Know your Customers Before you Extend Credit

Safeguard Your Cash Flow

By John Troyer, CPA, Partner, Audit and Accounting Services

Small JohnTroyer-04 HighResThe funny thing about customers is that they can keep you in business — but they can also put you out of it. The latter circumstance often arises when a company overly relies on a few customers that abuse their credit to the point where the company’s cash flow is dramatically impacted. To guard against this, diligently assess your customer’s credit worthiness before getting too deeply involved.

Gather information
A first step is to gather as much information as you can from new customers. Ask them to complete a credit application with the usual information, company name, address, website, phone number and tax identification number, number of years the company has existed, its legal form and parent company, if one exists. And depending on the amount of credit this new customer is asking you to extend to him or her, consider also asking for a bank reference and several trade references.

If the company is private, again depending on the amount of credit your customer is seeking, consider asking for an income statement and balance sheet. You’ll want to analyze financial data such as the profit margin, or net income divided by net sales. Ideally, this will have remained steady or increased during the past few years. The profit margin also should be similar to that of other companies in its industry.

From the balance sheet, you can calculate the current ratio, or the company’s current assets divided by its current liabilities. The higher this is, the more likely the company will be able to cover its bills. Generally, a current ratio of 2:1 is considered acceptable.

Check references and more
Next up is contacting the potential customer’s trade references to check the length of time the parties have been working together, the approximate size of the potential customer’s account and its payment record. Of course, a history of late payments is a red flag.

Similarly, you’ll want to follow up on the company’s bank references to determine the balances in its checking and savings accounts, as well as the amount available on its line of credit. Equally important, you’ll want to find out whether the company has violated any of its loan covenants. If so, the bank could withdraw its credit, making it difficult for the company to pay its bills.

After you’ve completed your own analysis, find out what others are saying — especially if the potential customer could be a significant portion of your sales. Search for articles on the company, paying attention to any that raise concerns, such as stories about lawsuits or plans to shut down a division.

In addition, you may want to order a credit report on the business from one of the credit rating agencies, such as Dun & Bradstreet or Experian. Among other information, the reports describe the business’s payment history and tell whether it has filed for bankruptcy or had a lien or judgment against it.

Most credit reports can be had for a nominal amount these days. The more expensive reports, not surprisingly, contain more information. The higher price tag also may allow access to updated information on a company over a period of time.

Stay informed, always
Assessing a potential customer’s ability to pay his or her bills requires some work upfront. Our recommendations are reminders that your business should have an established criterion that dictates the level of investigation necessary before granting credit based on:
• If the customer is new,
• The amount of credit being sought,
• Any history of not making payments on time, or
• A business environment change that may negatively impact your creditors’ business.

Making informed credit decisions is one key to running a successful company.

The best advice we can give is, “Don’t go it alone.” Contact John Troyer, CPA, Partner, Audit and Accounting Services, at 216-831-7171 or jtroyer@cp-advisors.com, for business and management advice.

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Sales Tax and Your 2016 Tax Return

Ohio taxpayers can deduct sales tax on their 2016 tax return

David Reape HighRes-08Ohio is one of the states where taxpayers can take an itemized deduction for state and local sales taxes in lieu of state and local income taxes. This break can be valuable to residents who purchased major items in 2016, such as a car or boat. But it’s one or the other, so it pays to figure out what’s the best benefit for you.

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 Ciuni & Panichi, Inc.‘s David Reape, CPA, at 216-831-7171 or dreape@cp-advisors.com. He can help you maximize your 2016 savings and effectively plan for 2017.

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Need to sell real property? Try an installment sale.

Is an installment sale right for you?

TJCIf you or your company owns real property, you may not always be able to dispose of it as quickly as you’d like. One avenue for perhaps finding a buyer a little sooner is by financing it yourself through an installment sale.

Benefits and risks
An installment sale occurs when you transfer property in exchange for a promissory note and receive at least one payment after the tax year of the sale. Doing so allows you to receive interest on the full amount of the promissory note, often at a higher rate than you could earn from other investments.  The installment sale rules allow the seller to defer the recognition of gain on the sale of the property in a manner that mirrors the receipt of the installment payments.

This deferral can be a very favorable tax benefit for sellers, but there may be some risks as well. For instance, the buyer may default on the loan, and you may have to deal with foreclosure.

Methodology
You generally must report an installment sale on your tax return under the “installment method.” Each installment payment typically consists of interest income, return of your adjusted basis in the property and gain on the sale. For every taxable year in which you receive an installment payment, you must report as income the interest and gain components.

Calculating taxable gain involves multiplying the amount of payments, excluding interest, received in the taxable year by the gross profit ratio for the sale. The gross profit ratio is equal to the gross profit (the selling price less your adjusted basis) divided by the total contract price (the selling price less any qualifying indebtedness — mortgages, debts and other liabilities assumed or taken by the buyer — that doesn’t exceed your basis).

Facts:
Proceeds  $1,000,000
Basis   $650,000
Realized Gain  $350,000

Year 1 Principal $68,000
Year 1 Interest  $54,000

Gain Calculation:
Year 1 Principal $68,000
X Gross Profit Ratio 35%
Year 1 Gain   $23,800

The selling price includes the money and the fair market value of any other property you received for the sale of the property, selling expenses paid by the buyer and existing debt encumbering the property (regardless of whether the buyer assumes personal liability for it).

You may be considered to have received a taxable payment even if the buyer doesn’t pay you directly. If the buyer assumes or pays any of your debts or expenses, it could be deemed a payment in the year of the sale. In many cases, though, the buyer’s assumption of your debt is treated as a recovery of your basis, rather than a payment.

See the example below for how recognized gain is calculated.

Facts:
Proceeds  $1,000,000
Basis   $650,000
Realized Gain  $350,000

Year 1 Principal $68,000
Year 1 Interest  $54,000

Gain Calculation:
Year 1 Principal $68,000
X Gross Profit Ratio 35%
Year 1 Gain   $23,800

It is important to note that items that are required to be recaptured at a different rate on the sale still need to be recognized.  For example, Section 1245 or Unrecapture Section 1250 gain need to be recognized in the year of the sale.

Complex rules
The rules of installment sales are complex. The best advice we can offer is:  “Don’t go it alone.” The Ciuni & Panichi, Inc. team has over 40 years of experience helping business owners and individuals make sound business and financial decisions. For real estate and construction advice and/or accounting services, contact Tony Constantine, CPA, Partner, at 216-831-7171 or tconstantine@cp-advisors.com

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How to Detect and Prevent Expense Reimbursement Fraud

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© 2017

How to Detect and Prevent Expense Reimbursement Fraud

Sweat the small stuff and Prevent Fraud

By Reggie Novak, CPA, CFE, Senior Manager, Audit and Accounting Services

ReggieNovakReimbursement fraud is often overlooked by management with the thought that their employees are trustworthy and the loss is small and not worth the time and effort to track. In reality, expense reimbursement schemes account for nearly 14 percent of all occupational frauds and result in a median loss of $30,000 per year, according to the Association of Certified Fraud Examiners (ACFE). And if your employees think management is “looking the other way,” dishonest employees may take advantage of their good natured managers.

Keeping your organization safe from thieving employees demands strong controls, tough actions against perpetrators and management leading by example. Whether you’re a multinational corporation employing sales representatives traveling throughout the world or a small not-for-profit organization, you can fall victim to expense reimbursement fraud.  Forensic accounting experts can help companies implement measures to detect and prevent expense reimbursement fraud.

Most common methods
According to the ACFE, expense reimbursement schemes generally fall into one of these four categories:

  1. Mischaracterized expenses. This involves requesting reimbursement for a personal expense by claiming that it’s business-related. For example, an employee takes a family vacation and requests reimbursement for meal and hotel expenses by submitting actual receipts and a false expense report.
  2. Overstated expenses. Overstating expenses involves inflating the cost of actual business expenses — for example, by altering receipts or obtaining a refund for a portion of the expense. A common scheme is to buy a first- or business-class airline ticket with a personal credit card, submit the expense for reimbursement, and then return the ticket and replace it with a coach ticket.
  3. Fictitious expenses. Obtaining reimbursement for nonexistent expenses by submitting false expense reports and fake receipts or other documentation would fall under the category of fictitious expenses. A common technique is to obtain a stockpile of blank receipts from taxicab companies or other vendors and submit them over time.
  4. Multiple reimbursements. This scam involves requesting reimbursement for the same expense several times — typically by submitting photocopied receipts or different forms of supporting documentation (for example, receipts, email confirmations, canceled checks, tickets and invoices).

These schemes tend to continue for long periods of time before they’re detected. The ACFE reports that the median duration of employee reimbursement frauds is 24 months.

Detection methods
Forensic accountants use a variety of techniques to detect employee reimbursement fraud. For example, they might review reimbursement documentation to look for photocopies, duplicates or fakes; compare employees’ expense reports and supporting documentation to check for multiple claims for the same expenses; and compare the times and dates of claimed expenses to work schedules and calendars to look for inconsistencies, such as expenses claimed during vacations.

Forensic experts also search for red flags that may signal fraudulent activity or warrant further investigation. For example, they might look for employees who:

  • Claim disproportionately larger reimbursements than other employees in comparable positions,
  • Pay large expenses in cash despite access to a company credit card,
  • Submit consecutively numbered receipts over long periods of time, and
  • Consistently submit expenses at or just under the company’s reimbursement limit for undocumented claims.

Another technique is to look for employees whose expense patterns violate Benford’s Law — a statistical analysis tool that can reveal fabricated numbers.

An ounce of prevention
In addition to detecting expense reimbursement fraud, forensic accounting experts can help companies implement preventive measures. These include written expense reimbursement policies and procedures requiring detailed expense reports that set forth amounts, times, places, people in attendance and specific business purposes. Employees also should be asked to use company credit cards, submit original, detailed receipts (no photocopies), and provide boarding passes for air travel. Periodic audits of travel and entertainment expense accounts can also have a powerful deterrent effect.

The best advice we can offer is, “don’t go it alone.” Contact Reggie Novak, CPA, CFE, Senior Manager, at Ciuni & Panichi, Inc. at 216-831-7171 or rnovak@cp-advisors.com to learn how you can protect your business from reimbursement fraud.

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Changed Deadlines for Tax Forms 1099-MISC, W-3, & W-2

Deadline change for 2016 Tax Form 1099-MISC

tax-formThe new filing deadline for 2016 Form 1099-MISC with amounts in Box 7 (non-employee compensation) is now January 31, 2017 with the 2016 Form 1096.  There is a new box to check on the 2016 Form 1096 when 1099-MISC with amounts in Box 7 are attached to the 1096. This deadline is nearly a month earlier than the previous February 28 date.

Recipient copies of 1099′s are to be provided to recipients by January 31. (No change for 2017.)

Deadline change for 2016 Form W-3 and Form W-2′s
The new filing deadline for 2016 Form W-3 and Form W-2′s (Copy A) with the Social Security Administration is now January 31, 2017, also nearly a month earlier than the previous February 28 deadline.

Employee copies of W-2′s are to be provided to recipients by January 31.  (No change for 2017.)

The due date changes for filing 2016 W-3′s and certain 2016 1096′s is intended to give the IRS more time to process employer - business provided data in order to coordinate with the issuance of tax refunds and reduce fraudulent tax filing and identity theft issues.

Potential for Penalties
Not providing a correct statement (intentional disregard) carries a penalty of $530 per 1099.  Late filing of mandatory 1099′s could lead to penalties ranging from $50 to $260 per 1099 based on when the correct information return is filed.  This may become an issue for clients with the changes to due dates and as the IRS steps up its 1099 compliance.

What clients can do now to alleviate compliance issues in January 2017
Review your records now to see who will need a 1099 for 2016 and verify they have all the information needed (FEI#, name, current address, and federal tax classification) to file accurate returns. This would include sub-contractors, attorneys, etc.  A Form W-9 can be found on the IRS website and provided to potential 1099 recipients to get the necessary information so returns can be processed in a timely manner.  This would be particularly helpful for recipients who will receive a 2016 1099-MISC with non-employee compensation since they will be affected by the change in filing deadlines.

The best advice we can offer is: “Don’t go it alone.” Ciuni & Panichi is here to help you make the right financial decisions for yourself and your employees.   For more information and if you have questions, contact Sue Latine at 216.831.7171 or slatine@cp-advisors.com.

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Be Aware: some tax deadlines have changed

Are you business taxes going up or down?

Be Aware – Several Tax Filing Deadlines Have Changed

By Nick Leacoma, CPA, Senior Manager, Tax

nelsmallerBe aware that tax filing deadlines have changed for various entities including C corporations and partnerships. The changes result from the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015.  Many of the changes apply to tax years starting after December 31, 2015.

C corporations
C corporations with calendar year-ends face a deadline shift from March 15 to April 15. Similarly, the tax return due dates for corporations with tax years that end on dates other than June 30 (and other than December 31) will now be the 15th day of the fourth month after the end of their tax years. Corporations with a June 30 year-end will continue to file taxes by September 15, until December 31, 2025. After this date, their filing deadline shifts to October 15.

C corporations with calendar year-ends will be allowed five-month extensions (Sept 15) until 2026, while companies with June 30 year-ends will be allowed seven-month extensions
(April 15), also until 2026. Corporations with other year-ends can receive six-month extensions. Starting with the 2026 returns, all extensions can be six months.

Partnerships
Partnerships with calendar year-ends must now file Form 1065 by March 15. This is a change from the previous due date of April 15. The new date should allow partners to use the information contained in these forms to file their personal returns, which typically are due a month later.

Partnerships with year-ends other than December 31 must file these forms by the 15th day of the third month after the close of their fiscal year-ends. Partnerships can ask for extensions of up to six months.

S corporations
The S corporation deadline remains the same. For those with calendar year-ends, Form 1120S, is due March 15. Similarly, the due dates for S corporations with other than calendar year-ends remain the 15th day of the third month after fiscal year-end. And S corporations are still able to request six-month extensions.

Trusts and Estates
The deadline for filing Estate and Trust returns remains unchanged. Form 1041 is due April 15.
The extended due date for Estates and Trusts has changed. The new extended due date for filing the Estate and Trust return has changed from Sept 15 to Sept 30.

Exempt Organizations
The Exempt Organization deadline also remains the same. For those with calendar year-ends, Form 990 is due May 15. Similarly, the due dates for exempt organizations with other than a calendar year-end remains the 15th day of the fifth month after fiscal year-end. There will now be a single automatic six month extension for exempt organizations, eliminating the current first 90-day extension.

FBAR
FinCEN Form 114, “Report of Foreign Bank and Financial Accounts” (also known as “FBAR”), will be due April 15, rather than June 30, starting with the 2016 tax year. This way, it aligns with the deadlines for individual income tax returns. FBAR filers will be able to request extensions of up to six months. For taxpayers filing FBARs for the first time, any penalty for failing to request or file for an extension in a timely manner may be waived.

Help with the changes
If you have questions about the new tax return deadlines, contact me, Nick Leacoma, CPA, Senior Manager in the Ciuni & Panichi, Inc. tax department, at 216-831-7171 or nleacoma@cp-advisors.com. I’ll be happy to help you make these important deadlines.

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A quick look at the President-elect’s tax plan for businesses

20171The election of Donald Trump as President of the United States could result in major tax law changes in 2017. Proposed changes spelled out in Trump’s tax reform plan released earlier this year that would affect businesses include:

  • Reducing the top corporate income tax rate from 35% to 15%,
  • Abolishing the corporate alternative minimum tax,
  • Allowing owners of flow-through entities to pay tax on business income at the proposed 15% corporate rate rather than their own individual income tax rate, although there seems to be ambiguity on the specifics of how this provision would work,
  • Eliminating the Section 199 deduction, also commonly referred to as the manufacturers’ deduction or the domestic production activities deduction, as well as most other business breaks — but, notably, not the research credit,
  • Allowing U.S. companies engaged in manufacturing to choose the full expensing of capital investment or the deductibility of interest paid, and
  • Enacting a deemed repatriation of currently deferred foreign profits at a 10% tax rate.
    President-elect Trump’s tax plan is somewhat different from the House Republicans’ plan. With Republicans retaining control of both chambers of Congress, some sort of overhaul of the U.S. tax code is likely. That said, Republicans didn’t reach the 60 Senate members necessary to become filibuster-proof, which means they may need to compromise on some issues in order to get their legislation through the Senate.

So there’s still uncertainty as to which specific tax changes will ultimately make it into legislation and be signed into law.

It may make sense to accelerate deductible expenses into 2016 that might not be deductible in 2017 and to defer income to 2017, when it might be subject to a lower tax rate. But there is some risk to these strategies, given the uncertainty as to exactly what tax law changes will be enacted. Plus no single strategy is right for every business.

Please contact Ciuni & Panichi, Inc. –  Jim Komos at 216.831.7171 or jkomos@cp-advisors.com to develop the best year-end strategy for your business.

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© 2016

Donating Appreciated Stock Offers Tax Advantages

Not-for-Profit Donations and Tax Savings

By Mike Klein, CPA, Ciuni & Panichi, Inc. Partner-In-Charge of the Not-for-Profit Group

mbkThe best scenario for not-for-profit organizations is when they have the revenue they need to achieve their mission, their benefactors’ pain is eased, and their donors enjoy the rewards of contributing as well as a nice tax deduction. It’s important for donors to know that donating appreciated stock can help fulfill all three needs. And best of all for donors, a gift from his or her portfolio is not only possible, it can boost the tax benefits of the charitable gift.

No pain from gains
Inform your potential and current donors that charitable organizations are more than happy to receive appreciated stock as a gift. Depending on the not-for-profit’s policy, it may maintain a stock portfolio or sell donated stock.

Contributing appreciated stock entitles donors to a tax deduction equal to the securities’ fair market value — just as if the stock was sold and the cash was contributed. The difference is neither the donor nor the charity receiving the stock will owe capital gains tax on the appreciation. Avoiding capital gains tax and also taking a tax deduction is a double benefit for donors.

The key word here is “appreciated.” The strategy doesn’t work with stock that’s declined in value. In this case it’s better to sell securities that have taken a loss and donate the proceeds. This way also allows for a double deduction for donors: one for the capital loss and one for the charitable donation.

Inevitable restrictions
Inevitably, there are restrictions on deductions for donating appreciated stock. Annually donors may deduct appreciated stock contributions to public charities only up to 30 percent of their adjusted gross income (AGI). For donations to nonoperating private foundations, the limit is 20 percent of AGI. Any excess can be carried forward up to five years.

So, for example, if you contribute $50,000 of appreciated stock to a public charity and have an AGI of $100,000, you can deduct just $30,000 this year. You can carry forward the unused $20,000 to next year. Whatever amount (if any) you can’t use next year can be carried forward until used up or you hit the five-year mark, whichever occurs first.

Moreover, donors must own the security for at least one year to deduct the fair market value. Otherwise, the deduction is limited to the tax basis (generally what was paid for the stock). Also, the charity must be a 501(c)(3) organization.

Last, these rules apply only to appreciated stock. If you donate a different form of appreciated property, such as artwork or jewelry, different requirements apply.

Intriguing option
A donation of appreciated stock is one of many strategies to encourage your donors to support your mission.

Need help? Contact Mike Klein, CPA, Ciuni & Panichi, Inc. Partner-in-Charge of the Not-for-Profit Group at 216-831-7171 or  mklein@cp-advisors.com. In addition to audit and accounting services, the Not-for-Profit Consulting Group offers a complete menu of advisory services including:  Resource Development, 990 Preparation, Strategic Management, Executive Coaching and Marketing.

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© 2016

 

Alternate Minimum Tax Awareness: Be ready for anything

The dreaded surprise tax: What you need to know about Alternative Minimum Tax

By Tony Constantine, CPA, Ciuni & Panichi, Inc. Partner, Tax

TJCAMT… those three little letters cause almost as much fear and trepidation as the other three letters… IRS!  Alternative Minimum Tax (AMT) just sounds scary, and for those facing it for the first time it can be.  You find the benefit that you count on from your itemized deductions wiped away and an increased (and often unexpected) tax liability.  It is important to understand what AMT is and if you are subject to it now, before you file your 2016 return. If you are, there are steps you can consider taking before year end to minimize potential liability.

Bigger bite
The AMT was established to ensure that high-income individuals pay at least a minimum tax, even if they have many large deductions that significantly reduce their “regular” income tax. If your AMT liability is greater than your regular income tax liability, you must pay the difference as AMT, in addition to the regular tax.

AMT rates begin at 26 percent and rise to 28 percent at higher income levels. The maximum rate is lower than the maximum income tax rate of 39.6 percent, but far fewer deductions are allowed, so the AMT could end up taking a bigger tax bite. For instance, you can’t deduct state and local income or sales taxes, property taxes, miscellaneous itemized deductions subject to the two percent floor, or home equity loan interest on debt not used for home improvements. You also can’t take personal exemptions for yourself or your dependents, or the standard deduction if you don’t itemize your deductions.

Steps to consider
Fortunately, you may be able to take steps to minimize your AMT liability, including:

Timing capital gains – The AMT exemption (an amount you can deduct in calculating AMT liability) phases out based on income, so realizing capital gains could cause you to lose part or all of the exemption. If it looks like you could be subject to the AMT this year, you might want to delay sales of highly appreciated assets until next year (if you don’t expect to be subject to the AMT then) or use an installment sale to spread the gains (and potential AMT liability) over multiple years.

Timing deductible expenses – Try to time the payment of expenses that are deductible for regular tax purposes but not AMT purposes for years in which you don’t anticipate AMT liability. Otherwise, you’ll gain no tax benefit from those deductions. If you’re on the threshold of AMT liability this year, you might want to consider delaying state tax payments, as long as the late-payment penalty won’t exceed the tax savings from staying under the AMT threshold.

Investing in the “right” bonds – Interest on tax-exempt bonds issued for public activities (for example, schools and roads) is exempt from the AMT. You may want to convert bonds issued for private activities (for example, sports stadiums), which generally don’t enjoy the AMT interest exemption.

Appropriate strategies
Failing to plan for the AMT can lead to unexpected — and undesirable — tax consequences. Please contact Ciuni & Panichi’s Tony Constantine, CPA, Partner, Tax, at 216-831-7171 or tconstantine@cp-advisors.com for help assessing your risk now, and to plan and implement the appropriate strategies for your situation.

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© 2016

Know the IRS Tax Rules on Claiming Hobby Losses

Will you pay tax on a business or hobby?

By Silvia McClellan, CPA, Tax Department Senior Accountant

silvia-mcclellan-highres-6Are you launching a “side business”? Perhaps you hope to turn your love of writing or photography into a paying gig. Or maybe you’d like to sell some of that beer you’re brewing in the garage. If, like many start-up business owners, you’re operating at a loss, it’s critical to understand the IRS’s tax “hobby loss” rules.

Business losses are fully deductible, but hobby losses aren’t. Deductions for hobby expenses generally can’t exceed your gross receipts (if any) from the activity. Also, you must claim hobby losses as itemized deductions, which may further reduce their tax benefits.

What’s a hobby?
“Hobby” is a bit of a misnomer. You’ll find the rules in Internal Revenue Code Section 183, entitled “Activities not engaged in for profit.” The key to distinguishing between deductible and nondeductible losses is whether you engage in an activity with a profit motive. The IRS can’t read your mind, of course, so it analyzes objective factors, including the following, to decide whether an activity is engaged in for profit:

  • Whether you treat it like a business, keep accurate records and use those records to improve its performance,
  • your expertise and that of your advisors,
  • the time and effort you (or your employees) expend in carrying on the activity,
  • whether you expect to profit from the appreciation of assets used in the activity,
  • your success in carrying on other similar or dissimilar activities,
  • your history of income or loss with respect to the activity and whether its performance is improving at a reasonable rate, and
  • the amount of occasional profits, if any.

The IRS also considers whether you have other substantial sources of income from which you’re deducting losses (thus making it more likely the activity isn’t engaged in for profit) and elements of personal pleasure or recreation (the less enjoyable the activity, the more likely you have a profit motive).

No single factor determines the outcome. An activity is presumed to be for profit if it’s been profitable in at least three of the last five tax years (although the IRS can attempt to prove that it hasn’t been).

What if you incorporate?
There’s a common misconception that the hobby loss rules apply only to individuals. While the rules don’t apply to C corporations, operating an activity through a flow-through entity such as an S corporation, limited liability company or partnership won’t shield you from the hobby loss rules. In fact, doing so can lead to unexpected — and unwelcome — tax consequences.

Consider the recent case of Estate of Stuller v. U.S. The Stullers operated a horse-breeding farm through an S corporation. They owned the land used by the farm and received rental income from the S corporation. In a decision that was upheld on appeal, a federal district court ruled that the Stullers didn’t have a profit motive and, therefore, couldn’t deduct the S corporation’s substantial losses against their income from other sources. Even though the ruling meant that the Stullers received no tax benefit from the S corporation’s rental expenses, they were still required to report the rental income on their individual tax returns.

Treat it like a business
The best way to increase the chances that the IRS will treat an activity as a business is to conduct it in a businesslike manner. Create a business plan and budget, consult advisors and keep good records.  For sound business and tax advice for your business, contact Silvia McClellan, CPA, at Ciuni & Panichi, Inc., 216-831-7171 or smcclellan@cp-advisors.com.

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© 2016

October Is National Financial Planning Month

Saving is a great start, but planning to reach your financial goals is even better.

Provided by Dane A. Wilson, Wealth Management Advisor

401(k) 403(b) audit SSAEAre you saving for retirement? Great. Are you planning for retirement? That is even better. Planning for your retirement and other long-range financial goals is an essential step – one that could make achieving those goals easier.

Saving without investing isn’t enough. Since interest rates are so low today, money in a typical savings account barely grows. It may not even grow enough to keep up with inflation, leaving the saver at a long-term financial disadvantage.

Very few Americans retire on savings alone. Rather, they invest some of their savings and retire mostly on the accumulated earnings those invested dollars generate over time.

Investing without planning usually isn’t enough. Most people invest with a general idea of building wealth, particularly for retirement. The problem is that too many of them invest without a plan. They are guessing how much money they will need once they leave work, and that guess may be way off. Some have no idea at all.

Growing and retaining wealth takes more than just investing. Along the way, you must plan to manage risk and defer or reduce taxes. A good financial plan – created with the assistance of an experienced financial professional – addresses those priorities while defining your investment approach. It changes over time, to reflect changes in your life and your financial objectives.

With a plan, you can set short-term and long-term goals and benchmarks. You can estimate the amount of money you will likely need to meet retirement, college, and health care expenses. You can plot a way to wind down your business or exit your career with confidence. You can also get a good look at your present financial situation – where you stand in terms of your assets and liabilities, the distance between where you are financially and where you would like to be.

Last year, a Gallup poll found that just 38% of investors had a written financial plan. Gallup asked those with no written financial strategy why they lacked one. The top two reasons? They just hadn’t taken the time (29%) or they simply hadn’t thought about it (27%).1

October is National Financial Planning Month – an ideal time to plan your financial future. The end of the year is approaching and a new one will soon begin, so this is the right time to think about what you have done in 2016 and what you could do in 2017. You might want to do something new; you may want to do some things differently. Your financial future is in your hands, so be proactive and plan.

Dane A. Wilson may be reached at 216-831-7171 or dwilson@cp-advisors.com
cp-advisors.com.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
  
Securities offered through 1st Global Capital Corp., Member FINRA/SIPC

Investment returns fluctuate and there is no assurance that a single rate of return will be sustained over an extended period of time. Investments are subject to market risks including the potential loss of principal invested
 
Citations.
1 – gallup.com/poll/184421/nonretired-investors-written-financial-plan.aspx [7/31/15]

 

Save Tax Dollars and Fund Your Health Savings Account

What’s the right tax-advantaged account to fund your health care expenses?

Jeff SpencerHealth care costs continue to climb. Jeffrey R. Spencer, CPA, MAcc, Ciuni & Panichi, Inc. Principal, explains some tax-friendly ways to cover your health care expenses.

Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Accounts (HRAs) all provide opportunities for tax-advantaged funding of health care expenses. But it’s important to know the difference to figure out what works best for you. Here’s an overview:

HSA
If you’re covered by a qualified high-deductible health plan (HDHP), you can contribute pretax income to an employer-sponsored HSA — or make deductible contributions to an HSA you set up yourself — up to $3,350 for individual coverage and $6,750 for family coverage for 2016. Plus, if you’re age 55 or older, you may contribute an additional $1,000.

The advantage of an HSA is you own the account and it can bear interest or be invested, growing in tax-deferred dollars similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.

FSA
Regardless of whether you have an HDHP, you can redirect pretax income to an employer-sponsored FSA up to an employer-determined limit — not to exceed $2,550 in 2016. The plan pays or reimburses you for qualified medical expenses, so you are paying for medical expenses with pretax dollars.

However, you need to predict your annual medical expenses because what you don’t use by the plan year’s end, you generally lose. Some plans may allow you to roll over up to $500 to the next year. Or it might give you a 2 1/2-month grace period to incur expenses to use up the previous year’s contribution.

HRA
An HRA is an employer-sponsored account that reimburses you for medical expenses. Unlike an HSA, no HDHP is required. Unlike an FSA, any unused portion typically can be carried forward to the next year. And there’s no government-set limit on HRA contributions. But only your employer can contribute to an HRA; employees aren’t allowed to contribute.

The best advice we can offer is: “Don’t go it alone.” We’re here to help you make the right financial decisions for yourself and your employees. Please contact Jeff at 216-831-7171 or jspencer@cp-advisors.com for more information.

You may also be interested in:

Getting Comfortable with the Home Office Tax Deduction

Tax Smart Gifting Strategies

© 2016

Why Good Governance Depends on Effective Oversight

Effective Finance Governance Protects Your Organization

MikeKlein9848Unlike public companies, an audit committee is not required by not-for-profit boards. In fact the Stanford Graduate School of Business 2015 Survey on Board of Directors of Nonprofit Organizations found a surprising 42 percent of not-for-profit organizations don’t have audit committees. If your organization is among that 42 percent, think seriously about creating an audit committee or assigning these all-important functions to another committee (e.g., finance committee).

Good audit and finance committees help ensure financial integrity, limit risk, and protect your reputation with regulators and the public. Most importantly, they help ensure good governance. Finance committee responsibilities include monitoring the organization’s budget and approving the distribution of its financial resources. Duties specific to the audit committee include oversight of:
• Financial reporting
• External and internal audit
• Compliance with legal and regulatory requirements
• Internal controls
• Form 990 review and filings and other reporting to regulatory agencies
• Recommendations in response to audit results
• Deciding whether a second opinion is required to resolve auditing issues

Ultimately, the audit (or finance) committee members are responsible for ensuring that all financial reports are accurate and portray your organization’s condition and performance transparently. Additionally committee members should look for signs of fraud — such as unreported revenue — in your organization’s financial statements.

Internal and external auditors
Finance and/or audit committee members regularly interact with the internal and external auditors. They approve the annual internal audit plan and review the internal auditors’ reports. Your committee members also may be responsible for approving the appointment of the internal audit head.  Committee members are also responsible for hiring, compensating and overseeing the external auditors as well as being their point of contact. Your committee members should regularly communicate with the auditors. For example, hold pre-audit meetings to discuss the work plan, request regular updates during the audit and conduct post-audit discussions to review findings before you present them to your board.

Controlling risk
An audit committee function that sometimes goes unmet by a finance committee relates to risk management. Committee members should ensure that  specific measures are in place to reduce your not-for-profit’s risk profile by conducting a comprehensive risk assessment to identify financial vulnerabilities such as those related to investment practices, antifraud policies, insurance coverage, and compliance with laws, regulations and donor and grantor requirements. And your committee members should take the lead in ensuring that internal controls are effective in minimizing those risks it identifies as the greatest threats.

Ideal committee members
The composition of finance and audit committees might vary, but one thing is certain — most members should have strong financial expertise including a working knowledge of financial reporting (including Generally Accepted Accounting Principles) and internal controls. Specific knowledge of not-for-profit-sector accounting and financial reporting issues is valuable too.
In addition, the American Institute of Certified Public Accountants recommends that at least a few committee members also serve on the board of directors. However, some states limit the number of audit committee members who may also serve on the board. And also be aware that appointing your board treasurer to the audit committee may create a conflict of interest, because the audit committee is responsible for independent monitoring of financial results.
Above all, committee members must maintain their independence.

We can help
The best advice we can offer is: “Don’t go it alone.” Ciuni & Panichi, Inc. has a dedicated team of professionals available to provide financial services including audit, accounting and 990 Form filings and a consulting practice to help you enrich and engage volunteer committees including the finance and audit committees. To learn more, contact Michael B. Klein, CPA, Partner-in-Charge of the Not-for-Profit Group at 216-831-7171 or mklein@cp-advisors.com.

 

Proposed IRS Regulations Could Reduce Valuation Discounts for Family-held Entities

What the proposed valuation regulation means for family-owned businesses

JRKsmallersmallerIRS Proposed Regulations clearly signal the Treasury Department’s intent to severely curtail the use of valuation discounts in family-owned entity transfers. Currently valuation discounts for items such as lack of marketability and/or lack of control are often used when valuing transfers amongst family members. A lower business valuation provides an attractive way to transfer assets to the next generation at a reduced tax cost.

Restrictions
The new regulations have four new types of restrictions called “disregarded restrictions” that will not be allowed to be taken into account when valuing certain interests that are transferred. These restrictions include the ability to liquidate the transferred interest; limit the liquidation proceeds to an amount less than a minimum value; defer the payment of the liquidation proceeds to six months or more; and permit the liquidation proceeds payment in any other manner than in cash or other property (other than certain notes). Also, taxpayers are prohibited from transferring a nominal interest to non-family members, such as employees or charities, in order to prevent a restriction from becoming a disregarded restriction.

Also, the regulation states that non-voting shares transferred to family members will be eligible for a valuation discount. However, if the owner who transfers the non-voting shares dies within three years of the transfer, the difference in value between non-voting shares and voting shares will become part of the owner’s estate.

Control and Lapsed Rights
The new regulations also expand the definition of “control” of an entity to holding at least 50 percent of capital or profits or ownership of any equity interest with the ability to cause liquidation. This expanded definition of control reduces the likelihood of being able to take a valuation discount. And the family member’s percentage of interests is calculated based on the entire family’s interest held including interest held indirectly by other entities. The new regulation also requires that if there is a lapse of a voting or liquidation right in an entity and the owner’s family holds control before and after the lapse, then its value is treated as a gift for taxation purposes.

Timing
The proposed regulations are proposed, but not yet law. The regulations were released at the beginning of August and a 90-day public comment period will ensue followed by a hearing set for December 1, 2016. The final regulations, which may be different than originally proposed, will be finalized once the Treasury Department publishes them. Although it’s not completely clear exactly what the final regulations will be, it is an indication that a change is coming.

What you should do now
Call us and we can help you prepare for the changes to come. Even if these changes are delayed or altered during the comment period and hearing, it is clear that changes are coming. Your CPA is your best adviser to help you navigate the changes for the best result for you. Contact Ciuni & Panichi, Inc. – Jim Komos, Tax Partner, at 216-831-7171 or jkomos@cp-advisors.com.

 

 

There’s still time for homeowners to save with green tax credits

Save with Some Green Tax Credits

TJCThe income tax credit for certain qualified residential alternative energy expenditures is still available through 2016.  The credit has been extended in part through 2021 by the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). So, you still have time to save both energy and taxes by making some eco-friendly investments.

What qualifies
The tax credit for residential alternative energy expenditures equals 30 percent of qualified alternative energy expenditures through 2016.  Beginning in 2017 the credit is only available for solar electric property and solar water heating property.  The credit is 30 percent through 2019 then is reduced to 26 percent for year 2020 and 22 percent in 2021.

Examples of improvement investments potentially eligible for the 30 percent credit in 2016 include:
• Eligible solar water heaters,
• Solar electricity equipment,
• Fuel cell plants,
• Small wind energy property, and
• Qualified geothermal heat pump property.

The taxpayer’s basis in their home must be reduced by the amount of the credit allowed.  Also, the credit is a nonrefundable tax credit.  This means that it can only be taken to the extent of your income tax.  The credit is available against alternative minimum tax as well.  Any credit amounts in excess of the taxpayer’s tax liability are available for carryover to the next year.

Manufacturer certifications required
When claiming the credit, you must keep with your tax records a certification from the manufacturer that the product qualifies. The certification may be found on the product packaging or the manufacturer’s website. Additional rules and limits apply. For more information about these and other green tax breaks, contact Ciuni & Panichi, Inc. Partner Tony Constantine, CPA, at 216-831-7171 or tconstantine@cp-advisors.com.

© 2016

Fraud and Inventory Loss

Hunting for misplaced “goods”

Fraud experts can help recover lost items
ReggieNovakIf your inventory numbers are not adding up during your year-end physical inventory, it may be time to uncover the source of the discrepancy and a fraud expert can help. Before assuming theft, a fraud expert determines whether the items were really stolen or were simply misplaced. In many cases, employees keep sloppy records or fail to follow proper procedures, resulting in “missing” inventory. For example, a company without a location assignment for each item, which can be an effective method of keeping tabs on overflow stock and returns, is likely to misplace inventory.

If there’s no innocent explanation for missing inventory, then the fraud expert looks for signs in the environment conducive to fraud. For example, a company with poor internal controls over purchasing, receiving and cash disbursements is at high risk of inventory theft. In addition, one person performing multiple duties within any one area of the Company can easily commit and conceal fraud.

If the expert believes inventory could have been stolen, he or she combs the records for clues. Anything that doesn’t follow established inventory procedures could be a red flag — such as odd journal entries posted to inventory, large gross margin decreases or sudden problems with out-of-stock inventory.

Exposing irregularities
Next, the expert works to prove the fraud. Inventory fraud may leave a paper (or electronic) trail, so forensic accountants typically review journal entries for unusual patterns. An entry recording a physical count adjustment made during a period when no count was taken obviously warrants investigation. The expert follows up by tracing unusual entries to supporting documents.

Vendor lists also may show suspicious patterns, such as post office box addresses substituting for street addresses, vendors with several addresses, and names closely resembling those of known vendors. Even if they’ve found no evidence of nonexistent vendors, fraud experts look at vendor invoices and purchase orders for anomalies such as unusually large invoices or alleged purchases that don’t involve delivery of goods.

Discrepancies between the amounts due per invoice, the purchase order and the amount actually paid warrant investigation. Finally, experts familiarize themselves with the cost, timing and purpose of routine purchases and flag any that deviate from the norm.

Catching the thief
Although a count performed by employees may disrupt normal business routines, it’s an effective way to learn exactly what merchandise may be missing — and could lead directly to the thief (unless the thief is involved in the physical inventory count!). Fraud experts sometimes recommend hiring an outside inventory firm to perform the count and value the inventory.
Whether employees or inventory specialists perform the job, a fraud expert carefully observes warehouse activity once employees realize a count is imminent. Thieves may attempt to shift inventory from another location to substitute for missing items they know will be discovered.

It’s important to confirm physical inventory as well.  Inventory at remote locations also can disappear, so fraud experts often will confirm quantities with the storage facility or go with the client to inspect them personally. Whenever possible, it’s best to perform a count in person rather than delegate the job to someone who may not be trustworthy. Unfortunately, sometimes it’s theft. But now you have the knowledge and evidence to address the issue appropriately.

The best advice is, “Don’t go it alone.” Contact Ciuni & Panichi, Inc. Certified Fraud Examiner, Reggie Novak, CPA, at 216-831-7171 or rnovak@cp-advisors.com.

You may also be interested in:

Go Green and Save

Selling your Business and its Customers

© 2016

Getting Comfortable with the Home Office Tax Deduction

home officeHome Office Tax Deduction

by: Eden LaLonde, CPA, MAcc

One of the best aspects of working at home is the easy commute. The second best part is it may qualify you for a tax deduction.

IRS rules require that you generally maintain a specific area in your home for use regularly and exclusively in connection with your business. What’s more, you must use the area as your principal place of business or, if you also conduct business elsewhere, use the area regularly to conduct business, such as for meeting clients and handling management and administrative functions. If you’re an employee, your use of the home office must be for your employer’s convenience and benefit.

The Internal Revenue Code provides a standard method to calculate the deduction for your home office based on the percentage of your home devoted to business use. You deduct the percentage (proportionate to the percentage of square footage used for the home office) of indirect home office expenses, including mortgage interest, property taxes, association fees, insurance premiums, utilities (if you do not have a separate hookup), security system costs, and depreciation (generally over a 39-year period). In addition, you deduct direct expenses, including business-only phone and fax lines, utilities (if you have a separate hookup), office supplies, painting and repairs, and depreciation on office furniture.

The other option is an easier way to claim the deduction, known as the simplified method. Under this method, you multiply the square footage of your home office (up to a maximum of 300 square feet) by a fixed rate of $5 per square foot. You can claim up to $1,500 per year using this method. Of course, if your deduction will be larger using the standard method, that’s the way to go.

The best advice we can offer is, “Don’t go it alone.” Contact Ciuni & Panichi or Eden LaLonde, CPA, MAcc, at 216-831-7171 or elalonde@cp-advisors.com.

You may also be interested in:

Student Loan Debt? Here’s Some Help.

College Funding Options

Three Mutual Fund Tax Hazards to Watch Out For

Tax and Your Mutual Funds

AMTInvesting in mutual funds is an easy way to diversify a portfolio, which is one reason why they’re commonly found in retirement plans such as IRAs and 401(k)s. But if you hold such funds in taxable accounts, or are considering such investments, beware of these three tax hazards:

 

  1. High turnover rates. Mutual funds with high turnover rates can create income that’s taxed at ordinary-income rates.  Turnover percent’s amount of the portfolio that is new on a year by year basis.  Choosing funds that provide primarily long-term gains can save you more tax dollars because of the lower long-term rates.
  2. Earnings reinvestments. Earnings on mutual funds are typically reinvested, and unless you keep track of these additions and increase your basis accordingly, you may report more gain than required when you sell the fund. (Since 2012, brokerage firms have been required to track — and report to the IRS — your cost basis in mutual funds acquired during the tax year.  However, you may be on your own for investments made prior to 2012.)
  3. Capital gains distributions. Buying equity mutual fund shares late in the year can be costly tax-wise. Such funds often declare a large capital gains distribution at year end, which is a taxable event. If you own the shares on the distribution’s record date, you’ll be taxed on the full distribution amount even if it includes significant gains realized by the fund before you owned the shares. And you’ll pay tax on those gains in the current year — even if you reinvest the distribution.

If your mutual fund investments aren’t limited to your tax-advantaged retirement accounts, watch out for these hazards.

The best advice we can offer is, “Don’t go it alone.” Contact David M. Reape, CPA, at Ciuni & Panichi, Inc. to help you avoid unnecessary tax liabilities. Contact us at 216-831-7171 or dreape@cp-advisors.com.

 

College Funding Options

College Funding Options:  You can plan to meet the costs through a variety of methods.

Provided by Dane A. Wilson, Wealth Management Advisor

DaneWilson-01 smaller2How can you cover your child’s future college costs? Saving early (and often) may be the key for most families. Here are some college savings vehicles to consider.

529 plans. Offered by states and some educational institutions, these plans let you save up to $14,000 per year for your child’s college costs without having to file an IRS gift tax return. A married couple can contribute up to $28,000 per year. (An individual or couple’s annual contribution to the plan cannot exceed the IRS yearly gift tax exclusion.) These plans commonly offer you options to try and grow your college savings through equity investments. You can even participate in 529 plans offered by other states, which may be advantageous if your student wants to go to college in another part of the country.1,2

While contributions to a 529 plan are not tax-deductible, 529 plan earnings are exempt from federal tax and generally exempt from state tax when withdrawn, as long as they are used to pay for qualified education expenses of the plan beneficiary. If your child doesn’t want to go to college, you can change the beneficiary to another child in your family. You can even roll over distributions from a 529 plan into another 529 plan established for the same beneficiary (or for another family member) without tax consequences.1

Grandparents can start a 529 plan, or other college savings vehicle, just as parents can; the earlier, the better. In fact, anyone can set up a 529 plan on behalf of anyone. You can even establish one for yourself.1

529 plans have been improved for 2016 with two additional features. One, you can now use 529 plan dollars to pay for computer hardware, software, and computer-related technology, as long as such purchases are qualified higher education expenses. Two, you can now reinvest any 529 plan distribution refunded to you by an eligible educational institution, as long as it goes back into the same 529 plan account. You have a 60-day period to do this from when you receive the refund.3

If you have a 529 plan and received such a refund at any time during January 1-December 18, 2015, you have until Tuesday, February 16, 2016 to put that money back into your 529 plan. If you meet that deadline, the distribution will not be seen as a non-qualified one by the IRS (i.e., fully taxable plus a 10% penalty).3

Coverdell ESAs. Single filers with adjusted gross income (AGI) of $95,000 or less and joint filers with AGI of $190,000 or less can pour up to $2,000 annually into these tax-advantaged accounts. While the annual contribution ceiling is much lower than that of a 529 plan, Coverdell ESAs have perks that 529 plans lack. Money saved and invested in a Coverdell ESA can be used for college or K-12 education expenses. Coverdell ESAs offer a broader variety of investment options compared to many 529 plans, and plan fees are also commonly lower.4

Contributions to Coverdell ESAs aren’t tax-deductible, but the account enjoys tax-deferred growth and withdrawals are tax-free so long as they are used for qualified education expenses. Contributions may be made until the account beneficiary turns 18. The money must be withdrawn when the beneficiary turns 30 (there is a 30-day grace period), or taxes and penalties will be incurred. Money from a Coverdell ESA may even be rolled over tax-free into a 529 plan (but 529 plan money may not be rolled over into a Coverdell ESA).2,4

UGMA & UTMA accounts. These all-purpose savings and investment accounts are often used to save for college. When you put money in the account, you are making an irrevocable gift to your child. You manage the account assets. When your child reaches the “age of majority” (usually 18 or 21, as defined by state UGMA or UTMA law), he or she can use the money to pay for college. However, once that age is reached, that child can also use the money to pay for anything else.5

Cash value life insurance. If you have a “cash-rich” permanent life insurance policy, you can take a loan from (or even cash out) the policy to meet college costs. The principal portions of these loans are tax-exempt in most instances. Should you fail to repay the loan balance, the policy’s death benefit will be lower, however.6

Did you know that the value of a life insurance policy is not factored into a student’s financial aid calculation? That stands in contrast to 529 plan funds, which are categorized as a parental asset even if the child owns the plan.6

Imagine your child graduating from college debt-free. With the right kind of college planning, that may happen. Talk to a financial advisor today about these savings methods and others.

Dane A. Wilson may be reached at 216-831-7171 or dwilson@cp-advisors.com
www.cp-advisors.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Dane A. Wilson may be reached at 216-831-7171 or dwilson@cp-advisors.com
cp-advisors.com.
Citations.
1 – irs.gov/uac/529-Plans:-Questions-and-Answers [8/24/15]
2 – time.com/money/3149426/college-savings-esa-529-differences-financial-aid/ [8/21/14]
3 – figuide.com/new-benefits-for-529-plans.html [1/13/16]
4 – time.com/money/4102891/coverdell-529-education-college-savings-account/ [11/9/15]
5 – franklintempleton.com/investor/products/goals/education/ugma-utma-accounts?role=investor [2/3/16]
6 – investopedia.com/articles/personal-finance/102915/life-insurance-vs-529.asp [10/29/15]

Tax-smart Gifting Strategies to Consider Now

More Tax Savings Ideas

tax giftingIf your 2015 tax liability was higher than you’d hoped and you’re ready to transfer some assets to your loved ones, it’s time to get started. Giving away assets will, of course, help reduce the size of your taxable estate. But with income-tax-smart gifting strategies, it also can reduce your income tax liability — and perhaps your family’s tax liability overall. Consider the following:

  • Gift appreciated or dividend-producing assets to loved ones eligible for the 0 percent rate. The 0 percent rate applies to both long-term gain and qualified dividends that would be taxed at 10 or 15 percent based on the taxpayer’s ordinary-income rate.
  • Gift appreciated or dividend-producing assets to loved ones in lower tax brackets. Even if no one in your family is eligible for the 0 percent rate, transferring assets to loved ones in a lower income tax bracket than you can still save taxes overall for your family. This strategy can be even more powerful if you’d be subject to the 3.8 percent net investment income tax on dividends from the assets or any gains if you sold the assets.
  • Don’t gift assets that have declined in value. Instead, sell the assets so you can take the tax loss. Then gift the sale proceeds.

If you’re considering making gifts to someone who’ll be under age 24 on December 31, make sure he or she won’t be subject to the “kiddie tax.” And if your estate is large enough that gift and estate taxes are a concern, you need to think about those taxes, too.

The best advice we can offer is, “Don’t go it alone.” Contact Tony Constantine, CPA at Ciuni & Panichi, Inc. today to explore tax strategies that will position you for a good tax season in 2017 and beyond at 216-831-7171 or tconstantine@cp-advisors.com.