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Concentration risks are a threat to your supply chain. These occur when a company relies on a customer or supplier for 10% or more of its revenue or materials, or on several customers or suppliers located in the same geographic region. If a key customer or supplier experiences turmoil, the repercussions travel up or down the supply chain and can quickly and negatively impact your business.

To protect yourself, it’s important to look for concentration risks as you monitor your financials and engage in strategic planning. Remember to evaluate not only your own success and stability, but also that of your key customers and supply chain partners.

2 types of concentration

Businesses tend to experience two main types of concentration risks:

1. Product-related. If your company’s most profitable product line depends on a few key customers, you’re essentially at their mercy. Key customers that unexpectedly cut budgets or switch to a competitor could significantly lower revenues.

Similarly, if a major supplier suddenly increases prices or becomes lax in quality control, it could cause your profits to plummet. This is especially problematic if your number of alternative suppliers is limited.

2. Geographic. When gauging geographic risks, assess whether a large number of your customers or suppliers are located in one geographic region. Operating near supply chain partners offers advantages such as lower transportation costs and faster delivery. Conversely, overseas locales may enable you to cut labor and raw materials expenses.

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

Financially feasible

Your supply chain is much like your cash flow: When it’s strong, stable and uninterrupted, you’re probably in pretty good shape. Our firm can help you assess your concentration risks and find financially feasible solutions.

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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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Mortgage interest rates are still at low levels, but they likely will increase as the Fed continues to raise rates. So if you’ve been thinking about helping your child — or grandchild — buy a home, consider acting soon. There also are some favorable tax factors that will help:

0% capital gains rate. If the child is in the 10% or 15% income tax bracket, instead of giving cash to help fund a down payment, consider giving long-term appreciated assets such as stock or mutual fund shares. The child can sell the assets without incurring any federal income taxes on the gain, and you can save the taxes you’d owe if you sold the assets yourself.

As long as the assets are worth $14,000 or less (when combined with any other 2017 gifts to the child), there will be no federal gift tax consequences — thanks to the annual gift tax exclusion. Married couples can give twice that amount tax-free if they split the gift. And if you don’t mind using up some of your lifetime exemption ($5.49 million for 2017), you can give even more. Plus, there’s the possibility that the gift and estate taxes could be repealed. If that were to happen, there’d be no limit on how much you could give tax-free (for federal purposes).

Low federal interest rates. Another tax-friendly option is lending funds to the child. Now is a good time for taking this step, too. Currently, Applicable Federal Rates — the rates that can be charged on intrafamily loans without causing unwanted tax consequences — are still quite low by historical standards. But these rates have begun to rise and are also expected to continue to increase this year. So lending money to a loved one for a home purchase sooner rather than later might be a good idea.

If you choose the loan option, it’s important to put a loan agreement in writing and actually collect payment (including interest) on the loan. Otherwise the IRS could deem the loan to actually be a taxable gift. Keep in mind that you’ll have to report the interest as income. But if the interest rate is low, the tax impact should be minimal.

If you have questions about these or other tax-efficient ways to help your child or grandchild buy a home, please contact us.

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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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Many taxpayers have questions after they file their tax returns. The IRS provides answers to many of them. These are a few of the most common.

How can I check the status of my refund?
You can go online to check on your refund if it has been 24 hours since the IRS would have received your e-filed tax return or four weeks after you mailed your paper return. Go to www.irs.gov and click on "Where's My Refund?" You will need your Social Security number, your filing status, and the amount of your tax refund.

What records should I keep?
Keep receipts, canceled checks, or other substantiation for any deductions or credits you claimed. Also keep records that verify other items on your tax return (W-2s, 1099s, etc.). Keep a copy of the tax return, along with the supporting records, for seven years.

What if I discover that I made a mistake on my return?
If you discover that you failed to report some income or claim a deduction or tax credit to which you are entitled, you can correct the error by filing an amended tax return using Form 1040X, Amended U.S. Individual Income Tax Return.

What if my address changes after I file?
If you move or have an address change after filing your return, send Form 8822, Change of Address, to the IRS. You should also notify the Postal Service of your new address so that you'll receive any refund you're due or any notices sent by the IRS.

For answers to other tax questions you may have, give us a call.

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