Tax Reform Update

Shortly before lunch on Wednesday, December 13, 2017, leaders from the House and the Senate have reached an agreement on a final tax bill.  A final vote on the tax bill is expected to occur next week.  Highlights of the agreement include lowering the corporate tax rate to 21 percent from the current 35 percent, lower the top individual tax rate from 39.6 percent to 37 percent, eliminate the corporate alternative minimum tax, and allow individuals to choose whether to deduct up to $10,000 in income, sales or other property taxes.

Check back in the coming weeks for updates as the bill becomes finalized into law. 


Senate Passes Tax Reform

After months of discussion and speculation and the House passing a tax reform bill in November, the Senate followed suit passing its version of tax reform over the past weekend.  A summary discussion of the bill can be found at https://www.journalofaccountancy.com/news/2017/dec/senate-passes-tax-reform-bill-201717990.html.

Contact us for assistance with your tax questions and preparation needs.


Washington May Be Eliminating State and Local Tax Deductions

The latest predictions of the proposed changes in the federal tax law appear to suggest that the following modifications will be made: 

  • Repeal of the state & local income tax deduction.
  • Potential repeal of the real estate tax deduction.

With these possibilities, it could prove wise to pay state and local fourth quarter tax estimates in the calendar year 2017.  In addition, if financially feasible, it could also be wise to pay some or all of your 2018 real estate taxes before the end of 2017.  If you decide to prepay real estate taxes, you must pay them directly to the taxing authorities rather than an escrow account.  Finally, remember that taxes deducted on Schedule A are added back for the calculation of the alternative minimum tax.

Contact us for further updates regarding this matter or to discuss your unique tax situation. 


How Age Shapes Your Exit Plan

By:  Jack Ellsworth

Your age can have a big impact on your attitude toward your business, and your feelings about one day getting out of it.  In fact, we know of one business advisor who runs a successful boutique mergers and acquisitions business who flatly refuses to take assignments from business owners over the age of 70.  Why?  He has found that septuagenarians are so personally invested in their businesses that they can rarely bring themselves to sell or transfer the business – frequently calling off the deal halfway though, claiming that they just wouldn’t know what to do with themselves if they left the business. 

John Warrillow, the author of Built to Sell: Creating a Business That Can Thrive Without You, noted several age-related patterns that emerged in the research for his book.  While it is dangerous to generalize – especially on something as touchy as age – there is probably some truth for business owners to consider in these patterns noted by Warrillow. 

Owners Aged 25 to 46

Twenty- and thirty-something business owners grew up in an age when job security did not exist.  They watched as their parents were downsized or packaged off into early retirement, and that resulted in a somewhat jaded attitude towards the role of a business in society.  Business owners in their twenties and thirties generally see their companies as a means to an end, and many expect to sell in the next 5 to 10 years.  Similar to their employed classmates, who tend to move to a new job every 3 to 5 years, business owners in this age group often expect to start and sell multiple businesses in their lifetime.

Aged 47 to 65

These are the “baby boomers.”  They came of age in a time when the social contract between a company and an employee was sacrosanct.  An employee agreed to be loyal to the company and, in return, the company agreed to provide a decent living and a pension for a few golden years. 

Many of the business owners in this generation think of their company as more than a profit center.  There is a much more personal and emotional attachment to the business.  They see their business as part of a community and, by extension, themselves as community leaders.  To many boomers, the idea of selling their company feels like selling out their employees and their community.  That is why so many business owners in their fifties and sixties are torn:  they know they need to sell to fund their retirement, but they agonize over where that will leave their loyal employees. 

Sixty-five Plus

Business owners in this age category grew up in a time when hobbies were impractical and discouraged.  You went to work while your wife tended to the kids (today, more than half of businesses are started by women, but those were different times), you ate dinner, you watched the news and you went to bed. 

With few hobbies and little other than work to define them, business owners in their late sixties, seventies and eighties feel lost without their business – that’s why so many refuse to sell or experience depression after they do. 

Summary

Of course, these are broad generalizations and there will always be exceptions to general rules of thumb.  Nonetheless, just like industry, nationality, geography, marital status, education and background, it appears that your age can have a large influence on how you approach your succession/exit plan. 

 

For more information on Cottrill Arbutina’s Business Succession & Exit Planning Services or for a complementary consultation, please contact us.


Happy Thanksgiving

As we get ready to celebrate Thanksgiving with family and friends, we at Cottrill Arbutina give thanks for you, our valued clients.  We are sincerely appreciate your confidence in us.  Whether you have been a client for 20 years or are new to us this year, we are grateful and value our business relationship with you. 

We wish you and those dear to you a wonderful, blessed Thanksgiving.


Domestic Production Activities Deduction (DPAD)

If you are the owner of a business that manufactures or produces your goods in the U.S., you need to be aware of the Domestic Production Activities Deduction (DPAD).  In order to qualify for this deduction, your business needs to have qualified production activities income, taxable income for the year, and pay W-2 wages to employees.  If you meet all three of these criteria, you could receive a deduction of 9% of the income that you earn from the business.  This deduction is available for the 2017 tax year, but is under consideration for repeal under proposed tax plan revisions.

Contact us if you have any questions related to the DPAD deduction or other tax matters.


Adding Some Formality to the Family Business

By:  Jack Ellsworth

Most family businesses start out with one person who wears many (or all) hats:  owner, general manager, sales manager, CFO, head of administration, etc.  There is a certain simplicity in having one person handling all decisions and the lack of formality and bureaucracy tends to work well ~ at least in the early years in the life of a family business.  As the next generation becomes more involved in the management of the business, the informal structure that worked well in the early years no longer seems to work quite so well.  Big picture decision-making becomes much more complex when multiple people and multiple generations are involved.  Harmony within the family and the business is harder to achieve.  In order for the first-generation business to successfully transition to a multi-generational business, it will most likely need to consider adding some degree of formality.  There are many ways that a business may consider formalizing its structures, and choosing which formalities and structures are appropriate depends on the particular circumstances of each individual family and business. The following are four examples of items that might be considered by family businesses interested in a successful transition involving the next generation. 

1.  Articulate a Clear Vision. We recommend that the family business consider developing and articulating a mission statement clearly defining its vision for the family and the business and drawing up a written business plan establishing the specific strategy to fulfill this vision. The vision of the family and the business are aligned in this process.

2. Define Roles. As management duties are divided within a family business, the roles and responsibilities of members of management should be clearly defined and documented. In addition, it is crucial to determine how decisions will be made within the management team ~ especially in instances where there is not consensus. Defining these roles and responsibilities and the decision-making process helps facilitate harmony in the family and the business.

3.  Establish Rules of Entry. Family businesses should consider establishing specific rules of entry for family members who wish to join the business. These rules should outline the minimum qualifications, education requirements and previous experience required to join the company. Applying these rules consistently ensures that the family business has qualified participants and avoids hard feelings due to perceived favoritism.

4.  Hold Formal Meetings. Formal meetings tend to be avoided in a family business setting because such formalities run counter to our notion of the family. However, holding formal meetings on a regular basis to discuss operational, strategic and administrative issues and to monitor the business’ adherence to its mission and business plan will improve communication within the family and the business and keep everyone moving in the same direction. Having an outside advisor assist in facilitating these meetings can be very helpful in making them most productive.

Most will agree that the informal nature of a family business is one of the things that people find most attractive and limited bureaucracy is refreshing.  While a family business naturally wants to maintain elements of this informal nature, as it matures and multiple generations become involved, certain formalities may need to be introduced to protect both the business and the family so that it can prosper beyond the current generation.

For more information on Cottrill Arbutina’s Business Succession & Exit Planning services or for a complementary consultation, please contact us.


Home Office Deduction

If you use part of your home for business purposes, you may be eligible to deduct expenses for the business use of your home.  This home office deduction is available for both homeowners and renters.  There are two basic requirements for you to qualify for this deduction:

  • Regular and exclusive use of part of your home.
  • Principal place of your business.

The amount of the deduction is dependent on the percentage of your home devoted to business use.
Contact us if you have any questions related to the home office deduction or other tax matters.


Real Estate Tax Audit Tips

By:  Paula Ledbetter

Real estate tax collector audits are required annually by Pennsylvania state law to examine the final accounts and records, payments and returns, and duplicates of taxing districts.  The performance of an audit on this information is to add to the reliability and credibility to the information reported by the tax collector, thus instilling a sense of confidence in the receiving governmental entity and community that public tax dollars are being fully collected and allocated to the taxing district.  An audit also provides an opportunity for the tax collector to receive recommendations for efficiency improvements to the tax collection process. 

During the selection process of a qualified auditor, entities should be mindful of  items such as: years of experience the auditor has in auditing real estate tax collectors; the auditor’s understanding of the Local Tax Collection Law – Act 169 of 1998; and the thoroughness of the auditor’s procedures (for example, confirming payments and dates with tax payers and taxing districts).  Other items to consider include requesting sample letters issued to other clients regarding identification of weaknesses and improvement suggestions as well as securing information transmitted between the auditor and the tax collector.

From an auditor’s perspective, when preparing records for an audit, the most important consideration a tax collector should keep in mind is traceability.  It should be easy to follow any given parcel from duplicate to bill, to payment, to deposit, and to disbursement (if not depositing directly into the school or municipality’s bank account).  Some helpful tips to keep in mind are as follows:

 

  • Payments
    • A taxpayer’s payment qualifies for discount, face or penalty based upon the postmark date on the payment envelope or the day the payment is hand delivered, not by the date on the taxpayer’s check. 
    • Checks for insufficient amounts should be returned to the taxpayer with an explanation for the return. If instead the tax collector accepts or holds the insufficient amount, he/she is now responsible to notify the taxpayer of the outstanding amount owed, and trace it to payment or inclusion on the delinquent tax report at the end of the tax cycle.
  • Bank deposit slips
    • Deposit slips must be detailed at the item level or attached to an amount matching detailed collection report.
    • Deposit slips must show the bank receipt stamp or machine mark. Making a copy of the deposit slip prior to making the deposit at the bank does not confirm the funds were deposited.  If deposit slips are not available, copies of bank statements must be provided to match the reported deposits.
    • If a check scanner is used, please provide the bank deposit receipt attached to the matching collection report.
  • Refunds
    • Refunds of tax payments deposited into the tax collection account are not permitted. According to the Manual, “The tax collector has no authority to make refunds from the tax collection account”.  All refunds of deposited tax payments can only be made by the taxing district. 
    • If the tax collector is informed by the taxpayer that he/she sent in a duplicate check for payment in error and the check has not been deposited into the tax collection account, the tax collector may return the duplicate check to the taxpayer.
  • Monthly reports to the taxing district
    • The tax collector is required to make periodic reports to the taxing district. Monthly summary reports to the taxing district must be made on the Department of Community and Economic Development (DCED) approved report. Using this report will ensure that a tax collector meets the requirement that the report to the taxing district include a “reconciled (report) from the tax duplicates to the amount of taxes remaining to be collected” as required by the Pennsylvania Tax Collector’s Manual.
    • According to the Pennsylvania Tax Collector’s Manual, “…monthly reports are due by the tenth day of each month for the previous month’s activity, but may be required more frequently by the taxing district by ordinance or resolution.” Hence, for example, a report submitted on October 10th should only include activity through September 30th.  Activity for October 1st through the 10th should not be included in the September 30th report; this activity will be included on the report submitted November 10th
  • End-of-Tax Year Considerations
    • Payments, deposits, and other disbursements must be recorded through and including December 31st. After these items are recorded, a list of delinquent, unpaid taxes must be generated, regardless of whether the tax collector also serves as the delinquent tax collector.
    • If using tax collector bank account that is interest bearing, all interest earned on the tax revenue moving through the account belongs to the taxing district(s). This interest should be disbursed to the taxing district(s) at the end of the tax cycle.
  • Computerized tax collection software
    • No matter how large or small your municipality is, you should consider using tax collection software. Being computerized is more time efficient and accurate, catching most mistakes before they become an issue.  Our firm has conducted more than 1,000 real estate audits since 1999.  In working with numerous tax collectors over the years, it is common for us to hear from tax collectors that they have received no formal training. 

The Pennsylvania Tax Collector’s Manual is a great resource for many questions, training, and information on preparing for an audit.  The Pennsylvania Tax Collector manual is located here.

Please contact us to learn more about our real estate collector audit services.


Donating Stock or Mutual Funds to Charity

Making cash contributions to an eligible organization is the simplest way to make a tax-deductible donation; however, gifting stock or mutual funds that have appreciated in value may provide a preferable tax outcome.  Contributions of long-term capital gain property, such as stocks or mutual funds, to charities are usually deductible at fair market value, and the donor generally does not recognize gain on appreciated, donated property.  In this scenario, the donor avoids paying tax on the appreciation (difference between fair market value and cost basis), but can deduct the full value, subject to limitations on charitable deductions.  Please note, if the stock or mutual fund in question has decreased in value, it is preferable to first sell the investment to recognize the loss, and then donate the cash sales proceeds.

If you are planning to make significant donations before the end of the year, or would like to discuss other charitable planning ideas, please contact us.