Auditing royalty agreements

Companies often grant licenses to others allowing them to use intellectual property — such as a patent or proprietary computer code — in exchange for royalties. Licensors can hire an external audit firm to ensure the licensee pays the correct royalty rate and amount. Here’s how the audit process works.

The agreement

The parties’ attorneys usually create a royalty agreement that governs the use of the intellectual property. This legal contract between the licensor and licensee details the terms of the arrangement. It spells out how the licensee may use the asset, the duration of the license and how much the licensee agrees to pay the licensor in royalties for the right to use the asset.

Unfortunately, royalty payments sometimes fall short of the agreed-upon amount. This may be due to a clerical error, confusion regarding the agreement’s terms — or even fraud. To detect and deter shortfalls, most contracts include a “right-to-audit” clause, meaning that the licensor retains the legal right to hire an outside firm to audit the licensee’s payments to confirm compliance with the terms detailed in the agreement.

The auditor’s role

When auditing royalty agreements, CPAs typically perform the following six steps:

1. Review the agreement to understand its scope, including the asset under license, the duration of the contract, prohibited uses and the royalty rate.

2. Analyze sales data used to derive royalty payments to date. Depending on the type of asset under license, the audit team may request production and inventory records.

3. Perform a detailed walk-through of the process the licensee follows to identify, track and report sales subject to a royalty payment.

4. Conduct random sampling of sales data to ensure the licensee applies the correct rate to generate the royalty payment.

5. Review sales and royalty payment trends to confirm that the licensee’s sales align with the royalty payments.

6. Gather individual invoices from key customers to locate and confirm that sales transactions subject to royalties actually generated a royalty payment.

Usually, the licensor assumes the cost of the royalty audit. However, some agreements include a clause that requires the licensee to assume responsibility for the cost of the audit if the audit uncovers underpayment of royalties by a certain margin.

Keep licensees on their toes

Most licensing arrangements function without a hitch. But a minor error or oversight could result in a significant shortfall in royalty payments. Periodic royalty audits can prevent small, but honest, mistakes from spiraling out of control — and help reduce the temptation for dishonest licensees to commit fraud. Contact us to discuss the benefits of auditing your royalty agreements.

© 2018

Leadership’s role during a nonprofit’s merger

If your not-for-profit is contemplating a merger or acquisition with another organization, you have a lot of work ahead of you. One of the most daunting challenges is keeping leaders focused and invested in the process. Most nonprofits are run by both board members and internal management, and this structure can bog down decision making and make transitions difficult.

5 phases

Discussions between merging nonprofits often begin a year or more before the actual integration takes place. And whether it’s a merger forming a new organization or an acquisition enlarging an existing nonprofit, leaders must make critical decisions during five phases:

1. Idea. Internal managers, and then board leadership, typically meet as a group to discuss the benefits of joining forces.

2. Formalizing. Here, the two nonprofits formalize their decision to combine. This can be achieved in a letter of intent that outlines expectations, agreed-upon roles for each organization and a timeframe. It’s in this phase that the two organizations and their leaders learn about each other and decide whether they want to go forward with the plan.

3. Development. Key leaders must be evaluated for their complementary skills and the role each might play in the new organization. Also, the board and management must develop a shared vision for the new organization. Mutual respect and trust, flexibility, and a willingness to compromise are important at this stage.

The team that works through the development phase must include representatives of all stake-holder groups. This includes board members, key management and staff, and constituents served. Involvement of all groups will result in greater buy-in and smoother integration.

4. Due diligence. Due diligence involves formal research into each of the combining organizations. Leaders ensure that financial and legal advisors have the materials they need to review and evaluate issues and potential impediments to the proposed merger.

5. Transition. Planned changes are implemented during this final phase, making it the most difficult and time-consuming for leadership. You may need to make an official name change, apply for a new tax-exempt status, communicate changes with the community and physically move locations.

All hands on deck

Your organization’s leaders should participate in evaluating the strategic potential of a merger and preparing the transition. Some of your executives and board members may have experience combining organizations. But even with such in-house expertise, your nonprofit needs to involve professionals such as accountants and attorneys in the process. Contact us for information.

© 2018

You might save tax if your vacation home qualifies as a rental property

Do you own a vacation home? If you both rent it out and use it personally, you might save tax by taking steps to ensure it qualifies as a rental property this year. Vacation home expenses that qualify as rental property expenses aren’t subject to the Tax Cuts and Jobs Act’s (TCJA’s) new limit on the itemized deduction for state and local taxes (SALT) or the lower debt limit for the itemized mortgage interest deduction.

Rental or personal property?

If you rent out your vacation home for 15 days or more, what expenses you can deduct depends on how the home is classified for tax purposes, based on the amount of personal vs. rental use:

Rental property. If you (or your immediate family) use the home for 14 days or less, or under 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a rental property. You can deduct rental expenses, including losses, subject to the real estate activity rules.

Your deduction for property tax attributable to the rental use of the home isn’t subject to the TCJA’s new SALT deduction limit. And your deduction for mortgage interest on the home isn’t subject to the debt limit that applies to the itemized deduction for mortgage interest. You can’t deduct any interest that’s attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction (subject to the new SALT limit).

Nonrental property. If you (or your immediate family) use the home for more than 14 days or 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a personal residence. You can deduct rental expenses only to the extent of your rental income. Any excess can be carried forward to offset rental income in future years.

If you itemize deductions, you also can deduct the personal portion of both property tax and mortgage interest, subject to the TCJA’s new limits on those deductions. The SALT deduction limit is $10,000 for the combined total of state and local property taxes and either income taxes or sales taxes ($5,000 for married taxpayers filing separately). For mortgage interest debt incurred after December 15, 2017, the debt limit (with some limited exceptions) has been reduced to $750,000.

Be aware that many taxpayers who have itemized in the past will no longer benefit from itemizing because of the TCJA’s near doubling of the standard deduction. Itemizing saves tax only if total itemized deductions exceed the standard deduction for the taxpayer’s filing status.

Year-to-date review

Keep in mind that, if you rent out your vacation home for less than 15 days, you don’t have to report the income. But expenses associated with the rental (such as advertising and cleaning) won’t be deductible.

Now is a good time to review your vacation home use year-to-date to project how it will be classified for tax purposes. By increasing the number of days you rent it out and/or reducing the number of days you use it personally between now and year end, you might be able to ensure it’s classified as a rental property and save some tax. But there also could be circumstances where personal property treatment would be beneficial. Please contact us to discuss your particular situation.

© 2018

At your own risk: The pitfalls of DIY estate planning

There’s no law that says you can’t prepare your own estate plan. And with an abundance of online services that automate the creation of wills and other documents, it’s easy to do. But unless your estate is small and your plan is exceedingly simple, the pitfalls of do-it-yourself (DIY) estate planning can be many.

Dotting the i’s and crossing the t’s

A common mistake people make with DIY estate planning is to neglect the formalities associated with the execution of wills and other documents. Rules vary from state to state regarding the number and type of witnesses who must attest to a will and what, specifically, they must attest to.

Also, states have different rules about interested parties (that is, beneficiaries) serving as witnesses to a will or trust. In many states, interested parties are ineligible to serve as witnesses. In others, an interested-party witness triggers an increase in the required number of witnesses (from two to three, for example).

Keeping abreast of tax law changes

Legislative developments during the last several years demonstrate how changes in the tax laws from one year to the next can have a dramatic impact on your estate planning strategies. DIY service providers don’t offer legal or tax advice — and provide lengthy disclaimers to prove it. Thus, they cannot be expected to warn users that tax law changes may adversely affect their plans.

Consider this example: A decade ago, in 2008, George used an online service to generate estate planning documents. At the time, his estate was worth $4 million and the federal estate tax exemption was $2 million.

George’s plan provided for the creation of a trust for the benefit of his children, funded with the maximum amount that could be transferred free of federal estate tax, with the remainder going to his wife, Ann. If George died in 2008, for example, $2 million would have gone into the trust and the remaining $2 million would have gone to Ann.

Suppose, however, that George dies in 2018, when the federal estate tax exemption has increased to $11.18 million and his estate has grown to $10 million. Under the terms of his plan, the entire $10 million — all of which can be transferred free of federal estate tax — will pass to the trust, leaving nothing for Ann.

While even a qualified professional couldn’t have predicted in 2008 what the estate tax exemption would be at George’s death, he or she could have structured a plan that would provide the flexibility needed to respond to tax law changes.

Don’t try this at home

These are just a few examples of the many pitfalls associated with DIY estate planning. To help ensure that you achieve your estate planning objectives, contact us to review your existing plan.

© 2018

Using analytical procedures in an audit provides many benefits

Analytical procedures can make audits more efficient and effective. First, they can help during the planning and review stages of the audit. But analytics can have an even bigger impact when used to supplement substantive testing during fieldwork.

Defining audit analytics

AICPA auditing standards define analytical procedures as “evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.” Analytical procedures also investigate “identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.” Examples of analytical tests include trend, ratio and regression analysis.

Using analytical procedures

During fieldwork, auditors can use analytical procedures to obtain evidence, sometimes in combination with other substantive testing procedures, that identifies misstatements in account balances. Analytical procedures are often more efficient than traditional, manual audit testing procedures that typically require the business being audited to produce significant paperwork. Traditional procedures also usually require substantial time to verify account balances and transactions.

Analytical procedures generally follow these five steps:

1. Form an independent expectation about an account balance or financial relationship.
2. Identify differences between expected and reported amounts.
3. Investigate the most probable cause(s) of any discrepancies.
4. Evaluate the likelihood of material misstatement.
5. Determine the nature and extent of any additional auditing procedures needed.

When using analytical procedures, the auditor must establish a threshold that can be accepted without further investigation. This threshold is a matter of professional judgment, but it’s influenced primarily by the concept of materiality and the desired level of assurance.

For differences that are due to misstatement (rather than a plausible explanation), the auditor must decide whether the misstatement is material (individually or in the aggregate). Material misstatements typically require adjustments to the amount reported and may also necessitate additional audit procedures to determine the scope of the misstatement.

Your role in audit analytics

Done right, analytical procedures can help make your audit less time-consuming, less expensive and more effective at detecting errors and omissions. But it’s important to notify your auditor about any major changes to your operations, accounting methods or market conditions that occurred during the current accounting period.

This insight can help auditors develop more reliable expectations for analytical testing and identify plausible explanations for significant changes from the balance reported in prior periods. Moreover, now that you understand the role analytical procedures play in an audit, you can anticipate audit inquiries, prepare explanations and compile supporting documents before fieldwork starts.

© 2018

How entity type affects tax planning for owner-employees

Come tax time, owner-employees face a variety of distinctive tax planning challenges, depending on whether their business is structured as a partnership, limited liability company (LLC) or corporation. Whether you’re thinking about your 2016 filing or planning for 2017, it’s important to be aware of the challenges that apply to your particular situation.

Partnerships and LLCs

If you’re a partner in a partnership or a member of an LLC that has elected to be disregarded or treated as a partnership, the entity’s income flows through to you (as does its deductions). And this income likely will be subject to self-employment taxes — even if the income isn’t actually distributed to you. This means your employment tax liability typically doubles, because you must pay both the employee and employer portions of these taxes.

The employer portion of self-employment taxes paid (6.2% for Social Security tax and 1.45% for Medicare tax) is deductible above the line. Above-the-line deductions are particularly valuable because they reduce your adjusted gross income and modified adjusted gross income, which are the triggers for certain additional taxes and phaseouts of many tax breaks.

But flow-through income may not be subject to self-employment taxes if you’re a limited partner or the LLC member equivalent. And be aware that flow-through income might be subject to the additional 0.9% Medicare tax on earned income or the 3.8% net investment income tax (NIIT), depending on the situation.

S and C corporations

For S corporations, even though the entity’s income flows through to you for income tax purposes, only income you receive as salary is subject to employment taxes and, if applicable, the 0.9% Medicare tax. Keeping your salary relatively — but not unreasonably — low and increasing your distributions of company income (which generally isn’t taxed at the corporate level or subject to employment taxes) can reduce these taxes. The 3.8% NIIT may also apply.

In the case of C corporations, the entity’s income is taxed at the corporate level and only income you receive as salary is subject to employment taxes, and, if applicable, the 0.9% Medicare tax. Nevertheless, if the overall tax paid by both the corporation and you would be less, you may prefer to take more income as salary (which is deductible at the corporate level) as opposed to dividends (which aren’t deductible at the corporate level, are taxed at the shareholder level and could be subject to the 3.8% NIIT).

Whether your entity is an S or a C corporation, tread carefully, however. The IRS remains on the lookout for misclassification of corporate payments to shareholder-employees. The penalties and additional tax liability can be costly.

As you can see, tax planning is extra important for owner-employees.  Plus, tax law changes proposed by the President-elect and the Republican majority in Congress could affect tax treatment of  your income in 2017. Please contact us for help identifying the ideal strategies for your situation.

©2016

Data analytics can help solve your nonprofit’s biggest challenges

If your not-for-profit wants to improve its budgeting, forecasting, fundraising or other functions but is having a hard time identifying both problems and solutions, data analytics can help. This form of business intelligence is already considered invaluable in the for-profit world. But it can be just as useful to nonprofits.

Informed decision making

Data analytics is the science of collecting and analyzing sets of data to develop useful insights, connections and patterns that can lead to more informed decision making. It produces such metrics as program efficacy, outcomes vs. efforts, and membership renewal that can reflect past and current performance and, in turn, predict and guide future performance.

The data usually comes from two sources:

1. Internal. Examples include your organization’s databases of detailed information on donors, beneficiaries or members.

2. External. This type of information can be obtained from government databases, social media and other organizations, both non- and for-profit.

Applied advantages

Data analytics can help your organization validate trends, uncover root causes and improve transparency. For example, analysis of certain fundraising data makes it easier to target those individuals most likely to contribute to your nonprofit.

It typically facilitates fact-based discussions and planning, which is helpful when considering new initiatives or cost-cutting measures that stir political or emotional waters. The ability to predict outcomes can support sensitive programming decisions by considering data on a wide range of factors — such as at-risk populations, funding restrictions, offerings available from other organizations and grantmaker priorities.

Needs dictate your purchase

Your organization’s informational needs should dictate the data analytics package you buy. Thousands of potential performance metrics can be produced, but not all of them will be useful. So keeping in mind your most important programs, identify those metrics that matter most to stakeholders and that truly drive decisions. Also ensure that the technology solution you choose complies with any applicable privacy and security regulations, as well as your organization’s ethical standards.

You can adopt the most cutting-edge software, but if your staff aren’t on board, data analytics will be of little benefit. Note that you may need to hire or develop qualified staff to conduct data analytics and convert the results into actionable intelligence.

Make the most of it

Before you choose a technology, make sure your organization, including your staff, is ready to make the most of it. We can help steer you in the right direction.

© 2018

Be aware of the tax consequences before selling your home

In many parts of the country, summer is peak season for selling a home. If you’re planning to put your home on the market soon, you’re probably thinking about things like how quickly it will sell and how much you’ll get for it. But don’t neglect to consider the tax consequences.

Home sale gain exclusion

The U.S. House of Representatives’ original version of the Tax Cuts and Jobs Act included a provision tightening the rules for the home sale gain exclusion. Fortunately, that provision didn’t make it into the final version that was signed into law.

As a result, if you’re selling your principal residence, there’s still a good chance you’ll be able to exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that qualifies for exclusion also is excluded from the 3.8% net investment income tax.

To qualify for the exclusion, you must meet certain tests. For example, you generally must own and use the home as your principal residence for at least two years during the five-year period preceding the sale. (Gain allocable to a period of “nonqualified” use generally isn’t excludable.) In addition, you can’t use the exclusion more than once every two years.

More tax considerations

Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, as long as you owned the home for at least a year. If you didn’t, the gain will be considered short-term and subject to your ordinary-income rate, which could be more than double your long-term rate.

Here are some additional tax considerations when selling a home:

Tax basis. To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use.

Losses. A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.

Second homes. If you’re selling a second home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.

A big investment

Your home is likely one of your biggest investments, so it’s important to consider the tax consequences before selling it. If you’re planning to put your home on the market, we can help you assess the potential tax impact. Contact us to learn more.

© 2018

Is it time to adopt the new hedge accounting principles?

Implementing changes in accounting rules can be a real drag. But the new hedge accounting standard may be an exception to this generality. Many companies welcome this update and may even want to adopt it early, because the new rules are more flexible and attempt to make hedging strategies easier to report on financial statements.

Hedging strategies today

Hedging strategies protect earnings from unexpected price jumps in raw materials, changes in interest rates or fluctuations in foreign currencies. How? A business purchases futures, options or swaps and then designates these derivative instruments to a hedged item. Gains and losses from both items are then recognized in the same period, which, in turn, stabilizes earnings.

The existing rules require hedging transactions to be documented at inception and to be “highly effective.” After purchasing hedging instruments, businesses must periodically assess the transactions for their effectiveness.

The existing guidance on hedging is one of the most complex areas of U.S. Generally Accepted Accounting Principles (GAAP). So, companies have historically shied away from applying these rules to avoid errors and restatements.

In turn, investors complain that, when a business opts not to use the hedge accounting rules, it prevents stakeholders from truly understanding how the business operates. The new standard tries to address these potential shortcomings.

Future of hedge accounting

Accounting Standards Update (ASU) No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, expands the strategies that are eligible for hedge accounting to include 1) hedges of the benchmark rate component of the contractual coupon cash flows of fixed-rate assets or liabilities, 2) hedges of the portion of a closed portfolio of prepayable assets not expected to prepay, and 3) partial-term hedges of fixed-rate assets or liabilities.

In addition, the updated standard:

• Allows for hedging of nonfinancial components, such as corrugated material in a cardboard box or rubber in a tire,


• Eliminates an onerous penalty in the “shortcut” method of hedge accounting for interest rate swaps that meet specific criteria,


• Eliminates the concept of recording hedge “ineffectiveness,”


• Adds the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate to a list of acceptable benchmark interest rates for hedges of fixed-interest-rate items, and


• Revises the presentation and disclosure requirements for hedging to be more user-friendly.

ASU 2017-12 also provides practical expedients to make it easier for private businesses to apply the hedge accounting guidance.

Early adoption

The update will be effective for public companies for reporting periods starting after December 15, 2018. Private companies and other organizations will have an extra year to comply with the changes. But many companies are expected to adopt the amended standard for hedge accounting ahead of the effective date.

If you use hedging strategies, contact us to discuss how to report these complex transactions — and whether it makes sense to adopt the updated rules sooner rather than later. While many companies expect to adopt the amendments early, the transition process calls for more work than just picking up a calculator and applying the new guidance.

© 2018

What businesses need to know about the tax treatment of bitcoin and other virtual currencies

Over the last several years, virtual currency has become increasingly popular. Bitcoin is the most widely recognized form of virtual currency, also commonly referred to as digital, electronic or crypto currency.

While most smaller businesses aren’t yet accepting bitcoin or other virtual currency payments from their customers, more and more larger businesses are. And the trend may trickle down to smaller businesses. Businesses also can pay employees or independent contractors with virtual currency. But what are the tax consequences of these transactions?

Bitcoin 101

Bitcoin has an equivalent value in real currency and can be digitally traded between users. It also can be purchased with real currencies or exchanged for real currencies. Bitcoin is most commonly obtained through virtual currency ATMs or online exchanges.

Goods or services can be paid for using “bitcoin wallet” software. When a purchase is made, the software digitally posts the transaction to a global public ledger. This prevents the same unit of virtual currency from being used multiple times.

Tax impact

Questions about the tax impact of virtual currency abound. And the IRS has yet to offer much guidance.

The IRS did establish in a 2014 ruling that bitcoin and other convertible virtual currency should be treated as property, not currency, for federal income tax purposes. This means that businesses accepting bitcoin payments for goods and services must report gross income based on the fair market value of the virtual currency when it was received, measured in equivalent U.S. dollars.

When a business uses virtual currency to pay wages, the wages are taxable to the employees to the extent any other wage payment would be. You must, for example, report such wages on your employees’ W-2 forms. And they’re subject to federal income tax withholding and payroll taxes, based on the fair market value of the virtual currency on the date received by the employee.

When a business uses virtual currency to pay independent contractors or other service providers, those payments are also taxable to the recipient. The self-employment tax rules generally apply, based on the fair market value of the virtual currency on the date received. Payers generally must issue 1099-MISC forms to recipients.

Finally, payments made with virtual currency are subject to information reporting to the same extent as any other payment made in property.

Deciding whether to go virtual

Accepting bitcoin can be beneficial because it may avoid transaction fees charged by credit card companies and online payment providers (such as PayPal) and attract customers who want to use virtual currency. But the IRS is targeting virtual currency transactions in an effort to raise tax revenue, and it hasn’t issued much guidance on the tax treatment or reporting requirements. So bitcoin can also be a bit risky from a tax perspective.

To learn more about tax considerations when deciding whether your business should accept bitcoin or other virtual currencies — or use them to pay employees, independent contractors or other service providers — contact us.

© 2018

Financial sustainability and your nonprofit

If your not-for-profit relies heavily on a few funding sources — for example, an annual government or foundation grant — what happens if you suddenly lose that support? The risk may be compounded if you generally spend every penny that comes in the door and fail to build adequate reserves. Bottom line: If your nonprofit hopes to serve its community many years into the future, you need to think about financial sustainability now.

Information, please

No organization can accurately evaluate its sustainability without timely, comprehensive and accurate financial reporting. In addition to providing a current picture of your standing, financial reports should compare actual figures with historical and projected numbers. Some nonprofits use “dashboards” that give real-time financial data, ratios and trends in easily understood graphic form.

It’s not enough for the board to review financial statements. Board members must provide true fiscal oversight and not leave major financial decisions to staff, no matter how trusted and loyal. The finance committee should report regularly to the full board and engage in dialogue about their reports and the organization’s financial health. Most importantly, your board shouldn’t merely take a backward-looking view but should also consider the future — for example, how current trends and developments might affect future plans for funding your nonprofit’s mission.

Lower costs, more revenue

Holding expenses down and continually searching for new revenue sources are critical to long-term financial sustainability. Many nonprofits forge formal partnerships with other organizations to share costs. Look into partnering with organizations that share your missions and serve similar populations. Such collaboration may enable you to make better use of limited resources while reducing competition for funding. By joining forces, you can more quickly scale up high-demand programs or services.

If you’re seeking new revenue ideas, consider expanding fee-based service offerings to new locations or populations. For example, an organization that provides services to children with disabilities in schools also could offer the services to children with disabilities in foster homes.

Funds in reserve

Finally, maintaining adequate reserves is a key component of financial sustainability. If you don’t have a reserve fund — or have one but no formal policy for determining the appropriate amount, maintaining it and allocating funds when necessary — make developing such a policy a priority. Contact us for help.

© 2018

Do you need to adjust your withholding?

 
If you received a large refund after filing your 2017 income tax return, you’re probably enjoying the influx of cash. But a large refund isn’t all positive. It also means you were essentially giving the government an interest-free loan.

That’s why a large refund for the previous tax year would usually indicate that you should consider reducing the amounts you’re having withheld (and/or what estimated tax payments you’re making) for the current year. But 2018 is a little different.

TCJA and withholding

To reflect changes under the Tax Cuts and Jobs Act (TCJA) — such as the increase in the standard deduction, suspension of personal exemptions and changes in tax rates and brackets —the IRS updated the withholding tables that indicate how much employers should hold back from their employees’ paychecks, generally reducing the amount withheld.

The new tables may provide the correct amount of tax withholding for individuals with simple tax situations, but they might cause other taxpayers to not have enough withheld to pay their ultimate tax liabilities under the TCJA. So even if you received a large refund this year, you could end up owing a significant amount of tax when you file your 2018 return next year.

Perils of the new tables

The IRS itself cautions that people with more complex tax situations face the possibility of having their income taxes underwithheld. If, for example, you itemize deductions, have dependents age 17 or older, are in a two-income household or have more than one job, you should review your tax situation and adjust your withholding if appropriate.

The IRS has updated its withholding calculator (available at irs.gov) to assist taxpayers in reviewing their situations. The calculator reflects changes in available itemized deductions, the increased child tax credit, the new dependent credit and repeal of dependent exemptions.

More considerations

Tax law changes aren’t the only reason to check your withholding. Additional reviews during the year are a good idea if:

• You get married or divorced,

• You add or lose a dependent,

• You purchase a home,

• You start or lose a job, or

• Your investment income changes significantly.

You can modify your withholding at any time during the year, or even multiple 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.)

The TCJA and your tax situation

If you rely solely on the new withholding tables, you could run the risk of significantly underwithholding your federal income taxes. As a result, you might face an unexpectedly high tax bill when you file your 2018 tax return next year. Contact us for help determining whether you should adjust your withholding. We can also answer any questions you have about how the TCJA may affect your particular situation.  

© 2018

4 estate planning techniques for blended families

Today, it’s not unusual for a family to include children from prior marriages. These “blended” families can create estate planning complications that may lead to challenges in the courts after your death.

Fortunately, you can reduce the chances of family squabbles by using estate planning techniques designed to preserve wealth for your heirs in the manner you want, with a minimum of estate tax erosion, if any. Here are four examples:

1. Will. Your will generally determines who gets what, when, where and how. It may be combined with “inter vivos trusts” established during your lifetime or be used to create testamentary trusts, or both. While you can include a few tweaks for your blended family through a codicil to the will, if the intended changes are substantive — such as removing an ex-spouse and adding a new spouse — you should meet with your estate planning attorney to have a new will prepared.

2. Living trust. The problem with a will is that it has to pass through probate. In some states, this can be a costly and time-consuming process. Alternatively, you might transfer assets to a living trust and designate members of your blended family as beneficiaries. Unlike with a will, these assets are exempt from probate. With a revocable living trust, the most common version, you retain the right to change beneficiaries and distribution amounts. Typically, a living trust is viewed as a supplement to — not a replacement for — a basic will.

3. Prenuptial agreement. Generally, a “prenup” executed before marriage defines which assets are characterized as the separate property of one spouse or community property of both spouses upon divorce or death. As such, prenuptial agreements are often used to preserve wealth for the children of a first marriage before an individual enters into a second union. It may also include other directives, such as estate tax elections, that would occur if the marriage dissolved. Be sure to investigate state law concerning the validity of your prenup.

4. Marital trust. This type of a trust can be customized to meet the needs of blended families. It can provide income for the surviving spouse and preserve the principal for the deceased spouse’s designated beneficiaries, who may be the children of prior relationships. If certain tax elections are made, estate tax that is due at the first death can be postponed until the death of the surviving spouse.

These are just four estate planning strategies that could prove helpful for blended families. You might use others, or variations on these themes, for your personal situation. Consult with us to develop a comprehensive plan.

© 2018

Get ready for the new lease standard

A new accounting rule for reporting leases goes into effect in 2019 for public companies. Although private companies have been granted a one-year reprieve, no business should wait until the last minute to start the implementation process. Some recently revised guidance is intended to ease implementation. Here’s an overview of what’s changing.

Old rules, new rules

Under the existing rules, companies must record lease obligations on their balance sheets only if the arrangements are considered financing transactions. Few arrangements get recorded, because accounting rules give companies leeway to arrange the agreements in a way that they can be treated as simple rentals for financial reporting purposes. If an obligation isn’t recorded on a balance sheet, it makes a business look like it is less leveraged than it really is.

In 2016, the Financial Accounting Standards Board (FASB) issued a new standard that calls for major changes to current accounting practices for leases. In a nutshell, Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), will require companies to recognize on their balance sheets the assets and liabilities associated with rentals.

Most existing arrangements that currently are reported as leases will continue to be reported as leases under the new standard. In addition, the new definition is expected to encompass many more types of arrangements that aren’t reported as leases under current practice.

Revised guidance

Recently, the FASB revised two provisions to make the lease guidance easier to apply:

1. Modified retrospective approach. Upon adoption of the new lease accounting standard, companies may elect to present results using the current lease guidance for prior periods. This will allow management to focus on accounting for current and future transactions under the new rules — rather than looking backward at old leases.

2. Maintenance charges. On March 28, the FASB agreed to give lessors and property managers the option not to separately account for the fees for “common area maintenance” charges, such as security, elevator repairs and snow removal.

In addition, the FASB has provided a practical expedient to utilities, oil-and-gas companies and energy providers that hold rights-of-way to accommodate gas pipelines or electric wires. Under the revised guidance, companies that hold such land easements won’t have to sort through years of old contracts to determine whether they meet the definition of a lease. This practical expedient applies only to existing land easements, however.

Need help?

The lease standard is expected to add more than $1.25 trillion of operating lease obligations to public company balance sheets starting in 2018. How will it affect your business? Contact us to help answer this question and evaluate which of your contracts must be reported as lease obligations under the new rules.

© 2018

TCJA changes to employee benefits tax breaks: 4 negatives and a positive

The Tax Cuts and Jobs Act (TCJA) includes many changes that affect tax breaks for employee benefits. Among the changes are four negatives and one positive that will impact not only employees but also the businesses providing the benefits.

4 breaks curtailed

Beginning with the 2018 tax year, the TCJA reduces or eliminates tax breaks in the following areas:

1. Transportation benefits. The TCJA eliminates business deductions for the cost of providing qualified employee transportation fringe benefits, such as parking allowances, mass transit passes and van pooling. (These benefits are still tax-free to recipient employees.) It also disallows business deductions for the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety. And it suspends through 2025 the tax-free benefit of up to $20 a month for bicycle commuting.

2. On-premises meals. The TCJA reduces to 50% a business’s deduction for providing certain meals to employees on the business premises, such as when employees work late or if served in a company cafeteria. (The deduction is scheduled for elimination in 2025.) For employees, the value of these benefits continues to be tax-free.

3. Moving expense reimbursements. The TCJA suspends through 2025 the exclusion from employees’ taxable income of a business’s reimbursements of employees’ qualified moving expenses. However, businesses generally will still be able to deduct such reimbursements.

4. Achievement awards. The TCJA eliminates the business tax deduction and corresponding employee tax exclusion for employee achievement awards that are provided in the form of cash, gift coupons or certificates, vacations, meals, lodging, tickets to sporting or theater events, securities and “other similar items.” However, the tax breaks are still available for gift certificates that allow the recipient to select tangible property from a limited range of items preselected by the employer. The deduction/exclusion limits remain at up to $400 of the value of achievement awards for length of service or safety and $1,600 for awards under a written nondiscriminatory achievement plan.

1 new break

For 2018 and 2019, the TCJA creates a tax credit for wages paid to qualifying employees on family and medical leave. To qualify, a business must offer at least two weeks of annual paid family and medical leave, as described by the Family and Medical Leave Act (FMLA), to qualified employees. The paid leave must provide at least 50% of the employee’s wages. Leave required by state or local law or that was already part of the business’s employee benefits program generally doesn’t qualify.

The credit equals a minimum of 12.5% of the amount of wages paid during a leave period. The credit is increased gradually for payments above 50% of wages paid and tops out at 25%. No double-dipping: Employers can’t also deduct wages claimed for the credit.

More rules, limits and changes

Keep in mind that additional rules and limits apply to these breaks, and that the TCJA makes additional changes affecting employee benefits. Contact us for more details.

© 2018

TCJA changes to employee benefits tax breaks: 4 negatives and a positive

The Tax Cuts and Jobs Act (TCJA) includes many changes that affect tax breaks for employee benefits. Among the changes are four negatives and one positive that will impact not only employees but also the businesses providing the benefits.

4 breaks curtailed

Beginning with the 2018 tax year, the TCJA reduces or eliminates tax breaks in the following areas:

1. Transportation benefits. The TCJA eliminates business deductions for the cost of providing qualified employee transportation fringe benefits, such as parking allowances, mass transit passes and van pooling. (These benefits are still tax-free to recipient employees.) It also disallows business deductions for the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety. And it suspends through 2025 the tax-free benefit of up to $20 a month for bicycle commuting.

2. On-premises meals. The TCJA reduces to 50% a business’s deduction for providing certain meals to employees on the business premises, such as when employees work late or if served in a company cafeteria. (The deduction is scheduled for elimination in 2025.) For employees, the value of these benefits continues to be tax-free.

3. Moving expense reimbursements. The TCJA suspends through 2025 the exclusion from employees’ taxable income of a business’s reimbursements of employees’ qualified moving expenses. However, businesses generally will still be able to deduct such reimbursements.

4. Achievement awards. The TCJA eliminates the business tax deduction and corresponding employee tax exclusion for employee achievement awards that are provided in the form of cash, gift coupons or certificates, vacations, meals, lodging, tickets to sporting or theater events, securities and “other similar items.” However, the tax breaks are still available for gift certificates that allow the recipient to select tangible property from a limited range of items preselected by the employer. The deduction/exclusion limits remain at up to $400 of the value of achievement awards for length of service or safety and $1,600 for awards under a written nondiscriminatory achievement plan.

1 new break

For 2018 and 2019, the TCJA creates a tax credit for wages paid to qualifying employees on family and medical leave. To qualify, a business must offer at least two weeks of annual paid family and medical leave, as described by the Family and Medical Leave Act (FMLA), to qualified employees. The paid leave must provide at least 50% of the employee’s wages. Leave required by state or local law or that was already part of the business’s employee benefits program generally doesn’t qualify.

The credit equals a minimum of 12.5% of the amount of wages paid during a leave period. The credit is increased gradually for payments above 50% of wages paid and tops out at 25%. No double-dipping: Employers can’t also deduct wages claimed for the credit.

More rules, limits and changes

Keep in mind that additional rules and limits apply to these breaks, and that the TCJA makes additional changes affecting employee benefits. Contact us for more details.

© 2018

Finding a bookkeeper for your nonprofit

Looking for the perfect bookkeeper is something like looking for an ideal mate. You’ll want to think hard about your organization’s needs before you start searching for, and commit to, the person who’ll handle your day-to-day accounting functions.

Define the role

Before advertising the position, define the role. Crafting a detailed job description that outlines responsibilities will help you attract qualified candidates and give you a consistent yardstick with which to measure them.

Common bookkeeper responsibilities include:

• Preparing and recording accounts payable, accounts receivable and cash receipts,

• Tracking expenses,

• Reconciling bank statements,

• Posting accounts to the general ledger, and

• Preparing for year-end financial audits.

If you’ll be relying on your bookkeeper to send donor acknowledgments, order supplies or handle any other clerical duties, spell out those duties in the job description.

Ensure a good fit

Not-for-profits have special bookkeeping challenges that for-profit businesses don’t. At the very least, you want a bookkeeper who understands there are differences, such as accounting for pledges, donated goods and services, and restricted donations. Candidates also must be:

• Knowledgeable about accounting basics,

• Willing to learn your organization’s accounting specifics,

• Attentive to details,

• Deadline-oriented, and

• Computer-literate.

Finally, because your bookkeeper will handle cash, financial records and proprietary information, potential hires must be trustworthy and above reproach. Conduct thorough background and credit checks on anyone you’re seriously considering, including following up on any references.

Get what you need

Many organizations hire a bookkeeper because other staff members don’t have the necessary accounting skills. If you’re in that situation, you may wonder how you can judge the accounting acumen of bookkeeper candidates. We can help you define the role and provide advice on hiring the bookkeeper that meets your needs.

© 2018

Casualty losses can provide a 2017 deduction, but rules tighten for 2018

If you suffered damage to your home or personal property last year, you may be able to deduct these “casualty” losses on your 2017 federal income tax return. For 2018 through 2025, however, the Tax Cuts and Jobs Act suspends this deduction except for losses due to an event officially declared a disaster by the President.

What is a casualty? It’s 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 on your 2017 return:

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 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.

Note that special relief has been provided to certain victims of Hurricanes Harvey, Irma and Maria and California wildfires that affects some of these rules. For details on this relief or other questions about casualty losses, please contact us.

© 2018

Power of attorney abuse: What you can do about it

A financial power of attorney — sometimes called a “power of attorney for property” or a “general power of attorney” — can be a valuable estate planning tool. The main disadvantage is that it’s susceptible to abuse by scam artists, dishonest caretakers or greedy relatives.

Help or harm

The most common type is the durable power of attorney, which allows someone (the agent) to act on behalf of another person (the principal) even if the person becomes mentally incompetent or otherwise incapacitated. It authorizes the agent to manage the principal’s investments, pay bills, file tax returns and handle other financial matters if the principal is unable to do so as a result of illness, advancing age or other circumstances.

A broadly written power of attorney gives an agent unfettered access to the principal’s bank and brokerage accounts, real estate and other assets. In the right hands, this can be a huge help in managing a person’s financial affairs when the person isn’t able to do so him- or herself. But in the wrong hands, it provides an ample opportunity for financial harm.

Take steps to prevent abuse

If you or a family member plans to execute a power of attorney, there are steps you can take to minimize the risk of abuse:

• Make sure the agent is someone you know and trust.

• Consider using a “springing” power of attorney, which doesn’t take effect until certain conditions are met.

• Use a “special” or “limited” power of attorney that details the agent’s specific powers.

• Appoint a “monitor” or other third party to review transactions executed by the agent, and require the monitor’s approval of transactions over a certain dollar amount.

• Provide that the appointment of a guardian automatically revokes the power of attorney.

Some state laws contain special requirements, such as a separate rider, to authorize an agent to make large gifts or conduct other major transactions.

Act now

If you have elderly parents who’ve signed powers of attorney, keep an eye on their agents’ activities. When dealing with powers of attorney, the sooner you act, the better. If you’re pursuing legal remedies against an agent, the sooner you proceed, the greater your chances of recovery. And if you wish to execute or revoke a power of attorney for yourself, you need to do so while you’re mentally competent. Contact us for additional details.

© 2018

What is job cost reporting?

Custom jobs require ongoing supervision to achieve the best financial results. Whether you’re a general contractor constructing a strip mall, a manufacturer building made-to-order parts or an architect drawing up blueprints, once a project is underway it’s easy to focus on getting the job done, rather than on the resources that are being consumed.

That’s why job cost reporting — the process of coding and allocating project expenses to track financial efficiency and profitability — is a mission-critical activity. Here are a few best practices to keep in mind.

Smart estimates

Proper job cost reporting begins with solid cost estimates. Start each job by arranging the estimates in the same cost categories that will be used to accumulate the actual job cost information. This will enable you to effectively manage contract activities. And you’ll be better able to compare the actual job costs to estimated costs.

The proper format often depends on how many job-costing levels were used in the estimate. For instance, larger jobs may require phase, activity or even unit costing. For smaller jobs, totals for, say, materials, labor and subcontracts are sufficient. If you perform service-type work, your cost information needs may include just job totals by labor, materials and other direct costs.

Information needs

What kinds of cost information do you need during and after the job? These requirements depend on the time span of that job and the nature of the work.

Jobs that will be completed over several months lend themselves to more-detailed reporting. The size and scope of the particular job, as well as the software and people available to process and monitor job cost information, also affect the amount of detail you can include.

Progress reports

Cost reporting during the job is critical to controlling costs. Monitoring actual progress to date compared with planned progress to date determines where the job is at a particular time.

Keep in mind that you can’t take corrective action until you know something is deviating from the plan. That’s why executing continuous job cost reporting from the estimate to completion is so important. But jobs completed within a few days or weeks may not benefit from detailed cost reporting because time constraints make it difficult to identify problems early enough to take effective corrective action.

Also remember, as experienced as you might be, gut feelings regarding how costs are running compared with how they were estimated are usually insufficient. You must obtain facts about the cost activities from jobs-in-process reports. Even if your “intuition” turns out to be correct, it may come too late for you to head off a major problem.

Worth the effort

Proper job cost reporting takes persistence and, ideally, a good software system. The truth is that better numbers will lead to better results in the form of less costly, more profitable projects. Need help designing an effective job cost system? Our accounting professionals can help you select software and implement a costing system that’s right for you.

© 2018

Tax credit for hiring from certain “target groups” can provide substantial tax savings

Many businesses hired in 2017, and more are planning to hire in 2018. If you’re among them and your hires include members of a “target group,” you may be eligible for the Work Opportunity tax credit (WOTC). If you made qualifying hires in 2017 and obtained proper certification, you can claim the WOTC on your 2017 tax return.

Whether or not you’re eligible for 2017, keep the WOTC in mind in your 2018 hiring plans. Despite its proposed elimination under the House’s version of the Tax Cuts and Jobs Act, the credit survived the final version that was signed into law in December, so it’s also available for 2018.

“Target groups,” defined

Target groups include:

• Qualified individuals who have been unemployed for 27 weeks or more,


• Designated community residents who live in Empowerment Zones or rural renewal counties,


• Long-term family assistance recipients,


• Qualified ex-felons,


• Qualified recipients of Temporary Assistance for Needy Families (TANF),


• Qualified veterans,


• Summer youth employees,


• Supplemental Nutrition Assistance Program (SNAP) recipients,


• Supplemental Security Income benefits recipients, and


• Vocational rehabilitation referrals for individuals who suffer from an employment handicap resulting from a physical or mental handicap.

Before you can claim the WOTC, you must obtain certification from a “designated local agency” (DLA) that the hired individual is indeed a target group member. You must submit IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” to the DLA no later than the 28th day after the individual begins work for you. Unfortunately, this means that, if you hired someone from a target group in 2017 but didn’t obtain the certification, you can’t claim the WOTC on your 2017 return.

A potentially valuable credit

Qualifying employers can claim the WOTC as a general business credit against their income tax. The amount of the credit depends on the:

• Target group of the individual hired,


• Wages paid to that individual, and


• Number of hours that individual worked during the first year of employment.

The maximum credit that can be earned for each member of a target group is generally $2,400 per employee. The credit can be as high as $9,600 for certain veterans.

Employers aren’t subject to a limit on the number of eligible individuals they can hire. In other words, if you hired 10 individuals from target groups that qualify for the $2,400 credit, your total credit would be $24,000.

Remember, credits reduce your tax bill dollar-for-dollar; they don’t just reduce the amount of income subject to tax like deductions do. So that’s $24,000 of actual tax savings.

Offset hiring costs

The WOTC can provide substantial tax savings when you hire qualified new employees, offsetting some of the cost. Contact us for more information.

© 2018

Families with college students may save tax on their 2017 returns with one of these breaks

Whether you had a child in college (or graduate school) last year or were a student yourself, you may be eligible for some valuable tax breaks on your 2017 return. One such break that had expired December 31, 2016, was just extended under the recently passed Bipartisan Budget Act of 2018: the tuition and fees deduction.

But a couple of tax credits are also available. Tax credits can be especially valuable because they reduce taxes dollar-for-dollar; deductions reduce only the amount of income that’s taxed.

Higher education breaks 101

While multiple higher-education breaks are available, a taxpayer isn’t allowed to claim all of them. In most cases you can take only one break per student, and, for some breaks, only one per tax return. So first you need to see which breaks you’re eligible for. Then you need to determine which one will provide the greatest benefit.

Also keep in mind that you generally can’t claim deductions or credits for expenses that were paid for with distributions from tax-advantaged accounts, such as 529 plans or Coverdell Education Savings Accounts.

Credits

Two 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, consider claiming the Lifetime Learning credit. But first determine if the tuition and fees deduction might provide more tax savings.

Deductions

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 was extended only through December 31, 2017. So it won’t be available on your 2018 return unless Congress extends it again or makes it permanent.

Maximizing your savings

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 2017 tax returns — and which will provide the greatest tax savings — please contact us.

© 2018

If you made gifts last year, you may (or may not) need to file a gift tax return

Gifting assets to loved ones is one of the simplest ways of reducing your taxable estate. However, what may not be as simple is determining whether you need to file a gift tax return (Form 709). With the April 17 filing deadline approaching, now is the time to find out an answer.

Return required

A federal gift tax return (Form 709) is required if you:

• Made gifts of present interests — such as an outright gift of cash, marketable securities, real estate or payment of expenses other than qualifying educational or medical expenses (see below) — if the total of all gifts to any one person exceeded the $14,000 annual exclusion amount (for 2017),

• Made split gifts with your spouse,

• Made gifts of present interests to a noncitizen spouse who otherwise would qualify for the marital deduction, if the total exceeded the $149,000 noncitizen spouse annual exclusion amount (for 2017),

• Made gifts of future interests — such as certain gifts in trust and certain unmarketable securities — in any amount, or

• Contributed to a 529 plan and elected to accelerate future annual exclusion amounts (up to five years’ worth) into the current year.

Return not required


No gift tax return is required if you:

• Paid qualifying educational or medical expenses on behalf of someone else directly to an educational institution or health care provider,

• Made gifts of present interests that fell within the annual exclusion amount,

• Made outright gifts to a spouse who’s a U.S. citizen, in any amount, including gifts to marital trusts that meet certain requirements, or

• Made charitable gifts and aren’t otherwise required to file Form 709 — if a return is otherwise required, charitable gifts should also be reported.

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.

In some cases it’s even advisable to file Form 709 to report nongifts. For example, suppose you sold assets to a family member or a trust. Again, filing a return triggers the statute of limitations and prevents the IRS from claiming, more than three years after you file the return, that the assets were undervalued and, therefore, partially taxable.

Contact us if you made gifts last year and are unsure if you should file a gift tax return.

© 2018

Unlock hidden cash from your balance sheet

Need cash in a hurry? Here’s how business owners can look to their financial statements to improve cash flow.

Receivables

Many businesses turn first to their receivables when trying to drum up extra cash. For example, you could take a carrot-and-stick approach to your accounts receivable — offering early bird discounts to new or trustworthy customers while tightening credit policies or employing in-house collections staff to “talk money in the door.”

But be careful: Using too much stick could result in a loss of customers, which would obviously do more harm than good. So don’t rely on amped up collections alone for help. Also consider refining your collection process through measures such as electronic invoicing, requesting upfront payments from customers with questionable credit and using a bank lockbox to speed up cash deposits.

Inventory

The next place to find extra cash is inventory. Keep this account to a minimum to reduce storage, pilferage and security costs. This also helps you keep a closer, more analytical eye on what’s in stock.

Have you upgraded your inventory tracking and ordering systems recently? Newer ones can enable you to forecast demand and keep overstocking to a minimum. In appropriate cases, you can even share data with customers and suppliers to make supply and demand estimates more accurate.

Payables

With payables, the approach is generally the opposite of how to get cash from receivables. That is, you want to delay the payment process to keep yourself in the best possible cash position.

But there’s a possible downside to this strategy: Establishing a reputation as a slow payer can lead to unfavorable payment terms and a compromised credit standing. If this sounds familiar, see whether you need to rebuild your vendors’ trust. The goal is to, indeed, take advantage of deferred payments as a form of interest-free financing while still making those payments within an acceptable period.

Is your balance sheet lean?

Smooth day-to-day operations require a steady influx of cash. By cutting the “fat” from your working capital accounts, you can generate and deploy liquid cash to maintain your company’s competitive edge and keep it in good standing with stakeholders. For more ideas on how to manage balance sheet items more efficiently, contact us.

© 2018

THE TAX CUTS AND JOBS ACT - PARKING, ENTERTAINMENT AND MEALS

The Tax Cuts and Jobs Act (‘the Act”) was signed by President Trump on December 22, 2017. The Act makes sweeping changes to the U.S. tax code and impacts virtually every business and individual taxpayer. Some business expense changes that will impact many of our clients are parking, entertainment, and meals.

 

Under the past law, the employer was allowed to deduct parking as an expense while allowing employees to receive this tax-free benefit. Effective January 1, 2018, The Act continues to allow the employees to receive the tax-free benefit but the employer now has to consider parking as a nondeductible expense.   

 

Because so many of our clients depend on entertainment as part of their business strategy to promote their businesses, we wanted to update you on the change made to entertainment expenses. Until December 31, 2017, businesses were allowed to deduct 50% of their entertainment expenses. As of January 1, 2018, the Act disallows a deduction for (1) any activity generally considered to be entertainment, amusement, or recreation; (2) membership dues for any club organized for business, pleasure, recreation, or other social purposes; or (3) a facility or portion thereof used in connection with any of these items.

 

Another area where many of our clients will be impacted is meals. Under the Act, taxpayers are still generally able to deduct 50 percent of the food and beverage expenses associated with operating their business.  For amounts incurred and paid after December 31, 2017, the Act expands this 50% limitation to all meals, including on premise dining which was previously 100% deductible.

 

Until December 31, 2017, individuals who are not reimbursed by their employer for business promotion or travel, deducted travel, business meals, and entertainment under miscellaneous expenses on Schedule A. As of January 1, 2018, miscellaneous expenses are no longer deductible at all. 

 

These are just highlights of some of the changes and impact of the Tax Cuts and Jobs Act. There is much more to discuss than can be covered in this letter. Tax reform is further complicated because many of the changes are temporary, generally ending after 2025.  We are focused on both the immediate and long-term impact of the Act on your situation. Please call our office for guidance on all of the provisions that directly affect you.

 

2018 Q1 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2018. 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 2017 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.


• Provide copies of 2017 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.


• File 2017 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS.


• File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2017. 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 12 to file the return.


• File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2017. 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 12 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 945, “Annual Return of Withheld Federal Income Tax,” for 2017 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 12 to file the return.

February 28

• File 2017 Forms 1099-MISC with the IRS if 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is April 2.)


• March 15


• If a calendar-year partnership or S corporation, file or extend your 2017 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2017 contributions to pension and profit-sharing plans.

© 2017

Conflict-of-interest checklist for nonprofits

Not-for-profit board officers, directors, trustees and key employees must avoid conflicts of interest because it’s their duty to do so. Any direct or indirect financial interest in a transaction or arrangement that might benefit one of these individuals personally could result in the loss of your organization’s tax-exempt status — and its reputation
Here’s a quick checklist to gauge whether your nonprofit is doing what it takes to avoid conflicts of interest:

• Do you have a conflict-of-interest policy in place that specifies what constitutes a conflict and lists exceptions?


• Do you require board officers, directors, trustees and key employees to annually pledge to disclose interests, relationships and financial holdings that could result in a conflict of interest?


• Do they understand that they must speak up if issues arise that could pose a possible conflict?


• Do you provide training in conflicts of interest?


• Do you have procedures in place that outline the steps you’ll take when a possible conflict of interest arises?


• Are individuals with possible conflicts asked to present only the facts, and then remove themselves from any discussion of the issue?


• Do you keep minutes of the meetings where the conflict of interest is discussed, noting those members present and voting, and indicating the final decision reached?\


• Do you put projects out for bid — with identical specifications — to multiple vendors?


• Do you supply a written contract to each vendor that details the service the company will provide, specific deliverables, cost estimates and a time frame for delivery?

If you answered “no” to any of these questions, contact us. We can help you make sure that you have an adequate conflict-of-interest policy in place and a full set of procedures to support it.

© 2018

Tax Cuts and Jobs Act: Key provisions affecting individuals

On December 20, Congress completed passage of the largest federal tax reform law in more than 30 years. Commonly called the “Tax Cuts and Jobs Act” (TCJA), the new law means substantial changes for individual taxpayers.

The following is a brief overview of some of the most significant provisions. Except where noted, these changes are effective for tax years beginning after December 31, 2017, and before January 1, 2026.

• Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%

• Near doubling of the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and married couples filing separately)

• Elimination of personal exemptions

•  Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit

• Elimination of the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty — effective for months beginning after December 31, 2018, and permanent

• Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes — for 2017 and 2018

• New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income taxes; $5,000 for separate filers)

• Reduction of the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers), with certain exceptions

• Elimination of the deduction for interest on home equity debt

• Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters)

• Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses)

• Elimination of the AGI-based reduction of certain itemized deductions

• Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances)

• Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year — permanent

• AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers

• Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing)

Be aware that additional rules and limits apply. Also, there are many more changes in the TCJA that will impact individuals. If you have questions or would like to discuss how you might be affected, please contact us.

© 2017

Tax Cuts and Jobs Act: Key provisions affecting estate planning

The Tax Cuts and Jobs Act of 2017 (TCJA) is a sweeping revision of the tax code that alters federal law affecting individuals, businesses and estates. Focusing specifically on estate tax law, the TCJA doesn’t repeal the federal gift and estate tax. It does, however, temporarily double the combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption.

Beginning after December 31, 2017, and before January 1, 2026, the combined gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption amounts double from an inflation-adjusted $5 million to $10 million. For 2018, the exemption amounts are expected to be $11.2 million ($22.4 million for married couples). Absent further congressional action, the exemptions will revert to their 2017 levels (adjusted for inflation) beginning January 1, 2026. The marginal tax rate for all three taxes remains at 40%.

Estate planning remains a necessity

Just because fewer families will have to worry about estate tax liability doesn’t mean the end of estate planning as we know it. Nontax issues that your plan should still take into account include asset protection, guardianship of minor children, family business succession and planning for loved ones with special needs, to name just a few.

In addition, it’s not clear how states will respond to the federal tax law changes. If you live in a state that imposes significant state estate taxes, many traditional estate-tax-reduction strategies will continue to be relevant.

Future estate tax law remains uncertain

It’s also important to keep in mind that the exemptions are scheduled to revert to their previous levels in 2026 — and there’s no guarantee that lawmakers in the future won’t reduce the exemption amounts even further. Contact us with questions on how the TCJA might affect your estate plan. We’ll be pleased to review your plan and recommend any necessary revisions in light of the TCJA.

© 2017