2016 IRA Contributions — It’s Not Too Late!

Yes, there’s still time to make 2016 contributions to your IRA.

IRA piggieThe deadline for such contributions is April 18, 2017. If the contribution is deductible, it will lower your 2016 tax bill. But even if it isn’t, making a 2016 contribution is likely a good idea.

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

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

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

  1. Deductible traditional. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn’t exceed certain limits — the contribution is fully deductible on your 2016 tax return. Account growth is tax-deferred; distributions are subject to income tax.
  2. Roth. The contribution isn’t deductible, but qualified distributions — including growth — are tax-free. Income-based limits, however, may reduce or eliminate your ability to contribute.
  3. Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions you’ll be taxed only on the growth. Alternatively, shortly after contributing, you may be able to convert the account to a Roth IRA with minimal tax liability.

Want to know which option best fits your situation? Contact Tony Constantine, CPA, Partner at Ciuni & Panichi, Inc. at 216.831.7171 or tconstantine@cp-advisors.com.

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Safe Harbor Deduction

Elderly Parent as a Tax Deduction
© 2017

Safe Harbor Deduction

safe harborTangible property safe harbors help maximize deductions

If last year your business made repairs to tangible property, such as buildings, machinery, equipment or vehicles, you may be eligible for a valuable deduction on your 2016 income tax return. But you must make sure they were truly “repairs,” and not actually “improvements.”
Why? Costs incurred to improve tangible property must be depreciated over a period of years. But costs incurred on incidental repairs and maintenance can be expensed and immediately deducted.

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

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

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

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

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

  1. Routine maintenance safe harbor. Recurring activities dedicated to keeping property in efficient operating condition can be expensed. These are activities that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.Amounts incurred for activities outside the safe harbor don’t necessarily have to be capitalized, though. These amounts are subject to analysis under the general rules for improvements.
  2. Small business safe harbor. For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. A qualified small business is generally one with gross receipts of $10 million or less.

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

Need more information?  Contact James Komos, CPA, CFP at Ciuni & Panichi, Inc. 216.831.7171 or jkomos@cp-advisors.com.

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Donating Appreciated Stock
© 2017

What if You Find a Mistake in Your Retirement Plan?

How common is this? How can you try to correct it if it occurs?

Provided by Dane A. Wilson, Wealth Management Advisor

401(k) 403(b) audit SSAEYour latest retirement plan account statement arrives in your email inbox. You take a look at it – and something seems amiss. “That can’t be right,” you say to yourself. There must be some kind of mistake. Who should you talk to about this? Who can fix it?

Mistakes do happen with retirement plans. As a consultant to these programs told the trade journal PLANSPONSOR, they are “ubiquitous.” In fact, they are so prevalent that the Internal Revenue Service devotes more than 20 web pages to helping employers fix them over at irs.gov.1,2

A small business has much on its collective mind, and sometimes its retirement savings program may get short shrift. Errors may occur regarding ongoing salary deferral amounts, plan participant loans, or company matches when an employee’s pay is boosted by tips or bonuses. In the case of traditional pension plans, an employer may even pay the retired worker too much.

How can you detect mistakes? Look at your paystubs consistently to make sure your account balance reflects your contributions. This will not be a direct relationship because of compound interest and yield over the years, but if something is really off, it should be evident. If you happen to have taken a loan from your plan, check to see that the balance reflects this. If you have changed your investment mix or the percentage of salary you defer into the plan per paycheck, examine your account statements over the next several months or year to confirm that these changes are carried out.

How can you try to fix these errors? You should turn to the plan sponsor (your employer) first. Approach your employer’s human resources department according to procedure. Read the rules for addressing such mistakes within the summary plan description (the booklet about the plan that you should have received at or shortly after your enrollment) and bring your account statements with you. Your employer will want to know about any potential mistake, because if it is not corrected, it could mean trouble with the IRS.1,3

About 40% of all workplace retirement plans in America are sponsored by companies with less than 10 employees. In such cases, your human resources contact may, effectively, be your boss. How should you bring up such a delicate matter to him or her?3

One, meet with your boss privately and be very polite. Maintain a pleasant attitude. Avoid appearing disgruntled. The conversation could awaken your boss to the need for better administration, better supervision of the plan.

If the answers you get at work don’t seem adequate, then contact the plan provider (the investment firm that furnishes the plan for your employer). You could also ask the financial professional who consults you to look into the matter on your behalf.

If you have retired after participating in a pension plan and you wish to challenge what you feel is a mistake, you may want to contact the Pension Rights Center at 888-420-6550 or via its website, pensionhelp.org.4

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.
 
  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 – plansponsor.com/Plan-Sponsors-Should-Be-Aware-of-Common-Errors/ [6/1/15]
2 – irs.gov/retirement-plans/plan-sponsor/fixing-common-plan-mistakes [9/15/16]
3 – thefiscaltimes.com/Articles/2014/01/08/How-Convince-Your-Employer-Fix-Your-401k [1/8/14]
4 – marketwatch.com/story/what-happens-when-theres-a-mistake-in-your-401k-2016-10-24 [10/24/16]

 

Elderly Parent as a Tax Deduction

When an elderly parent might qualify as your dependent

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

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

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

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

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

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

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

For more information and to see if you qualify, contact Ciuni & Panichi, Inc. Partner Tony Constantine, CPA at 216.831.7171 or tconstantine@cp-advisors.com.

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© 2017

Don’t Lose Revenue to Fraud

Getting employees to join the fight against fraud

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

ReggieNovakThe manufacturing sector is especially vulnerable to fraud schemes involving billing, corruption, and noncash assets, such as theft of inventory and equipment. Research suggests that businesses that provide a convenient and confidential way for employees to report unethical behavior are more likely to unearth embezzlement and other wrongdoing sooner and suffer smaller losses than those without established “whistleblower” policies.

To Catch a Thief
Proactive fraud prevention and detection controls can substantially reduce a company’s risk of fraud and minimize fraud losses. But all antifraud tools aren’t created equal. In each biennial edition of its Report to the Nations on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners (ACFE) has consistently found that tips are the most common method of detecting fraud by a significant margin.

In the 2016 report, the ACFE found that more than 39 percent of frauds were detected by tips. About half of these tips came from employees, and the rest were reported by vendors, customers, and anonymous sources. The second most common method of detection was internal audit, which unearthed fraud in 16.5 percent of the cases in the study.

Based on these statistics, it stands to reason that reporting hotlines can be a critical weapon when deterring fraud and minimizing losses. The ACFE reports that organizations that had reporting hotlines were much more likely to detect fraud, 47 percent compared to 28 percent.

Many private, smaller companies forgo reporting hotlines, because they’re seen as expensive and too formal for closely held organizations. However the median loss suffered by small organizations (those with fewer than 100 employees) was the same as that incurred by the largest organizations (those with more than 10,000 employees) the study found. This type of loss is likely to have a much greater impact on smaller organizations.

Implementing an effective reporting mechanism can be a powerful way to prevent and detect fraud for companies of all sizes.

Minimize the Fear of Retaliation
Most employees are honest and want to do what’s best for their employers. But the prevalence of anonymous tips suggests that many whistleblowers fear retaliation from co-workers if they speak up against wrongdoers or their allegations don’t pan out. This is especially true in smaller companies where it may be harder to safeguard a whistleblower’s identity.

An important component of an effective reporting hotline is to establish policies to protect the confidentiality of whistleblowers and prevent backlash, including verbal bullying or job loss — especially when employees report on suspected wrongdoing by their superiors. Often it’s beneficial to consult with an attorney to ensure that the company’s hotline and related policies comply with employment laws and other regulations that may apply where you operate.

When selecting a manager to oversee the reporting hotline, choose someone who’s fair and impartial and engenders trust among people inside and outside the organization. Provide your “ethics officer” with authority and training to act on information conveyed through the hotline. Hotlines can also be managed externally by third-party vendors.

Promote and Facilitate Reporting
Of course, employees need to know about the hotline before they’ll use it. Once you implement a confidential telephone or Internet reporting hotline, conduct a meeting to promote it to both would-be perpetrators and those who might make a report, including employees, clients, shareholders and vendors. The hotline should be convenient to use and available 24/7 in multiple languages.

Distribute guidelines for the reporting hotline when it’s first launched, when you conduct periodic fraud prevention training and when new employees join the company. Also create print and electronic promotional materials for the hotline to display in high-profile locations, such as in the lunchroom and on the company’s intranet site.

Remember, too, that reporting hotlines can unearth other problems besides fraud, such as unsafe working conditions or drug abuse by co-workers. Some companies even set up their hotlines to serve as an electronic “suggestion box” for ways to improve operating efficiencies or offer new product ideas.

Follow Up on Tips
Employees are more likely to report fraud if the company acts on tips in a prompt, serious manner and demonstrates a zero-tolerance policy for fraud. The most serious allegations should be reviewed with legal counsel first. Often, timely follow-up necessitates the use of an outside forensic accounting specialist who is trained in collecting a thorough and defensible trail of evidence.

The best advice we can offer is, “Don’t go it alone.” To ensure your business is protected, contact Reggie Novak, CPA, CFE, Senior Manager at Ciuni & Panichi, Inc., at 216-831-7171 or rnovak@cp-advisors.com.

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When to File a Gift Tax Return

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

TJCGenerally, you’ll need to file gift tax return if you made gifts that exceeded the $14,000-per-recipient gift tax annual exclusion (unless to your U.S. citizen spouse) and in certain other situations. If you transferred hard-to-value property, such as artwork or interests in a family business, consider filing a gift tax return even if not required.

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

When filing is required
You’ll need to file a gift tax return for 2016 if, during the tax year, you made gifts:

  • That exceeded the $14,000-per-recipient gift tax annual exclusion (other than to your  U.S. citizen spouse)
  • That exceeded the $148,000 annual exclusion for gifts to a noncitizen spouse
  • You wish to split with your spouse to take advantage of your combined $28,000 annual  exclusions
  • To a Section 529 college savings plan for your child, grandchild or other loved one  and you wish to accelerate up to five years’ worth of annual exclusions ($70,000) into  2016
  • Of future interests — such as remainder interests in a trust — regardless of the amount
  • Of jointly held or community property

When filing isn’t required
No return is required if your gifts for the year consist solely of annual exclusion gifts, present interest gifts to a U.S. citizen spouse, qualifying educational or medical expenses paid directly to a school or health care provider, and political or charitable contributions.

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

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

The best advice we can offer is, “don’t go it alone.” Contact Tony Constantine, CPA, Ciuni & Panichi, Inc. Tax Partner, at 216-831-7171 or tconstantine@cp-advisors.com for the advice you need for a positive tax filing experience.

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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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© 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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Are Your Business Taxes Going Up Or Down?

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.

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© 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.