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

Make Collections a Priority

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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Taxes and Operating Across State Lines

Preparing for an IRS Audit

Business Operations and Income Statements

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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Preparing for an IRS Audit

Taxes and Operating Across State Lines

Preparing for an IRS Tax Audit

Business owners: When it comes to IRS audits, be prepared

IRS Audit2If you recently filed your 2016 income tax return (rather than filing for an extension) you may now be wondering whether it’s likely that your business could be audited by the IRS based on your filing. Here’s what every business owner should know about the process.

Catching the IRS’s eye
Many business audits occur randomly, but a variety of tax-return-related items are likely to raise red flags with the IRS and may lead to an audit. Here are a few examples:

  • Significant inconsistencies between previous years’ filings and your most current filing,
  • Gross profit margin or expenses markedly different from those of other businesses in  your industry, and
  • Miscalculated or unusually high deductions.

An owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can also catch the IRS’s eye, especially if the business is structured as a corporation.

How to respond
If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.

The good news is that many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the field audit requires meeting with one or more IRS auditors.

More good news: In no instance will the agency demand an immediate response. You’ll be informed of the discrepancies in question and given time to prepare. To do so, you’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.

If the IRS selects you for an audit, we can help you to:

  • Understand what the IRS is disputing (it’s not always crystal clear),
  • Gather the specific documents and information needed, and
  • Respond to the auditor’s inquiries in the most expedient and effective manner.

Our best advice is: Don’t go it alone. Contact Jim Komos, CPA, Ciuni & Panichi, Inc. Tax Partner, at jkomos@cp-advisors.com or 216-831-7171.

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Make Collections a Priority

Consider Your Not-for-Profit Growth Stage

Nonprofit Life Cycle

7_istock_000005830377large_seedlingChallenges and opportunities mark growth stage
Nonprofits generally mature along a standard life cycle. An organization’s first steps are typically followed by a period of growth, which, ideally, is less eventful and stressful than those early years. The growth stage — beginning two or three years after “birth” and continuing until “maturation” at around age seven — isn’t without challenges. But this period also comes with a sense of accomplishment and the opportunity to diversify and bring in new staff and donors as the organization comes into its own.

Also in this stage, many of the not-for-profit’s administrative and operational systems become more formalized as the organization evolves.

Evolution of the mission
It may have seemed blasphemous to even consider when the organization was in its incubatory and birthing stages, but a nonprofit might adjust its mission during the growth stage in the face of new circumstances. Changed demographics, economic developments, or simply greater knowledge might make it appropriate to revise the organization’s purpose.

An organization can home in more intensely on a subset of the original mission, or it may shift its focus to another area. The organization may for the first time develop a strategic plan to incorporate the changes to the mission. Such changes might be essential if the not-for-profit is to remain relevant and viable.

Evolution of the board
Perhaps the most common marker of a nonprofit in the growth stage is the change in the focus of the board of directors, from day-to-day operations to governance. While the board will usually continue to be active in operations to some degree, it also must begin to work on strategic matters — the policies, planning and evaluations necessary to pave the path to sustainability.

The composition of the board is likely to change during this time, as founding board members move on. The result could be a larger and more inclusive collection of individuals, preferably with a wider range of skills, talents and backgrounds. Former or current volunteers or clients may ascend to board positions, propelled by their passions for the cause.

Boards also can establish committees at this time. It’s important to resist the urge to form too many committees — particularly those concerned with operations. Some organizations implement a three-committee structure, with committees for only internal affairs (for example, finance, HR and facilities), external affairs (for example, fundraising, PR and marketing) and governance.

Evolution of the staff
As the demand for services builds and the board expands programming, staffing will naturally progress, as well. The staff, like the board, should expand in the growth stage to avoid burnout. The nonprofit should design a clear organizational structure and hire experienced managers.
At this juncture, the not-for-profit should develop formal job descriptions, with greater job specialization. Employees will now be expected to work under formal systems, following policies and procedures and in a more efficient manner than seen before, during and after the organization’s launch. The executive director is generally still the primary decision maker, although he or she may not have time to be as involved in every area of the organization.

Evolution of the finances
Growth-stage organizations are generally in a more comfortable financial position, with less uncertainty. But, for nonprofits, that uncertainty never completely evaporates.

Although nonprofits in the growth stage have established good relations with their key funders, there are still challenges in securing the necessary funding to support current programming.

Thus, nonprofits in this stage need to look into ways of maintaining — or, better, expanding — growth, such as diversifying their revenue sources, managing cash flow and developing solid budgets. They should work with financial advisors to identify, monitor and respond to appropriate financial metrics, such as cost per primary outcome, cash reserves and working capital.

Keep calm and carry on
An organization that’s made it to the growth stage has overcome some challenging hurdles, but can’t afford to become complacent. Rather, the growth stage is the time to leverage what has been learned and steer into even greater success.

Need assistance?  Contact the Not-for-Profit experts at Ciuni & Panichi, Inc.

 

Taxes and Operating Across State Lines

Presents Tax Risks and Rewards

state lineIt’s a smaller business world after all. With the ease and popularity of e-commerce, as well as the incredible efficiency of many supply chains, companies of all sorts are finding it easier than ever to widen their markets. Doing so has become so much more feasible that many businesses quickly find themselves crossing state lines.

But therein lies a risk: Operating in another state means possibly being subject to taxation in that state. The resulting liability can, in some cases, inhibit profitability. But sometimes it can produce tax savings.

Do you have “nexus”?
Essentially, “nexus” means a business presence in a given state that’s substantial enough to trigger that state’s tax rules and obligations.

Precisely what activates nexus in a given state depends on that state’s chosen criteria. Triggers can vary but common criteria include:

  • Employing workers in the state,
  • Owning (or, in some cases even leasing) property there,
  • Marketing your products or services in the state,
  • Maintaining a substantial amount of inventory there, and
  • Using a local telephone number.

Then again, one generally can’t say that nexus has a “hair trigger.” A minimal amount of business activity in a given state probably won’t create tax liability there. For example, an HVAC company that makes a few tech calls a year across state lines probably wouldn’t be taxed in that state. Or let’s say you ask a salesperson to travel to another state to establish relationships or gauge interest. As long as he or she doesn’t close any sales, and you have no other activity in the state, you likely won’t have nexus.

Strategic moves
If your company already operates in another state and you’re unsure of your tax liabilities there — or if you’re thinking about starting up operations in another state — consider conducting a nexus study. This is a systematic approach to identifying the out-of-state taxes to which your business activities may expose you.

Keep in mind that the results of a nexus study may not be negative. You might find that your company’s overall tax liability is lower in a neighboring state. In such cases, it may be advantageous to create nexus in that state (if you don’t already have it) by, say, setting up a small office there. If all goes well, you may be able to allocate some income to that state and lower your tax bill.

The complexity of state tax laws offers both risk and opportunity. Contact Ciuni & Panichi, Inc. for help ensuring your business comes out on the winning end of a move across state lines.

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Could stronger governance benefit your business?

How to shape up your working capital.
© 2017

Governance and Your Business

Could stronger governance benefit your business?

FAEEvery company has at least one owner. And, in many cases, there exists leadership down through the organizational chart. But not every business has strong governance.

In a nutshell, governance is the set of rules, practices and processes by which a company is directed and controlled. Strengthening it can help ensure productivity, reduce legal risks and, when the time comes, ease ownership transitions.

Looking at business structure
Good governance starts with the initial organization (or reorganization) of a business.

Corporations, for example, are required by law to have a board of directors and officers and to observe certain other formalities. So this entity type is a good place to explore the concept.

Other business structures, such as partnerships and limited liability companies (LLCs), have greater flexibility in designing their management and ownership structures. But these entities will benefit greatly from strong governance with well-designed partnership or LLC operating agreements and a centralized management structure. They might, for instance, establish management committees that exercise powers similar to those of a corporate board.

Specifying the issues
The corporate model is an excellent framework to use to help establish strong governance in your company, regardless of its size or ownership structure. An important factor is to have clear and documented business articles and bylaws defining the roles and responsibilities of leadership and, if you have them, board members. For example: the organizational documents might:

  • Define and limit the authority of each executive,
  • Establish a board of directors or internal executive committee
  • Require board approval (or specific leadership approval) for certain actions,
  • Authorize the board to hire, evaluate, promote and fire executives based on merit,
  • Authorize the board to determine the compensation of top executives and to approve the terms of employment agreements, and
  • Create nonvoting classes of stock to provide equity to the owner’s family members who aren’t active in the business, but without conferring management control.

As you look over this list, consider whether and how any of these items might pertain to your company. There are, of course, other aspects to governance, such as establishing an ethics code and setting up protocols for information technology.

Knowing yourself
Strong governance is all about knowing your company and identifying the best ways to oversee its smooth and professional operation. For help, please contact Ciuni & Panichi, Inc.’s Frank Eich, CPA, MBA, senior manager, at feich@cp-advisors.com or 216-831-7171.

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Customer Collections

Make collections a priority

collectionsA new customer you’ve been cultivating for some time finally places a custom order. The production team works diligently to meet the customer’s expectation as well as the order’s two-week deadline. The final product ships on time and the team members are congratulating each other on a job well done. But what’s missing?

Everyone was so preoccupied with completing the sale and producing the product that no one bothered to check the customer’s credit or collect a down payment. What’s more, a billing clerk had to chase down the sales rep and plant manager to get all the necessary information to accurately complete the invoice — which was mailed a month after delivery. Now, everyone’s attention has returned to making the next sale or batch of product, leaving no one to follow up on payment.

If this sounds familiar, you’re not alone. Scenarios like this play out in factories from coast to coast, costing them all big bucks in the long run.

Manufacturers need to take a hard look at their billing practices. Here are some collection process procedures to consider implementing:

Make collections everyone’s job. Every employee has a role in making sure the company gets paid. Salespeople must obtain accurate billing information from customers (phone numbers, email addresses and names of payables personnel), as well as request approval to perform credit checks. They also need to negotiate contract terms — such as early-bird discounts, late payment penalties and down payments on custom orders — that will help get money in the door faster. The owner or CFO should approve all new customers and terms before the accounting department sets them up in the system.

In addition, factory workers need to code jobs properly and notify the billing department when orders ship. In return office personnel must promptly submit invoices and follow up on unpaid accounts.

Make sure your workers understand their roles in realizing revenue. And give them adequate training and tools to get the job done efficiently.

Streamline the billing process. You can’t collect what you don’t bill. Set up formal procedures that trigger an invoice as soon as the delivery truck pulls away from your dock. Electronic billing systems allow companies to send invoices via email or text. Most e-billing systems also enable online payment and purchase orders, as well as automatic re-orders, if applicable.

Assign dedicated collection personnel. Dedicated representatives should be assigned to handle each customer’s billing issues. This encourages office staff members to develop a rapport with customers. They should monitor all new accounts closely at first and become more flexible as the relationship develops.

Manage overdue accounts. Someone, possibly your controller or finance officer, should be in charge of monitoring when payments are made. Each week, he or she should report to the owners about the percentage of receivables in the 0–30 days category, 31–60 days category, and beyond. Doing so allows you to detect and reverse negative patterns before they have a business impact.

Develop a timeline for acting on overdue accounts. For instance, after 45 days, you might call or send a reminder text to customers who haven’t responded after the first bill. By pursuing these accounts before too much time has passed, you send the message that the company intends to get paid but is willing to work with the customer to resolve payment-related questions or problems.

Provide performance incentives. Too often, incentives are based on revenues, not profits or cash flow. Consider structuring your incentive program based (at least partially) on collections. For example, offer a bonus to workers if the company has 50 percent or more of accounts receivable in the 0–30 days category or keeps bad debt write-offs below 5 percent.

Consider factoring. It takes time to rein in collections. If your company needs immediate access to cash, factoring can be a short-term solution. Here, your receivables are sold to a third-party collection agency, usually for 60 to 85 cents on the dollar. This may seem expensive, but it can provide instant cash and free up employees for implementing long-term collection improvements.

When all collection attempts fail
After repeated unsuccessful attempts at collection, you may eventually realize that a customer isn’t going to pay. When it’s time for a write-off, the Internal Revenue Code (IRC) offers a tax deduction for business bad debts that may soften the blow.

Under IRC Section 166, a business bad debt is a loss from the worthlessness of a debt that was created or acquired in your trade or business, or was closely related to your trade or business when it became partly or totally worthless. Most bad debts involve credit sales to customers for goods or services. But they can also include:

  • Bona fide loans to customers or suppliers that are made for business reasons and have become uncollectible,
  • Business-related guarantees of debts that have become worthless, and
  • Debts attributable to an insolvent partner.

To qualify for the deduction, you must show that you’ve taken reasonable steps to collect the debt and there’s little likelihood it will be paid. You also must have previously included uncollectible credit sales in your accrual-basis gross income.

The best advice we can offer is, “don’t go it alone.” For sound business advice and high quality accounting services, contact John Troyer, CPA, Ciuni & Panichi, Inc. Partner, at jtroyer@cp-advisors.com or 216-831-7171.

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How to shape up your working capital

Concentration risks can hurt your supply chain

How to shape up your working capital

Working capital — current assets minus current liabilities

Everyday leader.It’s a common measure of liquidity. High liquidity generally equates with low risk, but excessive amounts of cash tied up in working capital may detract from growth opportunities and other spending options, such as expanding to new markets, buying equipment and paying down debt. Here are some recent working capital trends and tips for keeping your working capital in shape.

Survey says
Working capital management among U.S. companies has been relatively flat over the last four years, excluding the performance of oil and gas companies, according to the 2016 U.S. Working Capital Survey published by consulting firm REL and CFO magazine. The overall results were skewed somewhat because oil and gas companies increased their inventory reserves to take advantage of low oil prices, thereby driving up working capital balances for that industry.

The study estimates that, if all of the 1,000 companies surveyed managed working capital as efficiently as do the companies in the top quartile of their respective industries, more than $1 trillion of cash would be freed up from receivables, inventory and payables.

Rather than improve working capital efficiency, however, many companies have chosen to raise cash with low interest rate debt. Companies in the survey currently carry roughly $4.86 trillion in debt, more than double the level in 2008. As the Federal Reserve Bank increases rates, companies will likely look for ways to manage working capital better.

Efficiency initiatives
How can your company decrease the amount of cash that’s tied up in working capital? Best practices vary from industry to industry. Here are three effective exercises for improving working capital:

Expedite collections. Possible solutions for converting receivables into cash include: tighter credit policies, early bird discounts, collection-based sales compensation and in-house collection personnel. Companies also can evaluate administrative processes — including invoice preparation, dispute resolution and deposits — to eliminate inefficiencies in the collection cycle.

Trim inventory. This account carries many hidden costs, including storage, obsolescence, insurance and security. Consider using computerized inventory systems to help predict demand, enable data-sharing up and down the supply chain, and more quickly reveal variability from theft.

Postpone payables. By deferring vendor payments, your company can increase cash on hand. But be careful: Delaying payments for too long can compromise a firm’s credit standing or result in forgone early bird discounts.

From analysis to action
No magic formula exists for reducing working capital, but continuous improvement is essential. We can help train you on how to evaluate working capital accounts, identify strengths and weaknesses, and find ways to minimize working capital without compromising supply chain relationships.

Our best advice is: Don’t go it alone. Contact George Pickard, CPA, MSA, Ciuni & Panichi, Inc. senior manager, at gpickard@cp-advisors.com or 216-831-7171 for more information about how we can help you achieve your business goals.

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Supply Chain and Concentration Risks

Concentration risks can hurt your supply chain

Broken chain link held together by paper clipIf a company relies on a customer or supplier for 10 percent or more of its revenue or materials, or if several customers or suppliers are located in the same geographic region, it creates a concentration risk for your business. Because if or when a key customer or supplier experiences turmoil, the repercussions travel up or down the supply chain and can quickly and negatively impact your business.

To protect yourself, it’s important to look for concentration risks as you monitor your financials and engage in strategic planning. Remember to evaluate not only your own success and stability, but also concentration risks that are a threat to your customers and suppliers.

Two types of concentration risks
Businesses tend to experience two main types of concentration risks:

  1. Product-related. If your company’s most profitable product line depends on a few key customers, you’re essentially at their mercy. Key customers that unexpectedly cut budgets or switch to a competitor could significantly lower revenues.Similarly, if a major supplier suddenly increases prices or becomes lax in quality control, it could cause your profits to plummet. This is especially problematic if your number of alternative suppliers is limited.
  2. Geographic. When gauging geographic risks, assess whether a large number of your customers or suppliers are located in one geographic region. Operating near supply chain partners offers advantages such as lower transportation costs and faster delivery. Conversely, overseas locales may enable you to cut labor and raw materials expenses.

But there are also potential risks associated with close geographic proximity of customers or suppliers. Local weather conditions, tax rate hikes and regulatory changes can have a significant impact. And these threats increase substantially when dealing with global partners, which may also present risks in the form of geopolitical uncertainty and exchange rate volatility.

Financially feasible
Your supply chain is much like your cash flow: When it’s strong, stable and uninterrupted, you’re probably in pretty good shape. We can help you assess your concentration risks and find financially feasible solutions to minimize them. We work with businesses of all sizes and in a wide range of industries. Contact Ciuni & Panichi, Inc. and Dan Hout-Reilly, CPA, CVA, at dhout-reilly@cp-advisors.com or 216-831-7171.

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Technology Tips

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IT Tips

It may be time for your company to create a strategic IT plan

Portrait of three technicians standing in a server roomIt is understandable why many companies have taken an ad hoc approach to technology. A usual scenario is that as business needs developed and technology provided the best solutions, automation was implemented without creating an overall, company-wide plan.

As a result, many companies find all their different hardware and software may not communicate together. What’s worse, lack of integration can leave you more vulnerable to security risks. For these reasons, some businesses reach a point where they decide to implement a strategic IT plan.

Setting objectives
The objective of a strategic IT plan is to — over a stated period — roll out consistent, integrated, and secure hardware and software. In doing so, you’ll likely eliminate many of the security dangers wrought by lack of integration, while streamlining data-processing efficiency.

To get started, define your IT objectives. Identify not only the weaknesses of your current infrastructure, but also opportunities to improve it. Employee feedback is key: Find out who’s using what and why it works for them.  Also, figure out what isn’t working and why it isn’t working.

From a financial perspective, estimate a reasonable return on investment that includes a payback timetable for technology expenditures. Be sure your projections factor in both:

  • Hard savings, such as eliminating redundant software or outdated processes, and
  • Soft benefits, such as being able to more quickly and accurately share data within the  office as well as externally (for example, from sales calls).

Also calculate the price of doing nothing. Describe the risks and potential costs of falling behind or failing to get ahead of competitors technologically.

Working in phases
When you’re ready to implement your strategic IT plan, devise a reasonable and patient time line. Ideally, there should be no need to rush. You can take a phased approach, perhaps laying the foundation with a new server and then installing consistent, integrated applications on top of it.

A phased implementation can also help you stay within budget. You’ll need to have a good idea of how much the total project will cost. But you can still allow flexibility for making measured progress without putting your cash flow at risk.

Bringing it all together
There’s nothing wrong or unusual about wandering the vast landscape of today’s business technology. But, at some point, every company should at least consider bringing all their bits and bytes under one roof.

Need help. Please contact Reggie Novak, CPA, CFE, Ciuni & Panichi, Inc. senior manager, at rnovak@cp-advisors.com or 216-831-7171 for help managing your IT spending in a measured, strategic way.

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Tax Refund

Turn next year’s tax refund into cash in your pocket now

2018A tax refund, to be sure, feels like getting an influx of cash, and the bigger the check, the better. But it also means you are essentially giving the government an interest-free loan for close to a year. Keeping those dollars throughout the year is much better option for your financial well-being.

Now is the time to make a change in your withholding or estimated tax payments to begin collecting your 2017 refund now.

Reasons to modify amounts
It’s particularly important to check your withholding and/or estimated tax payments if:

  • You received an especially large 2016 refund,
  • You’ve gotten married or divorced or added a dependent,
  • You’ve purchased a home,
  • You’ve started or lost a job, or
  • Your investment income has changed significantly.

Even if you haven’t encountered any major life changes during the past year, changes in the tax law may affect withholding levels, making it worthwhile to double-check your withholding or estimated tax payments.

Making a change
You can modify your withholding at any time during the year, or even several times within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. For estimated tax payments, you can make adjustments each time quarterly payments are due.

While reducing withholdings or estimated tax payments will, indeed, put more money in your pocket now, you also need to be careful that you don’t reduce them too much. If you don’t pay enough tax during the year, you could end up owing interest and penalties when you file your return, even if you pay your outstanding tax liability by the April 2018 deadline.

The best advice we can offer is don’t go it alone. If you’d like help determining what your withholding or estimated tax payments should be for the rest of the year, please contact Tony Constantine, CPA, Ciuni & Panichi, Inc. Tax Partner at tconstantine@cp-advisors.com or 216-831-7171.

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Smartphones: The Next Fraud Frontier

Fraud and Your Phone

Touchscreen smartphone with Earth globeSmartphones quickly have become a standard part of life for much of the population, even our kids. Not surprisingly, they’ve also now become a standard target for hackers and other individuals with fraud-related intent. Understanding the risks associated with smartphones is the first step in staying secure.

Smartphone risks
According to the U.S. Department of Homeland Security’s United States Computer Emergency Readiness Team (US-CERT), smartphone security hasn’t kept pace with traditional computer security. These devices rarely contain technical security measures, such as firewalls and antivirus protections, and mobile operating systems aren’t updated as frequently as those on personal computers (PCs).

Yet users routinely store a wide range of sensitive information — including calendars, contact information, emails, text messages, passwords and user identification numbers — on their smartphones. Geolocation software can track where smartphones are at any time. In addition, apps can record personally identifiable information.

Even users who have little sensitive information on their smartphones are at risk. A hacker can target a phone and use it to trick its owner, or the owner’s contacts, into revealing confidential information. They also use targeted smartphones to attack others. Using malicious software, an attacker can control a phone by adding its number to a network of devices (called a “botnet”). And smartphones can spread viruses to PCs, which can be a big problem for companies with bring your own device (BYOD) policies.

Access points
An attacker can gain access to a smartphone through a variety of avenues. Sometimes an attacker obtains physical access, as when a phone is lost or stolen. More frequently, a hacker achieves virtual access by, for example, sending a phishing email that coaxes the recipient into clicking a link that installs malicious software.

Another way an attacker can gain access to a smartphone is text message spam.  Studies show that people are three times more likely to respond to spam received by cellphone than when using a desktop or laptop computer. These texts often lead you to shady websites that install malware on your phone or otherwise seek to steal sensitive details utilized for identity theft.

Apps can be dangerous, too. A user might install an app that turns out to be malicious or a legitimate app with weaknesses an attacker can exploit. A user could unleash such an attack simply by running the app.

Protective measures
Experts suggest that individual smartphone users, as well as those charged with managing an organization’s smartphones or administering a company’s BYOD policy, take several steps to reduce the odds of damaging attacks. Encryption is probably the most highly recommended precaution. When data is encrypted, it’s “scrambled” and unreadable to anyone who can’t provide a unique “key” to open it.

Two-step authentication, such as that offered by Gmail, is advisable when available. This approach adds a layer of authentication by calling the phone or sending a password via text message before allowing the user to log in. Of course, if the fraud perpetrator has obtained the phone illicitly, these authentication services put him or her one step closer to accessing the owner’s accounts.

Many users fail to enable all of their phones’ security features. If available, an owner should always activate remote find-and-wipe capabilities, the ability to delete known malicious apps remotely, PINs or passwords, and other options such as touch ID and fingerprint sensors if available. Conversely, users should disable interfaces such as Bluetooth and Wi-Fi when not in use. They also should set Bluetooth-enabled devices to be nondiscoverable, which prevents devices from being listed during a Bluetooth device search process.

Can you hear me now?
Just as smartphone technologies are evolving rapidly, so are the threats to their security. Users and managers need to stay on top of the risks and take the necessary precautions to protect these valuable but vulnerable devices. If you have a “bring your own device” policy or are thinking about creating one, we can help make sure the right security is in place for your company. To learn more, contact Reggie Novak, CPA, CFE, at 216-831-7171 or rnovak@cp-advisors.com.

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The Trump Tax Plan

Tax Plan

AMTThe Trump Administration served its opening volley on tax reform.  Although short on details and sure to be extensively debated and modified by Congress, it does offer us some insights on where the debate may be headed.  Of special importance is the omission of some key campaign proposals.  These include the border tax, potential limitations of mortgage interest, and charitable donation.

The Ciuni & Panichi team continues to watch the developing details of tax reform, keeping our clients in mind.  We will keep you abreast of major changes in proposals that will affect you and your businesses.

Summary of Trump’s Tax Plan

  • The business tax rate is reduced to 15 percent.  This includes all businesses even partnerships, S Corporations, and sole proprietors.
  • The number of income tax brackets will be cut from seven to three, with a top rate of 35 percent and lower rates of 25 percent and 10 percent. It is not clear what income ranges will fall under those brackets.  It would double the standard deduction.
  • It would eliminate most tax deductions. The mortgage interest and charitable contribution deductions would be retained.
  • Estate tax, otherwise known as the “death tax” will be eliminated.
  • There will be a “one-time tax” on the trillions of dollars held by corporations overseas.
  • The U.S. would go to a “territorial” tax system. Such systems typically exclude most or all of the income that businesses earn overseas. Most developed countries use this model.
  • Repeal of the alternative minimum tax and 3.8 percent Obamacare taxes.

Contact Jim Komos at 216.831.7171 or jkomos@cp-advisors.com for more information.

 

Key Individual 2017 Tax Deadlines You Need to Know

Additional Tax Deadlines

tax-formWhile April 15 (April 18 this year) is the main tax deadline on most individual taxpayers’ minds, it’s important to be aware of other deadlines throughout the rest of year. Here’s a look at when some key tax-related forms, payments and other actions are due.

June 15

  • File a 2016 individual income tax return (Form 1040) or file for a four-month extension (Form 4868), and pay any tax and interest due, if you live outside the United States.
  • Pay the second installment of 2017 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

September 15

  • Pay the third installment of 2017 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

October 2

  • If you’re the trustee of a trust or the executor of an estate, file an income tax return for the 2016 calendar year (Form 1041) and pay any tax, interest and penalties due, if an automatic five-and-a-half month extension was filed.

October 16

  • File a 2016 income tax return (Form 1040, Form 1040A or Form 1040EZ) and pay any tax, interest and penalties due, if an automatic six-month extension was filed (or if an automatic four-month extension was filed by a taxpayer living outside the United States).
  • Make contributions for 2016 to certain retirement plans or establish a SEP for 2016, if an automatic six-month extension was filed.
  • File a 2016 gift tax return (Form 709) and pay any tax, interest and penalties due, if an automatic six-month extension was filed.

December 31

  • Make 2017 contributions to certain employer-sponsored retirement plans.
  • Make 2017 annual exclusion gifts (up to $14,000 per recipient).
  • Incur various expenses that potentially can be claimed as itemized deductions on your 2017 tax return. Examples include charitable donations, medical expenses, property tax payments and expenses eligible for the miscellaneous itemized deduction.

Keep in mind that this list isn’t all-inclusive. Your accountant is your best advisor to make sure you are in compliance. Need help? Contact Nick Leacoma, CPA, Ciuni & Panichi, Inc. Tax Department senior manager at nleacoma@cp-advisors.com or 216-831-7171.

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Have a Plan, Not Just a Stock Portfolio

Diversification still matters. One day, this bull market will end.

Provided by Dane A. Wilson, Wealth Management Advisor

bull1In the first quarter of 2017, the bull market seemed unstoppable. The Dow Jones Industrial Average soared past 20,000 and closed at all-time highs on 12 consecutive trading days. The Nasdaq Composite gained almost 10% in three months. (1)

An eight-year-old bull market is rare. This current bull is the second longest since the end of World War II; only the 1990-2000 bull run surpasses it. Since 1945, the average bull market has lasted 57 months. (2)

Everyone knows this bull market will someday end – but who wants to acknowledge that fact when equities have performed so well?

Overly exuberant investors might want to pay attention to the words of Sam Stovall, a longtime, bullish investment strategist and market analyst. Stovall, who used to work for Standard & Poor’s and now works for CFRA, has seen bull and bear markets come and go. As he recently noted to Fortune, epic bull markets usually end “with a bang and not a whimper. Like an incandescent light bulb, they tend to glow brightest just before they go out.” (2)

History is riddled with examples. Think of the dot-com bust of 2000, the credit crisis of 2008, and the skyrocketing inflation of 1974. These developments wiped out bull markets; this bull market could potentially end as dramatically as those three did. (3)

A 20% correction would take the Dow down into the 16,000s. Emotionally, that would feel like a much more significant market drop – after all, the last time the blue chips fell 4,000 points was during the 2007-09 bear market. (4)

Investors must prepare for the worst, even as they celebrate the best. A stock portfolio is not a retirement plan. A diversified investment mix of equity and fixed-income vehicles, augmented by a strong cash position, is wise in any market climate. Those entering retirement should have realistic assessments of the annual income they can withdraw from their savings and the potential returns from their invested assets.

Now is not the time to be greedy. With the markets near historic peaks, diversification still matters, and it can potentially provide a degree of financial insulation when stocks fall. Many investors are tempted to chase the return right now, but their real mission should be chasing their retirement objectives in line with the strategy defined in their retirement plans. In a sense, this record-setting bull market amounts to a distraction – a distraction worth celebrating, but a distraction, nonetheless.

Dane A. Wilson, C&P Wealth Management, 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 – money.cnn.com/2017/03/31/investing/trump-rally-first-quarter-wall-street/index.html [3/31/17]
2 – fortune.com/2017/03/09/stock-market-bull-market-longest/ [3/9/17]
3 – kiplinger.com/article/investing/T052-C008-S002-5-reasons-bull-markets-end.html [4/3/14]
4 – thebalance.com/stock-market-crash-of-2008-3305535 [4/3/17]

 

You filed your taxes – could an audit follow?

So you just filed your taxes — could an audit be next?

irs auditLike many people, you probably feel a great sense of relief wash over you after your tax return is completed and filed. Unfortunately, even professionally prepared and accurate returns may sometimes be subject to an IRS audit.

The good news? Chances are slim that it will actually happen. Only a small percentage of returns go through the full audit process. Still, you’re better off informed than taken completely by surprise should your number come up.

Red flags
A variety of red flags can trigger an audit. Your return may be selected because the IRS received information from a third party — say, the W-2 submitted by your employer — that differs from the information reported on your return. This is often the employer’s mistake or occurs following a merger or acquisition.

In addition, the IRS scores all returns through its Discriminant Inventory Function System (DIF). A higher DIF score may increase your audit chances. While the formula for determining a DIF score is a well-guarded IRS secret, it’s generally understood that certain things may increase the likelihood of an audit, such as:

  • Running a traditionally cash-oriented business,
  • having a relatively high adjusted gross income,
  • using valid but complex tax shelters, or
  • claiming certain tax breaks, such as the home office deduction.

Bear in mind, though, that no single item will cause an audit. And, as mentioned, a relatively low percentage of returns are examined. This is particularly true as the IRS grapples with its budget issues.

Finally, some returns are randomly chosen as part of the IRS’s National Research Program. Through this program, the agency studies returns to improve and update its audit selection techniques.

Careful reading
If you receive an audit notice, the first rule is:  Don’t panic! Most are correspondence audits completed via mail. The IRS may ask for documentation on, for instance, your income or your purchase or sale of a piece of real estate.

Read the notice through carefully. The pages should indicate the items to be examined, as well as a deadline for responding. A timely response is important because it conveys that you’re organized and, thus, less likely to overlook important details. It also indicates that you didn’t need to spend extra time pulling together a story.

Your response (and ours)
Should an IRS notice appear in your mail, Ciuni & Panichi, Inc. can help.  Please contact Tony Constantine, CPA, at 216-831-7171 or tconstantine@cp-advisors.com. We can fully explain what the agency is looking for and help you prepare your response. If the IRS requests an in-person interview regarding the audit, we can accompany you — or even appear in your place if you provide authorization.

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Saving tax with home-related deductions and exclusions.

real estate trustCurrently, home ownership comes with many tax-saving opportunities. Consider both deductions and exclusions when you’re filing your 2016 return and tax planning for 2017:
Property tax deduction. Property tax is generally fully deductible — unless you’re subject to the alternative minimum tax (AMT).

Mortgage interest deduction. You generally can deduct interest on up to a combined total of $1 million of mortgage debt incurred to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible.

Home equity debt interest deduction. Interest on home equity debt used for any purpose (debt limit of $100,000) may be deductible. But keep in mind that, if home equity debt isn’t used for home improvements, the interest isn’t deductible for AMT purposes.

Mortgage insurance premium deduction. This break expired December 31, 2016, but Congress might extend it.

Home office deduction. If your home office use meets certain tests, you generally can deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, and the depreciation allocable to the space. Or you may be able to use a simplified method for claiming the deduction.

Rental income exclusion. If you rent out all or a portion of your principal residence or second home for less than 15 days, you don’t have to report the income. But expenses directly associated with the rental, such as advertising and cleaning, won’t be deductible.

Home sale gain exclusion. When you sell your principal residence, you can exclude up to $250,000 ($500,000 for married couples filing jointly) of gain if you meet certain tests. Be aware that gain allocable to a period of “nonqualified” use generally isn’t excludable.

Debt forgiveness exclusion. This break for homeowners who received debt forgiveness in a foreclosure, short sale or mortgage workout for a principal residence expired December 31, 2016, but Congress might extend it.

The debt forgiveness exclusion and mortgage insurance premium deduction aren’t the only home-related breaks that might not be available in the future. There have been proposals to eliminate other breaks, such as the property tax deduction, as part of tax reform.

Whether such changes will be signed into law and, if so, when they’d go into effect is uncertain. Also keep in mind that additional rules and limits apply to these breaks. So contact us for information on the latest tax reform developments or which home-related breaks you’re eligible to claim.

Need more information or assistance?  Contact Jim Komos, Partner in the Ciuni & Panichi, Inc. Tax Department at 216.831.7171 or jkomos@cp-advisors.com.

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© 2017

Looking for New Accounting Software

Don’t Shortcut Your Search for New Accounting Software

By Jim Komos, CPA, Partner, Tax Department

JRKsmallersmallerTechnology, used well, saves time and money. But when the technology solution doesn’t meet your needs or your organization’s abilities, it becomes a burden and source of ongoing frustration. So how do you get the benefits without the pain? It pays to put a little extra effort into the planning up front.  You should also discuss your options with your IT people and your accountant before you purchase accounting software.

All too often we see expensive accounting software packages underutilized or even not used at all.  A major reason for this is that either the system does not really match the needs of the organization, the systems are too complex for the personnel assigned to use the software, or there is insufficient resources to properly set up the system and related processing.  It is not uncommon for a well-run system to fall apart after a change in accounting personnel.

To help minimize these problems it is important to begin the process with an inventory of your software. What do you have now that you want to continue to use and what functions would you like to add. When thinking of enhancements, define them in terms of what you want to do. Let your potential vendor determine what technology you need to accomplish it.

Many construction / real estate companies buy accounting software and, even when the installation goes well, quickly grow frustrated when they don’t get the return on investment they’d expected. From an accounting perspective, two of the primary implementation risks that contractors face are bad data and missed opportunities.

Clean up before you boot up
You’ve probably heard that old tech adage, “garbage in, garbage out.” The “garbage” referred to is bad data. If inaccurate or garbled information goes into your new system, the reports coming out of it will be flawed. And this is a particular danger when transitioning from an older software platform to a newer one.  For example, you may be working off of inaccurate inventory counts or struggling with duplicate vendor entries. On a more serious level, your database may store information that reflects improperly closed quarters, unbalanced accounts because of data entry errors or outstanding retainage on old jobs.

Too often there is a rush to implement a new system by a specified date.  Cleaning up the data is usually the first thing to go when trying to meet these deadlines.

A methodical, analytical implementation should uncover some or, one hopes, all of such problems. You can then clean up the bad data and adjust entries to tighten the accuracy of your accounting records and, thereby, improve your financial reporting.

Seizing opportunities 
A major risk to construction accounting software implementation is imprecise or incomplete job-costing data. Contractors face a distinctive challenge in integrating not only general business accounting data, but also the details of multiple, ongoing projects.

A typical approach is to move job-costing info from the old system to the new one as quickly as possible, using whatever on-the-fly method seems most expedient.

Naturally, doing so can lead to data transfer errors. But, again, there’s also a risk of missed opportunity here. When upgrading to a new system, you’ll have the chance to improve your job costing. You may be able to, for instance, add new phases or cost code groups that allow you to manage project expenses much more efficiently and closely.

Beyond job costing, other opportunities for improvement include optimizing your chart of accounts and improving your internal controls. Again, to obtain these benefits, you’ll need to take a slow, patient approach to the software implementation.

Getting a leg up
Just thinking about what could go wrong will give you a leg up on avoiding the biggest disasters. To further increase your chances for success, involve your CPA in the implementation. “We’ve helped companies ease into their new software systems and get the results they expect,” said Jim Komos, CPA, Partner, Ciuni & Panichi, Inc. “And we’ve helped others recover from a very unpleasant implementation experience. Our advice is, don’t go it alone.” Contact Jim at 216-831-7171 or jkomos@cp-advisors.com.

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Transferring Not-for-Profit Leadership

Founder’s Syndrome and Not-for-Profits

By Mike Klein, CPA

mbkFounder’s Syndrome is a term that describes the challenge a not-for-profit organization could encounter when the time comes to transition its leadership functions from its founder to new management. The ailment occurs if the original leader has resisted delegating key responsibilities to other staff members — or helping the organization transition to a new leader.

It’s worth noting that founders’ reluctance to loosen their grip isn’t necessarily due to a power-hungry need to control. Founders tend to care deeply for their organizations and may fear that the organization would falter without their continued connection.

For example, they worry that donations might drop off if they’re not reaching out into the community anymore. They may be concerned that others in the organization lack the background to make savvy decisions. Or founders might have invested so much of themselves and their lives in the organization that they simply can’t imagine a different path.

Is your organization vulnerable?
Not-for-profits suffering from this affliction generally share some common characteristics: For example, because the founder has earned the trust of board members through their long-time relationships working together to advance the organization, they may be reluctant to give up their reliance on the founder for advice and guidance through decision making.

Another characteristic is the founder may not have transitioned day-to-day decision making to his or her subordinates, more out of habit than disregard for their leadership skills. Nevertheless, the appropriate mentoring and sharing of power necessary to prepare a successor and a strong leadership team is not occurring.

These conditions leave organizations in a vulnerable and risky position. If something should happen to the founder — retirement, death, disability or something else — how would the organization carry on?

How can you treat the “syndrome”?
The good news is that Founder’s Syndrome is treatable. The first step is to address the situation with the founder. This can be uncomfortable, but it’s critical. Members of the board or perhaps senior staff should begin by acknowledging the founder’s invaluable role over the years. They can then move on to discuss the importance of preserving the founder’s legacy when he or she inevitably can no longer lead.

Here are some other advisable actions:
Form a succession plan. A succession plan is a vital ingredient in preserving the organization. If no one in the organization wants to tackle this discussion with the founder, a professional coach or consultant could be retained.

Encourage founders to be active in the transition. Don’t just impose a transition onto the founder. One important contribution founders can make is recording their institutional memories. The leader’s vast knowledge should be documented so the organization can continue to benefit from it.

Ask the board of directors to step up. The board may need to step up its accountability in the absence of the strong leader to whom they’ve been accustomed. Board members must seize the reins and educate themselves about the organization in any areas where they’re lacking. This may require replacing existing board members. Bringing on new staff may be advisable, too.

The board can form an active fundraising committee so that a single individual isn’t responsible for driving donations. An army of zealous volunteers could be deployed as a bulwark against donation decline.

Entering Phase Two
Your organization’s founder likely has invested the proverbial blood, sweat and tears into launching your not-for-profit and overseeing its growth. That person, ideally, should become part of the plan as you create a road map for the organization’s future. Planning for the second generation of nonprofit leadership is in its own way just as important as creating a start-up nonprofit — be sure to allow your organization the time it needs to ready itself for that next stage.

Founder’s Syndrome is a difficult ailment to manage. The best advice we can offer is, “Don’t go it alone.” One of the best benefits of working with a consultant is he or she can help with the difficult conversations. Ciuni & Panichi, Inc. offers a wide range of not-for-profit consulting services, including executive coaching, board development and engagement, strategic fundraising, and marketing. To learn more, contact Mike Klein, CPA, MBA, at 216-831-7171 or mklein@cp-advisors.com.