Category Archives: Business

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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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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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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Bonus Depreciation and the TCJA

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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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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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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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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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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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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Putting Hedging Strategies to Work for Your Business

Hedging Strategies

Discussing business graphsThe Financial Accounting Standards Board (FASB) recently issued some targeted improvements to its guidance that could encourage more companies to engage in hedging arrangements to minimize volatility in their financial statements. Here’s a close-up on how businesses can hedge price fluctuations and why businesses and their investors alike approve of the changes to the hedge accounting rules.

Hedging
Some costs — such as interest rates, exchange rates and commoditized raw materials — are subject to price fluctuations based on changes in the external markets. Businesses may try to “hedge” against volatility in earnings, cash flow or fair value by purchasing derivatives based on those costs.

If futures, options and other derivative instruments qualify for hedge accounting treatment, any gains and losses are generally recognized in the same period as the costs are incurred. But hedge accounting is a common source of confusion (and restatements) under U.S. GAAP.

To qualify for the current hedge accounting rules, a transaction must be documented at inception and be “highly effective” at stabilizing price volatility. In addition, businesses must periodically assess hedging transactions for their effectiveness.

Simplification
In August 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The updated standard expands the range of transactions that qualify for hedge accounting and simplifies the presentation and disclosure requirements.

Notably, the update allows for hedging of nonfinancial components that are contractually specified and adds the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate to the list of acceptable benchmarks for fixed interest rate hedges.

ASU 2017-12 also eliminates the requirement to measure and report hedge “ineffectiveness.” That’s the amount the hedge fails to offset the hedged item.

Instead of reporting hedge ineffectiveness separately for cash flow hedges, the entire change in value of the derivative will be recorded in other comprehensive income and reclassified to earnings in the same period in which the hedged item affects earnings. Companies might still mismatch changes in value of a hedged item and the hedging instrument under the new standard, but they won’t be separately reported.

Universal support
Businesses, investors and other stakeholders universally welcome the changes to the hedge accounting rules. Although the updated standard goes into effect in 2019 for public companies and 2020 for private ones, many businesses that use hedging strategies are expected to adopt it early — and the FASB has hinted that the changes might encourage more companies to try hedging strategies.

Could hedging work for your business? If you have questions, contact George Pickard, CPA, MSA, Ciuni & Panichi, Inc. Senior Manager, at gpickard@cp-advisors.com or 216-831-7171 to discuss your options.

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Risk Management Framework

Risk Management Framework Maximizes Upsides

How effectively do you manage risk?

Risk and reward balanceBusinesses can’t eliminate risk, but they can manage it to maximize the entity’s economic return. A new framework aims to help business owners and managers more effectively integrate ERM practices into their overall business strategies.

A five-part approach is advisable
On September 6, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) published Enterprise Risk Management — Integrating with Strategy and Performance. You can use the updated framework to develop a more effective risk management strategy and to monitor the results of your ERM practices.

The updated framework discusses ERM relative to the changes in the financial markets, the emergence of new technologies and demographic changes. It’s organized into five interrelated components:

  1. Governance and culture. This refers to a company’s “tone at the top” and oversight function. It includes ethics, values and identification of risks.
  2. Strategy and objective setting. Proactive managers align the company’s appetite for risk with its strategy. This serves as the basis for identifying, assessing and responding to risk. By understanding risks, management enhances decision making.
  3. Performance. Management must prioritize risks, allocate its finite resources and report results to stakeholders.
  4. Review and revision. ERM is a continuous improvement process. Poorly functioning components may need to be revised.
  5. Information, communication and reporting. Sharing information is an integral part of effective ERM programs.

COSO Chair Robert Hirth said in a recent statement, “Our overall goal is to continue to encourage a risk-conscious culture.” He also said that the updated framework is not intended to replace COSO’s Enterprise Risk Management — Integrated Framework. Rather, it’s meant to reflect how the practice of ERM has evolved since 2004.

New insights
The updated framework clarifies several misconceptions from the previous version. Specifically, effective ERM encompasses more than taking an inventory of risks; it’s an entity-wide process for proactively managing risk. Additionally, internal control is just one small part of ERM; ERM includes other topics such as strategy setting, governance, communicating with stakeholders and measuring performance. These principles apply to all business levels, across all business functions and to organizations of any size.

Moreover, the update enables management to better anticipate risk so they can get ahead of it, with an understanding that change creates opportunities — not simply the potential for crises. In short, it helps increase positive outcomes and helps reduce negative surprises that come from risk-taking activities.

ERM in the future
Our advice is, “Don’t go it alone.” We can help you identify and optimize risks in today’s complex, volatile and ambiguous business environment. We’re familiar with emerging ERM trends and challenges, such as dealing with prolific data, leveraging artificial intelligence and automating business functions. Contact Reggie Novak, CPA, CFE, Ciuni & Panichi, Inc. senior manager, at 216.831.7171 or rnovak@cp-advisors.com for help adopting cost-effective ERM practices to help make your business more resilient and keep your business protected.

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FASB: Close-up on Restricted Cash

The FASB wants to fix inconsistent reporting

DanReilly-07 HighResThe Financial Accounting Standards Board (FASB) has amended U.S. Generally Accepted Accounting Principles (GAAP) to clarify the guidance on reporting restricted cash balances on cash flow statements. Until now, Accounting Standards Codification Topic 230, Statement of Cash Flows, didn’t specify how to classify or present changes in restricted cash. Over the years, the lack of specific instructions has led not-for-profit entities and other businesses to report transfers between cash and restricted cash as operating, investing or financing activities — or a combination of all three.

The new guidance essentially says that none of the above classifications are correct.

FASB members hope the amendments will cut down on some of the inconsistent reporting practices that have been in place because of the lack of clear guidance.

FASB Prescriptive guidance
Accounting Standards Update (ASU) No. 2016-18, Statement of Cash Flows (Topic 230) — Restricted Cash, still doesn’t define restricted cash or restricted cash equivalents. But the updated guidance requires that transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents be excluded from the entity’s operating, investing and financing activities. In other words, the details of those transfers shouldn’t be reported as cash flow activities in the statement of cash flows at all.

Instead, restricted cash and restricted cash equivalents balances and activities are treated the same as other cash and cash equivalents balances and activities on the statement of cash flows.  If the cash flow statement includes a reconciliation of the total cash balances for the beginning and end of the period, the FASB wants the amounts for restricted cash and restricted cash equivalents to be included with cash and cash equivalents. When, during a reporting period, the totals change for cash, cash equivalents, restricted cash and restricted cash equivalents, the updated guidance requires that these changes be explained.

Moreover, a not-for-profit entity or other business must provide narrative and/or tabular disclosures about the nature of restrictions on its cash and cash equivalents.

Effective dates
The updated FASB guidance goes into effect for public companies in fiscal years that start after December 15, 2017. Not-for-profit entities and private companies have an extra year before they have to apply the changes. Early adoption is permitted. Please contact Dan Hout-Reilly, CPA, CVA, Ciuni & Panichi, Inc. Audit and Accounting Service Department Manager, at 216.831.7171 or dhout-reilly@cp-advisors.com if you have additional questions about reported restricted cash or any other items on your organization’s statement of cash flows.

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Private Companies and Financial Reporting

Taxes and Cost Segregation

 

Private Companies and Financial Reporting

Private companies:  Consider these financial reporting shortcuts

private publicFor years, private companies and their stakeholders have complained that the Financial Accounting Standards Board (FASB) catered too much to large, public companies and ignored the needs of smaller, privately held organizations that have less complex financial reporting issues. In other words, they’ve said that U.S. Generally Accepted Accounting Principles (GAAP) are too complicated for them. The FASB answered these complaints by approving the establishment of the Private Company Council (PCC), a new body to improve the process of setting accounting standards for private companies.  The PCC advises the FASB on appropriate accounting treatment for private companies.  Under PCC’s advice the FASB has issued some Accounting Standards Updates (ASUs) that apply exclusively to private companies.

“Little GAAP”
Currently there are four ASUs that apply only to private companies:

  1. ASU No. 2014-02, Intangibles — Goodwill and Other (Topic 350): Accounting for Goodwill. Under this alternative, private companies may elect to amortize goodwill on their balance sheets over a period not to exceed 10 years, replacing the requirement to test for impairment annually with a requirement to test when a triggering event occurs that indicates the asset may be impaired.
  2. ASU No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps — Simplified Hedge Accounting Approach. This alternative provides entities with a practical expedient to qualify for cash flow hedge accounting treatment when they use vanilla interest rate swaps to convert variable-rate borrowings into fixed-rate borrowings.
  3. ASU No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. This allows a lessee to elect an alternative not to apply VIE guidance to a lessor entity under certain circumstances.  It’s important to note that the FASB is currently considering expanding this alternative: In June 2017, the FASB issued a proposal that would expand the accounting alternative to include all private company common control arrangements if both are not public business entities.
  4. ASU No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination. This alternative exempts private companies from recognizing certain hard-to-value intangible assets — such as non-competes and certain customer-related intangibles — acquired in a business combination, separately from goodwill.  If elected, the guidance established with ASU 2014-02 must be adopted to amortize goodwill.

No effective dates or preferability assessments
After the FASB issued these alternatives, it updated the guidance to remove the effective dates. It also has exempted private companies from having to make a preferability assessment before adopting one of these accounting alternatives. Under the previous rules, a private company that wanted to adopt an accounting alternative after its effective date had to first assess whether the alternative was preferable to its accounting policy at that time.

Forgoing an initial preferability assessment allows private companies to adopt a private company accounting alternative when they experience a change in circumstances or management’s strategic plan. It also allows private companies that were unaware of an accounting alternative to adopt the alternative without having to bear the cost of justifying preferability.

Right for you?
Simplified reporting sounds like a smart idea, but regulators, lenders and other stakeholders may require a private company to continue to apply traditional accounting models, especially if the company is large enough to consider going public or may merge with a public company. We can help private companies weigh the pros and cons of electing these alternatives. To learn more, contact George Pickard, CPA, MSA, Ciuni & Panichi, Inc. Senior Manager at gpickard@cp-advisors.com or 216-831-7171.

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Timeliness Counts in Financial Reporting

laterDon’t delay in closing books

Do you procrastinate when it comes to closing your books and delivering year-end financial statements? Lenders and investors may think the worst if an organization’s financial statements aren’t submitted in a timely manner. Here are three assumptions your stakeholders could make when your financial statements are late.

You are hiding negative results
No one wants to be the bearer of bad news. Deferred financial reporting can lead investors and lenders to presume that your organization’s performance has fallen below historical levels or what was forecast at the beginning of the year.

Your management team is not up to the task at hand
A delay in statements may lead to questions regarding your controller’s experience, the depth of your accounting department, or your overall ability to deal with a changing accounting landscape.  Fair or not, your stakeholders may assume any or all of the above concerns and that you and your team cannot pull together the requisite data to finish the financials.

Delayed statements may also signal that management doesn’t consider financial reporting a priority. This lackadaisical mindset implies that no one is monitoring financial performance throughout the year.

You are more likely to be a victim of occupational fraud
If financial statements aren’t timely or prioritized by the organization’s owners, unscrupulous employees may see it as an opportunity to steal from the organization. Fraud is more difficult to hide if you insist on timely financial statements and take the time to review them.  Assume your stakeholders are savvy and understand the control provided by strong reporting – and the potential for fraud when that reporting is absent or delayed.

Get back on track
Late financial statements cost more than time; they can impair relations with lenders and investors.  And specifically for not-for-profit organizations, they can negatively impact the opinions of donors and board members. Regardless of your reasons for holding out, timely financial statements are a must for fostering goodwill with outside stakeholders.

We can help you stay focused, work through complex reporting issues and communicate weaker-than-expected financial results in a positive, professional manner. Contact Herzl Ginsburg, Ciuni & Panichi, Inc. Audit and Accounting Services Department Manager, at hginsburg@cp-advisors.com or 216-831-7171 to learn more.

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Digital Marketing for Your Business

Business Operations and Income Statements

 

Digital Marketing for Your Business

Four digital marketing tips for every business

Photo woman working with new startup project in modern loft.You’d be hard pressed to find a company not looking to generate more leads, boost sales and improve its profit margins. The first step is creating awareness of your services and more importantly your expertise. Fortunately, today’s digital technologies make it easier to accomplish both tasks.

Here are four digital marketing tips for every business to consider:

  1. Add quality and current content to your website. Helpful blog posts, articles and even whitepapers can establish your business as a knowledge leader in your Few things disappoint and disinterest customers like an outdated or unchanging website. Give your visitors a reason to return.

    Review your website and add fresh content regularly to ensure it doesn’t look too old. Photos and videos are especially interesting to visitors. Beware, however, that posting amateurish-looking videos could do more harm than good. If you don’t have professional video production capabilities, you may need to hire a professional.  Finally if you haven’t updated your overall website design in a few years, it’s time.

  2. Leverage social media. If you’re not using social media tools already, focus on a couple of popular social media outlets, most definitely LinkedIn and perhaps Facebook and Twitter. Actively post content on them, including photos. Check the analytics regularly. LinkedIn, Facebook, and Twitter offer pretty detailed tracking so the you can see what content generated likes, clicks and re-tweets giving you insight to what appeals to your audience.
  3. Interact frequently. This applies to all of your online channels, including your website, social media platforms, email and online review sites. For example, be sure to respond promptly to any queries you receive on your site or via email, and be quick to reply to questions and comments posted on your social media pages.
  4. Keep your message concise and consistent with your brand. Remind your audience of what your business can do for them at every opportunity. The point is to help your customers and potential customers become aware of your services and/or products so they will think of you when they need them.

When it comes to marketing, you don’t want to swing and miss. Ciuni & Panichi, Inc. offers a full range of marketing advisory services to help you promote your business. To learn more, contact Jenna Snyder, at jsnyder@cp-advisors.com or 216-831-7171.

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2017 Q3 Tax Calendar

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Taxes and Cost Segregation

Could a cost segregation study save your company taxes?

cost segregationIf your business has acquired, constructed or substantially improved a building recently, consider a cost segregation study. One of these studies can enable you to identify building costs that are properly allocable to tangible personal property rather than real property. And this may allow you to accelerate depreciation deductions, reducing taxes and boosting cash flow.

Overlooked opportunities
IRS rules generally allow you to depreciate commercial buildings over 39 years (27½ years for residential properties). Often, businesses will depreciate structural components (such as walls, windows, HVAC systems, elevators, plumbing and wiring) along with the building.

Personal property — such as equipment, machinery, furniture and fixtures — is eligible for accelerated depreciation, usually over five or seven years. And land improvements — fences, outdoor lighting and parking lots, for example — are depreciable over 15 years.

Too often, companies allocate all or most of a building’s acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. Items that appear to be part of a building may in fact be personal property.

Examples include:

  • Removable wall and floor coverings,
  • Detachable partitions,
  • Awnings and canopies,
  • Window treatments,
  • Signage, and
  • Decorative lighting.

In addition, certain items that otherwise would be treated as real property may qualify as personal property if they serve more of a business function than a structural purpose. Examples include reinforced flooring to support heavy manufacturing equipment, electrical or plumbing installations, and dedicated cooling systems for server rooms.

A study in action
Let’s say you acquired a nonresidential commercial building for $5 million on January 1. If the entire purchase price is allocated to 39-year real property, you’re entitled to claim $123,050 (2.461 percent of $5 million) in depreciation deductions the first year.

A cost segregation study may reveal that you can allocate $1 million in costs to five-year property eligible for accelerated depreciation. Reallocating the purchase price increases your first-year depreciation deductions to $298,440 ($4 million × 2.461 percent, plus $1 million × 20 percent).

Impact of tax law changes
Bear in mind that tax law changes may occur this year that could significantly affect current depreciation and expensing rules. This in turn could alter the outcome and importance of a cost segregation study. Contact our firm for the latest details before you begin.

On the other hand, any forthcoming tax law changes likely won’t affect your ability to claim deductions you may have missed in previous tax years.

Worthy effort
As you might suspect, a cost segregation study will entail some effort in analyzing your building’s structural components and making your case to the IRS. But you’ll likely find it a worthy effort.

A look-back study may also deliver benefits
If your business invested in depreciable buildings or improvements in previous years, it may not be too late to take advantage of a cost segregation study. A “look-back” cost segregation study allows you to claim missed deductions in qualifying previous tax years.

To claim these tax benefits, we can help you file Form 3115, “Application for Change in Accounting Method,” with the IRS and claim a one-time “catch-up” deduction on your current year’s return. There will be no need to amend previous years’ returns.

The best advice we can offer is, “don’t go it alone.” Contact Tony Constantine, CPA, Ciuni & Panichi, Inc. Tax Partner, at tconstantine@cp-advisors.com or 216-831-7171. He can help you make sure you are not missing any of the tax benefits available to you.

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2017 Q3 Calendar

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2017 Q3 Tax Calendar

Key tax deadlines for businesses and other employers

tax-formHere are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us at 216-831-7171 or info@cp-advisors.com to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

July 31

  • Report income tax withholding and FICA taxes for second quarter 2017 (Form 941), and pay any tax due. (See exception below.)
  • File a 2016 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10

  • Report income tax withholding and FICA taxes for second quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 15

  • If a calendar-year C corporation, pay the third installment of 2017 estimated income taxes.
  • If a calendar-year S corporation or partnership that filed an automatic six-month extension:
    - File a 2016 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
    - Make contributions for 2016 to certain employer-sponsored retirement plans.

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Put your income statement to good use

JerardLocktish-(High)By midyear, most businesses that follow U.S. Generally Accepted Accounting Principles (GAAP) have issued their year-end financial statements. But how many have actually used them to improve their business operations in the future? Producing financial statements is more than a matter of compliance — owners and managers can use them to analyze performance and find ways to remedy inefficiencies and anomalies. How? Let’s start by looking at the income statement.

Benchmarking performance
Ratio analysis facilitates comparisons over time and against industry norms. Here are four ratios you can compute from income statement data:

  1. Gross profit. This is profit after cost of goods sold divided by sales. This critical ratio indicates whether the company can operate profitably. It’s a good ratio to compare to industry statistics because it tends to be calculated on a consistent basis.
  2. Net profit margin. This is calculated by dividing net income by sales and is the ultimate scorecard for management. If the margin is rising, the company must be doing something right. Often, this ratio is computed on a pretax basis to accommodate for differences in tax rates between pass-through entities and C corporations.
  3. Return on assets. This is calculated by dividing net income by the company’s total assets. The return shows how efficiently management is using its assets.
  4. Return on equity. This is calculated by dividing net profits by shareholders’ equity. The resulting figure tells how well the shareholders’ investment is performing compared to competing investment vehicles.

For all four profitability ratios, look at two key elements: changes between accounting periods and differences from industry averages.

Plugging profit drains
What if your company’s profitability ratios have deteriorated compared to last year or industry norms? Rather than overreacting to a decline, it’s important to find the cause. If the whole industry is suffering, the decline is likely part of a macroeconomic trend.

If the industry is healthy, yet a company’s margins are falling, management may need to take corrective measures, such as:

  • Reining in costs,
  • Investing in technology, and/or
  • Looking for signs of fraud.

For example, if an employee is colluding with a supplier in a kickback scam, direct materials costs may skyrocket, causing the company’s gross profit to fall.

Playing detective
For clues into what’s happening, study the main components of the income statement: gross sales, cost of sales, and selling and administrative costs. Determine if line items have fallen due to company-specific or industry-wide trends by comparing them to public companies in the same industry. Also, monitor trade publications, trade associations and the Internet for information.

The best advice we can offer is: “don’t go it alone.” Ciuni & Panichi, Inc. offers a wide range of management advisory services to help you keep your company operating in the black. Contact Jerad Locktish, CPA, Manager, at jlocktish@cp-advisors.com or 216-831-7171.

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