Experience is the Difference®

It’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 us for help ensuring your business comes out on the winning end of a move across state lines.

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Many companies take an ad hoc approach to technology. If you’re among them, it’s understandable; you probably had to automate some tasks before others, your tech needs have likely evolved over time, and technology itself is always changing.

Unfortunately, all of your different hardware and software may not communicate so well. 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.

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. Please contact our firm for help managing your IT spending in a measured, strategic way.

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Income and losses from investment real estate or rental property are passive by definition — unless you’re a real estate professional. Why does this matter? Passive income may be subject to the 3.8% net investment income tax (NIIT), and passive losses generally are deductible only against passive income, with the excess being carried forward.

Of course the NIIT is part of the Affordable Care Act (ACA) and might be eliminated under ACA repeal and replace legislation or tax reform legislation. But if/when such legislation will be passed and signed into law is uncertain. Even if the NIIT is eliminated, the passive loss issue will still be an important one for many taxpayers investing in real estate.

“Professional” requirements

To qualify as a real estate professional, you must annually perform:

  • More than 50% of your personal services in real property trades or businesses in which you materially participate, and
  • More than 750 hours of service in these businesses.

Each year stands on its own, and there are other nuances. (Special rules for spouses may help you meet the 750-hour test.)

Tax strategies

If you’re concerned you’ll fail either test and be subject to the 3.8% NIIT or stuck with passive losses, consider doing one of the following:

Increasing your involvement in the real estate activity. If you can pass the real estate professional tests, the activity no longer will be subject to passive activity rules.

Looking at other activities. If you have passive losses from your real estate investment, consider investing in another income-producing trade or business that will be passive to you. That way, you’ll have passive income that can absorb some or all of your passive losses.

Disposing of the activity. This generally allows you to deduct all passive losses — including any loss on disposition (subject to basis and capital loss limitations). But, again, the rules are complex.

Also be aware that the IRS frequently challenges claims of real estate professional status — and is often successful. One situation where the IRS commonly prevails is when the taxpayer didn’t keep adequate records of time spent on real estate activities.

If you’re not sure whether you qualify as a real estate professional, please contact us. We can help you make this determination and guide you on how to properly document your hours.

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If you recently filed for 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.

Response measures

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 most severe version, 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, our firm can help you:

  • 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.

Don’t let an IRS audit ruin your year — be it this year, next year or whenever that letter shows up in the mail. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one happens in the first place.

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What do charitable donors want? The classic answer is: Go ask each one individually. However, research provides some insight into donor motivation that can help your not-for-profit grow its financial support.

Taxing matters

The biennial U.S. Trust® Study of High Net Worth Philanthropy, conducted in partnership with the Indiana University Lilly Family School of Philanthropy, regularly finds that wealthy donors are primarily motivated by philanthropy. The tax benefits of giving were cited by only 18% of respondents in the 2016 survey.

On its own, your organization has little control over tax rates or deductions. But by teaming up with other nonprofits, you can exercise influence over tax policy. For example, groups such as the Charitable Giving Coalition have been credited with helping to defeat congressional challenges to the charitable deduction. Some nonprofits also partner up to influence state legislation on charitable giving incentive caps. Just keep in mind that, to preserve your nonprofit’s tax-exempt status, political lobbying should be kept to a minimum.

Matching opportunity

Other research has found that donors are just as motivated by matching gifts as they are by tax benefits. A joint Australian and American study gave supporters a choice between a tax rebate and a matching donation to charity. Donors were evenly split between the two — but those opting for the match gave more generously than those who took the rebate.

If your nonprofit hasn’t already tried offering matching gifts, it’s worth testing. You’ll need to identify donors willing to use their large gift to incentivize others — reliable supporters such as board members or trustees. Consider using their gifts during short-lived fundraisers, where a “ticking clock” lends the offer greater urgency.

Other strategies can enable donors to stretch their giving dollars. For example, encourage your supporters to give appreciated stock or real estate. As long as the donors meet applicable rules, they can avoid the capital gains tax liability they’d incur if they sold the assets.

Don’t make assumptions

Donors can be motivated by many social, emotional and financial factors. So it’s important not to assume you know how your target audience will respond to certain types of fundraising appeals. Perform some basic research, asking major donors and their advisors about their philanthropic priorities. Contact us for more revenue-boosting ideas.
 

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For many, an important estate planning goal is to encourage their children or other heirs to lead responsible, productive lives. One tool for achieving this goal is a principle trust.

By providing your trustee with guiding values and principles (rather than the set of rigid rules found in an incentive trust), a principle trust may be an effective way to accomplish your objectives. However, not everyone will be comfortable trusting a trustee with the broad discretion a principle trust requires.

Discretion and flexibility offered

A principle trust guides the trustee’s decisions by setting forth the principles and values you hope to instill in your beneficiaries. These principles and values may include virtually anything, from education and gainful employment to charitable endeavors and other “socially valuable” activities.

By providing the trustee with the discretion and flexibility to deal with each beneficiary and each situation on a case-by-case basis, it’s more likely that the trust will reward behaviors that are consistent with your principles and discourage those that are not.

Suppose, for example, that you value a healthy lifestyle free of drug and alcohol abuse. An incentive trust might withhold distributions (beyond the bare necessities) from a beneficiary with a drug or alcohol problem, but this may do little to change the beneficiary’s behavior. The trustee of a principle trust, on the other hand, is free to distribute funds to pay for a rehabilitation program or medical care.

At the same time, the trustee of a principle trust has the flexibility to withhold funds from a beneficiary who appears to meet your requirements “on paper,” but otherwise engages in behavior that violates your principles. Another advantage of a principle trust is that it gives the trustee the ability to withhold distributions from beneficiaries who neither need nor want the money, allowing the funds to continue growing and benefit future generations.

Not for everyone

Not everyone is comfortable providing a trustee with the broad discretion a principle trust requires. If it’s important for you to prescribe the specific conditions under which trust distributions will be made or withheld, an incentive trust may be appropriate. But keep in mind that even the most carefully drafted incentive trust can sometimes lead to unintended results, and the slightest ambiguity can invite disputes.

On the other hand, if you’re comfortable conferring greater power on your trustee, a principle trust can be one way to ensure that your wishes are carried out regardless of how your beneficiaries’ circumstances change in the future. We can help you decide which trust type might be more appropriate for your specific situation.

 

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The word "errors" being earased on lined paper. When companies reissue prior financial statements, it raises a red flag to investors and lenders. But not all restatements are bad news. Some result from an honest mistake or misinterpretation of an accounting standard, rather than from incompetence or fraud. Here’s a closer look at restatements and how external auditors can help a company’s management get it right. 

Avoid knee-jerk responses

The Financial Accounting Standards Board (FASB) defines a restatement as “a revision of a previously issued financial statement to correct an error.” Accountants decide whether to restate a prior period based on whether the error is material to the company’s financial results. Unfortunately, there aren’t any bright-line percentages to determine materiality. 

When you hear the word “restatement,” don’t automatically think of the frauds that occurred at Xerox, Enron or WorldCom. Some unscrupulous executives do use questionable accounting practices to meet quarterly earnings projections, maintain stock prices and achieve executive compensation incentives. But many restatements result from unintentional errors.

Spot error-prone accounts

Accounting rules can be complex. Recognition errors are one of the most common causes of financial restatements. They sometimes happen when companies implement a change to the accounting rules (such as the updated guidance on leases or revenue recognition) or engage in a complex transaction (such as reporting compensation expense from backdated stock options, hedge accounting, the use of special purpose or variable interest entities, and consolidating with related parties). 

Income statement and balance sheet misclassifications also cause a large number of restatements. For instance, a borrower may need to shift cash flows between investing, financing and operating on the statement of cash flows. 

Equity transaction errors, such as improper accounting for business combinations and convertible securities, can also be problematic. Other leading causes of restatements are valuation errors related to common stock issuances, preferred stock errors, and the complex rules related to acquisitions, investments and tax accounting. 

Want more accurate results?

Restatements also happen when a company upgrades to a higher level of assurance (say, when transitioning from reviewed statements to audited statements). That’s because audits are more likely than compilation or review procedures to catch reporting errors from prior periods. An external auditor is required to “plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.” 

But after the initial transition period, audits typically catch errors before financial statements are published, minimizing the need for restatements. Auditors are trained experts on U.S. Generally Accepted Accounting Principles (GAAP) — and they must take continuing professional education courses to stay atop the latest changes to the rules. 

In addition to auditing financial statements, we can help implement cost-effective internal control procedures to prevent errors and accurately report error-prone accounts and transactions. Contact us for help correcting a previous error, remedying the source of an error or upgrading to a higher level of assurance. 

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Say "insurance" to most people and auto, health, home, and life are the variants that spring to mind. But what if an illness or accident were to deprive you of your income? Even a temporary setback could create havoc with your financial affairs. Statistics show your chances of being disabled for three months or longer between ages 35 and 65 are almost twice those of dying during the same period.

Yet people with financial savvy often overlook disability insurance. Perhaps they feel adequately covered through their job benefits. However, such coverage can be woefully inadequate. The fact is, most individuals should consider disability insurance in their financial planning. When considering disability insurance, think in terms of long term and short term. Many employers provide long-term disability coverage for all employees. Find out if your employer does. If you have long-term disability insurance, you need to consider short-term coverage to supplement during the period of disability before your long-term coverage begins. To get the right coverage for you, take the following steps:

Scrutinize key policy terms. First, ask how "disability" is defined. Some policies use "any occupation" to determine if you are fit for work following an illness or accident. A better definition is "own occupation," whereby you receive benefits when you cannot perform the job you held at the time you became disabled.

Check the benefit period. Ideally, your policy should cover disabilities until you'll be eligible for Medicare and Social Security.

Determine how much coverage you need. Tally the after-tax income you would have from all sources during a period of disability and subtract this sum from your minimum needs.

Decide what you can afford. Disability insurance is not inexpensive. Plan to forgo riders and options that boost premiums significantly. If your budget won't support the ideal benefit payment, consider lengthening the elimination period (but be sure that accumulated sick leave, savings, etc., will carry you until the benefits kick in).

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Should you pay for your child's college education? Or should your child find the financing? There are compelling arguments for both sides, but ultimately, your family needs to do what's best for your financial situation. Most families find that a combination of both works the best.

Parents should pay.

Arguments in favor of shelling out your hard-earned cash for a son's or daughter's higher education can be compelling. For one thing, college is a very expensive proposition these days. A year of undergraduate study at a private university can easily top $30,000 and public in-state schools can run over $12,000. Of course, if your student decides to get an advanced degree or go to medical or law school, he or she can run up a bill exceeding the cost of your home mortgage. Advocates of this point of view ask, "Do you really want to saddle your kid with that kind of debt so early in life?"

They add that if your child ends up working to pay for college, that's less time available for study and making friends. And, of course, friendships built in college can generate a wealth of opportunities for a future career. Also, by investing in tax-deferred 529 plans, parents can withdraw funds free from federal and some state income taxes when it's time for college.

The child should take the responsibility.

Others argue that covering the cost of your child's college education should not be your priority. After all, they reason, your kid has a lifetime to pay back student loans, and making loan payments can generate a positive credit history. Advocates of this position also argue that kids who have to pay for their own tuition, books, and living expenses learn responsibility and value the investment that college represents. They also point to available tuition reimbursement plans provided by some companies or the military service option as a way to get a college education without breaking the bank.

Those on this side of the debate often argue that 529 plans are overrated as a savings vehicle because investment options can be limited and tax rules are likely to change, undermining future tax benefits. Finally, they reason that a parent's own retirement savings should take precedence over saving for a child's education.

Making the decision.

Of course, your family's dynamics, the importance you place on a college education, and your personal financial priorities will factor into this decision. If you'd like help looking at the pros and cons of this important issue, give us a call.

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Whether your firm has been operating for years, or you decided over last night's coffee to start a new venture, you're sure to face the need for business credit. Entrepreneurs often ask friends and family to invest in their start-up businesses, and many draw on personal funds to launch new firms. But to address ongoing business needs – such as requirements for inventory, equipment, and real estate – most firms seek additional help from credit card companies and banks.

Unfortunately, today financial institutions are more wary than they used to be about extending credit to small companies. And with many business revenues faltering because of market pressures, even well-established companies have found it difficult to obtain loans.

As a result, establishing good business credit has become more important than ever. To convince a lender that your company represents a good risk, you should first prepare a well-written business plan. It need not be as long as a Tolstoy novel, but should lay out in some detail your products, pricing, estimates, competition, and basis for cash flow projections. A clearly defined business plan will convince potential lenders that you've addressed the greatest obstacles to your firm's success. Before approaching lenders, consider your business structure as well. For example, a limited liability company or corporation may be seen as less risky than a sole proprietorship. The goal is to present a professional image to convince the lender that your company will prosper in good times and bad.

To establish good business credit, you'll also want to make sure all required licenses are current and your firm is registered with the major business credit reporting bureaus such as Experian and Equifax. Work with vendors who report to these bureaus so that your on-time payments are tracked.

Of course, the key to building good business credit is making all your payments on time. As with personal credit, your business credit score will climb as managers prove their skill at monitoring the firm's cash flow and their commitment to honoring the firm's obligations.

Also consider having our office review your financial statements before you send them to the bank. If you need assistance with this or other business concerns, give us a call.

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