Pay Raise? Consider Funding Your Retirement

You got that new job or promotion and along with it comes a pay raise.  Congratulations! 

Today’s Thursday Tax Tip provides a double benefit – not only can you save on taxes in the short and/or long run, but you can help further secure your retirement as well.  When you get a raise in your employment income, consider putting all or a portion of the increase into your retirement portfolio.  This is especially important to consider if the increase potentially puts you into a higher tax bracket.

If you have access to an employer-sponsored 401(k) plan, the IRS allows you to defer up to $18,000 pre-tax annually, plus $6,000 if you are age 50 or older.  You could also gain additional “free” tax deferred contributions if your employer offers a match, thus further boosting your retirement savings.

Another option is to invest in a Roth or traditional IRA.  Both IRS limits are $5,500 annually; $6,500 if you are over 50 years old. 

Which above retirement contribution option makes most sense for you?  Are there other retirement contribution options available?  Contact us today to review your unique financial and tax situation so that we can offer personalized suggestions for you.


Why You Should Start Thinking About Your 2017 Tax Filing NOW

By:  Michele Renz

I know, the title of this blog just sounds all wrong and a little crazy in that it seems premature.  It’s only October, and the IRS has indicated that they will not begin accepting 2017 returns until January 22, 2018.  However, the best time to start thinking about your 2017 tax return really is NOW.  If you are a business owner, self-employed, a high-income earner, or expect to itemize deductions, we at Cottrill Arbutina recommend scheduling a meeting with one of our tax professionals in October or November. 

Why so early, you ask?  Planning now allows you time to make the changes necessary to avoid unpleasant surprises in the spring.  Gathering your year-to-date records now will give you an idea on where you are going to end the year financially.  With this information, our tax professionals can take into account current tax laws to help advise you on transactions to execute before the end-of-the-year to minimize your 2017 tax liability, and that means more money in your pocket.  As an added bonus, you can head into the holidays with the peace of mind knowing that your tax situation is under control.  Another added bonus:  Less records to pull together after the holidays when you are focusing on and looking forward to your plans for 2018.

A large majority of the tax saving strategies for the current year must be executed by December 31st; therefore, waiting until 2018 to address your 2017 tax situation is too late.  Hence, NOW is the perfect time to think about and plan for your 2017 taxes!

Contact us today to schedule a consultation with one of our experienced tax professionals to see if strategies exist to reduce your 2017 tax liability.


Tax Considerations of Divorce and Separation

Finalized divorce and separation agreements commonly involve alimony and child support arrangements.  These arrangements affect the tax situation of both the payer and payee.  Following are three general rules to remember:

  • Alimony paid is deductible by the payer. In order to deduct alimony paid, the payer must include his or her spouse’s Social Security number or Individual Taxpayer Identification Number on the Form 1040 return. 
  • Alimony received is taxable to the payee and must be reported as income on the Form 1040. Alimony is not subject to tax withholding, so it may be necessary to increase the tax paid during the year to avoid a penalty.  Possible solutions to address this situation include making estimated tax payments or increasing the amount of tax withheld from wages.
  • Child support payments are neither tax deductible by the payer nor taxable to the payee.

The guidelines above are very general:  the tax situation can become very complex depending on formal couple’s financial situation.  Contact us today for help with your specific circumstances.


Every Owner Leaves – The Question is How?

By Jack Ellsworth

We have been dealing with business owners for many years and if there is one thing that we have learned about business owners it is this:  no two business owners are exactly alike.  Each business is unique in some way or another and each owner faces his or her own particular set of circumstances and challenges.  Yet, despite this fact, we have found one area where 100% of business owners are completely alike:  all business owners will ultimately leave their businesses – it is inevitable.  The question is “how?”  How will you leave your business and how can you prepare for this unavoidable event?  Let’s look at six possible transition or “exit” scenarios:

Sale to a Third Party

Many people do not engage in succession planning because they assume that an unsolicited buyer will eventually show up at their door and buy the business for a great price.  This happens, but not very often.  What if they show up too early or too late?  What if they don’t show up at all?  How can I make it more likely that someone will want to buy my business?

Sale to Co-Owner

Many assume that the business will ultimately be sold to a co-owner.  What if your relationship falls apart?  What if your co-owner become sick or dies? Planning for a transition to a co-owner in advance, having a good buy-sell agreement in place and accounting for the unexpected can help make this process more successful.

Gift to Child(ren)

Many business owners plan to give their business to one or more of their children.  This seems simple on the surface but it can get very complicated and messy when you get into the details, causing a lot of family and business strife.  How do you divide the business between children?  What about children not active in the business?  Who is in charge?  Is making equal gifts of the business to multiple children fair?  How do you reward one child’s contributions to the business’ success compared to another?  What if you want the kids to assume the business but can’t afford to give it to them?  Transitioning a business within a family takes very careful planning to preserve the business and the family.

Sell to Employees

A lot of us really want to see our employees carry on the business.  One big problem is that they usually have no money to buy it.  With advance planning done very carefully, this can be successfully accomplished.  Those who do not plan in advance have difficulty making this type of transition happen.

Close it Down

Sometimes, businesses are not transitioned at all and they simply shut down.  In some cases, it cannot be avoided and the owner accepts this fate.  In many cases, however, this is not the best outcome and it can be avoided with advance planning by the business owner. 

Die

Sometimes, business owners die while they still own and operate the business.  What happens to the business now?  What about the owner’s family and employees?  Whether the business owner dies unexpectedly at an early age or whether the owner lives a very long life while remaining the owner until the end, transitioning a business at the owner’s death can be very difficult if the ultimate transition of ownership and leadership was not properly planned for in advance.

Summary

If you are a business owner, you are GUARANTEED to leave your business one day – probably under one of the above six scenarios.  And let’s face it – some of these scenarios are more attractive than others.  Those who plan in advance have the opportunity to choose the scenario that works best for them and work to accomplish a successful transition on their terms.  Others are more likely to end up under a scenario that they would not have chosen.  Why not start planning today, take control of the process, and determine the scenario under which you make your inevitable exit? 

Contact us more information on Cottrill Arbutina’s Business Succession & Exit Planning or for a complementary consultation.


Using Retirement Funds for Qualified Higher Education Expenses

As college tuition become due, taxpayers are looking for sources of funds to pay make these payments.  Often, as a last resort, many taxpayers are forced to dip into retirement funds.  If you find yourself in this situation, keep in mind that withdrawals from an IRA before age 59 ½ are exempt from the 10% early distribution penalty if they are used for qualified higher education expenses.  Examples of these post-secondary qualified expenses are books, tuition, and room and board.  While this type of withdrawal is exempt from the 10% penalty, it is still subject to income tax in the year taken.

 

Please contact us if you find yourself in this situation, or have any other questions regarding IRS distributions and penalties.


Forming an LLC in Pennsylvania

By:  Larry Zahn

One of the more popular business entities used for small businesses today is the Limited Liability Company, commonly referred to as an LLC.  Many small businesses start out as sole proprietorships, filing a Schedule C with their personal income tax return.  However, the LLC offers several advantages that make this form of entity the preferred choice for many taxpayers.

An LLC is a hybrid between a partnership and a corporation.  Owners of an LLC are called members, and single member LLCs file their personal taxes just as a sole proprietorship does, using the Schedule C.  If the LLC has more than one member, then a partnership return would be filed with each partner picking up their pro rata share of profit or loss.  Members of LLCs can include individuals, corporations, or other LLCs.  Similar to a corporation, an LLC protects its members from personal liability for business debt.  Unless a member personally guarantees a debt, generally only the assets of the LLC will be liable to pay the business debts.

It is very simple to form an LLC in the state of Pennsylvania.  There are only two forms that are required to be filed, a Certificate of Organization [DSCB:15-8821] accompanied by a New Entity Docketing Statement [DSCB:15-134A].  These forms are filed with the Bureau of Corporations and Charitable Organizations together with a fee of $125.  There are no advertising requirements when forming a domestic LLC.

LLCs engaged in performing certain professional services are also required to annually file a Certificate of Annual Registration [DSCB:15-8221/8998].  These restricted professional services are defined as the following professional services:  chiropractic, dentistry, law, medicine and surgery, optometry, osteopathic medicine and surgery, podiatric medicine, public accounting, psychology or veterinary medicine.  All other LLCs are not subject to the annual filing.

Contact us today to schedule a consultation if you would like more information regarding LLC formation in Pennsylvania.


Gift Taxes

As we approach the end of the year, many taxpayers consider making gifts to family members and are concerned about the tax consequences of these gifts.  For calendar year 2017, each taxpayer can make gifts of up to $14,000 to as many individuals as they wish without incurring any gift tax liability.  This cap is scheduled to rise to $15,000 for 2018.  In addition to the annual exclusion, there is a lifetime estate and gift tax exemption of $5.49 million for 2017. 

Stay tuned as we monitor the ongoing tax reform discussions that are currently being discussed for any changes to the gift tax exemptions going forward. 

Contact us if you have any questions related to the taxability of gifts or other tax matters.


Cottrill Arbutina Cares About…Opportunities for College Students

By:  Michele Renz

Note:  This is the first blog in our on-going series entitled “Cottrill Arbutina Cares About…”, a blog that highlights the employees and community service of Cottrill Arbutina.

Cottrill Arbutina hosted approximately 15 accounting and finance majors from Geneva College in our Community Conference Room on Tuesday, September 26thJoel Martin, Shareholder, and Chad Agnew, Manager, Geneva College graduates, shared with the students their thoughts on what it takes to succeed in the accounting profession today.  Martin and Agnew stressed that in addition to the obvious need for technical accounting skills and general business understanding, the following job skills are just as essential in the accounting profession:  information technology expertise, excellent written and oral communication skills, leadership abilities, attention to detail, and a relentless desire for customer service.

Cottrill Arbutina supports college student opportunities by providing workshops in our offices, speaking at college campuses, and offering accounting internships for students from Geneva and other colleges and universities.  Annually, Cottrill provides approximately 5-6 full or part-time internships for accounting majors.

Contact us to arrange a Cottrill Arbutina employee representative to speak at your college or university or to learn more about our internship program.


Outsourcing Accounting Services Provides Cost Savings, Expertise, and Flexibility

By: Michele Renz

Sally has been your dedicated payroll clerk for 25 years.  She has always been dependable, performed her assigned responsibilities well, and can generally handle any exceptions that arise related to her job.  She has announced to you that her time has come:  she is riding blissfully off into the retirement sunset at the end of this month.  While you are personally happy for Sally, professionally, questions and thoughts begin to fill your mind:

  • “I haven’t had to get involved in the daily details of Sally’s job for years. How am I going to find the time to sit with her to learn them between now and the time she leaves with all of the other things I am responsible for?”
  • “I have to write the job description for this job. What do I want it to entail?”
  • “Where am I going to advertise this position?”
  • “How much time will I have to spend training this new person? Is there software training out there?”
  • “Although Sally was excellent at what she did, it would sure be nice to hire someone with a greater skillset so that I can do less of the day-to-day accounting duties and spend more time on strategic planning and identifying cost savings opportunities.”
  • “How much am I going to have to pay to get someone with the skillset I need? How am I going to convince my boss or board to spend the additional salary funds needed to get qualified candidates in the door?”
  • “What if the person that I hire doesn’t work out?”

Situations like the above are all too common and are becoming more so:  according to a June 2017 article at investopedia.com, 10,000 baby boomers are retiring each day.  Hence, the chances are likely that someone in your accounting department is getting ready to retire or will be retiring within the next 5-10 years.  If not, there is always the chance that one of your accounting employees will unexpectedly leave to care for an ill or aging family member or pursue another opportunity.  What is your plan if – rather, when – this happens?

An option to consider when replacing any accounting employee – a bookkeeper, payroll clerk, accounts receivable or payable clerk, general ledger clerk, or equivalent – is outsourcing accounting responsibilities to a CPA firm.  The following paragraphs discuss three benefits to outsourcing accounting responsibilities. 

Cost Savings

The first, and arguably most desirable, benefit of outsourcing accounting services is cost savings.  Let’s continue with the example of replacing Sally, the payroll clerk.  According to the Roberhalf.com salary calculator, the current salary range for a payroll clerk in the Pittsburgh, Pennsylvania region is $30,625 to $58,800, or an average of roughly $44,700.  However, you know that hiring Sally’s replacement will cost you much more than $44,700 as you will pay fringe benefits to the full-time replacement including vacation pay, sick pay, employer taxes, health care, and retirement contributions.  Using the Bureau of Labor Statistics June 2017 average fringe benefit rate of 31.7%, Sally’s replacement will cost  your organization approximately $58,900 annually – and that’s not including hiring and training costs. 

Depending on the industry in which you operate, the 31.7% fringe rate can run more in the 40-50% range.  For example, 2017/2018 retirement contribution rate alone for public school employees, according to the Public School Employees’ Retirement System (PSERS), is 32.57%.  Clearly, the fringe rate for the public school system easily approaches or exceeds the 50% range.

As far as the total cost savings advantage obtain from outsourcing the payroll function:  it depends.  It depends on the extent of services that the organization desires to be performed and the level of experienced staff required.  However, considering the payroll example above and assuming the performance of routine payroll procedures, it is very feasible that most organizations would realize a cost savings by outsourcing the payroll function or similar function to a CPA firm.  This, in turn, allows organizations to use these savings for investing in, advancing, and/or growing the organization.

Access to More Skills and Expertise

A close second benefit to cost savings is gaining access to more skills and expertise.  When outsourcing an accounting function to a CPA firm, you are getting individuals who are experienced in performing the function for which you are hiring.  This translates into less learning curve for the CPA firm individuals and less time invested in explaining and educating on your part.  Furthermore, you aren’t just getting the person or small team working on your particular project – you are gaining access to an entire team of accounting professionals.  Hence, should a question arise that the assigned person or team cannot answer, there is a firm with multiple CPAs who likely know the answer or how to find it.  Finally, being that they are experienced not only in the accounting function, but have experienced performing the function at multiple organizations, CPA firm personnel can perform highly efficiently.

Flexibility

When outsourcing accounting services, you have significant flexibility in which functions you want to outsource.  You can continuously outsource one or multiple traditional accounting functions entirely or only contract out a portion of the task that you desire.  Another benefit:  no more worrying about who will cover when an employee is on vacation!

Need assistance on special, short-term project such as integrating a merger into your account system or merger accounting entries?  This is something accounting professionals in a CPA firm can help with.  Not experienced with reviewing the financial impacts of a complicated lease agreement?  Again, CPAs can be a tremendous resource for this purpose.  Want help getting organized for your annual audit?  No one knows what is required for an audit more than a CPA firm.  In summary, agreements can be structured for just about any financial-related project and any duration. 

As you can see, outsourcing accounting functions to a CPA firm can be very beneficial to organizations.  Organizations can get high quality financial services from an expert whom they don’t need to hire full-time at a significant cost savings.

Cottrill Arbutina has a proven track record of performing outsourced accounting services and consulting for clients in government municipalities, school districts, non-profits, small- and mid-size businesses, and credit unions.  Contact us today to discuss how we can help your organization. 


I Have to Pay Taxes on What?!?!?!?

“How can I owe tax?  I didn’t get paid anything!”  That is a common misunderstanding for individuals and businesses who join a barter club and suddenly realize that the goods or services that they have received, in exchange for their goods or services, are required to be included in taxable income.  The taxability of the exchange occurs regardless of whether it is negotiated directly or facilitated through a barter club.  Barter clubs generally issue a Form 1099-B after the end of the year to report the value that had been received.  Otherwise, it is up to each taxpayer to track and report their income from such transactions.

 

Contact us today so that we can help you with this and other tax matters.