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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Thinking about Outsourcing Payroll?

Protect your Payroll and Ask for a Service Audit Report

Business People Meeting Communication Working Office ConceptPayroll can be an administrative nightmare if done in-house, especially for smaller companies. In addition to keeping up with employee withholdings and benefits enrollment, you must file state and federal payroll tax returns and follow union reporting requirements. Outside service companies that specialize in payroll administration can help you manage all of the details and minimize mistakes. Payroll providers can also handle expense reimbursement for employees and provide other services.

When payroll is outsourced, however, your company could be exposed to identity theft and other fraud risks if the service provider lacks sufficient internal controls. For example, sensitive electronic personal data could be hacked from your network and sold on the Dark Net — or old-fashioned paper files could be stolen and used to commit fraud.

Audits of payroll companies
Fortunately, CPAs offer two types of reports that provide assurance on whether an outside payroll provider’s controls over paper and electronic records are adequate.

Type I Audits.  This level of assurance expresses an opinion as to whether controls are properly designed.

Type II Audits.  Here, the auditor goes a step further and expresses an opinion on whether the controls are operating effectively.

When performing these attestation engagements, Statement on Standards for Attestation Engagements (SSAE) No. 18 requires:

  • The payroll company’s management to provide a written assertion about the fairness of the presentation of the description of the organization’s control objectives and related controls and the suitability of their design; and for a Type II audit, the operating effectiveness of those control objectives and related controls,
  • The auditor’s opinion in a Type II audit regarding description and suitability to cover a period consistent with the auditor’s tests of operating effectiveness, rather than being as of a specified date, and
  • Auditors to identify in the audit report any tests of control objectives and related controls conducted by internal auditors.

Further, auditors are prohibited from using evidence on the satisfactory operation of controls in prior periods as a basis for a reduction in testing in the current period, even if it’s supplemented with evidence obtained during the current period.

When an audit is complete, the service auditor typically will issue a report to the payroll company.

As the customer of the service provider, it is then up to you to obtain a copy of the audit report from the payroll provider and distribute it to your financial statement auditors as evidence of internal controls.

Outsourcing with confidence
Your financial statement auditors are required to consider the internal control environment for any services you outsource, including payroll, customer service, benefits administration and IT functions. Most service providers obtain service audit reports. If yours doesn’t, you might need to request permission for your CPA to contact and visit the payroll provider to plan their financial statement audit.

The best advice we can offer is:  Don’t go it alone.  Contact Robert Smolko, CPA, Ciuni & Panichi, Inc. audit partner, at 216-831-7171 or rsmolko@cp-advisors.com for sound advice when making decisions about your business.

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Close-up on restricted cash

Tax Reform Framework Released

Tax reform 2017

JRKsmallersmallerThe Trump Administration, the House Committee on Ways and Means, and the Senate Committee on Finance released a framework for tax reform yesterday that they hope will be enacted by year-end. The framework is intended to become the template on which the tax-writing committees will develop legislation. It is designed to keep the promises President Donald Trump made during his campaign.

A Summary of the Framework

For Individuals

  • Three tax brackets: 12 percent, 25 percent, and 35 percent (currently there are seven brackets, with the lowest one being 10 percent and the top one being 39.6 percent). However, the framework allows congressional tax-writing committees to add a fourth, higher bracket for high-income individuals. The income levels at which the three brackets would apply were not specified.
  • Repeal of the alternative minimum tax.
  • Repeal of the estate tax and the generation-skipping transfer tax.
  • Taxing pass-through income at a maximum rate of 25 percent. (The tax-writing committees would be given the task of developing rules to ensure that high-income taxpayers do not use this provision to avoid the 35 percent bracket.)
  • Increase the standard deduction to $12,000 for individuals and to $24,000 for married couples filing jointly.
  • Increase the child tax credit and provide a $500 credit for care of non-child dependents.
  • Eliminate most itemized deductions, including the deduction for state and local taxes.  They plan to preserve the deductibility of mortgage interest and charitable contributions. The framework directs Congress to maintain tax incentives for higher education, retirement savings, and employment.
  • Repeal of the death tax and generation-skipping transfer tax.

For Businesses

  • Limits the maximum tax rate applied to the business income of small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations to 25 percent.
  • Reduces the corporate tax rate to 20 percent. The committees also may consider methods to reduce the double taxation of corporate earnings.
  • Allow businesses to immediately write off (or “expense”) the cost of new investments in depreciable assets other than structures made after September 27, 2017, for at least five years. This policy represents an unprecedented level of expensing with respect to the duration and scope of eligible assets. The committees may continue to work to enhance unprecedented expensing for business investments, especially to provide relief for small businesses.
  • An end to taxation of U.S. companies’ worldwide income and a move to a territorial system. The tax-writing committees would have discretion to write anti-base-erosion measures.
  • A one-time tax on accumulated offshore earnings, which would be taxed at two unspecified rates: One rate for cash and cash equivalents and a lower rate for other assets.
  • Limit the deductibility of interest by C corporations.  The committees will also consider the tax treatment of interest paid by non-corporate taxpayers.  No further details provided.
  • Eliminate deductions, at the tax-writing committees’ discretion, but the framework calls for the research and low-income housing credits to be retained.

You can read the entire framework here.

If you have questions about how this reform will affect you, contact your tax advisor at Ciuni & Panichi, Inc. or Jim Komos, CPA, Tax Partner, at 216-831-7171 or jkomos@cp-advisors.com.

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The ABCs of the Tax Deduction for Educator Expenses

The ABCs of the Tax Deduction for Educator Expenses

Teachers who buy supplies for their classrooms may be eligible for a tax break.

Back to school compositionAt back-to-school time, much of the focus is on the students returning to the classroom — and on their parents buying them school supplies, backpacks, clothes, etc., for the new school year. But let’s not forget about the teachers. It’s common for teachers to pay for some classroom supplies out of pocket, and the tax code provides a special break that makes it a little easier for these educators to deduct some of their expenses.

The miscellaneous itemized deduction
Generally, your employee expenses are deductible when they are not reimbursed by your employer and ordinary and necessary to your business of being an employee. An expense is ordinary if it is common and accepted in your business. An expense is necessary if it is appropriate and helpful to your business.

These expenses must be claimed as a miscellaneous itemized deduction and are subject to a two percent of the adjusted gross income (AGI) floor. This means you’ll enjoy a tax benefit only if all your deductions subject to the floor, combined, exceed two percent of your AGI. For many taxpayers, including teachers, this can be a difficult threshold to meet.

The educator expense deduction
Congress created the educator expense deduction to allow teachers and other educators to receive a tax benefit from some of their unreimbursed out-of-pocket classroom expenses.

The break was made permanent under the Protecting Americans from Tax Hikes (PATH) Act of 2015.  Since 2016, the deduction has been annually indexed for inflation (though because of low inflation it hasn’t increased yet) and has included professional development expenses.

Qualifying elementary and secondary school teachers and other eligible educators (such as counselors and principals) can deduct up to $250 of qualified expenses. (If you’re married filing jointly and both you and your spouse are educators, you can deduct up to $500 of unreimbursed expenses — but not more than $250 each.)

Qualified expenses include amounts paid or incurred during the tax year for books, supplies, computer equipment (including related software and services), other equipment and supplementary materials that you use in the classroom. For courses in health and physical education, the costs for supplies are qualified expenses only if related to athletics.

An added benefit
The educator expense deduction is an “above-the-line” deduction, which means you don’t have to itemize and it reduces your AGI, which has an added benefit:  Because AGI-based limits affect a variety of tax breaks (such as the previously mentioned miscellaneous itemized deductions), lowering your AGI might help you maximize your tax breaks overall.

The best advice we can offer is “don’t go it alone.” Contact Tax Department Accountant Eden LaLonde, CPA, MAcc, at 216-831-7171 or elalonde@cp-advisors.com for more details about the educator expense deduction or tax breaks available for other work-related expenses.

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Having the Money Talk with Your Children

How much financial knowledge do they have?

Provided by Dane A. Wilson, Wealth Management Advisor

401(k) 403(b) audit SSAESome young adults manage to acquire a fair amount of financial literacy. In the classroom or the workplace, they learn a great deal about financial principles. Others lack such knowledge and learn money lessons by paying, to reference William Blake, “the price of experience.”

Broadly speaking, how much financial literacy do young people have today? At this writing, some of the most recent data appears in U.S. Bank’s 2016 Student and Personal Finance Study. After surveying more than 1,600 American high school and undergraduate students, the bank found that just 15% of students felt knowledgeable about investing. For that matter, just 42% felt knowledgeable about deposit and checking accounts.1

Relatively few students understood the principles of credit. Fifty-four percent thought that having “too many” credit cards would negatively impact their credit score. Forty-four percent believed that they could build or improve their credit rating by using credit or debit cards. Neither perception is accurate.1

Are parents teaching their children well about money? Maybe not. An interesting difference of opinion stood out in the survey results. Forty percent of the parents of the survey respondents said that they had taught their kids specific money management skills, but merely 18% of the teens and young adults reported receiving such instruction.1,2

A young adult should go out into the world with a grasp of certain money truths. For example, high-interest debt should be avoided whenever possible, and when it is unavoidable, it should be the first debt attacked. Most credit cards (and private student loans) carry double-digit interest rates.3

Living independently means abiding by some kind of budget. Budgeting is a great skill for a young adult to master, one that may keep them out of some stressful financial predicaments.

At or before age 26, health insurance must be addressed. Under the Affordable Care Act, most young adults can remain on a parent’s health plan until they are 26. This applies even if they marry, become parents, or live away from mom and dad. But what happens when they turn 26? If they sign up for an HMO, they need to understand how out-of-network costs can creep up on them. They should understand the potentially lower premiums that they could pay if enrolled in a high-deductible health plan (HDHP), but also the tradeoff – they might get hit hard in the wallet if a hospital stay or an involved emergency room visit occurs.3,4

Lastly, this is an ideal time to start saving & investing. Any parent would do well to direct their son or daughter to a financial professional of good standing and significant experience for guidance about building and keeping wealth. If a young adult aspires to retire confidently later in life, this could be the first step. A prospective young investor should know the types of investments available to them as well as the difference between investments and investment vehicles (which many Americans, young and old, confuse).

A money talk does not need to cover all the above subjects at once. You may prefer to dispense financial education in a way that is gradual and more anecdotal than implicitly instructive. Whichever way the knowledge is shared, sooner is better than later – because financially, kids have to grow up fast these days.

Dane A. Wilson may be reached at 216-831-7171 or dwilson@cp-advisors.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
 
Securities offered through 1st Global Capital Corp., Member FINRA/SIPC

Investment returns fluctuate and there is no assurance that a single rate of return will be sustained over an extended period of time. Investments are subject to market risks including the potential loss of principal invested
  
Citations.
1 – stories.usbank.com/dam/september-2016/USBankStudentPersonalFinance.pdf [9/16]
2 – tinyurl.com/yc6ejxjp [10/27/16]
3 – cnbc.com/2017/03/02/parents-need-to-have-real-world-money-talk-with-kids.html [3/2/17]
4 – healthcare.gov/young-adults/children-under-26/ [6/8/17]

 

Beware of the ongoing risk of employee misclassification

David Reape HighRes-08We live in an increasingly specialized society. As such, a subset of the workforce with distinctive skill sets that can perform high-quality services is increasing. Through independent contractor relationships, companies are able to access these services without the long-term entanglements of traditional employment.

And yet, risk remains. Classifying a worker as an independent contractor frees a business from payroll tax liability and allows it to forgo providing overtime pay, unemployment compensation, and other employee benefits. Also, independent status takes an individual off the company payroll, where an employee’s share of payroll taxes, plus income taxes, is automatically withheld.

For these reasons, the federal government views misclassifying a bona fide employee as an independent contractor as forcing a square peg into a round hole.

Key factors

The IRS has long been a primary enforcer of proper worker classification. When assessing worker classification, the agency will look at its 20 factor test to determine a worker’s proper classification. Key factors the IRS typically looks at include:

Level of behavioral control. This means the extent to which the company instructs a worker on when and where to do the work, what tools or equipment to use, whom to hire, where to purchase supplies and so on. Also, control typically involves providing training and evaluating the worker’s performance. The more control the company exercises, the more likely the worker is an employee.

Level of financial control. Independent contractors are more likely to invest in their own equipment or facilities, incur unreimbursed business expenses, and market their services to other customers. Employees are more likely to be paid by the hour or week or some other time period; independent contractors are more likely to receive a flat fee.

Relationship of the parties. Independent contractors are often engaged for a discrete project, while employees are typically hired permanently (or at least for an indefinite period). Also, workers who serve a key business function are more likely to be classified as employees.

The IRS examines a variety of factors within each category. You need to consider all of the facts and circumstances surrounding each worker relationship.

Protective measures

Once you’ve completed your review, there are several strategies you can use to minimize your exposure. When in doubt, reclassify questionable independent contractors as employees. This may increase your tax and benefit costs, but it will eliminate reclassification risk and possibly penalties.

From there, modify your relationships with independent contractors to better ensure compliance. For example, you might exercise less behavioral control by reducing your level of supervision or allowing workers to set their own hours or work from home.

Finally, consider using an employee-leasing company. Workers leased from these firms are employees of the leasing company, which is responsible for taxes, benefits and other employer obligations.

When in doubt, seek advice

At Ciuni & Panichi, Inc., we can help business leaders review the pertinent factors and use protective measures before and during an engagement. Contact David Reape, CPA, Tax Department Principal, at dreape@cp-advisors.com or 216-831-7171 to learn about the business advisory services available to help keep you in compliance today and into the future.

Three Midyear Tax Planning Strategies for Individuals

Midyear Tax Planning

april 15In the quest to reduce your tax bill, year-end planning can only go so far. Tax-saving strategies take time to implement, so review your options now. Here Nick Leacoma, CPA, Ciuni & Panichi, Inc. Tax Department Senior Manager, offers three strategies that can be more effective if you begin executing them midyear:

Consider your bracket
The top income tax rate is 39.6 percent for taxpayers with taxable income over $418,400 (singles), $444,550 (heads of households) and $470,700 (married filing jointly; half that amount for married filing separately). If you expect this year’s income to be near the threshold, consider strategies for reducing your taxable income and staying out of the top bracket. For example, you could take steps to defer income and accelerate deductible expenses. (This strategy can save tax even if you’re not at risk for the 39.6 percent bracket or you can’t avoid the bracket.)

You could also shift income to family members in lower tax brackets by giving them income-producing assets. This strategy won’t work, however, if the recipient is subject to the “kiddie tax.” Generally, this tax applies the parents’ marginal rate to unearned income (including investment income) received by a dependent child under the age of 19 (24 for full-time students) in excess of a specified threshold ($2,100 for 2017).

Look at investment income
This year, the capital gains rate for taxpayers in the top bracket is 20 percent. If you’ve realized, or expect to realize, significant capital gains, consider selling some depreciated investments to generate losses you can use to offset those gains. It may be possible to repurchase those investments, so long as you wait at least 31 days to avoid the “wash sale” rule.

Depending on what happens with health care and tax reform legislation, you also may need to plan for the 3.8 percent net investment income tax (NIIT). Under the Affordable Care Act, this tax can affect taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for joint filers). The NIIT applies to net investment income for the year or the excess of MAGI over the threshold, whichever is less. So, if the NIIT remains in effect (check back with us for the latest information), you may be able to lower your tax liability by reducing your MAGI, reducing net investment income or both.

Plan for medical expenses
The threshold for deducting medical expenses is 10 percent of AGI. You can deduct only expenses that exceed that floor. (The threshold could be affected by health care legislation. Again, check back with us for the latest information.)

Deductible expenses may include health insurance premiums (if not deducted from your wages pretax); long-term care insurance premiums (age-based limits apply); medical and dental services and prescription drugs (if not reimbursable by insurance or paid through a tax-advantaged account); and mileage driven for health care purposes (17 cents per mile driven in 2017). You may be able to control the timing of some of these expenses so you can bunch them into every other year and exceed the applicable floor.

These are just a few ideas for slashing your 2017 tax bill. To benefit from midyear tax planning, consult Nick Leacoma, CPA, at 216-831-7171 or nleacoma@cp-advisors.com. If you wait until the end of the year, it may be too late to execute the strategies that would save you the most tax.

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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

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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Credit Cards and Fraud

Having a policy can thwart fraud

mbkWhen it comes to fraud in any organization, credit cards are frequently a fraudster’s tool. Because the use of credit cards is so commonplace today, there’s always the risk of improper charges to your account. Credit card misuse could hurt your organization financially and jeopardize its reputation in the community. Always remember that physically locking credit cards only protects you from unauthorized use by those who have never been in possession of the card. Online purchases don’t require physically having the card, just knowledge of the card information. But there are ways to protect your organization against credit card fraud. Developing a credit card use policy is an important first step.

Certain components make sense
While each organization’s policy will vary according to its circumstances and priorities, certain components are both commonsense and essential. It’s important, for example, to address eligibility by setting restrictions on which employees may have or use your organization’s credit cards. You might, for example, want to limit cards to full-time employees who:

  • Travel regularly for their jobs,
  • Purchase large volumes of goods and services for the organization’s use, or
  • Otherwise incur regular business expenses of a kind appropriately paid by credit card.

You also should require written approval from a supervisor prior to having a credit card issued to an employee. In addition, your policy should clearly identify prohibited uses for the cards, such as cash advances, bank checks, traveler’s checks and electronic cash transfers — and explicitly state that the credit cards may never be used for personal expenses. You also might bar using the card for purchases of alcohol or other items inconsistent with your organization’s mission and values. Additionally, you may want to prohibit capital purchases, which often need to go through a more layered approval process. Finally, your policy should specify that reimbursement for returns of goods or services must be credited directly to the card account. The employee should receive no cash or refunds directly.

Spending limits should be specified, preapproval required
In addition to restricting the types of purchases, your policy should set a spending limit. Or you can rely on the specific limit set with the issuer for each card if that limit is in sync with the user’s needs. Do you know you can make more than one payment per month on a credit card? If you must use corporate credit cards, low credit limits are amongst your best tools to limit exposure to fraud. Many nonprofits require all employees to seek preapproval (usually in writing) prior to incurring any credit card charge as a proper internal control. Clearly state in your policy that unauthorized credit card purchases and charges without appropriate documentation are the responsibility of the employee, including any related late fees or interest.

Documentation and statement reconciliation are key
Employees must provide documentation — usually the original itemized receipt — to support all charges. For meal purchases, require employees to provide the names of everyone in attendance and a description of the meal’s business purpose to comply with IRS regulations. Request that all original receipts be submitted to the accounting department in an organized manner, and provide users with a standardized format to expedite processing by requiring department coding and descriptions of each charge. Supervisors should indicate their review and approval of the charges by a signature and date on the receipt or on the required form. Your accounting department should reconcile monthly credit card statements, and the statements should be reviewed by an executive or board member.

Enforcement should be mentioned
A policy without an enforcement mechanism is simply a piece of paper. Your policy should state that violations will result in disciplinary action, up to and including termination of employment and, where appropriate, criminal prosecution. Once you communicate your credit card policy, require the employee to sign an acknowledgment stating that he or she has read and understands the policy and procedures governing credit card use before receiving the card.

The right steps
Credit card use is sometimes a convenient way to handle expenses, particularly for event planning and travel. So if your not-for-profit permits credit card use, make sure that you have controls in place to deter and guard against misuse. Also implement similar controls for debit and purchase card use. Our best advice is:  Don’t go it alone. Ciuni & Panichi, Inc. has a team dedicated to working with not-for-profit organizations. The team provides accounting and 990 preparation as well as management advisory services. Additionally the firm provides consulting services on fundraising strategies, board and volunteer engagement, and marketing. Contact Mike Klein, CPA, Partner, at mklein@cp-advisors.com or 216-831-7171 to learn more.

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Consider Your Not-for-Profit Growth Stage

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

Make Collections a Priority

 

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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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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