Monthly Archives: November 2017

Moving 2018 Property Tax Payment to 2017

Why you may want to accelerate your property tax payment into 2017

own a homeAccelerating deductible expenses, such as property tax on your home, into the current year typically is a good idea. Why? It will defer tax, which usually is beneficial. Prepaying property tax may be especially beneficial this year, because proposed tax legislation might reduce or eliminate the benefit of the property tax deduction beginning in 2018.

Proposed changes
The initial version of the House tax bill would cap the property tax deduction for individuals at $10,000 in 2008. The initial version of the Senate tax bill would eliminate the property tax deduction for individuals altogether.

In addition, tax rates under both bills would go down for many taxpayers, making deductions less valuable. And because the standard deduction would increase significantly under both bills, some taxpayers might no longer benefit from itemizing deductions.

2017 year-end planning
You can prepay (by December 31) property taxes that relate to 2017 but that are due in 2018 and deduct the payment on your 2017 return. But you generally can’t prepay property tax that relates to 2018 and deduct the payment on your 2017 return.

Prepaying property tax will in most cases be beneficial if the property tax deduction is eliminated beginning in 2018. But even if the property tax deduction is retained, prepaying could still be beneficial. Here’s why:

  • If your property tax bill is very large, prepaying is likely a good idea in case the property  tax deduction is capped beginning in 2018.
  • If you could be subject to a lower tax rate in 2018 or won’t have enough itemized  deductions overall in 2018 to exceed a higher standard deduction, prepaying is also  likely tax-smart because a property tax deduction next year would have less or no  benefit.

However, there are a few caveats:

  • If you’re subject to the AMT in 2017, you won’t get any benefit from prepaying your  property tax. And if the property tax deduction is retained for 2018, the prepayment could  cost you a tax-saving opportunity next year.
  • If your income is high enough that the income-based itemized deduction reduction  applies to you, the tax benefit of a prepayment may be reduced.
  • While the initial versions of both the House and Senate bills generally lower tax rates,  some taxpayers might still end up being subject to higher tax rates in 2018, either  because of tax law changes or simply because their income goes up next year. If you’re  among them and the property tax deduction is retained, you may save more tax by  holding off on paying property tax until it’s due next year.

It’s still uncertain what the final legislation will contain and whether it will be passed and signed into law before the end of this year. But it’s good to consider the proposed changes and plan for the best outcome for you based on the information we have.

Our advice is:  Don’t go it alone. David Reape, CPA, Ciuni & Panichi, Inc. Tax Principal has been helping clients make sound financial decisions related to tax for over 20 years. He is a trusted advisor to both not-for-profit and for- profit organizations. If you have questions, contact him at: 216-831-7171 or dreape@cp-advisors.com.

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Risk Management and Your Business

Fortifying your Business with Enterprise Risk Management

Medieval castle, SpainHundreds of years ago, prosperous towns managed the various risks of foreign invaders, thieves and wild animals by fortifying their entire communities with walls and towers. Today’s business owners can take a similar approach with enterprise risk management (ERM).

Assessing threats
In short, ERM is an integrated, companywide system of identifying and planning for risk. Many larger companies have entire departments devoted to it. If your business is ready to implement an ERM program, be prepared for a lengthy building process.

This isn’t an undertaking most business owners will be able to complete themselves. You’ll need to sell your managers and employees on ERM from the top down. After you’ve gained commitment from key players, spend time assessing the risks your business may face. Typical examples include:

  • Financial perils,
  • information technology attacks or crashes,
  • weather-related disasters,
  • regulatory compliance debacles, and
  • supplier/customer relationship mishaps.

Because every business is different, you’ll likely need to add other risks distinctive to your company and industry.

Developing the program
Recognizing risks is only the first phase. To truly address threats under your ERM program, you’ll need to clarify what your company’s appetite and capacity for each risk is, and develop a cohesive philosophy and plan for how they should be handled. Say you’re about to release a new product. The program would need to address risks such as:

  • Potential liability,
  • protecting intellectual property,
  • shortage of raw materials,
  • lack of manufacturing capacity, and
  • safety regulation compliance.

Again, the key to success in the planning stage is conducting a detailed risk analysis of your business. Gather as much information as possible from each department and employee.

Depending on your company’s size, engage workers in brainstorming sessions and workshops to help you analyze how specific events could alter your company’s landscape. You may also want to designate an “ERM champion” in each department who will develop and administer the program.

Ambitious undertaking
Yes, just as medieval soldiers looked out from their battlements across field and forest to spot incoming dangers, you and your employees must maintain a constant gaze for developing risks.

Our advice is: “Don’t go it alone.” Contact Reggie Novak, CPA, CFE, Ciuni & Panichi, Inc., Senior Manager for help at rnovak@cp-advisors.com or 216.831.7171. He is experienced in risk assessment and management and with his expertise, he can help you and your employees design and implement a program to protect your business.

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Private Companies and Financial Reporting

GAAP vs. Tax-Basis Reporting

GAAP vs. tax-basis reporting: Choosing the right model for your business

Stock Trader Watching Computer Screens With Hands On HeadVirtually every business must file a tax return. Some private companies choose to issue tax-basis financial statements, rather than statements that comply with U.S. Generally Accepted Accounting Principles (GAAP), in order to keep their financial statements in line with their tax return. But the method of reporting has implications beyond the format of the financial statements, impacting specific line items on the financial statements.  Here are the key differences between these two financial reporting options.

GAAP
GAAP is the most common financial reporting standard in the United States. The Securities and Exchange Commission requires public companies to follow it. Many lenders expect private borrowers to follow suit, because GAAP is familiar and consistent.

In a nutshell, GAAP is based on the principle of conservatism, which generally ensures proper matching of revenue and expenses with a reporting period. The principle also aims to prevent businesses from overstating profits and asset values to mislead investors and lenders.

Tax-basis reporting
Compliance with GAAP can also be time-consuming and costly, depending on the level of assurance provided in the financial statements. So some smaller private companies opt to report financial statements using a special reporting framework. The most common type is the tax-basis format.

Tax-basis statements employ the same methods and principles that businesses use to file their federal income tax returns. Contrary to GAAP, tax law tends to favor accelerated gross income recognition and won’t allow taxpayers to deduct expenses until the amounts are known and other requirements have been met.

Key differences
When comparing GAAP and tax-basis statements, one difference relates to terminology used on the income statement: Under GAAP, businesses report revenues, expenses and net income. Tax-basis entities report gross income, deductions and taxable income. Their nontaxable items typically appear as separate line items or are disclosed in a footnote.

Capitalization and depreciation of fixed assets is another noteworthy difference. Under GAAP, the cost of a fixed asset (less its salvage value) is capitalized and systematically depreciated over its useful life. Businesses must assess whether useful lives and asset values remain meaningful over time and they may occasionally incur impairment losses if an asset’s market value falls below its book value.

For tax purposes, fixed assets typically are depreciated under the Modified Accelerated Cost Recovery System (MACRS), which generally results in shorter lives than under GAAP. Salvage value isn’t subtracted for tax purposes, but Section 179 expensing and bonus depreciation are subtracted before computing MACRS deductions.

Other reporting differences exist for inventory, pensions, leases, and accounting for changes and errors. In addition, businesses record allowances for bad debts, sales returns, inventory obsolescence and asset impairment under GAAP. But these allowances generally aren’t permitted under tax law; instead, they are deducted when transactions take place or conditions are met that make the amount fixed and determinable. Tax law also limits the deduction of certain expenditures such as penalties, fines, meals and entertainment and accrual expenses not paid within 2-1/2 months of year-end.

Pick a winner
Tax-basis reporting is a shortcut that makes sense for certain types of businesses. But for others, tax-basis financial statements may result in missing or even misleading information. Contact Herzl Ginsburg, CPA, Ciuni & Panichi, Inc. Audit and Accounting Services Department senior manager, at hginsburg@cp-advisors.com or 216.831.7171 to discuss which reporting model will work best for your business.

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Avoid ERISA Litigation

Avoid ERISA litigation with attention to common red flags

ERISAAny size retirement plan can run into serious trouble when sponsors aren’t careful. With some planning, though, your qualified retirement plan doesn’t have to be the target of ERISA litigation. Awareness of some of the most common red flags leading to litigation might be helpful.

Reasonable expenses
Of course, you can’t assure consistently strong investment performance. But plan sponsors can — and must — ensure that expenses are reasonable.

When your plan’s investment portfolios are performing well, it’s easy to pay less attention to the recordkeeping costs and investment management fees. But when performance is subpar, out-of-line expenses stick out like the proverbial sore thumb. Make sure you schedule regular, independent reviews of your plan expenses and fees every three to five years as part of your due diligence.

Opaque fee structures
In the past, complex and opaque fee structures such as revenue-sharing arrangements between asset managers and third-party administrators made it harder to get a handle on cost. But with the U.S. Department of Labor’s fee disclosure regulations now in their fourth year, pleading ignorance is no excuse. In fact, it never really was.

Mutual fund shares with built-in revenue sharing features still exist but, with required disclosure statements, it’s easier for you (and plan participants) to understand what they are. Although these built-in revenue sharing features aren’t inherently bad, they tend to be associated with funds that have higher expense charges.

In some plan fee litigation, courts have deemed fee-sharing arrangements a payoff to an administrator to recommend those funds, subordinating its assessment of the funds’ merits as sound investments.

Bundled services
Another expense-related red flag that could trigger litigation is exclusive use of a bundled plan provider’s investment funds. This also can raise questions about the effort that you put into investment performance evaluation.

So if you use only a bundled provider’s funds, you could give the appearance of not performing your fiduciary duty to seek out the most appropriate and competitively priced funds. And in fact, the odds are slim that one bundled provider has best-of-class funds in all of your desired investment strategy categories and asset classes. When retaining a bundled provider, question whether the recommendation of primarily proprietary funds could result in a conflict of interest if better performing and lower cost funds are available on their platform.

Share classes
Even when your plan’s investment lineup features funds from multiple asset management companies, you could be inadvertently flying a red flag if the funds in your investment menu are in an expensive share class. Individual investors, unless they have very deep pockets, generally have access to only retail-priced share classes. In contrast, retirement plans, even small ones, typically can use more competitively priced institutional share classes. The failure to use institutionally priced share classes has been at the heart of many class actions against plan sponsors.

Different share classes of the same mutual fund have different ticker symbols; that’s one easy way to determine what’s in the portfolio. Fund companies that offer shares with sales loads typically offer more variations, with “A,” “B” and “C” categories of retail shares, and an institutionally priced “I” share class without embedded sales charges.

Having some high-cost investments in your fund lineup isn’t in itself a reason that you’ll be deemed to have breached your fiduciary duties. There may indeed be good reasons to include them, notwithstanding the higher costs.

Investment policy statements
The concept of “procedural prudence” is embedded in ERISA and case law. This means plan sponsors must establish — and follow — policies and procedures to safeguard participants’ interests and set the criteria used to evaluate vendors, including asset managers.

Create an investment policy statement (IPS) to articulate your vision for plan investments overall, and the investment options you want to make available to participants. The IPS should clearly state:

  • What kind of assets you’ll include in investment options,
  • The degree of investment risk and volatility that’s acceptable,
  • How you’ll assess investment performance, and
  • When you’ll change managers.

Although having an IPS isn’t obligatory, doing so can show that you’re exercising procedural prudence — provided you can document your compliance with it. Merely signaling prudence won’t get you off the hook; following carefully crafted procedures and policies will go a long way toward preventing missteps that could lead to litigation in the first place. If you already have an IPS, be sure to follow it.

Next steps
Avoiding ERISA litigation is on every plan sponsor’s wish list. Reviewing expenses, fee structures and bundled services, and creating and following an IPS, can help you achieve this. Start by making periodic review of these areas the norm, in good times and bad.

Our advice is:  Don’t go it alone. Contact George Pickard, CPA, Ciuni & Panichi, Inc. Accounting and Audit Senior Manager, at 216-831-7171 or gpickard@cp-advisors.com for help with your plan. His expertise includes performing your plan audit, advising you on compliance issues and helping to avoid litigation.

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More Tax Reform Details Revealed

Tax Reform Details

Families and Individuals
The number of tax brackets for individuals have been reduced from seven to four brackets, with the top bracket remaining at 39.6%. Preliminary break points are as follows: komos tax
The lower tax rates begin to phase-out for income in excess of $1.2 million if filing joint, $1 million of all others.

State and local income taxes will no longer be deductible.  Only the first $10,000 of real estate taxes will be deductible.  Mortgage interest on new mortgages will only be deductible to the extent of the first $500,000 of debt.  The alternative minimum tax will go away.  The estate tax will be phased-out.

Business Tax Reform
Corporate Income Tax is reduced from 35 percent today to 20 percent.

Pass-through business income would be taxed depending on the type of business and the owner’s level of activity in the business.  This includes sole proprietorships, partnerships, Subchapter-S corporations, and limited liability companies.

  1. Personal service type business income – maximum rate of 39.6%
  2. Active owners in non-personal service business entities – maximum rate of 35%
  3. Other non-personal service business owners – maximum rate of 25%

Flow through firms earning less than $25 million can deduct interest in full. Corporations and large flow through firms are limited to an interest deduction equal to roughly 30 percent of profits.

Flow through firms can use small business expensing, which rises from $1 million to $5 million annually. All other firms can immediately expense all business investments (except buildings, land, and intangibles) for the next five years. This is known as “full business expensing.”

Ciuni & Panichi, Inc. will continue to stay abreast of the tax reform movement and will continue to keep you informed of significant changes. If you have any concerns, please contact, Jim Komos, CPA, CFP, Tax Partner, at 216-831-7171 or jkomos@cp-advisors.com

Investors: Beware of the Wash Sale Rule

Don’t let the wash sale rule wash out the potential tax benefits of a capital loss.

Wash sale ruleA tried-and-true tax-saving strategy for investors is to sell assets at a loss to offset gains that have been realized during the year. So if you’ve cashed in some big gains this year, consider looking for unrealized losses in your portfolio and selling those investments before year-end to offset your gains. This can reduce your 2017 tax liability.

But what if you expect an investment that would produce a loss if sold now, to recover and thrive in the future? Or perhaps you simply want to minimize the impact on your asset allocation. You might think you can simply sell the investment at a loss and then immediately buy it back. Not so fast: You need to be aware of the wash sale rule.

The rule up close
The wash sale rule prevents you from taking a loss on a security if you buy a substantially identical security (or an option to buy such a security) within 30 days before or after you sell the security that created the loss. You can recognize the loss only when you sell the replacement security.

Keep in mind that the rule applies even if you repurchase the security in a tax-advantaged retirement account, such as a traditional or Roth IRA.

Achieving your goals
Fortunately, there are ways to avoid the wash sale rule and still achieve your goals:

  • Sell the security and immediately buy shares of a security of a different company in the  same industry or shares in a mutual fund that holds securities much like the ones you  sold.
  • Sell the security and wait 31 days to repurchase the same security.
  • Before selling the security, purchase additional shares of that security equal to the  number you want to sell at a loss. Then wait 31 days to sell the original portion.

If you have a bond that would generate a loss if sold, you can do a bond swap. This is where you sell a bond, take a loss and then immediately buy another bond of similar quality and duration from a different issuer. Generally, the wash sale rule doesn’t apply because the bonds aren’t considered substantially identical. Thus, you can achieve a tax loss with virtually no change in economic position.

Minimizing your tax liability on your investments can be complicated. Our advice is, “Don’t go it alone.” James R. Komos, CPA, CFP, Tax Department Partner-in-Charge, has extensive experience in tax planning and preparation and he is a certified financial planner. He has the knowledge and expertise you need to make the right decisions for your family and business finances. Contact him at jkomos@cp-advisors.com or 216-831-7171.

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