Unforeseen disasters happen all the time and they may cause damage to your home or personal property. Before the Tax Cuts and Jobs Act, eligible casualty loss victims could claim a deduction on their tax returns. But there are new restrictions that make these deductions much more difficult to take.
What’s considered a casualty for tax purposes? It’s a sudden, unexpected or unusual event, such as a hurricane, tornado, flood, earthquake, or fire; an accident or act of vandalism; or even a terrorist attack.
For losses incurred in 2018 through 2025, the TCJA generally eliminates deductions for personal casualty losses, except for losses due to federally declared disasters. For example, during 2019, there were presidential declarations of major disasters in parts of Iowa and Nebraska after severe storms and flooding. So victims there would be eligible for casualty loss deductions.
Note: There’s an exception to the general rule of allowing casualty loss deductions only in federally declared disaster areas. If you have personal casualty gains because your insurance proceeds exceed the tax basis of the damaged or destroyed property, you can deduct personal casualty losses that aren’t due to a federally declared disaster up to the amount of your personal casualty gains.
Special timing election
If your casualty loss is due to a federally declared disaster, a special election allows you to deduct the loss on your tax return for the preceding year. If you’ve already filed your return for the preceding year, you can file an amended return to make the election and claim the deduction in the earlier year. This can help you get extra cash when you need it.
This election must be made by no later than six months after the due date (without considering extensions) for filing your tax return for the year in which the disaster occurs. However, the election itself must be made on an original or amended return for the preceding year.
Calculating personal losses
To calculate the casualty loss deduction for personal-use property in an area declared a federal disaster, you must take the following three steps:
- Subtract any insurance proceeds.
- Subtract $100 per casualty event.
- Combine the results from the first two steps and then subtract 10% of your adjusted gross income (AGI) for the year you claim the loss deduction.
Important: Another factor that now makes it harder to claim a casualty loss is that you must itemize deductions to claim one. For 2018 through 2025, fewer people will itemize, because the TCJA significantly increased the standard deduction amounts. For 2019, they are $12,200 for single filers, $18,350 for heads of households, and $24,400 for married joint-filing couples.
So even if you qualify for a casualty deduction, you might not get any tax benefit, because you don’t have enough itemized deductions.
We can help
These are the rules for personal property. Keep in mind that the rules for business or income-producing property are different. If you have disaster-related losses, we can help you navigate the complex rules.
Once your 2018 tax return has been successfully filed with the IRS, you may still have some questions. Here are brief answers to three questions that we’re frequently asked at this time of year.
Question #1: What tax records can I throw away now?
At a minimum, keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return. So you can generally get rid of most records related to tax returns for 2015 and earlier years. (If you filed an extension for your 2015 return, hold on to your records until at least three years from when you filed the extended return.)
However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.
You’ll need to hang on to certain tax-related records longer. For example, keep the actual tax returns indefinitely, so you can prove to the IRS that you filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)
When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)
Question #2: Where’s my refund?
The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Refund Status” to find out about yours. You’ll need your Social Security number, filing status and the exact refund amount.
Question #3: Can I still collect a refund if I forgot to report something?
In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later. So for a 2018 tax return that you filed on April 15 of 2019, you can generally file an amended return until April 15, 2022.
However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.
We can help
Contact us if you have questions about tax record retention, your refund or filing an amended return. We’re available all year long — not just at tax filing time!
Americans who are 65 and older qualify for basic Medicare insurance, and they may need to pay additional premiums to get the level of coverage they desire. The premiums can be expensive, especially if you’re married and both you and your spouse are paying them. But one aspect of paying premiums might be positive: If you qualify, they may help lower your tax bill.
Medicare premium tax deductions
Premiums for Medicare health insurance can be combined with other qualifying health care expenses for purposes of claiming an itemized deduction for medical expenses on your individual tax return. This includes amounts for “Medigap” insurance and Medicare Advantage plans. Some people buy Medigap policies because Medicare Parts A and B don’t cover all their health care expenses. Coverage gaps include co-payments, co-insurance, deductibles and other costs. Medigap is private supplemental insurance that’s intended to cover some or all gaps.
Fewer people now itemize
Qualifying for a medical expense deduction can be difficult for a couple of reasons. For 2019, you can deduct medical expenses only if you itemize deductions and only to the extent that total qualifying expenses exceeded 10% of AGI. (This threshold was 7.5% for the 2018 tax year.)
The Tax Cuts and Jobs Act nearly doubled the standard deduction amounts for 2018 through 2025. For 2019, the standard deduction amounts are $12,200 for single filers, $24,400 for married joint-filing couples and $18,350 for heads of households. So, fewer individuals are claiming itemized deductions.
However, if you have significant medical expenses (including Medicare health insurance premiums), you may itemize and collect some tax savings.
Important note: Self-employed people and shareholder-employees of S corporations can generally claim an above-the-line deduction for their health insurance premiums, including Medicare premiums. So, they don’t need to itemize to get the tax savings from their premiums.
Other deductible medical expenses
In addition to Medicare premiums, you can deduct a variety of medical expenses, including those for ambulance services, dental treatment, dentures, eyeglasses and contacts, hospital services, lab tests, qualified long-term care services, prescription medicines and others.
Keep in mind that many items that Medicare doesn’t cover can be written off for tax purposes, if you qualify. You can also deduct transportation expenses to get to medical appointments. If you go by car, you can deduct a flat 20-cents-per-mile rate for 2019, or you can keep track of your actual out-of-pocket expenses for gas, oil and repairs.
Need more information?
Contact us if you have additional questions about Medicare coverage options or claiming medical expense deductions on your personal tax return. Your advisor can help determine the optimal overall tax-planning strategy based on your personal circumstances.
Many businesses have a life cycle that, as life cycles tend to do, concludes with a period of decline and failure. Often, the demise of a company is driven by internal factors — such as weak financial oversight, lack of management consensus or one-person rule.
External factors typically contribute, as well. These may include disruptive competitors; local, national or global economic changes; or a more restrictive regulatory environment.
But just because bad things happen doesn’t mean they have to happen to your company. To prepare for the worst, identify a business turnaround strategy that you can implement if a severe decline suddenly becomes imminent.
When a company is drifting toward serious trouble, there are usually warning signs. Examples include:
- Serious deterioration in the accuracy or usage of financial measurements,
- Poor results of key performance indicators — including working capital to assets, sales and retained earnings to assets, and book value to debt,
- Adverse trends, such as lower margins, market share or working capital,
- Rapid increase in debt and employee turnover, and
- Drastic reduction in assessed business value.
Not every predicament that arises will threaten the very existence of your business. But when missteps and misfortune build up, the only thing that may save the company is a well-planned turnaround strategy.
5 stages of a turnaround
No two turnarounds are exactly alike, but they generally occur in five basic stages:
- Rapid assessment of the decline by external advisors,
- Re-evaluation of management and staffing,
- Emergency intervention to stabilize the business,
- Operational restoration to pursue or achieve profitability, and
- Full recovery and growth.
Each of these stages calls for a detailed action plan. Identify the advisors or even a dedicated turnaround consultant who can help you assess the damage and execute immediate moves. Prepare for the possibility that you’ll need to replace some managers and even lay off staff to reduce employment costs.
In the emergency intervention stage, a business does whatever is necessary to survive — including consolidating debt, closing locations and selling off assets. Next, restoring operations and pursuing profitability usually means scaling back to only those business segments that have achieved, or can achieve, decent gross margins.
Last, you’ll need to establish a baseline of profitability that equates to full recovery. From there, you can choose reasonable growth strategies that will move the company forward without leading it over another cliff.
In case of emergency
If your business is doing fine, there’s no need to create a minutely detailed turnaround plan. But, as part of your strategic planning efforts, it’s still a good idea to outline a general turnaround strategy to keep on hand in case of emergency. Our firm can help you devise either strategy. We can also assist you in generating financial statements and monitoring key performance indicators that help enable you to avoid crises altogether.
As companies increase their investments in social media marketing, many are seeking ways to make it simpler and more cost-effective. Here are some ways to take a measured approach.
Pick your battles
Many marketers have realized that their companies don’t need to be on every social media platform. You just need to establish a strong presence on the few that best fit your business.
How do you determine that? For many companies, the answer is clear: Go where your competitors and customers are most active. You may need to pick a few different platforms and use them regularly until one or two emerge as clear favorites.
Maximize your reach
Simply getting a customer to “like” or “follow” your company may not generate sales or brand exposure. For example, whether Facebook posts will reach users’ “friends” is a function of the platform’s proprietary algorithm. And with so much news and other content flooding customers’ feeds, your updates may get lost in the shuffle.
In addition to posting on social media, your business can buy ads. Social media platforms sell ads (called “native ads”) that look like normal posts, not paid advertisements, and may appear at the top of customers’ feeds. Many businesses are buying these ads, but investing heavily in advertising reduces the cost advantages of social media marketing. Also, these ads may annoy some users.
Measure your results
Quantifying the results of social media marketing has historically been problematic. It’s easy to identify, at any given time, how many people follow you on Twitter or Instagram, but how many are likely to buy your products or services?
Software developers have responded by creating analytics programs that identify which platforms generate the most traffic to your website — and even more sophisticated programs that track an individual customer’s behaviors after viewing your posts. But, as with any software purchase, approach this one carefully. Ensure your employees will be able to use all necessary features and that you’ll be able to disseminate the data effectively.
Expand your interactions
When the time is right, you may want to use social media for more than just marketing. The most direct way to link social media to revenue is to allow customers to buy products directly on your social media page or app, rather than requiring them to click through to your website or call a salesperson. Of course, this functionality requires an upfront investment in secure e-commerce technology.
Some companies are also using social media to facilitate customer service. People tend to appreciate the quick response, but some complaints may be too sensitive or complicated to discuss publicly. So, it’s generally best to allow employees to respond to simpler questions online but train them to channel more complex issues to phone calls, emails or private messages.
Don’t get overwhelmed
Social media marketing can be a cost-effective way to build brand awareness and customer loyalty. But it’s also an ever-evolving sphere that can become overwhelming. Contact us for help measuring and managing the financial investment you make in your efforts.
It’s every business owner’s nightmare. Should hackers gain access to your customers’ or employees’ sensitive data, the very reputation of your company could be compromised. And lawsuits might soon follow.
No business owner wants to think about such a crisis, yet it’s imperative that you do. Suffering a data breach without an emergency response plan leaves you vulnerable to not only the damage of the attack itself, but also the potential fallout from your own panicked decisions.
5 steps to take
A comprehensive plan generally follows five steps once a data breach occurs:
1. Call your attorney. He or she should be able to advise you on the potential legal ramifications of the incident and what you should do or not do (or say) in response. Involve your attorney in the creation of your response plan, so all this won’t come out of the blue.
2. Engage a digital forensics investigator. Contact us for help identifying a forensic investigator that you can turn to in the event of a data breach. The preliminary goal will be to answer two fundamental questions: How were the systems breached? What data did the hackers access? Once these questions have been answered, experts can evaluate the extent of the damage.
3. Fortify your IT systems. While investigative and response procedures are underway, you need to proactively prevent another breach and strengthen controls. Doing so will obviously involve changing passwords, but you may also need to add firewalls, create deeper layers of user authentication or restrict some employees from certain systems.
4. Communicate strategically. No matter the size of the company, the communications goal following a data breach is essentially the same: Provide accurate information about the incident in a reasonably timely manner that preserves the trust of customers, employees, investors, creditors and other stakeholders.
Note that “in a reasonably timely manner” doesn’t mean “immediately.” Often, it’s best to acknowledge an incident occurred but hold off on a detailed statement until you know precisely what happened and can reassure those affected that you’re taking specific measures to control the damage.
5. Activate or adjust credit and IT monitoring services. You may want to initiate an early warning system against future breaches by setting up a credit monitoring service and engaging an IT consultant to periodically check your systems for unauthorized or suspicious activity. Of course, you don’t have to wait for a breach to do these things, but you could increase their intensity or frequency following an incident.
Data breaches are an inevitable risk of running a business in today’s networked, technology-driven world. Should this nightmare become a reality, a well-conceived emergency response plan can preserve your company’s goodwill and minimize the negative impact on profitability. We can help you budget for such a plan and establish internal controls to prevent and detect fraud related to (and not related to) data breaches.
Absenteeism has typically been a thorn in the side of many companies. But there’s a flip side to employees failing to show up to work: “presenteeism.” This is when employees come in to work unwell or put in excessive overtime.
Now you probably appreciate and respect workers who are team players and go the extra mile. But employees who come to work when they aren’t operating at full physical or mental capacity may make mistakes, cause accidents, create confusion and ultimately hurt productivity. In other words, presenteeism can slowly and silently erode your bottom line unless you recognize and deal with it.
Address mental health
A common response to presenteeism is, “But we offer paid sick days.” Although paid sick days do generally help resolve incidences of a physical ailment or injury, they may not adequately address struggles with mental illness or extreme personal stress (such as a divorce or financial crisis). Some managers may raise an eyebrow at those taking a “mental health day,” so sufferers end up coming in to work when they really may need the day off.
How can you help? If you sponsor a health care plan, it likely offers coverage for mental health and substance use disorder services, including behavioral health treatment. Be sure employees are aware of this. Also, reinforce with employees that you’ll honor the sick-day provisions spelled out in your employee manual for all types of ailments (physical, mental and psychological). Train supervisors to support employees’ well-being and encourage those who need to take time off to do so if they need it.
Discourage excessive overtime
Another common cause of presenteeism is the perceived notion among many workers that they must work excessive overtime to prove themselves. Many companies still operate under an “old school” culture that says putting in extra overtime will make the boss happy and lead to quicker raises and promotions.
Generally, many managers assume that, if an employee is absent, his or her productivity must be suffering. Conversely, if that same employee is putting in extra time and skipping vacations, he or she must be highly productive. But these assumptions aren’t always true — they must be supported by a thorough, objective and analytical performance evaluation process.
You can prevent this type of presenteeism by strongly encouraging, if not strictly enforcing, vacation time. Communicate to employees your concerns about overworking and remind them to take advantage of the time off that they’ve earned. (Doing so can also deter fraud.)
Find the balance
Having a workforce full of dedicated, hard-working employees is still a goal that every business should strive for. But, at the same time, work-life balance is a concept that benefits both employers and employees. Our firm can help you analyze the numbers related to productivity that can help you make optimal decisions regarding staffing and workflow.
As an individual, you’ve no doubt been urged to regularly check your credit score. Most people nowadays know that, with a subpar personal credit score, they’ll have trouble buying a home or car, or just getting a reasonable-rate credit card.
But how about your business credit score? It’s important for much the same reason — you’ll have difficulty obtaining financing or procuring the assets you need to operate competitively without a solid score. So, you’ve got to be vigilant about it.
Algorithms and data
Business credit scores come from various reporting agencies, such as Experian, Equifax and Dun & Bradstreet. Each agency has its own algorithm for calculating credit scores. Like personal credit scores, higher business credit scores equate with lower risk (and vice versa).
Credit agencies track your business by its employer identification number (EIN). They compile data from your EIN, including the company’s address, phone number, owners’ names and industry classification code. Agencies may also search the Internet and public records for bankruptcies, judgments and tax liens. Suppliers, landlords, leasing companies and other creditors may also report payment experiences with the company to credit agencies.
Timely bill payment is the biggest factor affecting your business credit score. But other important ones include:
Level of success. Higher net worth or annual revenues generally increase your credit score.
Structure. Corporations and limited liability companies tend to receive higher scores than sole proprietorships and partnerships because these entities’ financial identities are separate from those of their owners.
Industry. Some agencies keep track of the percentage of companies under the company’s industry classification code that have filed for bankruptcy. Participation in high-risk industries tends to lower a business credit score.
Track record. Credit agencies also look at the length and frequency of your company’s credit history. Once you establish credit, your business should periodically borrow additional money and then repay it on time to avoid the risk of being downgraded.
Business credit scores help lenders decide whether to approve your loan request, as well as the loan’s interest rate, duration and other terms. Unfortunately, some small businesses and start-ups may have little to no credit history.
Build your company’s credit history by applying for a company credit card and paying the balance off each month. Also put utilities and leases in your company’s name, so the business is on the radar of the credit reporting agencies.
Sometimes, credit agencies base their ratings on incomplete, false or outdated information. Monitor your credit score regularly and note any downgrades. In some cases, the agency may be willing to change your score if you contact them and successfully prove that a rating is inaccurate.
Maintaining a healthy business credit score should play a central role in how you manage your company’s finances. Contact us for help in using credit to help maintain your cash flow and build the bottom line.
In the broadest sense, strategic planning comprises two primary tasks: establishing goals and achieving them. Many business owners would probably say the first part, coming up with objectives, is relatively easy. It’s that second part — accomplishing those goals — that can really challenge a company. The key to turning your strategic objectives into a reality is a solid implementation plan.
Start with people
After clearly identifying short- and long-range goals under a viable strategic planning process, you need to establish a formal plan for carrying it out. The most important aspect of this plan is getting the right people involved.
First, appoint an implementation leader and give him or her the authority, responsibility and accountability to communicate and champion your stated objectives. (If yours is a smaller business, you could oversee implementation yourself.)
Next, establish teams of carefully selected employees with specific duties and timelines under which to complete goal-related projects. Choose employees with the experience, will and energy to implement the plan. These teams should deliver regular progress reports to you and the implementation leader.
Watch out for roadblocks
On the surface, these steps may seem logical and foolproof. But let’s delve into what could go wrong with such a clearly defined process.
One typical problem arises when an implementation team is composed of employees wholly or largely from one department. Often, they’ll (inadvertently or intentionally) execute an objective in such a way that mostly benefits their department but ultimately hinders the company from meeting the intended goal.
To avoid this, create teams with a diversity of employees from across various departments. For example, an objective related to expanding your company’s customer base will naturally need to include members of the sales and marketing departments. But also invite administrative, production and IT staff to ensure the team’s actions are operationally practical and sustainable.
Another common roadblock is running into money problems. Ensure your implementation plan is feasible based on your company’s budget, revenue projections, and local and national economic forecasts. Ask teams to include expense reports and financial projections in their regular reports. If you determine that you can’t (or shouldn’t) implement the plan as written, don’t hesitate to revise or eliminate some goals.
Succeed at the important part
Strategic planning may seem to be “all about the ideas,” but implementing the specific goals related to your strategic plan is really the most important part of the process. Of course, it’s also the most difficult and most affected by outside forces. We can help you assess the financial feasibility of your objectives and design an implementation plan with the highest odds of success.
An independent quality of earnings (QOE) report can be a valuable tool in mergers and acquisitions. It’s important for both buyers and sellers to look beyond the quantitative information provided by the selling company’s financial statements.
There’s a lack of guidance from the American Institute of Certified Public Accountants (AICPA) regarding scope and format of a QOE report. As a result, these engagements may be customized to meet the needs of the party requesting the report.
Typically, QOE reports analyze the individual components of earnings (that is, revenue and expenses) on a month-to-month basis. The goals are twofold: 1) to determine whether earnings are sustainable, and 2) to identify potential risks and opportunities, both internal and external, that could affect the company’s ability to operate as a going concern.
Examples of issues that a QOE report might uncover include:
- Deficient accounting policies and procedures,
- Excessive concentration of revenue with one customer,
- Transactions with undisclosed related parties,
- Inaccurate period-end adjustments,
- Unusual revenue or expense items,
- Insufficient loss reserves, and
- Overly optimistic prospective financial statements.
QOE analyses can be performed on financial statements that have been prepared in-house, as well as those that have been compiled, reviewed or audited by a CPA firm. Rather than focus on historical results and compliance with Generally Accepted Accounting Principles (GAAP), QOE reports focus on how much cash flow the company is likely to generate for investors in the future.
Earnings before interest, taxes, depreciation and amortization (EBITDA) for the trailing 12 months is often the starting point for assessing earnings quality. To reflect a more accurate picture of a company’s operations, EBITDA may need to be adjusted for such items as:
- Nonrecurring items, such as a loss from a natural disaster or a gain from an asset sale,
- Above- or below-market owners’ compensation,
- Discretionary expenses, and
- Differences in accounting methods used by the company compared to industry peers.
In addition, QOE reports usually entail detailed ratio and trend analysis to identify unusual activity. Additional procedures can help determine whether changes are positive or negative.
For example, an increase in accounts receivable could result from revenue growth (a positive indicator) or a buildup of uncollectible accounts (a negative indicator). If it’s the former, the gross margin on incremental revenue should be analyzed to determine if the new business is profitable — or if the revenue growth results from aggressive price cuts.
We can help
Using an objective accounting professional to provide a QOE report can help the parties stay focused on financial matters during M&A discussions and add credibility to management’s historical and prospective financial statements. Contact us if you’re in the market to buy or sell a business.
Financial statements present a company’s financial position as of a specific date, typically the end of the year or quarter. But sometimes events happen shortly after the end of the period that have financial implications for the prior period or for the future. Here’s a look at what’s reportable and what’s not.
Classifying subsequent events
So-called “subsequent events” happen between the date of the financial statements and the date the financial statements are available to be issued. This lag usually lasts two or three months, because it takes time to record end-of-period journal entries, make estimates, draft footnotes and, if applicable, complete external compilation, review or audit procedures. The two types of subsequent events include:
Recognized. These events provide further evidence of conditions that existed on the financial statement date. For example, a major customer might file for bankruptcy. There was probably evidence of the customer’s financial distress in the prior period, such as a decrease in revenue or a buildup of receivables. The customer’s bankruptcy filing may trigger a write-off for bad debts to be recorded on the balance sheet in the prior period.
Nonrecognized. These subsequent events reflect unforeseeable conditions that didn’t exist at the end of the accounting period. Examples might include a change in foreign exchange rates, a fire or an unexpected natural disaster that severely damages the business.
Generally, the former must be recorded in the financial statements. The latter type of subsequent event isn’t required to be recorded but may have to be disclosed in the footnotes.
Disclosing subsequent events
Nonrecognized subsequent events must be disclosed in the footnotes only if failure to disclose the details would cause the financial statements to be misleading to investors and lenders. Subsequent event disclosures should include 1) a description of the nature of the event, and 2) an estimate of the financial effect (or, if not practical, a statement that an estimate can’t be made).
In some extreme cases, the effect of a subsequent event may be so pervasive that a company’s viability is questionable. This may cause the CPA to re-evaluate the going concern assumption that underlies its financial statements.
Footnotes add value
Subsequent events may not be reflected on a company’s balance sheet or income statement. But, when in doubt, companies typically disclose subsequent events to promote transparency in financial reporting. Contact us for more information about reporting and disclosing subsequent events.
The Public Company Accounting Oversight Board (PCAOB) recently voted to finalize two related standards aimed at improving audits of accounting estimates and the work of specialists. Though the new, more consistent guidance would apply specifically to public companies, the effects would likely filter down to audits of private entities that use accounting estimates or rely on the work of specialists.
Financial statements often report assets at fair value or use other types of accounting estimates, such as allowances for doubtful accounts, credit losses and impairments of long-lived assets. These estimates may involve some level of measurement uncertainty. So, they may be susceptible to misstatement and require more auditor focus.
PCAOB Release No. 2018-005, Auditing Accounting Estimates, Including Fair Value Measurements , aims to improve audits of estimates. The new risk-based standard would promote greater consistency in application. It would emphasize the importance of professional skepticism when auditors evaluate management’s estimates and the need to devote greater attention to potential management bias. Under the updated standard, auditors would consider both corroborating and contradictory evidence that’s obtained during the audit.
Use of specialists
Some accounting estimates may be easily determinable. But many are inherently subjective or complex, requiring the use of specialists. Examples include:
- Actuaries to determine employee benefit obligations,
- Engineers to determine obligations regarding environmental remediation, and
- Appraisers to determine the value of intangible assets or real estate.
The audit guidance on using the work of specialists hasn’t changed much since it was originally published in the 1970s. It deals with auditors’ oversight of third-party specialists, as well as the auditor’s use of the work of a professional hired by management. Existing guidance requires auditors to evaluate the relationship of a specialist to the client, including situations that might impair the specialist’s objectivity. But it doesn’t provide specific requirements.
PCAOB Release No. 2018-006, Amendments to Auditing Standards for Auditor’s Use of the Work of Specialists , would provide more direction for carrying out that evaluation. The updated standard would extend the auditor’s responsibility for evaluating specialists beyond simply obtaining an understanding of their work. It would require auditors to perform additional procedures to evaluate the appropriateness of the company’s data, as well as significant assumptions and methods used. However, auditors wouldn’t be required to reperform the work of the company’s specialist.
The PCAOB issued these related standards simultaneously at the end of 2018, and wants both to become effective for audits of financial statements for fiscal years ending on or after December 15, 2020. However, the updated guidance is pending approval by the Securities and Exchange Commission. Contact us to discuss how these updated standards are likely to affect your company’s audit procedures in the coming years.
Distinguishing between liabilities and equity on a company’s balance sheet may seem straightforward. But difficulties arise when it comes to the terms of complex securities and financial contracts like redeemable equity instruments, equity-linked or indexed instruments, and convertible instruments.
The good news is that the Financial Accounting Standards Board (FASB) is currently working on a project to improve how to determine the difference between liabilities and equity.
Need for change
Work on this project dates as far back as 1986, when distinguishing liabilities from equity was added to the FASB’s technical agenda. Since then, the board has issued various pieces of guidance to help resolve issues that have been raised. But the outcry for revisions to the liabilities vs. equity topic hasn’t waned.
In 2017, accounting professionals told the FASB that current guidance is “overly complex, internally inconsistent, path dependent, form based and is a cause for frequent financial statement restatements.”
Once again, the project is a top priority for the FASB. In 2019, deliberations will initially focus on two areas:
- Accounting for convertible instruments with embedded conversion features, and
- Determining whether instruments are indexed to an entity’s own stock.
A convertible instrument, typically a bond or a preferred stock, is an instrument that can be converted into a different security — often shares of the company’s common stock. For example, emerging and growing companies often use convertible debt as an alternative financing solution. It’s basically a loan obtained by a company from venture capital or angel investors whereby both parties agree to convert the debt into equity at a specific date.
Convertible instruments create complex accounting issues and have become a major source of confusion and restatements. In February 2019, the FASB tentatively voted to:
- Revise certain disclosures for convertible instruments, including adding disclosure objectives for convertible debt and for convertible preferred shares,
- Centralize the guidance on convertible preferred shares in Accounting Standards Codification (ASC) Topic 505, Equity, and convertible debt in ASC Subtopic 470-20, Debt — Debt with Conversion and other Options, and
- Improve the diluted earnings-per-share calculation and derivative scope exception.
Under the existing rules, there are currently five models to account for convertible debt, which the board plans to narrow down to one or two models. As a result, convertible debt would be recognized in the balance sheet as a single liability, measured at amortized cost. There would no longer be bifurcation, or separation, of the conversion feature and the debt host. Similarly, convertible preferred shares would be recognized in the balance sheet as a single equity element.
Many start-ups and midsize businesses use convertible instruments to raise cash. But it’s easy for management to miss an aspect of an arrangement and then follow the wrong accounting model under today’s complex, inconsistent principles. And the complex accounting rules even may cause some businesses to avoid tapping into these financing alternatives.
Fortunately, the FASB is taking steps to simplify the financial reporting requirements — and we’re atop the latest developments. Contact us for more information.
In recent years, external auditors have focused more attention on related party transactions. Although related party transactions aren’t necessarily bad, they do raise some concerns about the risk of misstatement or omission in financial reporting.
3 focal points
Issues with related parties played a prominent role in the scandals that surfaced nearly two decades ago at Enron, Tyco International and Refco. Public outrage about these scandals led Congress to pass the Sarbanes-Oxley Act of 2002 and establish the Public Company Accounting Oversight Board (PCAOB). Similar problems have arisen in more recent financial reporting fraud cases, prompting the PCAOB to enact tougher standards on related-party transactions and financial relationships.
PCAOB Auditing Standard No. 2410 (AS 2410), Related Parties, requires auditors of public companies to beef up their efforts in financial statement matters that pose increased risk of fraud. Specifically, auditors must focus on three critical areas:
1. Related-party transactions, such as those involving directors, executives and their family members,
2. Significant unusual transactions (SUTs) that are outside the company’s normal course of business or that otherwise appear to be unusual due to their timing, size or nature, and
3. Other financial relationships with the company’s executive officers and directors.
Subjecting these transactions and financial relationships to enhanced auditor scrutiny may help avert corporate failures. The PCAOB also hopes that enhanced auditor scrutiny will lead to improvements in accounting transparency and disclosures, which will help investors to more clearly gauge financial performance and fraud risks.
From start to finish
AS 2410 requires auditors to obtain a more in-depth understanding of every related-party financial relationship and transaction, including their nature, terms and business purpose (or lack thereof). Tougher related-party audit procedures must be performed in conjunction with the auditor’s risk assessment procedures, which occur in the planning phase of an audit.
In addition, auditors are expected to communicate with the audit committee throughout the audit process regarding the auditor’s evaluation of the company’s identification of, accounting for and disclosure of its related-party relationships and transactions. They can’t wait until the end of the engagement to communicate on these matters.
During fieldwork, expect auditors to be on the hunt for undisclosed related parties and unusual transactions. Examples of information that may be gathered during the audit that could reveal undisclosed related parties include information contained on the company’s website, tax filings, corporate life insurance policies, contracts and organizational charts.
Certain types of questionable transactions — such as contracts for below-market goods or services, bill-and-hold arrangements, uncollateralized loans and subsequent repurchase of goods sold — also might signal that a company is engaged in unusual or undisclosed related-party transactions.
To facilitate the audit process, management should be up-front with auditors about all related party transactions, even if they’re not required to be disclosed or consolidated on the company’s financial statements.
Let’s be honest
Private companies also engage in numerous related party transactions, and they may experience spillover effects of the tougher PCAOB auditing standard, which applies only to audits of public companies. Regardless of whether you’re publicly traded or privately held, it’s important to identify, evaluate and disclose all related parties. We can help you present related party relationships and transactions, openly and completely.
In 2018, U.S. organizations that suffered a data breach lost an average of $7.91 million as a result. That’s the highest average organizational cost of all the countries and regions covered in the 2018 Cost of a Data Breach Study by IBM and independent research firm Ponemon Institute. Malicious or criminal attacks were the source of more than half of those breaches, rather than system glitches and human errors.
With so much at stake, it’s no surprise that auditors consider these issues when conducting their audit risk assessments. This audit season, prepare to answer questions about cybersecurity and the effectiveness of your company’s internal controls against cyberthreats.
Inspections of public companies
In recent years, Public Company Accounting Oversight Board (PCAOB) inspectors have interviewed auditors of companies that have experienced a breach into their computer systems to find out how the auditors and their firms responded to the incidents. They report that auditors today are increasingly focused on matters related to cybersecurity.
Audit firms have provided varying levels of guidance, both when assessing risk at the start of an engagement and when uncovering a cybersecurity incident that occurred during audit fieldwork or the period under audit.
“Many of the firms are actually factoring cybersecurity issues into their risk assessment at this point in time, and there is a real focus on developing real understanding about cybersecurity incidents,” reported William Powers, deputy director for technology in the PCAOB’s Division of Registration and Inspections.
Possible questions that auditors might ask during fieldwork include:
- How does management identify and prioritize cyberrisks?
- What kind of internal controls has management established to safeguard digital assets and sensitive data (such as formal policies and procedures, employee training and the use of security analytics)?
- How does management monitor internal controls to ensure effective operation?
- Does management have a detailed breach response plan?
- If a breach occurred during the accounting period, how did management respond and how much did it cost?
- Has the company purchased cyber liability and breach response insurance?
The PCAOB hasn’t yet found any material misstatements on a public company’s financial statements as a result of a cybersecurity breach. But there’s a risk that future attacks may affect financial reporting. So, the PCAOB is planning to expand its inspection program to explore what auditors are doing to protect clients’ data and stakeholder data.
Universal risk factor
PCAOB inspectors target audits of public companies. But private companies can also be victims of cyberattacks — and the effects may be even more devastating for companies with fewer resources to absorb the losses and assign dedicated staff to respond to breaches.
The increasing frequency and severity of cyberattacks underscores the need for auditors of entities of all sizes to update their procedures. It’s our job to ask key questions about cyberrisks and the effectiveness of your internal controls. The answers, in turn, can help you formulate more effective governance strategies.
Did you make large gifts to your children, grandchildren or other heirs last year? If so, it’s important to determine whether you’re required to file a 2018 gift tax return — or whether filing one would be beneficial even if it isn’t required.
Generally, you must file a gift tax return for 2018 if, during the tax year, you made gifts:
- That exceeded the $15,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse),
- That you wish to split with your spouse to take advantage of your combined $30,000 annual exclusion,
- That exceeded the $152,000 annual exclusion for gifts to a noncitizen spouse,
- To a Section 529 college savings plan and wish to accelerate up to five years’ worth of annual exclusions ($75,000) into 2018,
- Of future interests — such as remainder interests in a trust — regardless of the amount, or
- Of jointly held or community property.
No return required
No gift tax return is required if your gifts for the year consist solely of gifts that are tax-free because they qualify as:
- Annual exclusion gifts,
- Present interest gifts to a U.S. citizen spouse,
- Educational or medical expenses paid directly to a school or health care provider, or
- Political or charitable contributions.
Be ready for April 15
The gift tax return deadline is the same as the income tax filing deadline. For 2018 returns, it’s April 15, 2019 — or October 15, 2019, if you file for an extension. But keep in mind that, if you owe gift tax, the payment deadline is April 15, regardless of whether you file for an extension. If you’re not sure whether you must (or should) file a 2018 gift tax return, contact us.
It’s not just businesses that can deduct vehicle-related expenses. Individuals also can deduct them in certain circumstances. Unfortunately, the Tax Cuts and Jobs Act (TCJA) might reduce your deduction compared to what you claimed on your 2017 return.
For 2017, miles driven for business, moving, medical and charitable purposes were potentially deductible. For 2018 through 2025, business and moving miles are deductible only in much more limited circumstances. TCJA changes could also affect your tax benefit from medical and charitable miles.
Current limits vs. 2017
Before 2018, if you were an employee, you potentially could deduct business mileage not reimbursed by your employer as a miscellaneous itemized deduction. But the deduction was subject to a 2% of adjusted gross income (AGI) floor, which meant that mileage was deductible only to the extent that your total miscellaneous itemized deductions for the year exceeded 2% of your AGI. For 2018 through 2025, you can’t deduct the mileage regardless of your AGI. Why? The TCJA suspends miscellaneous itemized deductions subject to the 2% floor.
If you’re self-employed, business mileage is deducted from self-employment income. Therefore, it’s not subject to the 2% floor and is still deductible for 2018 through 2025, as long as it otherwise qualifies.
Miles driven for a work-related move in 2017 were generally deductible “above the line” (that is, itemizing isn’t required to claim the deduction). But for 2018 through 2025, under the TCJA, moving expenses are deductible only for certain military families.
Miles driven for health-care-related purposes are deductible as part of the medical expense itemized deduction. Under the TCJA, for 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5% of your AGI. For 2019, the floor returns to 10%, unless Congress extends the 7.5% floor.
The limits for deducting expenses for charitable miles driven haven’t changed, but keep in mind that it’s an itemized deduction. So, you can claim the deduction only if you itemize. For 2018 through 2025, the standard deduction has been nearly doubled. Depending on your total itemized deductions, you might be better off claiming the standard deduction, in which case you’ll get no tax benefit from your charitable miles (or from your medical miles, even if you exceed the AGI floor).
Differing mileage rates
Rather than keeping track of your actual vehicle expenses, you can use a standard mileage rate to compute your deductions. The rates vary depending on the purpose and the year:
- Business: 54.5 cents (2018), 58 cents (2019)
- Medical: 18 cents (2018), 20 cents (2019)
- Moving: 18 cents (2018), 20 cents (2019)
- Charitable: 14 cents (2018 and 2019)
Do you have questions about deducting vehicle-related expenses? Contact us. We can help you with your 2018 return and 2019 tax planning.
The accounting rules for reporting stock compensation have been expanded. They now include share-based payments to nonemployees for providing goods and services, under recent guidance issued by the Financial Accounting Standards Board (FASB).
Under existing U.S. Generally Accepted Accounting Principles (GAAP), the FASB requires businesses that give stock awards to independent contractors or consultants to follow a separate standard from the one used for employee stock compensation.
Under Accounting Standards Codification (ASC) Subtopic 505-50, Equity — Equity-Based Payments to Non-Employees, the measurement date for nonemployees is determined at the earlier of the date at which:
- The commitment for performance is complete, or
- The counterparty’s performance is complete.
The FASB originally chose to apply different stock compensation guidance to nonemployees because independent contractors and consultants were perceived as having significant freedom to move from company to company. In theory, independent contractors could watch stock price movements to determine where to work.
However, the FASB now believes the assumptions behind the dual standards were overstated, because full-time employees also have the freedom to move from job to job.
In June 2018, the FASB issued Accounting Standards Update (ASU) No. 2018-07, Compensation — Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting. It eliminates the separate guidance for stock compensation paid to nonemployees and aligns it with the guidance for stock compensation paid to employees.
Under the aligned guidance, all share-based compensation payments will be measured with an estimate of the fair value of the equity the business is obligated to issue at the grant date. The grant date is the date the business and the stock award recipient agree to the terms of the award. Essentially, compensation will be recognized in the same period and in the same manner as if the company had paid cash for goods or services instead of stock.
The guidance doesn’t cover stock compensation that’s used to provide financing to the company that issued the shares. It also doesn’t include stock awards tied to a sale of goods or services as part of a contract accounted for under the new-and-improved revenue recognition standard.
The updated standard is effective for public companies for fiscal years that begin after December 15, 2018. Private companies have an extra year to implement the changes for annual reports.
Early adoption is generally permitted, but businesses aren’t allowed to follow the changes in ASU No. 2018-07 until they’ve implemented the new revenue recognition standard. Contact us for more information.
“I could sell water to a whale.”
Indeed, most salespeople possess an abundance of confidence. One could say it’s a prerequisite for the job. Because of their remarkable self-assurance, sales staffers might appear to be largely autonomous. Hand them something to sell, tell them a bit about it and let them do their thing — right?
Not necessarily. The sales department needs support just like any other part of a company. And we’re not just talking about office supplies and working phone lines. Here are five ways that your business can give its sales staff the support they really need:
1. Show them the data. Virtually every aspect of business is driven by analytics these days, but sales has been all about the data for decades. To keep up with the competition, provide your sales team with the most cutting-edge metrics. The right ones vary depending on your industry and customer base, but consider analytics such as lead conversion rate and quote-to-close.
2. Invest in sales training and upskilling. If you don’t train salespeople properly, they’ll face an uphill climb to success and may not stick around to get there with you. (This is often partly why sales staffs tend to have high turnover.) Once a salesperson is trained, offer continuing education — now commonly referred to as “upskilling” — to continue to enhance his or her talents.
3. Effectively evaluate employee performance. For sales staff, annual job reviews can boil down to a numbers game whereby it was either a good year or a bad one. Make sure your performance evaluations for salespeople are as comprehensive and productive as they are for any other type of employee. Sales goals should obviously play a role, but look for other professional development objectives as well.
4. Promote positivity, ethics and high morale. Sales is often a frustrating grind. It’s not uncommon for sales staff members to fall prey to negativity. This can manifest itself in various ways: bad interactions with customers, plummeting morale and, in worst cases, even unethical or fraudulent activities. Urge your supervisors to interact regularly with salespeople to combat pessimism and find ways to keep spirits high.
5. Regularly re-evaluate your compensation model. Finding the right way to compensate sales staff has challenged, if not perplexed, companies for years. Some businesses opt for commission only, others provide a salary plus commission. There are additional options as well, such as profit margin plans that compensate salespeople based on how well the company is doing.
If your compensation model is working well, you may not want to rock the boat. But re-evaluate its efficacy at least annually and don’t hesitate to explore other approaches. Our firm can help you analyze the numbers related to compensation as well as the metrics you’re using to track and assess sales.
For many businesses, offering employees a 401(k) plan is no longer an option — it’s a competitive necessity. But employees often grow so accustomed to having a 401(k) that they don’t pay much attention to it.
It’s in your best interest as a business owner to buck this trend. Keeping your employees engaged with their 401(k)s will increase the likelihood that they’ll appreciate this benefit and get the most from it. In turn, they’ll value you more as an employer, which can pay dividends in productivity and retention.
Promote positive awareness
Throughout the year, remind employees that a 401(k) remains one of the most tax-efficient ways to save for retirement. Regardless of investment results, the pretax advantage and any employer match make a 401(k) plan an ideal way to save.
For example, point out that, for every $100 of pay they defer to the 401(k), the entire $100 is invested in the plan — not reduced for taxes as it would be if it were paid directly to them. And any employer match increases investment potential.
At the same time, make sure employees know that your 401(k) plan operates under federal regulations. Although the value of their accounts may go up and down, it isn’t affected by the performance of your business, because plan assets aren’t commingled with company funds.
Encourage patience, involvement
The fluctuations and complexities of the stock market may cause some participants to worry about their 401(k)s — or to try not to think about them. Regularly reinforce that their accounts are part of a long-term retirement savings and investment strategy. Explain that both the economy and stock market are cyclical. If employees are invested appropriately for their respective ages, their accounts will likely rebound from most losses.
If a change occurs in the investment environment, such as a sudden drop in the stock market, present it as an opportunity for them to reassess their investment strategy and asset allocation. Market shifts have a significant impact on many individuals’ asset allocations, resulting in portfolios that may be inappropriate for their ages, retirement horizons and risk tolerance. Suggest that employees conduct annual rebalancing to maintain appropriate investment risk.
As part of their benefits package, some businesses provide financial counseling services to employees. If you’re one of them, now is a good time to remind them of this resource. Employee assistance programs sometimes offer financial counseling as well.
Another option is to occasionally engage investment advisors to come in and meet with your employees. Your plan vendor may offer this service. Of course, you should never directly give financial advice to employees through anyone who works for your company.
A 401(k) plan is a substantial investment for any company in time, money and resources. Encourage employees to appreciate your efforts — for their benefit and yours. We can help you assess and express the financial advantages of your plan.
As the old saying goes, “Knowledge is power.” This certainly rings true in business, as those who best understand their industries and markets tend to have a knack for staying on top. If that person is a company’s owner, however, great knowledge can turn into a vulnerability when he or she decides to retire or otherwise leave the business.
As you develop your succession plan, consider how to mitigate the loss of pure know-how that will occur when you step down. One way to tackle this risk is to implement a knowledge management strategy.
Two types of knowledge
Knowledge management is a formal process of recognizing and treating knowledge as an asset that your company can identify, maintain and share. Generally, a business can subdivide knowledge into two types:
1. Explicit knowledge. This exists in the tangible world and typically includes company reports, financial statements and databases. These items are usually easy to access, extrapolate from and append. For your succession plan, however, you may need to dig deeper into your own confidential files, memos or emails.
2. Tacit knowledge. This is information that resides solely between the ears of a business’s leadership, employees and perhaps even service providers. As such, it’s not easily retrievable. In terms of succession planning, this may be the stuff that you haven’t written down or even talked about much.
Typical knowledge management categories include:
- Taxes and accounting,
- Financial management,
- Strategic planning,
- HR, payroll and employment practices,
- Sales and marketing,
- Production, and
A comprehensive knowledge management effort related to your succession plan will call on you to undertake a full inventory of every category listed above and perhaps others. Gathering your explicit knowledge may entail compiling years’, even decades’, worth of documents, files and writings. This may not be an easy task, but it’s still a matter of straight research.
You’ll likely find capturing your tacit knowledge somewhat more challenging. One idea is to ask a suitable employee or engage an outside consultant to interview you regarding all the pertinent categories. Many business owners find these conversations arduous at first but eventually enlightening and enjoyable.
A legacy preserved
A solid succession plan is imperative to maintaining the future stability and success of your company. Knowledge management can strengthen that plan and help preserve the legacy you’ve worked so hard to build. Contact us for further information and for help identifying knowledge related to your tax filings, accounting methods and other financial matters.
Like most businesses, you’ve probably experienced a significant increase in the number of customers who prefer to make cashless payments. And you may be wondering: How does the acceptance of these types of transactions affect the auditing of your financial statements?
Cashless transactions require the exchange of digital information to facilitate payments. Instead of focusing on the collection and recording of physical cash, your auditors will spend significant time analyzing your company’s electronic sales records. This requires four specific procedures.
1. Identifying accepted payment methods
Auditors will ask for a list of the types of payments your company accepts and the process maps for each payment vehicle. Examples of cashless payment methods include:
- Credit and debit cards,
- Mobile wallets (such as Venmo),
- Digital currencies (such as Bitcoin),
- Automated Clearing House (ACH) payments,
- Wire transfers, and
- Payments via intermediaries (such as PayPal).
Be prepared to provide documents detailing how the receipt of cashless payments works and how the funds end up in your company’s bank account.
2. Evaluating roles and responsibilities
Your auditors will request a list of employees involved in the receipt, recording, reporting and analysis of cashless transactions. They will also want to see how your company manages and monitors employee access to every technology platform connected to cashless payments.
Evaluating who handles each aspect of the cashless payment cycle helps auditors confirm whether you have the appropriate level of security and segregation of duties to prevent fraud and misstatement.
3. Testing the reconciliation process
Auditors will review prior sales reconciliations to test their accuracy and ensure appropriate recognition of revenue. This may be especially challenging as companies implement the new accounting rules on revenue recognition for long-term contracts. Auditors also will test accounting entries related to such accounts as inventory, deferred revenue and accounts receivable.
4. Analyzing trends
Cashless transactions create an electronic audit trail. So, there’s ample data for auditors to analyze. To uncover anomalies, auditors may, for example, analyze sales by payment vehicle, over different time periods and according to each employee’s sales activity.
If your company has experienced payment fraud, it’s important to share that information with your audit team. Also tell them about steps you took to remediate the problem and recover losses.
Preparing for a cashless future
Before we arrive to conduct fieldwork, let’s discuss the types of cashless payments you now accept — or plan to accept in the future. Depending on the number of cashless methods, we’ll amend our audit program to review them in detail.
Many companies, especially those that operate in areas prone to natural disasters, should consider business interruption insurance. Unlike a commercial property policy, which may cover certain repairs of damaged property, this coverage generally provides the cash flow to cover revenues lost and expenses incurred while normal operations are suspended because of an applicable event.
But be warned: Business interruption insurance is arguably among the most complicated types of coverage on the market today. Submitting a claim can be time-consuming and requires careful preparation. Here are some best practices to keep in mind:
Notify your insurer immediately. Contact your insurance rep by phone as soon as possible to describe the damage. If your policy has been water-damaged or destroyed, ask him or her to send you a copy.
Review your policy. Read your policy in its entirety to determine how to best present your claim. It’s important to understand the policy’s limits and deductibles before spending time documenting losses that may not be covered.
Practice careful recordkeeping. Maintain accurate records to support your claim. Reorganize your bookkeeping to segregate costs related to the business interruption and keep supporting invoices. Among the necessary documents are:
- Predisaster financial statements and income tax returns,
- Postdisaster business records,
- Copies of current utility bills, employee wage and benefit statements, and other records showing continuing operating expenses,
- Receipts for building materials, a portable generator and other supplies needed for immediate repairs,
- Paid invoices from contractors, security personnel, media outlets and other service providers, and
- Receipts for rental payments, if you move your business to a temporary location.
While the Tax Cuts and Jobs Act (TCJA) reduces most income tax rates and expands some tax breaks, it limits or eliminates several itemized deductions that have been valuable to many individual taxpayers. Here are five deductions you may see shrink or disappear when you file your 2018 income tax return:
1. State and local tax deduction. For 2018 through 2025, your total itemized deduction for all state and local taxes combined — including property tax — is limited to $10,000 ($5,000 if you’re married and filing separately). You still must choose between deducting income and sales tax; you can’t deduct both, even if your total state and local tax deduction wouldn’t exceed $10,000.
2. Mortgage interest deduction. You generally can claim an itemized deduction for interest on mortgage debt incurred to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible. For 2018 through 2025, the TCJA reduces the mortgage debt limit from $1 million to $750,000 for debt incurred after Dec. 15, 2017, with some limited exceptions.
3. Home equity debt interest deduction. Before the TCJA, an itemized deduction could be claimed for interest on up to $100,000 of home equity debt used for any purpose, such as to pay off credit cards (for which interest isn’t deductible). The TCJA effectively limits the home equity interest deduction for 2018 through 2025 to debt that would qualify for the home mortgage interest deduction.
4. Miscellaneous itemized deductions subject to the 2% floor. This deduction for expenses such as certain professional fees, investment expenses and unreimbursed employee business expenses is suspended for 2018 through 2025. If you’re an employee and work from home, this includes the home office deduction. (Business owners and the self-employed may still be able to claim a home office deduction against their business or self-employment income.)
5. Personal casualty and theft loss deduction. For 2018 through 2025, this itemized deduction is suspended except if the loss was due to an event officially declared a disaster by the President.
Be aware that additional rules and limits apply to many of these deductions. Also keep in mind that the TCJA nearly doubles the standard deduction. The combination of a much larger standard deduction and the reduction or elimination of many itemized deductions means that, even if itemizing has typically benefited you in the past, you might be better off taking the standard deduction when you file your 2018 return. Please contact us with any questions you have.
Investors, lenders and other stakeholders have been vocal in recent years about pushing companies to provide more information in their financial reports about cybersecurity. Could your company do a better job disclosing cyberrisks and recent hacks?
Most public companies could do better, according to recent testimony during congressional hearings by Jay Clayton, Chairman of the Securities and Exchange Commission (SEC). Here are ways his agency is attempting to “refresh” the disclosure guidance.
Updating the guidance
The SEC doesn’t expect to overhaul its Disclosure Guidance: Topic No. 2, Cybersecurity. Rather, it plans to consider whether important information about cybersecurity should be disclosed to stakeholders within the context of the existing rules. For example, companies may need to beef up their management’s discussion and analysis (MD&A) and footnote disclosures to reflect potential cyberrisks and material financial implications of data breaches.
The current guidance on cybersecurity, which was published in 2011, doesn’t include a specific requirement for companies to disclose computer system intrusions. The SEC’s effort to update the guidance comes amid concerns that more public companies have been experiencing attacks to their computer systems, but their disclosures haven’t been timely or informative enough.
Changes in the works
Regulators in the SEC don’t know whether the update will be issued in the form of staff-level guidance or a regulatory release approved by the SEC’s commissioners. But they’ve decided to address two key areas in the update:
- Financial reporting controls and procedures that identify and disclose cybersecurity threats in a timely manner, and
- Corporate strategies and policies regarding cybersecurity prevention, detection and breach response.
On the one hand, companies feel a responsibility to share relevant information openly and honestly with stakeholders. On the other, they don’t want to prematurely disclose information about a breach before they know the extent of the damage or to release inaccurate information that later needs to be revised. Company insiders may also be working with law enforcement, in which case they don’t want to disclose information that could compromise the investigation.
Regardless of whether your business is public or private, it’s important to assemble a team of professional advisors — including legal, insurance and financial experts — to identify risk factors and to handle breach response, measure the impact and mitigate potential losses. We can help you provide transparent and timely information to your stakeholders.
Private companies that follow U.S. Generally Accepted Accounting Principles (GAAP) must comply with the landmark new revenue recognition standard in 2019. Many private company CFOs and controllers report that they still have significant work to do to meet the demands of the sweeping rules. If you haven’t started the implementation process, it’s time to get the ball rolling.
Lessons from public company peers
Affected private companies must start following Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification Topic 606), the first time they issue financial statements in 2019. For private companies with a fiscal year end or issuing quarterly statements under U.S. GAAP, that could be within the next few months. Other private companies have until the end of the year or even early 2020. No matter what, it’s crunch time.
Public companies, which had to begin following the standard in 2018, reported that, even if the new accounting didn’t radically change the number they reported in the top line of their income statements, it changed the method by which they had to calculate it. They had to comb through contracts and offer paper trails to back up their estimates to auditors. Public companies largely reported that the standard was more work than they anticipated. Private companies can expect the same challenges.
The revenue recognition standard erases reams of industry-specific revenue guidance in U.S. GAAP and attempts to come up with the following five-step revenue recognition model for most businesses worldwide:
1. Identify the contracts with a customer.2. Identify the performance obligations in the contract.3. Determine the transaction price.4. Allocate the transaction price to the performance obligations.5. Recognize revenue as the entity satisfies a performance obligation.
In many cases, the revenue a company reports under the new guidance won’t differ much from what it reported under old rules. But the timing of when a company can record revenues may be affected, particularly for long-term, multi-part arrangements. Companies also must assess:
- The extent by which payments could vary due to such terms as bonuses, discounts, rebates and refunds,
- The extent that collected payments from customers is “probable” and won’t result in a significant reversal in the future, and
- The time value of money to determine the transaction price.
We can help
Our accounting experts can help you avoid a “fire drill” right before your implementation deadline and employ best practices learned from public companies that made the switch in 2018. Contact us for help getting your revenue reporting systems, processes and policies up to speed.
A technician at a mobility equipment supplier was servicing the motorized wheelchair of a long-time customer and noticed it was a brand-new model. “Where did you buy the chair?” he asked the customer. “At the health care supply store on the other side of town,” the customer replied. The technician paused and then asked, “Well, why didn’t you buy the chair from us?” The customer replied, “I didn’t know you sold wheelchairs.”
Most business owners would likely agree that selling to existing customers is much easier than finding new ones. Yet many companies continue to squander potential sales to long-term, satisfied customers simply because they don’t create awareness of all their products and services.
It seems puzzling that the long-time customer in our example wouldn’t know that his wheelchair service provider also sold wheelchairs. But when you look a little deeper, it’s easy to understand why.
The repair customer always visited the repair shop, which had a separate entrance. While the customer’s chair was being repaired, he sat in the waiting area, which provided a variety of magazines but no product brochures or other promotional materials. The customer had no idea that a new sales facility was on the other side of the building until the technician asked about the new wheelchair.
Are you losing business from long-term customers because of a similar disconnect? To find out, ask yourself two fundamental questions:
1. Are your customers buying everything they need from you? To find the answer, you must thoroughly understand your customers’ needs. Identify your top tier of customers — say, the 20% who provide 80% of your revenue. What do they buy from you? What else might they need? Don’t just take orders from them; learn everything you can about their missions, strategic plans and operations.
2. Are your customers aware of everything you offer? The quickest way to learn this is, simply, to ask. Instruct your salespeople to regularly inquire about whether customers would be interested in products or services they’ve never bought. Also, add flyers, brochures or catalogs to orders when you fulfill them. Consider building greater awareness by hosting free lunches or festive corporate events to educate your customers on the existence and value of your products and services.
If you have long-term customers, you must be doing something right — and that’s to your company’s credit. But, remember, it’s not out of the question that you could lose any one of those customers if they’re unaware of your full spectrum of products and services. That’s an open opportunity for a competitor.
By taking steps to raise awareness of your products and services, you’ll put yourself in a better position to increase sales and profitability. Our firm can help you identify your strongest revenue sources and provide further ideas for enhancing them.
Ask many entrepreneurs and small business owners to show you their financial statements and they’ll likely open a laptop and show you their bookkeeping software. Although tracking financial transactions is critical, spreadsheets aren’t financial statements.
In short, financial statements are detailed and carefully organized reports about the financial activities and overall position of a business. As any company evolves, it will likely encounter an increasing need to properly generate these reports to build credibility with outside parties, such as investors and lenders, and to make well-informed strategic decisions.
These are the typical components of financial statements:
Income statement. Also known as a profit and loss statement, the income statement shows revenues and expenses for a specified period. To help show which parts of the business are profitable (or not), it should carefully match revenues and expenses.
Balance sheet. This provides a snapshot of a company’s assets and liabilities. Assets are items of value, such as cash, accounts receivable, equipment and intellectual property. Liabilities are debts, such as accounts payable, payroll and lines of credit. The balance sheet also states the company’s net worth, which is calculated by subtracting total liabilities from total assets.
Cash flow statement. This shows how much cash a company generates for a particular period, which is a good indicator of how easily it can pay its bills. The statement details the net increase or decrease in cash as a result of operations, investment activities (such as property or equipment sales or purchases) and financing activities (such as taking out or repaying a loan).
Retained earnings/equity statement. Not always included, this statement shows how much a company’s net worth grew during a specified period. If the business is a corporation, the statement details what percentage of profits for that period the company distributed as dividends to its shareholders and what percentage it retained internally.
Notes to financial statements. Many if not most financial statements contain a supplementary report to provide additional details about the other sections. Some of these notes may take the form of disclosures that are required under Generally Accepted Accounting Principles — the most widely used set of accounting rules and standards. Others might include supporting calculations or written clarifications.
Financial statements tell the ongoing narrative of your company’s finances and profitability. Without them, you really can’t tell anyone — including yourself — precisely how well you’re doing. We can help you generate these reports to the highest standards and then use them to your best advantage.
As you likely know by now, the Tax Cuts and Jobs Act (TCJA) reduced or eliminated many deductions for individuals. One itemized deduction the TCJA kept intact is for investment interest expense. This is interest on debt used to buy assets held for investment, such as margin debt used to buy securities. But if you have investment interest expense, you can’t count on benefiting from the deduction.
There are a few hurdles you must pass to benefit from the investment interest deduction even if you have investment interest expense:
1. You must itemize deductions. In the past this might not have been a hurdle, because you may have typically had enough itemized deductions to easily exceed the standard deduction. But the TCJA nearly doubled the standard deduction, to $24,000 (married couples filing jointly), $18,000 (heads of households) and $12,000 (singles and married couples filing separately) for 2018. Plus, some of your other itemized deductions, such as your state and local tax deduction, might be smaller on your 2018 return because of TCJA changes. So you might not have enough itemized deductions to exceed your standard deduction and benefit from itemizing.
2. You can’t have incurred the interest to produce tax-exempt income. For example, if you borrow money to invest in municipal bonds, which are exempt from federal income tax, you can’t deduct the interest.
3. You must have sufficient “net investment income.” The investment interest deduction is limited to your net investment income. For the purposes of this deduction, net investment income generally includes taxable interest, nonqualified dividends and net short-term capital gains, reduced by other investment expenses. In other words, long-term capital gains and qualified dividends aren’t included. However, any disallowed interest is carried forward. You can then deduct the disallowed interest in a later year if you have excess net investment income.
You may elect to treat net long-term capital gains or qualified dividends as investment income in order to deduct more of your investment interest. But if you do, that portion of the long-term capital gain or dividend will be taxed at ordinary-income rates.
Will interest expense save you tax?
As you can see, the answer to the question depends on multiple factors. We can review your situation and help you determine whether you can benefit from the investment interest expense deduction on your 2018 tax return.
The IRS opened the 2018 income tax return filing season on January 28. Even if you typically don’t file until much closer to the April 15 deadline, this year consider filing as soon as you can. Why? You can potentially protect yourself from tax identity theft — and reap other benefits, too.
What is tax identity theft?
In a tax identity theft scheme, a thief uses your personal information to file a fraudulent tax return early in the tax filing season and claim a bogus refund.
You discover the fraud when you file your return and are informed by the IRS that the return has been rejected because one with your Social Security number has already been filed for the same tax year. While you should ultimately be able to prove that your return is the legitimate one, tax identity theft can cause major headaches to straighten out and significantly delay your refund.
Filing early may be your best defense: If you file first, it will be the tax return filed by a would-be thief that will be rejected — not yours.
What if you haven’t received your W-2s and 1099s?
To file your tax return, you must have received all of your W-2s and 1099s. January 31 was the deadline for employers to issue 2018 Form W-2 to employees and, generally, for businesses to issue Form 1099 to recipients of any 2018 interest, dividend or reportable miscellaneous income payments.
If you haven’t received a W-2 or 1099, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for help.
What are other benefits of filing early?
Besides protecting yourself from tax identity theft, the most obvious benefit of filing early is that, if you’re getting a refund, you’ll get that refund sooner. The IRS expects more than nine out of ten refunds to be issued within 21 days.
But even if you owe tax, filing early can be beneficial. You still won’t need to pay your tax bill until April 15, but you’ll know sooner how much you owe and can plan accordingly. Keep in mind that some taxpayers who typically have gotten refunds in the past could find themselves owing tax when they file their 2018 return due to tax law changes under the Tax Cuts and Jobs Act (TCJA) and reduced withholding from 2018 paychecks.
If you have questions about tax identity theft or would like help filing your 2018 return early, please contact us. While the new Form 1040 essentially does fit on a postcard, many taxpayers will also have to complete multiple schedules along with the form. And the TCJA has changed many tax breaks. We can help you ensure you file an accurate return that takes advantage of all of the breaks available to you.
While most provisions of the Tax Cuts and Jobs Act (TCJA) went into effect in 2018 and either apply through 2025 or are permanent, there are two major changes under the act for 2019. Here’s a closer look.
1. Medical expense deduction threshold
With rising health care costs, claiming whatever tax breaks related to health care that you can is more important than ever. But there’s a threshold for deducting medical expenses that was already difficult for many taxpayers to meet, and it may be even harder to meet this year.
The TCJA temporarily reduced the threshold from 10% of adjusted gross income (AGI) to 7.5% of AGI. Unfortunately, the reduction applies only to 2017 and 2018. So for 2019, the threshold returns to 10% — unless legislation is signed into law extending the 7.5% threshold. Only qualified, unreimbursed expenses exceeding the threshold can be deducted.
Also, keep in mind that you have to itemize deductions to deduct medical expenses. Itemizing saves tax only if your total itemized deductions exceed your standard deduction. And with the TCJA’s near doubling of the standard deduction for 2018 through 2025, many taxpayers who’ve typically itemized may no longer benefit from itemizing.
2. Tax treatment of alimony
Alimony has generally been deductible by the ex-spouse paying it and included in the taxable income of the ex-spouse receiving it. Child support, on the other hand, hasn’t been deductible by the payer or taxable income to the recipient.
Under the TCJA, for divorce agreements executed (or, in some cases, modified) after December 31, 2018, alimony payments won’t be deductible — and will be excluded from the recipient’s taxable income. So, essentially, alimony will be treated the same way as child support.
Because the recipient ex-spouse would typically pay income taxes at a rate lower than that of the paying ex-spouse, the overall tax bite will likely be larger under this new tax treatment. This change is permanent.
TCJA impact on 2018 and 2019
Most TCJA changes went into effect in 2018, but not all. Contact us if you have questions about the medical expense deduction or the tax treatment of alimony — or any other changes that might affect you in 2019. We can also help you assess the impact of the TCJA when you file your 2018 tax return.
For many companies, revenue is one of the largest financial statement accounts. It’s also highly susceptible to financial misstatement.
When it comes to revenue, auditors customarily watch for fictitious transactions and premature recognition ploys. Here’s a look at some examples of critical issues that auditors may target to prevent and detect improper revenue recognition tactics.
Auditors aim to understand the company, its environment and its internal controls. This includes becoming familiar with key products and services and the contractual terms of the company’s sales transactions. With this knowledge, the auditor can identify key terms of standardized contracts and evaluate the effects of nonstandard terms. Such information helps the auditor determine the procedures necessary to test whether revenue was properly reported.
For example, in construction-type or production-type contracts, audit procedures may be designed to 1) test management’s estimated costs to complete projects, 2) test the progress of contracts, and 3) evaluate the reasonableness of the company’s application of the percentage-of-completion method of accounting.
Gross vs. net revenue
Auditors evaluate whether the company is the principal or agent in a given transaction. This information is needed to evaluate whether the company’s presentation of revenue on a gross basis (as a principal) vs. a net basis (as an agent) complies with applicable standards.
Revenue must be reported in the correct accounting period (generally the period in which it’s earned). Cutoff testing procedures should be designed to detect potential misstatements related to timing issues, as well as to obtain sufficient relevant and reliable evidence regarding whether revenue is recorded in the appropriate period.
If the risk of improper accounting cutoffs is related to overstatement or understatement of revenue, the procedures should encompass testing of revenue recorded in the period covered by the financial statements — and in the subsequent period.
A typical cutoff procedure might involve testing sales transactions by comparing sales data for a sufficient period before and after year end to sales invoices, shipping documentation or other evidence. Such comparisons help determine whether revenue recognition criteria were met and sales were recorded in the proper period.
Starting in 2018 for public companies and 2019 for other entities, revenue must be reported using the new principles-based guidance found in Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The updated guidance doesn’t affect the amount of revenue companies report over the life of a contract. Rather, it affects the timing of revenue recognition.
In light of the new revenue recognition standard, companies should expect revenue to receive renewed attention in the coming audit season. Contact us to help implement the new revenue recognition rules or to discuss how the changes will affect audit fieldwork.
Audit opinions differ depending on the information available, financial viability, errors discovered during audit procedures and other limiting factors. The type of opinion your auditor issues tells stakeholders whether you’re in compliance with accounting rules and likely to continue operating as a going concern.
To find out what type of audit opinion you’ve received, scan the first page of your financial statements. Known as the “audit opinion letter,” this is where your auditor states whether the financial statements are fairly presented in all material respects, compliant with Generally Accepted Accounting Principles (GAAP) and free from material misstatement. But the opinion doesn’t constitute an endorsement or evaluation of the company’s financial results.
Most audit opinion letters consist of three paragraphs. The introductory paragraph identifies the company, accounting period and auditor’s responsibilities. The second discusses the scope of work performed. The third paragraph contains the audit opinion.
In general, there are four types of audit opinions, ranked from most to least desirable.
1. Unqualified. A clean “unqualified” opinion is the most common (and desirable). Here the auditor states that the company’s financial condition, position and operations are fairly presented in the financial statements.
2. Qualified. The auditor expresses a qualified opinion if the financial statements appear to contain a small deviation from GAAP, but are otherwise fairly presented. To illustrate: An auditor will “qualify” his or her opinion if a borrower incorrectly estimates warranty expense, but the exception doesn’t affect the rest of the financial statements.
Qualified opinions are also given if the company’s management limits the scope of audit procedures. For example, a qualified opinion may result if you deny the auditor access to a warehouse to observe year-end inventory counts.
3. Adverse. When an auditor issues an adverse opinion, there are material exceptions to GAAP that affect the financial statements as a whole. Here the auditor indicates that the financial statements aren’t presented fairly. Typically, an adverse opinion letter contains a fourth paragraph that outlines these exceptions.
4. Disclaimer. Even more alarming to lenders and investors is a disclaimer opinion. Disclaimers occur when an auditor gives up midaudit. Reasons for disclaimers may include significant scope limitations, material doubt about the company’s going-concern status and uncertainties within the subject company itself. A disclaimer opinion letter briefly outlines the auditor’s reasons for throwing in the towel.
Ready, set, audit
Before fieldwork starts for the audit of your 2018 financial statements, let’s discuss any foreseeable scope limitations and possible deviations from GAAP. Depending on the situation, we may be able to recommend corrective actions and help you proactively communicate with stakeholders about the reasons for a less-than-perfect audit opinion.
For several years now, cloud computing has been touted as the perfect way for companies large and small to meet their software and data storage needs. But, when it comes to choosing and deploying a solution, one size doesn’t fit all.
Many businesses have found it difficult to fully commit to the cloud for a variety of reasons — including complexity of choices and security concerns. If your company has struggled to make a decision in this area, a hybrid cloud might provide the answer.
Public vs. private
The “cloud” in cloud computing is generally categorized as public or private. A public cloud — such as Amazon Web Services, Google Cloud or Microsoft Azure — is shared by many users. Private clouds, meanwhile, are created for and restricted to one business or individual.
Not surprisingly, public clouds generally are considered less secure than private ones. Public clouds also require Internet access to use whatever is stored on them. A private cloud may be accessible via a company’s local network.
Hybrid computing, as the name suggests, combines public and private clouds. The clouds remain separate and distinct, but data and applications can be shared between them. This approach offers several potential advantages, including:
Scalability. For less sensitive data, public clouds give businesses access to enormous storage capabilities. As your needs expand or shrink — whether temporarily or for the long term — you can easily adjust the size of a public cloud without incurring significant costs for additional on-site or remote private servers.
Security. When it comes to more sensitive data, you can use a private cloud to avoid the vulnerabilities associated with publicly available options. For even greater security, procure multiple private clouds — this way, if one is breached, your company won’t lose access or suffer damage to all of its data.
Accessibility. Public clouds generally are easier for remote workers to access than private clouds. So, your business could use these for productivity-related apps while confidential data is stored on a private cloud.
Risks and costs
Using a blended computer infrastructure like this isn’t without risks and costs. For example, it requires more sophisticated technological expertise to manage and support compared to a straight public cloud approach. You’ll likely have to invest more dollars in procuring multiple public and private cloud solutions, as well as in the IT talent to maintain and support the infrastructure.
Overall, though, many businesses that have been reluctant to solely rely on either a public or private cloud may find that hybrid cloud computing brings the best of both worlds. Our firm can help you assess the financial considerations involved.
With the year underway, your business probably has a strategic plan in place for the months ahead. Or maybe you’ve created a general outline but haven’t quite put the finishing touches on it yet. In either case, there’s a time-tested approach to refining your strategic plan that you should consider: a SWOT analysis. Let’s take a closer look at what each of the letters in that abbreviation stands for:
Strengths. A SWOT analysis starts by identifying your company’s core competencies and competitive advantages. These are how you can boost revenues and build value. Examples may include an easily identifiable brand, a loyal customer base or exceptional customer service.
Unearth the source of each strength. A loyal customer base, for instance, may be tied to a star employee or executive — say a CEO with a high regional profile and multitude of community contacts. In such a case, it’s important to consider what you’d do if that person suddenly left the business.
Weaknesses. Next the analysis looks at the opposite of strengths: potential risks to profitability and long-term viability. These might include high employee turnover, weak internal controls, unreliable quality or a location that’s no longer advantageous.
You can evaluate weaknesses relative to your competitors as well. Let’s say metrics indicate customer recognition of your brand is increasing, but you’re still up against a name-brand competitor. Is that a battle you can win? Every business has its Achilles’ heel — some have several. Identify yours so you can correct them.
Opportunities. From here, a SWOT analysis looks externally at what’s happening in your industry, local economy or regulatory environment. Opportunities are favorable external conditions that could allow you to build your bottom line if your company acts on them before competitors do.
For example, imagine a transportation service that notices a growing demand for food deliveries in its operational area. The company could allocate vehicles and hire drivers to deliver food, thereby gaining an entirely new revenue stream.
Threats. The last step in the analysis is spotting unfavorable conditions that might prevent your business from achieving its goals. Threats might come from a decline in the economy, adverse technological changes, increased competition or tougher regulation.
Going back to our previous example, that transportation service would have to consider whether its technological infrastructure could support the rigorous demands of the app-based food-delivery industry. It would also need to assess the risk of regulatory challenges of engaging independent contractors to serve as drivers.
Typically presented as a matrix (see accompanying image), a SWOT analysis provides a logical framework for better understanding how your business runs and for improving (or formulating) a strategic plan for the year ahead. Our firm can help you gather and assess the financial data associated with the analysis.
Those who run family-owned businesses often underestimate the need for a succession plan. After all, they say, we’re a family business — there will always be a family member here to keep the company going and no one will stand in the way.
Not necessarily. In one all-too-common scenario, two of the owner’s children inherit the business and, while one wants to keep the business in the family, the other is eager to sell. Such conflicts can erupt into open combat between heirs and even destroy the company. So, it’s important for you, as a family business owner, to create a formal succession plan — and to communicate it well before it’s needed.
Talk it out
A good succession plan addresses the death, incapacity or retirement of an owner. It answers questions now about future ownership and any potential sale so that successors don’t have to scramble during what can be an emotionally traumatic time.
The key to making any plan work is to clearly communicate it with all stakeholders. Allow your children to voice their intentions. If there’s an obvious difference between siblings, resolving that conflict needs to be central to your succession plan.
Perhaps the simplest option, if you have sufficient assets outside your business, is to leave your business only to those heirs who want to be actively involved in running it. You can leave assets such as investment securities, real estate or insurance policies to your other heirs.
Another option is for the heirs who’d like to run the business to buy out the other heirs. But they’ll need capital to do that. You might buy an insurance policy with proceeds that will be paid to the successor on your death. Or, as you near retirement, it may be possible to arrange buyout financing with your company’s current lenders.
If those solutions aren’t viable, hammer out a temporary compromise between your heirs. In a scenario where they are split about selling, the heirs who want to sell might compromise by agreeing to hold off for a specified period. That would give the other heirs time to amass capital to buy their relatives out or find a new co-owner, such as a private equity investor.
Family comes first
For a family-owned business, family should indeed come first. To ensure that your children or other relatives won’t squabble over the company after your death, make a succession plan that will accommodate all your heirs’ wishes. We can provide assistance, including helping you divide your assets fairly and anticipating the applicable income tax and estate tax issues.
Retirement plan contribution limits are indexed for inflation, and many have gone up for 2019, giving you opportunities to increase your retirement savings:
- Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans: $19,000 (up from $18,500)
- Contributions to defined contribution plans: $56,000 (up from $55,000)
- Contributions to SIMPLEs: $13,000 (up from $12,500)
- Contributions to IRAs: $6,000 (up from $5,500)
One exception is catch-up contributions for taxpayers age 50 or older, which remain at the same levels as for 2018:
- Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans: $6,000
- Catch-up contributions to SIMPLEs: $3,000
- Catch-up contributions to IRAs: $1,000
Keep in mind that additional factors may affect how much you’re allowed to contribute (or how much your employer can contribute on your behalf). For example, income-based limits may reduce or eliminate your ability to make Roth IRA contributions or to make deductible traditional IRA contributions.
For more on how to make the most of your tax-advantaged retirement-saving opportunities in 2019, please contact us.
If you’re like many Americans, letters from your favorite charities have been appearing in your mailbox in recent weeks acknowledging your 2018 year-end donations. But what happens if you haven’t received such a letter — can you still claim an itemized deduction for the gift on your 2018 income tax return? It depends.
To support a charitable deduction, you need to comply with IRS substantiation requirements. This generally includes obtaining a contemporaneous written acknowledgment from the charity stating the amount of the donation, whether you received any goods or services in consideration for the donation, and the value of any such goods or services.
“Contemporaneous” means the earlier of 1) the date you file your tax return, or 2) the extended due date of your return. So if you made a donation in 2018 but haven’t yet received substantiation from the charity, it’s not too late — as long as you haven’t filed your 2018 return. Contact the charity and request a written acknowledgment.
Keep in mind that, if you made a cash gift of under $250 with a check or credit card, generally a canceled check, bank statement or credit card statement is sufficient. However, if you received something in return for the donation, you generally must reduce your deduction by its value — and the charity is required to provide you a written acknowledgment as described earlier.
Substantiation is serious business
Don’t take the substantiation requirements lightly. In one U.S. Tax Court case, the taxpayers substantiated a donation deduction with canceled checks and a written acknowledgment. The IRS denied the deduction, however, because the acknowledgment failed to state whether the taxpayers received goods or services in consideration for their donation.
The taxpayers obtained a second acknowledgment including the required statement. But the Tax Court didn’t accept it because it wasn’t contemporaneous (that is, it was obtained after the tax return was filed).
2018 and 2019 deductions
Additional substantiation requirements apply to some types of donations. We can help you determine whether you have sufficient substantiation for the donations you hope to deduct on your 2018 income tax return — and guide you on the substantiation you’ll need for gifts you’re planning this year to ensure you can enjoy the desired deductions on your 2019 return.
Now that 2019 has begun, there isn’t too much you can do to reduce your 2018 income tax liability. But it’s smart to begin preparing for filing your 2018 return. Because the Tax Cuts and Jobs Act (TCJA), which was signed into law at the end of 2017, likely will have a major impact on your 2018 taxes, it’s a good time to review the most significant provisions impacting individual taxpayers.
Rates and exemptions
Generally, taxpayers will be subject to lower tax rates for 2018. But a couple of rates stay the same, and changes to some of the brackets for certain types of filers (individuals and heads of households) could cause them to be subject to higher rates. Some exemptions are eliminated, while others increase. Here are some of the specific changes: Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37%
Elimination of personal and dependent exemptions.
AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers for 2018.
Approximate doubling of the gift and estate tax exemption, to $11.18 million for 2018
Credits and deductions
Generally, tax breaks are reduced for 2018. However, a few are enhanced.
Here’s a closer look:
Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit
Near doubling of the standard deduction, to $24,000 (married couples filing jointly), $18,000 (heads of households) and $12,000 (singles and married couples filing separately) for 2018
Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes
New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income or sales taxes; $5,000 for separate filers)
Reduction of the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers), with certain exceptions
Elimination of the deduction for interest on home equity debt
Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters)
Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses)
Elimination of the AGI-based reduction of certain itemized deductions
Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances)
Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year How are you affected?
As you can see, the TCJA changes for individuals are dramatic. Many rules and limits apply, so contact us to find out exactly how you’re affected. We can also tell you if any other provisions affect you, and help you begin preparing for your 2018 tax return filing and 2019 tax planning. © 2019
Section 529 plans are a popular education-funding tool because of tax and other benefits.
Two types are available: 1) prepaid tuition plans, and 2) savings plans. And one of these plans got even better under the Tax Cuts and Jobs Act (TCJA). Enjoy valuable benefits 529 plans provide a tax-advantaged way to help pay for qualifying education expenses.
First and foremost, although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred. In addition, some states offer tax incentives for contributing in the form of deductions or credits. But that’s not all. 529 plans also usually offer high contribution limits. And there are no income limits for contributing. Lock in current tuition rates With a 529 prepaid tuition plan, if your contract is for four years of tuition, tuition is guaranteed regardless of its cost at the time the beneficiary actually attends the school. This can provide substantial savings if you invest when the child is still very young. One downside is that there’s uncertainty in how benefits will be applied if the beneficiary attends a different school. Another is that the plan doesn’t cover costs other than tuition, such as room and board. Fund more than just college tuition A 529 savings plan can be used to pay a student’s expenses at most postsecondary educational institutions. Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, supplies, computer equipment, software, Internet service and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.
In addition, the Tax Cuts and Jobs Act expands the definition of qualified expenses to generally include elementary and secondary school tuition. However, tax-free distributions used for such tuition are limited to $10,000 per year. The biggest downside may be that you don’t have direct control over investment decisions; you’re limited to the options the plan offers. Additionally, for funds already in the plan, you can make changes to your investment options only twice during the year or when you change beneficiaries. But each time you make a contribution to a 529 savings plan, you can select a different option for that contribution, regardless of how many times you contribute throughout the year. And every 12 months you can make a tax-free rollover to a different 529 plan for the same child. Picking your plan Both prepaid tuition plans and savings plans offer attractive benefits. We can help you determine which one is a better fit for you or explore other tax-advantaged education-funding options. © 2018
One of the most frequent questions that we receive from taxpayers when their business had a profitable year is "Where is the money". We tell them that they had a profit of $500,000, and yet they have less money in their bank than they did at the beginning of the year.
Business owners sometimes mistakenly equate profits with cash flow. Here’s how this can lead to surprises when managing day-to-day operations — and why many profitable companies experience cash shortages.
Working capital Profits are closely related to taxable income. Reported at the bottom of your company’s income statement, they’re essentially the result of revenue less the cost of goods sold and other operating expenses incurred in the accounting period. Generally Accepted Accounting Principles (GAAP) require companies to “match” costs and expenses to the period in which revenue is recognized. Under accrual-basis accounting, it doesn’t necessarily matter when you receive payments from customers or when you pay expenses. For example, inventory sitting in a warehouse or retail store can’t be deducted — even though it may have been long paid for (or financed). The expense hits your income statement only when an item is sold or used. Your inventory account contains many cash outflows that are waiting to be expensed. Other working capital accounts — such as accounts receivable, accrued expenses and trade payables — also represent a difference between the timing of cash flows. As your business grows and prepares for increasing future sales, you invest more in working capital, which temporarily depletes cash. The reverse also may be true. That is, a mature business may be a “cash cow” that generates ample cash, despite reporting lackluster profits. Capital expenditures, loan payments and more Working capital tells only part of the story. Your income statement also includes depreciation and amortization, which are noncash expenses. And it excludes changes in fixed assets, bank financing and owners’ capital accounts, which affect cash that’s on hand.
To illustrate: Suppose your company uses tax depreciation schedules for book purposes. In 2018, you purchased new equipment to take advantage of the expanded Section 179 and bonus depreciation allowances. The entire purchase price of these items was deducted from profits in 2018. However, these purchases were financed with debt. So, actual cash outflows from the investments in 2018 were minimal. In 2019, your business will make loan payments that will reduce the amount of cash in the company’s checking account. But your profits will be hit with only the interest expense (not the amount of principal that’s being repaid). Plus, there will be no “basis” left in the 2018 purchases to depreciate in 2019. These circumstances will artificially boost profits in 2019, without a proportionate increase in cash.
Look beyond profits It’s imperative for business owners and management to understand why profits and cash flow may not sync. If your profitable business has insufficient cash on hand to pay employees, suppliers, lenders or even the IRS, contact us to discuss ways to more effectively manage the cash flow cycle. © 2019