Accounting and tax update

1. Accounting and tax update Presented by: Don Johnston, cpa, mst – Partner, Grossman Yanak & Ford LLP

2. Overview of the Day • Accounting-Related Topics • Tax-Related Matters • Cheating the System • The Future of Tax Reform • Tax Ideas and General Business Thoughts • Pennsylvania Tax Issues

3. Accounting-related topics

4. Keeping track of your clients’ finances • Understanding Your Client’s Financial Statements • Legal Structure of Business Entities • The Tax Man – When to be Concerned

5. What you need to pay attention to: • Read and understand the financial statements that are prepared by outside parties • Review the tax returns • Restrictions within your own document • Communicate with your client’s outside advisors   • Be aware of cash distributions made (tax and non-tax)

6. What you need to pay attention to: • Ensure that the owner understands the tax consequences of the business  • Review the deferred tax disclosures where relevant and ask if client is a pass-through entity • Be sure clients use reputable advisors who understand their business and can help with technical issues and planning (this includes payroll tax advisors)

7. Identifying creative accounting on the balance sheet • The Top Ways Companies Cook the Books • Accelerating Revenues • Delaying Expenses • Reserves on the Books after an Acquisition

8. Identifying creative accounting on the balance sheet • The Top Ways Companies Cook the Books • Other Income and Expenses • Pension Plans (be aware of defined benefit plans) • Off-balance Sheet Items • Overstating the Value of Inventory

9. Tax-related topics

10. The Banker’s guide to reviewing a tax return • Understand the carryovers • Review non-deductible meals and entertainment expenses • What are the book/tax differences? • What type of entity are you reviewing? (C corporation or pass-through)

11. The Bankers guide to reviewing a tax return • Basis of accounting? (cash or accrual) • Carefully review the attachments/schedules • Does cash reconcile? • Do you need to consider self-employment tax issues?

12. The Bankers guide to reviewing a tax return • Are there “mandatory” tax distributions? • Are you reviewing the owner’s returns? • Are the returns being filed and is the tax being paid?

13. Tax issues affecting all taxpayers • As professional advisors, “tax” matters we should be aware of: • Identify theft/confidentiality issues • Dealing with the IRS and PA Department of Revenue • Tax notices received • Penalties assessed • Trust fund tax issues are present • Sales tax filings (collection-remittance) • Nexus issues/filing obligations

14. Tax issues affecting all taxpayers • Problems at the IRS • Further changes to the ACA will continue to be a top priority and will have significant ramifications for the IRS • Reduced operating budgets and fewer personnel • Increased complexity in all areas • Potential tax reform

15. Business blunders • Tax mistakes that cost our clients money • Failing to understand how pass-through entities work • Failing to plan for current/future changes in the law • Giving payroll tax responsibilities to an unqualified person • Failing to have a long-term exit strategy • Using an inexperienced tax professional

16. Individual tax planning strategies • U.S. Tax Income is not a singular system but ismulti-dimensional • Regular income tax system • Alternative minimum system • Self-employment tax system • Net investment tax system • “Pass-through” tax system • Payroll taxes • State taxes • Franchise taxes • Sales taxes • Property taxes • Local income taxes • Business privilege taxes

17. Individual tax planning strategies • Regular tax system – two basic precepts • Assumes that any and all sources of economic income and gain are taxable • Assumes there are no deductions allowed against any of the reported income unless specifically authorized and allowed by a provision of the IRC

18. Individual blunders • Tax mistakes that cost YOU money • Failing to understand the graduated tax rate system • Failing to properly plan and file for your children • Failing to use tax-free savings strategies (retirement, college) • Failing to understand the Alternative Minimum Tax (AMT)

19. Individual blunders • Tax mistakes that cost YOU money • Failing to think about your tax position during the current year • Failing to file returns on time and incurring penalties • Poor college planning (pre- and post-college) • Preparing your return yourself or using an inexperienced tax professional

20. Missed individual tax deductions • Page 1 (Form 1040) • State and local tax refunds • Increased stock basis for reinvested dividends • Schedule C • All costs related to a Schedule C business • Depreciation on your home for home office • Salary you pay your kids

21. Missed individual tax deductions • Page 1 (Form 1040) • Self-employed health insurance and Medicare • Self-employment taxes for self-employed persons • Student loan interest paid by Mom and Dad • IRA or retirement plan contributions • Moving expenses

22. Missed individual tax deductions • Page 2 (Form 1040) • Child-Care credit • American Opportunity credit (education costs) • Foreign Tax credits

23. Missed individual tax deductions • Schedule A • State sales tax • State income tax paid for prior year returns • Out-of-pocket charitable deductions • Noncash donations • Refinancing points

24. Missed individual tax deductions • Schedule A (miscellaneous 2%) • Legal fees paid to secure alimony • Tax preparation and planning fees • Investment fees • Schedule A • Gambling losses

25. Cheating the system

26. Cheating the system • Where are Americans cheating the most? • Schedule C and small businesses • Meals and entertainment • Charitable deductions • Paying for childcare/Nanny

27. Cheating the system • Speaking of tax cheats…

28. Future of tax reform

29. Future tax policy is uncertain • Some form of tax reform is likely to be achieved • Actual change will require cooperation with Congress • Tax reform will be tied to healthcare reform

30. Challenges to irs enforcement • IRS facing numerous issues • Increasing complexity of tax code • Administrative funding cuts – understaffed, low morale • Additional responsibilities of ACA and FATCA • Identity theft concerns • New tax laws coming as a result of the GOP takeover

31. How taxpayers cope with these issues • Ongoing uncertainty makes it difficult to plan for the future • Taxpayers must pay attention to current rules but include flexibility in strategy to adapt to changes in the law

32. Tax ideas & general business thoughts

33. Tax ideas & general business thoughts • IRC Section 199 deduction • IC-DISC tax-saving opportunity • Educational Improvement Tax Credit “EITC”

34. Ways to attract an irs audit • Red flags for IRS agents: • Unreported income • Net operating losses from pass-through entities • Rental loss reported in year with little or no rental income • Excess charitable donations • $0 compensation for S corporation shareholder-officers • Math errors and rounded numbers

35. Federal and state tax notices • General thoughts about addressing notices: • Be sure notice is legitimate, not fraud/identity theft • Review and recalculate tax, penalty and interest due • If correct, pay tax using certified mail • Take action to resolve problem from incorrect notice • All actions should be documented in writing and followed up with a phone call (ask for response in writing) • Keep good notes to avoid making same mistake again

36. Pennsylvania tax issues

37. PENNSYLVANIA TAX AMNESTY PROGRAM • Incorrect Pennsylvania tax notices and adjustments

38. PENNSYLVANIA TAX AMNESTY PROGRAM • Created by PA Act 84 in July 2016 • Program runsfrom April 21, 2017 to June 19, 2017 • Covers tax filings/delinquencies through December 31, 2015 • Numerous types of taxes are eligible • Taxpayers that participated in 2010 Amnesty program are ineligible to participate in this program • Procedures to be finalized in the near future

39. PENNSYLVANIA TAX AMNESTY PROGRAM • Benefits of the program • PA DOR will waive penalties, fees and 50% of interest charged for late payments • Consequences of not participating • 5% non-participation penalty added to delinquent balance due • May also be subject to other enforcement actions

40. Final thoughts

41. Grossman yanak & Ford llp • How Can We Help You? • Audit/Assurance Services • Tax Services (businesses and individuals) • Business Valuation Services • ERP Solutions Services • Transaction-Related Issues – Mergers & Acquisitions

42. Thank you for your attention! 412-338-9300 • www.gyf.com