Experience is the Difference®

The American Institute of Certified Public Accountants (AICPA) has clarified its guidance on pro forma compilations. Here’s an explanation of when the new Statement on Standards for Accounting and Review Services (SSARS) applies and what your CPA now expects from you when performing these nontraditional attestation services. 

Overview

SSARS 22 applies when an accountant has been engaged to perform a compilation engagement on pro forma financial information. Unlike forecasts or projections that reflect prospective financial results, pro forma financial information shows what the historical financial statements would have looked like had a transaction or event — such as a business combination, disposition of a business line or change in capitalization — occurred at an earlier date. 

The new guidance explains that a compilation engagement on pro forma financial information is often undertaken as a separate engagement. But it can also be done in conjunction with a compilation, a review or an audit of financial statements. 

Expectations for clients

When compiling pro forma statements, what do we expect from you? Under SSARS 22, the company’s management must 1) provide written acknowledgment that it accepts full responsibility for the preparation and fair presentation of the pro forma financial information in accordance with the applicable financial reporting framework, and 2) include (or make readily available) the following in any document containing the pro forma financial information:

  • Your company’s financial statements for the most recent year,
  • A summary of significant assumptions,
  • Interim period historical financial information, if interim period pro forma financial information is presented, and
  • In the case of a business combination, the relevant historical financial information for the significant constituent parts of the combined entity.

Financial statements and historical interim financial information are deemed to be “readily available” if a third party can obtain them without any further action by the entity. For example, historical interim financial information on a company’s website may be considered readily available. However, information that’s available upon request isn’t considered readily available.

Additionally, pro forma financial information must be based on historical financial statements that have been compiled, reviewed or audited. Moreover, the new standard requires you to ask your CPA for permission before including the compilation report in any document containing pro forma financial information that indicates that a compilation has been performed on such information. 

Up and running

SSARS 22 is effective for compilation reports on pro forma financial information dated on or after May 1, 2017. We understand these fundamental changes and have updated our practices to comply with the new guidance. Contact us for help compiling your pro formas.

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Many not-for-profit youth sports leagues are at risk for fraud and don’t even know it. Because cash transactions are common and leagues usually are managed by volunteers with little oversight, it’s easy for crooked individuals to take advantage of the situation. Unfortunately, sports league fraud is usually committed by board members or officers who are well known and respected in their communities. How then can your league prevent this crime?

Simple steps

By far the most important step you can take is to segregate duties. This means that no single individual receives, records and deposits funds coming in, pays bills and reconciles bank statements. Assign someone uninvolved in handling deposits and payments to receive and reconcile the bank statement. A different person should monitor the budget, and every payment (or at least payments over a certain threshold) should require two signatures. If your league has credit or debit cards, ask someone who isn’t an authorized user to review the statements.

Also, your league should:

Mandate board review. Your board of directors should receive and review financial reports on a quarterly or monthly basis — including when the league isn’t in season. The treasurer should submit a report for every board meeting, with bank statements attached.

Require online registration and payment. A lot of leagues still use paper registrations and accept payment by cash or check. Cash can be pocketed in the blink of an eye, and checks can be diverted to thieves’ own accounts. But with online registration, payments are deposited directly into the league’s account.

Rotate treasurers. Treasurers are the most likely youth sports league officials to commit fraud because they have the easiest access to funds and the ability to cover their tracks. Make sure no one person stays in the treasurer position for more than a couple of years. If funds are available, consider hiring a part-time bookkeeper who will report directly to your board.

Not all fun and games

Many youth sports leagues are ripe for fraud, in large part because of their lack of formality and their environment of trust. Structure may seem counter to the spirit of amateur leagues, but if your group doesn’t adopt some smart business practices, it could end up out of business. Contact us for more information.

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A potential downside of tax-deferred saving through a traditional retirement plan is that you’ll have to pay taxes when you make withdrawals at retirement. Roth plans, on the other hand, allow tax-free distributions; the tradeoff is that contributions to these plans don’t reduce your current-year taxable income. 

Unfortunately, your employer might not offer a Roth 401(k) or another Roth option, and modified adjusted gross income (MAGI)-based phaseouts may reduce or eliminate your ability to contribute to a Roth IRA. Fortunately, there is a solution: the “back door” Roth IRA.

Are you phased out?

The 2017 contribution limit for all IRAs combined is $5,500 (plus an additional $1,000 catch-up contribution if you’ll be age 50 or older by December 31). You can make a partial contribution if your MAGI falls within the applicable phaseout range, but no contribution if it exceeds the top of the range:

  • For married taxpayers filing jointly: $186,000–$196,000.
  • For single and head-of-household taxpayers: $118,000–$133,000.

(Note: Married taxpayers filing separately are subject to much lower phaseout ranges.)

Using the back door

If the income-based phaseout prevents you from making Roth IRA contributions and you don’t already have a traditional IRA, a “back door” IRA might be right for you. 

How does it work? You set up a traditional account and make a nondeductible contribution to it. You then wait until the transaction clears and convert the traditional account to a Roth account. The only tax due will be on any growth in the account between the time you made the contribution and the date of conversion, which should be little, if any, assuming you’re able to make the conversion quickly.

More limited tax benefit in some cases

If you do already have a traditional IRA, the back-door Roth IRA strategy is still available but there will be more tax liability on the conversion. A portion of the amount you convert to a Roth IRA will be considered attributable to deductible contributions and thus be taxable. It doesn’t matter if you set up a new traditional IRA for the nondeductible contributions; all of your traditional IRAs will be treated as one for tax purposes. 

Roth IRAs have other benefits and downsides you need to factor into your decision, and additional rules apply to IRA conversions. Please contact us for assistance in determining whether a backdoor Roth IRA is right for you.

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Bartering might seem like something that happened only in ancient times, but the practice is still common today. And the general definition remains the same: the exchange of goods and services without the exchange of money. Because no cash changes hands in a typical barter transaction, it’s easy to forget about taxes. But, as one might expect, you can’t cut Uncle Sam out of the deal. 

A taxing transaction

The IRS generally treats a barter exchange similarly to a transaction involving cash, so you must report as income the fair market value of the products or services you receive. If there are business expenses associated with the transaction, those can be deducted. Any income arising from a bartering arrangement is generally taxable in the year you receive the bartered product or service. 

And income tax liability isn’t the only thing you’ll need to consider. Barter activities may also trigger self-employment taxes, employment taxes or an excise tax. 

Barter in action 

Let’s look at an example. Mike, a painting contractor, requires legal representation for a lawsuit. He engages Maria as legal counsel to represent him during the litigation. Maria charges Mike $6,000 for her work on the case. 

Being short of cash, Mike agrees to paint Maria’s office in exchange for her $6,000 fee. Both Mike and Maria must report $6,000 of taxable gross income during the year the exchange takes place. Because Mike and Maria each operate a viable business, they’re entitled to deduct any business expenses resulting from the barter transaction.

Using an exchange company

You may wish to arrange a bartering deal though an exchange company. For a fee, one of these companies can allow you to network with other businesses looking to trade goods and services. For tax purposes, a barter exchange company typically must issue a Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions,” annually to its clients or members.

Although bartering may appear cut and dried, the tax implications can complicate the deal. We can help you assess a bartering arrangement and manage the tax impact.

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Upcoming tax deadlines for individuals While April 15 (April 18 this year) is the main tax deadline on most individual taxpayers’ minds, there are others through the rest of the year that are important to be aware of. To help you make sure you don’t miss any important 2017 deadlines, here’s a look at when some key tax-related forms, payments and other actions are due. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. 

Please review the calendar and let us know if you have any questions about the deadlines or would like assistance in meeting them.  

June 15

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

September 15   

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

October 2    

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

October 16    

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

December 31  

  • Make 2017 contributions to certain employer-sponsored retirement plans.
  • Make 2017 annual exclusion gifts (up to $14,000 per recipient).
  • Incur various expenses that potentially can be claimed as itemized deductions on your 2017 tax return. Examples include charitable donations, medical expenses, property tax payments and expenses eligible for the miscellaneous itemized deduction.
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You're probably familiar with 529 college savings plans. Named for Section 529 of the Internal Revenue Code, they're also known as qualified tuition programs, and they offer tax benefits when you save for college expenses.

But are you aware of a lesser-known cousin, established under Section 530 of the code? It's called a Coverdell Education Savings Account and it's been available since 1998.

The general idea of Coverdell accounts is similar to 529 plans – to provide tax incentives to encourage you to set money aside for education. However, one big difference between the two is this: Amounts you contribute to a Coverdell can be used to pay for educational costs from kindergarten through college.

Generally, you can establish a Coverdell for a child under the age of 18 – yours or someone else's. Once the Coverdell is set up, you can make contributions of as much as $2,000 each year. That contribution limit begins to phase out when your income reaches $190,000 for joint filers and $95,000 for single filers.

Anyone, including trusts and corporations, can contribute to the account until the child turns 18. There are no age restrictions when the Coverdell is established for someone with special needs.

While your contribution is not tax-deductible, earnings within the account are tax-free as long as you use them for educational expenses or qualify for an exception. In addition, you can make a tax-free transfer of the account balance to another eligible beneficiary.

Qualified distributions from a Coverdell are tax-free when you use the money to pay for costs such as tuition, room and board, books, and computers.

Please call for information about other rules that apply to Coverdell accounts. We'll be happy to help you decide whether establishing one makes sense for you.

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To err is human, but your not-for-profit’s supporters, not to mention the IRS, may be less than forgiving if errors affect your financial books. Fortunately, if you attend to accounting details, you can avoid these common pitfalls:

1. Failing to follow accounting procedures. Even the smallest nonprofit should set formal, documented and detailed procedures for managing financial and bookkeeping chores. Your process should include all aspects of managing your organization’s money — how to accept, document and deposit donations, pay bills, and handle every step in between. Put these procedures in writing and make sure you follow each step, every time.

2. Making data entry errors. It’s easy to wreak havoc on your accounts by entering a $500 payment as $50 or transposing numbers. So check and double-check every entry every time. Reconcile accounts against bank statements immediately, and don’t overlook even the smallest discrepancy.

3. Working without a budget. You can’t control overspending or invest a surplus if you don’t know they exist. Budgets don’t have to be intricate to be useful; just look at a few months’ worth of bills and deposits to create a starting point. Then refine your plan as you go along. Include a “miscellaneous” category, but don’t allow it to account for the majority of your expenses.

4. Playing loose with petty cash. Small expenditures like picking up a few office supplies or buying a pizza for volunteers is much easier to do with a petty cash fund. Handle the cash with care, though. Lock it up, authorize only a few people to make disbursements and require receipts for all expenditures.

5. Neglecting to properly categorize. All money coming in and going out of your organization must be assigned to the appropriate category. This is particularly important if you accept donations that may be earmarked for certain programs. To be successful at this, you need to properly set up the initial chart of accounts and define how items should be assigned.

Contact us with any nonprofit financial question or if you need help devising organizationwide policies.
 

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A Roth IRA can be a valuable estate planning tool, offering the opportunity for tax-free growth as long as it exists and requiring no distributions during your life, thus allowing you to pass on a greater amount of wealth to your family. While traditional IRAs are more common, there’s no time like the present to consider how a Roth IRA might better help you achieve your estate planning goals.

Roth vs. traditional IRA

With a Roth IRA, you give up the deductibility of contributions for the opportunity to make tax-free withdrawals. This differs from a traditional IRA, where contributions may be deductible and earnings grow on a tax-deferred basis, but withdrawals (less any prorated nondeductible contributions) are subject to ordinary income taxes — plus a 10% penalty if you’re under age 59½ at the time of the distribution.

With a Roth IRA, you can make tax-free withdrawals up to the amount of your contributions at any time. And withdrawals of account earnings are tax-free if you make them after you’ve had the Roth IRA for five years and you’re age 59½ or older.

Also on the plus side, especially from an estate planning perspective, you can leave funds in your Roth IRA as long as you want. This differs from the required minimum distributions starting after age 70½ that generally apply to traditional IRAs.

So, with a Roth IRA, you can let the entire account grow tax-free over your lifetime for the benefit of one or more heirs. While the beneficiary will be required to take distributions, they’ll be tax-free and can be spread out over his or her lifetime, allowing the remaining assets in the account to continue to grow tax-free.

Limited contributions

For 2017, the annual Roth IRA contribution limit is $5,500 ($6,500 for taxpayers age 50 or older), reduced by any contributions made to traditional IRAs. Your modified adjusted gross income (MAGI) may also affect your ability to contribute, however.

In 2017, the contribution limit phases out for married couples filing jointly with MAGIs between $186,000–$196,000. The 2017 phaseout range for single and head-of-household filers is $118,000–$133,000.

Conversion question

If your income is too high to contribute to a Roth IRA, consider converting your traditional IRA into a Roth, effectively turning future tax-deferred potential growth into tax-free potential growth. When you do a Roth conversion, you have to pay taxes on the amount you convert. But this also has an estate planning benefit because you’re paying taxes that your heirs might otherwise have to pay later.

If you have questions on how a Roth IRA may fit into your estate plan, please get in touch with us.

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Controls assessmentThe Securities and Exchange Commission (SEC) requires public companies to evaluate and report on internal controls over financial reporting using a recognized control framework. Private companies generally aren’t required to use a framework for the oversight of internal controls, unless they’re audited, but a strong system of checks and balances is essential for them as well. 

A critical process

Reporting on internal controls is an ongoing process, not a one-time assessment, that’s affected by an entity’s board of directors or owners, management, and other personnel. It’s designed to provide reasonable assurance regarding the effectiveness and efficiency of operations, the reliability of financial reporting, compliance with applicable laws and regulations, and safeguarding of assets. 

A strong system of internal controls helps a company achieve its strategic and financial goals, in addition to minimizing the risk of fraud. At the most basic level, auditors routinely monitor the following three control features. These serve as a system of checks and balances that help ensure management directives are carried out:

1. Physical restrictions. Employees should have access to only those assets necessary to perform their jobs. Locks and alarms are examples of ways to protect valuable tangible assets, including petty cash, inventory and equipment. But intangible assets — such as customer lists, lease agreements, patents and financial data — also require protection using passwords, access logs and appropriate legal paperwork.

2. Account reconciliation. Management should confirm and analyze account balances on a regular basis. For example, management should reconcile bank statements and count inventory regularly. 

Interim financial reports, such as weekly operating scorecards and quarterly financial statements, also keep management informed. But reports are useful only if management finds time to analyze them and investigate anomalies. Supervisory review takes on many forms, including observation, test counts, inquiry and task replication.

3. Job descriptions. Another basic control is detailed job descriptions. Company policies also should call for job segregation, job duplication and mandatory vacations. For example, the person who receives customer payments should not also approve write-offs (job segregation). And two signatures should be required for checks above a prescribed dollar amount (job duplication).

Controls assessment

Is your company’s internal control system strong enough? Even if you’re not required to follow the SEC’s rules on assessing internal controls, a thorough system of checks and balances will help your company achieve its goals. Company insiders sometimes lack the experience or objectivity to assess internal controls. But our auditors have seen the best — and worst — internal control systems and can help evaluate whether your controls are effective.

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Successful business people have a solid understanding of the three financial statements prepared under U.S. Generally Accepted Accounting Principles (GAAP). A complete set of financial statements helps stakeholders — including managers, investors and lenders — evaluate a company’s financial condition and results. Here’s an overview of each report.

1. Income statement

The income statement (also known as the profit and loss statement) shows sales, expenses and the income earned after expenses over a given period. A common term used when discussing income statements is “gross profit,” or the income earned after subtracting the cost of goods sold from revenue. Cost of goods sold includes the cost of labor, materials and overhead required to make a product.

Another important term is “net income.” This is the income remaining after all expenses (including taxes) have been paid.

2. Balance sheet

This report tallies the company’s assets, liabilities and net worth to create a snapshot of its financial health. Current assets (such as accounts receivable or inventory) are reasonably expected to be converted to cash within a year, while long-term assets (such as plant and equipment) have longer lives. Similarly, current liabilities (such as accounts payable) come due within a year, while long-term liabilities are payment obligations that extend beyond the current year or operating cycle.

Net worth or owners’ equity is the extent to which the book value of assets exceeds liabilities. Because the balance sheet must balance, assets must equal liabilities plus net worth. If the value of your liabilities exceeds the value of the assets, your net worth will be negative.

Public companies may provide the details of shareholders’ equity in a separate statement called the statement of retained earnings. It details sales or repurchases of stock, dividend payments and changes caused by reported profits or losses.

3. Cash flow statement

This statement shows all the cash flowing into and out of your company. For example, your company may have cash inflows from selling products or services, borrowing money and selling stock. Outflows may result from paying expenses, investing in capital equipment and repaying debt.

Although this report may seem similar to an income statement, it focuses solely on cash. It’s possible for an otherwise profitable business to suffer from cash flow shortages, especially if it’s growing quickly.

Typically, cash flows are organized in three categories: operating, investing and financing activities. The bottom of the statement shows the net change in cash during the period. To remain in business, companies must continually generate cash to pay creditors, vendors and employees. So watch your statement of cash flows closely.

Ratios and trends

Are you monitoring ratios and trends from your financial statements? Owners and managers who pay regular attention to these three key reports stand a better chance of catching potential trouble before it gets out of hand and pivoting, when needed, to maximize the company’s value.

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