Author Archives: Ciuni & Panichi

Unlock hidden cash from your balance sheet

Cyber security concept: keyholeUnlock money to buy assets

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

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

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

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

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

Payables
With payables, the approach is generally the opposite of how to get cash from receivables. That is, you want to delay the payment process to keep yourself in the best possible cash position.
But there’s a possible downside to this strategy: Establishing a reputation as a slow payer can lead to unfavorable payment terms and a compromised credit standing. If this sounds familiar, see whether you need to rebuild your vendors’ trust. The goal is to, indeed, take advantage of deferred payments as a form of interest-free financing while still making those payments within an acceptable period.

Is your balance sheet lean?
Smooth day-to-day operations require a steady influx of cash. By cutting the “fat” from your working capital accounts, you can generate and deploy liquid cash to maintain your company’s competitive edge and keep it in good standing with stakeholders.

For more ideas on how to manage balance sheet items more efficiently, contact George Pickard, CPA, MSA, Ciuni & Panichi, Inc. Principal, at gpickard@cp-advisors.com or 216-831-7171.

©2018

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Time for Strategic Planning

Make Budgeting a News Year Resolution

 

Two tax credits just for small businesses

Small Business Tax CreditTwo tax credits just for small businesses may reduce your 2017 and 2018 tax bills

Tax credits reduce tax liability dollar-for-dollar, potentially making them more valuable than deductions, which reduce only the amount of income subject to tax. Maximizing available credits is especially important now that the Tax Cuts and Jobs Act has reduced or eliminated some tax breaks for businesses. Two still-available tax credits are especially for small businesses that provide certain employee benefits.

1. Credit for paying health care coverage premiums
The Affordable Care Act (ACA) offers a credit to certain small employers that provide employees with health coverage. Despite various congressional attempts to repeal the ACA in 2017, nearly all of its provisions remain intact, including this potentially valuable tax credit.

The maximum credit is 50 percent of group health coverage premiums paid by the employer, if it contributes at least 50 percent of the total premium or of a benchmark premium. For 2017, the full credit is available for employers with 10 or fewer full-time equivalent employees (FTEs) and average annual wages of $26,200 or less per employee. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $52,400.

The credit can be claimed for only two years, and they must be consecutive. (Credits claimed before 2014 don’t count, however.) If you meet the eligibility requirements but have been waiting to claim the credit until a future year when you think it might provide more savings, claiming the credit for 2017 may be a good idea. Why? It’s possible the credit will go away in the future if lawmakers in Washington continue to try to repeal or replace the ACA.

At this point, most likely any ACA repeal or replacement wouldn’t go into effect until 2019 (or possibly later). So if you claim the credit for 2017, you may also be able to claim it on your 2018 return next year (provided you again meet the eligibility requirements). That way, you could take full advantage of the credit while it’s available.

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

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

If you didn’t create a retirement plan in 2017, you might still have time to do so. Simplified Employee Pensions (SEPs) can be set up as late as the due date of your tax return, including extensions. If you’d like to set up a different type of plan, consider doing so for 2018 so you can potentially take advantage of the retirement plan credit (and other tax benefits) when you file your 2018 return next year.

Determining eligibility
Keep in mind that additional rules and limits apply to these tax credits. We’d be happy to help you determine whether you’re eligible for these or other credits on your 2017 return and also plan for credits you might be able to claim on your 2018 return if you take appropriate actions this year. Please contact Robert Smolko, CPA, Ciuni & Panichi, Inc. partner, at 216-831-7171 or rsmolko@cp-advisors.com for sound tax and business advice when making decisions about your business.

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7 steps to choosing a successor for your family business

Cash Balance Plans

7 steps to choosing a successor for your family business

Will your family business survive your retirement?

Small businessThere’s an old saying regarding family-owned businesses: “Shirtsleeves to shirtsleeves in three generations.” It means the first-generation owner started in shirtsleeves and built the company up from nothing but, by the third generation, the would-be owner is back in shirtsleeves with nothing because the business failed or was sold.

Although you can’t guarantee your company will buck this trend, you can take extra care when choosing a successor to give your family business a fighting chance. Here are seven steps to consider:

  1. Make no assumptions. Many business owners assume their son or daughter wants to run the company or that a particular child is right for the role. But such an assumption can doom the company.
  2. Decide which family members are viable candidates, if any. External parties such as professional advisors or an advisory board can provide invaluable input. Outsiders are more likely to be impartial and have no vested interest in your decision. They might help you realize that someone who’s not in your family is the best choice.
  3. Look at skills and temperament. Once you’ve settled on a few candidates, hold private meetings with each to discuss the leadership role. Get a feel for whether anyone you’re considering may lack the skills or temperament to run the business.
  4. If there are multiple candidates, give each a fair shot. This is no different from what happens in publicly held companies and larger private businesses. Allow each qualified candidate to fill a position at the company and move up the management ladder.
  5. Rotate the jobs each candidate performs, if possible. Let them gain experience in many areas of the business, gradually increasing their responsibilities and setting more rigorous goals. You’ll not only groom a better leader, but also potentially create a deeper management team.
  6. Clearly communicate your decision. After a reasonable period of time, pick your successor. Meet with the chosen candidate to discuss a transition time line, compensation and other important issues. Also sit down with those not selected and explain your choice. Ideally, these individuals can stay on to provide the aforementioned management depth. Some, however, may choose to leave or be better off working elsewhere. Be forewarned: This can be a difficult, emotional time for family members.
  7. Work with your successor on a well-communicated transition of power. Once you’ve picked a successor, he or she effectively becomes a business partner. It’s up to the two of you to gradually shift power from one generation to the next (assuming the business is staying in the family). Don’t underestimate the human element and how much time and effort will be required to make the succession work.

Our advice is: “Don’t go it alone. Let us help you meet and overcome this critical challenge. We have more than 40 years of experience working with family-owned businesses and helping them make sound decisions and transitions. Contact Melissa Knisely, CPA, Ciuni & Panichi, Inc. Tax Manager, today at 216-831-7171 or by email here.

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Tax Cuts and Jobs Act – Confused?

Bonus Depreciation and the TCJA

Tax Cuts and Jobs Act – Confused?

Personal exemptions and standard deductions and tax credits, oh my!

iceburgUnder the Tax Cuts and Jobs Act (TCJA), individual income tax rates generally go down for 2018 through 2025. But that doesn’t necessarily mean your income tax liability will go down.

The TCJA also makes a number of changes to tax breaks for individuals, reducing or eliminating some while expanding others. The total impact of all of these changes is what will ultimately determine whether you see reduced taxes. One interrelated group of changes affecting many taxpayers are personal exemptions, standard deductions and the child credit.

Personal exemptions
For 2017, taxpayers can claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. For families with children and/or other dependents, such as elderly parents, these exemptions can really add up.

For 2018 through 2025, the TCJA suspends personal exemptions. This will substantially increase taxable income for large families. However, enhancements to the standard deduction and child credit, combined with lower tax rates, might mitigate this increase.

Standard deduction
Taxpayers can choose to itemize certain deductions on Schedule A or take the standard deduction based on their filing status instead. Itemizing deductions when the total will be larger than the standard deduction saves tax, but it makes filing more complicated.

For 2017, the standard deductions are $6,350 for singles and separate filers, $9,350 for head of household filers, and $12,700 for married couples filing jointly. The TCJA nearly doubles the standard deductions for 2018 to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. (These amounts will be adjusted for inflation for 2019 through 2025.)

For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps even provide some additional tax savings. But for those with many dependents or who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from enhancements to the child credit.

Child credit
Credits can be more powerful than exemptions and deductions because they reduce taxes dollar-for-dollar, rather than just reducing the amount of income subject to tax. For 2018 through 2025, the TCJA doubles the child credit to $2,000 per child under age 17.

The new law also makes the child credit available to more families than in the past. For 2018 through 2025, the credit doesn’t begin to phase out until adjusted gross income exceeds $400,000 for joint filers or $200,000 for all other filers, compared with the 2017 phase out thresholds of $110,000 and $75,000, respectively.

The TCJA also includes, for 2018 through 2025, a $500 credit for qualifying dependents other than qualifying children.

Tip of the iceberg
Many factors will influence the impact of the TCJA on your tax liability for 2018 and beyond.  What’s discussed here is just the tip of the iceberg. For example, the TCJA also makes many changes to itemized deductions. Our advice is: Don’t go it alone. David Reape, CPA, Ciuni & Panichi, Inc. Tax Principal, has extensive experience and expertise in tax laws and is knowledgeable about the TCJA. He can provide valuable advice for your business. Contact him at 216-831-7171 or by email here.

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Make Budgeting Part of Your New Year’s Resolution

Make a budget now

2017 review and 2018 trends. Rubber Stamp on desk in the Office. Business and work backgroundIt’s important to resist the temptation to rely on gut instinct or take shortcuts when budgeting for 2018. Creating a solid budget that’s based on the three components of your company’s financial statements will help you manage profits, cash flow, and debt.

Income statement
Start the budgeting process with your income statement: Analyze revenues, margins, operating expenses, and profits or losses. It’s important to be aware of the specifics.

From an overall budgetary standpoint, gross profit margin is a critical metric. If your margin is declining, you may need to pivot quickly to increase your revenues or lower your costs. For example, you might plan to hire a new sales person, launch a new marketing campaign, discontinue an unprofitable segment or negotiate lower prices with a supplier.

It’s easy to get hung up on analyzing your income statement — particularly if your company is profitable. Yet bear in mind that this part of your budget doesn’t reflect cash-related activities such as buying new equipment or borrowing money from the bank.  Today’s profitability may diminish in the face of tomorrow’s risks and threats. And the money you’ve earned may be dangerously tied up in financial assets or obligations.

In this regard, nonprofits often manage the opposite scenario.  Under generally accepted accounting principles, grant revenue is often recognized in full in the year the grant is made, while the cash is received over a number of future years covered by the grant, with the future cash flows effectively subject to time restrictions as to their receipt and availability.  This results in revenue recognition in one year with cash flow over a number of years.

Statement of cash flow
Though gross margin is important, the center point of an effective budget is the statement of cash flow. It begins where the income statement leaves off — with your net income. From there, the statement is typically divided into three subsections:

  1. Operating cash flow (activities associated with running the business),
  2. investing cash flow (activities associated with growing the business), and
  3. financing cash flow (activities associated with obtaining money).

For many companies, cash ebbs and flows throughout the year. And, if you have large contracts or experience seasonal fluctuations, it can be hard to stay fiscally responsible when cash balances are high. Many companies will project their cash-flows out for a period of time – 13 weeks for example – in an attempt to reconcile and manage their cash flow in light of their net income and related projections.  Predicting exactly when cash will come in (or dry up) is tricky — but your CPA can help you make reasonable assumptions based on your historical payment data.

Balance sheet
Think of your balance sheet as a snapshot of your company’s financial condition on a given date. The balance sheet lists assets, liabilities and shareholders’ equity. Elements such as these can help you realistically shape your budget going forward.

For instance, budgeted balances for certain working capital accounts (such as accounts receivable, inventory and accounts payable) are typically driven by revenue and cost of sales.

Loans will be repaid in accordance with their amortization schedules. Some companies will use a loan line item to manage their budget, effectively setting a loan amount the company is willing to accept.  This approach proves even more effective when implemented in conjunction with a cash projection model, such as that noted above.  A target is set and when met – it is evaluated in light of expected cash flows in the future.

Getting help
Companies that operate without a budget can quickly become cash poor and debt heavy. Our advice is: Don’t go it alone. We can help review your financial statements and establish a feasible budget that puts you on the road to success in 2018 and beyond. Contact Herzl Ginsburg, CPA, Ciuni & Panichi, Inc. Audit and Accounting Services Department Senior Manager, at 216.831.7171 or by email here.

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Cash Balance Plans

Bonus Depreciation and the TCJA

Cash Balance Plans

More professional practices (and practice groups) should look into Cash Balance Plans.

Provided by Dane A. Wilson, Wealth Management Advisor

DaneWilson-01 smaller2In corporate America, pension plans are fading away: 59% of Fortune 500 companies offered them to new hires in 1998, but by 2015, only 20% did. In contrast, some legal, medical, accounting, and engineering firms are keeping the spirit of the traditional pension plan alive by adopting cash balance plans.1

Owners and partners of these highly profitable businesses sometimes get a late start on retirement planning. Cash balance plans give them a chance to catch up. Contributions to these defined benefit plans are age dependent: the older you are, the more you can potentially sock away each year for retirement. In 2016, a 55-year-old could defer as much as $180,000 a year into a cash balance plan; a 65-year-old, as much as $245,000.2

These plans are not for every business as they demand consistent contributions from the plan sponsor. Yet, they may prove less expensive to a company than a classic pension plan, and offer significantly greater funding flexibility and employee benefits compared to a defined contribution plan, such as a 401(k).2,3,4,5

How does a cash balance plan differ from a traditional pension plan? In a cash balance plan, a business or professional practice maintains an account for each employee with a hypothetical “balance” of pay credits (i.e., employer contributions) plus interest credits. There can be no discrimination in favor of partners, executives, or older employees; the owner(s) have to be able to make contributions for other employees as well. The plan pays out a pension-style monthly income stream to the participant at retirement – either a set dollar amount or a percentage of compensation. Lump-sum payouts are also an option.3,4

Each year, a plan participant receives a pay credit equaling 5-8% of his or her compensation, augmented by an interest credit commonly linked to the performance of an equity index or the yield of the 30-year Treasury (the investment credit can be variable or fixed). Cash balance plans are commonly portable: the vested portion of the account balance can be paid out if an employee leaves before a retirement date.2

As an example of how credits are accrued, let’s say an employee named Joe Green earns $75,000 annually at the XYZ Group. He participates in a cash balance plan that provides a 5% annual salary credit and a 5% annual interest credit once there is a balance. Joe’s first-year pay credit would be $3,750 with no interest credit as there was no balance in his hypothetical account at the start of his first year of participation. For year two (assuming no raises), Joe would get another $3,750 pay credit and an interest credit of $3,750 x 5% = $187.50. So, at the end of two years of participation, his hypothetical account would have a balance of $7,687.50.

An employer takes on considerable responsibility with a cash balance plan. It must make annual contributions to the plan, and an actuary must determine the minimum yearly contribution to keep the plan appropriately funded. The employer effectively assumes the investment risk, not the employee. For example, if the plan says it will award participants a fixed 5% interest credit each year, and asset performance does not generate that large a credit, the employer may have to contribute more to the plan to fulfill its promise. The employer and the financial professional consulting the employer about the plan determine the investment choices, which usually lean conservative.2,4

Employer contributions to the plan for a given tax year must be made by the federal income tax deadline for that year (plus extensions). Funding the plan before the end of a calendar year is fine; the employer just needs to understand that any overage will represent contributions not tax-deductible. The plan must cover at least 50 employees or 40% of the firm’s workforce.4

Cash balance plans typically cost a company between $2,000-5,000 to create and between $2,000-10,000 per year to run. That may seem expensive, but a cash balance plan offers owners the potential to keep excess profits earned above the annual interest credit owed to employees. Another perk is that cash balance plans can be used in tandem with 401(k) plans.3,4,5

These plans can be structured to reward owners appropriately. When a traditional defined benefit plan uses a safe harbor formula, rank-and-file employees may be rewarded more than owners and executives would prefer. Cash balance plan formulas can remedy this situation.5

Benefit allocations are based on career average pay, not just “the best years.” In a traditional defined benefit plan, the eventual benefit is based on a 3- to 5-year average of peak employee compensation multiplied by years of service. In a cash balance plan, the benefit is determined using an average of all years of compensation.5

Cash balance plans are less sensitive to interest rates than old-school pension plans. As rates rise and fall, liabilities in a traditional pension plan fluctuate. This opens a door to either overfunding or underfunding (and underfunding is a major risk right now with such low interest rates). By contrast, a cash balance plan has relatively minor variations in liability valuation.5

A cash balance plan cannot be administered with any degree of absentmindedness. It must pass yearly non-discrimination tests; it must be submitted for IRS approval every five years instead of every six. Obviously, a plan document must be drawn up and periodically amended, and there are the usual annual reporting requirements.5

Ideally, a cash balance plan is run by highly compensated employees (HCEs) of a firm who are within their prime earning years. Regarding non-discrimination, a company should try to aim for at least a 5:1 ratio – there should at least be 1 HCE plan participant for every 5 other plan participants. In the best-case scenario for non-discrimination testing, the HCEs are 10-15 years older than half (or more) of the company’s workers.4,5

If a worst-case scenario occurs and a company founders, cash balance plan participants have a degree of protection for their balances. Their benefits are insured up to their maximum value by the Pension Benefit Guaranty Corporation (PBGC). If a cash balance plan is terminated, plan participants can receive their balances as a lump sum, roll the money over into an IRA, or request that the plan sponsor transfer its liability to an insurer (with the pension benefits paid to the plan participant via an insurance contract).3,4

Cash balance plans have grown increasingly popular. Some businesses have even adopted dual profit-sharing and cash balance plans. Maybe it is time for your firm to look into this intriguing alternative to the traditional pension plan.

Dane A. Wilson may be reached at 216-831-7171 or dwilson@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 – reuters.com/article/us-column-miller-pensions-idUSKCN10M12L [8/11/16]
2 – thinkadvisor.com/2016/11/01/cash-balance-plans-supersize-small-business-retire [11/1/16]
3 – investopedia.com/articles/financial-advisors/092315/cash-balance-pensions-pros-cons-small-biz.asp [9/23/15]
4 – retirewire.com/cash-balance-plan/ [11/21/16]
5 – cashbalanceactuaries.com/cash-balance-vs.-defined-benefit-plans [1/17/17]

 

Bonus Depreciation and the TCJA

The TCJA temporarily expands bonus depreciation

bonus depreciationThe Tax Cuts and Jobs Act (TCJA) enhances some tax breaks for businesses while reducing or eliminating others. One break it enhances — temporarily — is bonus depreciation. While most TCJA provisions go into effect for the 2018 tax year, you might be able to benefit from the bonus depreciation enhancements when you file your 2017 tax return.

Pre-TCJA bonus depreciation
Under pre-TCJA law, for qualified new assets that your business placed in service in 2017, you can claim a 50 percent first-year bonus depreciation deduction. Used assets don’t qualify. This tax break is available for the cost of new computer systems, purchased software, vehicles, machinery, equipment, office furniture, etc.

In addition, 50 percent bonus depreciation can be claimed for qualified improvement property, which means any qualified improvement to the interior portion of a nonresidential building if the improvement is placed in service after the date the building is placed in service. But qualified improvement costs don’t include expenditures for the enlargement of a building, an elevator or escalator, or the internal structural framework of a building.

TCJA expansion
The TCJA significantly expands bonus depreciation:  For qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage increases to 100 percent. In addition, the 100 percent deduction is allowed for not just new but also used qualifying property.

The new law also allows 100 percent bonus depreciation for qualified film, television and live theatrical productions placed in service on or after September 28, 2017. Productions are considered placed in service at the time of the initial release, broadcast or live commercial performance.

Beginning in 2023, bonus depreciation is scheduled to be reduced 20 percentage points each year. So, for example, it would be 80 percent for property placed in service in 2023, 60 percent in 2024, etc., until it would be fully eliminated in 2027.

For certain property with longer production periods, the reductions are delayed by one year. For example, 80 percent bonus depreciation would apply to long-production-period property placed in service in 2024.

Bonus depreciation is only one of the business tax breaks that have changed under the TCJA. Our advice is, Don’t go it alone. David Reape, CPA, Ciuni & Panichi, Inc. Tax Principal, has extensive experience and expertise in tax laws and is knowledgeable about the TCJA. He can provide valuable advice for your business. Contact him 216-831-7171 or by email here.

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Time for Strategic Planning

You must find time for strategic planning

businessman's hand holds an alarm clock.As a business owner, you know that it’s easy to spend nearly every working hour on the multitude of day-to-day tasks and crises that never seem to end. It’s essential to your company’s survival, however, to find time for strategic planning. Lost in the weeds Business owners put off strategic planning for many reasons. New initiatives, for example, usually don’t begin to show tangible results for some time, which can prove frustrating. But perhaps the most significant hurdle is the view that strategic planning is a time-sucking luxury that takes one’s focus off of the challenges directly in front of you. Although operational activities are obviously essential to keeping your company running, they’re not enough to keep it moving forward and evolving. Accomplishing the latter requires strategic planning. Without it, you can get lost in the weeds, working constantly yet blindly, only to look up one day to find your business teetering on the edge of a cliff — whether because of a tough new competitor, imminent product or service obsolescence, or some other development that you didn’t see coming. Quality vs. quantity So how much time should you and your management team devote to strategic planning? There’s no universal answer. Some experts say a CEO should spend only 50 percent of his or her time on daily operations, with the other half going to strategy — a breakdown that could be unrealistic for some. The emphasis is better put on quality rather than quantity. However many hours you decide to spend on strategic planning, use that time solely for plotting the future of your company. Block off your schedule, choose a designated and private place, and give it your undivided attention. Make time for strategic planning just as you would for tending to an important customer relationship. Time well spent Effective strategic planning calls for not only identifying the right business-growing initiatives, but also regularly re-evaluating and adjusting them as circumstances change. Thus, strategizing should be part of your weekly or monthly routine — not just a “once in a while, as is convenient” activity. You may need to delegate some of your current operational tasks to make that happen but, in the long run, it will be time well spent. One way to stay on track is to work with a business advisor. By way of scheduled meetings with your advisor, time is designated for planning. Contact Mike Benz, Ciuni & Panichi, Inc. Executive Advisor, 216-831-7171 or by email to learn about the many advisory services the firm offers that will help you achieve your business goals in 2018. You may also be interested in: Is Your Company’s Retirement Plan as Good as it Could Be? Private Companies and Financial Reporting

2018 Q1 Tax Calendar

Key tax deadlines for businesses and other employers

Q1 tax planningHere are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact Nick Leacoma, CPA, Ciuni & Panichi, Inc. Tax Department senior manager, at 216.831.7171 or by email at nleacoma@cp-advisors.com to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements. January 31

  • File 2017 Forms W-2, “Wage and Tax Statement,” with the Social Security  Administration and provide copies to your employees.
  • Provide copies of 2017 Forms 1099-MISC, “Miscellaneous Income,” to recipients of  income from your business where required.
  • File 2017 Forms 1099-MISC reporting nonemployee compensation payments in Box 7  with the IRS.
  • File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for  2017. If your un-deposited tax is $500 or less, you can either pay it with your return or  deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax  for the year in full and on time, you have until February 12 to file the return.
  • File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social  Security and income taxes withheld in the fourth quarter of 2017. If your tax liability is  less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax  for the quarter in full and on time, you have until February 12 to file the return.  (Employers that have an estimated annual employment tax liability of $1,000 or less may  be eligible to file Form 944,“Employer’s Annual Federal Tax Return.”)
  • File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2017 to report  income tax withheld on all non-payroll items, including backup withholding and  withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less  than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for  the year in full and on time, you have until February 12 to file the return.

February 28

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

March 15

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

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Tax and Year-end Charitable Giving in 2017

What you need to know about year-end charitable giving in 2017

94614509 7LDtuFbZN m 1 2491365522 B6DDA49AAC07AB657567EBDF0BCF5C93 rCharitable giving can be a powerful tax-saving strategy: Donations to qualified charities are generally fully deductible, and you have complete control over when and how much you give.

Here are some important considerations to keep in mind this year to ensure you receive the tax benefits you desire.

Delivery date
To be deductible on your 2017 return, a charitable donation must be made by Dec. 31, 2017. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” But what does this mean? Is it the date you, for example, write a check or make an online gift via your credit card? Or is it the date the charity actually receives the funds — or perhaps the date of the charity’s acknowledgment of your gift?

The delivery date depends in part on what you donate and how you donate it. Here are a few examples for common donations:

Check. The date you mail it.

Credit card. The date you make the charge.

Pay-by-phone account. The date the financial institution pays the amount.

Stock certificate. The date you mail the properly endorsed stock certificate to the charity.

Qualified charity status
To be deductible, a donation also must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions.

The IRS’s online search tool, Exempt Organizations (EO) Select Check, can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access EO Select Check at http://apps.irs.gov/app/eos. Information about organizations eligible to receive deductible contributions is updated monthly.

Potential impact of tax reform
The charitable donation deduction isn’t among the deductions that have been proposed for elimination or reduction under tax reform. In fact, income-based limits on how much can be deducted in a particular year might be expanded, which will benefit higher-income taxpayers who make substantial charitable gifts.

However, for many taxpayers, accelerating into this year donations that they might normally give next year may make sense for a couple of tax-reform-related reasons:

  1. If your tax rate goes down for 2018, then 2017 donations will save you more tax because  deductions are more powerful when rates are higher.
  2. If the standard deduction is raised significantly and many itemized deductions are  eliminated or reduced, then it may not make sense for you to itemize deductions in 2018,  in which case you wouldn’t benefit from charitable donation deduction next year.

Many additional rules apply to the charitable donation deduction. Our advice is: Don’t go it alone. David Reape, CPA, Ciuni & Panichi, Inc. Tax Principal, has extensive experience and expertise in the tax laws regarding charitable donations. Contact him at dreape@cp-advisors.com or 216-831-7171.

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Moving 2018 Property Tax to 2017

Risk Management and Your Business

Do your financial statements contain hidden messages?

Do you “Read” your financial statements?

Key Performance IndicatorOver time, many business owners develop a sixth sense: They learn how to “read” a financial statement by computing financial ratios and comparing them to the company’s results over time and against those of competitors. Here are some key performance indicators (KPIs) that can help you benchmark your company’s performance in three critical areas.

  1. Liquidity
    “Liquid” companies have sufficient current assets to meet their current obligations. Cash is obviously the most liquid asset, followed by marketable securities, receivables and inventory.

    Working capital — the difference between current assets and current liabilities — is one way to measure liquidity. Other KPIs that assess liquidity include working capital as a percentage of total assets and the current ratio (current assets divided by current liabilities). A more rigorous benchmark is the acid (or quick) test, which excludes inventory and prepaid assets from the equation.

  2. Profitability
    When it comes to measuring profitability, public companies tend to focus on earnings per share. But private firms typically look at profit margin (net income divided by revenue) and gross margin (gross profits divided by revenue).

    For meaningful comparisons, you’ll need to adjust for nonrecurring items, discretionary spending and related-party transactions. When comparing your business to other companies with different tax strategies, capital structures or depreciation methods, it may be useful to compare earnings before interest, taxes, depreciation and amortization (EBITDA).

  3. Asset management
    Turnover ratios show how efficiently companies manage their assets. Total asset turnover (sales divided by total assets) estimates how many dollars in revenue a company generates for every dollar invested in assets. In general, the more dollars earned, the more efficiently assets are used.
    Turnover ratios also can be measured for each specific category of assets. For example, you can calculate receivables turnover ratios in terms of days. The collection period equals average receivables divided by annual sales multiplied by 365 days. A collection period of 45 days indicates that the company takes an average of one and one-half months to collect invoices.

It’s all relative
The amounts reported on a company’s financial statements are meaningless without a relevant basis of comparison. Our advice is: Don’t go it alone. Dan Hout-Reilly, CPA, CVA, Ciuni & Panichi, Inc. Senior Manager, works with companies to help them assess their current practices and situation and identify opportunities for improvement. Please contact Dan at 216-831-7171 or dhout-reilly@cp-advisors.com to learn more about how we can help your business.

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Demystifying the Audit Process

Audit and You

audit concept hand drawing on tablet pcIndependent auditors provide many benefits to business owners and management: They can help uncover errors in your financials, identify material weaknesses in your internal controls, and increase the level of confidence lenders and other stakeholders have in your financial reporting.

But many companies are unclear about what to expect during a financial statement audit. Here’s an overview of the five-step process.

  1. Accepting the engagement
    Once your company has selected an audit firm, you must sign an engagement letter. Then your auditor will assemble your audit team, develop a timeline, and explain the scope of the audit inquiries and onsite “fieldwork.”
  2. Assessing risk
    The primary goal of an audit is to determine whether a company’s financial statements are free from “material misstatement.” Management, along with third-party stakeholders that rely on your financial statements, count on them to be accurate and conform to U.S. Generally Accepted Accounting Principles (GAAP) or another accepted standard.

    Auditing rules require auditors to assess general business risks, as well as industry- and company-specific risks. The assessment helps auditors 1) determine the accounts to focus audit procedures on, and 2) develop audit procedures to minimize potential risks.

  3. Planning
    Based on the risk assessment, the audit firm develops a detailed audit plan to test the internal control environment and investigate the accuracy of specific line items within the financial statements. The audit partner then assigns audit team members to work on each element of the plan.
  4. Gathering evidence
    During fieldwork, auditors test and analyze internal controls. For example, they may trace individual transactions to original source documents, such as sales contracts, bank statements or purchase orders. Or they may test a random sample of items reported on the financial statements, such as the prices or number of units listed for a randomly selected sample of inventory items. Auditors also may contact third parties — such as your company’s suppliers or customers — to confirm specific transactions or account balances.
  5. Communicating the findings
    At the end of the audit process, your auditor develops an “opinion” regarding the accuracy and integrity of your company’s financial statements. In order to do so, they rely on quantitative data such as the results of their testing, as well as qualitative data, including statements provided by the company’s employees and executives. The audit firm then issues a report on whether the financial statements 1) present a fair and accurate representation of the company’s financial performance, and 2) comply with applicable financial reporting standards.

An audit can provide real value to your business.
Understanding the audit process can help you understand its value. An audit can provide insight into your business and help identify areas for improvement. And if your company doesn’t currently issue audited financial statements, your current level of assurance may not be adequate.

Trying to figure out if your company needs audited financial statements is an important decision. We can help. We welcome your questions. Let’s have a conversation. Contact Jerad Locktish, CPA, Ciuni & Panichi, Inc. Audit and Accounting Senior Manager at 216-831-7171 or jlocktish@cp-advisors.com to learn more.

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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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Is Your Company’s Retirement Plan as Good as It Could Be?

Many retirement plans need refining. Others need to avoid conflicts with Department of Labor rules.

Provided by Dane A. Wilson, Wealth Management Advisor

DaneWilson-01 smaller2At times, running your business takes every ounce of energy you have. Whether you have a human resources officer at your company or not, creating and overseeing a workplace retirement plan takes significant effort. These plans demand periodic attention.

As a plan sponsor, you assume a fiduciary role. You accept a legal responsibility to act with the best financial interests of others in mind – your retirement plan participants and their beneficiaries. You are obligated to create an investment policy statement (IPS) for the plan, educate your employees about how the plan works, and choose the investments involved. That is just the beginning.1

You must demonstrate the value of the plan. Your employees should not merely shrug at what you are offering – a great opportunity to save, invest, and build wealth for the future. Financial professionals know how to communicate the importance of the plan in a user-friendly way, and they can provide the education that “flips the switch” and encourages worker participation. If this does not happen, your employees may view the plan as just an option instead of a necessity as they save for retirement.

You must monitor and benchmark investment performance and investment fees. Some plans leave their investment selections unchanged for decades. If the menu of choices lacks diversity, if the investment vehicles underperform the S&P 500 year after year and have high fees, how can this be in the best interest of the plan participants?

You must provide enrollment paperwork and plan notices in a timely way. Often, this duty falls to a person that has many other job tasks, so these matters get short shrift. The plan can easily fall out of compliance with Department of Labor rules if these priorities are neglected.

You must know the difference between 3(21) and 3(38) investment fiduciary services. The numbers refer to sections of ERISA, the Employment Retirement Income Security Act. Most investment advisors are 3(21) – they advise the employer about investment selection, but the employer makes the final call. A 3(38) investment advisor has carte blanche to choose and adjust the plan’s investments – and he or she needs to be overseen by the plan sponsor.2

To avoid conflicts with the Department of Labor, you should understand and respect these requirements and responsibilities. Beyond the basics, you should see that your company’s retirement plan is living up to its potential.

We can help you review your plan and suggest ways to improve it. An attractive retirement plan could help you hire and hang onto the high-quality employees you need. Ask us about a review, today – you need to be aware of your plan’s mechanics, fees, and performance, and you could face litigation, fines, and penalties if your plan fails to meet Department of Labor and Internal Revenue Service requirements.

Dane A. Wilson may be reached at 216-831-7171 or dwilson@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 – cnbc.com/2017/08/23/qualified-retirement-plan-sponsors-are-fiduciaries.html [8/23/17]
2 – tinyurl.com/ycrqheey [4/7/17]

 

Ready for the new not-for-profit accounting standard?

A new accounting standard goes into effect starting in 2018 for churches, charities and other not-for-profit entities.

Here’s a summary of the major changes:

Group of people around the worldNet asset classifications
The existing rules require not-for-profit organizations to classify their net assets as either unrestricted, temporarily restricted or permanently restricted. But under Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, there will be only two classes: net assets with donor restrictions and net assets without donor restrictions.

The simplified approach recognizes changes in the law that now allow organizations to spend from a permanently restricted endowment even if its fair value has fallen below the original endowed gift amount. Such “underwater” endowments will now be classified as net assets with donor restrictions, along with being subject to expanded disclosure requirements. In addition, the new standard eliminates the current “over-time” method for handling the expiration of restrictions on gifts used to purchase or build long-lived assets (such as buildings).

Other major changes
The new standard includes specific requirements to help financial statement users better assess a nonprofit’s operations. Specifically, organizations must provide information about:

Liquidity and availability of resources. This includes qualitative and quantitative  disclosures about how they expect to meet cash needs for general expenses within one  year of the balance sheet date.

Expenses. The new standard requires all not-for-profit entities to report expenses by  both function (which is already required) and nature in one location. In addition, it calls  for enhanced disclosures regarding specific methods used to allocate costs among  program and support functions.

 Investment returns. Organizations will be required to net all external and direct internal  investment expenses against the investment return presented on the statement of  activities. This will facilitate comparisons among different not-for-profit entities,  regardless of whether investments are managed externally (for example, by an outside  investment manager who charges management fees) or internally (by staff).

Additionally, the new standard allows not-for-profit entities to use either the direct or indirect method to present net cash from operations on the statement of cash flows. The two methods produce the same results, but the direct method tends to be more understandable to financial statement users. To encourage not-for-profits to use the direct method, entities that opt for the direct method will no longer need to reconcile their presentation with the indirect method.

To be continued
ASU 2016-14 is the first major change to the accounting rules for not-for-profits since 1993. However, it’s only phase one of a larger project to enhance financial reporting transparency for donors, grantors, creditors and other users of not-for-profits’ financial statements.

Our best advice is: “Don’t go it alone.” If you have questions, contact Michael B. Klein, CPA, MBA, Ciuni & Panichi, Inc. Partner who leads the Not-for-Profit Group at 216-831-7171 or mklein@cp-advisors.com.

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