We believe in creating a strong working relationship with our clients to determine their specific accounting and compliance needs.

Manufacturers and Accounting Software

By: Danielle Cottle, CPA, CGMA- Manager

Holbrook & Manter’s Team is proficient in a number of accounting software. We can assist your manufacturing business no matter what platform you choose to use. QuickBooks products continue to be popular among business owners. QuickBooks offers several versions of their product on both desktop software and online platforms. While the desktop versions of Premier and Enterprise are customized to several industries, we have seen an uptick in use of the products with manufacturers.

There are many reasons why our clients in the manufacturing industry enjoy using QuickBooks. Some of them include:

·         They can manage inventory (by location, unit of measure, serial number, etc.)

·         They can track inventory by using a mobile inventory barcode scanner.

·         They can print a physical inventory worksheet to use for month end or annual count.

·         They can create assemblies from individual components to finished goods

·         They can view stock status reports to see which items need reordered and set up automatic reorder points

·         The business owner can track customer orders from estimate to final invoice

·         They enjoy creating customizable reports to see revenue and costs by job

·         They can review the profitability by product report to see which products are the most profitable.

·         The software is easy to set up and use while keeping costs down.

If the QuickBooks products aren’t robust enough for your manufacturing and inventory needs, several of our clients work with third-party software’s that integrate with QuickBooks to give them the full functionality and reporting needed. No matter what route you take, our team would love to partner with you as you select software that best fits your needs. Contact us today for more information.

H&M Celebrates Manufacturing Day

By: Molly Pensyl, Marketing & Business Development Manager

Today is Manufacturing Day, something our firm always celebrates each year. We are fortunate enough to partner with a number of manufacturers to assist them with accounting and management advisory services. Serving manufacturing clients has been a part of our firm’s fabric for decades.

Manufacturing Day is produced by the National Association of Manufacturers. It is held each year on the first Friday in October to celebrate modern manufacturing. The day is meant to inspire the next generation of those to enter the industry.

A few of our team members who frequently service H&M manufacturing clients answered some questions about the industry in honor of MFG Day.

What makes working with manufacturers enjoyable for your?

William Bauder: I enjoy working with our manufacturing clients because, personally, I enjoy watching the process of items being made.  I love to tour the plants and observe the process. 

Danille Cottle: Being able to see the manufacturing process happen by taking a tour of our client’s facilities is exciting to watch. All of the parts, labor and automation used in the process are unique for each client and I enjoy seeing the process through from start to finish.

Stephen Smith: I simply enjoy the whole process and have a great deal of respect for the industry. I am always amazed whenever I visit/tour our manufacturing clients and witness how they achieve all that they do. The ingenuity, ownership of the process, passion for the product, as well as pride of deliverable is always front and center.  I think people would be surprised to see the amount of hours and dedication put into the final product they are creating and it always shows.

What is one thing about the manufacturing business that you have encountered that you think others would be surprised to know?

William Bauder: Often times we are working with local manufacturers, but, it is important to remember that their customers and their competition are often global in nature.  Not only are our clients worried about other manufacturers in the US undercutting prices or competing for the same skilled labor, but, so is the international market.

Danielle Cottle: I think people would be surprised to see the amount of hours and dedication put into the final product they are creating and it always shows!

Stephen Smith: Manufacturing is the backbone of American business, which holds true here in Ohio and especially in our region. It is ever changing and evolving and many aren’t aware of the new raw materials being invented, new ways of doing things that are being developed and the automation and robotics being used to drive efficiencies. The production process in-between the inputs and product outputs is continuously changing for the better.

H&M looks forward to many more years of working with those in manufacturing and joins with everyone in the industry celebrating today. To learn more about MFG Day, visit the official website here: www.mfgday.com

       Danielle Cottle

      William Bauder

      Stephen Smith

 

 

 

The Tax Consequences of Selling the Wrong Block of the Same Stock

By: Mark Rhea, J.D.- Senior Assistant Accountant

Many people have a favorite stock or stocks that they accumulate of over time in multiple blocks. Whatever the stock that is bought, it is important for the owner to have a selling strategy in place if they plan to sell only some of the same stock that they have accumulated.

The IRS assumes by Federal Regulation that if a person sells a stock that they have bought on multiple occasions, the first stocks they purchased are the first ones to be sold. This is something known as the FIFO method (First-In-First-Out). See 26 CFR § 1.1012-1. While the FIFO method may be advantageous as it will most likely result in long term capital gains treatment at lower rates (for stocks held for more than one year), it may result an unnecessarily high long term capital gains tax bill.  Let me illustrate by example.

Bob purchased stock in XYZ Corporation in blocks of 1000 shares on two separate occasions.  The first block purchased on January 1, 2014 at $10.00 per share, resulting in a basis of $10,000 ($10.00 times 1000 shares). The second block of 1,000 shares is purchased on January 1, 2015 at $20.00 per share, resulting in a basis of $20,000 ($20.00 times 1,000 shares). On September 1, 2017, Bob decides that he wants to sell half of his stock because the value of the stock is now at $30.00 per share. Bob instructs his broker to sell 10,000 shares of his stock without specifying which block of stock that he wants to sell. By default under the FIFO method, the first block of 1000 shares purchase is sold resulting in gross proceeds of $30,000 ($30.00 times 1000 shares). For tax purposes, under the FIFO method, the basis of $10,000 for the first block of stock is subtracted from the gross proceeds of $30,000 for a $20,000 long term capital gain.  Assuming the highest long term capital gains tax rate of 20%, this results in a long term capital gains tax of $4000 (20% times $20,000). Had Bob contacted his broker and specifically directed them to sell his second block of 100 shares purchased at $20.00 per share ($20,000 basis), the amount of the long term capital gain would have been lower as the basis of the second block of stock was higher. In this case, the $20,000 basis is subtracted from the gross proceeds of $30,000 resulting in a long term capital gain of $10,000 Assuming again a 20% capital gains tax rate, this sale would only result in a long term capital gain tax of $2000 (20% times $10,000) compared to $4000.

If Bob wants to sell the second block of stock, not only does he need to specify to the broker that he wants the second block of stock sold, but the broker needs to confirm that specification in writing to Bob (See 26 CFR § 1.1012-1(c)(2) and (3)(i)).

For anyone to be prepared for the situation that Bob is in, it is important for them to be in contact with their broker to ensure that the proper procedures and documentation are done so that the desired block of stock is sold and resulting tax treatment are guaranteed. A broker should be able easily assist you and answer any questions you may have. As for tax planning, Holbrook & Manter will work with you to create a tax strategy that is advantageous to your needs.

Are you Subject to Underpayment Penalties?

By: Bryan Davidson, CPA- Tax Manager

Have you switched jobs in the past year?  Did you start a business?  Do you own interest in a pass-through entity? Did you reduce your withholding?  These are all scenarios that could result in underpayment penalties come next April.  The penalty is avoidable if any of the following tests are met.  They are:

1.       Small Balance Due. If after deducting your withholding from your total tax you owe less than $1,000 then there is no penalty applied.

2.       No Prior-year Tax. If you had no prior year tax liability and was a U.S. citizen or resident for the entire year then no penalty would apply for the next year.

3.       Exception 1 – Using Prior Year Tax.  If you paid through withholding and timely estimates 100% of your prior year tax then no penalty will be assessed.  If your AGI for the prior year was greater than $150,000 then 110% of your prior year tax must be paid in.

4.       Exception 2 – 90% of Current Year Tax.  If you paid through withholding and timely estimates 90% of your total current year tax then no penalties will be assessed.

5.       Exception 3 – Annualized Method.  If you paid through withholding and timely estimates 90% of your current year tax.  The total income for the year is broken down by year-to-date for each quarter and applied to estimates. 

All of these tests can be applied to a taxpayer and the one with the smallest penalty can be used.  These tests can also be used for planning.  If you know of a particular change in your income for the coming year and wish to owe little or no tax in April we can base estimates on that information.  The estimates and penalties are also based on quarterly due dates.  If your tax situation has changed since the prior year we can prepare estimates for the remainder of the year that will reduce your penalties.

Side Hustle or Hobby? Know the Difference

Nowadays, many professionals have a “side hustle”- the term is becoming main stream and as more and more people venture into this arena, it is important to know what makes your side gig legit and what keeps it classified as a hobby in the eyes of the IRS.

If you run a business on the side and derive most of your income from another source (whether from another business you own, employment or investments), you may face a peculiar risk: Under certain circumstances, this on-the-side business might not be a business at all in the eyes of the IRS.

Generally, a taxpayer can deduct losses from profit-motivated activities, either from other income in the same tax year or by carrying the loss back to a previous tax year or forward to a future tax year. But, to ensure some pursuits are really businesses — and not mere hobbies intended primarily to offset other income — the IRS enforces what are commonly referred to as the “hobby loss” rules.

For example, if you haven’t earned a profit from your business in three out of five consecutive years, you’ll bear the burden of proof to show that the enterprise isn’t merely a hobby. If a profit can be proven within this period, the burden falls on the IRS. In either case, the agency uses nine nonexclusive factors to determine whether the activity is a business or a hobby — including management expertise and time and effort dedicated.

If your enterprise is redefined as a hobby, there are many business deductions and credits that you won’t be eligible to claim. You may still write off certain expenses related to the hobby, but only to the extent of income the hobby generates. If you’re concerned about the hobby loss rules, Holbrook & Manter can help you evaluate your situation. Contact us today.

Separating Real Estate Assets from your Business

Many companies choose not to combine real estate and other assets into a single entity. Perhaps the business fears liability for injuries suffered on the property. Or legal liabilities encountered by the company could affect property ownership. But there are valid and potentially beneficial tax reasons for holding real estate in a separate entity as well.

Avoiding costly mistakes

Many businesses operate as C corporations so they can buy and hold real estate just as they do equipment, inventory and other assets. The expenses of owning the property are treated as ordinary expenses on the company’s income statement. However, when the real estate is sold, any profit is subject to double taxation: first at the corporate level and then at the owner’s individual level when a distribution is made. As a result, putting real estate in a C corporation can be a costly mistake.

If the real estate were held instead by the business owner(s) or in a pass-through entity, such as a limited liability company (LLC) or limited partnership, and then leased to the corporation, the profit upon a sale of the property would be taxed only once — at the individual level.

Maximizing tax benefits

The most straightforward and seemingly least expensive way for a business owner to maximize the tax benefits is to buy the property outright. However, this could transfer liabilities related to the property directly to the owner, putting other assets — including the business — at risk. In essence, it would negate part of the rationale for organizing the business as a corporation in the first place.

So it’s generally best to hold real estate in its own limited liability entity. The LLC is most often the vehicle of choice for this, but limited partnerships can accomplish the same ends if there are multiple owners. No matter which structure is used, though, make sure all entities are adequately insured.

Tailoring the right strategy

There are many complexities to a company owning real estate. And there’s no one-size-fits-all solution to protecting yourself legally while minimizing your tax liability. But if you do nothing and treat real estate like any other business asset, you could be exposing your business to substantial risk. So please contact our firm for an assessment of your situation. We can help tailor a strategy that’s right for you. Contact Holbrook & Manter today.

 

 

Crafting a Family Budget

We often discuss the importance of having a budget for any size business in other blogs on our sites. However, having a budget for your family is just as important. Here we share a few basic tips to get you started:

Simplicity is the key to a successful family budget. But every budget needs to cover all necessary items. To find the right balance, your budget should address two distinct facets of your family members’ lives: the near term and the long term.

In the near term, your budget should encompass the primary, day-to-day items that affect every family. First, housing: This is often the biggest expense in a family budget. And a budget shouldn’t include only mortgage or rent payments, but also expenses such as utilities, furnishings, maintenance and supplies.

Naturally, there are other items related to daily life for which you need to account. These include groceries, vehicle and transportation expenses, clothing, child care, insurance and out-of-pocket medical expenses. And you need to draw clear distinctions between fixed and discretionary spending.

Along with being a practical guide to family spending, a budget needs to address long-term goals. Naturally, some goals are further out than others. One of your longest-term objectives is probably to retire comfortably. So the budget should incorporate retirement plan contributions and other ways to meet this goal.

A relatively less long-term goal might be funding your children’s education. So, again, the budget should reflect this. And, as a long-term but “as soon as possible” objective, the budget needs to be structured to pay off debt and maintain a strong credit rating.

Only through careful planning and discussion can families build a budget that addresses both daily finances and long-term financial goals. To discuss your financial goals, contact us today.

Navigating Audit Time for Non-Profit Organizations

By: Jordan Matulevich, Staff Accountant

When audit time arrives for your non-profit organization, you will want to be as prepared as possible to ensure that the process runs as smooth as it can. Remember, an audit is intended to aid you in your mission as it reviews the financial condition of your operation. The results of your audit and the steps you take because of them can greatly improve your fiscal standing and allow you to reach the various goals you have for the future of your organization. Also, the audit process strengthens the confidence of your donors and solidifies your stance in regards to compliance.

H&M performs a number of audits each year and we are happy to offer a few top tips for non-profits as they embark on the audit process.

1.)    Documentation is key in all audit engagements. You won’t want spend time rushing around trying to gather all audit-related documentation when the time comes. Instill an organizational process that creates an organized and efficient audit trail makes providing documentation during audit time much easier. Try giving one staff member the on-going responsibility of maintaining the company’s records in an organized fashion. This will further the objective of having sufficient audit documentation when the time comes.

2.)    Spend some time researching the details around your specific audit framework. This will help elevate some confusion about the process and give you enough insight to feel fully prepared ahead of the start of the audit. The more you know about your audit framework, the more you will understand what is being done once auditors arrive on-site to begin working.

3.)    The goal of the auditor is to endure that your financial statements accurately reflect your current financial standing. To aide them in this process ahead of time, you should review financial records to make sure they line up with generally accepting accounting principles (GAAP). You can also look at how funds are flowing in and out of the door to make sure donor and grant money is being used as intended. Also take a look at your internal controls to make sure you are protecting your organization against fraud-related events.

4.)    An important on-going tip…keep in contact with your auditor when new opportunities and events arise for your organization. This will allow the auditor to assist you in accurately recording these elements in an effort to cut down on stress and questions while the audit is occurring.

5.)    Remember, your audit manager/partner maintains a constant wealth of knowledge in accounting, picking their brain about items you find difficult may result in streamlined processes. Don’t be afraid to ask questions.

For more information about preparing for your audit or for all of the services we provide to non-profit organizations, please contact us today. We would be happy to assist you.

Understanding the Differences Between Health Care Accounts

Tax-friendly ways to pay for health care expenses are very much in play for many people. The three primary players, so to speak, are Health Savings Accounts (HSAs), Flexible Spending Arrangements (FSAs) and Health Reimbursement Arrangements (HRAs).

All provide opportunities for tax-advantaged funding of health care expenses. But what’s the difference between these three types of accounts? Here’s an overview of each one:

HSAs. If you’re covered by a qualified high-deductible health plan (HDHP), you can contribute pretax income to an employer-sponsored HSA — or make deductible contributions to an HSA you set up yourself — up to $3,400 for self-only coverage and $6,750 for family coverage for 2017. Plus, if you’re age 55 or older, you may contribute an additional $1,000.

You own the account, which can bear interest or be invested, growing tax-deferred similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.

FSAs. Regardless of whether you have an HDHP, you can redirect pretax income to an employer-sponsored FSA up to an employer-determined limit — not to exceed $2,600 in 2017. The plan pays or reimburses you for qualified medical expenses.

What you don’t use by the plan year’s end, you generally lose — though your plan might allow you to roll over up to $500 to the next year. Or it might give you a 2½-month grace period to incur expenses to use up the previous year’s contribution. If you have an HSA, your FSA is limited to funding certain “permitted” expenses.

HRAs. An HRA is an employer-sponsored arrangement that reimburses you for medical expenses. Unlike an HSA, no HDHP is required. Unlike an FSA, any unused portion typically can be carried forward to the next year. And there’s no government-set limit on HRA contributions. But only your employer can contribute to an HRA; employees aren’t allowed to contribute.

Keep in mind that these plans could be affected by health care or tax legislation. Contact H&M  to discuss these and other ways to save taxes in relation to your health care expenses.

Moving Capital Gains to your Children

If you’re an investor looking to save tax dollars, your kids might be able to help you out. Giving appreciated stock or other investments to your children can minimize the impact of capital gains taxes.

For this strategy to work best, however, your child must not be subject to the “kiddie tax.” This tax applies your marginal rate to unearned income in excess of a specified threshold ($2,100 in 2017) received by your child who at the end of the tax year was either: 1) under 18, 2) 18 (but not older) and whose earned income didn’t exceed one-half of his or her own support for the year (excluding scholarships if a full-time student), or 3) a full-time student age 19 to 23 who had earned income that didn’t exceed half of his or her own support (excluding scholarships).

Here’s how it works: Say Bill, who’s in the top tax bracket, wants to help his daughter, Mary, buy a new car. Mary is 22 years old, just out of college, and currently looking for a job — and, for purposes of the example, won’t be considered a dependent for 2017.

Even if she finds a job soon, she’ll likely be in the 10% or 15% tax bracket this year. To finance the car, Bill plans to sell $20,000 of stock that he originally purchased for $2,000. If he sells the stock, he’ll have to pay $3,600 in capital gains tax (20% of $18,000), plus the 3.8% net investment income tax, leaving $15,716 for Mary. But if Bill gives the stock to Mary, she can sell it tax-free and use the entire $20,000 to buy a car. (The capital gains rate for the two lowest tax brackets is generally 0%. For assistance with this tax savings tactics and others, please contact Holbrook & Manter today.