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

The Importance of Audit Readiness

By: Shannon Robinson, CPA- Senior Accountant

Timely audits are important for organizations.  Timely financial statements can help an organization plan for the coming year.  Timely financial statements will also allow organizations to make smarter budget and financial decisions.  Second, timely internal control reports and management letter comments can help organizations’ correct issues before they create bigger problems.  Auditors often have very helpful recommendations on how to correct various issues and save the organization time, money, and resources in the process.  

How does an organization receive a timely audit report? 

First, it is important to have everything reconciled and ready for the auditor as soon as possible after year end.  Auditors, like many others, schedule out their work or audits a few months out at a time.  If you are not ready when you are scheduled to be this can cause scheduling problems and make it hard for the auditor to complete your audit.  A few things are very important for the auditors to get starting planning for your audit.  Most auditors like to receive the following items a few weeks prior to their scheduled onsite audit work; a final trail balance, detail schedules, account reconciliations, and updated bank confirmations.  A final trial balance allows the auditor to see what kind of numbers they are working with and how they compare to prior years.  This allows them to determine what sections they need to detail test and how many testing selections they need to make.  Once auditors know how many selections they need to make they need detail reports that reconcile to the trial balance in order to make their selections.  If auditors are provided this information prior to coming on site they can make their testing selections and provide the selections to the organization ahead of time.  This way the organization can have the detail pulled when the auditors arrive onsite.  Lastly, it is important to let the auditor know if you opened any new bank accounts or took on any new debt during the year.  Most auditors will send confirmations to financial institutions to confirm the balances of the organization’s accounts at year end.  It takes several days to get these confirmations completed and mailed back to the auditor.  If the confirmations can be set up, signed, mailed, and returned prior to going onsite for the audit it will make the audit process go much faster.  If the organization doesn’t let the auditor know about new accounts and waits until they are onsite to provide the new information the auditor then has to wait another several days to send out and receive new confirmations thus adding a week or more to the audit completion date. 

Secondly, it is important to be available during the onsite work to answer any questions the auditors might have and to pull any additional information the auditors request while on site.  The more of the audit that can be completed while onsite the better.  It can be hard to audit by email and it is not efficient.  Again, if the organization is not ready when the auditor comes on site and the auditor has to finish the audit later it can be difficult to find the time to finish the audit.  As mentioned early auditor’s set up their schedules a few months out at a time.  Even though auditors have their schedules planned out they understand that things don’t always work out as planned.  It is best for auditors if you let them know as soon as you know you are not going to be ready or available during your scheduled onsite work dates.  If you don’t let us know we can’t re-work our schedules.  If we show up and the organization is not ready we often waste time that we could be working on another audit.  It is best for auditors if they can come on site and complete all the work necessary during that time.  If we leave with open items it makes our audit less efficient which can lead to higher fees for the organization.

Every organization has different closing processes.  Figure out which process works best for your organization and help improve the timeliness of your organization’s audit.  Hopefully, by improving your audit timeliness, you can improve the organization overall with timely financial statements and by timely implementing internal control recommendations.  Please reach out to H&M for help with all of your audit needs. 

H&M Welcomes New Senior Accountant

H&M is proud to announce that Jennifer M. Moore, CPA, JD has joined our team!

Jennifer has been working in public accounting since 2015. She received a B.S. in Finance from Ball State University before going on to Ohio Northern University Pettit College of Law where she earned her J.D. While at Ohio Northern, she was a member of the Law Review and her work was published, (Ohio Northern University Law Review: Volume 39, No. 3 State v. Dunn Ohio N.U.L.REV.1075 (2013).

Jennifer was admitted to the Ohio Bar in 2014 and earned her CPA in 2018. She is a member of the Ohio Society of CPAs and the American Institute of Certified Public Accountants. She is also active in the Columbus Young Professionals Club.

Jennifer grew up in Canton, Ohio. She was a member of the Women’s Softball Team at Ball State University. In her free time she enjoys being outdoors, running, hunting, and spending time with family and friends.

Welcome to the our team, Jennifer!

Tax strategies for accrual-basis businesses as the year winds down

The last month or so of the year offers accrual-basis taxpayers an opportunity to make some timely moves that might enable them to save money on their 2018 tax bills. The key to saving tax as an accrual-basis taxpayer is to properly record and recognize expenses that were incurred this year but won’t be paid until 2019. Doing so will enable you to deduct those expenses on your 2018 federal tax return.

Common examples of such expenses include commissions, salaries and wages; payroll taxes; advertising; and interest. Also look into expenses such as utilities, insurance and property taxes. You can also accelerate deductions into 2018 without paying for the expenses in 2018 by charging them on a credit card. (This works for cash-basis taxpayers, too.)

In addition, review all prepaid expense accounts and write off any items that have been used up before the end of the year. If you prepay insurance for a period beginning in 2018, you can expense the entire amount this year rather than spreading it between 2018 and 2019, as long as a proper method election is made. This is treated as a tax expense and thus won’t affect your internal financials.

There are many other strategies to explore. Review your outstanding receivables and write off any receivables you can establish as uncollectible. Pay interest on all shareholder loans to the company. Update your corporate record book to record decisions and be better prepared for an audit. Holbrook & Manter can provide further details on these and other year-end tax tips for accrual-basis businesses. Contact us today. 

The Tax Advantages of a 529 College Savings Plan

A topic often on the minds of parents (or grandparents) is college funding. One option, which can be especially beneficial if the children in question still have many years until heading off to college, is a Section 529 plan.

Tax-deferred compounding

529 plans are generally state-sponsored, and the savings-plan option offers the opportunity to potentially build up a significant college nest egg because of tax-deferred compounding. So, these plans can be particularly powerful if contributions begin when the child is young. Although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred. In addition, some states offer applicable state tax incentives.

Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, supplies, computer-related items and, generally, room and board) are income-tax-free for federal purposes and, in many cases, for state purposes as well. (The Tax Cuts and Jobs Act changes the definition of “qualifying expenses” to include not just postsecondary school costs, but also primary and secondary school expenses.)

Additional benefits

529 plans offer other benefits, too. They usually have high contribution limits and no income-based phaseouts to limit contributions. There’s generally no beneficiary age limit for contributions or distributions. And the owner can control the account — even after the child is a legal adult — as well as make tax-free rollovers to another qualifying family member.

Finally, 529 plans provide estate planning benefits: A special break for 529 plans allows you to front-load five years’ worth of annual gift tax exclusions, which means you can make up to a $75,000 contribution (or $150,000 if you split the gift with your spouse) in 2018. In the case of grandparents, this also can avoid generation-skipping transfer taxes.

Minimal minuses

One negative of a 529 plan is that your investment options are limited. Another is that you can make changes to your options only twice a year or if you change the beneficiary.

But whenever you make a new contribution, you can choose a different option for that contribution, no matter how many times you contribute during the year. Also, you can make a tax-free rollover to another 529 plan for the same child every 12 months.

More to learn

We’ve focused on 529 savings plans here; a prepaid tuition version of 529 plans is also available. If you’d like to learn more, contact Holbrook & Manter. 

A Valuation Can Strengthen Your Buy-Sell Agreement

A solid buy-sell agreement can help closely held businesses avoid disruptions when a shareholder leaves the business. Arguably, the most critical provisions in a buy-sell agreement are those that address valuation-related issues. Incomplete or outdated valuation provisions can lead to costly, bitter disputes that hurt both individual shareholders and the company.

Here are some business valuation issues to consider when drafting a buy-sell.

What’s the appropriate valuation method?

The valuation provision of a buy-sell agreement describes how a departing shareholder’s business interest will be priced for purchase by the company or the remaining shareholders. Three common methods of valuing an interest include:

1.      Prescribed formula. Some buy-sell agreements call for a simple formula to establish the amount of the buyout. For example, a buy-sell might specify that “shares will be purchased at four times earnings before interest and taxes (EBIT) for the previous 12 months.” Usually, a valuation professional will suggest an initial buyout formula.

A drawback to valuation formulas is that they typically apply to historical financial results (not projected results) and may not reflect a business’s current value in today’s marketplace. Moreover, it’s difficult to account in a formula for all factors that can affect earnings in any given year — including discretionary, unusual or one-off expenses.

Earnings-based formulas also may be subject to misinterpretation or manipulation. For instance, shareholders might over- or understate expenses in anticipation of a buyout. Or they may disagree about what’s included in (or excluded from) “earnings.”

2.      Fixed price. An agreement also might specify a fixed price reached through negotiation by the shareholders, often with the input of a business valuation expert. This approach fosters collaboration and discussion among shareholders at a time when they aren’t yet facing a triggering event.

Like a formula, the main appeal of a fixed price often is its perceived simplicity. But a fixed price may not reflect the business’s value at the time of a triggering event. And both formulas and fixed prices might require periodic adjustments due to external factors (such as the recent Tax Cuts and Jobs Act) that can affect a company’s value and capital structure in ways not contemplated when the agreement was drafted.

3.      Outside opinion from a business valuation professional. Alternatively, a buy-sell agreement could call for an agreed-upon process, usually a formal business valuation, to guide the buyout when a triggering event happens. Objective, timely business valuations are likely to take into consideration current circumstances, thereby producing more meaningful results.

The agreement might provide for the retention of a joint valuation expert or require that both sides hire their own experts. In the latter situation, a third expert might be needed if the experts’ opinions don’t fall within a certain range of each other. The buy-sell agreement should specify who’s required to pay the valuation fees (the buyer, the seller or the company).

What are the valuation parameters?

Other relevant parameters to consider in the valuation provision of a buy-sell agreement include the appropriate level and standard of value, as well as the valuation date.

There are basically three “levels” of value: 1) minority, marketable, 2) minority, nonmarketable, and 3) controlling. In turn, these levels can affect the methods, assumptions and adjustments the expert uses — and, therefore, the final value.

For example, if an expert uses publicly traded (minority, marketable) stock prices to value a private business interest on a minority, nonmarketable level, it may be appropriate to apply a discount to reflect the time and effort required to sell private stock vs. an actively traded stock. Conversely, if valuing a controlling interest, the expert might apply a control premium or make adjustments that only a controlling owner could do to optimize the company’s earnings.

Likewise, the buy-sell agreement should specifically define the “standard” of value to prevent disputes during the buyout process. A business valuation expert can provide definitions for a variety of relevant standards, including fair market value, fair value, book value and investment value. Different triggering events or departing shareholders may require different levels or standards of value.

It’s also critical to specify the valuation date in advance. After all, a business’s value can change overnight. Using the date of the triggering event could prompt shareholders to time their departures to maximize their buyouts. It could also create financial reporting headaches if the buyout happens in the middle of the reporting period. So, many owners opt to value the interest “as of” the last day of the most recent fiscal year.

Choose wisely

When creating or reviewing a buy-sell agreement, there are no one-size-fits-all valuation provisions. The right choice depends on the shareholders’ objectives — and what’s right today might not be the right choice tomorrow. Contact us today for assistance with this matter. We would be happy to assist you. 

Proper SOX Planning

By: David J. Gruber, CPA- Director of Risk Advisory Services

The Sarbanes-Oxley Act of 2002 (often shortened to SOX ) is legislation passed by the U.S. Congress to protect shareholders and the general public from accounting errors and fraudulent practice on the enterprise, as well as improve the accuracy of corporate disclosures.  Section 404 of Sarbanes-Oxley mandates public companies to issue an internal control report that contains management’s assertions regarding the effectiveness of the company’s internal control structure and procedures over financial reporting.  The steps leading to the company’s assessment can include:

· Documenting the company’s processes through narratives, flowcharts, and / or matrices

·  Identifying and documenting the key controls present to prevent financial statement errors

·  Evaluating the design of the key controls

·  Perform testing on the effectiveness of the key controls

·   Evaluating the results of the testing

Proper planning for Sox projects is the key to making them run smoothly and efficiently. This compliance work of documenting and testing the internal control structure can be an arduous task, and can be very time consuming for both the client and the SOX service provider.   Proper planning can ease the pain of of this work and help avoid any unnecessary bumps in the road.

Keys to proper planning:

·  Effective communication is often a key element in the proper planning and successful completion of a project.  Communication of the plan up-front, including timing and expectations, as well as ongoing communication of the progress during the project are essential to keep the project on track.

·   Well in advance of starting the project, hold a detailed planning meeting with all key personnel covering various topics such as:  changes in the business that could have an effect on the control environment (i.e. change in major customers, major acquisitions, etc.), changes in key personnel, discussion of the company’s risk assessment (have this document updated with the latest financial information prior to this meeting to allow for analysis), and changes in scope.

·   Plan the fieldwork around the work load of the client – avoid being on-site during the busiest times for the client, such as, month-end close, quarter-end filing deadlines, etc.

·   Properly plan the staffing of the project – ensure knowledgeable well-trained staff are ready and available to meet the client’s needs (i.e. plan for success and succeed in meeting the plan).

·   Do the little things well that will ensure the proper completion of the project with as little disruption to the client as possible.  One good example of this – during fieldwork, compile a list of questions / issues to discuss with client personnel and go over them all at once, instead of interrupting the client multiple times for each individual question.  Another example is to coordinate sample selections between the Sox service provider and the external auditor to minimize management and staff time in pulling information and answering information.

In short, proper planning can help your SOX project run as smoothly as possible to the benefit of all parties involved. Contact me directly for assistance with your planning and your SOX project. Shoot me an email now at DGruber@HolbrookManter.com or call me at 614.494.5300

Are you prepared to detect fraud?

By: Denise Smith, CPA, CGMA- Senior Accountant

How prepared are you and your company to detect fraud?  Fraud is defined as wrongful or criminal deception intended to result in financial or personal gain. Even if you have policies, procedures and programs to prevent or detect fraud, unfortunately you may still fall victim to fraud.  You and your personnel can be prepared to find and detect fraud by being aware of behaviors and signs.   

The Association of Certified Fraud Examiners publishes a report annually that lists, among other things – behavioral red flags that may indicate that someone is perpetrating a fraud:

·         Living beyond their means

·         Having financial difficulties

·         Having an unusually close relationship with a vendor or customer

·         Control Issues, unwillingness to share duties

·         Having a “wheeler-dealer attitude”

·         Going through a divorce or family problems

·         Irritability, suspiciousness or defensiveness

·         Addiction problems

·         Complaining of inadequate pay

·         Past employment related problems

·         Refusal to take vacations

·         Excessive pressure from within the organization

·         Social isolation

·         Complaining about lack of authority

·         Excessive family or peer pressure for success

·         Instability in life circumstances

·         Past legal problems

Other situations which may warrant looking further:

·         Missing documentation.  Do you have a hard time locating invoices or checks, etc.?

·         Do you have a large number of void checks or sales transactions? It is easy to make a mistake and need to void a transaction or check, but if you are seeing this on a regular basis – it may be time to ask a few questions.

·         Have you seen a large increase in purchasing or invoices being paid without a corresponding increase in sales?

·         Have you seen any duplicate payments to vendors?  If so, are you sure that all refunds have been deposited back to the company?

·         If you have a threshold for signatures on a check, are you seeing many checks falling just below this amount?

·         Are you receiving multiple complaints from customers about receiving statements for amounts that are not owed? It may be time to check up on some of these complaints.

Contrary to what you may believe, an audit, review or compilation of your financial statements by a CPA firm cannot be relied on to detect fraud.  That does not mean, however, that you cannot keep an eye on the red flags listed above, and give Holbrook and Manter a call to find out if we have some suggestions for tightening your internal controls or new procedures to try to detect fraud.

Self-Employment Taxes & Spouse-Owned Businesses

If you own a profitable, unincorporated business with your spouse, you probably find the high self-employment (SE) tax bills burdensome. An unincorporated business in which both spouses are active is typically treated by the IRS as a partnership owned 50/50 by the spouses. (For simplicity, when we refer to “partnerships,” we’ll include in our definition limited liability companies that are treated as partnerships for federal tax purposes.)

For 2018, that means you’ll each pay the maximum 15.3% SE tax rate on the first $128,400 of your respective shares of net SE income from the business. Those bills can mount up if your business is profitable. To illustrate: Suppose your business generates $250,000 of net SE income in 2018. Each of you will owe $19,125 ($125,000 × 15.3%), for a combined total of $38,250. Fortunately, there may be ways your spouse-owned business can lower your combined SE tax hit.

Divorce yourself from the concept

While the IRS creates the impression that involvement by both spouses in an unincorporated business automatically creates a partnership for federal tax purposes, in many cases it will have a tough time making the argument — especially when the spouses have no discernible partnership agreement and the business hasn’t been represented as a partnership to third parties (such as banks and customers).

If you can establish that your business is a sole proprietorship (or a single-member LLC treated as a sole proprietorship for tax purposes), only the spouse who is considered the proprietor owes SE tax. So, let’s assume the same facts as in the previous example, except that your business is a sole proprietorship operated by one spouse. Now you have to calculate SE tax for only that spouse. For 2018, the SE tax bill is $23,172 [($128,400 × 15.3%) + ($121,600 × 2.9% Medicare tax)]. That’s much less than the combined SE tax bill from the first example ($38,250).

Show a lopsided ownership percentage

Even if you do have a spouse-owned partnership, it’s not a given that it’s a 50/50 one. Your business might more properly be characterized as owned, say, 80% by one spouse and 20% by the other spouse, because one spouse does much more work than the other.

Let’s assume the same facts as in the first example, except that your business is an 80/20 spouse-owned partnership. In this scenario, the 80% spouse has net SE income of $200,000, and the 20% spouse has net SE income of $50,000. For 2018, the SE tax bill for the 80% spouse is $21,722 [($128,400 × 15.3%) + ($71,600 × 2.9%)], and the SE tax bill for the 20% spouse is $7,650 ($50,000 × 15.3%). The combined total SE tax bill is only $29,372 ($21,722 + $7,650).

Explore all strategies

More-complicated strategies are also available if this plan does not fit your needs. Contact Holbrook & Manter to learn more about how you can reduce your spouse-owned business’s SE taxes.

Thousands of Ohio BWC rebate checks remain uncashed & are set to expire

Deadlines for Ohio employers to cash rebate checks issued by the Ohio Bureau of Workers’ Compensation are fast approaching. October is the month to make sure you get a hold of the funds owed to you as a part of $1.5 billion rebate issued by the BWC this summer.  The BWC began issuing the checks in late June and continued to do so throughout July, with the checks expiring at the 90 day mark. The Ohio Society of CPAs shares the following detailed information:

More than 5,500 rebate checks issued to Ohio employers by the Ohio Bureau of Workers’ Compensation remain uncashed.  The checks total $10.8 million and will expire in October, as part of a $1.5 billion rebate earlier this year. There are 44 outstanding checks expiring Oct. 3, worth $143,241, BWC said. On Friday, Oct. 12, 665 checks worth more than $2.2 million will expire, followed by 782 checks worth more than $1.5 million on Tuesday, Oct. 16; 1,291 checks worth more than $2.4 million on Thursday, Oct. 18; 1,611 checks worth more than $3 million on Monday, Oct. 22; and 1,154 checks worth more than $1.5 million on Wednesday, Oct. 24.

Should you miss your deadline, the BWC says they will reissue the checks but will further delay your access to the rebates.  BWC Chief of Fiscal and Planning Barbara Ingram shared this quote on their website,  “Employers can spend their rebates as they choose, whether that means hiring new employees, growing their business or investing in safety. They just need to get those checks to the bank quickly so they can begin putting their rebates to good use.”

Read more about the rebate checks and the upcoming deadlines on the Ohio BWC website at this link: goo.gl/NCxjfT

 

 

The dangers of waiting to ask your accountant that important question

By: Linda Lehman, Senior Assistant Accountant

Your business is constantly evolving; and with that comes changes to business practices, along with laws & regulations.  Maybe it’s starting a new product or service, a change in ownership, or an employee with an unusual withholding.

You are busy, and may decide to handle the situation the best you can to get by for now.  “I’ll make a note and then ask Holbrook & Manter about it at tax time.  I don’t want to spend the time or money on it right now”. 

Without realizing it, a year or more could pass between the time of the event in question, and meeting with us to prepare your return.  In that time frame, you may have been consistently mis-handling the issue for quite a long period.  Meanwhile, important deadlines may have passed which could cause penalties or prevent you from qualifying for certain opportunities.  It also takes extra time (and money) to correct the issue back to the time of the initial event-if it’s possible to do so.  By not addressing the issue immediately it could negatively impact relationships with clients, vendors, or employees.

Consider this hypothetical scenario:

Client XYZ met with Holbrook & Manter staff members recently to finalize their 2017 tax return.  When asked for copies of W2s issued to employees, we were told the individuals were contractors, not on payroll and therefore had no taxes withheld.  Further discussion with XYZ determined the individuals were, in fact, employees as defined by the IRS.  At this point the individuals had been misclassified for over a year, and in all likelihood, had filed their personal returns for 2017 without the proper W2.

Holbrook & Manter was able to help correct the errors, but it was costly for the client – penalties & interest were assessed, not to mention the professional fees incurred.  It created conflicts with upset employees who may have had to amend their personal returns, and incur penalties & interest of their own. 

At one point during the process of correcting the various issues this created, the client commented that they wondered if they were handling these individuals correctly when first bringing them on board.  Had they taken a few minutes to ask our advice before heading down the wrong path, a lot of time, money, and aggravation would have been avoided.  

 The best time to ask a question, or obtain advice, is NOW!

 Take a few minutes to give us a call or send an email with your question.  We can advise you on the proper course of action so the issue is handled appropriately.