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

Five Tips for Safe Intrafamily Loans

If a relative needs financial help, offering an intrafamily loan might seem like a good idea. But if not properly executed, such loans can carry substantial negative tax consequences — such as unexpected taxable income, gift tax or both. Here are five tips to consider:

1.      Create a paper trail. In general, to avoid undesirable tax consequences, one thing you’ll need to do is show that the loan was bona fide. Doing so should include documenting evidence of:

  •   The amount and terms of the debt,
  •   Interest charged,
  •   Fixed repayment schedules,
  •   Collateral,
  •   Demands for repayment, and
  •   The borrower’s solvency at the time of the loan and payments made.

Be sure to make your intentions clear — and help avoid loan-related misunderstandings — by documenting the loan and payments received, as well.

2.      Demonstrate an intention to collect. Even if you think you may eventually forgive the loan, ensure the borrower makes at least a few payments. By having some repayment history, you’ll make it harder for the IRS to argue that the loan was really an outright gift. And if a would-be borrower has no realistic chance of repaying a loan — don’t make it. If you’re audited, the IRS is sure to treat such a loan as a gift.

3.      Charge interest if the loan exceeds $10,000. If you lend more than $10,000 to a relative, charge at least the applicable federal interest rate (AFR). In any case, the interest on the loan will be taxable income to you. (If no or below-AFR interest is charged, taxable interest is calculated under the complicated below-market-rate loan rules.) However, if no or below-AFR interest is charged, all of the forgone interest over the term of the loan may have to be treated as a gift in the year the loan is made. This will increase your chances of having to use some of your lifetime exemption.

4.      Use the annual gift tax exclusion. If you want to, say, help your daughter buy a house but don’t want to use up any of your lifetime estate and gift tax exemption, make the loan, charge interest and then forgive the interest, the principal payments or both each year under the annual gift tax exclusion. For 2016, you can forgive up to $14,000 per borrower ($28,000 if your spouse joins in the gift) without paying gift taxes or using any of your lifetime exemption. But you will still have interest income in the year of forgiveness.

5.      Forgive or file suit. If an intrafamily loan that you intended to collect is in default, don’t let it sit too long. To prove this was a legitimate loan that soured, you’ll need to take appropriate legal steps toward collection. If you know you’ll never collect and can’t bring yourself to file suit, begin forgiving the loan using the annual gift tax exclusion, if possible. Contact us today to learn more about intrafamily loans and the tax issues that come along with them. We would be happy to assist you.

The Many Reasons to Invest in a Business Valuation

 By: Stephen C. Smith CPA, CGMA, MBA, CVA- Principal

Possibly selling your business is not the only reason to have a business valuation performed. There are several scenarios that call for a thorough review of your business’ worth. I have been performing this service for clients for many years, for many different reasons. Yes, if you are preparing to sell your business, a valuation will provide you with the numbers you need to a secure a deal that benefits both you and the new owner. But that is just one reason.

You will need to know the fair-market value of your operation in the event that you consider merging with another entity. Or, you will need to be armed with the right numbers if you plan to add a new owner to the business so you can set the buy-in amount for him/her. The same goes for owners and other shareholders that will be exiting the business.

What about your own exit strategy? Knowing the value of your business sets you up to create a better retirement plan, whether you plan to sell, pass it along or close up shop all together. Many times I work with business owners who must know the value of their operation due to a family-related situation. For example, business owners going through divorce proceedings often need to know the value of their business so they are properly informed during legal proceedings. Or, a family emergency comes into play and the current value of the business is as vital piece of information that is needed as the parties involved work towards a solution.  Sometimes needing to be aware of the true value of your  business has nothing to do with selling or leaving and everything to do with expansion. How you know just how far you can grow without knowing where you currently stand in regards to finances and value?

When looking for someone to assist your privately held enterprise with independent valuation requirements, you want to partner with a CPA with varied experiences and intense training in valuation theory as well as application, litigation support, accounting, tax, auditing, finance, insurance, economics and investments. There is no substitution for experience, so you will want to secure a firm that routinely performs business valuations. Holbrook & Manter is that firm. Contact us today for more information about our services. I would be honored to assist you in assessing the current value of your business.  

New Accounting Standard Coming for Not-for-Profit Organizations

By: William Bauder, CPA, CGMA, CITP, Manager of Assurance and Advisory Services 

The Financial Accounting Standards Board (FASB) recently issued a new accounting standard in regards to not-for-profit organizations and their financial statements. This change is sure to be felt throughout the not-profit community, as this is the first significant change made to the FASB’s current guidelines since 1993. After nearly a quarter century of doing things one way, not-for profits will now have to adhere to the new standard that changes the disclosure and presentation requirements for financial statements. This new standard is designed to assist not-for-profits in sharing more detailed and relevant information with everyone from donors to creditors and everyone in between that may review their financial statements. According to the FASB, the new standard simplifies and improves the face of the financial statements for not-for-profits and enhances the disclosures in the notes.

Here is a summary of some of the biggest changes:

 

  • Net asset classifications: net asset classifications will be changing from the traditional three classifications (permanently restricted, temporarily restricted, unrestricted) to two classifications (with donor restrictions, without donor restrictions)

 

  • Cash Flows: organizations will now have the option to report cash flows using the direct method, without also having to present the indirect method.

 

  • Underwater endowments: Changes the reporting of underwater endowment amounts within net assets with donor restrictions and enhances disclosure requirements.

 

  • Liquidity: changes in the disclosure requirements on how the organization manages its liquid available resources and liquidity risk.

 

Luckily we will have more time to digest and plan for these new standards as they are effective for annual reporting periods beginning after December 15, 2017.  If you would like more information on this recent accounting change, or any other accounting matters, feel free to give us a call, we would be happy to help.

Plan now for Itemized Deductions

Year end may seem far away. But now’s a good time to start looking ahead to what itemized deductions you may be able to claim for the 2016 tax year.

Following is a list of selected deduction and exclusion items to consider. Don’t use the list as a tax planning worksheet. Rather, think of it as an exercise to help with your tax planning efforts and a good conversation starter for the next time we visit. Bear in mind that various limitations may apply to the items listed. Once you review the list, contact H&M to set proactive tax planning into motion. We can assist you with your year-round tax needs.

Deductible unreimbursed employee expenses

  •      Business travel expenses.
  •      Business education expenses.
  •      Professional organization or chamber of commerce dues.
  •      License fees.
  •      Impairment-related work expenses.
  •      Depreciation on home computers your employer requires you to use in work.

Deductible money management costs

  •       Tax preparation fees.
  •      Depreciation on home computers used to produce investment income.
  •      Investment interest expenses.
  •       Dividend reinvestment plan service charges.
  •      Loss of deposits due to financial institution insolvency.

Deductible personal expenditures

  •         Income, real estate and personal property taxes (state, foreign and local).
  •        Medical and dental expenses.
  •        Qualifying charitable contributions.
  •        Personal casualty and theft losses.

Income excludable from taxable income

  •         Health and most life insurance proceeds.
  •        Military allowances and veterans benefits.
  •        Some scholarship and grant proceeds.
  •        Some Social Security benefits.
  •        Workers’ compensation proceeds

 

When an inheritance is too good to be true

Most people are genuinely appreciative of inheritances, and who wouldn’t enjoy some unexpected money? But in some cases, it may be too good to be true. While most inherited property is tax-free to the recipient, this isn’t always the case with property that’s considered income in respect of a decedent (IRD). If you have large balances in an IRA or other retirement account — or inherit such assets — IRD can be a significant estate planning issue.

IRD explained

IRD is income that the deceased was entitled to, but hadn’t yet received, at the time of his or her death. It’s included in the deceased’s estate for estate tax purposes, but not reported on his or her final income tax return, which includes only income received before death.

To ensure that this income doesn’t escape taxation, the tax code provides for it to be taxed when it’s distributed to the deceased’s beneficiaries. Also, IRD retains the character it would have had in the deceased’s hands. For example, if the income would have been long-term capital gain to the deceased, such as uncollected payments on an installment note, it’s taxed as such to the beneficiary.

IRD can come from various sources, including unpaid salary, fees, commissions or bonuses, and distributions from traditional IRAs and employer-provided retirement plans. In addition, IRD results from deferred compensation benefits and accrued but unpaid interest, dividends and rent.

The lethal combination of estate and income taxes (and, in some cases, generation-skipping transfer tax) can quickly shrink an inheritance down to a fraction of its original value.

What recipients can do

If you inherit IRD property, you may be able to minimize the tax impact by taking advantage of the IRD income tax deduction. This frequently overlooked write-off allows you to offset a portion of your IRD with any estate taxes paid by the deceased’s estate and attributable to IRD assets. You can deduct this amount on Schedule A of your federal income tax return as a miscellaneous itemized deduction. But unlike other deductions in that category, the IRD deduction isn’t subject to the 2%-of-adjusted-gross-income floor.

Keep in mind that the IRD deduction reduces, but doesn’t eliminate, IRD. And if the value of the deceased’s estate isn’t subject to estate tax — because it falls within the estate tax exemption amount ($5.45 million for 2016), for example — there’s no deduction at all.

Calculating the deduction can be complex, especially when there are multiple IRD assets and beneficiaries. Basically, the estate tax attributable to a particular asset is determined by calculating the difference between the tax actually paid by the deceased’s estate and the tax it would have paid had that asset’s net value been excluded.

If you receive IRD over a period of years — IRA distributions, for example — the deduction must be spread over the same period. Also, the amount includible in your income is net IRD, which means you should subtract any deductions in respect of a decedent (DRD). DRD includes IRD-related expenses you incur — such as interest, investment advisory fees or broker commissions — that the deceased could have deducted had he or she paid them. Thus, to minimize IRD, it’s important to keep thorough records of any related expenses.

Be prepared

As you can see, IRD assets can result in an unpleasant tax surprise. Because these assets are treated differently from other assets for estate planning purposes, you should partner with a CPA that is experienced in this area to make sure your plan is in the correct order. Together we can identify IRD assets and determine their tax implications. Contact us today.

Zac Anderson Joins the H&M Team

The Holbrook & Manter team continues to grow with the addition of Zac Anderson. Zac joins us a staff accountant. He is a native of the Cincinnati area and a graduate of The Ohio State University with a degree in business administration with a specialization in accounting.

Zac’s professional background includes serving as an intern with Deloitte and the Ohio Department of Taxation. He also previously worked for Kimball Midwest in Columbus, Ohio. He is excited to be returning to public accounting and looks forward to providing excellent service to H&M clients.

Zac and his wife live in Upper Arlington and they enjoy exploring the city and trying new restaurants. He loves the outdoors and enjoys activities such as hiking.

Welcome to the firm, Zac!

 

New Staff Accountant Joins the H&M Team

 

The growth continues at Holbrook & Manter with the hiring of Annamarie DePrey. Annamarie has joined us as a staff accountant and will be working in our Marion office.

Annamarie is armed with over 20 years of accounting experience and enjoys working with business owners. She shares the following information about herself:

I was born and raised in Waldo, Ohio. I moved to Columbus and received my degree from The Ohio State University. 11 years later we decided to move back to Waldo and raise our family. We still reside in Waldo where my husband built a house near the family farm. We have three children, Evon, Nathon and Lydia. Evon is a senior at the University of Toledo. Nathon is a sophomore at the University of Northwestern Ohio and Lydia is a senior in high school. In my spare time I enjoy attending sporting events for my children and I am an avid OSU sports fan.

Welcome to the team, Annamarie!

Are you sure you want to take that 401(k) loan?

It can be hard to resist- the urge to splurge on a large purchase. Perhaps it is a trip or a new car- whatever the temptation might be, if you’ve pondered dipping into your 401(k) account for the money, make sure you’re aware of the consequences, many of them tax-related,  before you take out the loan.

Pros and cons

Many 401(k) plans allow participants to borrow as much as 50% of their vested account balances, up to $50,000. These loans are attractive because:

  • They’re easy to get (no income or credit score requirements),
  • There’s minimal paperwork,
  • Interest rates are low, and
  • You pay interest back into your 401(k) rather than to a bank.

Yet, despite their appeal, 401(k) loans present significant risks. Although you pay the interest to yourself, you lose the benefits of tax-deferred compounding on the money you borrow.

You may have to reduce or eliminate 401(k) contributions during the loan term, either because you can’t afford to contribute or because your plan prohibits contributions while a loan is outstanding. Either way, you lose any future earnings and employer matches you would have enjoyed on those contributions.

Loans, unless used for a personal residence, must be repaid within five years. Generally, the loan terms must include level amortization, which consists of principal and interest, and payments must be made no less frequently than quarterly.

Additionally, if you’re laid off, you’ll have to pay the outstanding balance quickly — typically within 30 to 90 days. Otherwise, the amount you owe will be treated as a distribution subject to income taxes and, if you’re under age 59½, a 10% early withdrawal penalty.

Hardship withdrawals

If you need the money for emergency purposes, rather than recreational ones, determine whether your plan offers a hardship withdrawal. Some plans allow these to pay certain expenses related to medical care, college, funerals and home ownership — such as first-time home purchase costs and expenses necessary to avoid eviction or mortgage foreclosure.

Even if your plan allows such withdrawals, you may have to show that you’ve exhausted all other resources. Also, the amounts you withdraw will be subject to income taxes and, except for certain medical expenses or if you’re over age 59½, a 10% early withdrawal penalty.

Like plan loans, hardship withdrawals are costly. In addition to owing taxes and possibly penalties, you lose future tax-deferred earnings on the withdrawn amounts. But, unlike a loan, hardship withdrawals need not be paid back. And you won’t risk any unpleasant tax surprises should you lose your job.

The right move

Generally, you should borrow or take hardship withdrawals from a 401(k) only in emergencies or when no other financing options exist (and your job is secure). For help deciding whether such a loan would be right for you and what your options will mean for your tax wise, please call us. We would be happy to assist you.

Ohio’s Sales Tax Holiday Returns

 

By: Molly Pensyl, Business Development Manager 

Just in time for back-to-school shopping- Ohio’s “Sales Tax Holiday” returns this week! Thank goodness for shopping venues that are open late or even around the clock because the holiday kicks off at midnight on Friday, August 5, 2016 and ends on Sunday, August 7, 2016 at 11:59pm.  The following items will be exempt from sales and use tax during that time frame: 

Clothing priced at $75 per item or less
School supplies priced at $20 per item or less
School instructional material priced at $20 per item or less

Keep in mind, items used in a trade or business are not exempt under the sales tax holiday. The Ohio Department of Taxation answers some frequently asked questions about the holiday on their website. Click here to review them so you are informed when you go out armed with your credit cards-ready to do some tax-free damage.

 http://www.tax.ohio.gov/sales_and_use/salestaxholiday/holidayfaq.aspx

H&M Welcomes New Staff Accountant

 

The growth continues for Holbrook & Manter, CPAs with the hiring of Jordan Matulevich. Jordan has joined the firm as a staff accountant and will work out of our Columbus office.

Jordan is from Cranberry Township, Pennsylvania. He holds a degree in accounting and finance from Slippery Rock University, where he was active in the business fraternity and accounting club.

Jordan currently lives in Upper Arlington and enjoys visiting local restaurants. He also enjoys sports and states that he is a Pittsburgh Steelers fan.

Jordan is excited to provide quality client service to the family-owned and closely held businesses that H&M works with. Welcome to the firm, Jordan!