Is This Your Situation: Wondering If An Audit Can Benefit You

Your privately owned business may not need a financial statement audit according to law, but that doesn’t mean you should skip it. Read through to learn why an audit can be a smart move.

With the vicissitudes of change combined with technological advances, we’re living in an age of transparency where businesses are required to disclose more information about their taxes, financial records, operations and executive salaries.  While private companies are spared the intense scrutiny of professional auditors and not required to provide an external review of their financial statements, there are advantages to having an external audit many business heads rarely consider.

Seven reasons why an external audit is smart business

  1. Audits improve functioning of the business. Objective scrutiny of a business’s operations leads to creative improvements and controls, which result in better products and services and a fatter bottom line.Just as regular tuneups improve an automobile engine’s functioning, the external audit achieves similar results by improving a company’s performance by  reinforcing and strengthening what works and eliminating what’s slowing a business down.  Internal controls are scrutinized to make sure they’re achieving their goals and whether timetables and stakeholders’ interests and goals are being achieved.
  2. All companies, regardless of size and industry, can benefit from an external audit.A common misconception is small companies don’t need to be audited. Auditors can identify and address potential problems that may be holding you back.
  3. Audited financial statements are considered more reliable. Investing in an external audit is considered a proactive strategy that improves and enhances the image of the business in the public eye.  It circumvents potential mistrust that comes when information is revealed after the fact.  It also gives customers or clients (existing and potential) and investors a sense of security, knowing that your company’s financial statements have gone through the audit process.
  4. The audit process encourages transparency.  Financial statements that have been verified by an external auditor are considered more reliable in the business marketplace.  External auditors are trained specifically to focus on tightening and improving business processes to reduce the amount of risk of misreporting financial data.
  5. External auditors have no agenda other than the truth.
  6. Audits help foster a culture that encourages change and growth. Rather than view an external audit as a bureaucratic annoyance, managers ought to embrace the audit concept as a conduit to a stronger business, new systems and processes, all of which open the door to innovation.
  7. Audits lead to better hiring decisions.A company’s employees (human capital) are as valuable as its products or services and business operations.After all, their expertise, motivation and attitude affect and define the company’s culture.A careful external audit evaluates every variable in a company’s machinery.

Do you want to know about the advantages of an audit for your business, and what it would involve? Give us a call today.

Big Changes in Social Security and Retirement Plans for 2018

From 401(k) plans to individual retirement accounts to Social Security, the federal government has been busy in recent weeks adjusting numbers for 2018. Whether you’re an employee or business owner, senior management or nonexempt staff, these changes may affect how you approach retirement in the coming months and years.

Social Security: New ceilings

First, let’s start with what is not changing. The 7.65 percent Social Security deduction remains the same. And as before, it’s doubled to 15.30 percent for the self-employed.

However, the maximum earnings subject to Social Security rises from $127,200 to $128,700, a $1,500 increase. The Society for Human Resource Management estimates that this change means 12 million more workers will be paying more Social Security tax than before. The 1.45 percent Medicare portion, which has no ceiling, remains unchanged.

Those who are working while collecting Social Security catch a small break: The SSA is raising slightly the amount people can earn before losing a portion of Social Security benefits. The new amounts are $10 or $40 a month, depending on the recipient’s status.

Another significant change is to the maximum Social Security benefit for those retiring at full retirement age, which changes from $2,687/month to $2,788/month, a $101 increase. More details are available on the Social Security site.

Retirement plan limits rise

Workers who can afford to do so can put away a little more for retirement: The limit for 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan is increased from $18,000 to $18,500.

It’s a little more complicated for those contributing to IRAs:

  • For single taxpayers covered by a workplace retirement plan, the phase-out range is $63,000 to $73,000, up from $62,000 to $72,000.
  • For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $101,000 to $121,000, up from $99,000 to $119,000.
  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $189,000 and $199,000, up from $186,000 and $196,000.
  • For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Roth IRA contributors also get a bump up: The income phase-out range is $120,000 to $135,000 for singles and heads of household, up from $118,000 to $133,000. For married couples filing jointly, the income phase-out range is $189,000 to $199,000, up from $186,000 to $196,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Some IRA numbers are not changing, however:

  • The limit on annual contributions to an IRA remains $5,500. The additional catch-up contribution limit for individuals age 50 and over remains $1,000.
  • The catch-up contribution limit for employees age 50 and over who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains unchanged at $6,000.

These are just summaries of complex rules. Be sure to give us a call or email a WFY advisor at info@cpa-wfy.com so we can explain how these changes may affect your situation.

© Copyright 2017. All rights reserved.

Senate Tax Plan Outline Released

The Senate Republican’s tax reform plan was released last week. Several proposals changed from the House Tax bill. The key changes in the plan from the current law are as follows:

Individuals:

  • Current tax rates: Seven brackets from 10% to 39.6%.
  • Proposed tax rates: Seven brackets at 10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5%.
  • Current standard deduction: $6,350 individuals and $12,700 married filing joint.
  • Proposed standard deduction: $12,000 individuals and $24,000 married filing joint.
  • Elimination of personal exemptions, worth $4,050 per person.
  • Increase child tax credit from $1,000 to $1,650 and add a $500 credit for nonchild dependents.
  • Eliminate most itemized deductions, including property taxes and state and local tax deductions (will keep charitable contributions and medical expense deduction).
  • Continue to exclude from gross income up to $500,000 for joint filers ($250,000 for other filers) on the sale of a principal residence if the taxpayer owned and used the home for five out of the previous eight years (currently two out of five years). The exclusion would be available once every five years  (currently every two years).
  • Repeal of the alternative minimum tax.
  • Double the exemption for the estate tax amount to $10 million (no plan for repeal).

Businesses:

  • Small and family-owned business and flow through entities (Sole Proprietorships, Partnerships and S Corporations) will receive an additional 17.4% deduction of domestic qualified business income (limited to 50% of the W-2 wages of the taxpayer) effective in 2018. Certain professional service businesses are not eligible for the deduction, with a possible exemption if the qualified income is less than $150,000 (joint filers).
  • Proposed C Corporation tax rate 20% effective in 2019 (most other provisions begin in 2018).
  • Imposing a one-time 10% tax on accumulated foreign earnings, reduced to 5% for illiquid assets.
  • Nonresidential and residential rental property tax depreciation reduced to 25 years.
  • Increase Section 179 expensing limitation, deducting the cost of certain property, to $1 million and the phase out threshold to $2.5 million (currently $510,000 expense limitation with $2 million phaseout) and certain nonresidential property improvements would also qualify for Section 179 expense.
  • Limit the deduction for net interest expenses incurred by a business in excess of 30% of the business’s adjusted taxable income and any disallowed interest may be carried forward indefinitely.
  • Eliminate the deduction allowed for Section 199 domestic manufacturing activities after 2018.
  • Disallow deductions for entertainment, amusement or recreation but retain 50% deduction for business related meals.

WFY will update you as the plan progresses into a bill.

Contact us at info@cpa-wfy.com to discuss how to maximize your 2017 tax benefits through comprehensive year-end tax planning.

House Tax Bill Outline Released

By Richard A. Huffman, CPA MST

Wright Ford Young & Co.

On the heels of the recently passed 2018 budget resolution that allows for tax legislation to increase the federal deficit by $1.5 trillion over 10 years the House Republican leaders released details of its tax overhaul plan. The key changes in the plan from the current law are as follows:

Individuals:

  • Current tax rates: Seven brackets from 10% to 39.6%.
  • Proposed tax rates: Four brackets at 12%, 25%, 35% and 39.6%.
  • Current standard deduction: $6,350 individuals and $12,700 married filing joint.
  • Proposed standard deduction: $12,000 individuals and $24,000 married filing joint.
  • Elimination of personal exemptions, worth $4,050 per person.
  • Increase child tax credit from $1,000 to $1,600 and add a $300 credit for non-child dependents.
  • Eliminate most itemized deductions, including state and local tax deductions (will keep charitable contributions deduction).
  • Limit itemized property tax deduction to $10,000.
  • Limit home mortgage interest on new loans up to $500,000 debt.
  • Repeal of the alternative minimum tax.
  • Double the exemption for the estate tax and repeal it after six years.

Businesses:

  • Small and family-owned business and flow through entity tax rate reduction
    • Current maximum tax rate 39.6%.
    • Proposed maximum tax rate 25%.
  • (Sole Proprietorships, Partnerships and S Corporations).
  • Current C Corporation tax rate 35%
  • Proposed C Corporation tax rate 20%.
  • Global minimum tax of 10% applied to income that American companies earn anywhere in the world.
  • Imposing a one-time 12% tax on accumulated foreign earnings, reduced to 5% for illiquid assets.
  • Allowing businesses to expense the cost of certain new property placed in service after September 27, 2017, and before January 1, 2023.

WFY will update you as the bill progresses through the expected many changes before it is slated for a vote and potential law.

Contact us at info@cpa-wfy.com to discuss how to maximize your 2017 tax benefits through comprehensive year-end tax planning.

The Pros and Cons of Becoming an ESOP

An ESOP is not the only way for employees to own a company, but it is by far the most common. Although the concept was almost unknown until 1974, by 2014, about 7,000 companies had ESOPs covering 13.5 million employees, according to the National Center for Employee Ownership, a nonprofit membership group that provides information and research on ESOPs.

An ESOP can work in a variety of ways. Employees can buy stock directly, be offered it as a bonus, receive stock options or obtain stock through a profit-sharing plan. Some employees become owners through worker cooperatives in which every staffer has an equal vote.

Many have the impression that ESOPs are just a last resort for troubled companies, but only a handful of ESOPs are set up for this purpose. They are most commonly used to provide a market for the shares of departing owners of successful closely held firms. Their purpose? To motivate and reward employees or to take advantage of incentives to borrow money for acquiring new assets in pretax dollars. In almost every case, ESOPs are a contribution to employees rather than an employee purchase.

Getting to the details

ESOPs are a kind of employee benefit plan, similar in some ways to a profit-sharing plan. In an ESOP, a company sets up a trust fund. Then, the firm contributes new shares of its own stock or cash to buy existing shares. The ESOP can borrow money to buy new or existing shares as the firm makes cash contributions to the plan, enabling it to repay the loan. So no matter how the plan acquires stock, company contributions to the trust are tax-deductible, within certain limits.

Shares in the trust are allocated to individual employee accounts. Although there are some exceptions, generally all full-time employees who are at least 21 participate in the plan. Allocations can be made based on pay. As employees accumulate seniority in the company, they acquire an increasing right to the shares in their accounts — known as vesting — but employees must be 100 percent vested in three to six years, whether vesting happens (by virtue of the plan rules) all at once or gradually.

When employees leave the company, they receive their stock — and then the company buys it back from them at fair market value unless there is a public market for the shares. In private firms, employees must be able to vote their allocated shares on major issues such as whether the firm should close or relocate. In public companies, employees must be able to vote regarding all issues.

Here are some of the tax benefits of ESOPs:

  • Contributions of stock are tax-deductible.
  • Cash contributions are deductible.
  • Contributions used to repay a loan the ESOP takes out to buy company shares are tax-deductible. ESOP financing is accomplished with pretax dollars.
  • Sellers of C corporations can get a tax deferral. Once an ESOP owns 30 percent of all the shares in the company, the seller can reinvest the proceeds in other securities and defer any tax on the gains.
  • In S corporations, the percentage of ownership held by the ESOP isn’t subject to income tax at the federal level, and often not at the state level either.
  • Dividends are tax-deductible.
  • Employees pay no tax on contributions to the ESOP, only on distributions of their accounts, and then at potentially favorable rates.

But there also are limits and drawbacks such as:

  • ESOPs are not allowed in partnerships or most professional corporations.
  • ESOPs can be used in S corporations, but don’t qualify for rollovers and have lower contribution limits.
  • Private companies must repurchase the shares of any departing employees, and this can become a major expense.

ESOPs can improve your company’s performance, but only if they are combined with opportunities for employees to participate in decisions affecting their work.

These are the basics. Provisions can be complicated and there are exceptions. You should work with a qualified professional to set one up and learn the details in advance. Give us a call or email a WFY advisor at info@cpa-wfy.com if you are interested in learning more about ESOP and for referral of specialist ESOP advisory firms.

© Copyright 2017. All rights reserved.