formula also applies if the award is dependent on satisfying a performance condition that’s probable of being achieved.

Right for you?

Share-based payments can be an effective way for cash-strapped businesses to attract and retain executives. But the existing accounting rules have discouraged some companies from trying out employee stock options and restricted stock in their compensation plans. With simplification efforts in effect, it’s easier than ever to report these transactions. Contact us to discuss whether share-based payments could work for your company.

© 2017

A family bank professionalizes intrafamily lending

Posted by Admin Posted on May 25 2017

If you’re interested in lending money to your children or other family members, consider establishing a “family bank.” These entities enhance the benefits of intrafamily loans, while minimizing unintended consequences.

Upsides and downsides of intrafamily lending

Lending can be an effective way to provide your family financial assistance without triggering unwanted gift taxes. So long as a loan is structured in a manner similar to an arm’s-length loan between unrelated parties, it won’t be treated as a taxable gift. This means, among other things:

  • Documenting the loan with a promissory note,
  • Charging interest at or above the applicable federal rate,
  • Establishing a fixed repayment schedule, and
  • Ensuring that the borrower has a reasonable prospect of repaying the loan.

Even if taxes aren’t a concern, intrafamily loans offer important benefits. For example, they allow you to help your family financially without depleting your wealth or creating a sense of entitlement. Done right, these loans can promote accountability and help cultivate the younger generation’s entrepreneurial capabilities by providing financing to start a business.

Too often, however, people lend money to family members with little planning and regard for potential unintended consequences. Rash lending decisions can lead to misunderstandings, hurt feelings, conflicts among family members and false expectations. That’s where the family bank comes into play.

Make loans through a family bank

A family bank is a family-owned, family-funded entity — such as a dynasty trust, a family limited partnership or a combination of the two — designed for the sole purpose of making intrafamily loans. Often, family banks are able to make financing available to family members who might have difficulty obtaining a loan from a bank or other traditional funding sources or to lend at more favorable terms.

By “professionalizing” family lending activities, a family bank can preserve the tax-saving power of intrafamily loans while minimizing negative consequences. The key to avoiding family conflicts and resentment is to build a strong family governance structure that promotes communication, group decision making and transparency.

Establishing clear guidelines regarding the types of loans the family bank is authorized to make — and allowing all family members to participate in the decision-making process — ensures that family members are treated fairly and avoids false expectations.

Contact us to learn more about the ins and outs of intrafamily lending.

© 2017

Could stronger governance benefit your business?

Posted by Admin Posted on May 24 2017

Every company has at least one owner. And, in many cases, there exists leadership down through the organizational chart. But not every business has strong governance.

In a nutshell, governance is the set of rules, practices and processes by which a company is directed and controlled. Strengthening it can help ensure productivity, reduce legal risks and, when the time comes, ease ownership transitions.

Looking at business structure

Good governance starts with the initial organization (or reorganization) of a business. Corporations, for example, are required by law to have a board of directors and officers and to observe certain other formalities. So this entity type is a good place to explore the concept.

Other business structures, such as partnerships and limited liability companies (LLCs), have greater flexibility in designing their management and ownership structures. But these entities can achieve strong governance with well-designed partnership or LLC operating agreements and a centralized management structure. They might, for instance, establish management committees that exercise powers similar to those of a corporate board.

Specifying the issues

For the sake of simplicity, however, let’s focus on governance issues in the context of a corporation. In this case, the business’s articles of incorporation and bylaws lay the foundation for future governance. The organizational documents might:
 

• Define and limit the authority of each executive,
• Establish a board of directors,
• Require board approval of certain actions,
• Authorize the board to hire, evaluate, promote and fire executives based on merit,
• Authorize the board to determine the compensation of top executives and to approve the terms of employment agreements, and
• Create nonvoting classes of stock to provide equity to the owner’s family members who aren’t active in the business, but without conferring management control.


As you look over this list, consider whether and how any of these items might pertain to your company. There are, of course, other aspects to governance, such as establishing an ethics code and setting up protocols for information technology.

Knowing yourself

At the end of the day, strong governance is all about knowing your company and identifying the best ways to oversee its smooth and professional operation. Please contact our firm for help running a profitable, secure business.

© 2017

A “back door” Roth IRA can benefit higher-income taxpayers

Posted by Admin Posted on May 23 2017

A potential downside of tax-deferred saving through a traditional retirement plan is that you’ll have to pay taxes when you make withdrawals at retirement. Roth plans, on the other hand, allow tax-free distributions; the tradeoff is that contributions to these plans don’t reduce your current-year taxable income.

Unfortunately, your employer might not offer a Roth 401(k) or another Roth option, and modified adjusted gross income (MAGI)-based phaseouts may reduce or eliminate your ability to contribute to a Roth IRA. Fortunately, there is a solution: the “back door” Roth IRA.

Are you phased out?

The 2017 contribution limit for all IRAs combined is $5,500 (plus an additional $1,000 catch-up contribution if you’ll be age 50 or older by December 31). You can make a partial contribution if your MAGI falls within the applicable phaseout range, but no contribution if it exceeds the top of the range:

  • For married taxpayers filing jointly: $186,000–$196,000.
  • For single and head-of-household taxpayers: $118,000–$133,000.

(Note: Married taxpayers filing separately are subject to much lower phaseout ranges.)

Using the back door

If the income-based phaseout prevents you from making Roth IRA contributions and you don’t already have a traditional IRA, a “back door” IRA might be right for you.

How does it work? You set up a traditional account and make a nondeductible contribution to it. You then wait until the transaction clears and convert the traditional account to a Roth account. The only tax due will be on any growth in the account between the time you made the contribution and the date of conversion, which should be little, if any, assuming you’re able to make the conversion quickly.

More limited tax benefit in some cases

If you do already have a traditional IRA, the back-door Roth IRA strategy is still available but there will be more tax liability on the conversion. A portion of the amount you convert to a Roth IRA will be considered attributable to deductible contributions and thus be taxable. It doesn’t matter if you set up a new traditional IRA for the nondeductible contributions; all of your traditional IRAs will be treated as one for tax purposes.

Roth IRAs have other benefits and downsides you need to factor into your decision, and additional rules apply to IRA conversions. Please contact us for assistance in determining whether a backdoor Roth IRA is right for you.

© 2017

Business owners: When it comes to IRS audits, be prepared

Posted by Admin Posted on May 22 2017

If you recently filed for your 2016 income tax return (rather than filing for an extension) you may now be wondering whether it’s likely that your business could be audited by the IRS based on your filing. Here’s what every business owner should know about the process.

Catching the IRS’s eye

Many business audits occur randomly, but a variety of tax-return-related items are likely to raise red flags with the IRS and may lead to an audit. Here are a few examples:

  • Significant inconsistencies between previous years’ filings and your most current filing,
  • Gross profit margin or expenses markedly different from those of other businesses in your industry, and
  • Miscalculated or unusually high deductions.

An owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can also catch the IRS’s eye, especially if the business is structured as a corporation.

Response measures

If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.

The good news is that many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the most severe version, the field audit, requires meeting with one or more IRS auditors.

More good news: In no instance will the agency demand an immediate response. You’ll be informed of the discrepancies in question and given time to prepare. To do so, you’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.

If the IRS selects you for an audit, our firm can help you:

  • Understand what the IRS is disputing (it’s not always crystal clear),
  • Gather the specific documents and information needed, and
  • Respond to the auditor’s inquiries in the most expedient and effective manner.

Don’t let an IRS audit ruin your year — be it this year, next year or whenever that letter shows up in the mail. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one happens in the first place.

© 2017

Why financial restatements happen … and how to prevent them

Posted by Admin Posted on May 19 2017

When companies reissue prior financial statements, it raises a red flag to investors and lenders. But not all restatements are bad news. Some result from an honest mistake or misinterpretation of an accounting standard, rather than from incompetence or fraud. Here’s a closer look at restatements and how external auditors can help a company’s management get it right.

Avoid knee-jerk responses

The Financial Accounting Standards Board (FASB) defines a restatement as “a revision of a previously issued financial statement to correct an error.” Accountants decide whether to restate a prior period based on whether the error is material to the company’s financial results. Unfortunately, there aren’t any bright-line percentages to determine materiality.

When you hear the word “restatement,” don’t automatically think of the frauds that occurred at Xerox, Enron or WorldCom. Some unscrupulous executives do use questionable accounting practices to meet quarterly earnings projections, maintain stock prices and achieve executive compensation incentives. But many restatements result from unintentional errors.

Spot error-prone accounts

Accounting rules can be complex. Recognition errors are one of the most common causes of financial restatements. They sometimes happen when companies implement a change to the accounting rules (such as the updated guidance on leases or revenue recognition) or engage in a complex transaction (such as reporting compensation expense from backdated stock options, hedge accounting, the use of special purpose or variable interest entities, and consolidating with related parties).

Income statement and balance sheet misclassifications also cause a large number of restatements. For instance, a borrower may need to shift cash flows between investing, financing and operating on the statement of cash flows.

Equity transaction errors, such as improper accounting for business combinations and convertible securities, can also be problematic. Other leading causes of restatements are valuation errors related to common stock issuances, preferred stock errors, and the complex rules related to acquisitions, investments and tax accounting.

Want more accurate results?

Restatements also happen when a company upgrades to a higher level of assurance (say, when transitioning from reviewed statements to audited statements). That’s because audits are more likely than compilation or review procedures to catch reporting errors from prior periods. An external auditor is required to “plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.”

But after the initial transition period, audits typically catch errors before financial statements are published, minimizing the need for restatements. Auditors are trained experts on U.S. Generally Accepted Accounting Principles (GAAP) — and they must take continuing professional education courses to stay atop the latest changes to the rules.

In addition to auditing financial statements, we can help implement cost-effective internal control procedures to prevent errors and accurately report error-prone accounts and transactions. Contact us for help correcting a previous error, remedying the source of an error or upgrading to a higher level of assurance.

© 2017

It’s a matter of principle — and trust — when using a principle trust

Posted by Admin Posted on May 18 2017

For many, an important estate planning goal is to encourage their children or other heirs to lead responsible, productive lives. One tool for achieving this goal is a principle trust.

By providing your trustee with guiding values and principles (rather than the set of rigid rules found in an incentive trust), a principle trust may be an effective way to accomplish your objectives. However, not everyone will be comfortable trusting a trustee with the broad discretion a principle trust requires.

Discretion and flexibility offered

A principle trust guides the trustee’s decisions by setting forth the principles and values you hope to instill in your beneficiaries. These principles and values may include virtually anything, from education and gainful employment to charitable endeavors and other “socially valuable” activities.

By providing the trustee with the discretion and flexibility to deal with each beneficiary and each situation on a case-by-case basis, it’s more likely that the trust will reward behaviors that are consistent with your principles and discourage those that are not.

Suppose, for example, that you value a healthy lifestyle free of drug and alcohol abuse. An incentive trust might withhold distributions (beyond the bare necessities) from a beneficiary with a drug or alcohol problem, but this may do little to change the beneficiary’s behavior. The trustee of a principle trust, on the other hand, is free to distribute funds to pay for a rehabilitation program or medical care.

At the same time, the trustee of a principle trust has the flexibility to withhold funds from a beneficiary who appears to meet your requirements “on paper,” but otherwise engages in behavior that violates your principles. Another advantage of a principle trust is that it gives the trustee the ability to withhold distributions from beneficiaries who neither need nor want the money, allowing the funds to continue growing and benefit future generations.

Not for everyone

Not everyone is comfortable providing a trustee with the broad discretion a principle trust requires. If it’s important for you to prescribe the specific conditions under which trust distributions will be made or withheld, an incentive trust may be appropriate. But keep in mind that even the most carefully drafted incentive trust can sometimes lead to unintended results, and the slightest ambiguity can invite disputes.

On the other hand, if you’re comfortable conferring greater power on your trustee, a principle trust can be one way to ensure that your wishes are carried out regardless of how your beneficiaries’ circumstances change in the future. We can help you decide which trust type might be more appropriate for your specific situation.

© 2017

It may be time for your company to create a strategic IT plan

Posted by Admin Posted on May 17 2017

Many companies take an ad hoc approach to technology. If you’re among them, it’s understandable; you probably had to automate some tasks before others, your tech needs have likely evolved over time, and technology itself is always changing.

Unfortunately, all of your different hardware and software may not communicate so well. What’s worse, lack of integration can leave you more vulnerable to security risks. For these reasons, some businesses reach a point where they decide to implement a strategic IT plan.

Setting objectives

The objective of a strategic IT plan is to — over a stated period — roll out consistent, integrated, and secure hardware and software. In doing so, you’ll likely eliminate many of the security dangers wrought by lack of integration, while streamlining data-processing efficiency.

To get started, define your IT objectives. Identify not only the weaknesses of your current infrastructure, but also opportunities to improve it. Employee feedback is key: Find out who’s using what and why it works for them.

From a financial perspective, estimate a reasonable return on investment that includes a payback timetable for technology expenditures. Be sure your projections factor in both:
 

• Hard savings, such as eliminating redundant software or outdated processes, and
• Soft benefits, such as being able to more quickly and accurately share data within the office as well as externally (for example, from sales calls).


Also calculate the price of doing nothing. Describe the risks and potential costs of falling behind or failing to get ahead of competitors technologically.

Working in phases

When you’re ready to implement your strategic IT plan, devise a reasonable and patient time line. Ideally, there should be no need to rush. You can take a phased approach, perhaps laying the foundation with a new server and then installing consistent, integrated applications on top of it.

A phased implementation can also help you stay within budget. You’ll need to have a good idea of how much the total project will cost. But you can still allow flexibility for making measured progress without putting your cash flow at risk.

Bringing it all together

There’s nothing wrong or unusual about wandering the vast landscape of today’s business technology. But, at some point, every company should at least consider bringing all their bits and bytes under one roof. Please contact our firm for help managing your IT spending in a measured, strategic way.

© 2017

Real estate investor vs. professional: Why it matters

Posted by Admin Posted on May 17 2017

Income and losses from investment real estate or rental property are passive by definition — unless you’re a real estate professional. Why does this matter? Passive income may be subject to the 3.8% net investment income tax (NIIT), and passive losses generally are deductible only against passive income, with the excess being carried forward.

Of course the NIIT is part of the Affordable Care Act (ACA) and might be eliminated under ACA repeal and replace legislation or tax reform legislation. But if/when such legislation will be passed and signed into law is uncertain. Even if the NIIT is eliminated, the passive loss issue will still be an important one for many taxpayers investing in real estate.

“Professional” requirements

To qualify as a real estate professional, you must annually perform:

  • More than 50% of your personal services in real property trades or businesses in which you materially participate, and
  • More than 750 hours of service in these businesses.

Each year stands on its own, and there are other nuances. (Special rules for spouses may help you meet the 750-hour test.)

Tax strategies

If you’re concerned you’ll fail either test and be subject to the 3.8% NIIT or stuck with passive losses, consider doing one of the following:

Increasing your involvement in the real estate activity. If you can pass the real estate professional tests, the activity no longer will be subject to passive activity rules.

Looking at other activities. If you have passive losses from your real estate investment, consider investing in another income-producing trade or business that will be passive to you. That way, you’ll have passive income that can absorb some or all of your passive losses.

Disposing of the activity. This generally allows you to deduct all passive losses — including any loss on disposition (subject to basis and capital loss limitations). But, again, the rules are complex.

Also be aware that the IRS frequently challenges claims of real estate professional status — and is often successful. One situation where the IRS commonly prevails is when the taxpayer didn’t keep adequate records of time spent on real estate activities.

If you’re not sure whether you qualify as a real estate professional, please contact us. We can help you make this determination and guide you on how to properly document your hours.

© 2017

Hire your children to save taxes for your business and your family

Posted by Admin Posted on May 15 2017

It can be difficult in the current job market for students and recent graduates to find summer or full-time jobs. If you’re a business owner with children in this situation, you may be able to provide them with valuable experience and income while generating tax savings for both your business and your family overall.

Shifting income

By shifting some of your business earnings to a child as wages for services performed by him or her, you can turn some of your high-taxed income into tax-free or low-taxed income. For your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s wages must be reasonable.

Here’s an example of how this works: A business owner operating as a sole proprietor is in the 39.6% tax bracket. He hires his 17-year-old son to help with office work full-time during the summer and part-time into the fall. The son earns $6,100 during the year and doesn’t have any other earnings.

The business owner saves $2,415.60 (39.6% of $6,100) in income taxes at no tax cost to his son, who can use his $6,350 standard deduction (for 2017) to completely shelter his earnings. The business owner can save an additional $2,178 in taxes if he keeps his son on the payroll longer and pays him an additional $5,500. The son can shelter the additional income from tax by making a tax-deductible contribution to his own IRA.

Family taxes will be cut even if the employee-child’s earnings exceed his or her standard deduction and IRA deduction. That’s because the unsheltered earnings will be taxed to the child beginning at a rate of 10% instead of being taxed at the parent’s higher rate.

Saving employment taxes

If your business isn’t incorporated or a partnership that includes nonparent partners, you might also save some employment tax dollars. Services performed by a child under age 18 while employed by a parent aren’t considered employment for FICA tax purposes. And a similar exemption applies for federal unemployment tax (FUTA) purposes. It exempts earnings paid to a child under age 21 while employed by his or her parent.

If you have questions about how these rules apply in your particular situation or would like to learn about other family-related tax-saving strategies, contact us.

© 2017

How to shape up your working capital

Posted by Admin Posted on May 12 2017

Working capital — current assets minus current liabilities — is a common measure of liquidity. High liquidity generally equates with low risk, but excessive amounts of cash tied up in working capital may detract from growth opportunities and other spending options, such as expanding to new markets, buying equipment and paying down debt. Here are some recent working capital trends and tips for keeping your working capital in shape.

Survey says

Working capital management among U.S. companies has been relatively flat over the last four years, excluding the performance of oil and gas companies, according to the 2016 U.S. Working Capital Survey published by consulting firm REL and CFO magazine. The overall results were skewed somewhat because oil and gas companies increased their inventory reserves to take advantage of low oil prices, thereby driving up working capital balances for that industry.

The study estimates that, if all of the 1,000 companies surveyed managed working capital as efficiently as do the companies in the top quartile of their respective industries, more than $1 trillion of cash would be freed up from receivables, inventory and payables.

Rather than improve working capital efficiency, however, many companies have chosen to raise cash with low interest rate debt. Companies in the survey currently carry roughly $4.86 trillion in debt, more than double the level in 2008. As the Federal Reserve Bank increases rates, companies will likely look for ways to manage working capital better.

Efficiency initiatives

How can your company decrease the amount of cash that’s tied up in working capital? Best practices vary from industry to industry. Here are three effective exercises for improving working capital:

Expedite collections. Possible solutions for converting receivables into cash include: tighter credit policies, early bird discounts, collection-based sales compensation and in-house collection personnel. Companies also can evaluate administrative processes — including invoice preparation, dispute resolution and deposits — to eliminate inefficiencies in the collection cycle.

Trim inventory. This account carries many hidden costs, including storage, obsolescence, insurance and security. Consider using computerized inventory systems to help predict demand, enable data-sharing up and down the supply chain, and more quickly reveal variability from theft.

Postpone payables. By deferring vendor payments, your company can increase cash on hand. But be careful: Delaying payments for too long can compromise a firm’s credit standing or result in forgone early bird discounts.

From analysis to action

No magic formula exists for reducing working capital, but continuous improvement is essential. We can help train you on how to evaluate working capital accounts, identify strengths and weaknesses, and find ways to minimize working capital without compromising supply chain relationships.

© 2017

Prepaid funeral plans may not provide peace of mind

Posted by Admin Posted on May 11 2017

The cost of a funeral has increased steadily during the past two decades. In fact, once all funeral-related costs are factored in, the typical traditional funeral service will cost an average family $8,000 to $10,000.

To relieve their families of the burden of planning a funeral, many people plan their own and pay for them in advance. Unfortunately, prepaid funeral plans are fraught with potential traps.

Avoiding the pitfalls of prepaid plans

Some plans end up costing more than the benefits they pay out. And there may be a risk that you’ll lose your investment if the funeral provider goes out of business or you want to change your plans. Some states offer protection — such as requiring a funeral home or cemetery to place funds in a trust or to purchase a life insurance policy to fund funeral costs — but many do not.

If you’re considering a prepaid plan, find out exactly what you’re paying for. Does the plan cover merchandise only (casket, vault, etc.) or are services included? Is the price locked in or is there a possibility that your family will have to pay additional amounts?

In addition, the Federal Trade Commission recommends that you ask the following questions:

  • What happens to the money you’ve prepaid?
  • What happens to the interest income on prepayments placed in a trust account?
  • Are you protected if the funeral provider goes out of business?
  • Can you cancel the contract and get a full refund if you change your mind?
  • What happens if you move or die while away from home? Can the plan be transferred? Is there an additional cost?

Another option

One alternative that avoids the pitfalls of prepaid plans is to let your family know your desired arrangements and set aside funds in a payable-on-death (POD) bank account. Simply name the person who will handle your funeral arrangements as beneficiary. When you die, he or she will gain immediate access to the funds without the need for probate.

If you have questions on the best way to fund your funeral expenses, we’d be happy to be of assistance.

© 2017

Looking for concentration risks in your supply chain

Posted by Admin Posted on May 10 2017

Concentration risks are a threat to your supply chain. These occur when a company relies on a customer or supplier for 10% or more of its revenue or materials, or on several customers or suppliers located in the same geographic region. If a key customer or supplier experiences turmoil, the repercussions travel up or down the supply chain and can quickly and negatively impact your business.

To protect yourself, it’s important to look for concentration risks as you monitor your financials and engage in strategic planning. Remember to evaluate not only your own success and stability, but also that of your key customers and supply chain partners.

2 types of concentration

Businesses tend to experience two main types of concentration risks:

1. Product-related. If your company’s most profitable product line depends on a few key customers, you’re essentially at their mercy. Key customers that unexpectedly cut budgets or switch to a competitor could significantly lower revenues.

Similarly, if a major supplier suddenly increases prices or becomes lax in quality control, it could cause your profits to plummet. This is especially problematic if your number of alternative suppliers is limited.

2. Geographic. When gauging geographic risks, assess whether a large number of your customers or suppliers are located in one geographic region. Operating near supply chain partners offers advantages such as lower transportation costs and faster delivery. Conversely, overseas locales may enable you to cut labor and raw materials expenses.

But there are also potential risks associated with geographic centricity. Local weather conditions, tax rate hikes and regulatory changes can have a significant impact. And these threats increase substantially when dealing with global partners, which may also present risks in the form of geopolitical uncertainty and exchange rate volatility.

Financially feasible

Your supply chain is much like your cash flow: When it’s strong, stable and uninterrupted, you’re probably in pretty good shape. Our firm can help you assess your concentration risks and find financially feasible solutions.

© 2017

Want to help your child (or grandchild) buy a home? Don’t wait!

Posted by Admin Posted on May 09 2017

Mortgage interest rates are still at low levels, but they likely will increase as the Fed continues to raise rates. So if you’ve been thinking about helping your child — or grandchild — buy a home, consider acting soon. There also are some favorable tax factors that will help:

0% capital gains rate. If the child is in the 10% or 15% income tax bracket, instead of giving cash to help fund a down payment, consider giving long-term appreciated assets such as stock or mutual fund shares. The child can sell the assets without incurring any federal income taxes on the gain, and you can save the taxes you’d owe if you sold the assets yourself.

As long as the assets are worth $14,000 or less (when combined with any other 2017 gifts to the child), there will be no federal gift tax consequences — thanks to the annual gift tax exclusion. Married couples can give twice that amount tax-free if they split the gift. And if you don’t mind using up some of your lifetime exemption ($5.49 million for 2017), you can give even more. Plus, there’s the possibility that the gift and estate taxes could be repealed. If that were to happen, there’d be no limit on how much you could give tax-free (for federal purposes).

Low federal interest rates. Another tax-friendly option is lending funds to the child. Now is a good time for taking this step, too. Currently, Applicable Federal Rates — the rates that can be charged on intrafamily loans without causing unwanted tax consequences — are still quite low by historical standards. But these rates have begun to rise and are also expected to continue to increase this year. So lending money to a loved one for a home purchase sooner rather than later might be a good idea.

If you choose the loan option, it’s important to put a loan agreement in writing and actually collect payment (including interest) on the loan. Otherwise the IRS could deem the loan to actually be a taxable gift. Keep in mind that you’ll have to report the interest as income. But if the interest rate is low, the tax impact should be minimal.

If you have questions about these or other tax-efficient ways to help your child or grandchild buy a home, please contact us.

© 2017

Operating across state lines presents tax risks — or possibly rewards

Posted by Admin Posted on May 08 2017

It’s a smaller business world after all. With the ease and popularity of e-commerce, as well as the incredible efficiency of many supply chains, companies of all sorts are finding it easier than ever to widen their markets. Doing so has become so much more feasible that many businesses quickly find themselves crossing state lines.

But therein lies a risk: Operating in another state means possibly being subject to taxation in that state. The resulting liability can, in some cases, inhibit profitability. But sometimes it can produce tax savings.

Do you have “nexus”?

Essentially, “nexus” means a business presence in a given state that’s substantial enough to trigger that state’s tax rules and obligations.

Precisely what activates nexus in a given state depends on that state’s chosen criteria. Triggers can vary but common criteria include:

  • Employing workers in the state,
  • Owning (or, in some cases even leasing) property there,
  • Marketing your products or services in the state,
  • Maintaining a substantial amount of inventory there, and
  • Using a local telephone number.

Then again, one generally can’t say that nexus has a “hair trigger.” A minimal amount of business activity in a given state probably won’t create tax liability there. For example, an HVAC company that makes a few tech calls a year across state lines probably wouldn’t be taxed in that state. Or let’s say you ask a salesperson to travel to another state to establish relationships or gauge interest. As long as he or she doesn’t close any sales, and you have no other activity in the state, you likely won’t have nexus.

Strategic moves

If your company already operates in another state and you’re unsure of your tax liabilities there — or if you’re thinking about starting up operations in another state — consider conducting a nexus study. This is a systematic approach to identifying the out-of-state taxes to which your business activities may expose you.

Keep in mind that the results of a nexus study may not be negative. You might find that your company’s overall tax liability is lower in a neighboring state. In such cases, it may be advantageous to create nexus in that state (if you don’t already have it) by, say, setting up a small office there. If all goes well, you may be able to allocate some income to that state and lower your tax bill.

The complexity of state tax laws offers both risk and opportunity. Contact us for help ensuring your business comes out on the winning end of a move across state lines.

© 2017

Conflict minerals: SEC reconsiders the disclosure requirements

Posted by Admin Posted on May 05 2017

The Securities and Exchange Commission (SEC) is reviewing its controversial disclosure rule that requires businesses to trace the sources of certain minerals used in their products. Businesses subject to the rule complain about its costs, but human rights groups say it has produced tangible benefits and that the compliance costs are vastly overstated. Will the SEC pare back its required disclosures? Here’s the latest.

Close-up on conflict minerals

SEC Release No. 34-67716, Conflict Minerals, was issued in 2012 as part of the financial reforms under the Dodd-Frank Act. It requires public companies that use gold, tantalum, tin or tungsten in their supply chains to report the following information to the SEC:

  • Descriptions of the facilities used to process the conflict minerals,
     
  • Country of origin of the conflict minerals, and
     
  • Efforts to determine the mine or location of origin.

If the minerals originated in the Democratic Republic of the Congo or an adjoining country, the company must submit a report to the SEC describing the measures it took to “exercise due diligence on the conflict minerals’ source and chain of custody.” One such measure is an independent private sector audit of these disclosures.

Together, these disclosure requirements are intended to discourage the use of minerals obtained from this violence-ridden region of central Africa. The ultimate goal is to cut off cash flow to the rebels, who have brutally murdered more than 5.4 million people in civil wars in this region.

Recent legal battles

On January 31, 2017, SEC Acting Chairman Michael Piwowar solicited public comment within 45 days on whether the conflict minerals disclosure rule is appropriate. Not surprisingly, the comments were split. Human rights advocates and other nongovernmental groups want the rule kept intact. These groups believe that the compliance costs are overstated and will decrease over time.

On the flip side, businesses that use conflict minerals — including electronics manufacturers, wholesale distributors, retailers, automakers and a variety of other types of businesses — largely oppose the disclosure requirements, arguing that compliance is cost-prohibitive. Moreover, they contend that the requirements have strained supply chain relationships, especially with private suppliers and customers that must report on the chain of custody for conflict minerals in order to do business with public companies that must comply with the SEC’s disclosure requirements.

In light of this feedback, the SEC staff was ordered on April 7, 2017, to recommend changes to the conflict minerals rule. However, the current requirements remain in effect until the revised guidance is released.

Uncertain fate of the disclosure rule

As the government enters a phase of deregulation, the conflict minerals disclosures and other rules passed under the Dodd-Frank Act may be relaxed, temporarily suspended or rescinded altogether. We’re atop the latest developments and can help ensure you’re in compliance with the latest requirements.

© 2017

Worried about challenges to your estate plan? Make it no contest

Posted by Admin Posted on May 05 2017

Estate planning is all about protecting your family and ensuring that your wealth is distributed according to your wishes. So the idea that someone might challenge your estate plan can be disconcerting. One strategy for protecting your plan is to include a “no-contest” clause in your will or revocable trust (or both).

What’s a no-contest clause?

A no-contest clause essentially disinherits anyone who contests your will or trust (typically on grounds of undue influence or lack of testamentary capacity) and loses. It’s meant to serve as a deterrent against frivolous challenges that would create unnecessary expense and delay for your family.

Most, but not all, states permit and enforce no-contest clauses. And even if they’re allowed, the laws differ — often in subtle ways — from state to state, so it’s important to consult state law before including a no-contest clause in your will or trust.

Some jurisdictions have different rules regarding which types of proceedings constitute a “contest.” For example, in some states your heirs may be able to challenge the appointment of an executor or trustee without violating a no-contest clause. And in some states, courts will refuse to enforce the clause if a challenger has “probable cause” or some other defensible reason for bringing the challenge. This is true even if the challenge itself is unsuccessful.

Are there alternative strategies?

A no-contest clause can be a powerful deterrent, but it’s also important, wherever you live, to design your estate plan in a way that minimizes incentives to challenge it. To avoid claims of undue influence or lack of testamentary capacity, have a qualified physician or psychiatrist examine you — at or near the time you sign your will or trust — and attest in writing to your mental competence. Also choose witnesses whom your heirs trust and whom you expect to be able and willing to testify, if necessary, to your freedom from undue influence. Finally, record the execution of your will.

Of course, you should also make an effort to treat your children and other family members fairly, remembering that “equal” isn’t necessarily fair, depending on the circumstances.

Protect yourself

As you develop or update your estate plan, it’s important to think about ways to protect yourself against challenges by disgruntled heirs or beneficiaries. We can help you determine if a no-contest clause can be an effective tool for discouraging such challenges.

© 2017

3 hot spots to look for your successor

Posted by Admin Posted on May 03 2017

Picking someone to lead your company after you step down is probably among the hardest aspects of retiring (or otherwise moving on). Sure, there are some business owners who have a ready-made successor waiting in the wings at a moment’s notice. But many have a few viable candidates to consider — others have too few.

When looking for a successor, for best results, keep an open mind. Don’t assume you have to pick any one person — look everywhere. Here are three hot spots to consider.

1. Your family. If yours is a family-owned business, this is a natural place to first look for a successor. Yet, because of the relationships and emotions involved, finding a successor in the family can be particularly complex. Make absolutely sure a son, daughter or other family member really wants to succeed you. But also keep in mind that desire isn’t enough. The loved one must also have the proper qualifications, as well as experience inside and, ideally, outside the company.

2. Nonfamily employees. Keep an eye out for company “stars” who are still early in their careers, regardless of their functional or geographic area. Start developing their leadership skills as early as possible and put them to the test regularly. For example, as time goes on, continually create new projects or positions that give them responsibility for increasingly larger and more complex profit centers to see how they’ll measure up.

3. The wide, wide world. If a family member or current employee just isn’t feasible, you can always look externally. A good way to start is simply by networking with people in your industry, former employees and professional advisors. You can also try placing an ad in a newspaper or trade publication, or on an Internet job site. Don’t forget executive search firms either; they’ll help screen candidates and conduct interviews.

At the end of the day, any successor — whether family member, employee or external candidate — must have the right stuff. Please contact our firm for help setting up an effective succession plan.

© 2017

Choosing between a calendar tax year and a fiscal tax year

Posted by Admin Posted on May 02 2017

Many business owners use a calendar year as their company’s tax year. It’s intuitive and aligns with most owners’ personal returns, making it about as simple as anything involving taxes can be. But for some businesses, choosing a fiscal tax year can make more sense.

What’s a fiscal tax year?

A fiscal tax year consists of 12 consecutive months that don’t begin on January 1 or end on December 31 — for example, July 1 through June 30 of the following year. The year doesn’t necessarily need to end on the last day of a month. It might end on the same day each year, such as the last Friday in March.

Flow-through entities (partnerships, S corporations and, typically, limited liability companies) using a fiscal tax year must file their return by the 15th day of the third month following the close of their fiscal year. So, if their fiscal year ends on March 31, they would need to file their return by June 15. (Fiscal-year C corporations generally must file their return by the 15th day of the fourth month following the fiscal year close.)

When a fiscal year makes sense

A key factor to consider is that if you adopt a fiscal tax year you must use the same time period in maintaining your books and reporting income and expenses. For many seasonal businesses, a fiscal year can present a more accurate picture of the company’s performance.

For example, a snowplowing business might make the bulk of its revenue between November and March. Splitting the revenue between December and January to adhere to a calendar year end would make obtaining a solid picture of performance over a single season difficult.

In addition, if many businesses within your industry use a fiscal year end and you want to compare your performance to your peers, you’ll probably achieve a more accurate comparison if you’re using the same fiscal year.

Before deciding to change your fiscal year, be aware that the IRS requires businesses that don’t keep books and have no annual accounting period, as well as most sole proprietorships, to use a calendar year.

It can make a difference

If your company decides to change its tax year, you’ll need to obtain permission from the IRS. The change also will likely create a one-time “short tax year” — a tax year that’s less than 12 months. In this case, your income tax typically will be based on annualized income and expenses. But you might be able to use a relief procedure under Section 443(b)(2) of the Internal Revenue Code to reduce your tax bill.

Although choosing a tax year may seem like a minor administrative matter, it can have an impact on how and when a company pays taxes. We can help you determine whether a calendar or fiscal year makes more sense for your business.

© 2017

Turning next year’s tax refund into cash in your pocket now

Posted by Admin Posted on May 02 2017

Each year, millions of taxpayers claim an income tax refund. To be sure, receiving a payment from the IRS for a few thousand dollars can be a pleasant influx of cash. But it means you were essentially giving the government an interest-free loan for close to a year, which isn’t the best use of your money.

Fortunately, there is a way to begin collecting your 2017 refund now: You can review the amounts you’re having withheld and/or what estimated tax payments you’re making, and adjust them to keep more money in your pocket during the year.

Reasons to modify amounts

It’s particularly important to check your withholding and/or estimated tax payments if:

  • You received an especially large 2016 refund,
  • You’ve gotten married or divorced or added a dependent,
  • You’ve purchased a home,
  • You’ve started or lost a job, or
  • Your investment income has changed significantly.

Even if you haven’t encountered any major life changes during the past year, changes in the tax law may affect withholding levels, making it worthwhile to double-check your withholding or estimated tax payments.

Making a change

You can modify your withholding at any time during the year, or even several times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. For estimated tax payments, you can make adjustments each time quarterly payments are due.

While reducing withholdings or estimated tax payments will, indeed, put more money in your pocket now, you also need to be careful that you don’t reduce them too much. If you don’t pay enough tax during the year, you could end up owing interest and penalties when you file your return, even if you pay your outstanding tax liability by the April 2018 deadline.

If you’d like help determining what your withholding or estimated tax payments should be for the rest of the year, please contact us.

© 2017

Use pro formas to plot your route to success

Posted by Admin Posted on May 02 2017

Running a business is like going on a road trip — and a detailed business plan that includes a set of pro forma financials can serve as a road map or GPS app that improves your odds of arriving on time and on budget. If your plan doesn’t cover the prospective quantitative details in pro formas, expect to hit some bumps along the road to achieving your strategic goals.

What to include

Investors and lenders may require business plans from companies that are starting up, seeking additional funding, or restructuring to avoid bankruptcy. Beyond all of the verbiage in the executive summary, business description and market analysis, comprehensive business plans include at least three years of pro forma:

  • Balance sheets (projecting assets, liabilities and equity),
  • Income statements (projecting expected revenue, expenses, gains, losses and net profits), and
  • Cash flow statements (highlighting sources and uses of cash from operating, financing and investing activities).

Pro forma financial statements are the quantitative details that back up the qualitative portions of your business plan. Pro formas tell stakeholders that management is aware of when cash flow and capacity shortages are likely to occur and how sensitive the results are to changes in the underlying assumptions.

How to crunch the numbers

Unless you’re launching a start-up, historical financial statements are the usual starting point for pro forma financials. Historical statements tell where the company is now. The next step is to ask, “Where do we want to be in three, five or 10 years?” Long-term goals fuel the assumptions that, in turn, drive the pro formas.

For example, suppose a company with $5 million in sales wants that figure to double over a three-year period. How will it get from Point A ($5 million in 2016) to Point B ($10 million in 2019)? Many roads lead to the desired destination.

Management could, for example, hire new salespeople, acquire the assets of a bankrupt competitor, build a new plant or launch a new product line. Attach a “statement of assumptions” to your pro forma financials, which shows how you plan to achieve your goals and how the changes will flow through the financial statements.

Need help?

Running a company following a business plan that doesn’t include pro forma financials is like going on a road trip with an unreliable GPS app or a bad map: Pro formas help you monitor where you are, what alternate routes or side trips exist along the way, and how close you are to the final destination. We can help you prepare pro forma financial statements, compare expected to actual results and adjust your assumptions as needed.

© 2017

Asset valuations and your estate plan go hand in hand

Posted by Admin Posted on Apr 27 2017

If your estate plan calls for making noncash gifts in trust or outright to beneficiaries, you need to know the values of those gifts and disclose them to the IRS on a gift tax return. For substantial gifts of noncash assets other than marketable securities, it’s a good idea to have a qualified appraiser value the gifts at the time of the transfer.

Adequately disclosing a gift

A three-year statute of limitations applies during which the IRS can challenge the value you report on your gift tax return. The three-year term doesn’t begin until your gift is “adequately disclosed.” This means you need to not just file a gift tax return, but also:

  •  Give a detailed description of the nature of the gift
  • Explain the relationship of the parties to the transaction, and
  • Detail the basis for the valuation.

The IRS also may require certain financial statements or other financial data and records.
Generally, the most effective way to ensure you’ve disclosed gifts adequately and triggered the statute of limitations is to have a qualified, independent appraiser submit a valuation report that includes information about the property, the transaction and the appraisal process.

IRS-imposed penalties

Using a qualified appraiser is important because, if the IRS deems your valuation to be “insufficient,” it can revalue the property and assess additional taxes and interest. If the IRS finds that the property’s value was “substantially” or “grossly” misstated, it will also assess additional penalties.

A “substantial” misstatement occurs if you report a value that’s 65% or less of the actual value — the penalty is 20% of the amount by which your taxes are underpaid. A “gross” misstatement occurs if your reported value is 40% or less of the actual value — the penalty is 40% of the amount by which your taxes are underpaid.

Before taking any action, consult with us regarding the tax and legal consequences of any estate planning strategies. In addition, we can help you work with a qualified appraiser to ensure your gifts are adequately disclosed.

© 2017

Enhance benefits’ perceived value with strong communication

Posted by Admin Posted on Apr 26 2017

Providing a strong package of benefits is a competitive imperative in today’s business world. Like many employers, you’ve probably worked hard to put together a solid menu of offerings to your staff. Unfortunately, many employees don’t perceive the full value of the benefits they receive.

Why is this important? An underwhelming perception of value could cause good employees to move on to “greener” pastures. It could also inhibit better job candidates from seeking employment at your company. Perhaps worst of all, if employees don’t fully value their benefits, they might not fully use them — which means you’re wasting dollars and effort on procuring and maintaining a strong package.

Targeting life stage

Among the most successful communication strategies for promoting benefits’ value is often the least commonly used. That is, target the life stage of your employees.

For example, an employee who’s just entering the workforce in his or her twenties will have a much different view of a 401(k) plan than someone nearing retirement. A younger employee will also likely view health care benefits differently. Employers who tailor their communications to the recipient’s generation can improve their success rate at getting workers to understand their benefits.

Covering all bases

There are many other strategies to consider as well. For starters, create a year-round benefits communication program that features clear, concise language and graphics. Many employers discuss benefits with their workforces only during open enrollment periods.

Also, gather feedback to determine employees’ informational needs. You may learn that you have to start communicating in multiple languages, for instance. You might also be able to identify staff members who are particularly knowledgeable about benefits. These employees could serve as word-of-mouth champions of your package who can effectively explain things to others.

Identifying sound strategies

Given the cost and effort you put into choosing, developing and offering benefits to your employees, the payoff could be much better. We can help you ensure you’re getting the most bang for your benefits buck.

© 2017

Now’s a great time to purge old tax records

Posted by Admin Posted on Apr 25 2017

Whether you filed your 2016 tax return by the April 18 deadline or you filed for an extension, you may be overwhelmed by the amount of documentation involved. While you need to hold on to all of your 2016 tax records for now, it’s a great time to take a look at your records for previous tax years to see what you can purge.

Consider the statute of limitations

At minimum, keep tax records for as long as the IRS has the ability to audit your return or assess additional taxes, which generally is three years after you file your return. This means you likely can shred and toss — or electronically purge — most records related to tax returns for 2013 and earlier years (2012 and earlier if you filed for an extension for 2013).

In some cases, the statute of limitations extends beyond three years. If you understate your adjusted gross income by more than 25%, for example, the limitations period jumps to six years. And there is no statute of limitations if you fail to file a tax return or file a fraudulent one.

Keep some documents longer

You’ll need to hang on to certain records beyond the statute of limitations:

Tax returns. Keep them forever, so you can prove to the IRS that you actually filed.

W-2 forms. Consider holding them until you begin receiving Social Security benefits. Why? In case a question arises regarding your work record or earnings for a particular year.

Records related to real estate or investments. Keep these as long as you own the asset, plus three years after you sell it and report the sale on your tax return (or six years if you’re concerned about the six-year statute of limitations).

This is only a sampling of retention guidelines for tax-related documents. If you have questions about other documents, please contact us.

© 2017

Do you know the tax implications of your C corp.’s buy-sell agreement?

Posted by Admin Posted on Apr 24 2017

Private companies with more than one owner should have a buy-sell agreement to spell out how ownership shares will change hands should an owner depart. For businesses structured as C corporations, the agreements also have significant tax implications that are important to understand.

Buy-sell basics

A buy-sell agreement sets up parameters for the transfer of ownership interests following stated “triggering events,” such as an owner’s death or long-term disability, loss of license or other legal incapacitation, retirement, bankruptcy, or divorce. The agreement typically will also specify how the purchase price for the departing owner’s shares will be determined, such as by stating the valuation method to be used.

Another key issue a buy-sell agreement addresses is funding. In many cases, business owners don’t have the cash readily available to buy out a departing owner. So insurance is commonly used to fund these agreements. And this is where different types of agreements — which can lead to tax issues for C corporations — come into play.

Under a cross-purchase agreement, each owner buys life or disability insurance (or both) that covers the other owners, and the owners use the proceeds to purchase the departing owner’s shares. Under a redemption agreement, the company buys the insurance and, when an owner exits the business, buys his or her shares.

Sometimes a hybrid agreement is used that combines aspects of both approaches. It may stipulate that the company gets the first opportunity to redeem ownership shares and that, if the company is unable to buy the shares, the remaining owners are then responsible for doing so. Alternatively, the owners may have the first opportunity to buy the shares.

C corp. tax consequences

A C corp. with a redemption agreement funded by life insurance can face adverse tax consequences. First, receipt of insurance proceeds could trigger corporate alternative minimum tax.

Second, the value of the remaining owners’ shares will probably rise without increasing their basis. This, in turn, could drive up their tax liability if they later sell their shares.

Heightened liability for the corporate alternative minimum tax is generally unavoidable under these circumstances. But you may be able to manage the second problem by revising your buy-sell as a cross-purchase agreement. Under this approach, owners will buy additional shares themselves — increasing their basis.

Naturally, there are downsides. If owners are required to buy a departing owner’s shares, but the company redeems the shares instead, the IRS may characterize the purchase as a taxable dividend. Your business may be able to mitigate this risk by crafting a hybrid agreement that names the corporation as a party to the transaction and allows the remaining owners to buy back the shares without requiring them to do so.

For more information on the tax ramifications of buy-sell agreements, contact us. And if your business doesn’t have a buy-sell in place yet, we can help you figure out which type of funding method will best meet your needs while minimizing any negative tax consequences.

© 2017

Measuring “fair value” for financial reporting purposes

Posted by Admin Posted on Apr 21 2017

The balance sheet usually reflects the historic cost of assets and liabilities. But certain items must be reported at “fair value” under U.S. Generally Accepted Accounting Principles (GAAP). Here’s a closer look at what fair value is and which balance sheet accounts it affects.

Fair value vs. fair market value

Accounting Standards Codification (ASC) Topic 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This definition is similar in many respects to “fair market value,” which is defined in IRS Revenue Ruling 59-60.

The main difference is that fair market value focuses on the universe of hypothetical buyers and sellers. Conversely, FASB uses the term “market participants,” which refers to buyers and sellers in the asset’s or liability’s principal market. The principal market is entity specific and may vary among companies.

Hierarchy of value

Under ASC Topic 820, fair value is most often associated with business combinations and subsequent accounting for goodwill and other intangibles after the deal closes. Other examples of items that are reported at fair value include

  • Impairment or disposals of long-lived assets,
  • Asset retirement or environmental obligations,
  • Stock compensation, and
  • Certain financial assets and liabilities.

When measuring fair value, the FASB provides a hierarchy of methods that may not necessarily apply to valuations performed for other purposes. GAAP gives top priority to market-based methods, such as quoted prices in active markets for identical assets or liabilities.

When market data isn’t readily available for a specific company, GAAP looks to quoted prices in active markets for similar assets or liabilities — in other words, comparable public stock prices or sales of controlling interests in comparable companies. The least desirable level of inputs under GAAP is unobservable data, such as cash flow or cost estimates prepared by management (which may be used to estimate value under the income or cost approach).

Changes in value

Decreases in the fair value of an asset (or increases in the fair value of a liability) may result from, say, poor company performance, changes in economic conditions and inaccurate estimates made in the past. Companies aren’t allowed to overstate the value of assets (or understate the value of a liability) under GAAP, so changes in fair value may lead to write-offs or restatements.

Outside expertise

Auditors are specifically prohibited from providing valuation services for their public audit clients. Private companies may follow suit to prevent independence issues during audits. So, companies often turn to valuation experts who are independent from their auditors to make fair value estimates — and then their auditors can evaluate whether those estimates appear reasonable. Contact us if you have any questions about fair value, including how it’s estimated or when it applies.

© 2017

Life insurance and an estate plan may not always mix well

Posted by Admin Posted on Apr 20 2017

A life insurance policy can be an important part of an estate plan. The tax benefits are twofold: The policy can provide a source of wealth for your family income-tax-free, and it can supply funds to pay estate taxes and other expenses.

However, if you own your policy, rather than having, for example, an irrevocable life insurance trust (ILIT) own it, you’ll have to take extra steps to keep the policy’s proceeds out of your taxable estate.

3-year rule explained

If you already own an insurance policy on your life, you can remove it from your taxable estate by transferring it to a family member or to an ILIT. However, there’s a caveat.

If you transfer a life insurance policy and don’t survive for at least three years, the tax code requires the proceeds to be pulled back into your estate. Thus, they may be subject to estate taxes.

Fortunately, there’s an exception to the three-year rule for life insurance (or other property) you transfer as part of a “bona fide sale for adequate consideration.” For example, let’s say you wanted to transfer your policy to your daughter. You could do so without triggering the three-year rule as long as your daughter paid adequate consideration for the policy.

Determining adequate consideration isn’t an exact science. One definition is fair market value, which is essentially the price on which a willing seller and a willing buyer would agree.

Triggering the transfer-for-value rule

The problem with the bona fide sale exception is that, when life insurance is involved, it may trigger another, equally devastating, rule: the transfer-for-value rule. Under this rule, a transferee who gives valuable consideration for a life insurance policy will be subject to ordinary income taxes on the amount by which the proceeds exceed the consideration and premiums the transferee paid.

So, in the previous example, even if your daughter purchased the policy for the appropriate amount to avoid the three-year rule, she could be subject to some income tax when she receives the proceeds.

Recipe for success: Selling to a trust

It may be possible to avoid the three-year rule — without running afoul of the transfer-for-value rule — by selling an existing life insurance policy for adequate consideration to an irrevocable grantor trust. A grantor trust is a trust structured so that you, the grantor, are the owner for income tax purposes but not for estate tax purposes.

While there’s been talk of an estate tax repeal, it’s still uncertain if and when that will happen. So if your estate is large enough that estate taxes could be an issue, it’s best to continue to factor that into your planning. Please contact us if you have questions about how you should address your life insurance policy in your estate plan.

© 2017

How can you take customer service to the next level?

Posted by Admin Posted on Apr 19 2017

Just about every business intends to provide world-class customer service. And though many claim their customer service is exceptional, very few can back up that assertion. After all, once a company has established a baseline level of success in interacting with customers, it’s not easy to get to that next level of truly great service. But, fear not, there are ways to elevate your game and, ultimately, strengthen your bottom line in the process.

Start at the top

As is the case for many things in business, success starts at the top. Encourage your fellow owners (if any) and management team to regularly serve customers. Doing so cements customer relationships and communicates to employees that serving others is important and rewarding. Your involvement shows that customer service is the source of your company’s ultimate triumph.

Moving down the organizational chart, cultivate customer-service heroes. Publish articles about your customer service achievements in your company’s newsletter or post them on your website. Champion these heroes in meetings. Public praise turns ordinary employees into stars and encourages future service excellence.

Just make sure to empower all employees to make customer-service decisions. Don’t talk of catering to customers unless your staff can really take the initiative to meet your customers’ needs.

Create a system

Like everyone in today’s data-driven world, customers want information. So strive to provide immediate feedback to customers with a highly visible response system. This will let customers know that their input matters and you’ll reward them for speaking up.

The size and shape of this system will depend on the size, shape and specialty of the company itself. But it should likely encompass the right combination of instant, electronic responses to customer inquires along with phone calls and, where appropriate, face-to-face interactions that reinforce how much you value their business.

Give them a thrill

Consistently great customer service can be an elusive goal. You may succeed for months at a time only to suffer setbacks. Don’t get discouraged. Our firm can help you build a profitable company that excels at thrilling your customers.

© 2017

Individual tax calendar: Key deadlines for the remainder of 2017

Posted by Admin Posted on Apr 19 2017

While April 15 (April 18 this year) is the main tax deadline on most individual taxpayers’ minds, there are others through the rest of the year that are important to be aware of. To help you make sure you don’t miss any important 2017 deadlines, here’s a look at when some key tax-related forms, payments and other actions are due. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you.

Please review the calendar and let us know if you have any questions about the deadlines or would like assistance in meeting them.  

June 15

  • File a 2016 individual income tax return (Form 1040) or file for a four-month extension (Form 4868), and pay any tax and interest due, if you live outside the United States.
  • Pay the second installment of 2017 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

September 15  

  • Pay the third installment of 2017 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

October 2   

  • If you’re the trustee of a trust or the executor of an estate, file an income tax return for the 2016 calendar year (Form 1041) and pay any tax, interest and penalties due, if an automatic five-and-a-half month extension was filed.

October 16   

  • File a 2016 income tax return (Form 1040, Form 1040A or Form 1040EZ) and pay any tax, interest and penalties due, if an automatic six-month extension was filed (or if an automatic four-month extension was filed by a taxpayer living outside the United States).
  • Make contributions for 2016 to certain retirement plans or establish a SEP for 2016, if an automatic six-month extension was filed.
  • File a 2016 gift tax return (Form 709) and pay any tax, interest and penalties due, if an automatic six-month extension was filed.

December 31  

  • Make 2017 contributions to certain employer-sponsored retirement plans.
  • Make 2017 annual exclusion gifts (up to $14,000 per recipient).
  • Incur various expenses that potentially can be claimed as itemized deductions on your 2017 tax return. Examples include charitable donations, medical expenses, property tax payments and expenses eligible for the miscellaneous itemized deduction.

© 2017

Bartering may be cash-free, but it’s not tax-free

Posted by Admin Posted on Apr 19 2017

Bartering might seem like something that happened only in ancient times, but the practice is still common today. And the general definition remains the same: the exchange of goods and services without the exchange of money. Because no cash changes hands in a typical barter transaction, it’s easy to forget about taxes. But, as one might expect, you can’t cut Uncle Sam out of the deal.

A taxing transaction

The IRS generally treats a barter exchange similarly to a transaction involving cash, so you must report as income the fair market value of the products or services you receive. If there are business expenses associated with the transaction, those can be deducted. Any income arising from a bartering arrangement is generally taxable in the year you receive the bartered product or service.

And income tax liability isn’t the only thing you’ll need to consider. Barter activities may also trigger self-employment taxes, employment taxes or an excise tax.

Barter in action

Let’s look at an example. Mike, a painting contractor, requires legal representation for a lawsuit. He engages Maria as legal counsel to represent him during the litigation. Maria charges Mike $6,000 for her work on the case.

Being short of cash, Mike agrees to paint Maria’s office in exchange for her $6,000 fee. Both Mike and Maria must report $6,000 of taxable gross income during the year the exchange takes place. Because Mike and Maria each operate a viable business, they’re entitled to deduct any business expenses resulting from the barter transaction.

Using an exchange company

You may wish to arrange a bartering deal though an exchange company. For a fee, one of these companies can allow you to network with other businesses looking to trade goods and services. For tax purposes, a barter exchange company typically must issue a Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions,” annually to its clients or members.

Although bartering may appear cut and dried, the tax implications can complicate the deal. We can help you assess a bartering arrangement and manage the tax impact.

© 2017

Benchmarking receivables

Posted by Admin Posted on Apr 14 2017

Accounts receivable represents a major asset for many companies. But how do your company’s receivables compare to others? Here’s the skinny on receivables ratios, including how they’re computed and sources of potential benchmarking data.

Starting point

A logical starting point for evaluating the quality of receivables is the days sales outstanding (DSO) ratio. This represents the average number of days you take to collect money after booking sales. It can be computed by dividing the average accounts receivable balance by annual revenues and then multiplying the result by 365 days.

Companies that are diligent about managing receivables may be rewarded with lower DSO ratios. Those with relatively high DSO ratios may have “stale” receivables on the books. In some cases, these accounts may be overdue by 31 to 90 days — or longer. If more than 20% of receivables are stale, it may indicate lax collection habits, a poor-quality customer base or other serious issues.

The percentage of delinquent accounts is another critical number. You may decide to outsource these accounts to third-party collectors to eliminate the hassles of making collections calls and threatening legal actions to collect what you’re owed.

Potential risks

Accounts receivable also may be a convenient place to hide fraud because of the high volume of transactions involved. When receivables are targeted in a fraud scheme, it’s common for there to be an increase in stale receivables, a higher percentage of write-offs compared to previous periods, or an increase in receivables as a percentage of sales or total assets.

In addition to creating phony invoices or customers, a dishonest worker may engage in lapping scams. This happens when a receivables clerk assigns payments to incorrect accounts to conceal systematic embezzlement. For example, a fraudster might steal Company A’s payment and cover it up by subsequently applying Company B’s payment to Company A’s outstanding balance. Then Company C’s payment is later applied to Company B’s outstanding balance, and so on.

Alternatively, a fraudster may send the customer an inflated invoice and then “skim” the difference after applying the legitimate amount to the customer’s account. Using separate employees for invoicing and recording payments helps reduce the likelihood that skimming will occur, unless two or more employees work together to steal from their employer.

Call for help

Like any valuable asset, accounts receivable needs to be managed and safeguarded. Auditors evaluate receivables as part of their standard auditing procedures, including performing ratio analysis, sending confirmation letters and reconciling bank deposits with customer receipts.
Contact us if you have any concerns regarding receivables midyear or your financial statements aren’t audited. In addition to surprise audits, we can customize an agreed-upon-procedures engagement that zeroes in on receivables.

© 2017

Acquaint yourself with the Roth IRA as an estate planning tool

Posted by Admin Posted on Apr 13 2017

A Roth IRA can be a valuable estate planning tool, offering the opportunity for tax-free growth as long as it exists and requiring no distributions during your life, thus allowing you to pass on a greater amount of wealth to your family. While traditional IRAs are more common, there’s no time like the present to consider how a Roth IRA might better help you achieve your estate planning goals.

Roth vs. traditional IRA

With a Roth IRA, you give up the deductibility of contributions for the opportunity to make tax-free withdrawals. This differs from a traditional IRA, where contributions may be deductible and earnings grow on a tax-deferred basis, but withdrawals (less any prorated nondeductible contributions) are subject to ordinary income taxes — plus a 10% penalty if you’re under age 59½ at the time of the distribution.

With a Roth IRA, you can make tax-free withdrawals up to the amount of your contributions at any time. And withdrawals of account earnings are tax-free if you make them after you’ve had the Roth IRA for five years and you’re age 59½ or older.

Also on the plus side, especially from an estate planning perspective, you can leave funds in your Roth IRA as long as you want. This differs from the required minimum distributions starting after age 70½ that generally apply to traditional IRAs.

So, with a Roth IRA, you can let the entire account grow tax-free over your lifetime for the benefit of one or more heirs. While the beneficiary will be required to take distributions, they’ll be tax-free and can be spread out over his or her lifetime, allowing the remaining assets in the account to continue to grow tax-free.

Limited contributions

For 2017, the annual Roth IRA contribution limit is $5,500 ($6,500 for taxpayers age 50 or older), reduced by any contributions made to traditional IRAs. Your modified adjusted gross income (MAGI) may also affect your ability to contribute, however.

In 2017, the contribution limit phases out for married couples filing jointly with MAGIs between $186,000–$196,000. The 2017 phaseout range for single and head-of-household filers is $118,000–$133,000.

Conversion question

If your income is too high to contribute to a Roth IRA, consider converting your traditional IRA into a Roth, effectively turning future tax-deferred potential growth into tax-free potential growth. When you do a Roth conversion, you have to pay taxes on the amount you convert. But this also has an estate planning benefit because you’re paying taxes that your heirs might otherwise have to pay later.

If you have questions on how a Roth IRA may fit into your estate plan, please get in touch with us.

© 2017

Look at your employees with cybersecurity in mind

Posted by Admin Posted on Apr 12 2017

Today’s businesses operate in an era of hyper-connectedness and, unfortunately, a burgeoning global cybercrime industry. You can’t afford to hope you’ll luck out and avoid a cyberattack. It’s essential to establish policies and procedures to minimize risk. One specific area on which to focus is your employees.

Know the threats

There are a variety of cybercrimes you need to guard against. For instance, thieves may steal proprietary or sensitive business data with the intention of selling that information to competitors or other hackers. Or they may be more interested in your employees’ or customers’ personal information for the same reason.

Some cybercriminals may not be necessarily looking to steal anything but rather disable or damage your business systems. For example, they may install “ransomware” that locks you out of your own data until you pay their demands. Or they might launch a “denial-of-service attack,” under which hackers overwhelm your site with millions of data requests until it can no longer function.

Be mindful

Naturally, crimes may be committed by shadowy outsiders. But, all too often, it’s a company employee who either leaves the door open for a cybercriminal or perpetrates the crime him- or herself.

For this reason, it’s essential for your hiring managers to be mindful of cybersecurity when reviewing employment applications — particularly those for positions that involve open access to sensitive company data. If an applicant has an unusual or spotty job history, be sure to find out why before hiring. Check references and conduct background checks as well.

For both new and existing employees, make sure your cybersecurity policies are crystal clear. Include a statement in your employment handbook informing employees that their communications are stored in a backup system, and that you reserve the right to monitor and examine company computers and emails (sent and received) on your system. When such monitoring systems are in place, prudence or suspicious activity will dictate when they should be ramped up.

Don’t compromise

These are just a few points to bear in mind in relation to your employees and cybercrime. Although most workers are honest and not looking to do harm, all it takes is one mistake or one bad apple to compromise your company’s cybersecurity. We can provide you with more ideas for protecting your data and your business systems.

© 2017

A timely postmark on your tax return may not be enough to avoid late-filing penalties

Posted by Admin Posted on Apr 11 2017

Because of a weekend and a Washington, D.C., holiday, the 2016 tax return filing deadline for individual taxpayers is Tuesday, April 18. The IRS considers a paper return that’s due April 18 to be timely filed if it’s postmarked by midnight. But dropping your return in a mailbox on the 18th may not be sufficient.

An example

Let’s say you mail your return with a payment on April 18, but the envelope gets lost. You don’t figure this out until a couple of months later when you notice that the check still hasn’t cleared.

You then refile and send a new check. Despite your efforts to timely file and pay, you’re hit with failure-to-file and failure-to-pay penalties totaling $1,500.

Avoiding penalty risk

To avoid this risk, use certified or registered mail or one of the private delivery services designated by the IRS to comply with the timely filing rule, such as:
 

• DHL Express 9:00, Express 10:30, Express 12:00 or Express Envelope,
• FedEx First Overnight, Priority Overnight, Standard Overnight or 2Day, or
• UPS Next Day Air Early A.M., Next Day Air, Next Day Air Saver, 2nd Day Air A.M. or 2nd Day Air.


Beware: If you use an unauthorized delivery service, your return isn’t “filed” until the IRS receives it. See IRS.gov for a complete list of authorized services.

Another option

If you’re concerned about meeting the April 18 deadline, another option is to file for an extension. If you owe tax, you’ll still need to pay that by April 18 to avoid risk of late-payment penalties as well as interest.

If you’re owed a refund and file late, you won’t be charged a failure-to-file penalty. However, filing for an extension may still be a good idea.

We can help you determine if filing for an extension makes sense for you — and help estimate whether you owe tax and how much you should pay by April 18.

© 2017

What are the most tax-advantaged ways to reimburse employees’ education expenses?

Posted by Admin Posted on Apr 10 2017

Reimbursing employees for education expenses can both strengthen the capabilities of your staff and help you retain them. In addition, you and your employees may be able to save valuable tax dollars. But you have to follow IRS rules. Here are a couple of options for maximizing tax savings.

A fringe benefit

Qualifying reimbursements and direct payments of job-related education costs are excludable from employees’ wages as working condition fringe benefits. This means employees don’t have to pay tax on them. Plus, you can deduct these costs as employee education expenses (as opposed to wages), and you don’t have to withhold income tax or withhold or pay payroll taxes on them.

To qualify as a working condition fringe benefit, the education expenses must be ones that employees would be allowed to deduct as a business expense if they’d paid them directly and weren’t reimbursed. Basically, this means the education must relate to the employees’ current occupations and not qualify them for new jobs. There’s no ceiling on the amount employees can receive tax-free as a working condition fringe benefit.

An educational assistance program

Another approach is to establish a formal educational assistance program. The program can cover both job-related and non-job-related education. Reimbursements can include costs such as:

  • Undergraduate or graduate-level tuition,
  • Fees,
  • Books, and
  • Equipment and supplies.

Reimbursement of materials employees can keep after the courses end (except for textbooks) aren’t eligible.

You can annually exclude from the employee’s income and deduct up to $5,250 (or an unlimited amount if the education is job related) of eligible education reimbursements as an employee benefit expense. And you don’t have to withhold income tax or withhold or pay payroll taxes on these reimbursements.

To pass muster with the IRS, such a program must avoid discrimination in favor of highly compensated employees, their spouses and their dependents, and it can’t provide more than 5% of its total annual benefits to shareholders, owners and their dependents. In addition, you must provide reasonable notice about the program to all eligible employees that outlines the type and amount of assistance available.

Train and retain

If your company has employees who want to take their professional skill sets to the next level, don’t let them go to a competitor to get there. By reimbursing education costs as a fringe benefit or setting up an educational assistance program, you can keep your staff well trained and evolving toward the future and save taxes, too. Please contact us for more details.

© 2017

Create a strong system of checks and balances

Posted by Admin Posted on Apr 07 2017

The Securities and Exchange Commission (SEC) requires public companies to evaluate and report on internal controls over financial reporting using a recognized control framework. Private companies generally aren’t required to use a framework for the oversight of internal controls, unless they’re audited, but a strong system of checks and balances is essential for them as well.

A critical process

Reporting on internal controls is an ongoing process, not a one-time assessment, that’s affected by an entity’s board of directors or owners, management, and other personnel. It’s designed to provide reasonable assurance regarding the effectiveness and efficiency of operations, the reliability of financial reporting, compliance with applicable laws and regulations, and safeguarding of assets.

A strong system of internal controls helps a company achieve its strategic and financial goals, in addition to minimizing the risk of fraud. At the most basic level, auditors routinely monitor the following three control features. These serve as a system of checks and balances that help ensure management directives are carried out:

1. Physical restrictions. Employees should have access to only those assets necessary to perform their jobs. Locks and alarms are examples of ways to protect valuable tangible assets, including petty cash, inventory and equipment. But intangible assets — such as customer lists, lease agreements, patents and financial data — also require protection using passwords, access logs and appropriate legal paperwork.

2. Account reconciliation. Management should confirm and analyze account balances on a regular basis. For example, management should reconcile bank statements and count inventory regularly.

Interim financial reports, such as weekly operating scorecards and quarterly financial statements, also keep management informed. But reports are useful only if management finds time to analyze them and investigate anomalies. Supervisory review takes on many forms, including observation, test counts, inquiry and task replication.

3. Job descriptions. Another basic control is detailed job descriptions. Company policies also should call for job segregation, job duplication and mandatory vacations. For example, the person who receives customer payments should not also approve write-offs (job segregation). And two signatures should be required for checks above a prescribed dollar amount (job duplication).

Controls assessment

Is your company’s internal control system strong enough? Even if you’re not required to follow the SEC’s rules on assessing internal controls, a thorough system of checks and balances will help your company achieve its goals. Company insiders sometimes lack the experience or objectivity to assess internal controls. But our auditors have seen the best — and worst — internal control systems and can help evaluate whether your controls are effective.

© 2017

Be aware of the ins and outs of holding joint title to property

Posted by Admin Posted on Apr 06 2017

Owning assets jointly with one or more children or other heirs is a common estate planning “shortcut.” But like many shortcuts, it can produce unintended — and costly — consequences.

Advantages

There are two potential advantages to joint ownership: convenience and probate avoidance. If you hold title to property with a child as joint tenants with “right of survivorship,” when you die, the property is transferred to your child automatically. You don’t need a trust or other estate planning vehicles and it’s not necessary to go through probate.

Disadvantages

Joint ownership offers simplicity, but it can also create a number of problems, especially if you add someone as a co-tenant instead of a joint tenant with right of survivorship, including:

Unnecessary taxes. Adding a child’s name to the title may be considered an immediate taxable gift of one-half of the property’s value. And when you die, the property’s value then will be included in your taxable estate, though any gift tax paid with the original transfer would be allowed as an offset.

Creditor claims. Joint ownership exposes the property to claims by your co-owner’s creditors or former spouses.

Loss of control. Your co-owner may be able to dispose of certain property without your consent or prevent you from selling or borrowing against certain property.

Unintended consequences. If your co-owner predeceases you, his or her share of the property may pass according to his or her estate plan or the laws of intestate succession. If you hold the property as co-tenants, instead of joint tenants with the right of survivorship, for instance, you’ll generally have no say in the ultimate disposition of that portion of the property.

One or more properly drafted trusts can avoid each of these problems without the need for probate. If you have additional questions on how to address your assets in your estate plan, please contact us.

© 2017

Matchmaker, matchmaker: Choosing the right lender

Posted by Admin Posted on Apr 05 2017

It’s easy to think of lenders as doing your company a favor. But business financing relationships are just that: relationships. Yes, a lender has the working capital you need to grow. But a stable, successful business represents an enormously beneficial opportunity for the lender as well. So you should be just as picky with your lender as it is with your financials.

Where to start

If you indeed have a long-standing relationship with a local bank, make that your first call. There’s no understating the importance of familiarity, good communication and an amicable rapport when negotiating terms, making payments and dealing with whatever business complications may come up.

But should your local bank not offer the size or scope of financing needed, or if you’d just like to get an idea of what else is out there, don’t hesitate to shop around. Look for a lender with multiple loan products, so you have a better chance at structuring one to your liking. And get some referrals regarding the strength of service and support.

Other alternatives

If yours is a small business, check into the availability of Small Business Administration or other government-backed loan programs. These are often designed to boost local economies, so you may be able to get favorable terms and rates.

Last, but not least, don’t limit yourself to traditional lenders. Today’s lending environment is competitive and technology driven. So businesses have a wide variety of alternatives, many of which are just a few clicks away. These include angel investors, online peer-to-peer lending networks and crowdsourcing.

Best results

Many, if not most, companies can’t grow without taking on some debt. But precisely how you go about using debt to your advantage depends largely on the lenders with which you choose to do business. Let us play matchmaker and help you find the ideal partner. We can also offer assistance in structuring and presenting your financial statements for best results.

© 2017

Saving tax with home-related deductions and exclusions

Posted by Admin Posted on Apr 04 2017

Currently, home ownership comes with many tax-saving opportunities. Consider both deductions and exclusions when you’re filing your 2016 return and tax planning for 2017:

Property tax deduction. Property tax is generally fully deductible — unless you’re subject to the alternative minimum tax (AMT).

Mortgage interest deduction. You generally can deduct interest on up to a combined total of $1 million of mortgage debt incurred to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible.

Home equity debt interest deduction. Interest on home equity debt used for any purpose (debt limit of $100,000) may be deductible. But keep in mind that, if home equity debt isn’t used for home improvements, the interest isn’t deductible for AMT purposes.

Mortgage insurance premium deduction. This break expired December 31, 2016, but Congress might extend it.

Home office deduction. If your home office use meets certain tests, you generally can deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, and the depreciation allocable to the space. Or you may be able to use a simplified method for claiming the deduction.

Rental income exclusion. If you rent out all or a portion of your principal residence or second home for less than 15 days, you don’t have to report the income. But expenses directly associated with the rental, such as advertising and cleaning, won’t be deductible.

Home sale gain exclusion. When you sell your principal residence, you can exclude up to $250,000 ($500,000 for married couples filing jointly) of gain if you meet certain tests. Be aware that gain allocable to a period of “nonqualified” use generally isn’t excludable.

Debt forgiveness exclusion. This break for homeowners who received debt forgiveness in a foreclosure, short sale or mortgage workout for a principal residence expired December 31, 2016, but Congress might extend it.

The debt forgiveness exclusion and mortgage insurance premium deduction aren’t the only home-related breaks that might not be available in the future. There have been proposals to eliminate other breaks, such as the property tax deduction, as part of tax reform.

Whether such changes will be signed into law and, if so, when they’d go into effect is uncertain. Also keep in mind that additional rules and limits apply to these breaks. So contact us for information on the latest tax reform developments or which home-related breaks you’re eligible to claim.

© 2017

A refresher on tax-related ACA provisions affecting businesses

Posted by Admin Posted on Apr 03 2017

Now that the bill to repeal and replace the Affordable Care Act (ACA) has been withdrawn and it’s uncertain whether there will be any other health care reform legislation this year, it’s a good time to review some of the tax-related ACA provisions affecting businesses:

Small employer tax credit. Qualifying small employers can claim a credit to cover a portion of the cost of premiums paid to provide health insurance to employees. The maximum credit is 50% of premiums paid by the employer, provided it contributes at least 50% of the total premium or of a benchmark premium.

Penalties for not offering complying coverage. Applicable large employers (ALEs) — those with at least 50 full-time employees (or the equivalent) — are required to offer full-time employees affordable health coverage that meets certain minimum standards. If they don’t, they’re charged a penalty if just one full-time employee receives a tax credit for purchasing his or her own coverage through a health care marketplace. This is sometimes called the “employer mandate.”

Reporting of health care costs to employees. The ACA generally requires employers who filed 250 or more W-2 forms in the preceding year to annually report to employees the value of health insurance coverage they provide. The reporting requirement is informational only; it doesn’t cause health care benefits to become taxable.

Additional 0.9% Medicare tax. This applies to:

  • Wages and/or self-employment (SE) income above $200,000 for single and head of household filers, or
  • Combined wages and/or SE income above $250,000 for married couples filing jointly ($125,000 for married couples filing separately).

While there is no employer portion of this tax, employers are responsible for withholding the tax once an employee’s compensation for the calendar year exceeds $200,000, regardless of the employee’s filing status or income from other sources.

Cap on health care FSA contributions. The Flexible Spending Account (FSA) cap is indexed for inflation. For 2017, the maximum annual FSA contribution by an employee is $2,600.

There’s also one significant change that hasn’t kicked in yet: Beginning in 2020, the ACA calls for health insurance companies that service the group market and administrators of employer-sponsored health plans to pay a 40% excise tax on premiums that exceed the applicable threshold, generally $10,200 for self-only coverage and $27,500 for family coverage. This is commonly referred to as the “Cadillac tax.”

The ACA remains the law, at least for now. Contact us if you have questions about how it affects your business’s tax situation.

© 2017

3 financial statements you should know

Posted by Admin Posted on Mar 31 2017

Successful business people have a solid understanding of the three financial statements prepared under U.S. Generally Accepted Accounting Principles (GAAP). A complete set of financial statements helps stakeholders — including managers, investors and lenders — evaluate a company’s financial condition and results. Here’s an overview of each report.

1. Income statement

The income statement (also known as the profit and loss statement) shows sales, expenses and the income earned after expenses over a given period. A common term used when discussing income statements is “gross profit,” or the income earned after subtracting the cost of goods sold from revenue. Cost of goods sold includes the cost of labor, materials and overhead required to make a product.

Another important term is “net income.” This is the income remaining after all expenses (including taxes) have been paid.

2. Balance sheet

This report tallies the company’s assets, liabilities and net worth to create a snapshot of its financial health. Current assets (such as accounts receivable or inventory) are reasonably expected to be converted to cash within a year, while long-term assets (such as plant and equipment) have longer lives. Similarly, current liabilities (such as accounts payable) come due within a year, while long-term liabilities are payment obligations that extend beyond the current year or operating cycle.

Net worth or owners’ equity is the extent to which the book value of assets exceeds liabilities. Because the balance sheet must balance, assets must equal liabilities plus net worth. If the value of your liabilities exceeds the value of the assets, your net worth will be negative.

Public companies may provide the details of shareholders’ equity in a separate statement called the statement of retained earnings. It details sales or repurchases of stock, dividend payments and changes caused by reported profits or losses.

3. Cash flow statement

This statement shows all the cash flowing into and out of your company. For example, your company may have cash inflows from selling products or services, borrowing money and selling stock. Outflows may result from paying expenses, investing in capital equipment and repaying debt.

Although this report may seem similar to an income statement, it focuses solely on cash. It’s possible for an otherwise profitable business to suffer from cash flow shortages, especially if it’s growing quickly.

Typically, cash flows are organized in three categories: operating, investing and financing activities. The bottom of the statement shows the net change in cash during the period. To remain in business, companies must continually generate cash to pay creditors, vendors and employees. So watch your statement of cash flows closely.

Ratios and trends

Are you monitoring ratios and trends from your financial statements? Owners and managers who pay regular attention to these three key reports stand a better chance of catching potential trouble before it gets out of hand and pivoting, when needed, to maximize the company’s value.

© 2017

Will your favorite charity accept your donation?

Posted by Admin Posted on Mar 30 2017

If your estate plan includes charitable donations, be sure to discuss any planned gifts with the intended recipients before you finalize your plan. This is particularly important for donations that place restrictions on the charity’s use of the gift, as well as donations of real estate or other illiquid assets.

Why a charity may reject your gift

Some charities have policies of rejecting gifts that come with strings attached — they accept only unrestricted gifts. And many charities are reluctant to accept gifts of real estate or other noncash assets that may expose them to liability or require an investment in order to convert the assets into operating funds.

If a charity rejects your gift, the property will end up back in your estate and will go to any contingent or residual beneficiaries. If these beneficiaries aren’t other charities, rejection of the gift may create estate tax liability.

Reconsider donating real estate

Real estate is particularly risky for nonprofits. The charity may be exposed to liability for environmental issues, zoning and building code violations, and other risks. It may require a cash investment to pay the mortgage or maintain the property. And certain types of property — such as rental properties — can generate “debt-financed income,” which may cause the nonprofit to be subject to unrelated business income tax.

Even if a charity accepts gifts of real estate, it may place strict conditions on such gifts. For example, to minimize their liability, some charities require donors to place real estate in a limited liability company (LLC) and donate LLC interests. Another option is to donate property to a supporting organization that disposes of real estate on a charity’s behalf.

Call first — then revise your plan

If you’d like to make charitable gifts through your estate plan, contact the organization to ensure it would be willing to accept your donation. If the answer is yes, we can help make the proper revisions to your plan.

© 2017

Consider key person insurance as a succession plan safeguard

Posted by Admin Posted on Mar 29 2017

In business, and in life, among the most important ways to manage risk is through insurance. For certain types of companies — particularly start-ups and small businesses — one major threat is the sudden loss of an owner or hard-to-replace employee. To safeguard against this risk, insurers offer key person insurance.

Under a key person policy, a business buys life insurance covering the owner or employee, pays the premiums and names itself beneficiary. Should the key person die while the policy is in effect, the business receives the payout. As you formulate and adjust your succession plan, one of these policies can serve as a critical safeguard.

Costs and coverage

Key person insurance can take a variety of forms. Term policies last for a specified number of years, typically five to 20. Whole life (or permanent) policies, which are generally more expensive, provide coverage as long as premiums are paid, and they gradually build up cash surrender value. This value appears on a business’s balance sheet and may be drawn on, if the business needs working capital.

The cost of key person insurance also depends on the covered individual’s health, age and medical history, as well as the desired death benefit. When budgeting for premiums, bear in mind that premiums generally aren’t tax deductible. On the flip side, death benefits typically aren’t included in the business’s taxable income when received.

In terms of coverage limits, insurers may quote a rule of thumb of eight to 10 times the key person’s annual salary. But every business will have different cash flow needs when a key person unexpectedly dies. A more accurate estimate typically comes from evaluating lost income (or value), as well as the costs of finding and training a suitable replacement.

An important decision

If you’ve already chosen a successor, you can buy a policy that covers both of you. And if you haven’t, it may be even more critical to buy coverage on your life to protect the solvency of your business. Please contact our firm for help deciding whether key person insurance is for you.

© 2017

Victims of a disaster, fire or theft may be able to claim a casualty loss deduction

Posted by Admin Posted on Mar 28 2017

If you suffered damage to your home or personal property last year, you may be able to deduct these “casualty” losses on your 2016 federal income tax return. A casualty is a sudden, unexpected or unusual event, such as a natural disaster (hurricane, tornado, flood, earthquake, etc.), fire, accident, theft or vandalism. A casualty loss doesn’t include losses from normal wear and tear or progressive deterioration from age or termite damage.

Here are some things you should know about deducting casualty losses:

When to deduct. Generally, you must deduct a casualty loss on your return for the year it occurred. However, if you have a loss from a federally declared disaster area, you may have the option to deduct the loss on an amended return for the immediately preceding tax year.

Amount of loss. Your loss is generally the lesser of 1) your adjusted basis in the property before the casualty (typically, the amount you paid for it), or 2) the decrease in fair market value of the property as a result of the casualty. This amount must be reduced by any insurance or other reimbursement you received or expect to receive. (If the property was insured, you must have filed a timely claim for reimbursement of your loss.)

$100 rule. After you’ve figured your casualty loss on personal-use property, you must reduce that loss by $100. This reduction applies to each casualty loss event during the year. It doesn’t matter how many pieces of property are involved in an event.

10% rule. You must reduce the total of all your casualty or theft losses on personal-use property for the year by 10% of your adjusted gross income (AGI). In other words, you can deduct these losses only to the extent they exceed 10% of your AGI.

Have questions about deducting casualty losses? Contact us!

© 2017

2017 Q2 tax calendar: Key deadlines for businesses and other employers

Posted by Admin Posted on Mar 27 2017

Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

April 18

  •  If a calendar-year C corporation, file a 2016 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.
  •  If a calendar-year C corporation, pay the first installment of 2017 estimated income taxes.

May 1   

  • Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), and pay any tax due. (See exception below.)

May 10

  • Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.

June 15

  • If a calendar-year C corporation, pay the second installment of 2017 estimated income taxes.

© 2017

How auditors evaluate fraud risks

Posted by Admin Posted on Mar 24 2017

Assessing fraud risks is an integral part of the auditing process. Statement on Auditing Standards (SAS) No. 99, Consideration of Fraud in a Financial Statement Audit, requires auditors to consider potential fraud risks before and during the information-gathering process. Business owners and managers may find it helpful to understand how this process works — even if their financial statements aren’t audited.

Risk factors

SAS 99 advises auditors to presume that, if given the opportunity, companies will improperly recognize revenue and management will attempt to override internal controls. Certain factors create opportunities for dishonest employees to commit fraud and, therefore, should be avoided, if possible. Examples of fraud risk factors that auditors consider include:
 

* Large amounts of cash or other valuable inventory items on hand, without adequate security measures in place,
* Heavy dependence on a few key employees, who have too much power and too few checks and balances,
* Employees with conflicts of interest, such as relationships with other employees and financial interests in vendors or customers,
* Unrealistic goals and performance-based compensation that tempt workers to artificially boost revenue and profits,
* Failure to conduct background checks and other pre-employment screening, and
* Weak internal controls.


Auditors also watch for questionable journal entries that dishonest employees could use to hide their impropriety. These entries might, for example, be made to seldom-used or intracompany accounts; on holidays, weekends, or the last day of the accounting period; or with limited descriptions. Fraudsters also tend to use round numbers — just below the dollar threshold that would require additional signatures — for their fictitious journal entries.

Next steps

Auditors are responsible for using professional skepticism throughout the audit process, as well as planning and performing the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, either caused by fraud or error. Auditors generally aren’t required to investigate fraud. But they are required to communicate fraud risk findings to the appropriate level of management, who can then take actions to prevent fraud in their organizations.

If conditions exist that make it impractical to plan an audit in a way that will adequately address fraud risks, an auditor may even decide to withdraw from the engagement. When conditions are ripe for fraud, we can help you pursue a formal forensic accounting investigation to find out more.

© 2017

Direct tuition payments benefit your grandchild and your estate plan

Posted by Admin Posted on Mar 23 2017

Grandparents often want to play a role in financing their grandchildren’s education. If you’re one of them, it’s important to consider the impact that different financing options will have on your estate plan.

Make direct tuition payments

A simple but effective technique is to make tuition payments on behalf of your grandchild. So long as you make the payments directly to the educational institution, they avoid gift and generation-skipping transfer (GST) taxes without using up any of your $5.49 million gift or GST tax exemption or $14,000 gift tax annual exclusion.

But this technique is available only for tuition, not for other expenses, such as room and board, fees, books, and equipment. So it may be desirable to combine it with other techniques.

Is a HEET an option?

Another disadvantage of direct payments is that, if you wait until the student has tuition bills to pay, there’s a risk that you’ll die before the funds are removed from your estate. Other techniques allow you to set aside funds for future education expenses, shielding those funds from estate taxes. A tool that’s particularly attractive for grandparents is the health and education exclusion trust (HEET).

A HEET is a “dynasty” trust designed to make direct payments of tuition (and, if you desire, medical expenses) on behalf of its beneficiaries. You can use your annual exclusions and lifetime exemption to make gift-tax-free contributions. Contributed assets are removed from your estate.

Most significant, a properly designed HEET allows you to avoid GST tax without using up any of your GST tax exemption. A trust can trigger GST taxes in two ways: 1) a taxable distribution to your grandchild or another “skip person” (that is, a person more than one generation below you), or 2) a taxable termination, in which all nonskip trust interests terminate and only skip interests remain.

A HEET avoids taxable distributions by making direct payments to educational or health care organizations. And it avoids taxable terminations by granting a significant interest (usually 10% or more) to a charity, which ensures that there’s always at least one nonskip interest.

Explore all of your options

It’s possible that gift, estate and GST taxes could be repealed later this year. But even if this happens, as long as funding your grandchild’s education is an important goal of yours, implementing one or both of these strategies likely won’t have any negative impact. And doing so can be beneficial if these taxes aren’t repealed or if they return in the future. If you’d like to learn more about your options to help fund your grandchild’s education expenses, please contact us.

© 2017

Offer plan loans? Be sure to set a reasonable interest rate

Posted by Admin Posted on Mar 22 2017

Like many businesses, yours may allow retirement plan participants to take out loans from their accounts. Such loans are governed by many IRS and Department of Labor (DOL) rules and regulations. So if your company offers plan loans, your plan document must comply with current laws — including setting a “reasonable” interest rate.

Agency perspectives

Neither the IRS nor DOL provides a set percentage for plan sponsors to use. Yet both require the rate to be “reasonable.” The IRS asks if the interest rate is similar to local interest rates and to what local banks charge individuals for similar loans with similar credit and collateral. Meanwhile, DOL regulations say that an interest rate is reasonable if it’s equal to commercial lending interest rates under similar circumstances.

The DOL provides several examples of how to determine the interest rate. For example, suppose the plan loan interest rate is set at 8%, but local banks offer between 10% and 12% for similar circumstances. In this example, the loan will fail to meet the reasonable standard.

Keep in mind that the plan participant pays the interest to his or her own retirement plan account. That’s one reason why charging an interest rate that’s lower than what local banks are charging isn’t considered reasonable. The purpose of charging interest on retirement plan loans is to help prevent long-term harm to the participant’s retirement nest egg.

Ill consequences

If your plan fails to assess a reasonable interest rate, participant loans may result in a prohibited transaction. What does this mean? Prohibited transactions are certain transactions between a retirement plan and a disqualified person. Disqualified persons taking part in a prohibited transaction must pay a tax.

A prohibited transaction includes the lending of money or other extension of credit between a plan and a disqualified person. However, the laws specifically exempt plan loans from the prohibited transaction list as long as they comply with applicable rules. If your interest rate isn’t reasonable, the plan loan may lose its exempt status and become subject to the prohibited transaction tax.

Ongoing task

Ensuring you’re offering a reasonable plan loan interest rate is an ongoing task. Review your plan document and loan policy statement to determine whether the plan sets an interest rate. You may need to update the document to comply with the more recent regulations and interest rates. We can help you with this review, as well as in calculating a reasonable rate.

© 2017

Who can — and who should — take the American Opportunity credit?

Posted by Admin Posted on Mar 21 2017

If you have a child in college, you may be eligible to claim the American Opportunity credit on your 2016 income tax return. If, however, your income is too high, you won’t qualify for the credit — but your child might. There’s one potential downside: If your dependent child claims the credit, you must forgo your dependency exemption for him or her. And the child can’t take the exemption.

The limits

The maximum American Opportunity credit, per student, is $2,500 per year for the first four years of postsecondary education. It equals 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of such expenses.

The ability to claim the American Opportunity credit begins to phase out when modified adjusted gross income (MAGI) enters the applicable phaseout range ($160,000–$180,000 for joint filers, $80,000–$90,000 for other filers). It’s completely eliminated when MAGI exceeds the top of the range.

Running the numbers

If your American Opportunity credit is partially or fully phased out, it’s a good idea to assess whether there’d be a tax benefit for the family overall if your child claimed the credit. As noted, this would come at the price of your having to forgo your dependency exemption for the child. So it’s important to run the numbers.

Dependency exemptions are also subject to a phaseout, so you might lose the benefit of your exemption regardless of whether your child claims the credit. The 2016 adjusted gross income (AGI) thresholds for the exemption phaseout are $259,400 (singles), $285,350 (heads of households), $311,300 (married filing jointly) and $155,650 (married filing separately).

If your exemption is fully phased out, there likely is no downside to your child taking the credit. If your exemption isn’t fully phased out, compare the tax savings your child would receive from the credit with the savings you’d receive from the exemption to determine which break will provide the greater overall savings for your family.

We can help you run the numbers and can provide more information about qualifying for the American Opportunity credit.

© 2017

Make sure the IRS won’t consider your business to be a “hobby”

Posted by Admin Posted on Mar 20 2017

If you run a business “on the side” and derive most of your income from another source (whether from another business you own, employment or investments), you may face a peculiar risk: Under certain circumstances, this on-the-side business might not be a business at all in the eyes of the IRS. It may be a hobby.

The hobby loss rules

Generally, a taxpayer can deduct losses from profit-motivated activities, either from other income in the same tax year or by carrying the loss back to a previous tax year or forward to a future tax year. But, to ensure these pursuits are really businesses — and not mere hobbies intended primarily to offset other income — the IRS enforces what are commonly referred to as the “hobby loss” rules.

If you haven’t earned a profit from your business in three out of five consecutive years, including the current year, you’ll bear the burden of proof to show that the enterprise isn’t merely a hobby. But if this profit test can be met, the burden falls on the IRS. In either case, the agency looks at factors such as the following to determine whether the activity is a business or a hobby:

  • Do you carry on the activity in a business-like manner?
  • Does the time and effort put into the activity indicate an intention to make a profit?
  • Do you depend on income from the activity?
  • If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
  • Have you changed methods of operation to improve profitability?
  • Do you (or your advisors) have the knowledge needed to carry on the activity as a successful business?
  • Have you made a profit in similar activities in the past?
  • Does the activity make a profit in some years?
  • Do you expect to make a profit in the future from the appreciation of assets used in the activity?

Dangers of reclassification
If your enterprise is reclassified as a hobby, you can’t use a loss from the activity to offset other income. You may still write off certain expenses related to the hobby, but only to the extent of income the hobby generates. If you’re concerned about the hobby loss rules, we can help you evaluate your situation.

© 2017

FAQs about agreed upon procedures

Posted by Admin Posted on Mar 17 2017

An agreed upon procedures (AUP) engagement uses procedures similar to an audit, but on a smaller and limited scale. Here’s how a customized AUP engagement differs from an audit and can be used to identify specific problems that require immediate action.

How do AUPs compare to audits?

The American Institute of Certified Public Accountants (AICPA) regulates both audits and AUP engagements. But the natures of these two types of accounting services are quite different. When a CPA firm performs an audit, its client is the company. With an AUP engagement, the client is typically the company’s lender or another third party — a fact that usually alleviates potential conflicts of interest.

Another key difference is that of responsibility. Audits require CPAs to provide a formal opinion on whether the company’s financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP).

On the other hand, CPAs make no formal conclusions when performing AUPs; they simply act as finders of fact. It’s the client’s responsibility to draw conclusions based on the CPA’s findings.

AUP engagements may target specific financial data (such as accounts payable, accounts receivable or related party transactions), nonfinancial information (such as a review of internal controls or compliance with royalty agreements), a specific financial statement (such as the income statement or balance sheet) or even a complete set of financial statements.

When do you need AUPs?

AUPs boast several advantages over audits. They can be performed at any time during the year — not just at year end. And because you have the flexibility to choose only those procedures you feel are necessary, they can be cost-effective.

Lenders may, for example, request an AUP engagement, if they have doubts or questions about a borrower’s financials — or if they want to check on the progress of a distressed company’s turnaround plan. Or a business owner may decide to hire a CPA to perform an AUP engagement, if he or she suspects that the CFO is misrepresenting the company’s financial results or the plant manager is stealing inventory. These engagements can also be useful in mergers and acquisition due diligence.

Who can help?

An AUP engagement can be used to dig deeper into financial results and identify specific problems that require immediate action. We can help you customize an AUP engagement that can identify problems and resolve issues quickly and effectively.

© 2017

Divorce necessitates an estate plan review

Posted by Admin Posted on Mar 16 2017

There are few events that can completely upend a person’s life more than divorce. Of course, there’s the emotional toll on you and your family to contend with, but you also have to consider the divorce’s impact on your estate plan.

When you originally crafted your plan, you likely centered many of its strategies around your spouse. Thus, when divorce proceedings begin, it’s crucial to update your estate plan as soon as possible to avoid unintended outcomes. Don’t wait until the divorce is final.

Who’s next in line for your wealth?

Unless you wish to provide your soon-to-be former spouse with an inheritance, amend your will and any trusts to eliminate him or her as a beneficiary. In addition, unless you’re comfortable with him or her administering your estate or controlling your wealth, you should designate someone else as executor or trustee. This is a good idea even if you live in one of the many states where divorce automatically nullifies any gifts or bequests to an ex-spouse and automatically revokes an appointment of a former spouse as executor or trustee.

There are several reasons for this. First, if you die before the divorce is final — even if you’re legally separated — your spouse will still inherit in accordance with your will or revocable trust, and his or her appointment as executor or trustee likely will stand.

Second, typically, the laws in these states treat your estate plan as if your former spouse had predeceased you. If you’ve named contingent or residual beneficiaries, any property your spouse would have received will go to them. If not, the property will pass according to the laws of intestate succession. But relying on these laws can be dangerous.

Finally, keep in mind that, in many states, as long as you’re legally married, your spouse will retain elective share or community property rights to a portion of your estate. So while updating your plan soon after you decide to divorce can reduce the amount your spouse will receive if you die while you’re still married, it can be difficult to disinherit him or her completely before the divorce is final.

Seek peace of mind

If you’re going through divorce proceedings, contact us. We can help review and revise your estate plan to ensure that the proper heirs are provided for in the event of your death.

© 2017

Getting your money’s worth out of a company retreat

Posted by Admin Posted on Mar 15 2017

Company retreats can cost enormous amounts of time and money. Are they worth it? Sometimes. Large-scale get-togethers can involve considerable out-of-pocket costs. And if the retreat is poorly planned or executed, participants’ wasted time is the biggest expense.

But a properly budgeted, planned and executed retreat can be hugely profitable, producing fresh ideas, renewed enthusiasm and heightened employee morale. Here are a few ways to get your money’s worth out of a company retreat.

Create specific objectives

First, nail down your goals and objectives. Several months ahead of time, determine and prioritize a list of the important issues you want to address. But include only the top two or three on the final agenda. Otherwise, you risk rushing through some items without adequate time for discussion and formalized action plans.

If one of the objectives is to include time for socializing, recreation or relaxation, great. Mixing fun with work keeps people energized. But if staff see the retreat as merely time away from the office to party and golf, don’t expect to complete many work-related agenda items. One successful way to mix work and pleasure is to schedule work sessions for the morning and more fun, team-building exercises later in the day.

Set limits, allow flexibility

Next, work on the budget. Determining available resources early in the planning process will help you set limits for such variable costs as location, accommodations, food, transportation, speakers and entertainment.

Instead of insisting on certain days for the retreat, select a range of possible dates. This openness helps with site selection and makes it easier to negotiate favorable hotel and travel rates. Keep your budget as flexible as possible, building in a 5% to 10% safety cushion. Always expect unforeseen, last-minute expenses.

Have fun

Company retreats are serious business in the sense that you’re sacrificing time and productivity to identify strategic goals and improve teamwork. But these events should still be fun experiences for you and your staff. We can help you establish a reasonable budget to help ensure an enjoyable, productive and cost-effective retreat.

© 2017

2016 IRA contributions — it’s not too late!

Posted by Admin Posted on Mar 14 2017

Yes, there’s still time to make 2016 contributions to your IRA. The deadline for such contributions is April 18, 2017. If the contribution is deductible, it will lower your 2016 tax bill. But even if it isn’t, making a 2016 contribution is likely a good idea.

Benefits beyond a deduction

Tax-advantaged retirement plans like IRAs allow your money to grow tax-deferred — or, in the case of Roth accounts, tax-free. But annual contributions are limited by tax law, and any unused limit can’t be carried forward to make larger contributions in future years.

This means that, once the contribution deadline has passed, the tax-advantaged savings opportunity is lost forever. So it’s a good idea to use up as much of your annual limit as possible.

Contribution options

The 2016 limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2016). If you haven’t already maxed out your 2016 limit, consider making one of these types of contributions by April 18:

1. Deductible traditional. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn’t exceed certain limits — the contribution is fully deductible on your 2016 tax return. Account growth is tax-deferred; distributions are subject to income tax.

2. Roth. The contribution isn’t deductible, but qualified distributions — including growth — are tax-free. Income-based limits, however, may reduce or eliminate your ability to contribute.

3. Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions you’ll be taxed only on the growth. Alternatively, shortly after contributing, you may be able to convert the account to a Roth IRA with minimal tax liability.

Want to know which option best fits your situation? Contact us.

© 2017

The Section 1031 exchange: Why it’s such a great tax planning tool

Posted by Admin Posted on Mar 13 2017

Like many business owners, you might also own highly appreciated business or investment real estate. Fortunately, there’s an effective tax planning strategy at your disposal: the Section 1031 “like kind” exchange. It can help you defer capital gains tax on appreciated property indefinitely.

How it works

Section 1031 of the Internal Revenue Code allows you to defer gains on real or personal property used in a business or held for investment if, instead of selling it, you exchange it solely for property of a “like kind.” In fact, these arrangements are often referred to as “like-kind exchanges.” Thus, the tax benefit of an exchange is that you defer tax and, thereby, have use of the tax savings until you sell the replacement property.

Personal property must be of the same asset or product class. But virtually any type of real estate will qualify as long as it’s business or investment property. For example, you can exchange a warehouse for an office building, or an apartment complex for a strip mall.

Executing the deal

Although an exchange may sound quick and easy, it’s relatively rare for two owners to simply swap properties. You’ll likely have to execute a “deferred” exchange, in which you engage a qualified intermediary (QI) for assistance.

When you sell your property (the relinquished property), the net proceeds go directly to the QI, who then uses them to buy replacement property. To qualify for tax-deferred exchange treatment, you generally must identify replacement property within 45 days after you transfer the relinquished property and complete the purchase within 180 days after the initial transfer.

An alternate approach is a “reverse” exchange. Here, an exchange accommodation titleholder (EAT) acquires title to the replacement property before you sell the relinquished property. You can defer capital gains by identifying one or more properties to exchange within 45 days after the EAT receives the replacement property and, typically, completing the transaction within 180 days.

The rules for like-kind exchanges are complex, so these arrangements present some risks. If, say, you exchange the wrong kind of property or acquire cash or other non-like-kind property in a deal, you may still end up incurring a sizable tax hit. Be sure to contact us when exploring a Sec. 1031 exchange.

© 2017

Evaluating going concern issues

Posted by Admin Posted on Mar 11 2017

Financial statements are generally prepared under the assumption that the business will remain a “going concern.” That is, it’s expected to continue to generate a positive return on its assets and meet its obligations in the ordinary course of business. But sometimes conditions put that assumption into question.

Recently, the responsibility for making going concern assessments shifted from auditors to management. So, it’s important for you to identify the red flags that going concern issues exist.

Make the call

Under Accounting Standards Update No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, management is responsible for assessing whether there are conditions or events that raise “substantial doubt” about the company’s ability to continue as a going concern within one year after the date that the financial statements are issued — or available to be issued. (The alternate date prevents financial statements from being held for several months after year end to see if the company survives.)

When going concern issues arise, auditors may adjust balance sheet values to liquidation values, rather than historic costs. Footnotes also may report going concern issues. And the auditor’s opinion letter — which serves as a cover letter to the financial statements — may be downgraded to a qualified or adverse opinion. All of these changes forewarn lenders and investors that the company is experiencing financial distress.

Meet the threshold

When evaluating the going concern assumption, look for signs that your company’s long-term viability may be questionable, such as:
 

  • Recurring operating losses or working capital deficiencies,
  • Loan defaults and debt restructuring,
  • Denial of credit from suppliers,
  • Dividend arrearages,
  • Disposals of substantial assets,
  • Work stoppages and other labor difficulties,
  • Legal proceedings or legislation that jeopardizes ongoing operations,
  • Loss of a key franchise, license or patent,
  • Loss of a principal customer or supplier, and
  • An uninsured or underinsured catastrophe.



The existence of one or more of these conditions or events doesn’t automatically mean that there’s a going concern issue. Similarly, the absence of these conditions or events isn’t a guarantee that your company will meet its obligations over the next year.

Comply with the new guidance

Compliance with the new accounting standard starts with annual periods ending after December 15, 2016. So, managers of calendar-year entities will need to make the going concern assessment starting with their 2016 year-end financial statements. Contact us for more information about making going concern assessments and how it will affect your financial reporting.

© 2017

Keep family matters out of the public eye by avoiding probate

Posted by Admin Posted on Mar 09 2017

Although probate can be time consuming and expensive, perhaps its biggest downside is that it’s public — anyone who’s interested can find out what assets you owned and how they’re being distributed after your death. The public nature of probate can also draw unwanted attention from disgruntled family members who may challenge the disposition of your assets, as well as from other unscrupulous parties.

However, by implementing the right estate planning strategies, you can keep much or even all of your estate out of probate.

Probate, defined

Probate is a legal procedure in which a court establishes the validity of your will, determines the value of your estate, resolves creditors’ claims, provides for the payment of taxes and other debts and transfers assets to your heirs.

Is probate ever desirable? Sometimes. Under certain circumstances, you might feel more comfortable having a court resolve issues involving your heirs and creditors. Another possible advantage is that probate places strict time limits on creditor claims and settles claims quickly.

Choose the right strategies

There are several ways you can avoid (or minimize) probate. (You’ll still need a will — and probate — to deal with guardianship of minor children, disposition of personal property and certain other matters.)

The right strategies depend on the size and complexity of your estate. The simplest ways to avoid probate involve designating beneficiaries or titling assets in a manner that allows them to be transferred directly to your beneficiaries outside your will. So, for example, be sure that you have appropriate, valid beneficiary designations for assets such as life insurance policies, annuities and retirement plans.

For assets such as bank and brokerage accounts, look into the availability of “pay on death” (POD) or “transfer on death” (TOD) designations, which allow these assets to avoid probate and pass directly to your designated beneficiaries. However, keep in mind that, while the POD or TOD designation is permitted in most states, not all financial institutions and firms make this option available.

For homes or other real estate — as well as bank and brokerage accounts and other assets — some people avoid probate by holding title with a spouse or child as “joint tenants with rights of survivorship” or as “tenants by the entirety.” Be aware that drawbacks exist for this technique.

Contact us with all of your probate questions.

© 2017

Listen and trust: The power of collaborative management

Posted by Admin Posted on Mar 08 2017

Many business owners are accustomed to running the whole show. But as your company grows, you’ll likely be better off sharing responsibility for major decisions. Whether you’ve recruited experienced managers or developed “home grown” talent, you can empower these employees by taking a more collaborative approach to management.

Not employees — team members

Successful collaboration starts with a new mindset. Stop thinking of your managers as employees and instead regard them as team members working toward the same common goals. To promote collaboration and make the best use of your human resources, clearly communicate your strategic objectives. For example, if you’ve prioritized expanding into new territories, make sure your managers aren’t still focusing on extracting new business from current sales areas.

You also must be willing to listen to your managers’ ideas — and to act on the viable ones. Relinquishing control can be hard for business owners, but keep the advantages in mind. A collaborative approach distributes the decision-making burden, so it doesn’t fall on just your shoulders. This may relieve stress and allow you to focus on areas of the company you may have neglected.

Confidence and development

Even as you move to a more collaborative management model and include employees in strategic decisions, don’t forget to recognize their individual skills and talents. You and other managers may have uncertainties about a new marketing plan, for instance, but you should trust your marketing director to carry it out with minimal oversight.

To ensure that managers know they have your confidence, conduct regular performance reviews where you note their contributions and accomplishments and explore opportunities for growth. Moreover, help them grow professionally by providing constructive, ongoing training to develop their leadership and teamwork skills.

An open mind

As you learn to trust your management team with greater responsibility, keep in mind that the process can be bumpy. In a crisis, your instinct may be to take charge and brush off your managers’ advice. But it’s critical to keep your mind open and be receptive to input from people who may one day run your company. Let our firm assist you in assessing the profitability impact of your management team.

© 2017

When an elderly parent might qualify as your dependent

Posted by Admin Posted on Mar 07 2017

It’s not uncommon for adult children to help support their aging parents. If you’re in this position, you might qualify for the adult-dependent exemption. It allows eligible taxpayers to deduct up to $4,050 for each adult dependent claimed on their 2016 tax return.

Basic qualifications

For you to qualify for the adult-dependent exemption, in most cases your parent must have less gross income for the tax year than the exemption amount. (Exceptions may apply if your parent is permanently and totally disabled.) Generally Social Security is excluded, but payments from dividends, interest and retirement plans are included.

In addition, you must have contributed more than 50% of your parent’s financial support. If you shared caregiving duties with a sibling and your combined support exceeded 50%, the exemption can be claimed even though no one individually provided more than 50%. However, only one of you can claim the exemption.

Factors to consider

Even though Social Security payments can usually be excluded from the adult dependent’s income, they can still affect your ability to qualify. Why? If your parent is using Social Security money to pay for medicine or other expenses, you may find that you aren’t meeting the 50% test.

Don’t forget about your home. If your parent lives with you, the amount of support you claim under the 50% test can include the fair market rental value of part of your residence. If the parent lives elsewhere — in his or her own residence or in an assisted-living facility or nursing home — any amount of financial support you contribute to that housing expense counts toward the 50% test.

Easing the financial burden

Sometimes caregivers fall just short of qualifying for the exemption. Should this happen, you may still be able to claim an itemized deduction for the medical expenses that you pay for the parent. To receive a tax benefit, the combined medical expenses paid for you, your dependents and your parent must exceed 10% of your adjusted gross income.

The adult-dependent exemption is just one tax break that you may be able to employ to ease the financial burden of caring for an elderly parent. Contact us for more information on qualifying for this break or others.

© 2017

Posted by Admin Posted on Mar 07 2017

Filing deadline rapidly approaching for flow-through entities

Posted by Admin Posted on Mar 07 2017


The federal income tax filing deadline for calendar-year partnerships, S corporations and limited liability companies (LLCs) treated as partnerships or S corporations for tax purposes is March 15. While this deadline is nothing new for S corporation returns, it’s earlier than previous years for partnership returns.

In addition to providing continued funding for federal transportation projects, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 changed the due dates for several types of tax and information returns, including partnership income tax returns. The revised due dates are generally effective for tax years beginning after December 31, 2015. In other words, they apply to the tax returns for 2016 that are due in 2017.

The new deadlines

The new due date for partnerships with tax years ending on December 31 to file federal income tax returns is March 15. For partnerships with fiscal year ends, tax returns are due the 15th day of the third month after the close of the tax year.

Under prior law, returns for calendar-year partnerships were due April 15. And returns for fiscal-year partnerships were due the 15th day of the fourth month after the close of the fiscal tax year.

One of the primary reasons for moving up the partnership filing deadline was to make it easier for owners to file their personal returns by the April 15 deadline (April 18 in 2017 because of a weekend and a Washington, D.C., holiday). After all, partnership (and S corporation) income flows through to the owners. The new date should allow owners to use the information contained in the partnership forms to file their personal returns.

Extension deadlines

If you haven’t filed your partnership or S corporation return yet, you may be thinking about an extension. Under the new law, the maximum extension for calendar-year partnerships is six months (until September 15). This is up from five months under prior law. So the extension deadline doesn’t change — only the length of the extension. The extension deadline for calendar-year S corporations also remains at September 15. But you must file for the extension by March 15.

Keep in mind that, to avoid potential interest and penalties, you still must (with a few exceptions) pay any tax due by the unextended deadline. There may not be any tax liability from the partnership or S corporation return. But if filing for an extension for the entity return causes you to also have to file an extension for your personal return, you need to keep this in mind related to the individual tax return April 18 deadline.

Filing for an extension can be tax-smart if you’re missing critical documents or you face unexpected life events that prevent you from devoting sufficient time to your return right now. Please contact us if you need help or have questions about the filing deadlines that apply to you or avoiding interest and penalties.

© 2017

Cooking the books

Posted by Admin Posted on Mar 06 2017

What’s the most costly type of white collar crime? On average, a company is likely to lose more money from a scheme in which the financial statements are falsified or manipulated than from any other type of occupational fraud incident. The costs frequently include more than just the loss of assets — victimized companies also may suffer lost shareholder value, lower employee morale, premature tax liabilities and reputational damage. Let’s take a closer look at what’s at stake when employees “cook the books.”

Low frequency, high cost

The Report to the Nations on Occupational Fraud and Abuse published in 2016 by the Association of Certified Fraud Examiners (ACFE) found that less than 10% of the fraud schemes in its survey involved financial statement fraud. However, those cases clocked the greatest financial effect, with a median loss of $975,000. Compare that amount to the median losses for asset misappropriation ($125,000) and corruption ($200,000).

What makes financial statement fraud especially problematic is that the costs can quickly snowball out of control. For example, when an executive fudges the numbers to make a company appear more profitable, the company will likely incur greater liability for taxes or dividends.

Plus, it might be necessary to take on debt to make those payments, leading to higher interest costs. Or an acquisition of a healthy company might be pursued to hide the actual underperformance. In the end, more fraud may be necessary to pay for the original scam.

Common schemes

The ACFE defines financial statement fraud as “a scheme in which an employee intentionally causes a misstatement or omission of material information in the organization’s financial reports.” Common ploys include:

* Concealed liabilities,
* Fictitious revenues,
* Inflated asset valuations,
* Misleading disclosures, and
* Timing differences.

Revenue recognition is a particularly ripe area for financial statement fraud, especially as companies start to implement the new revenue recognition guidance for long-term contracts. Early revenue recognition can be accomplished through several avenues, including 1) keeping books open past the end of the accounting period, 2) delivering products early, 3) recording revenue before full performance of a contract, and 4) backdating sales agreements.

Preventive medicine

Victims of financial statement fraud often find their long-term survival severely threatened in a relatively short period of time. Hiring an outside forensic accounting specialist to evaluate internal controls can help identify red flags, ferret out ongoing schemes and deter would-be fraudsters. Contact us for more information.

© 2017

Make health care decisions while you’re healthy

Posted by Admin Posted on Mar 02 2017

Estate planning isn’t just about what happens to your assets after you die. It’s also about protecting yourself and your loved ones. This includes having a plan for making critical medical decisions in the event you’re unable to make them yourself. And, as with other aspects of your estate plan, the time to act is now, while you’re healthy. If an illness or injury renders you unconscious or otherwise incapacitated, it will be too late.

Without a plan that expresses your wishes, your family may have to make medical decisions on your behalf or petition a court for a conservatorship. Either way, there’s no guarantee that these decisions will be made the way you would want, or by the person you would choose.

2 documents, 2 purposes

To ensure that your wishes are carried out, and that your family is spared the burden of guessing — or arguing over — what you would decide, put those wishes in writing. Generally, that means executing two documents: 1) a living will and 2) a health care power of attorney (HCPA).

Unfortunately, these documents are known by many different names, which can lead to confusion. Living wills are sometimes called “advance directives,” or “health care directives.” And HCPAs may also be known as “durable powers of attorney for health care” or “health care proxies.”

Regardless of terminology, these documents serve two purposes: 1) to guide health care providers in the event you become terminally ill or permanently unconscious, and 2) to appoint someone you trust to make medical decisions on your behalf.

A living will expresses your preferences for the use of life-sustaining medical procedures, such as artificial feeding and breathing, surgery, invasive diagnostic tests, and pain medication. It also specifies the situations in which these procedures should be used or withheld.

An HCPA authorizes a surrogate — your spouse, child or another trusted representative — to make medical decisions or consent to medical treatment on your behalf when you’re unable to do so. It’s broader than a living will, which generally is limited to end-of-life situations, although there may be some overlap.

Put your plan into action

No matter how carefully you plan, living wills and HCPAs are effective only if your documents are readily accessible and health care providers honor them. Contact us with questions.

© 2017

Don’t make hunches — crunch the numbers

Posted by Admin Posted on Mar 01 2017

Some business owners make major decisions by relying on gut instinct. But investments made on a “hunch” often fall short of management’s expectations.

In the broadest sense, you’re really trying to answer a simple question: If my company buys a given asset, will the asset’s benefits be greater than its cost? The good news is that there are ways — using financial metrics — to obtain an answer.

Accounting payback

Perhaps the most common and basic way to evaluate investment decisions is with a calculation called “accounting payback.” For example, a piece of equipment that costs $100,000 and generates an additional gross margin of $25,000 per year has an accounting payback period of four years ($100,000 divided by $25,000).

But this oversimplified metric ignores a key ingredient in the decision-making process: the time value of money. And accounting payback can be harder to calculate when cash flows vary over time.

Better metrics

Discounted cash flow metrics solve these shortcomings. These are often applied by business appraisers. But they can help you evaluate investment decisions as well. Examples include:

Net present value (NPV). This measures how much value a capital investment adds to the business. To estimate NPV, a financial expert forecasts how much cash inflow and outflow an asset will generate over time. Then he or she discounts each period’s expected net cash flows to its current market value, using the company’s cost of capital or a rate commensurate with the asset’s risk. In general, assets that generate an NPV greater than zero are worth pursuing.

Internal rate of return (IRR). Here an expert estimates a single rate of return that summarizes the investment opportunity. Most companies have a predetermined “hurdle rate” that an investment must exceed to justify pursuing it. Often the hurdle rate equals the company’s overall cost of capital — but not always.

A mathematical approach

Like most companies, yours probably has limited funds and can’t pursue every investment opportunity that comes along. Using metrics improves the chances that you’ll not only make the right decisions, but that other stakeholders will buy into the move. Please contact our firm for help crunching the numbers and managing the decision-making process.

© 2017

Posted by Admin Posted on Mar 01 2017

When it comes to charitable deductions, all donations aren’t created equal

Posted by Admin Posted on Mar 01 2017

As you file your 2016 return and plan your charitable giving for 2017, it’s important to keep in mind the available deduction. It can vary significantly depending on a variety of factors.

What you give

Other than the actual amount you donate, one of the biggest factors that can affect your deduction is what you give:

Cash. This includes not just actual cash but gifts made by check, credit card or payroll deduction. You may deduct 100%.

Ordinary-income property. Examples include stocks and bonds held one year or less, inventory, and property subject to depreciation recapture. You generally may deduct only the lesser of fair market value or your tax basis.

Long-term capital gains property. You may deduct the current fair market value of appreciated stocks and bonds held for more than one year.

Tangible personal property. Your deduction depends on the situation:

  •  If the property isn’t related to the charity’s tax-exempt function (such as an antique donated for a charity auction), your deduction is limited to your basis.
  •  If the property is related to the charity’s tax-exempt function (such as an antique donated to a museum for its collection), you can deduct the fair market value.

Vehicle. Unless the vehicle is being used by the charity, you generally may deduct only the amount the charity receives when it sells the vehicle.

Use of property. Examples include use of a vacation home and a loan of artwork. Generally, you receive no deduction because it isn’t considered a completed gift.

Services. You may deduct only your out-of-pocket expenses, not the fair market value of your services. You can deduct 14 cents per charitable mile driven.

Other factors

Your annual charitable donation deductions may be reduced if they exceed certain income-based limits. And if you receive some benefit from the charity, your deduction generally must be reduced by the benefit’s value.

In addition, various substantiation requirements apply. And the charity must be eligible to receive tax-deductible contributions. Finally, keep in mind that tax law changes could be passed later this year that might affect your 2017 charitable deductions.

If you have questions about how much you can deduct on your 2016 return, let us know. We also can keep you apprised of the latest information on any tax law changes.

© 2017

Posted by Admin Posted on Feb 27 2017

Tangible property safe harbors help maximize deductions

Posted by Admin Posted on Feb 27 2017

If last year your business made repairs to tangible property, such as buildings, machinery, equipment or vehicles, you may be eligible for a valuable deduction on your 2016 income tax return. But you must make sure they were truly “repairs,” and not actually “improvements.”

Why? Costs incurred to improve tangible property must be depreciated over a period of years. But costs incurred on incidental repairs and maintenance can be expensed and immediately deducted.

What’s an “improvement”?

In general, a cost that results in an improvement to a building structure or any of its building systems (for example, the plumbing or electrical system) or to other tangible property must be capitalized. An improvement occurs if there was a betterment, restoration or adaptation of the unit of property.

Under the “betterment test,” you generally must capitalize amounts paid for work that is reasonably expected to materially increase the productivity, efficiency, strength, quality or output of a unit of property or that is a material addition to a unit of property.

Under the “restoration test,” you generally must capitalize amounts paid to replace a part (or combination of parts) that is a major component or a significant portion of the physical structure of a unit of property.

Under the “adaptation test,” you generally must capitalize amounts paid to adapt a unit of property to a new or different use — one that isn’t consistent with your ordinary use of the unit of property at the time you originally placed it in service.

2 safe harbors

Distinguishing between repairs and improvements can be difficult, but a couple of IRS safe harbors can help:

1. Routine maintenance safe harbor. Recurring activities dedicated to keeping property in efficient operating condition can be expensed. These are activities that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.

Amounts incurred for activities outside the safe harbor don’t necessarily have to be capitalized, though. These amounts are subject to analysis under the general rules for improvements.

2. Small business safe harbor. For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. A qualified small business is generally one with gross receipts of $10 million or less.

There is also a de minimis safe harbor as well as an exemption for materials and supplies up to a certain threshold. Contact us for details on these safe harbors and exemptions and other ways to maximize your tangible property deductions.

© 2017

Posted by Admin Posted on Feb 27 2017

Use an ILIT as a wealth preserver

Posted by Admin Posted on Feb 23 2017

If you’re concerned about your family’s financial well-being after you’re gone, life insurance can provide peace of mind. Going a step further and setting up an irrevocable life insurance trust (ILIT) to hold the policy offers additional estate planning benefits.

Asset protection

If you’re concerned about your heirs’ money management skills, an ILIT may be the answer. Why? Your loved ones won’t receive the proceeds directly, as they would if they were the policy beneficiaries. Rather, they’re the beneficiaries of the trust, and the trust controls when they receive proceeds.

You can also establish conditions for distributing funds from an ILIT. For example, you might instruct the trustee to withhold funds from a beneficiary who drops out of school or develops a substance abuse problem.

A properly drafted ILIT can also protect trust assets against your and your beneficiaries’ creditors, particularly if it’s established in a state with favorable asset protection laws.

Estate tax savings

Placing your life insurance policy in an ILIT removes it and its proceeds from your taxable estate. Contributing an existing life insurance policy to an ILIT constitutes a taxable gift to the trust beneficiaries of the policy’s fair market value (which generally approximates its cash value). With the combined gift and estate tax exemption currently at $5.49 million, now may be a good time to make such a gift.

Future ILIT contributions to cover premium payments will be taxable gifts. You may, however, be able to apply your annual gift tax exclusion to reduce or eliminate the tax — provided the ILIT is structured appropriately and certain other requirements are met.

Bear in mind that a repeal of the federal estate tax has been proposed by President Trump and the Republican-led Congress. A repeal or other estate tax law changes could have a significant impact on an ILIT’s estate tax benefits.

Drawbacks

An ILIT does have some significant limitations you need to be aware of. After you transfer a policy to the trust, you can no longer:

  • Change or add beneficiaries,
  • Assign, surrender or cancel the policy, or
  • Borrow against or withdraw from the policy’s cash value.

In addition, you’re not allowed to alter the ILIT’s terms or act as trustee.

Nevertheless, you can design the trust to adapt to changing circumstances and provide that children or grandchildren born after you establish the trust be automatically added as beneficiaries.

Contact us for additional details if you’re considering using an ILIT.

© 2017

What can a valuation expert do for your succession plan?

Posted by Admin Posted on Feb 22 2017

Most business owners spend a lifetime building their business. And when it comes to succession, they face the difficult decision of whether to sell, dissolve or transfer the business to family members (or a nonfamily successor).

Many complicated issues are involved, including how to divvy up business interests, allocate value and tackle complex tax issues. Thus, as you put together your succession plan, include not only your financial and legal advisors, but also a qualified valuation professional.

Various value factors

When drafting a succession plan, a valuation expert can help you put a number on various factors that will affect your company’s value. Just a few examples include:

Projected cash flows. According to both the market and income valuation approaches, future earnings determine value. To the extent that a business experiences decreasing, or increasing, demand and rising (or falling) prices, expected cash flows will be affected. Historical financial statements may require adjustments to reflect changes in future expectations.

Perceived risk. Greater risk results in higher discount rates (under the income approach) and lower pricing multiples (under the market approach), which translates into lower values (and vice versa). When selecting comparables, the transaction date is an important selection criterion a valuator considers.

Expected growth. Greater expected revenue growth contributes to value. In addition, there’s a high correlation between revenue growth and earnings (and thus, cash flow) growth.

Other determinants of discounts

In many cases, valuation discounts are applied to a company’s value. For example, decreased liquidity translates into higher marketability discounts, while increased liquidity reduces marketability discounts. Other factors that affect the magnitude of valuation discounts include:

• Type of assets held,
• Financial performance of the underlying assets,
• Portfolio diversification,
• Leverage,
• Owner rights and restrictions,
• Distribution history, and
• Personal characteristics of the general partners or managing members.

Discounts vary significantly, but can reach (or exceed) 40% of the entity’s net asset value, depending on the specifics of the situation.

For best results

An accurate and timely value estimate can facilitate the succession process and prevent costly and time-consuming conflicts. Please contact our firm for more information.

© 2017

Deduct all of the mileage you’re entitled to — but not more

Posted by Admin Posted on Feb 21 2017

Rather than keeping track of the actual cost of operating a vehicle, employees and self-employed taxpayers can use a standard mileage rate to compute their deduction related to using a vehicle for business. But you might also be able to deduct miles driven for other purposes, including medical, moving and charitable purposes.  

What are the deduction rates?

The rates vary depending on the purpose and the year:

Business: 54 cents (2016), 53.5 cents (2017)

Medical: 19 cents (2016), 17 cents (2017)

Moving: 19 cents (2016), 17 cents (2017)

Charitable: 14 cents (2016 and 2017)

The business standard mileage rate is considerably higher than the medical, moving and charitable rates because the business rate contains a depreciation component. No depreciation is allowed for the medical, moving or charitable use of a vehicle.  

In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls.

What other limits apply?

The rules surrounding the various mileage deductions are complex. Some are subject to floors and some require you to meet specific tests in order to qualify.

For example, miles driven for health-care-related purposes are deductible as part of the medical expense deduction. But medical expenses are deductible only to the extent they exceed 10% of your adjusted gross income.

And while miles driven related to moving can be deductible, the move must be work-related. In addition, among other requirements, the distance from your old residence to the new job must be at least 50 miles more than the distance from your old residence to your old job.

Other considerations

There are also substantiation requirements, which include tracking miles driven. And, in some cases, you might be better off deducting actual expenses rather than using the mileage rates.

So contact us to help ensure you deduct all the mileage you’re entitled to on your 2016 tax return — but not more. You don’t want to risk back taxes and penalties later.

And if you drove potentially eligible miles in 2016 but can’t deduct them because you didn’t track them, start tracking your miles now so you can potentially take advantage of the deduction when you file your 2017 return next year.

© 2017

Use qualified auditors for your employee benefit plans

Posted by Admin Posted on Feb 17 2017

U.S. public companies are required to report their financial results using U.S. Generally Accepted Accounting Principles (GAAP). But, since 2007, hundreds of foreign companies listed on U.S. stock markets have been able to report financial results using International Financial Reporting Standards (IFRS) instead of GAAP. The Securities and Exchange Commission (SEC) is currently considering a proposal that, if approved, would allow domestic companies to supplement their GAAP results with IFRS results. Here’s the latest.

Dueling standards

Throughout the world, companies use two predominant accounting standards to report their financial results: GAAP and IFRS. The primary difference is that GAAP tends to be prescriptive and rules-based, whereas IFRS tends to be subjective and principles-based.
There are also subtle differences in the accounting methods that are allowed under each standard. For example, the last-in, first-out inventory (LIFO) method is common in the United States, but it’s not permitted under IFRS.

History lesson

Most of the countries in the world, including member states of the European Union, have adopted IFRS. And they’ve been increasingly pressuring U.S. accounting regulators to use global accounting standards.

In 2008, the SEC floated the idea of adopting IFRS as the primary financial reporting regime for U.S. companies. Then the financial crisis hit. The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) continued working on convergence projects. But it was clear that U.S. interest in IFRS had started to wane.

In 2012, the SEC released a much-awaited report on IFRS in the United States. The report described the challenges of adopting IFRS, rather than making recommendations on whether international accounting standards should be used for domestic companies.

Work in progress

Last year, the SEC announced plans to issue a proposal that would allow U.S. public companies to voluntarily disclose limited IFRS information as non-GAAP supplemental information to their regular GAAP financial statements.

However, this proposal was put on hold because of leadership changes at the SEC (due to the new presidential administration as well as an unrelated resignation of the Chief Accountant last fall). Once rulemaking efforts resume full-swing, public companies with global operations may pressure the SEC to issue a proposal that would permit supplemental IFRS disclosures, as well as to continue pursuing additional IFRS convergence efforts.

© 2017

Are you leaving your IRA to someone other than your spouse?

Posted by Admin Posted on Feb 16 2017

An IRA can be a powerful wealth-building tool, offering tax-deferred growth (tax-free in the case of a Roth IRA), asset protection and other benefits. But if you leave an IRA to your children — or to someone else other than your spouse — these benefits can be lost without careful planning.

“Inherited IRA” stretches tax benefits

Surviving spouses who inherit IRAs are permitted to roll them into their own IRAs, allowing the funds to continue growing tax-deferred or tax-free until they’re withdrawn in retirement or after age 70½. Beneficiaries other than your spouse, such as your children, are treated differently.

To take full advantage of an IRA’s tax benefits, nonspouse beneficiaries must transfer the funds directly into an “inherited IRA.” Although the beneficiaries will have to begin taking distributions by the end of the following year, they’ll be able to stretch those distributions over their life expectancies, allowing earnings to grow tax-deferred or tax-free as long as possible.

Your children or other nonspouse beneficiaries won’t have this option, however, unless you name them as beneficiaries (or secondary beneficiaries) of your IRA. If you leave an IRA to your estate, your children or other heirs will still receive a share of the IRA as beneficiaries of your estate, but they’ll have to withdraw the funds within five years (or, if you die after age 70½, over what would otherwise be your remaining actuarial life expectancy).

If you name multiple nonspousal beneficiaries (several children, for example), they’ll have to establish separate inherited IRA accounts by the end of the year after the year of your death in order to take distributions over their own life expectancies. If they miss the deadline, they’ll have to use the oldest beneficiary’s life expectancy.

Be aware that, unlike other IRAs, inherited IRAs aren’t protected from creditors in bankruptcy.

Inherited IRA rules 

The following special rules apply to an inherited IRA:

  • The IRA must be a new IRA set up for the specific purpose of receiving the inherited account.
  • The IRA must be specially titled in the deceased account owner’s name.
  • No other contributions may be made to the IRA.
  • No other amounts may generally be rolled into or out of the IRA.
  • Required minimum distributions will need to be made over the beneficiary’s life expectancy starting the year after the IRA owner’s death

Please contact us if you have questions about how to address your IRA in your estate plan.

© 2017

An EAP can keep your top players on the floor

Posted by Admin Posted on Feb 15 2017

A good basketball team is at its best when its top players are on the floor. Similarly, a company is the most productive, efficient and innovative when its best employees are in the right positions, doing great work.

Unfortunately, it’s not uncommon for good employees to battle personal problems, such as substance dependence, financial and legal woes, or mental health issues. These struggles can negatively affect their productivity and the working environment around them. One way employers can help is by offering a benefit called an employee assistance program (EAP).

A benefit with benefits

An EAP helps identify at-risk employees and assist them in finding the professional help they need. An employee who enrolls in the EAP may, for example, immediately be put in touch with a counselor or social worker.

According to the U.S. Department of Labor’s Office of Disability Employment Policy, EAPs have been shown to contribute to:

• Decreased absenteeism,
• Reduced accidents and fewer workers’ compensation claims,
• Greater employee retention,
• Fewer labor disputes, and
• Significantly reduced medical costs arising from early identification and treatment of individual mental health and substance abuse issues.

An EAP is, of course, not a substitute for health care insurance.

Vendors available

Employers don’t have to create and administer EAPs on their own. A wide variety of vendors are available. But, as is the case with any benefit, it’s important to choose a vendor carefully and make sure you get good value for your investment. Please contact our firm for assistance in assessing the costs and specific features of an EAP.

© 2017

Do you need to file a 2016 gift tax return by April 18?

Posted by Admin Posted on Feb 14 2017

Last year you may have made significant gifts to your children, grandchildren or other heirs as part of your estate planning strategy. Or perhaps you just wanted to provide loved ones with some helpful financial support. Regardless of the reason for making a gift, it’s important to know under what circumstances you’re required to file a gift tax return.

Some transfers require a return even if you don’t owe tax. And sometimes it’s desirable to file a return even if it isn’t required.

When filing is required

Generally, you’ll need to file a gift tax return for 2016 if, during the tax year, you made gifts:

    That exceeded the $14,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse),

•    That exceeded the $148,000 annual exclusion for gifts to a noncitizen spouse,

•    That you wish to split with your spouse to take advantage of your combined $28,000 annual exclusions,

•    To a Section 529 college savings plan for your child, grandchild or other loved one and wish to accelerate up to five years’ worth of annual exclusions ($70,000) into 2016,

•    Of future interests — such as remainder interests in a trust — regardless of the amount, or

•    Of jointly held or community property.

When filing isn’t required

No return is required if your gifts for the year consist solely of annual exclusion gifts, present interest gifts to a U.S. citizen spouse, qualifying educational or medical expenses paid directly to a school or health care provider, and political or charitable contributions.

If you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

Meeting the deadline

The gift tax return deadline is the same as the income tax filing deadline. For 2016 returns, it’s April 18, 2017 (or October 16 if you file for an extension). If you owe gift tax, the payment deadline is also April 18, regardless of whether you file for an extension.

Have questions about gift tax and the filing requirements? Contact us to learn more.

© 2017


 

SEPs: A powerful retroactive tax planning tool

Posted by Admin Posted on Feb 13 2017

Simplified Employee Pensions (SEPs) are sometimes regarded as the “no-brainer” first choice for high-income small-business owners who don’t currently have tax-advantaged retirement plans set up for themselves. Why? Unlike other types of retirement plans, a SEP is easy to establish and a powerful retroactive tax planning tool: The deadline for setting up a SEP is favorable and contribution limits are generous.

SEPs do have a couple of downsides if the business has employees other than the owner: 1) Contributions must be made for all eligible employees using the same percentage of compensation as for the owner, and 2) employee accounts are immediately 100% vested.

Deadline for set-up and contributions

A SEP can be established as late as the due date (including extensions) of the business’s income tax return for the tax year for which the SEP is to first apply. For example:

  •  A calendar-year partnership or S corporation has until March 15, 2017, to establish a SEP for 2016 (September 15, 2017, if the return is extended).
  • A calendar-year sole proprietor or C corporation has until April 18, 2017 (October 16, 2017, if the return is extended), because of their later filing deadlines.

The deadlines for limited liability companies (LLCs) depend on the tax treatment the LLC has elected. Furthermore, the business has until these same deadlines to make 2016 contributions and still claim a potentially hefty deduction on its 2016 return.

Generally, other types of retirement plans would have to have been established by December 31, 2016, in order for 2016 contributions to be made (though many of these plans do allow 2016 contributions to be made in 2017).

Contribution amounts

Contributions to SEPs are discretionary. The business can decide what amount of contribution it will make each year. The contributions go into SEP-IRAs established for each eligible employee.

For 2016, the maximum contribution that can be made to a SEP-IRA is 25% of compensation (or 20% of self-employed income net of the self-employment tax deduction) of up to $265,000, subject to a contribution cap of $53,000. The 2017 limits are $270,000 and $54,000, respectively.

Setting up a SEP is easy

A SEP is established by completing and signing the very simple Form 5305-SEP (“Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement”). Form 5305-SEP is not filed with the IRS, but it should be maintained as part of the business’s permanent tax records. A copy of Form 5305-SEP must be given to each employee covered by the SEP, along with a disclosure statement.

Of course, additional rules and limits do apply to SEPs, but they’re generally much less onerous than those for other retirement plans. If you think a SEP might be good for your business, please contact us.

© 2017

Is annual financial reporting enough?

Posted by Admin Posted on Feb 10 2017

Businesses generally issue year-end financial statements to let investors and lenders evaluate their financial health. But proactive stakeholders — including the company’s CEO and board of directors — may want more than one “snapshot” per year of financial results. Interim statements let stakeholders know how a company is doing each quarter or month, but they also have drawbacks and limitations.

Benefits

Interim reports may provide signals of impending financial turmoil due to, say, the loss of a major customer, significant uncollectible accounts receivable or pilfered inventory. Or they might confirm that a turnaround plan appears successful or that a startup has finally achieved profits. In short, they allow stakeholders to check up on performance, giving them either midyear peace of mind or the opportunity to implement corrective measures early on.

Limitations

But beware: Interim financials usually don’t conform to U.S. Generally Accepted Accounting Principles. Outside accounting firms rarely review or audit interim statements because of the cost to do so. Absent external oversight, internal finance and accounting personnel with bad news to report might be tempted to cook the books to appear more profitable.

Interim numbers may omit many of the adjustments that external accountants make at year end, such as estimates for bad-debt write-offs, accrued expenses, prepaid items, management bonuses or income taxes. In addition, some companies save tedious bookkeeping procedures, such as physical inventory counts and updating depreciation schedules, until year end. So interim account balances might reflect last year’s amounts or be based on historic gross margins.

It’s also important to realize that some companies are seasonal. If there are operating peaks and troughs, for example, you can’t multiply quarterly profits by four to reliably predict year-end performance. For seasonal operations, you may want to benchmark last year’s monthly (or quarterly) results against the current year-to-date numbers.

When the numbers don’t add up

If interim statements reveal irregularities or trigger concerns, consider seeking outside accounting expertise. We can conduct a forensic investigation or agreed-upon procedures that target high-risk account balances or an account that was previously adjusted by auditors. Contact us for more information.

© 2017

2016 charitable deductions: Substantiate them or lose them

Posted by Admin Posted on Feb 09 2017

Sharing your wealth with a favorite charity can benefit those in need and reduce your taxable estate. In addition, your donations can ease your income tax liability. But you must meet IRS substantiation requirements. If you fail to do so, the IRS could deny the corresponding deductions you’re claiming. Let’s take a look at the requirements for different asset types.

Cash gifts

Generally, you can substantiate gifts of less than $250 with a canceled check, written receipt or other reliable record (such as a credit card statement) that indicates the name of the charity and the amount and date of your gift.

If you donate more than $75 in exchange for goods or services other than intangible religious benefits (such as admission to religious ceremonies), the charity must provide you with a statement that 1) advises you that your deduction is limited to the amount by which your gift exceeds the value of those goods and services, and 2) provides a good-faith estimate of that value.

Gifts of $250 or more require a “contemporaneous” written acknowledgment from the charity that includes the amount and date of your gift and the estimated value of any goods or services you received or a statement that no goods or services were received. If goods or services received consisted entirely of intangible religious benefits, a statement to that effect must be included. An email will suffice.

To satisfy the contemporaneous requirement, you must have the acknowledgment in your possession before you file your income tax return. If you file later than the extended due date of your return, you must have received the acknowledgment by that extended due date.

Noncash gifts

If you make noncash gifts totaling more than $500 for the year, you must file Form 8283, “Noncash Charitable Contributions,” with your federal income tax return. And for gifts of property valued at more than $5,000 ($10,000 for closely held stock) you’ll need to obtain a “qualified appraisal” by a “qualified appraiser” and have the appraiser sign Sec. B, Part III, “Declaration of Appraiser.” If property is valued at more than $500,000, you’re required to attach a copy of the appraisal report to your return. No appraisal is required for publicly traded securities, regardless of value.

A qualified appraiser is a professional who meets certain education, experience and accreditation requirements. A qualified appraisal must 1) be prepared, signed and dated by a qualified appraiser other than the taxpayer or the recipient of the donation, 2) be conducted within 60 days of the gift, 3) provide certain information about the property, the appraiser and the valuation methods used, and 4) not involve fees based on a percentage of the appraised value or deduction amount.

Don’t leave it to chance

If you’ve made substantial charitable donations, their deductibility depends on compliance with IRS substantiation rules. Contact us to ensure you’ve properly substantiated your donations and can maximize your deductions on your 2016 income tax return.

© 2017

Envision your advisory board before you form it

Posted by Admin Posted on Feb 08 2017

Many companies reach a point in their development where they could benefit from an advisory board. It’s all too easy in today’s complex business world to get caught up in an “echo chamber” of ideas and perspectives that only originate internally.

For many business owners, an understandable first question about the concept is: What should my advisory board look like? To find an answer, start by envisioning the ideal size and composition of your company’s board in terms of skill sets and personalities.

The guest list

First and foremost, participants in your advisory board should have skills, experience and expertise that complement your company’s in-house staff. Second, they should support your established long-term strategic goals.

Ideal board candidates can think creatively and provide constructive advice while maintaining discretion with sensitive business issues. This allows the board to honestly discuss every aspect of your operations, including:

• Current challenges,
• Emerging opportunities, and
• Managerial dynamics.

Selecting advisory members is similar to selecting friends and colleagues to invite to an intimate dinner party. You want a diverse mix of backgrounds, expertise and skills. For example, try to balance impulsive, assertive personalities with more thoughtful, cautious ones.

An evolving entity

Bear in mind that, as your business needs change, you may need to rotate some board members out and bring in new blood. For instance, if the company needs to upgrade to a new technology platform to minimize data breaches, board members who were invaluable when the company began — and technology perhaps played a less prominent role — may lack the experience needed to get the business through the next phase.

In addition, the size of your board may change over time. Generally, business owners should limit the number of members to three to seven people. This will help keep the board affordable and manageable, particularly in terms of effective deliberation and decision making. But it may need to grow beyond that in number if your company itself gets larger.

Innovation and competition

Sage advice and diversity of opinion can be invaluable when looking to innovate and gain a competitive edge. Please contact our firm for help assessing whether now is the time for your business to form an advisory board.

© 2017

What you need to know about the tax treatment of ISOs

Posted by Admin Posted on Feb 07 2017

Incentive stock options allow you to buy company stock in the future at a fixed price equal to or greater than the stock’s fair market value on the grant date. If the stock appreciates, you can buy shares at a price below what they’re then trading for. However, complex tax rules apply to this type of compensation.

Current tax treatment

ISOs must comply with many rules but receive tax-favored treatment:

  • You owe no tax when ISOs are granted.
  • You owe no regular income tax when you exercise ISOs, but there could be alternative minimum tax (AMT) consequences.
  • If you sell the stock after holding the shares at least one year from the exercise date and two years from the grant date, you pay tax on the sale at your long-term capital gains rate. You also may owe the 3.8% net investment income tax (NIIT). 
  • If you sell the stock before long-term capital gains treatment applies, a “disqualifying disposition” occurs and any gain is taxed as compensation at ordinary-income rates.

So if you were granted ISOs in 2016, there likely isn’t any impact on your 2016 income tax return. But if in 2016 you exercised ISOs or you sold stock you’d acquired via exercising ISOs, then it could affect your 2016 tax liability. And it’s important to properly report the exercise or sale on your return to avoid potential interest and penalties for underpayment of tax.

Future exercises and stock sales

If you receive ISOs in 2017 or already hold ISOs that you haven’t yet exercised, plan carefully when to exercise them. Waiting to exercise ISOs until just before the expiration date (when the stock value may be the highest, assuming the stock is appreciating) may make sense. But exercising ISOs earlier can be advantageous in some situations.

Once you’ve exercised ISOs, the question is whether to immediately sell the shares received or to hold on to them long enough to garner long-term capital gains treatment. The latter strategy often is beneficial from a tax perspective, but there’s also market risk to consider. For example, it may be better to sell the stock in a disqualifying disposition and pay the higher ordinary-income rate if it would avoid AMT on potentially disappearing appreciation.

The timing of the sale of stock acquired via an exercise could also positively or negatively affect your liability for higher ordinary-income tax rates, the top long-term capital gains rate and the NIIT.

Planning ahead

Keep in mind that the NIIT is part of the Affordable Care Act (ACA), and lawmakers in Washington are starting to take steps to repeal or replace the ACA. So the NIIT may not be a factor in the future. In addition, tax law changes are expected later this year that might include elimination of the AMT and could reduce ordinary and long-term capital gains rates for some taxpayers. When changes might go into effect and exactly what they’ll be is still uncertain. 

If you’ve received ISOs, contact us. We can help you ensure you’re reporting everything properly on your 2016 return and evaluate the risks and crunch the numbers to determine the best strategy for you going forward.

© 2017

Take small-business tax credits where credits are due

Posted by Admin Posted on Feb 06 2017

Tax credits reduce tax liability dollar-for-dollar, making them particularly valuable. Two available credits are especially for small businesses that provide certain employee benefits. And one of them might not be available after 2017.

1. Small-business health care credit

The Affordable Care Act (ACA) offers a credit to certain small employers that provide employees with health coverage. The maximum credit is 50% of group health coverage premiums paid by the employer, provided it contributes at least 50% of the total premium or of a benchmark premium.

For 2016, the full credit is available for employers with 10 or fewer full-time equivalent employees (FTEs) and average annual wages of $25,000 or less per employee. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $52,000.

To qualify for the credit, online enrollment in the Small Business Health Options Program (SHOP) generally is required. In addition, the credit can be claimed for only two years, and they must be consecutive. (Credits claimed before 2014 don’t count, however.)

If you meet the eligibility requirements but have been waiting to claim the credit until a future year when you think it might provide more savings, claiming the credit for 2016 may be a good idea. Why? It’s possible the credit will go away for 2018 because lawmakers in Washington are starting to take steps to repeal or replace the ACA.

Most likely any ACA repeal or replacement wouldn’t go into effect until 2018 (or possibly later). So if you claim the credit for 2016, you may also be able to claim it on your 2017 return next year (provided you again meet the eligibility requirements). That way, you could take full advantage of the credit while it’s available.

2. Retirement plan credit

Small employers (generally those with 100 or fewer employees) that create a retirement plan may be eligible for a $500 credit per year for three years. The credit is limited to 50% of qualified start-up costs.

Of course, you generally can deduct contributions you make to your employees’ accounts under the plan. And your employees enjoy the benefit of tax-advantaged retirement saving.

If you didn’t create a retirement plan in 2016, it might not be too late. Simplified Employee Pensions (SEPs) can be set up as late as the due date of your tax return, including extensions.

Maximize tax savings

Be aware that additional rules apply beyond what we’ve discussed here. We can help you determine whether you’re eligible for these credits. We can also advise you on what other credits you might be eligible for when you file your 2016 return so that you can maximize your tax savings.

© 2017

FASB approves one-step impairment test for goodwill

Posted by Admin Posted on Feb 03 2017

In January, the Financial Accounting Standards Board (FASB) issued updated guidance to simplify goodwill impairment testing for public companies and private companies that haven’t taken advantage of the simplified reporting option for goodwill. Here are the details.

The basics

Goodwill shows up on a company’s balance sheet when it buys another business at a price that’s more than the purchased business’s market value. This premium is considered an intangible asset that generally includes the reputation of the purchased business and its competitive advantage in the market.

Under U.S. Generally Accepted Accounting Principles (GAAP), companies are typically required to test for declines in the value of the goodwill at least once a year. When there’s a drop in the fair value of goodwill, companies must record an impairment. Impairment write-offs may be viewed by stakeholders as a sign that an acquired business isn’t living up to management’s expectations.

Old rules vs. new rules

Under existing GAAP, goodwill impairment testing is a two-step process. The first step is to determine whether an impairment exists and then value it. The second step includes determining the implied fair value of the goodwill and comparing it with its carrying amount on the balance sheet.

Companies have complained for years that the second step requires complex calculations. Further, they told the FASB that investors are more interested in the existence of an impairment than in a precise calculation of its amount.

In 2014, the FASB issued a reprieve for private companies that carry goodwill on the balance sheet: They can elect to forgo annual impairment testing and, instead, amortize goodwill over a 10-year period.

Soon public companies and private companies that still test annually for impairment will also have a simpler route: An update to GAAP scraps the second step of the existing impairment test. So, goodwill impairment will simply equal the excess of the entire reporting unit’s carrying amount over its fair value.

Effective date

The revised standard goes into effect in 2020 for calendar-year public companies that file financial statements with the Securities and Exchange Commission. All other public companies can delay implementation of the update for one year — and private companies that haven’t elected to amortize goodwill can delay implementation for two years. However, because one-step testing is easier than two-step testing, many companies are expected to take advantage of the early adoption option that’s permitted for annual impairment tests conducted after January 1, 2017.

© 2017

5 questions single parents should ask about their estate plans

Posted by Admin Posted on Feb 02 2017

In many respects, estate planning for single parents of minor children is similar to estate planning for families with two parents. Single parents want to provide for their children’s care and financial needs after they’re gone. But when only one parent is involved, certain aspects of an estate plan demand special attention. If you’re a single parent, here are five questions you should ask:

1. Are my will and other estate planning documents up to date? If you haven’t reviewed your estate plan recently, do so as soon as possible to ensure that it reflects your current circumstances. The last thing you want is for a probate court to decide your children’s future.

2. Have I selected an appropriate guardian? If the other parent is unavailable to take custody of your children should you become incapacitated or die suddenly, does your estate plan designate a suitable, willing guardian to care for them? Will the guardian need financial assistance to raise your kids and provide for their education? If not, you might want to preserve your wealth in a trust until your children are grown.

3. Am I adequately insured? With only one income to depend on, plan carefully to ensure that you can provide for your retirement as well as your children’s financial security. Life insurance can be an effective way to augment your estate. You should also consider disability insurance. Unlike many married couples, single parents don’t have a “backup” income in the event they can no longer work.

4. What if I become incapacitated? As a single parent, it’s particularly important for you to include in your estate plan a living will or advance directive to specify your preferences for the use of life-sustaining medical procedures and a health care power of attorney to designate someone to make other medical decisions on your behalf. You should also have a revocable living trust or durable power of attorney that provides for the management of your finances.

5. Have I established a trust for my children? Trust planning is one of the most effective ways to provide for children regardless of their age. Trust assets are managed by one or more qualified, trusted individuals or corporate trustees, and you specify when and under what circumstances funds should be distributed to your kids. But a trust is particularly important if you have minor children. Without one, your assets may come under the control of your former spouse or a court-appointed administrator.

If you’re a single parent, we can help answer all of your estate planning questions.

© 2017

PTO banks: A smart HR solution for many companies

Posted by Admin Posted on Feb 01 2017

“I’m taking a sick day!” This familiar refrain usually is uttered with just cause, but not always. What if there were no sick days? No, we’re not suggesting employees be forced to work when they’re under the weather. Rather, many businesses are adopting a different paradigm when it comes to paid time off (PTO).

Under the “PTO bank” concept, employers merge most (or all) of the traditional components of excused absences (vacation time, sick time, personal days and so on) into one simple employee-managed account, typically offering not quite as many PTO days as under a traditional PTO system. One benefit of this approach is that employers are no longer put in a position to have to judge whether leave is used appropriately. PTO banks may not work for every business, but more and more companies are finding them beneficial.

6 primary motivations

There are a number of reasons that employers are offering PTO banks. Specifically, according to a survey by the HR professional society WorldatWork, here are the six primary motivations:

1. Greater flexibility for employees. Like their employers, many employees appreciate not having to worry about distinguishing vacation time from sick time.

2. Ease of administration. Employers don’t have to deal with the complications of separating the various PTO components, which makes the HR and payroll staff’s job easier.

3. Increased cost effectiveness. More efficient administration often reduces the costs of time and resources spent dealing with employee absences and lost productivity.

4. The ability to stay competitive with other companies. Many employees and job candidates view PTO banks as a more contemporary and appealing approach to excused absences.

5. Reduced absenteeism. Interestingly, some employers have seen employees miss fewer work days once PTO banks have been established — possibly because of the greater sense of control employees have over their time.

6. Improved employee morale. Simplifying the PTO process and gaining greater command over their time off is typically viewed as a positive, empowering thing by employees.

Enticing benefits

Although these many potential benefits may seem enticing, PTO banks may not be right for every employer. For example, you may not want to disrupt your current system if it’s working well. Please contact our firm for a review of your PTO approach and how it’s affecting your financials.

© 2017

2016 higher-education breaks can save your family taxes

Posted by Admin Posted on Jan 31 2017

Was a college student in your family last year? Or were you a student yourself? You may be eligible for some valuable tax breaks on your 2016 return. To max out your higher education breaks, you need to see which ones you’re eligible for and then claim the one(s) that will provide the greatest benefit. In most cases you can take only one break per student, and, for some breaks, only one per tax return.

Credits vs. deductions

Tax credits can be especially valuable because they reduce taxes dollar-for-dollar; deductions reduce only the amount of income that’s taxed. A couple of credits are available for higher education expenses:

1. The American Opportunity credit — up to $2,500 per year per student for qualifying expenses for the first four years of postsecondary education.

2. The Lifetime Learning credit — up to $2,000 per tax return for postsecondary education expenses, even beyond the first four years.

But income-based phaseouts apply to these credits.

If you’re eligible for the American Opportunity credit, it will likely provide the most tax savings. If you’re not, the Lifetime Learning credit isn’t necessarily the best alternative.

Despite the dollar-for-dollar tax savings credits offer, you might be better off deducting up to $4,000 of qualified higher education tuition and fees. Because it’s an above-the-line deduction, it reduces your adjusted gross income, which could provide additional tax benefits. But income-based limits also apply to the tuition and fees deduction.

Be aware that the tuition and fees deduction expired December 31, 2016. So it won’t be available on your 2017 return unless Congress extends it or makes it permanent.

How much can your family save?

Keep in mind that, if you don’t qualify for breaks for your child’s higher education expenses because your income is too high, your child might. Many additional rules and limits apply to the credits and deduction, however. To learn which breaks your family might be eligible for on your 2016 tax returns — and which will provide the greatest tax savings — please contact us.

© 2017

Posted by Admin Posted on Jan 31 2017

The “manufacturers’ deduction” isn’t just for manufacturers

Posted by Admin Posted on Jan 31 2017

The Section 199 deduction is intended to encourage domestic manufacturing. In fact, it’s often referred to as the “manufacturers’ deduction.” But this potentially valuable tax break can be used by many other types of businesses besides manufacturing companies.

Sec. 199 deduction 101

The Sec. 199 deduction, also called the “domestic production activities deduction,” is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts.

Yes, the deduction is available to traditional manufacturers. But businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing also may be eligible.

The deduction isn’t allowed in determining net self-employment earnings and generally can’t reduce net income below zero. But it can be used against the alternative minimum tax.

How income is calculated

To determine a company’s Sec. 199 deduction, its qualified production activities income must be calculated. This is the amount of domestic production gross receipts (DPGR) exceeding the cost of goods sold and other expenses allocable to that DPGR. Most companies will need to allocate receipts between those that qualify as DPGR and those that don’t ― unless less than 5% of receipts aren’t attributable to DPGR.

DPGR can come from a number of activities, including the construction of real property in the United States, as well as engineering or architectural services performed stateside to construct real property. It also can result from the lease, rental, licensing or sale of qualifying production property, such as:

• Tangible personal property (for example, machinery and office equipment),
• Computer software, and
• Master copies of sound recordings.

The property must have been manufactured, produced, grown or extracted in whole or “significantly” within the United States. While each situation is assessed on its merits, the IRS has said that, if the labor and overhead incurred in the United States accounted for at least 20% of the total cost of goods sold, the activity typically qualifies.

Contact us to learn whether this potentially powerful deduction could reduce your business’s tax liability when you file your 2016 return.

© 2017

Ready, set, audit

Posted by Admin Posted on Jan 27 2017

If your business issues audited financial statements and follows a calendar year end, your external auditing procedures have already begun. At a minimum, you’ve signed an engagement letter, sent over preliminary financial statements and allowed your CPA to observe any year end physical inventory counts. But there are some steps you can still take to streamline audit fieldwork.

Think like an auditor

An external audit is less intrusive if you anticipate your auditor’s document requests and inquiries. Auditors typically ask clients to provide similar documents year after year. They’ll accept copies or client-prepared schedules for certain items, such as bank reconciliations and fixed asset ledgers. To verify other items, such as leases, invoices and bank statements, they’ll want to see original source documents.

What does change annually is the sample of transactions that auditors randomly select to test your account balances. The element of surprise is important because it keeps bookkeepers honest.

Prepare for audit inquiries by comparing last year’s financial statements to the current ones. Your auditor is likely to ask questions about any line items that have changed materially. A “materiality” rule of thumb for small businesses might be to inquire about items that change by more than, say, 10% or $10,000.

Review 2015 adjustments

Ideally, management should learn from the adjusting journal entries auditors make at the end of audit fieldwork each year. These adjustments correct for accounting errors, unrealistic estimates and omissions. Often internally prepared financial statements need similar adjustments, year after year, to comply with U.S. Generally Accepted Accounting Principles (GAAP).

For example, auditors may need to prompt clients to write off bad debts, evaluate repairs and supplies accounts for capitalizable items, and record depreciation expense and accruals. Making routine adjustments before the auditor arrives may save time and reduce discrepancies between the preliminary and final financial statements.

You can also reduce audit adjustments by asking your auditor about any major transactions or complicated accounting rules before the start of fieldwork. For instance, you might be uncertain how to account for a recent acquisition or classify a shareholder advance.

Plan ahead

An external audit doesn’t have to be a time-consuming or disruptive event. The key is to prepare, so that audit fieldwork will run smoothly.

© 2017

2 postmortem estate planning strategies for married couples

Posted by Admin Posted on Jan 26 2017

It’s crucial to review and update your estate plan in light of significant life changes or new tax laws. It’s equally important to be aware of strategies that can be implemented after your death to achieve your estate planning goals. The flexibility postmortem strategies provide is especially important during times of estate tax law uncertainty, like now. If you’re married, here are two postmortem estate planning strategies you should know about.

1. Spousal right of election

The spousal right of election provides a way to alter the planned distribution of your wealth after you’re gone. In most states, a surviving spouse has the right to circumvent his or her spouse’s will and take an elective share (one-half or one-third, for instance) of certain property.

So, for example, let’s say you leave all of your assets to your children or other beneficiaries. Your spouse might exercise his or her right of election if it would produce a more favorable tax outcome. Even if the federal estate tax is repealed, which is on the agenda of President Trump and the Republican majority in Congress, there may be state estate tax or income tax consequences to consider.

2. QTIP trust

Qualified terminable interest property (QTIP) trusts are often used to take advantage of the marital deduction while ensuring that assets are preserved for the children (particularly children from a previous marriage). They also receive some creditor protection.

Ordinarily, to qualify for the marital deduction (which allows assets to transfer from one spouse to the other free of federal gift and estate tax), you must transfer assets to your spouse with no strings attached. The QTIP trust is an exception to this rule.

So long as your spouse receives all of the QTIP trust income for life and certain other requirements are met, your estate can enjoy the benefits of the marital deduction while still preserving assets for your children or other beneficiaries. When your spouse dies, any remaining trust assets pass to your beneficiaries but are included in your spouse’s taxable estate.

Here’s where the postmortem planning comes in: To claim the marital deduction for amounts transferred to a QTIP trust, your executor (called a “personal representative” in some states) must make an election on your estate tax return. A properly designed QTIP trust gives your executor the flexibility to make the election, not make the election or make a partial election, depending on which strategy would produce the optimal results. Because a QTIP trust creates opportunities for postmortem estate planning, it may be a good strategy even if you don’t need it to protect your children or assets.

Contact us to learn more about postmortem estate planning strategies.

© 2017

Is your business committed to its cost-control regimen?

Posted by Admin Posted on Jan 25 2017

At the beginning of the year, many people decide they’re going to get in the best shape of their lives. Similarly, many business owners declare that they intend to cut costs and operate at peak efficiency going forward.

But, like keeping up an exercise routine, controlling costs takes an ongoing effort. You need to not only review expenses now, but also commit yourself to doing so regularly. Here are some key points to keep in mind.

Choosing where to slim down

A good cost-control plan starts by clearly identifying manageable expenses in every business area — no exceptions. Prime candidates include:

• Contracts for phone and data service, hardware, and software,
• Lease agreements for office space, plant and warehouse space, and equipment,
• Mission-critical supplies and assets (such as safety gear, tools and vehicles),
• Maintenance contracts (for example, janitorial service),
• Repairs and leasehold improvements, and
• Utilities and office supplies.

Controlling expenses in these and other areas doesn’t mean one-time cost cutting, which is really just a reaction to a problem. Cost control requires foresight and strategic management.

Going the distance

Indeed, many business owners sometimes confuse cost-control programs with cost-cutting initiatives. The difference is that a cost-control plan should be a long-term solution — not just a quick-fix measure to make budget or shore up a bad quarter.

Managing expenses should be a strategic decision that starts at the top and is clearly communicated down the organizational chart. Train and encourage your managers to accurately track costs with an eye toward maximizing profitability. In turn, team leaders should work with their employees to solve the problems driving up expenses. It’s always better to be proactive than reactive.

Boosting cash flow

Controlling costs is among the best ways to maintain or increase cash flow. Tightly managed expenses free up dollars for profitable operations, prevent excessive inventory and wasteful spending, and keep cash available for business growth. Need help with your cost-control regimen? Please contact our firm.

© 2017

The investment interest expense deduction: Less beneficial than you might think

Posted by Admin Posted on Jan 25 2017

Investment interest — interest on debt used to buy assets held for investment, such as margin debt used to buy securities — generally is deductible for both regular tax and alternative minimum tax purposes. But special rules apply that can make this itemized deduction less beneficial than you might think.

Limits on the deduction

First, you can’t deduct interest you incurred to produce tax-exempt income. For example, if you borrow money to invest in municipal bonds, which are exempt from federal income tax, you can’t deduct the interest.

Second, and perhaps more significant, your investment interest deduction is limited to your net investment income, which, for the purposes of this deduction, generally includes taxable interest, nonqualified dividends and net short-term capital gains, reduced by other investment expenses. In other words, long-term capital gains and qualified dividends aren’t included.

However, any disallowed interest is carried forward. You can then deduct the disallowed interest in a later year if you have excess net investment income.

Changing the tax treatment

You may elect to treat net long-term capital gains or qualified dividends as investment income in order to deduct more of your investment interest. But if you do, that portion of the long-term capital gain or dividend will be taxed at ordinary-income rates.

If you’re wondering whether you can claim the investment interest expense deduction on your 2016 return, please contact us. We can run the numbers to calculate your potential deduction or to determine whether you could benefit from treating gains or dividends differently to maximize your deduction.

© 2017

Why 2016 may be an especially good year to take bonus depreciation

Posted by Admin Posted on Jan 23 2017

Bonus depreciation allows businesses to recover the costs of depreciable property more quickly by claiming additional first-year depreciation for qualified assets. The PATH Act, signed into law a little over a year ago, extended 50% bonus depreciation through 2017.

Claiming this break is generally beneficial, though in some cases a business might save more tax in the long run if they forgo it. However, 2016 may be an especially good year to take bonus depreciation. Keep this in mind when you’re filing your 2016 tax return.

Eligible assets

New tangible property with a recovery period of 20 years or less (such as office furniture and equipment) qualifies for bonus depreciation. So does off-the-shelf computer software, water utility property and qualified improvement property. And beginning in 2016, the qualified improvement property doesn’t have to be leased.

It isn’t enough, however, to have acquired the property in 2016. You must also have placed the property in service in 2016.

Now vs. later

If you’re eligible for bonus depreciation and you expect to be in the same or a lower tax bracket in future years, taking bonus depreciation (to the extent you’ve exhausted any Section 179 expensing available to you) is likely a good tax strategy. It will defer tax, which generally is beneficial.

But if your business is growing and you expect to be in a higher tax bracket in the near future, you may be better off forgoing bonus depreciation. Why? Even though you’ll pay more tax for 2016, you’ll preserve larger depreciation deductions on the property for future years, when they may be more powerful — deductions save more tax when you’re paying a higher tax rate.

Making a decision for 2016

The greater tax-saving power of deductions when rates are higher is why 2016 may be a particularly good year to take bonus depreciation. With both President Trump and the Republican-controlled Congress wishing to reduce tax rates, there’s a good chance that such legislation could be signed into law.

This means your tax rate could be lower for 2017 (if changes go into effect for 2017) and future years. If that happens, there’s a greater likelihood that taking bonus depreciation for 2016 would save you more tax than taking all of your deduction under normal depreciation schedules over a period of years.

Also keep in mind that, under the PATH Act, bonus depreciation is scheduled to drop to 40% for 2018, drop to 30% for 2019, and expire Dec. 31, 2019. Of course, Congress could pass legislation extending 50% bonus depreciation or making it permanent — or it could eliminate it or reduce the bonus depreciation percentage sooner.

If you’re unsure whether you should take bonus depreciation on your 2016 return — or you have questions about other depreciation-related breaks, such as Sec. 179 expensing — contact us.

© 2017

What is a business?

Posted by Admin Posted on Jan 20 2017

Differentiating the purchase of a business from the purchase of a group of assets is something that the Financial Accounting Standards Board (FASB) has been debating for years. In January 2017, the board finally published guidance to help financial executives and accountants define what a business is in the context of a business combination.

Existing rules

Business owners and managers generally know the difference between a business and a group of assets. But in some instances — such as a merger or an acquisition — the distinction is unclear. Under existing U.S. Generally Accepted Accounting Principles (GAAP), a business has three elements:

1. Inputs,
2. Processes, and
3. Outputs.

The existing guidance requires no minimum inputs or outputs to meet the definition of a business, leading to broad interpretations. In many cases, routine asset purchases are currently treated like complex business combinations.

Proposed clarity

Under Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, a business must. at minimum, include an input and a “substantive process” that contributes to the ability to create outputs. The presence of more than an insignificant amount of goodwill is an indicator that a substantive process is present.

Inputs can include people, money, raw materials, finished goods and other economic resources that create (or have the ability to create) goods or services. Outputs typically are considered goods or services for customers that provide (or have the ability to provide) a return to the business’s investors in the form of dividends, lower costs or other economic benefits.

Shortcut approach

The update includes an initial test to help businesses make a quick decision regarding whether the business combination accounting rules apply to a particular transaction: If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset (or group of similar identifiable assets), the deal won’t be considered a business combination. To illustrate, when a company leases a building, the lease and building are considered a single identifiable asset.

Bottom line

The update is expected to reduce the number of transactions that qualify as business combinations vs. routine asset acquisitions. Unsure how to account for an upcoming acquisition (or disposal) under the new rules? We can help.

© 2017

Should you set up trusts in a more “trust-friendly” state?

Posted by Admin Posted on Jan 19 2017

While it’s natural to set up trusts in the state where you live, you may be losing out on significant benefits available in more “trust-friendly” states. For example, some states:

• Don’t tax trust income,
• Authorize domestic asset protection trusts, which provide added protection against creditors’ claims,
• Permit silent trusts, under which beneficiaries need not be notified of their interests,
• Allow perpetual trusts, enabling grantors to establish “dynasty” trusts that benefit many generations to come,
• Have directed trust statutes, which make it possible to appoint an advisor or committee to direct the trustee with regard to certain matters, or
• Offer greater flexibility to draft trust provisions that delineate the trustee’s powers and duties.

To take advantage of these and other benefits, review your state’s trust laws and trust-related tax laws and consider whether another state’s laws would be more favorable.

It’s also important to review both states’ rules for determining a trust’s “residence” for tax and other purposes. Typically, states make this determination based on factors such as:

• The grantor’s home state,
• The location of the trust’s assets,
• The state where the trust is administered (that is, where the trustees reside or the trust’s records are kept), or
• The states where the trust’s beneficiaries reside.

Keep in mind that some states tax income derived from in-state sources even if earned by an out-of-state trust.

To enjoy the advantages of a trust-friendly state, establish the trust in that state and take steps to ensure that your choice of residence is respected (such as naming a trustee in the state and keeping the trust’s assets and records there). It may also be possible to move an existing trust from one state to another. We can help you determine if setting up trusts in another state would help you achieve your estate planning goals.

© 2017

Succession planning and estate planning must go hand in hand

Posted by Admin Posted on Jan 18 2017

As the saying goes, nothing lasts forever — and that goes for most companies. Then again, with the right succession plan in place, you can do your part to ensure your business continues down a path of success for at least another generation. From there, it will be your successor’s job to propel it further into perpetuity.

Some business owners make the mistake of largely ignoring succession planning under the assumption that it’s taken care of within their estate plans. Others create a succession plan but fail to adequately integrate it into their estate plan. To avoid these mistakes, it’s important to recognize the difference between succession planning and estate planning.

Similar, but different

Essentially, succession planning is the careful identification and training of those who will not only take over the day-to-day operations of your company, but also lead it forward to future growth. Your family members and other heirs will likely be affected here. But many others will be as well — including your named successor (whether or not a family member), business partners, employees, vendors and customers.

Estate planning, meanwhile, involves determining the distribution of your assets through gifting strategies, wills and other tools (such as trusts and insurance). The people affected by it are your family members and other heirs.

Because of this important distinction, it’s critical to undertake succession planning and estate planning as a joint effort. After all, who gets leadership responsibilities in the business and who gets ownership interests in the business may or may not be the same.

You must ask yourself who is best suited to run the business when you depart, and what ownership transfer plan will treat you and all of your heirs fairly or otherwise achieve your estate planning goals. This includes, among other things, knowing when you want to retire and how much income you’ll need to do it.

Success today and tomorrow

Do you have both a clear succession plan and a well-documented estate plan? And are the two compatible in every respect? To make absolutely sure you can answer “yes” to both of these questions, please contact us. Our firm can help you develop plans that will distribute your assets per your wishes while putting your company in the best position to succeed going forward.

© 2017

Deduction for state and local sales tax benefits some, but not all, taxpayers

Posted by Admin Posted on Jan 17 2017

The break allowing taxpayers to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes was made “permanent” a little over a year ago. This break can be valuable to those residing in states with no or low income taxes or who purchase major items, such as a car or boat.

Your 2016 tax return

How do you determine whether you can save more by deducting sales tax on your 2016 return? Compare your potential deduction for state and local income tax to your potential deduction for state and local sales tax.

Don’t worry — you don’t have to have receipts documenting all of the sales tax you actually paid during the year to take full advantage of the deduction. Your deduction can be determined by using an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale plus the tax you actually paid on certain major purchases (for which you will need substantiation).

2017 and beyond

If you’re considering making a large purchase in 2017, you shouldn’t necessarily count on the sales tax deduction being available on your 2017 return. When the PATH Act made the break “permanent” in late 2015, that just meant that there’s no scheduled expiration date for it. Congress could pass legislation to eliminate the break (or reduce its benefit) at any time.

Recent Republican proposals have included elimination of many itemized deductions, and the new President has proposed putting a cap on itemized deductions. Which proposals will make it into tax legislation in 2017 and when various provisions will be signed into law and go into effect is still uncertain.

Questions about the sales tax deduction or other breaks that might help you save taxes on your 2016 tax return? Or about the impact of possible tax law changes on your 2017 tax planning? Contact us — we can help you maximize your 2016 savings and effectively plan for 2017.

© 2017

Can you defer taxes on advance payments?

Posted by Admin Posted on Jan 17 2017

Many businesses receive payment in advance for goods and services. Examples include magazine subscriptions, long-term supply contracts, organization memberships, computer software licenses and gift cards.

Generally, advance payments are included in taxable income in the year they’re received, even if you defer a portion of the income for financial reporting purposes. But there are exceptions that might provide you some savings when you file your 2016 income tax return.

Deferral opportunities

The IRS allows limited deferral of income related to advance payments for:

• Goods or services,
• Intellectual property licenses or leases,
• Computer software sales, leases or licenses,
• Warranty contracts,
• Subscriptions,
• Certain organization memberships,
• Eligible gift card sales, and
• Any combination of the above.

In the year you receive an advance payment (Year 1), you may defer the same amount of income you defer in an “applicable financial statement.” The remaining income must be recognized in the following year (Year 2), regardless of the amount of income you recognize in Year 2 for financial reporting purposes. Let’s look at an example.

Fred and Ginger are in the business of giving dance lessons. On November 1, 2016, they receive an advance payment from Gene for a two-year contract that provides up to 96 one-hour lessons. Gene takes eight lessons in 2016, 48 lessons in 2017 and 40 lessons in 2018.

In their applicable financial statements, Fred and Ginger recognize 1/12 of the advance payment in their 2016 revenues, 6/12 in their 2017 revenues and 5/12 in their 2018 revenues. For federal income tax purposes, they need to include only 1/12 of the advance payment in their 2016 gross income. But they must include the remaining 11/12 in their 2017 gross income.

The applicable financial statement

An applicable financial statement is one that’s audited by an independent CPA or filed with the SEC or certain other government agencies. If you don’t have this statement, it’s still possible to defer income; you simply need a reasonable method for determining the extent to which advance payments are earned in Year 1.

Suppose, for example, that a company issues gift certificates but doesn’t track their use and doesn’t have an applicable financial statement. The company may be able to defer income based on a statistical study that indicates the percentage of gift certificates expected to be redeemed in Year 1.

If your business receives advance payments, consult your tax advisor to determine whether you can reduce your 2016 tax bill by deferring some of this income to 2017. And make sure you abide by the IRS’s rules on these payments.

© 2017

Use non-GAAP financial reporting measures with caution

Posted by Admin Posted on Jan 13 2017

The most useful metric to gauge a company’s performance isn’t necessarily net income, pretax profits or earnings per share, as defined under U.S. Generally Accepted Accounting Principles (GAAP). In some industries, investors and lenders turn to non-GAAP measures for additional information.

Before relying on non-GAAP metrics, however, it’s important to understand what’s included and excluded to avoid making misinformed investment decisions. Here are the upsides and potential downsides of using non-GAAP information.

Upsides

Over the years, the use of non-GAAP measures has grown. Some investors and executives argue that certain unaudited figures provide a more meaningful proxy of financial performance than customary earnings figures reported under GAAP.

One popular example is earnings before interest, taxes, depreciation and amortization (EBITDA). Many investors argue that EBITDA approximates a company’s net cash flow available for lenders and investors over the accounting period.

Downsides

In recent years, however, some companies have manipulated EBITDA figures by excluding certain costs, such as stock- or options-based compensation, that are plainly a cost of doing business. This trend has made it difficult for investors and lenders to make fair comparisons and understand the items taken out.

Some public companies include EBITDA figures and other non-GAAP measures in earnings releases, investor presentations and the management, discussion and analysis section of their financial statements. These unaudited figures may be cherry-picked to paint a stronger financial picture than the one presented in their audited financial statements. In turn, these companies may see their stock prices go up when the earnings are announced three to four weeks before audited financial statements are filed with the Securities and Exchange Commission (SEC).

A balanced approach

One thing is certain: Non-GAAP measures are under greater scrutiny by the SEC and other regulatory bodies. So, companies that decide to disclose such information should exercise caution and avoid making claims that could potentially mislead investors and lenders. Need help responsibly reporting non-GAAP figures for your company? We can help.

© 2017

Explore all of your options when appointing the executor of your estate

Posted by Admin Posted on Jan 12 2017

The executor’s role is critical to the administration of an estate and the achievement of estate planning objectives. So your first instinct may be to name a trusted family member as executor (also referred to as a personal representative). But that might not be the best choice.

Important duties

Your executor has a variety of important duties, including:
• Arranging for probate of your will (if necessary) and obtaining court approval to administer your estate,

• Taking inventory of — and collecting, recovering or maintaining — your assets, including life insurance proceeds and retirement plan benefits,

• Obtaining valuations of your assets,

• Preparing a schedule of assets and liabilities,

• Arranging for the safekeeping of personal property,

• Contacting your beneficiaries to advise them of their entitlements under your will,

• Paying any debts incurred by you or your estate and handling creditors’ claims,

• Defending your will in the event of litigation,

• Filing tax returns on behalf of your estate, and

• Distributing your assets among your beneficiaries according to the terms of your will.

Typically, family members lack the skills and time to handle all of these tasks on their own. They’re entitled, of course, to hire accountants, attorneys, financial planners and other advisors — at the estate’s expense — for assistance. But even with professional help, serving as executor is a big job that requires a substantial time commitment during an already stressful period. Plus, if your executor is also a beneficiary of your will, other beneficiaries may view that as a conflict of interest.

A few alternatives

So, what are your options? One is to name a trusted advisor, such as an accountant or lawyer, as executor. Another is to appoint an advisor and a family member as co-executors. The advisor would handle most of the executor’s day-to-day responsibilities, while your family member would oversee the process and ensure that the advisor acts in your family’s best interests.
We can help you decide who would best serve as your estate’s executor. Please contact us with questions.

© 2017

Identify all of your company’s retirement plan fiduciaries

Posted by Admin Posted on Jan 11 2017

Your company probably offers its employees a retirement plan. If so, can you identify all of your plan fiduciaries? From a risk management perspective, it’s critical for business owners to know who has fiduciary status — and the associated liability. Here are some common, though in some cases overlooked, plan fiduciaries:

Named fiduciaries. The Employee Retirement Income Security Act (ERISA) requires a plan to have named fiduciaries. The plan document identifies the corporate entity or individual serving as the named fiduciary. If they aren’t immediately identified, the plan document will set the requirements for naming them.

Plan trustees. These are people who have exclusive authority and discretion to manage and control the plan assets. The trustee can be subject to the direction of a named fiduciary. These plan fiduciaries have a broad scope of responsibility.

Board of directors and committee members. The individuals who choose plan trustees and administrative committee members are considered under ERISA to be fiduciaries. Typically these are the members of the corporate board of directors. The scope of their fiduciary duty focuses on how they fulfill that specific function, and not on everything that happens with the plan itself. The law also sees as fiduciaries people who exercise discretion in key decisions about plan administration, including members of the administrative committee, if such a committee exists.

Investment managers and advisors. The named fiduciary can appoint one or more investment managers for the plan’s assets. People or firms who manage plan assets are plan fiduciaries. However, individuals employed by third party service providers can fall into different fiduciary categories. The investment manager who has complete discretion over plan asset investments has the greatest fiduciary responsibility. In contrast, a corporation or individual who offers investment advice, but doesn’t actually call the shots, has a lesser fiduciary responsibility.

These are just a few examples. Anyone who exercises discretionary authority over any vital facet of plan operations may be considered a “functional fiduciary.” Please contact our firm for a review of your retirement plan and its fiduciaries.

© 2017

Help prevent tax identity theft by filing early

Posted by Admin Posted on Jan 10 2017

If you’re like many Americans, you might not start thinking about filing your tax return until close to this year’s April 18 deadline. You might even want to file for an extension so you don’t have to send your return to the IRS until October 16.

But there’s another date you should keep in mind: January 23. That’s the date the IRS will begin accepting 2016 returns, and filing as close to that date as possible could protect you from tax identity theft.

Why early filing helps

In an increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. This is usually done early in the tax filing season. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.

A victim typically discovers the fraud after he or she files a tax return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the same tax year. The IRS then must determine who the legitimate taxpayer is.

Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.

Another important date

Of course, in order to file your tax return, you’ll need to have your W-2s and 1099s. So another key date to be aware of is January 31 — the deadline for employers to issue 2016 W-2s to employees and, generally, for businesses to issue 1099s to recipients of any 2016 interest, dividend or reportable miscellaneous income payments.

Delays for some refunds

The IRS reminded taxpayers claiming the earned income tax credit or the additional child tax credit to expect a longer wait for their refunds. A law passed in 2015 requires the IRS to hold refunds on tax returns claiming these credits until at least February 15.

An additional benefit

Let us know if you have questions about tax identity theft or would like help filing your 2016 return early. If you’ll be getting a refund, an added bonus of filing early is that you’ll be able to enjoy your refund sooner.

© 2017

New HRA offers small employers an attractive, tax-advantaged health care option

Posted by Admin Posted on Jan 09 2017

In December, Congress passed the 21st Century Cures Act. The long and complex bill covers a broad range of health care topics, but of particular interest to some businesses should be the Health Reimbursement Arrangement (HRA) provision. Specifically, qualified small employers can now use HRAs to reimburse employees who purchase individual insurance coverage, rather than providing employees with costly group health plans.

The need for HRA relief

Employers can use HRAs to reimburse their workers’ medical expenses, including health insurance premiums, up to a certain amount each year. The reimbursements are excludable from employees’ taxable income, and untapped amounts can be rolled over to future years. HRAs generally have been considered to be group health plans for tax purposes.

But the Affordable Care Act (ACA) prohibits group health plans from imposing annual or lifetime benefits limits and requires such plans to provide certain preventive services without any cost-sharing by employees. And according to previous IRS guidance, “standalone HRAs” — those not tied to an existing group health plan — didn’t comply with these rules, even if the HRAs were used to purchase health insurance coverage that did comply. Businesses that provided the HRAs were subject to fines of $100 per day for each affected employee.

The IRS position was troublesome for smaller businesses that struggled to pay for traditional group health plans or to administer their own self-insurance plans. The changes in the Cures Act give these employers a third option for providing one of the benefits most valued by today’s employees.

The QSEHRA

Under the Cures Act, certain small employers can maintain general purpose, standalone HRAs that aren’t “group health plans” for most purposes under the Internal Revenue Code, Employee Retirement Income Security Act and Public Health Service Act.

More specifically, the legislation allows employers that aren’t “applicable large employers” under the ACA to provide a Qualified Small Employer HRA (QSEHRA) if they don’t offer a group health plan to any of their employees. Annual benefits under a QSEHRA:

• Can’t exceed an indexed maximum of $4,950 per year ($10,000 if family members are covered),
• Must be employer-funded (no salary reductions), and
• Can be used for only IRC Section 213(d) medical care.

QSEHRA benefits must be offered on the same terms to all “eligible employees” (certain individuals can be disregarded) and may be excluded from income only if the recipient has minimum essential coverage. There is a notice requirement and employees’ permitted benefits must be reported on Form W-2.

If you’re interested in exploring the QSEHRA option for your business, contact us for further details.

© 2017

Accounting for M&As

Posted by Admin Posted on Jan 09 2017

Many buyers are uncertain how to report mergers and acquisitions (M&As) under U.S. Generally Accepted Accounting Principles (GAAP). After a deal closes, the buyer’s postdeal balance sheet looks markedly different than it did before the entities combined. Here’s guidance on reporting business combinations to help minimize future write-offs and restatements due to inaccurate purchase price allocations. 

Purchase price allocations

Under GAAP, buyers must allocate the purchase price paid in M&As to all acquired assets and liabilities based on their fair values. The process starts by estimating a cash equivalent purchase price. 

If a buyer pays 100% cash up front, the purchase price is already at a cash equivalent value. But the cash equivalent price is less clear if a seller accepts noncash terms, such as an earnout that’s contingent on the acquired entity’s future performance or stock in the newly formed entity.

The next step is to identify all tangible and intangible assets and liabilities acquired in the business combination. The seller’s presale balance sheet will report most tangible assets and liabilities, including inventory, equipment and payables. However, intangibles are reported only if they were previously purchased by the seller. But intangibles are usually generated internally, so they’re rarely included on the seller’s balance sheet. 

Fair value

Acquired assets and liabilities are then added to the buyer’s postdeal balance sheet, based on their fair values on the acquisition date. The difference between the sum of these fair values and the purchase price is reported as goodwill.

Goodwill and other indefinite-lived intangibles — such as brand names and in-process research and development — usually aren’t amortized for GAAP purposes. Instead, companies generally must test goodwill for impairment each year. Impairment testing also is needed when certain triggering events occur, such as the loss of a key person or an unanticipated increase in competition. If a borrower reports an impairment loss, it could mean that the business combination has failed to achieve management’s expectations. 

Rather than test for impairment, private companies may elect to amortize goodwill straight-line, generally over 10 years. Companies that elect this alternate method, however, must still test for impairment when certain triggering events occur.

Bottom line

A business combination is a significant transaction, so it’s important to get the accounting right from the start. We can help buyers identify intangibles, estimate fair value and allocate purchase price even when a deal’s cash-equivalent purchase price isn’t readily apparent.

© 2017

Going back to basics with asset protection strategies

Posted by Admin Posted on Jan 05 2017

Asset protection trusts — both offshore and domestic — can be effective vehicles for protecting your wealth in today’s litigious society. But these trusts can be complex and expensive, so they’re not right for everyone. For those seeking simpler asset protection strategies, there are several basic, yet effective, tools to consider.

Some of these strategies involve transferring assets to another person or entity, or changing the way property is titled. Here are a few common asset protection strategies:

Insurance. For many people, insurance is the first line of defense against liability claims that expose their assets to risk. It includes personal or homeowners liability insurance, as well as professional liability insurance for doctors, lawyers and other professionals who are common targets for lawsuits.

Lifetime gifts. The most effective asset protection strategy may also be the simplest: giving your assets away to your children or other loved ones. After all, a creditor can’t come after assets you don’t own. The disadvantage of this approach is that you must relinquish control over the assets.

Tenancy by the entirety. Many states permit married couples to hold their homes or other real estate as “tenants by the entirety.” This form of ownership protects assets against claims by either spouse’s separate creditors. So, for example, it can be effective when one spouse is exposed to professional liability risks. It doesn’t, however, protect couples against claims by their joint creditors. Tenancy by the entirety, if available, may be a good option for people who aren’t comfortable transferring title to their spouses.

Retirement accounts. Qualified retirement plans — such as 401(k), 403(b), and 457 plans, as well as certain pension and profit-sharing plans — are excellent asset protection vehicles. IRAs offer more limited protection. Assets held in most qualified plans enjoy unlimited protection from creditors’ claims — both in bankruptcy and outside of bankruptcy — under the Employee Retirement Income Security Act.

Keep in mind that, for these strategies to work, you must implement them at a time when there are no pending or threatened claims against you. Otherwise, you may run afoul of fraudulent conveyance laws.

Before you weigh your asset protection options, we can help you conduct a risk assessment to evaluate your level of exposure. Armed with this information, you can determine which asset protection tools are right for you.

© 2017

4 principles of competitive intelligence

Posted by Admin Posted on Jan 04 2017

We live and work in the information age. As such, the opportunity to gather knowledge about your company’s competitors and industry as a whole has never been better. This practice — commonly known as “competitive intelligence” — can help you stay more nimble in the marketplace and avoid getting left behind as innovation surges forward.

Before you dive into competitive intelligence, however, it’s important to establish a formal policy governing your efforts. (If you’ve already gotten started, perhaps slow down and integrate a policy going forward.) Generally, a competitive intelligence policy should follow four primary principles:

1. Be authentic. When gathering information, don’t hide behind secret identities or misrepresent your affiliation. For instance, if you sign up to receive marketing e-mails from a competitor, use an official company address and, if asked, state “product or service evaluation” as the reason you’re subscribing.

2. Respect all formal agreements. In the course of gathering competitive intelligence, you or your employees may establish sources within the industry or even with a specific competitor. Be sure you don’t encourage these sources, even inadvertently, to violate any standing confidentiality or noncompete agreements.

3. Abide by all intellectual property rights and laws. As you may know, the technicalities of intellectual property law are complex. It can be easy to run afoul of the rules unintentionally. When accessing or studying another company’s products or services, proceed carefully and consult your attorney before putting any lessons learned into practice.

4. Monitor consultants closely. When it comes to competitive intelligence, the Achilles’ heel of many companies isn’t their employees but outside consultants. If you engage third parties for any purpose, be sure they know and abide by your policy.

With the Internet booming and social media thriving, there’s a wealth of information out there about your competitors. It can help you shape your strategic planning and stay in better touch with your industry. Please contact our firm for assistance in integrating competitive intelligence into your profit enhancement goals.

© 2017

Are you able to deduct medical expenses on your tax return?

Posted by Admin Posted on Jan 03 2017

For many people, the cost of medical care keeps going up. So if possible, you should find ways to claim tax breaks related to health care. Unfortunately, it can be difficult because there’s a threshold for deducting itemized medical expenses that can be tough to meet.

To make matters worse, the threshold for senior taxpayers is going up beginning January 1, 2017.

General rules

Before 2013, you could claim an itemized deduction for unreimbursed medical expenses paid for you, your spouse and your dependents, to the extent those expenses exceeded 7.5% of your adjusted gross income (AGI). AGI includes all of your taxable income items, reduced by certain write-offs, including those for deductible IRA contributions, alimony payments and student loan interest.

As part of the Affordable Care Act, a higher deduction threshold of 10% of AGI now applies to most taxpayers. However, if either you or your spouse were at least 65 as of December 31, 2016, the 10%-of-AGI deduction threshold won’t affect you for the 2016 tax year (the tax return you’ll file in 2017). For 2016, the 7.5%-of-AGI deduction threshold still applies for qualifying seniors.

However, this exemption is temporary. Beginning January 1, 2017, the 10% threshold will apply to all taxpayers, including those over 65.

Consider “bunching” expenses in alternating years

If you aren’t eligible for a deduction, you might be able to qualify if you concentrate medical expenses in alternating years. That way, you may qualify to claim an itemized medical expense deduction every other year — instead of losing the opportunity to claim any deduction for health care costs. Of course, this might only work if you have flexibility about when medical expenses are incurred.

Eligible expenses

Qualified medical expenses involve the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. This includes payments to physicians, dentists and other medical practitioners, as well as equipment, supplies, diagnostic devices, prescription drugs and other health care expenses.
Contact us if you have questions about what expenses are eligible and whether you can qualify for a deduction.

© 2017

Posted by Admin Posted on Jan 03 2017

2017 Q1 tax calendar: Key deadlines for businesses and other employers

Posted by Admin Posted on Jan 03 2017

Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

January 31

• File 2016 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.

• File 2016 Forms 1099-MISC, “Miscellaneous Income,” reporting nonemployee compensation payments in Box 7 with the IRS, and provide copies to recipients.

• File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2016. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944,“Employer’s Annual Federal Tax Return.”

• File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2016. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.

• File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2016 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

February 28

File 2016 Forms 1099-MISC with the IRS and provide copies to recipients. (Note that Forms 1099-MISC reporting nonemployee compensation in Box 7 must be filed by January 31, beginning with 2016 forms filed in 2017.)

March 15

If a calendar-year partnership or S corporation, file or extend your 2016 tax return. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.

© 2017

Close-up on the use of XBRL in financial reporting

Posted by Admin Posted on Dec 30 2016

The use of eXtensible Business Reporting Language (XBRL) has slowly gained traction since 2009, when the Securities and Exchange Commission (SEC) began requiring public companies to submit regulatory filings tagged in XBRL. Could so-called “inline XBRL” help interactive data finally become more mainstream?
 
Two-stage process

XBRL is an interactive data format that allows financial statement information to be downloaded directly into spreadsheets, analyzed in a variety of ways using commercial off-the-shelf software and used within investment models in other software formats. In theory, the SEC hopes the use of standardized interactive data will make financial information easier for investors to analyze and assist in automating regulatory filings and business information processing.  

But, in practice, XBRL reporting has so far fallen short of the SEC’s expectations. In addition to submitting “XBRL Instance Documents,” public companies must continue reporting with PDF documents. PDFs are more familiar to financial statement users and, therefore, tend to be regarded as the official version that most analysts and investors use. This two-stage financial reporting process adds significant financial preparation costs and contributes to tagging errors and other data quality problems.

Human-readable alternative

In June 2016, the SEC began allowing companies to voluntarily embed interactive data directly into financial statements. The inline XBRL format helps ensure a filing is accurate, consistent and complete. It also renders a separate PDF filing unnecessary.

So far, about 30 public companies have voluntarily used inline XBRL in the past six months. Voluntary use of inline XBRL expires in March 2020, but the SEC is currently considering making inline XBRL mandatory. If that happens, the effective date of the changes probably won’t be for several years.

Interested in switching over?

In the meantime, the voluntary period of inline XBRL filing gives the SEC time to evaluate its usefulness, consider exceptions, and resolve technological and practical issues before mandating its use — or abandoning the concept. Contact us for more information on XBRL and whether the inline format could help your public company reduce reporting costs and errors.

© 2016

A difficult decision: Having an elderly parent declared incapacitated.

Posted by Admin Posted on Dec 30 2016


If your elderly parent’s mental state is deteriorating to the point where he or she is unable to manage day-to-day activities, it may be time to make the difficult decision to have him or her declared incapacitated. But how do you know if such action is necessary?

2 key questions

Knowing the answers to these two key questions can help you determine whether it’s necessary to have a parent declared incapacitated:

1. What’s the difference between capacity and incapacity? The legal definition of “capacity” varies from state to state, but generally it’s the mental ability to adequately function. A person is presumed competent unless an adjudication process determines otherwise. That is, a judge must declare a person incompetent. Factors leading to such a decision will depend on the circumstances.

One barometer of whether someone is able to adequately function is the person’s ability to understand basic financial matters. Another is whether a person is able to attend to his or her own health needs.

2. What’s the role of a guardian/conservator? If you make the decision to have an incapacity determination and the judge agrees that your parent is no longer competent, the court will appoint a guardian/conservator. He or she will be responsible for managing your parent’s affairs.

More often than not, an incapacitated person’s child is appointed guardian/conservator, but the guardian/conservator doesn’t have to be a family member. In some states a person can designate whom he or she wants to act as his or her guardian/conservator.

The guardianship/conservatorship will specify if the guardian/conservator has been appointed for the management of all aspects of your parent’s life or a specific aspect of it, such as for solely financial matters. Whatever the decision, the guardian/conservator will owe a duty of care to your parent and will be held accountable by the court for showing that his or her actions are appropriate.

Estate planning strategies

An estate planning technique that may be worth exploring is to have your parent execute a durable power of attorney for property or a living trust. If your parent executes one of these documents, generally the agent or trustee named can manage your parent’s financial affairs.

Similarly, a durable power of attorney for health care, or health care proxy, can allow the agent named to make health care decisions on behalf of your parent. These documents can provide the criteria under which your parent will be considered incapacitated so that a guardianship/conservatorship proceeding isn’t necessary.

Deciding whether to have your parent declared incapacitated can be excruciating. If you’re in this situation, please don’t hesitate to reach out to us for guidance.

© 2016

Considering a spinoff? Think it through.

Posted by Admin Posted on Dec 29 2016

In popular culture, the word “spinoff” usually refers to a television show whose main characters originated from an already established show. But the word applies to the business world, too. Here it describes a division or subsidiary of a company being sold off to a buyer as a separate entity.

The process is hardly simple. As a seller, you need to not only get a good price for your division or subsidiary, but also minimize any negative impact on your remaining holdings.

Driving factors

Many factors can drive a company to spin off a division. Common reasons include:

•    Seizing an opportunity in the M&A marketplace,

•    Focusing better on the core business,

•    Accessing capital for reinvestment, and

•    Operating more efficiently.

Spinoffs are usually executed more quickly than full-blown business sales, which can be appealing. Also, in consolidated industries with limited buyer pools, management may worry that a full sale would raise red flags with antitrust authorities.

Potential challenges

If it’s a standalone subsidiary being sold, the spinoff will likely be relatively easy. The unit is already legally separate from its parent and probably won’t have much overlap with its parent’s operations.

More challenging is spinning off an internal division — also known as a “carveout.” Here the seller has to determine which of its employees, clients and product lines will be included in the carved-out division. The seller also must legally extricate the division’s assets, debts and liabilities from those of the parent company.

Because a company must decide which employees, products and property belong with the selling division, battles over ownership of certain assets are possible. For example, if the carveout and a unit that’s remaining with the parent company both rely on the same exclusive intellectual property, who retains ownership postsale?

Worthy consideration

Is your company looking to streamline operations? Could it use the cash from selling a strong division? If so, a spinoff is worth considering. But you’ll need to think through the strategy thoroughly and execute the deal carefully. Please contact our firm to discuss the concept further and assess the financials involved.

© 2016

Few changes to retirement plan contribution limits for 2017

Posted by Admin Posted on Dec 27 2016


Retirement plan contribution limits are indexed for inflation, but with inflation remaining low, most of the limits remain unchanged for 2017. The only limit that has increased from the 2016 level is for contributions to defined contribution plans, which has gone up by $1,000.





Nevertheless, if you’re not already maxing out your contributions, you still have an opportunity to save more in 2017. And if you turn age 50 in 2017, you can begin to take advantage of catch-up contributions.

However, keep in mind that additional factors may affect how much you’re allowed to contribute (or how much your employer can contribute on your behalf). For example, income-based limits may reduce or eliminate your ability to make Roth IRA contributions or to make deductible traditional IRA contributions. If you have questions about how much you can contribute to tax-advantaged retirement plans in 2017, check with us.  

© 2016

What your's plan?

Posted by Admin Posted on Dec 23 2016

Companies restate financial results for a variety of reasons

Posted by Admin Posted on Dec 23 2016

When a company reissues or revises its financial statements, some people automatically assume that management is cooking the books. But there can be legitimate reasons for restatements, beyond management incompetence and fraud. So, before leaping to conclusions, it’s important to understand what went wrong — and find ways to prevent future restatements.

Complex standards

Often, owners and managers are more focused on running the business than staying on top of today’s increasingly complex accounting rules. Inadvertent mistakes and misinterpretations may cause an occasional restatement.
 
Restatements typically occur when the company’s financial statements are subjected to a higher level of scrutiny. For example, restatements may occur when a company:

•    Converts from compiled or reviewed financial statements to audited financial statements,

•    Decides to file for an initial public offering, or

•    Brings in additional internal (or external) accounting expertise, such as a new controller or audit firm.

The restatement process can be time consuming and costly. Regular communication with lenders and shareholders can help overcome the negative stigma associated with restatements. Management also needs to reassure employees, customers and suppliers that the company is in sound financial shape to ensure their continued support.

Error-prone accounts

Common sources of financial restatements include recognition errors and misclassifications on the financial statements. For example, management might make recognition errors when implementing the new standards on accounting for leases or contract revenues in the near future. Or, you may need to shift cash flows between investing, financing and operating on the statement of cash flows, in accordance with recent guidance issued on reporting cash flow.

Equity transaction errors, such as improper accounting for business combinations and convertible securities, can also be problematic. Other leading causes of restatements are valuation errors related to common stock issuances and preferred stock errors and the complex rules related to acquisitions, investments and tax accounting.

The probability of error increases as the complexity of your transactions increases. Examples of hard-to-report activities include hedging, issuing stock options, using special purpose or variable interest entities, and consolidating financial statements with related parties.

Need help?

Financial reporting can be challenging in today’s complex business environment. The best way to avoid restatements is to get it right the first time around. We can help you implement internal controls to test for errors and omissions, educate in-house accountants on changes to GAAP, audit your financial results and investigate the causes of any anomalies.

 © 2016

Posted by Admin Posted on Dec 23 2016

Posted by Admin Posted on Dec 23 2016

Tips for efficient year-end physical inventory counts

Posted by Admin Posted on Dec 23 2016



Do you dread the year-end physical inventory count? Business owners and managers often view these procedures as time consuming and disruptive. But a well-executed inventory count is more than a matter of compliance. It can also provide valuable insight into improving operational efficiency. Here’s how to run your count to maximize the benefits and minimize the hassle.

The basics

Inventory includes raw materials, work-in-progress and finished goods. Your physical inventory count also may include parts and supplies inventory. Under U.S. Generally Accepted Accounting Principles (GAAP), inventory is recorded at the lower of cost or market value.

Estimating the value of inventory may involve subjective judgment calls, especially if your company converts raw materials into finished goods available for sale. For example, the value of work-in-progress inventory includes overhead allocations and, in some cases, may require percentage-of-completion assessments.

A moving target

The inventory count gives a snapshot of how much inventory is on hand at year end. The value of inventory is always in flux, as work is performed and items are delivered or shipped. To capture a static value, it’s essential that business operations “freeze” while the count takes place.

Usually, it makes sense to count inventory during off-hours to minimize the disruption to business operations. Larger organizations with multiple locations may be unable to count everything at once. So, larger companies often break down their counts by physical location.

Proactive planning

Planning is the key to minimizing disruptions. Before counting starts, management can:

• Order (or create) prenumbered inventory tags,
• Conduct a dry run to identify roadblocks and schedule workers,
• Assign workers to count inventory using two-person teams to prevent fraud,
• Write off any unsalable items, and
• Precount and bag slow-moving items.

If your company issues audited financial statements, your audit team will be present during the physical inventory count. They aren’t there to help count inventory. Instead, they’ll observe the procedures, review written inventory processes and cutoffs, evaluate internal controls over inventory, and perform independent counts to compare to your inventory listing and counts made by your employees.

Beyond the count

When the inventory count is complete, it’s critical to investigate discrepancies between your computerized accounting records and physical inventory counts. We can use this information to help you evaluate how to stock items more efficiently and safeguard against future write-offs due to fraud, damage or obsolescence.

© 2016

Get smart when tackling estate planning for intellectual property

Posted by Admin Posted on Dec 22 2016



If you own intellectual property (IP), such as a patent or copyright, you need to know how to account for it in your estate plan. These intangible assets can be highly valuable, and you’ll want them to be handled according to your wishes after you die.

2 important questions

IP generally falls into one of these categories: patents, copyrights, trademarks or trade secrets. For estate planning purposes, IP raises two important questions:
 

1. What’s it worth?
2. How should it be transferred?


Valuing IP is a complex process, so it’s best to obtain an appraisal from a professional with experience valuing IP.

After you know the IP’s value, it’s time to decide whether to transfer the IP to family members, colleagues, charities or others through lifetime gifts or through bequests after your death. The gift and estate tax consequences will affect your decision, but also consider your income needs, as well as who is in the best position to monitor your IP rights and take advantage of their benefits.

If you’ll continue to depend on the IP for your livelihood, for example, hold on to it at least until you’re ready to retire or you no longer need the income. You also might want to retain ownership of the IP if you feel that your children or other transferees lack the desire or wherewithal to exploit its economic potential and monitor and protect it against infringers.

Whichever strategy you choose, it’s important to plan the transaction carefully to ensure your objectives are achieved. There’s a common misconception that, when you transfer ownership of the tangible medium on which IP is recorded, you also transfer the IP rights. But IP rights are separate from the work itself and are retained by the creator — even if the work is sold or given away.

Don’t overlook your IP

A primary goal of your estate plan is to ensure your assets are distributed per your wishes after your death. It’s easy to remember to include tangible assets, such as homes and vehicles, but don’t forget to account for intangible assets, including IP. We can help you determine how to address any patents, copyrights or other IP you own in your estate plan.

© 2016

Workers age 50 and up: Boost retirement savings before year end with catch-up contributions

Posted by Admin Posted on Dec 22 2016

Whether you didn’t save as much for retirement as you would have wished earlier in your career or you’d simply like to make the most of tax-advantaged savings opportunities, if you’ll be age 50 or older on December 31, consider making “catch-up” contributions to your employer-sponsored retirement plan by that date. These are additional contributions beyond the regular annual limits that can be made to certain retirement accounts. 

401(k)s and SIMPLEs

Under 2016 401(k) limits, if you’re age 50 or older, after you’ve reached the $18,000 maximum limit for all employees, you can contribute an extra $6,000, for a total of $24,000. If your employer offers a Savings Incentive Match Plan for Employees (SIMPLE) instead, your regular contribution maxes out at $12,500 in 2016. If you’re 50 or older, you’re allowed to contribute an additional $3,000 — or $15,500 in total for the year. 

But, check with your employer because, while most 401(k) plans and SIMPLEs offer catch-up contributions, not all do. 

Self-employed plans

If you’re self-employed, retirement plans such as an individual 401(k) — or solo 401(k) — also allow catch-up contributions. A solo 401(k) is a plan for those with no other employees. You can defer 100% of your self-employment income or compensation, up to the regular yearly deferral limit of $18,000, plus a $6,000 catch-up contribution in 2016. But that’s just the employee salary deferral portion of the contribution. 

You can also make an “employer” contribution of up to 20% of self-employment income or 25% of compensation. The total combined employee-employer contribution is limited to $53,000, plus the $6,000 catch-up contribution.

Catch-up contributions to non-Roth accounts not only can enlarge your retirement nest egg, but also can reduce your 2016 tax liability. And keep in mind that catch-up contributions are available for IRAs, too, but the deadline for 2016 contributions is later: April 18, 2017. If you have questions about catch-up contributions or other retirement saving strategies, please contact us.

© 2016

Welcome to Our Blog!

Posted by Admin Posted on Nov 08 2012
This is the home of our new blog. Check back often for updates!