What are the new net asset classes?

• Funds earmarked for a specific purpose, 
• The passage of time (for example, when the funds may be used only after a specific number of years has passed),
• The funds included in board-designated operating reserves, or
• The occurrence of a specific event — for example, the attainment of a desired programmatic outcome. 

How has liquidity and available resources reporting changed?

What about reporting your expenses and investment return?

How to present operating cash flows?

What should you do next?

Effective date

When a business generates a financial transaction, it creates a paper trail. This paper trail is called a “Source Document.” Your bookkeeper or accountant may ask you to provide them with some sort of source document to verify data and record transactions correctly. A good source document should describe the basic facts of the transaction such as the date, the amount, the purpose, and all parties involved in the transaction. 

Some examples of source documents include:

• Bank Statements
• Payroll Reports
• Invoices
• Leases & Contracts
• Check Registers
• Purchase Orders
• Deposit Slips – not included on a bank statement
• Check Copies – not included on a bank statement
• Evidence of a Sale or Disposal of an Asset
• Credit Card Statements
• Amortization Schedules
• Sales Tax Returns

The source document is a good internal control and provides evidence a transaction occurred. Providing source documents to your bookkeeper or accountant in a timely manner assists them in preparation of financial statements and accurately analyzing your business activity. 

In the Accounting Services Department at Stockman Kast Ryan + Co, we take a balance sheet approach when closing a set of books. This means each account on the balance sheet (assets/liabilities and equity) is reconciled to source documents (bank statements, amortization schedules, payroll and sales tax returns, etc.) before closing the net income for the year. We view all the transactions during the year to capture any reclassifications that may need to be reallocated to a different account as well as reconciling expenses such as payroll. 

There are many things to take into consideration when finalizing a Year End Closing.

Here are some tips for closing your books:
 

1. Make sure all cash/bank/checking accounts are reconciled. Pay special attention to stale checks or old deposits that have not cleared the bank and investigate the problem.
2. Reconcile your Accounts Receivable and Accounts Payable. Make sure all invoicing and bills are posted (especially if you’re on an accrual basis — income/expenses are recognized when they occur rather than when received/paid). Be sure all payments have been applied to open invoices.  
3. Reconcile all credit card accounts and statements. Expenses charged to a credit card should be dated when charged NOT when the statement is paid. For example, if you charged expenses in December but the statement doesn’t come until January, you can still capture those expenses in the current year.
4. Get ALL cash receipts to post. If there were payments paid from the owner that related to business, they would be applied to their “Owner Contribution” account. That would reduce their personal cash payments and increase expenses.
5. If you have loans on your balance sheet, request a year-end report with the balance from the bank or lending institution to make sure they match. If they don’t balance each other, it is typically due to interest expenses. You can create a journal entry, posting the interest to your expense account, thus adjusting the amount of your loan amount to the actual balance on the bank records
6. Prepare and file 1099s. Hopefully throughout the year you have collected the W9 information on all of the contractors. If you have not, they need to be finalized and postmarked to the contractor no later than January 31st.
7. Prepare and file W2s. This may be done by your payroll service provider, but if you prepare your own payroll reports the W2s need to be finalized and postmarked to the employee by January 31st.
8. Print out a YTD General Ledger. Go through each account and review everything in it. Make sure that each cash and loan account (checking, receivables, payables, notes, inventory and fixed assets) has backup documentation to prove that their balances are correct. Review your income and expense accounts and verify that all of the transactions are posted to the correct accounts. 

Common information we will require from you to prepare your tax return:

• Back-up or portable company file of QuickBooks (Accountant’s Copy if changes are expected to be returned and imported). If the file is not supplied, we need hard copy reports for the current year of the Balance Sheet (Current Year/Prior Year if available), Income Statement, Trial Balance, General Ledger, AP Aging and AR Aging from the accounting system
• Documentation for bank loans/account balances as of year end
• Sales tax liability as of year end
• Year End Payroll Reports (Payroll Summary)
• YTD Payroll Tax Returns (Quarterly 941s, 940, State tax forms)
• Copies of W3/W2s
• Health Insurance Premium total paid for owner or S-corp shareholder
• Inventory balance at year end
• POS Sales Report 1/1–12/31
• Donations (amounts, descriptions and charitable organizations)
• 1099s Received (also, 1099s issued)
• Fixed Assets — Details on any equipment purchased or sold/disposed of, including purchase date, total cost, description, and any financing associated with the asset.  Also include date of sale and amount received when disposed of as well as any trade associated with the disposal.

Generally, we will make the final year-end adjustments to the balance sheet to zero out the owners’ distributions/draws for the upcoming year as well as to record depreciation. Occasionally, we have additional tax adjustments that may also affect your books.

We know that closing out your books for the year can be a daunting task. But taking the time to prepare now will likely save you both time and money later. “Clean” books make the tax preparation process that much easier and efficient. If you have questions regarding any of the suggestions listed here, please let us know. 

When President Obama signed into law the 21st Century Cures Act on December 13, 2016, most of the media coverage focused on the provisions related to medical innovation. But the law also includes some good news for small businesses that have been prohibited in recent years from providing their employees with Health Reimbursement Arrangements (HRAs). Specifically, as of January 1, 2017, qualified small employers can use HRAs to reimburse employees who purchase individual insurance coverage, rather than providing employees with costly group health plans. 

The need for HRA relief

Employers can use HRAs to reimburse their workers’ medical expenses, including health insurance premiums, up to a certain amount each year. The reimbursements are excludable from employees’ taxable income, and untapped amounts can be rolled over to future years. HRAs generally have been considered to be group health plans for tax purposes. 

The Affordable Care Act (ACA) prohibits group health plans from imposing annual or lifetime benefits limits and requires such plans to provide certain preventive services without any cost-sharing by employees. According to previous IRS guidance, “standalone HRAs” — those not tied to an existing group health plan — didn’t comply with these rules, even if the HRAs were used to purchase health insurance coverage that did comply. And businesses that provided the HRAs were subject to fines of $100 per day for each affected employee.

The IRS position was troublesome for smaller businesses that struggled to pay for traditional group health plans or to administer their own self-insurance plans. The changes in the 21st Century Cures Act give these employers a third option for providing one of the benefits most valued by today’s employees.

A new kind of HRA

The law incorporates an earlier bill known as the Small Business Healthcare Relief Act in creating an exception from the ACA penalties for “Qualified Small Employer Health Reimbursement Arrangements” (QSEHRAs). These HRAs won’t be treated as group health plans. Employees won’t be required to pay taxes on the employer’s contribution, nor will the employer be liable for payroll taxes on it.

QSEHRAs must satisfy the following requirements:

• The employer has fewer than 50 full-time employees, meaning it isn’t an “applicable large employer” subject to the employer shared-responsibility provision under the ACA.
• The employer doesn’t offer a separate group health plan to any of its employees.
• The HRA is provided on the same terms to all eligible employees, except that an employee’s benefit can vary based on criteria such as age and family size. 
• The HRA is funded solely by the employer, with no salary-reduction contributions.
• The HRA provides payment or reimbursement for medical care expenses, which can include individual health insurance as well as out-of-pocket expenses.
• The amount of payments and reimbursements don’t exceed $4,950 for individual employees or $10,000 for family coverage, subject to cost-of-living adjustments in future years. (The limits will be prorated for employees who aren’t covered by the HRA for an entire year.)

In addition, when an employer offers an HRA, all employees generally must be eligible unless they’re within their first 90 days on the job, under age 25, part-time or seasonal workers, covered in a collective bargaining unit, or certain nonresident aliens.  

Notice and reporting requirements

Employers that offer QSEHRAs must comply with some notice requirements. At least 90 days before each plan year begins (or on the first day a new employee is eligible), the employer must provide eligible employees a notice stating:

• The amount of the employee’s permitted benefit under the HRA for the year,
• That the employee should provide information about that amount to any Health Insurance Exchange to which the employee applies for advance payment of the premium assistance tax credit (also referred to as a federal subsidy), and
• That, if the employee isn’t covered under the minimum essential coverage for any month, the employee may be subject to tax under Internal Revenue Code Section 5000A for that month and reimbursements may be included in gross income.

Failure to provide timely notice will subject an employer to a $50 penalty for each employee, up to $2,500 annually. Notice will be considered timely for 2017 if provided by March 31, 2017.

In addition, employers must report the value of any QSEHRA benefit on employees’ Forms W-2, beginning with forms issued in January 2018 for 2017. Future IRS guidance on such reporting is expected.

Impact on employee subsidies

An employee’s eligibility for subsidies for individual insurance will be affected by his or her eligibility for a QSEHRA. If the QSEHRA makes health insurance “affordable” (meaning Silver-level coverage would cost no more than 9.69% of the employee’s household income), the employee won’t qualify for a subsidy. If the QSEHRA doesn’t make health insurance affordable, the employee can receive a subsidy but the amount will be reduced by the amount of the HRA benefit.

On the horizon

Although President-elect Trump and the Republican Congress have promised to repeal the ACA, the QSEHRA exception in the 21st Century Cures Act could complicate matters. If smaller employers take advantage of the exception, the individual insurance market is likely to expand and the risk pool is likely to diversify. This could both stabilize premiums and give more citizens a stake in preserving some of the ACA’s provisions. 

If you need guidance on your insurance or other benefits planning during this uncertain time, we can help.

As you may be aware, there have been several changes in due dates for some federal tax returns, which will be effective for the 2017 filing season or the 2016 tax year for calendar year-end filers. These modifications relate mostly to flow-through entities, including S corporations and partnerships that provide Schedule K-1s (partner’s/shareholder’s share of income, deductions, credits, etc.), containing investment information of partners/shareholders. 

Due dates related to individual tax returns or estimated tax payments will remain the same; however, one new date will take effect next year that affects individuals. 

What does this mean to you? As you gather tax documents for the coming tax season, we have compiled some suggested actions for your consideration to facilitate a smooth process. 

Partnerships (Form 1065) — The due date is moved from April 15 to March 15 or the 15th day of the third month after the year-end.

S Corporation (Form 1120S) — No change, due dates remain March 15, allowing for preparation of Schedule K-1s as they relate to individuals and organizations 

C Corporations (Form 1120) — Due date moved from March 15 to April 15; in most cases, returns will be due on the 15th of the fourth month after the year-end. However, although the due date of these returns has been pushed back a month, we encourage clients to submit the financial information necessary to complete these returns as soon as possible.

Individuals and Businesses — Foreign Bank and Financial Accounts Report (FBAR) (Report 114) — This form is required for individuals and businesses with a financial interest in, or signature authority over, at least one financial account located outside of the United States, and the aggregate value of all foreign financial accounts exceeding $10,000 at any time during the calendar year reported.

This due date change is the most significant for individual taxpayers; forms are now due April 15 rather than June 30. (For 2017 the due date is April 18 because April 15 falls on a Saturday and the Washington D.C. Emancipation Day holiday will be observed on April 17.) However, for the first time, a six-month extension to Oct. 15 will be available.

Please include any and all information related to foreign accounts when submitting your individual, partnership or corporate tax return documentation.

We understand that adjusting to this new system can be overwhelming. We have included a quick reference guide for tax deadlines from the AICPA HERE. Please feel free to contact our office (719-630-1186) if you have any questions or concerns related to due dates, your tax returns or any other tax or financial concern. 

If your business involves the production, purchase or sale of merchandise, your inventory accounting method can significantly affect your tax liability. In some cases, using the last-in, first-out (LIFO) inventory accounting method, rather than first-in, first-out (FIFO), can reduce taxable income, giving cash flow a boost. Tax savings, however, aren’t the only factor to consider.

FIFO vs. LIFO

FIFO assumes that merchandise is sold in the order it was acquired or produced. Thus, the cost of goods sold is based on older — and often lower — prices. The LIFO method operates under the opposite assumption: It allocates the most recent costs to the cost of sales.

If your inventory costs generally rise over time, LIFO offers a definite tax advantage. By allocating the most recent — and, therefore, higher — costs first, it maximizes your cost of goods sold, which minimizes your taxable income. But LIFO involves more sophisticated record keeping and more complex calculations, so it’s more time-consuming and expensive than FIFO.

Other considerations

LIFO can create a problem if your inventory levels begin to decline. As higher inventory costs are used up, you’ll need to start dipping into lower-cost “layers” of inventory, triggering taxes on “phantom income” that the LIFO method previously has allowed you to defer. If you use LIFO and this phantom income becomes significant, consider switching to FIFO. It will allow you to spread out the tax on phantom income.

If you currently use FIFO and are contemplating a switch to LIFO, beware of the IRS’s LIFO conformity rule. It generally requires you to use the same inventory accounting method for tax and financial statement purposes. Switching to LIFO may reduce your tax bill, but it will also depress your earnings and reduce the value of inventories on your balance sheet, which may place you at a disadvantage in comparison to competitors that don’t use LIFO. There are various issues to address and forms to complete, so be fully informed and consult your tax advisor before making a switch.

The method you use to account for inventory can have a big impact on your tax bill and financial statements. These are only a few of the factors to consider when choosing an inventory accounting method. Contact us for help assessing which method will provide the best fit with your current financial situation. ©2016

Section 179 deduction 

First-year bonus depreciation 

Contemplate what your business needs now

Section 179 deduction 

First-year bonus depreciation 

Contemplate what your business needs now

When’s the delivery date?

• Check. The date you mail it. 
• Credit card. The date you make the charge. 
• Pay-by-phone account. The date the financial institution pays the amount.
• Stock certificate. The date you mail the properly endorsed stock certificate to the charity.

Is the organization “qualified”?

The year is quickly drawing to a close, but there’s still time to take steps to reduce your 2016 tax liability — you just must act by December 31. Here are six actions to consider taking:

1.    Prepay tuition bills for academic periods that will begin in January, February or March of 2017 (if it will make you eligible for a tax credit).

If your 2016 adjusted gross income (AGI) qualifies you for the American Opportunity credit (maximum of $2,500 per eligible student) or the Lifetime Learning credit (maximum of $2,000 per family), consider prepaying tuition bills that aren’t due until early 2017 if it generates a bigger credit on this year’s tax return. You can claim a 2016 credit based on prepaying tuition for academic periods that begin in January through March of 2017. 

Bear in mind that both the American Opportunity credit and the Lifetime Learning credit can be reduced or eliminated if your modified adjusted gross income (MAGI) is too high. For the former, the current MAGI phaseout range for unmarried individuals is $80,000 to $90,000 and the range for married couples filing jointly is $160,000 to $180,000. For the latter, the phaseout range for unmarried individuals is $55,000 to $65,000, and for married couples filing jointly it’s $111,000 to $131,000.

If you’re ineligible for these two higher education tax credits because your MAGI is too high, you might still qualify for a deduction of up to $4,000 of qualified higher education tuition. However, you can’t claim the deduction for the same year you claim an education credit or if anyone else claims an education credit for the same student for the same year.

2.   Donate to your favorite charities.

If reducing your taxable estate is an important estate planning goal for you, making lifetime charitable donations can help achieve that goal and benefit your favorite organizations. In addition, by making donations during your lifetime, rather than at death, you’ll receive income tax deductions.

Consider making charitable gifts of appreciated stock if you plan to make significant charitable donations before year-end.  If the appreciated stock has been held for one year or more, you’ll avoid paying tax on the appreciation but will still be able to deduct the donated property’s full value.  There’s paperwork involved with the donation of appreciated stock, so start now to give yourself and your investment advisor enough time to complete the donation before year-end.

To take a 2016 charitable donation deduction, the gift must be made by December 31. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” But what does this mean? Is it the date you, for example, write a check or make an online gift via your credit card? Or is it the date the charity actually receives the funds — or perhaps the date of the charity’s acknowledgment of your gift?

The delivery date depends in part on what you donate and how you donate it. Here are a few examples for common donations:

• Check. The date you mail it. 
• Credit card. The date you make the charge. 
• Pay-by-phone account. The date the financial institution pays the amount.
• Stock certificate. The date you mail the properly endorsed stock certificate to the charity.

3.   Sell investments at a loss to offset capital gains you’ve recognized this year.

Selling investments that are currently worth less than what you paid for them and are held in taxable brokerage accounts may allow you to lower your 2016 tax bill. Why? Because you can offset the resulting capital losses against capital gains from earlier in the year. 

If your losses exceed gains, you’ll have a net capital loss for the year. You can deduct up to $3,000 of net capital loss (or $1,500 if you are married and file separately) on this year’s return against ordinary income from salary, self-employment activities, alimony, interest, and other types of income. Any excess net capital loss is carried forward to future years and puts you in position for tax savings in 2017 and beyond.

However, be aware of the wash-sale rules, which preclude the deductibility of losses in certain situations. If, for example, you sold a security the last week of December for a loss and then bought it back the first week of January next year, you wouldn’t be able to use the loss to offset your 2016 gains.

4.    Avoid a 50% penalty by taking retirement plan RMDs.

After you reach age 70½, you must take annual required minimum distributions (RMDs) from your IRAs (except Roth IRAs) and, generally, from your defined contribution plans (such as 401(k) plans). You also could be required to take RMDs if you inherited a retirement plan (including Roth IRAs). 

If you don’t comply — which usually requires taking the RMD by December 31 — you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t. 

5.    Make 2016 annual exclusion gifts.

The 2016 gift tax annual exclusion allows you to give up to $14,000 per recipient tax-free — without using up any of your gift and estate or GST tax exemption. A married couple can give $28,000 to each recipient. (The exclusion amount will remain the same for 2017.)

The gifted assets are removed from your taxable estate, which can be especially advantageous if you expect them to appreciate. That’s because the future appreciation can avoid gift and estate taxes. Because the exclusion doesn’t carry over from year to year, you need to use your 2016 exclusion by December 31. 

6.    Incur deductible medical expenses (if your deductible medical expenses for the year already exceed the applicable floor).

Consider bunching nonurgent medical procedures (and any other services and purchases with timing that you can control without negatively affecting your or your family’s health) into one year. 

Medical costs are deductible only to the extent they exceed 10% of AGI for people younger than age 65. However, if you or your spouse will be age 65 or older as of year end, the deduction threshold for this year is only 7.5% of AGI. (In 2017, this threshold will increase to 10% of AGI for people age 65 or older.) These taxpayers may want to bunch medical expenses into 2016 to potentially be able to take advantage of the 7.5% floor.

A few additional miscellaneous steps you can take before December 31 to reduce your 2016 tax bill and tie up loose ends include:

• Make sure your 2016 withholding and estimated tax payments are adequate to protect you from underpayment of estimated tax penalties.
• Determine if your 401(k) contributions are going to reach the maximum level permitted for 2016 and make last-minute adjustments if possible.
• Check your partnership and S-corporation stock basis. If you own an interest in a partnership or S-corporation that is expecting a loss for 2016, check with your tax advisor to make sure that you have enough tax basis to take a deduction for the loss.
• Pay your 2016 property tax bill that’s due in early 2017 if you won’t be subject to alternative minimum tax in 2016.
• Make your January mortgage payment.
• Ask your employer if your bonus can be deferred until January. 

Keep in mind that in certain situations these strategies might not make sense. We’d be pleased to help you determine the right steps to take now to lessen your 2016 tax bite.