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

Deducting home equity interest under the Tax Cuts and Jobs Act

Passage of the Tax Cuts and Jobs Act (TCJA) in December 2017 has led to confusion over some longstanding deductions. In response, the IRS recently issued a statement clarifying that the interest on home equity loans, home equity lines of credit and second mortgages will, in many cases, remain deductible.

How it used to be

Under prior tax law, a taxpayer could deduct “qualified residence interest” on a loan of up to $1 million secured by a qualified residence, plus interest on a home equity loan (other than debt used to acquire a home) up to $100,000. The home equity debt couldn’t exceed the fair market value of the home reduced by the debt used to acquire the home.

For tax purposes, a qualified residence is the taxpayer’s principal residence and a second residence, which can be a house, condominium, cooperative, mobile home, house trailer or boat. The principal residence is where the taxpayer resides most of the time; the second residence is any other residence the taxpayer owns and treats as a second home. Taxpayers aren’t required to use the second home during the year to claim the deduction. If the second home is rented to others, though, the taxpayer also must use it as a home during the year for the greater of 14 days or 10% of the number of days it’s rented.

In the past, interest on qualifying home equity debt was deductible regardless of how the loan proceeds were used. A taxpayer could, for example, use the proceeds to pay for medical bills, tuition, vacations, vehicles and other personal expenses and still claim the itemized interest deduction.

What’s deductible now

The TCJA limits the amount of the mortgage interest deduction for taxpayers who itemize through 2025. Beginning in 2018, for new home purchases, a taxpayer can deduct interest only on acquisition mortgage debt of $750,000.

On February 21, the IRS issued a release (IR 2018-32) explaining that the law suspends the deduction only for interest on home equity loans and lines of credit that aren’t used to buy, build or substantially improve the taxpayer’s home that secures the loan. In other words, the interest isn’t deductible if the loan proceeds are used for certain personal expenses, but it is deductible if the proceeds go toward, for example, a new roof on the home that secures the loan. The IRS further stated that the deduction limits apply to the combined amount of mortgage and home equity acquisition loans — home equity debt is no longer capped at $100,000 for purposes of the deduction.

Further clarifications

As a relatively comprehensive new tax law, the TCJA will likely be subject to a variety of clarifications before it settles in. Please contact Holbrook & Manter for help better understanding this provision or any other.

Death and Taxes

By: Linda Yutzy, Administrative Assistant

Most of us have heard the quote from Benjamin Franklin, “In this world, nothing is certain except death and taxes.”  It would be safe to say that no one enjoys paying taxes and not many really want to think about death either.  But, both require planning and thought.

For many of us, after the New Year rolls around, we make our resolutions and then promptly forget them.  The end of January comes and we receive our mail marked “Important Tax Document Enclosed” and realize that we need to get some documents together for our taxes to be prepared – that’s worse than going to the dentist!  And, while we should see our dentist regularly, we should also be proactive with our tax planning.  It is always a good idea to follow up with your tax preparer if your tax situation changes; you have a move, a new baby, a different, job, an inheritance, or other life altering event. 

If none of the above situations apply to you, it is still a good idea to be organized and ready for the tax preparation.  Don’t wait until April 1st to get your tax information together.  Keep a file folder ready for any tax documents that arrive.  It is a good idea to make up a folder at the beginning of a new year and put any tax related documents in that folder as you receive them.  Did you make a donation to Goodwill?  Put your receipt and the amount donated in the folder.  Did you sell or buy a new home?  Make copies of the settlement statements and put them in the folder.  Simple things like that can make getting ready for the accountant so much simpler.

Preparing for taxes is not usually greeted with warm, fuzzy feelings and neither is preparing for death.  Hopefully, it will not happen for a very long time, but all of us still need to prepare for it – young or old, married or single.  We do not want our families and loved ones to be overly burdened with our passing.  It is difficult to deal with the loss and the gaping hole that is left, but to be completely unprepared compounds the grief and the loss for those left behind.  Below are some suggestions to get started in the process of getting prepared:

·         Write a Last Will and Testament – it does not have to be fancy or minutely detailed, but at least get a basic will in place.  There are templates that can be found online that can be used to prepare a legal will.  It is a good idea to check on the legal requirements for a will in your state.

·         Designate a Power of Attorney – choose someone you trust to be a power of attorney just in case you are unable to sign important documents.  The POA does not have to be a family member or close friend.  Sometimes a trusted advisor is a great option – notice the emphasis on trust!

·         Prepare a Living Will and designate a Medical Power of Attorney – again, choose someone you trust to make decisions you would want to have made when you no longer can make them.  Discuss with the MPOA your wishes and the decisions you would want to have made, too.

·         Keep a master file of where important papers are located – insurance policies, mortgages, wills, trusts, Healthcare power of attorney, etc.  Include in that list your bank accounts and safe deposit box if you have one, your broker and broker accounts, your CPA, your attorney, your financial planner, etc.  Let your POA or relatives know where this file is located.

·         Outline your funeral or memorial service – if there are certain things you want, make them known.

·         Keep a list of your online presence – keep logins and passwords saved where a trusted family member or friend can find them.

All of these items can be updated as needed.  As your family grows, your last will and testament will most likely change.  You may consider setting up a trust to see to the needs or your family.  There are so many options!  If you have questions on how to get started and what to do, contact our office.  We would be happy to assist you!

Holbrook & Manter Nominated for “Best of Business” Award

Holbrook & Manter is proud to once again be a finalist for a Columbus CEO Magazine “Best of Business” award. Voting for the 2018 poll is now open.

We are nominated in the “Best Accounting Firm” category (less than 20 CPAs). You will find this under the “financial” section of the voting ballot. We were honored to be named the winner in this category in 2015.

The ballot can be accessed at http://www.columbusceo.com/ and voting is open through July 27, 2018.

Our team values and appreciates all the hard work each of us provides to support each other, and most importantly, our clients. We also value and encourage supporting all businesses in the region. Vote now for all of your favorites!

Voting only takes a moment. We appreciate your support.



Common Types of IRS Tax Penalties

Around this time of year, many people have filed and forgotten about their 2017 tax returns. But you could get an abrupt reminder in the form of an IRS penalty. Here are three common types and how you might seek relief:

1.      Failure-to-file and failure-to-pay. The IRS will consider any reason that establishes that you were unable to meet your federal tax obligations despite using “all ordinary business care and prudence” to do so. Frequently cited reasons include fire, casualty, natural disaster or other disturbances. The agency may also accept death, serious illness, incapacitation or unavoidable absence of the taxpayer or an immediate family member.

If you don’t have a good reason for filing or paying late, you may be able to apply for a first-time penalty abatement (FTA) waiver. To qualify for relief, you must have: 1) received no penalties (other than estimated tax penalties) for the three tax years preceding the tax year in which you received a penalty, 2) filed all required returns or filed a valid extension of time to file, and 3) paid, or arranged to pay, any tax due. Despite the expression “first-time,” you can receive FTA relief more than once, so long as at least three years have elapsed.

2.      Estimated tax miscalculation. It’s possible, but unlikely, to obtain relief from estimated tax penalties on grounds of casualty, disaster or other unusual circumstances. You’re more likely to get these penalties abated if you can prove that the IRS made an error, such as crediting a payment to the wrong tax period, or that calculating the penalty using a different method (such as the annualized income installment method) would reduce or eliminate the penalty.

3.      Tax-filing inaccuracy. These penalties may be imposed, for example, if the IRS finds that your return was prepared negligently or that there’s a substantial understatement of tax. You can obtain relief from these penalties if you can demonstrate that you properly disclosed your tax position in your return and that you had a reasonable basis for taking that position.

Generally, you have a reasonable basis if your chances of withstanding an IRS challenge are greater than 50%. Reliance on a competent tax advisor greatly improves your odds of obtaining penalty relief. Other possible grounds for relief include computational errors and reliance on an inaccurate W-2, 1099 or other information statement. Reach out to Holbrook & Manter for assistance with these matters. We are ready and willing to help. 

The risks of naming a minor as the beneficiary of your life insurance policy or retirement plan

A common estate planning mistake is to designate a minor as beneficiary — or contingent beneficiary — of a life insurance policy or retirement plan. While making your young child the beneficiary of such assets may seem like an excellent way to provide for him or her in the case of your untimely death, doing so can have significant undesirable consequences.

Not per your wishes

The first problem with designating a minor as a beneficiary is that insurance companies and financial institutions generally won’t pay large sums of money directly to a minor. What they’ll typically do in such situations is require costly court proceedings to appoint a guardian to manage the child’s inheritance. And there’s no guarantee the guardian will be someone you’d choose.

For example, let’s suppose you’re divorcing your spouse and you’ve appointed your minor children as beneficiaries. If you die while the children are still minors, a guardian for the assets will be required. The court will likely appoint their living parent — your ex-spouse — which may be inconsistent with your wishes.

Age of majority

There’s another problem with naming a minor as a beneficiary: The funds will have to be turned over to the child after he or she reaches the age of majority (18 or 21, depending on state law). Generally, that isn’t the ideal age for a child to gain unrestricted access to large sums of money.

A better strategy

Instead of naming your minor child as beneficiary of your life insurance policy or retirement plan, designate one or more trusts as beneficiaries. Then make your child a beneficiary of the trust(s). This approach provides several advantages. It:

  • Avoids the need for guardianship proceedings,
  • Gives you the opportunity to select the trustee who’ll be responsible for managing the assets, and
  • Allows you to determine when the child will receive the funds and under what circumstances.

If you’re unsure of whom to name as beneficiary of your life insurance policy or retirement plan or would like to learn about more ways to provide for your minor children, please contact us. Your accountant is an important player in your estate planning, we would be happy to assist you.

Be Flexible about Changing M&A Objectives

Sometimes an M&A deal ends up not only in a different place from where it started, but in a different guise. Whether it’s due to shifting market conditions or other unforeseen factors, a buyer’s acquisition strategy may change during the course of deal negotiations. For example, a transaction initially intended as a full company sale might become a division spinoff or strategic partnership. The key to success when objectives change is for deal parties to remain flexible.

Evolutions happen

What makes a prospective buyer change its acquisition objectives midstream? Due diligence might reveal that the selling business, which seemed like an ideal fit, would in fact be difficult to integrate. Or a seller may have more debt obligations or unprofitable product lines than its potential buyer realized.

In many cases, such issues can be worked out before or after the deal closes. But it may make more sense to recalibrate the deal — particularly if the buyer is primarily interested in one particular division. In that case, a spinoff of that division might be in everyone’s best interests. The buyer would pay only for a unit that suits its strategic model and the seller would receive a cash infusion and retain its core business.

When partnerships make sense

Here’s another scenario: After initial discussions with a buyer about a full sale, a seller gets cold feet or simply prefers a slower integration. So it proposes a strategic partnership instead of an acquisition. Forming such a partnership can provide a structure for potential buyers and sellers to learn how to work together. The two may share common principles, such as administrative resources or raw materials. More important, their collaboration enables them to work out any cultural integration issues.

Strategic partnership agreements often contain a clause allowing the buyer to make an ownership bid after a specified period of time. Agreements can also be informal and allow the relationship to evolve and possibly dissolve at a certain point.

Trouble coming up with the funds to make an acquisition also occasionally forces buyers to recalibrate. If the financing it needs isn’t available, a buyer might take a minority stake in a company as part of a longer-term acquisition bid.

Scaling up

Changing objectives don’t always result in a more limited deal. In some cases, buyers and sellers discover during early discussions that there’s more potential value in a transaction than they thought. What originally was intended to be a partial acquisition or a strategic partnership may become a full sale.

If this occurs, the parties may need to restart the deal, either because the buyer has to secure additional financing or the seller needs its board’s approval to make a full sale. But if the price is right and the value proposition is clear, such obstacles usually aren’t difficult to overcome.

Greater good

Although M&A transactions with clear, unchanging objectives often close faster and with less hassle, they aren’t always possible. Both buyers and sellers can benefit by entering into negotiations with an open mind. That way, if issues arise, the participants will have the flexibility to make the best deal — regardless of how much it differs from their original conception. H&M is skilled at assisting those navigating through M&A deals. Contact us today for more information and for help with your next deal. 

The Changing Face of Personal Exemptions and the Standard Deduction

Personal tax exemptions and the standard deduction have looked largely the same for quite some time. But, in light of the Tax Cuts and Jobs Act (TCJA) passed late last year, many individual taxpayers may find themselves confused by the changing face of these tax-planning elements. Here are some clarifications.

For 2017, taxpayers can claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. If they choose not to itemize, they can take a standard deduction based on their filing status: $6,350 for singles and separate filers, $9,350 for head of household filers, and $12,700 for married couples filing jointly.

For 2018 through 2025, the TCJA suspends personal exemptions but roughly doubles the standard deduction amounts to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. The standard deduction amounts will be adjusted for inflation beginning in 2019.

For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps even provide some additional tax savings. But for those with many dependents or who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from family tax credits. Please remember that tax planning is a year-round, on-going exercise. Contact us today for more information. 

The Importance of Bank Reconciliations

By: Andrew Roffe, Staff Accountant

We are often asked what a bank reconciliation is and if we perform them. The answer is yes, we do and more information about what this practice entails is the topic of this blog.

Bank reconciliation… or a “Bank Rec” as you may hear it referred to…  is the practice of comparing your company records against bank records. Bank reconciliations are used to check for any variances between the two sets of records. It is normal to have minor variances between the company records and a bank’s record, which is usually caused by timing, bounced checks, checks in transit, and accounting errors. A reconciliation should easily explain these minor variances.

Bank reconciliations are also a key aspect of an internal control system and are necessary in preventing and detecting fraud. A proper internal control system will have multiple people in the accounting department involved in the cash cycles to create a segregation of duties. The person who performs the reconciliations should not be the same person that records the transactions in the accounting records or processes cash disbursements or receipts.

If your company undergoes an audit, the auditors will examine the company’s ending bank reconciliation as part of their testing procedures. The reconciliation offers a verification of the accuracy and completeness of the accounting records of the business.

Bank reconciliations are recommended to be performed at least monthly but may be performed more frequently. It may be necessary for a company running on minimal cash reserves to perform multiple bank reconciliations in a month. An organization may perform daily reconciliations if they suspect that someone is committing fraud.

For more information about bank reconciliations or internal controls, reach out to us today. We would be happy to assist you.

Fixing a Broken Trust

An irrevocable trust has long been a key component of many estate plans. But what if it no longer serves your purposes? Is it too late to change it? Depending on applicable state law, you may have options to fix a “broken” trust.

How trusts break

There are several reasons a trust can break, including:

Changing circumstances. A trust that works just fine when it’s established may no longer achieve its original goals if your family circumstances change.

New tax laws. Many trusts were created when gift, estate and generation-skipping transfer (GST) tax exemption amounts were relatively low. Today, however, the exemptions have risen to $11.18 million, so trusts designed to minimize gift, estate and GST taxes may no longer be necessary. And with transfer taxes out of the picture, the higher income taxes often associated with these trusts — previously overshadowed by transfer tax concerns — become a more important factor.

Mistakes. Potential errors include naming the wrong beneficiary, omitting a critical clause from the trust document, including a clause that’s inconsistent with your intent, and failing to allocate your GST tax exemption properly.

How to fix them

If you have one or more trusts in need of repair, you may have several tools at your disposal, depending on applicable law in the state where you live and, if different, in the state where the trust is located. Potential tools include:

Reformation. The Uniform Trust Code (UTC), adopted in more than half the states, provides several tools for fixing broken trusts. Non-UTC states may provide similar options. Reformation allows you to ask a court to rewrite a trust’s terms to conform with the grantor’s intent. This tool is available if the trust’s original terms were based on a legal or factual mistake.

Modification. This tool may be available, also through court proceedings, if unanticipated circumstances require changes in order to achieve the trust’s purposes. Some states permit modification — even if it’s inconsistent with the trust’s purposes — with the consent of the grantor and all the beneficiaries.

Relocation. In some cases, it may be possible to fix a broken trust by changing its situs — that is, by moving it to a jurisdiction whose laws are more favorable. The UTC may allow a trustee to relocate a trust to an appropriate jurisdiction if doing so would be in the beneficiaries’ best interests.

The rules regarding modification of irrevocable trusts are complex and vary dramatically from state to state. And there are risks associated with revising or moving a trust, including uncertainty over how the IRS will view the changes. Before you make any changes, consult with us to discuss the potential benefits and risks.

Is your Business Working – Or is it Working You?

By: Jennie Schott, Audit & Assurance Services Staff

No matter the size of your business venture, Holbrook & Manter is committed to helping you stay focused, passionate and compliant so you can be successful. According to the United States Small Business Administration, roughly twenty-percent of small businesses fail within the first year of inception, half fail within the first five years, and only one-third are still standing after the ten-year mark. It is widely known that – generally speaking – entrepreneurs are some of the most passionate, hard-working, innovative, and driven people in America. So, why has it become such a challenge for so many entrepreneurs to keep their businesses going?

Many entrepreneurs start with the passion, or idea, for a product or a service. Pairing passion with the drive to become a self-led boss, fix a societal problem, or a combination of things, can make a young entrepreneur feel confident enough to transition their concept into a business venture. While drive and passion are highly valuable attributes in the small business equation, the assumptions that (a) one person can do it with little assistance or knowledge outside of their own, and (b) mastering the execution of a product or service will be the hardest part of starting the business, are common pitfalls for young entrepreneurs.

“What kind of compliance rules and regulations am I supposed to be adhering to?”, or, “What kind of accounting software will I use?”, or, “How will I ensure I have enough cash flows to keep my business running – and how will I know how much cash I will need?” are most likely not the first few questions a new entrepreneur asks when pulling together the initial pieces of a start-up. Unfortunately, these can be some of the most detrimental oversights if small business owners do not seek the appropriate guidance during the life of their small business. Lack of planning for the right things can make a business owner over-worked, leading to frustration and turning the thing that was once a passion into a burden. The phrase ‘it takes an Army’ is no exception when it comes to running a successful small business – and that is where H&M comes in.

At Holbrook & Manter, CPAs, we offer a wide-range of business services, and have helped to promote long-term financial growth for our diverse client-base for almost 100 years. With the combination of the various backgrounds present in the leadership of our firm partnered with the longevity of many of our clients, we know what it takes to keep a small business on its feet.

From Start-Up and Business Planning consulting services, to becoming your business’s outsourced Accounting Department, our Business Services and Solutions Team can contribute the financial expertise, guidance and tools your business needs. Our Audit and Assurance team also offers a variety of consulting services, and can assist you and your business with ratio analysis, compilations of financial data, and different levels of Review and Audit services that may be required by third-party debt issuers and/or regulatory authorities. The services our teams can provide will help to ensure that your business is not only in compliance, but also determine the profitability of the business today, and in the future. Our hope is to be able to give small business owners the freedom and confidence to be actively involved in the pieces of the business that they are truly passionate about.